Proposing S.115BBB and the Budget - Part V

ANONYMOUS MAGNANIMITY FAILS TO IMPRESS THE FM : PROPOSED S. 115BBB

By proposing to put tax at maximum marginal rate the anonymous or pseudonymous donations given to charitable institutions, the Finance Minister plans to plug a misuse of the Income Tax provisions. However, the proposal is likely to cause hardship in genuine cases.

The proposed amendment

In chapter XII of the Income Tax Act, after section 115BBB the following section 115BBC is proposed to be inserted with effect from April 1, 2007.

'115BBC (1) Where the total income of an assessee, being a person in receipt of income on Anonymous behalf of any University or other educational institution referred to in sub-clause (iiiad) or sub-clause donations to (vi) or any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via) or any fund or institution referred to in sub-clause (iv) or any trust or institution referred' to in sub-clause (v) of clause (23c) of section 10 or any trust or institution referred to in section 11, includes any income by way of any anonymous donation, the income-tax payable shall be the aggregate of the amount of income-tax calculated on the income by way of any anonymous donation, at the rate of thirty per cent.

The amount of income tax with which the assessee would have been chargeable had his total income reduced by the amount of income referred to in clause(1):The provisions of sub-section (1) shall not apply to any anonymous donation received by-any trust or institution created or established wholly for religious purposes.

ANALYSIS

Definition of 'Anonymous donation': The proposed amendment defines anonymous donation to mean any voluntary contribution referred to in sub-clause (iia) of clause (24) of section 2, where a person receiving such contribution does not maintain a record of the identity indicating the name and address of the person making such contribution and such other particulars as may be prescribed.

The proposed amendment applies to the following categories of assessees:-
a. any university or other educational institution existing solely for educational purposes and not for purposes of profit. If the aggregate annual receipts of such university or educational institution do not exceed the amount of annual receipts as may be prescribed

b. any hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit. If the aggregate annual receipts of such hospital or institution do not exceed the amount of annual receipts as may be prescribed

c. any other fund or institution established for charitable purposes which may be notified by the Central Government in the Official Gazette, having regard to the objects of the fund or institution and its importance throughout India or throughout any States

d. any trust including any other legal obligation or institution wholly for public religious purposes or charitable purposes, which may be notified by the Central Government in the Official Gazette, having regard to the manner in which the affairs of the trust or institution are administered and supervised for ensuring that the income accruing thereto is properly applied for the objects thereof

e. any trust or institution referred to in section 11 of the Act.

TAX CALCULATION

If an institution referred to in the above paragraph is in receipt of an income, which, includes an anonymous donation, the income tax payable shall be calculated as follows.
The amount of Income Tax on the amount of anonymous donation shall be calculated @ 30%.

The amount arrived at after reducing the amount, which has been charged @ 30% shall be chargable to Tax at the normal rate.

EXCLUSION

The provisions of sub section (1) shall not apply to the following institutions: Anonymous donation received by a wholly religious trust.
Anonymous donation received by a trust created wholly for religious and charitable purposes. This will however, not include donations made with a specific direction that such donation is for any university or other educational institution or any hospital or other medical institution run by such trust or institution.

Thus donations to partly religious and partly charitable trusts are proposed to be taxed only if the donation is specifically for an educational or medical purpose. One fails to understand the logic that would have gone into concluding that donations meant for educational or medical purpose are prone to misuse while donations not given specifically for medical or educational purpose are better quality donations.

Obviously the Finance Minister did not want to invite the wrath of religious bodies by proposing a maximum marginal tax on donations made to religious trusts and so decided to stay away from it.

The definition of anonymous donation is ambiguous and is likely to cause confusion and hardship in genuine cases. The proposed definition casts a responsibility on the part of the person receiving the donations to maintain the record of the identity indicating the name and address of the person making the contribution and such other particulars as may be prescribed.

From plain reading of the definition it seems that if the person making the contribution gives false particulars or fails to give proper particular, the trust would be penalized, such income being charged to tax at maximum marginal rate.

Section 13 provides for cases where section 11 shall not apply. Proposed sub section (7) of section 13 provides that nothing contained in section 11 or section 12 shall have an effect of excluding from the total income of the previous year. Any anonymous donation referred to in section 115BBC on which tax is payable in accordance with the provisions of that section. It seems this amendment has been proposed as a measure of abundant precaution, lest any provision in section 11 or 12 should operate against the provisions of the proposes section 115BBC.

This amendment will take effect from April 1, 2007 and will accordingly apply in relation to the assessment year 2007-08 and subsequent years.

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