Every nation is dependent on the revenues generated from the collection of taxes as it is further utilised for meeting the expenses of the Government. Taxes are broadly divided into two parts, direct and indirect taxes. The tax that is levied directly on the income or wealth of a person is called direct tax. Income tax is one of form of direct taxes. Indirect taxes are imposed on price of goods or services and allows the tax burden to shift. The levy of income tax in India is governed by the Income Tax Act, 1961 and Income Tax Rules, 1962. However, the Act also provides relief to the tax payers by providing exemption, deduction and rebate.
Tax payers are always eager to save their tax liabilities by showing their income as the exempted income. The Income Tax Act of 1961 provides for tax exemptions to individuals, Hindu Undivided Families, companies and also to various entities including the Government funded entities who are engaged in charitable activities. The exemptions are claimed on the basis of the source of income and the exempted income is not included in the total income of the taxpayer. When individuals, HUFs, companies make donation to the charitable bodies then they get tax exemptions. The purpose of this is to encourage and fulfill social objectives in different areas such as charity, religion, medical, education, etc.
Section 10(23C) of the Income Tax Act, 1961 deals with tax exemptions. It lays down that when an income is received by any person on behalf of fund or trust or institution or university or other educational institution or hospital or other medical institution then it is exempt from tax subject to certain condition.
Section 11 and 12 provides for the voluntary contributions receives by a trust or institution created wholly or partly for charitable or religious purposes or by certain research association or universities and other educational institutions or hospitals and other medical institutions or an electoral trust. While dealing with Section 11 of the Income Tax Act, 1961 it has been stated that accumulation of Income from trust property held for charitable purpose is permissible up to 15% on the gross receipts without attaching any liability of tax.
As the charitable bodies get the tax exemptions for the certain donations received, the tax payers take dubious steps to evade the taxes.
On 10th August 2022, the Central Board of Direct Taxes (CBDT) under Department of Revenue of Ministry of Finance published a notification. The CBDT prescribed certain rules to amend the Income Tax Rules, 1962 in exercise of the powers conferred under Section 295 of the Income-Tax Act, 1961. These rules are called as the Income Tax (24th Amendment) Rules, 2022 which shall insert “Rule 17AA- Books of account and other documents to be kept and maintained.”
The CBDT’s move came just after the audit report published by the office of the Comptroller and Auditor General of India (CAG) on 8th of August 2022. CAG in its report mentioned certain irregularities which it found during the internal audit of the charitable bodies. According to the report, there are “ineffective monitoring of accumulation of income and its utilization, ineffective monitoring of receipts and utilization of foreign contribution, the inadequacy of survey of educational Trusts, absence of provision for disclosure of TDS in the audit report, no parameter to verify the identity of the donors for detection of anonymous donation, etc. The IT Act has no provision to restrict donations by a Trust to another Trust out of current years’ income. Therefore, certain Trusts/Institutions are taking undue benefits by availing of the permissible accumulation of 15 per cent out of the current year’s income and then transferring the rest of the income to others trusts.” The CAG in its report also asked the Income-Tax Department to amend existing legislation to prevent the misuse of tax exemption granted to charitable trusts, including educational trusts.
With an aim to strengthen the surveillance and ensure tax benefits are meant for right causes, the Rule 17AA of the Income-tax (24th Amendment) Rules, 2022 lays down a comprehensive list of the books of account and other documents to be kept and maintained to get income tax exemptions. These record keeping requirements are applicable to funds, institutions, trusts, universities, other educational institutions, hospitals and other medical institutions under clause (a) of the tenth proviso to clause (23C) of Section 10 and Section 12A(1)(b)(i) of the Income Tax Act, 1961.
The books of account includes cash book, ledger, journal, copies of bills (whether machine numbered or otherwise serially numbered), original bills (whether issued to the person and receipts in respect of the payments made by the person) and any other book that may be required to be maintained to give a true and fair value of the state of the affairs of the person and explain the transactions effected.
The other documents include documents pertaining to record of all the projects and institutions run by the person (containing details of their name, address and objectives) and the source of income, voluntary contributions received, PAN and AADHAR number of the voluntary contributors, loan and borrowings, investment made, payments made domestically or abroad, contribution received for the purpose of renovation or repair of temple, mosque, gurudwara, church or other place, reasons for making contributions when educational institution is receiving or making contribution, etc.
The books of accounts and other documents specified shall be kept and maintained by the fund or institution or trust or any university or other educational institution or any hospital or other medical institution at its registered office, in written form or in electronic form or in digital form or as print-outs of data stored in electronic form or in digital form or any other form of electromagnetic data storage device for a period of ten years from the end of the relevant assessment year.
All or any of the books of account and other documents may be kept at such other place in India as the management may decide by way of a resolution and where such a resolution is passed, the fund or institution or trust or any university or other educational institution or any hospital or other medical institution shall, within seven days thereof, intimate the jurisdictional Assessing Officer in writing giving the full address of that other place and such intimation shall be duly signed and verified by the person who is authorized to verify the return of income under section 140 of the Act, as applicable to the assessee.
It can be concluded that the step taken by CBDT assumes a great significance in handling with the existing loopholes which was also pointed out by the CAG. When the charitable bodies will have to keep all the records then they will work in a fair manner. This will further strengthen the tax system and will check the misuse of tax exemptions granted to the charitable bodies. The intentions behind these rules are for the good but the small genuine institutions might face problems as they might not have enough means to maintain these records for compliance.