Pre Budget Memorandum: Suggestions for amendments for better compliance

1) Under section 11 exemption is available to registered trusts if they spend at least 85% of the income property held under trust. However, when any trust spends more than its income (say by borrowings) then the resultant deficit is not calculated by the ITR Form 7 in ‘Part-B-TI & TTI’ and the same is not allowed to be carried forward. Moreover, there is no column in the ITR-7 which provides for a place holder for entering brought forward deficit to be adjusted against income of the current year.

However as per innumerable judgements of many ITAT, High Courts and the Supreme Court, the deficit is permitted to be carried forward and set off against the income of the next year.

a) Hon’ble Supreme Court Excess application of income– HELD THAT:- in,  Subros Educational Society [2018  SC ORDER],   held that eligible trust which are enjoying the registration u/s. 12AA of the Act are entitled to carry forward and set off the excess application of income – direct that the excess expenditure incurred by the assessee trust in earlier assessment year should be allowed to be set off against the income of this year.

b) Bombay High Court: Commissioner of Income Tax – Exemption versus m/s. Dawat-e-Hadiyah Dated. – January 23, 2020

Carry forward of deficit and allowing set off against the income of the subsequent years – Whether allowing the deficit will tantamount to double deduction on account of expenditure out of exempt income? – HELD THAT:- concluded in favour of the assessee and against the revenue by the Supreme Court in Commissioner of Income Tax (Exemption), New Delhi Vs. Subros Educational Society [2018 SC ORDER]

c) Gujarat High Court: Citation: [1995] 211 ITR 293, Commissioner of Income-Tax Versus Shri Plot Swetamber Murti Pujak Jain Mandal. – November 3, 1993.

It is the well-settled position that income derived from the trust property has to be determined on commercial principles and if commercial principles for determining the income are applied, it is but natural that the adjustment of the expenses incurred by the trust for charitable and religious purposes in the earlier year against income earned by the trust in the subsequent year will have to be regarded as application of income of the trust for charitable and religious purposes in the subsequent year in which such adjustment has been made having regard to the benevolent provisions contained in section 11 of the Act and will have to be excluded from the income of the trust under section 11(1)(a) of the Act. Therefore, the assessee is entitled to carry forward expenses for set off in the subsequent year.

d) Karnataka High Court: Commissioner of Income Tax (Exemptions), Bengaluru, The Assistant Director Of Income Tax (Exemptions) versus Sri Vani Education Centre: Dated. – January 14, 2019

Assessment of trust – When the income of a charitable or religious trust /institution is required to be computed by applying general commercial principles then the assessee is eligible to carry forward the deficit to the subsequent years: – Substantial questions of law covered by the judgment of Commissioner Of Income Tax Vs. Rajasthan and Gujarati Charitable Foundation Poona [2017 -Supreme Court]. – Decided in favour of the Assessee.

Entitlement to carry forward of deficit to assessee trust – Held that: – Substantial questions of law covered by the judgment of Commissioner of Income-Tax (Exemptions) And Another Versus Ohio University Christ College [2018- Karnataka High Court] – Decided in favour of the Assessee.

e) Rajasthan High Court Dated. – February 12, 2019

Indian Medical Trust Versus Principal Commissioner Of Income-Tax Central, Jaipur

It is clear from the above that as many as five High Courts have interpreted the provision in an identical and similar manner. Learned Counsel for the Revenue could not show any judgment where any other High Court has taken contrary view. Since we are in agreement with the view taken by the aforesaid High Court, we answer these questions in favour of the assessee and against the Revenue.

f) Andhra Pradesh High Court – November 12, 2015

The Director Of Income Tax [Exemptions] Versus Share India

Held that:- CBDT circular dated 24.01.1973 enables a trust, which had taken a loan for incurring expenditure for charitable and religious purposes, to repay the said loan from out of its income in the subsequent year; and such repayment of loan is to be treated as application of income for charitable and religious purposes under Section 11 (1) (a) of the Act. Money for charitable and religious purposes, beyond the income of a trust, can be applied, for charitable and religious purposes, either by taking a loan or utilizing a part of the corpus of the Trust. As the CBDT circular dated 24.01.1973 enables repayment of a loan for the previous year utilizing the income of the subsequent year, and for such utilization to be treated as application of income under Section 11 (1) (a) of the Act, there is no reason why excess application of money, for charitable and religious purposes, (deficit) of the earlier year should not be set off against the income for the subsequent year. In the absence of any specific prohibition in the Section 11 (1) (a) of the Act in this regard, and in the light of the CBDT circular dated 24.01.1973 we find no error in the order of the Tribunal, much less a substantial question of law, necessitating interference in this appeal.

