Charities to beware

QUESTION: What are the changes in the budget that are proposed in relation to charities?

ANSWER: Where there is violation by a trust in carrying out the objects of the trust or institution, the trust loses exemption under the present law. If the charitable institution thereafter complies with its objects in a later year, there is, at present, no difficulty in getting the exemption, once its affairs are brought back in line with the objects. There were some differences on the issue, whether the registration once granted could be cancelled with the Tribunal taking the view that registration once granted cannot be cancelled. Normally inference would have been that where there is a power to grant registration, the power to cancel the same is implied. But cancellation should not ordinarily be necessary, where violation is of temporary nature with exemption withdrawn for that year of violation. Quite often the inference of violation itself is disputed. Cancellation in such cases would not be necessary or it could await.

The proposed amendment under Sec. 12AA would provide for cancellation, if the Commissioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution after a reasonable opportunity of being heard. It would mean that if defects are remedied, such institution should ask for a fresh registration. The present provision for appeal to the Tribunal against refusal of registration under Sec. 253(1)(c) should no doubt cover cancellation as well, so that there would be a right of appeal to the Tribunal.

The Rajasthan High Court in Dy. CIT v Cosmopolitan Education Society (2000) 244 ITR 494 (Raj) pointed out that it would not be reasonable to punish a charitable institution for temporary lapses of the people in power. In such cases denial of exemption itself is a hardship affecting the public for whom the charity is created. Cancellation of registration would deprive the right to exemption for future years as well. The proper remedy in such cases of default on the part of the trustees of persons of the governing body would be that the exemption will be denied for the trust unless the delinquents make good such amount either misspent or misappropriated rather than punishing the trust by imposition of taxes and by further cancellation of registration as now proposed. Voluntary agencies play a useful role in society, so that genuine institutions should not be hurriedly subject to any precipitate action. It is therefore, necessary to ensure that such power of cancellation is exercised with a sense of responsibility.

Q: What are the proposals relating to tax deduction at source (TDS)?

A: The existing responsibilities relating to TDS are wide. There has been a feeling that the basic exemption limits for TDS which were fixed many years ago require reconsideration. The rate at which tax has to be deducted is also found to be high, especially after the general reduction in tax rate, resulting in refund in most cases as in the case of contractors. The demand for review of this had been pending for a long time. Meanwhile Finance (No.2) Bill, 2004 seeks to extend further the TDS obligations.

In respect of payments to contractors the limit was Rs. 20,000 for each transaction. But there is now a further extension that even if individual transactions fall below Rs. 20,000 there will be liability for deduction, if the aggregate transactions during the year exceed Rs. 50,000. This amendment under Sec. 194C will be effective from October 1, 2004. Liability for tax deduction at source is sought to be imposed for compensation including enhanced compensation arising out of compulsory acquisition by insertion of a new clause 195LA, if such payment exceeds Rs. 1 lakh. This provision is also effective from October1.

Collection of tax at source is proposed to be extended to amounts collected for a grant of fees or licence in running a parking lot, toll plaza, mines and quarries under the newly introduced clause (1C) in Sec. 206C of the Income-tax Act effective from October 1, 2004. The proposed deduction is at 2 per cent. There is also a proposal to extend consequential liability by way of denial of deduction of the amount from which there is failure to deduct tax at source in computation of taxable income. Sec. 40(a)(i) of the Income-tax Act already provides for such disallowance in respect of payments to non-residents. This was understandable, because it will not be easy to collect tax from the non-residents, unless it is collected at the time of payment. But this provision is now sought to be extended even to payments made locally in respect of brokerage or commission under Sec. 194H, fees for professional and technical services under Sec. 194J and payments to contractors or sub-contractors under Sec. 194C.

The result would be that the amount of payment itself would be disallowed in computation of taxable income, if there was failure to deduct tax at source, apart from liability for the tax failed to be deducted along with interest and possible penalty in absence of a reasonable cause for such failure. This disallowance will add to the burden and is a redundancy which is certainly avoidable. While direct payment of income-tax on the amount received by the payee would spare liability from deposit of such amount that should have been deducted, the disallowance may still stand in absence of any discretion to the assessing officer to allow the deduction, where the failure is either bona fide or where there is no loss to revenue irrespective of such failure.

The amendment is also clumsily worded giving rise to a doubt as to whether deduction or payment which was not made within time permissible for the same will get allowed, if it is paid in the same year, because the proviso makes it deductible for payments in subsequent years. The present practice is to allow the deduction, if it could be shown that deduction has been made at any time before filing the return or where the return is taken up for scrutiny at any time before assessment is made. This is what is sought to be curbed by the proposal by allowing the same only in the subsequent year, where the payment is made in subsequent year. It needs to be clarified that where the delayed deduction or payment is made in the same year, there is no need for disallowance.

Q: What are the changes in the budget which would affect the corporate sector?

A: The corporate sector has reason to complain about what has not been done than what has been done. MAT continues with extension: Minimum Alternate Tax (MAT) has been a source of irritation for the corporate sector. Withdrawal of tax credit under Sec. 115JAA, restriction on set off of carried forward losses and depreciation by a narrow interpretation supported by an amendment and the deeming provision assuming that all carried forward losses and depreciation are absorbed to the extent of statutory profit even in the year when tax is paid on the basis of book profits have all resulted in liability for many companies, which have no real profits, but have burdened them with liability for MAT.

Waiver of interest for many companies by banks and financial institutions has cast additional burden by treating the waived amount of interest, which was neither paid nor allowed for income-tax purposes, as liable for book profits tax, though such an inference is controversial. The initial objective of taxing prosperous companies, which do not declare dividend, has been lost sight of.

S. Rajaratnam

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