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NEW DELHI December 13, 2013


Performance Audit Report of Comptroller and Auditor General of India, Union Government on ‘Exemptions to Charitable Trusts and Institutions’ (Direct Taxes) Report No. 20 of 2013 was tabled in the Parliament today.


Income Tax Act, 1961 (Act) provides various tax exemptions to charitable Trusts &Institutions (Trusts) to fulfill their objectives. The concerned authorities [(DGIT/CCIT/CIT/DIT(E)] of the Income Tax Department (ITD)grant registration/approval/notification to the Trusts for claiming exemption after verifying the objectives of Trusts. Based on the registration/approval/notification granted by the concerned authorities, assessing officer allow exemption to the Trusts after completion of assessment as per provisions prescribed in the Act.

The main objective of the present Performance Audit Report is to seek assurance that registrations are given to Trusts involved in charitable activities and exemptions are allowed to eligible Trusts only. Our study also seeks assurances that proper monitoring mechanism exists for utilization of accumulations of income and inadequacies in the provisions of Act relating to exemptions.

We have pointed out lapses in registration process, allowance of exemptions during assessment, non‐monitoring of accumulations of surplus income and Foreign Contributions (FCs) received. Besides, we have highlighted inconsistencies in Act which led to incorrect assessment and non‐levy of taxes. Our report also touched upon the issue of under utilization of resources placed at the disposal of ITD.

ITD received  1.75 lakh applications of Trusts during FY 09 to FY 11 for granting registrations/approvals or issuing notifications for claiming exemption. ITD granted registrations/approvals/notifications in 0.90 lakh cases while it denied approval in 0.36 lakh cases and 0.49 lakh cases were pending. We scrutinized all the 0.90 lakh cases where ITD granted registrations/approvals/notifications and noticed procedural mistakes in 6,948 cases (7.72 per cent).

We identified 1.37 lakh assessments of Trusts (Scrutiny: 0.17 lakh & Summary: 1.20 lakh). We checked 0.81 lakh assessment cases (Scrutiny: 0.15 lakh & Summary: 0.66 lakh). We have highlighted 1,283 (Scrutiny: 1,019 & Summary: 264) objections of irregular exemption involving tax effect of Rs. 3,019.21 crore in the AR. The objections of scrutiny cases constitute 6.5% of total scrutiny cases test checked by audit.

Important audit findings

With reference to Registration and Exemption

1. ITD granted registrations/approvals/notifications to the 799 Trusts without verifying necessary documents such as copy of the Trust Deed, proper clauses in the Trust Deed, audited accounts etc.

(Paragraphs 2.3 to 2.10)

2. ITD granted registrations/approvals/notifications to 73 Trusts having no PAN which is in contravention of the provisions of Act.

(Paragraphs 2.11 to 2.13)

3. There was no correlation in granting or rejecting approvals/registrations among different authorities. ITD did not take action to cancel registration in three cases involving tax effect of Rs. 4.94 crore.ITD granted registration/exemption in 161 cases irregularly involving revenue impact of Rs. 24.23 crore with retrospective effect contravening provisions contained in Act. An illustration is given below:

In DIT‐E, Mumbai, Breach Candy Hospital was granted registration u/s 12A in September 2007 and allowed exemption u/s 11 forAY 09. However, CCIT rejected approval u/s 10(23C) on25April 2010 for AY 03 to AY 11on the ground of profit motive and no philanthropy. ITD did not take action to cancel the registration u/s 12A and disallow the exemption u/s 11. This resulted in underassessment of income of Rs. 14.56 crore involving tax effect of Rs. 4.94 crore.

(Paragraphs 2.18 to 2.25)

4. There was a delay of more than 6 months to 24 months beyond stipulated period in granting approvals/registrations/notifications in 594 cases. The delay on the part of ITD resulted in deemed approval, to Trusts which were otherwise not eligible. An illustration is given below:

In Madhya Pradesh, CIT Gwalior rejected the application of Sarva Seva Samarpit Samiti submitted for registration u/s 12AA on 18 June 2009 after stipulated period of six months on 29 January 2010. On appeal, ITAT set aside the order of CIT vide its order dated 28 May 2010 on the ground that CIT had passed its order after stipulated period of six months. Delay in rejection of the application within stipulated period by the CIT resulted in incorrect grant of approval to an institute which was not even eligible in the opinion of the CIT.