g) Madhya Pradesh High Court [2012] 349 ITR 559 (MP) Dated. – July 8, 2011: Commissioner of Income-Tax Versus Shri Gujrati Samaj

in view of section 11(1)(a) of the Act it cannot be said that the expenditure incurred in the earlier year cannot be met out of the income of the subsequent year and utilization of such income for meeting the expenditure of the earlier year would not amount to such income being applied for charitable or religious purposes – In the case of CIT v. Maharana of Mewar Charitable Foundation [1986 – Rajasthan High Court]- Decided in favor of the assessee

Suggestion: Therefore, a specific provision should be made in section 11 permitting carry forward of deficit to next year and set it off against the income of the next year. Consequent modification should also be made in the ITR-7

2) 12A.(1)- Conditions for applicability of sections 11 and 12: Loss of exemption on delay in filing Audit Report and ITR 7

“(b) The exemption u/s 11 & 12 is not available if the assessee- trust fails to get the accounts of the trust or institution for that year audited before the specified date referred to in section 44AB (i.e. 15th Jan,21) and the person in receipt of the income furnishes by that date (i.e. 15th Jan,21) the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed.”

(ba) the person in receipt of the income has furnished the return of income for the previous year in accordance with the provisions of sub-section (4A) of section 139, within the time allowed under that section. (i.e. by 15th February 21)

The delay of even a few days can attract a huge liability because the entire income will be taxed @ 30% (Slab benefit given). Thus, in cases where the income of any trust is very large say Rs. 10 crores then the tax would be Rs. 3 Crore. Compared it with the penalty for late filing tax audit report by an assessee whose turnover is say, Rs. 100 crores, a maximum of Rs. 1.50 Lakhs.

Suggestion: Therefore, a provision should be inserted for levy of penalty in case of delay in filing the audit report or the return for the Trust,with a maximum monetary limit. This way the trust would also get the benefit of section 273B i.e. dropping of penalty on showing a reasonable cause for delay

A case for Delinking of ITRs and Form 3CD

Contradiction between Dates in Form 3CD and the dates for submission of Audit Reports:

There are many clauses in the Form 3CD & ITRs which require common information to be filled up. However, as the dates of filing of Form 3CD and ITRs are different i.e. 15th Jan 21 for 3CD and 15th Feb 21 for ITR, the assessee and the tax auditor both will find it difficult to answer because the answers to questions in Form 3CD (to be submitted by 15th January 21) would depend upon the answers to be given in ITR  (to be submitted by 15th February 21) because of some specific provisions made in the Act. Let us consider these contradictions:

The Income Tax Act has been amended by the Finance Act 2020 and further amended by The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 to provide certain restrictions and/or relaxations in the existing provisions and also to bring in some additional provisions. One of such additional restriction that has been inserted pertains to the requirement of furnishing of Audit Report/ CA Certificates at least one month prior to the due date for furnishing the return of income under sub-section (1) of section 139. The reports are as under:

Furnishing of Audit Reports:

S.L. Section Report
1 44AB Tax Audit Report
2 92E Transfer Pricing Report
3 12A(b) Charitable Trust claiming exemption u/s 11 & 112
4 10(23C) Various Govt. Relief Funds, Universities, Education Institutions, Hospitals etc. claiming exemption
5 80IA Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc.
6 80JJAA Deduction in respect of employment of new employees.
7 115JB Companies paying MAT
8 115JC Special provisions for payment of tax by certain persons other than a company.

