Somogyan Pal

Somogyan Pal
Additional Commissioner,
Income Tax, Ahmedabad

Ms Somogyan Pal, who belongs to Odisha, joined the Indian Revenue Service (IRS) in 1997 after completing Masters and M.Phil in Sociology from Jawaharlal Nehru University New Delhi. Presently posted as Additional Commissioner in Ahmedabad has worked in various places like Cuttack, National Academy of Direct Taxes (NADT), Nagpur and Mumbai.

Executive Summary

There are various provisions in the Act which give exemptions and deductions with the sole intention of promoting Social Development & Scientific Research which contributes in the overall growth of the Nation. Section 35(1)(ii) of the IT Act is one of such provision. This article is a small effort to explain how these provisions are being mis- utilised and frauds committed and the state is deprived of its genuine taxes. This information will guide the Assessing Officers when they come across any such Cases.

The punch line, “ Trust, but Verify” was used by the President of USA, Ronald Reagan in diplomatic negotiations during cold war. I had never thought that I will ever encounter a situation where the above quote will become my tagline.

Non-Governmental Organizations, popularly called NGOs’- whether public trusts, associations, or other non-profit entities (including non-profit companies), perform a vital role in supplementing governmental efforts in achieving economic development and social welfare. We need such organizations because the resources at the command of the government are far less compared to actual requirements. At the same time, the outreach and the wealth of local knowledge of noble citizen of the country can fruitfully utilized for the benefit of society.

NGOs exist in all countries, whether developed or developing, where orthodox or progressive. Tax administrations the world over acknowledge their voluntary efforts and provide incentives to genuine charitable organizations. Most often, this is done by either partially or fully exempting their incomes from tax, and also by providing tax incentives to donors in order to encourage them to contribute resources to such organizations. The Indian Income Tax Act, 1961 too incorporates several provisions to extend tax breaks and incentives to such organizations as well as to their donors.

During the course of assessment proceedings of professionals (mainly doctors) and in few cases of builders for A.Y. 2016-17 in Ahmedabad, it was noticed that assessees had given donations in large sums to Shri Arvindo Institute of Applied Scientific Research Trust, Puduchery. It was approved by the prescribed authority under rule 6 of the Income-tax Rules, 1962, i.e., the Director – General of Income tax (Exemptions) in concurrence with the Secretary, Department of Scientific and Industrial Research for the purposes of clause (ii) of sub-section (1) of section 35 (thirty-five/one/two) of the Income-tax Act, 1961, under the category “Association” subject to the some conditions, by Notification: S.O.503 dated 4/11/1991 for the purpose of sections 35,35(1) and 35(1)(ii) of Income Tax Act 1961. (This section allows weighted deduction on the expenditure incurred on donations to eligible entities).

In one such case, an amount of Rs. 25,37,500/- was claimed as donation given to this Trust which was having registered address at Shri Arvindo Institute, at Andheri(East), Mumbai. A weighted deduction of Rs.44,40,625/- u/s. 35(1)(ii) being 175% of the donation was claimed by the assessee.

On perusal of the details furnished by the assessee, the CBDT’s approval letter appeared to be suspicious as the approval was given for an indefinite period although it was issued prior to amendment. An enquiry was made from CBDT as to the genuineness of the claim. It was confirmed that Shri Arvindo Institute of Applied Scientific Research Trust (Mumbai) is not a recognised trust for deduction u/s 35(l)(ii). Subsequently, CBDT vide Instruction dated 14th December, 2018 has also clarified that the said trust was earlier approved u/s 35(1)(ii), which has expired on 31st March, 2006.

In view of the fact that a scam appeared to be organized at a larger scale, enquiry was made with the CIT (Exemptions), Mumbai, where Shri Arvindo Institute of Applied Scientific Research Trust was being assessed. It was ascertained that the Trust had 11 bank accounts with different banks. The bank statements were obtained and some of the donors were identified by the officers of my Range from the bank accounts by reverse trailing and obtaining KYC documents from the donors’ banks. This information was passed to the respective AOs for further action.

Since the complete details of various bank accounts of the Trust and source of deposits therein were not available, a request was made to FIU-IND (Financial Intelligence Unit-India), New Delhi this organization provides quality financial intelligence for safeguarding the financial system from abuses and economic offences. Here it would not be out of place to place my sincere thanks to Shri Naresh Balodia,IRS, Pr.Commissioner of Income Tax, who inspired and actively guided us in this investigation.