(Paragraphs 2.26 to 2.30)

With reference to Assessment

5. Twenty two Trusts accumulated surpluses of Rs. 819 crore ranging from 35.7 to 84.8 percent of their total income. These surpluses were used for creating fixed assets for earning more profit or transferred to other Trusts rather than charitable purpose to avoid tax.

(Paragraphs 3.2 to 3.7)

6.       In Maharashtra, DIT‐E, Mumbai, Jamshetji Tata Trust and NavajbaiRatan Tata Trust earned Rs. 1,905 crore and Rs. 1,234 crore on account of capital gain during AY 09 and AY 10 respectively and invested the same in prohibited mode of investments which is in contravention to the provisions of section 13(1)(d) of Act. It resulted in short levy of tax of Rs. 1066.95 crore. The Ministry accepted (May 2013) the audit observation.

(Paragraphs 3.8 to 3.13)

7. ITD allowed irregular exemptions of TV subsidy received from BCCI in cases of Saurashtra Cricket Association, Baroda Cricket Association, Kerala Cricket Association and Maharashtra Cricket Association resulting in short levy of tax of Rs. 37.23 crore.

(Paragraphs 3.28 to 3.32)

8. ITD allowed irregular exemptions to 30 Trusts involving tax effect of Rs. 59.61 crore where voluntary contributions, received without specific directions, were taken to corpus fund instead of treating as income.

(Paragraphs 3.33 to 3.38)

9. ITD allowed irregular exemptions to 28 Trusts involving tax effect of Rs. 11.74 crore where Trusts violated the provisions of section 13 of Act.

(Paragraphs 3.42 to 3.45)

With reference to Accumulations and Foreign Contribution

10. ITD allowed irregularly exemptions u/s 11(2) to 120 Trusts involving tax effect of Rs. 106.10 crore for the surpluses accumulated without submitting Form 10 /details of investments made in specified modes to the AO.

(Paragraphs 4.1 to 4.4)

11. ITD did not tax accumulations of 23 Trusts after specified period involving tax effect of Rs. 100.07 crore. ITD allowed irregularly exemptions to 5 Trusts involving tax effect of Rs. 43.35 crore for accumulations invested in non specified modes.

(Paragraphs 4.5 to 4.12)

12. As per MHA web site, NGOs/Trusts received Foreign Contributions (FCs) Rs. 10,338 crore during FY 10 and MHA monitors it under FCRA, 1976. CBDT has not issued any guidelines/circulars to watch FCs received with specific directions and utilized for the purpose for which it was received.

(Paragraphs 4.13 to 4.14)

With reference to Inconsistencies in Act

13. ITD has not taken uniform practice in allowing depreciation, repayment of loan and deficit of earlier years.

14. ITD allowed irregular depreciation to Trusts in 240 cases involving tax effect of Rs. 248.39 crore. One of the case is illustrated as under:

In Kerala, CIT Kottyam, Matha Amrithanandamayi Math, claimed depreciation of Rs. 138.46 crore during AY 07 to AY 09 as application against income from property held under Trust. This was not in order as Trust has not added back depreciation for any of the AYs for which it already claimed deduction for acquisition of capital asset as application of money involving potential revenue impact of Rs. 46.77 crore.

(Paragraphs 5.1 to 5.5)

15. There is no internal mechanism within ITD to have control over the receipts issued by the entity having registration under section 80G. ITD did not cross‐check the donations received by 24 Trusts.

(Paragraphs 5.18 to 5.20)

16. There is no enabling provision in Act to deduct TDS in case of Trusts. Therefore, AOs allowed expenditure incurred by Trusts in seven cases, without deducting TDS which involved tax effect of Rs. 9.49 crore.

(Paragraphs 5.25 to 5.29)

17. Sub sections (iiiab) and (iiiac) u/s 10(23C) of Act exempt income of any university or other educational institution/hospitals existing solely for educational/philanthropic purposes and not for purposes of profit, which is wholly or substantially financed by the Government. However, the word “substantially financed” is not defined in Act.

(Paragraphs 5.30 to 5.33)

With reference to Resource Utilization

18. ITD has not maintained comprehensive database on Trusts. ITD does not have any system to analyze the number of Trusts registered with their filing of returns.

(Paragraphs 6.2 to 6.19)

Summary of Recommendations

With reference to Registration and Exemption

1. The Ministry should ensure compliance to the existing mechanism to ascertain whether the competent authorities DGIT‐E/CCIT/CIT/DIT‐E have verified all the requisite documents as specified in Act for registration.