Since different alternative regimes of taxation have been introduced e.g. for domestic manufacturing companies section 115BA provide for tax @ 25%, section 115BAA provide for concessional tax @ 22% for all domestic companies and some other provisions provides for a tax @ 30%. The assessees have been given an option to choose any one of the options or continue to remain under legacy provisions of tax. The selection of the option say, option u/s 115BAA with concessional rate of taxation of 22%, is coupled with certain restrictions like foregoing your claim of additional depreciation u/s 32(1)(iia), foregoing the brought forward MAT credit etc. Therefore, the answers in form 3CD would depend upon whether the assessee has selected the option, say u/s 115BBA or not. If selected then, answers will be different and if not selected then the answers will be different. But the irony is that the last date for exercising the option has been fixed at one month later than the last date of submission of the audit reports say form 3CD i.e. There may be a situation when the assessee could not decide whether to select the option or not at the time of submission of form 3CD on 15th January 21( being the last date for submission of form 3CD) because he has got full one month’s time more to select the option ( i.e. by 15th February) There are many practical difficulties due to this provision. Some of which are: –

Let us consider some examples

In a case where an assessee is required to be audited u/s 44AB of the Act, the auditor would have to submit form 3CD to the department by 15th January 2021 for return of income of the assessee to be filed one month later, by 15th February 21. The difficulties are

1) No auditor would submit form 3CD unless he has authentic accounting information certified by the assessee. When such authentic accounting information is available with the assessee then why would he not submit the ROI also by 15th January 21 itself. The situation would become more complex when the Tax Auditor and the Statutory Auditor are different persons. In case of variation how would the reconciliation be done and what would be the legal value of such reconciliation under the Act?

2) Further in Form 3CA/3CB the Tax Auditor will have to give his report as under:

“In our opinion and to the best of our information and according to examination of books of account including other relevant documents and explanations given to us, the particulars given in the said Form No.3 CD are true and correct subject to the following observations/qualifications, if any:”

How it is possible to give the above said report if the accounts were still open and not closed as on 15th January 21?

3) Clause (8a) seeks answer on the question if the assessee has opted for taxation under section 115BA/ 115BAA/ 115BAB?

Under Section 115BA/115BAA/115BAB the option can be exercised by the assessee in the prescribed manner on or before the due date specified under section 139(1). That means an assessee willing to exercise the option can do so upto 15th February 2021, then how can an auditor answer the question in clause (8a) latest by 15th January 21, when he had not exercised the option by 15th January 21 because the said option becomes time barred 1 month later i.e. only on 15th February 2021?

4) Clause 18 answer is required to be given to the questions

(ca) Adjustment made to the written down value u/s115BAA Rs………
(cb) Adjusted written down value Rs………
(c) Depreciation allowable Rs………
(d) Written down value at the end of the year Rs………

The figures would vary depending upon whether the option u/s 115BAA has been exercised or not and for which the last date is again 15th February 21. These values would be required only if the option has been exercised other wise not.

5) Section 115BAA(3) proviso requires that where there is an additional  depreciation allowance in respect of a block of asset which has not been given full effect to prior to the assessment year beginning on the 1st day of April, 2020 then corresponding adjustment shall be made to the written down value of such block of assets as on the 1st day of April, 2019 in the prescribed manner, if the option under section 115BAA(5) is exercised for a previous year relevant to the assessment year beginning on the 1st day of April, 2020.

However, where there is an allowance for additional depreciation in respect of a block of asset which has not been given full effect to prior to the assessment year beginning on the 1st day of April, 2020, corresponding adjustment shall be made to the written down value of such block of assets as on the 1st day of April, 2019 in the prescribed manner, if the option under sub-section (5) is exercised for a previous year relevant to the assessment year beginning on the 1st day of April, 2020. The questions that need answers are:

a) The value of the corresponding adjustment is required to be made in the prescribed manner. However, till now the GOI has not prescribed any manner for calculating the value of adjustment.

b) This adjustment is possible only for one assessment year i.e. AY 20-21. However, it is not necessary for an assessee to opt for this option for A Y 20-21 only. The assessee may decide to opt this option after, say 3 years. In such a case the value of the corresponding adjustment will be nil, being restricted to the AY 20-21 only.

c) The value of Adjustment to be made to the written down value u/s 115BAA as stated in clause (ca) is equal to the amount of unabsorbed additional depreciation as at 1st April 2019 which is required to be carried forward to the AY 2020-21. The other figures in the remaining clauses would depend the amount of adjustment in clause (ca). These all will depend upon whether the assessee opts to exercise the option u/s 115BAA (5), the time for exercising such option is 15th February 21. How can one determine this value 1 month prior to the date of exercise of the option u/s 115BAA (5)?

