By C. N. Vaze
Khushboo Mehta
Chartered Accountants
Is It Fair
The Income Tax Act, 1961 (‘the Act’) provides exemption to
income of charitable or religious and other institutions under Section 11 of the
Act. This exemption is dependent on compliance with conditions prescribed in the
law. However, the exemption provisions are stringent and on non compliance, the
institution may altogether lose its exemption.
Section 13 of the Act prescribes situations under which
exemption can be denied. Section 13(1)(c) states that exemption under Section 11
shall be denied if any part of income or property of the trust or institution is
used or applied directly or indirectly for the benefit of persons referred to in
Section 13(3) of the Act (hereinafter referred to as specified persons).
Further, Section 13(2) lists down an inclusive list of instances where income or
property of the trust can be said to have been applied for the benefit of
specified persons. The persons referred in Section 13(3) are mainly the author
of the trust, any person who has made substantial contribution, trustee, etc. A
substantial donor is one who has donated Rs.50,000, not in a year but since the
inception of the trust.
However, Section 13(6), read with Section 12(2) of the Act
provides a little bit of relief in the sense that it states that incase a
charitable or religious trust or institution, running an educational or medical
institution or hospital, provides educational or medical facilities to persons
referred in Section 13(3) free of cost or at a concessional rate, the trust
shall not be denied exemption, but only the value of such benefit (in the form
of free or concessional services) shall be considered as income for the purposes
of Section 11. The
benefit of exemption under Section 11(1) shall not be available to such income
and such deemed income will be taxed at the maximum marginal rate under Section
164 (2) of the Act.
The net effect of the above provisions is that while a
charitable or religious trust running an educational or medical institution or a
hospital is allowed to enjoy the exemption even after providing free or
concessional services to certain specified persons, any other trust or
institution other than this is denied exemption merely because only some part of
its income or property is used or applied for the benefit of certain specified
persons.
Is it fair to deny
trusts or institutions (other than those running hospitals or educational
institutions) their entire exemption just because a part of their income or
assets are used for the benefit of certain specified persons?
Further, certain clauses of Section 13(2) and Section 13(3)
are rather impractical and difficult to follow. For instance clause (g) of
Section 13(2) mentions that where income or property of above Rs. 1000 is
diverted in favour of specified persons referred to in Section 13(3), the same
shall be deemed to be for the benefit of such persons, and thus the entire
exemption shall be denied. The ceiling of Rs. 1000 was introduced by the Finance
Act, 1972 when one thousand rupees could be considered to be a considerable
amount. However, no increment in this ceiling has been done so far. In recent
days, the amount of rupees one thousand has become so nominal that it becomes
almost impossible to get away from this provision. Again, the specified persons
mentioned in Section 13(3) include a person whose total contribution
upto
the end of previous year exceeds fifty thousand rupees. The word ‘upto’
indicates the aggregate of contributions made, including the contributions of
prior years. Thus, for a person who makes a contribution almost every year, it
shall not take much time for his aggregate contribution to exceed fifty thousand
rupees. Thereafter, any transaction, howsoever insignificant, with such person
shall be subjected to restriction of Section 13 of the Act.
This implies that anyone from the public at large can avail
benefits of the charitable or religious trust in the form of financial or other
help. However, any of the specified persons, even in genuine cases, cannot avail
the benefit of the trust. Further, any benefit in almost all circumstances is
bound to be more than rupees one thousand. It is understandable that it will be
taxed in the hands the trust. But does it really justify a total denial of
exemption?
Further, low limits as explained above, make it rather
difficult for the charitable trust or institution to work. In case of many
specified persons, the trust or institution may have to prepare a separate list
of such specified persons and transactions entered into with them. In case of
numerous transactions, it may also become difficult for the auditor to verify
and certify. Though, the basic intent behind the provisions of Section 13 is
noble — so as to ensure that the funds of the trust, meant to be for the benefit
of public the at large, are not spent on prohibited persons — the said
provisions are so strict that they seem to defeat the basic intent and purpose
of the Act which is to encourage charitable and religious trusts / institutions
and to make their working easier.
On the other hand, as mentioned earlier, a much more lenient
and rather logical treatment is given to charitable or religious trusts or
institutions running educational or medical facilities or hospitals. Section
13(6), read with section 12(2), states that when a charitable or religious trust
running educational or medical facilities or a hospital provides educational or
medical facilities to persons specified in Section 13(3) free of cost or at a
concessional rate, only the value of such benefit shall be considered as income
instead of denying the whole exemption. The irony is that the draft direct ‘tax
code’ contains the same provisions.To make the law fair, the author recommends
that the law be amended to:
1. Increase the limit of Rs. 50,000 for determining a
substantial donor;
2. The principle enshrined in Section 12(2) be extended to
any benefit derived by persons mentioned in Section 13(3) and transactions
covered in Section 13(b) of the Act;
3. The list of relatives be reduced to one generation.