2. The Ministry may consider inserting box (PAN No) in Form No 10 A and also bringing about suitable changes in Rule 17A of the Income Tax Rules making PAN a pre‐requisite condition for registration.
3. The Ministry may consider providing suitable database of registered trusts/institutions to AOs to have co‐ordination between Approving Authorities and AOs. The activities beyond scope of its objects and omissions on the part of the assessee should be reported by AO to Approving Authorities so that withdrawal or penalty may be initiated against erring Institutions.
4. The Ministry may ensure that the competent authorities adhere to the limitation of time for passing order u/s 10(23C), 12A and 80G otherwise responsibilities may be fixed to avoid allowing exemption to the ineligible Trusts.
With reference to Assessment

5 The Ministry may evolve a mechanism so that Trusts are not allowed accumulations consistently through strict monitoring of Form 10 invariably in all the cases to cover all assessments whether in summary/scrutiny or bring amendment in the Act to restrict such accumulations up to a certain limit.

6 The Ministry may devise an appropriate control mechanism with clearly defined responsibilities to ensure utilization of accumulated funds over a period of time or tax the same.

7 The Ministry may evolve effective monitoring system to make AOs responsible to check investments in unauthorized modes in all the cases.

8 The Ministry may initiate action for withdrawal of exemption /cancellation of registrations/approvals u/s 12A / 10(23C) of Act in case of violation of provisions of section 13 of Act.

With reference to Accumulations and Foreign Contribution

9 ITD should monitor accumulations of income by Trusts that are used in specified mode, specified time and for specific purposes. Prescribed registers should be maintained and updated strictly to watch accumulations and this database should also be computerized and available to the AOs while finalizing assessments.

10 ITD may ensure that all the stipulated conditions are fulfilled before granting exemptions u/s 11(2) on the basis of Form 10 required to be filed by assessees before filing of returns.

11 ITD may ensure that FC cases are selected for scrutiny as per guidelines issued by CBDT.

With reference to Inconsistencies in Act

12 The Ministry may bring suitable amendment in Act to streamline the treatment of depreciation, deficit and repayment of loans.

13 The Ministry should issue suitable instructions to verify information of major donations received u/s 80G during scrutiny cases to ensure proper accounting of donations/transactions in the accounts of donors.

14 The Ministry may bring suitable definition for the phrase “substantially financed” to clarify provisions of section 10(23C).

15 The Ministry may consider bringing suitable modifications in provisions for compliance with TDS provisions by Trusts and the provisions may be made for proper disclosure in the Audit Reports.

16 The Ministry may consider bringing out suitable changes in Forms to be submitted by Trusts.

With reference to Resource Utilization

17 The Ministry may maintain a comprehensive database of Trusts with linkage of the PAN, details of registration and assessment. The Ministry may also consider making mandatory electronic filing of returns of Trusts.

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  1. vswami says:

    A Critique:

    Quite many of the CAG’s observations relate to the gross irregularities directly flowing from glaring violations by the ITD of the extant rules, norms and regulations already in place. Considering the reported significant loss to the revenue, the CAG could have desirably laid down at least a tentative time frame for carrying out the remedial courses of action suggested.
    Likewise, instead of leaving it open to the government and /or its empowered authorities, the CAG Report for the sake of its completeness,need to have desirably suggested or recommended the outermost time limit for giving effect and plug in suitable foolproof correctives, be it in the form of legislative amendments/modifications,or otherwise.
    In the absence of the foregoing, as has been the history, this will be just one more report on paper,and remain so for ever, with no concerted steps or initiatives from the men in governance. More so,because of the presently obtaining grave uncertainly over the future rulers, pending the general elections round the corner.

  2. S PRAKASH says:

    Really shocking.With all these leackages how the department is announcing that they have reached the traget of Direct Tax collection? Kindly suggest some transparent methods for the CBDT to make public at least BIG 100 Trust/individual/company/firm/llp cases collection and demand in each of the Commissioners Circle.Publish it in the papaer, the trusts and educational institutions are claiming exemption u/s 10(10) are really doing any service in the filed of education? They are selling education, selling morallity,selling service to earn hand some profits.They are really in the business of eduction and even the religious trusts are not out of this question.It is better the government should think of removing the exemption sections like 10,11,12 and 13 from at least in new INCOME TAX CODE, which is hidden in the dark bag till date.

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