6) Clause 20(b): Details of contributions received from employees for various funds as referred to in section 36(1)(va):

S.N. Nature of Fund Sum receivable from employees Due date for payment The actual amount paid The actual date of payment to the concerned authorities –
1 2 3 4 5 6

Under this clause compliance with respect to the Due date of Payment is required to be ensured. Whether this due date is the date as per the Provident Fund Act or as per the date u/s 43B i.e. the contribution of the employees will be allowed as expenses if paid upto the due date as per section 43B or only as per the due date under the PF Act.

An assessee who is liable to audit u/s 44AB and who is also covered by the labour law provisions to contribute to Provident Fund or Superannuation Fund or Gratuity Fund or any Other Fund for the Welfare Of Employees faces the problems of disallowance of the Employees’ Contribution (by the employer assessee) if the payment is not made by the due dates as prescribed under explanation to section 36(1)(va) which is 15th (21st) day of the next month for different payment. Once disallowed he may or may not get the deduction u/s 43B(b) on payment basis if paid before the due date for filing of return of income u/s 139(1).

The problem is heightened when the tax auditor has to highlight every case of delay in payment in item 20 in Form 3CD. Once this delay is reported in the form 3CD by the Tax auditor, the CPC raises a demand by disallowing the total amount which has been belatedly paid by the assessee. This demand is raised by the CPC while processing the Return of Income u/s 143(1)(a)(iv) i.e. after making the adjustments for disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return. Once that is done then it can’t be rectified u/s 154 because it is not a mistake apparent from record because it is a highly debatable issue not covered u/s 154. In this situation the assessee will have to go in appeal before the CIT(A) who would decide the matter whether late payment of PF contribution should be allowed u/s 43B(b) or not.

The issue became highly debatable when the restriction applied on the payment of Employers’ Contribution by 2nd proviso to section 43B was delated by the Finance Act 2003 and some changes were also made in the 1st proviso. The Supreme Court held such amendment to the proviso to be retrospectively effective w.e.f. from 1st April, 1988 and not AY 2003-04 in the case of Alom Extrusions Limited [2009] 319 ITR 306. It is worth mentioning here that the only issue before the Supreme Court was whether the amendments were effective retrospectively i.e. from 1st April 1988 or from AY 2003-04 prospectively. The question of disallowance of employees’ contribution u/s 36(1) (va) was not there before the Supreme Court for its judgement and no decision was given by the SC on this issue.

What followed thereafter is not less than a tax nightmare. Different State High Courts started giving different interpretation to the said decision of the SC. However, the controversy relating to the payment of the Employers’ Contribution has been solved by the Act itself u/s 43B(b) by expressly providing that employers’ contribution to PF will be allowed as deduction even if paid belatedly but before the due date of filing of the return of income u/s 139(1).

Thereafter the controversy that still remains is pertaining to the allowance of the Employees’ Contribution to PF on payment basis u/s 43B(b).

Different High Courts of the States are of differing views on it. While one section holds that such belated payment cannot  be allowed due to the restriction in explanation to section 36(1)(va) which deals with the issue of belated payment of employees’ contribution while the other section holds that it can be allowed u/s 43B(b) because the amended proviso which applied retrospectively covers both types of contributions i.e. Employees’ Contribution & Employers’ Contribution also. This decisions of some of the high court are summarized as under: i.e. (Employees’ Contribution only)

1 Gujarat High Court Not Allowed
2 Karnataka High Court Allowed
3 Calcutta High Court Allowed
4 Bombay High Court Generally allowed
5 Madras High court Allowed & Disallowed both
6 Delhi High Court Allowed
7 Rajasthan High Court Allowed
8 Kerala high Court Not Allowed
9 Punjab & Har High Court Allowed
10 Madhya Pradesh High Court No Clarity
11 Patna High Court Allowed
12 Allahabad High Court Allowed
13 Gauhati High Court Allowed

In the case of Rajasthan High Court there was a chance to settle this controversy by the SC when the Revenue filed appeal before the Supreme Court but the Revenue had to withdraw this appeal due to revised higher monetary limit of tax effect for filing appeal before the Supreme Court.