A request for identification of accounts and information regarding the credits in the accounts of Shri Arvindo Institute of Applied Scientific Research Trust was officially made.

The FIU-IND provided the details of all the bank accounts operated by the Arvindo Trust from F.Y. 2011-12 till F.Y 2017-18 comprising of 18 Bank accounts, having total credits of Rs 279,70,80,977/-., a sum beyond my expectation. Suddenly, genuineness of every transaction was under suspect. Such a huge sum must have included a lot of donors and each needed a fresh confirmation. Added to it, such donations qualified for weighted deduction. So the quantum of tax forgone was much higher than this. It had opened a Pandora’s Box or a bee hive accidently and the volume was beyond my wildest imaginations. I could visualize the stockpile of data for cross verification across India. I remembered the great American statistician, W Edwards Deming, who once said- “In God we trust. All other must bring data”.

On specific request, FIU also provided the information regarding credits in bank accounts of Shri Arvindo Institute of Applied Scientific Research Trust in F.Y. 2011-12, since remedial measure in A.Y. 2012-13 was getting time barred soon. The information was received regarding the bank accounts from which the credits were received. However, the donors were not yet identified. On examination of the information, it was found that in total 87 cases credit of Rs.11.54 crores was received in F.Y. 2011-12. The major account in this case in which the amounts were deposited was Federal Bank, Kolkata. Out of the 87 entries of donors in the said account, FIU-IND could provide bank account details of 22 cases only. In some of the cases, the date of clearing of the cheque, the amount of cheque deposited and name of the remitting bank was also mentioned.

The credit entries showed receipts from 27 banks. Hence, notices u/s.133(6) were issued to 27 banks along with information of the date of credit, amount of credit requesting to provide the sender’s account no. as well as PAN and KYC details. The Inspectors of this Range were engaged in pursuing all the 27 banks to provide information.

Initially the banks were not in a position to give the information stating the information was not available and that they needed the sender’s name and account number to trace out the PAN. Since this was a time-barring matter, summons were issued to the local branch of the Federal Bank in Ahmedabad through which all the transactions have taken place to provide the information as early as possible. In response to the summons, Federal Bank provided the name of the senders and in some cases the account numbers. In those cases KYC was obtained and from the PAN, jurisdiction was ascertained and information was passed to jurisdictional AO. In few cases, the branch stated that they were not able to provide the sender’s account no. stating that “as per practices prevailing in those days (2011-12) clearing cheques (debit vouchers) used to ultimately reach to Drawee Bank Branches; so, original cheques are expected to be available with the Drawee Bank Branches;also note that the mentioned cheques were mostly deposited in Mumbai & other Branches that’s why no vouchers are available with our Branch.”

In cases where only the basic information was available,i.e. like only the name of the assessee and the date of credit of cheque, the vast treasure of PAN database was searched and the assessees identified and the information was disseminated to the AO for further action.

This massive exercise of following up with 27 Banks and searching the PAN database was made possible with the dedicated efforts of the inspectors and staff of the Range in spite of having other pressing issues. Due to a clear time-bound plan and follow-up, the information could be passed for donations of Rs. 8.68 crores was disseminated to the jurisdictional AOs well within deadline of 31/03/2019 for reopening of the cases of the donors for AY 2012-13.

In few of the cases where assessment order was passed by A.O, the same has been confirmed by CIT(Appeals) by stating that the donation was given to unrecognized organization hence the claim of decuction u/s 35(1)(ii) is not allowable to the assessee. Subsequently, CBDT, vide F. No. 225/351/2018-ITA(II) dated 14.12.2018 issued instructions to AOs to conduct effective enquiries and pass the assessment orders in respect of the above matter. The Board had also directed that dissemination for subsequent years would be made by the CIT (Exemptions), Mumbai.

The Assessing Officers need to be vigilant where such kind of donation given by assessee comes to their notice. Proper enquiry along with authentic establish that the donation given is genuine and the organization/institute is duly approved by CBDT.

I read an American politician, recently saying that-

“It’s about time law enforcement got as organized as organized crime”. No one will disagree.

Source- Taxaloguue – Volume 1- Issue 2- OCT-Dec 2019 Issued by Directorate of Legal & Research -Central Board of Direct Taxes

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January 2021