“Case disposed off.  Dismissed as withdrawn- 9th January 2020” Reported on 27th April 2020.

So, whether the deduction will be allowed or disallowed can be answered only after knowing the location of the High Court in whose jurisdiction the assessee has the place of business.

The exercise of jurisdiction by the CPC based on the Form 3CD is also questionable because the Tax Auditor only indicates the factual due dates and dates of payment of the contribution. The Form 3CD nowhere indicates the amount of the adjustments for disallowance of expenditure but not taken into account in computing the total income in the return. This is the exercise to be done by the assessee himself while filling the Return of Income wherein proper space has been provided for such adjustments under the head Income from Business or Profession.

So, while submitting form 3CD by 15th January 21 the Tax Auditor will not be able to give correct answer because the assessee has got time upto 15th February 21 to make payment of the same and claimed it as deduction under section 43B.

Suggestion: The controversy must be set right so as to bring full clarity in the implementation of the section 36(1)(va). Accordingly, section 43B may be amended to include a clause for payment of employees’ contributions of PF, EPF also

7) Clause 21(b)(i)(B) : Details of payment on which tax has been deducted but has not been paid on or before the due date specified in sub-section (1) of section 139.

The tax auditor just can’t straight way answer this question on 15th January 21 and disallow 30% of the expenditure even when the time for belated payment of TDS is still available upto 15th February 21.

8) Clause 26(B): Payment under Section 43B

Under section 43B payment of prescribed expenditures is allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him :

Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.

Therefore, a tax auditor just can’t answer this question on 15th February 21 particularly when the time for payment of the above sums is still available upto 15th March 21.

9) Clause 32(a): Details of brought forward loss or depreciation allowance, in the following manner, to the extent available: (Also refer clause 4 above)

Sl.

No.

Assessment year Nature of Loss / Allowance Amount as returned All losses/ allowances not allowed under section 115BAA Amount as adjusted by withdrawal of additional depreciation on account of opting for taxation under section 115BAA Amounts as assessed Remarks
(1) (2) (3) (4) (5) (6) (7) (8)

The answer to the question in column (5) & (6) will depend upon whether the assessee has exercised the option of being assessed under the concessional rate of taxation as provided in section 115BAA. However, the last date for exercising this option is 15th February 2021. If the assessee does not exercise the option then the amount to be reported in column (5) & (6) will be NIL and if exercised then the amount will have to be calculated in the manner as given in section 115BAA. Therefore, it will be very difficult for the tax auditor to provide the accurate answer one month in advance of a date in future.

10) Clause 33 Section-wise details of deductions, if any, admissible under Chapter VIA or Chapter III (Section 10A, Section 10AA):

Section under which deduction is claimed Amounts admissible as per the provision of the Income-tax Act, 1961 and fulfils the conditions, if any, specified under the relevant provisions of Income-tax Act, 1961 or Income-tax Rules,1962 or any other guidelines, circular, etc., issued in this behalf
   

The answer to these questions will again depend whether the assessee has exercised the option of being assessed under the concessional rate of taxation as provided in section 115BAA. However, the last date for exercising this option is 15th February 2021. If the assessee does not exercise the option then the amount to be reported will be the actual amount eligible for deduction and if exercised then the amount to be reported will be NIL. Therefore, it will again be very difficult for the tax auditor to provide the accurate answer one month in advance of a date in future.

11) Suggestions: It would therefore, be worthwhile to consider the above practical difficulties, rather contradictions, between the dates given in various audit reports and the ITR Forms and such contradictions must be set right by delinking the ITR Form and the Audit reports or making both effective from the same date as it was, before the amendments.

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