Date:23/03/2006 URL: http://www.thehindubusinessline.com/2006/03/23/stories/2006032301191100.htm

Back There goes the anon

R. Anand

Anonymous donations are now under the scanner

One of the popular methods of getting rid of black-money seems to be to donate cash to religious and charitable institutions without the donor disclosing his name.

Religious and charitable trusts have played a significant role in addressing the socio-economic needs of the country.

The Income-Tax Act, 1961 has encouraged trusts to expand and grow, particularly in the educational and medical fields. But the proliferation of trusts across the country has made their regulation and monitoring a difficult task. While Sections 11 to 13 of the Act exempt the income of a trust,, Section 80G allows deductions on the donations received .

Trusts have to undergo the process of registration in accordance with Section 12A of the Act and adhere to the conditions relating to investments and application of income. Of late, there have been debates over the issue of whether trusts also need to pay some income-tax, at least on the surplus generated on various activities. Taxing trusts is as sensitive an issue as taxing agricultural income The Finance Bill, 2006 has, however, touched upon one irksome area relating to trusts — anonymous donations.

Anonymous donations

A new Section 115BBC has been inserted to provide that any income by way of anonymous donations to trusts shall be included in the total income of the trusts and taxed at the maximum marginal rate of 30 per cent. , The amendment aims to prevent trusts from receiving anonymous donations.

One of the popular methods of getting rid of black-money seems to be to donate cash to religious institutions and charitable institutions without the donor disclosing his name. This part of the transaction is sought to be tracked through the process of taxing anonymous donations in the hands of the trust.

It appears that this amendment, more than taxing trusts, seems to be getting to the root of the problem — generation of black-money and deploying the same through anonymous donations. There is no doubt that the proposal is justified, but then it has its own share of ifs and buts.

What is anonymous?

The provision is drafted to indicate that the test of anonymity will lie in the hands of the trust maintaining records which, among other things, requires indicating the name and address of the person and such other particulars as may be prescribed. It will be interesting to see what will constitute "such other particulars" as and when they are prescribed by the board. How do the records kept by the trust lead to the conclusion of anonymity from the viewpoint of the donor?

What would happen if the person discloses his full identity and address but for some reason the trust decides to maintain inaccurate and incomplete records of the said donor? Will it then also be treated as anonymous?

For the first time in income-tax legislation, anabstract legal term "anonymous" has been inserted in the Act. Courts will be busy deciding the situations and circumstances where the test of anonymity will be applied. In legal parlance there is a clear distinction between anonymous and pseudonymous.

The word "pseudonymous" means bearing a false or factious name, while the word "anonymous" means without any name acknowledged or of unknown name or whose name is withheld. The difference becomes important because charitable trusts are not in a position to verify whether a false or fictious name is given by the donor. In short, doors are open for a fresh round of litigation on this issue.

In 2001, the Parthasarathi Shome Committee made noteworthy recommendations in the matter of taxing trusts. It recommended that income based deduction for donations under Section 80G are converted into a tax credit at the lowest marginal rate of 10 per cent. Second, the exemptions under Sections 10 and 11 to 13 in respect of the income of charitable trusts and institutions of various categories should be restricted only to donative non-profit organisations (NPOs) to be defined as those in which 90 per cent of the receipts are through donations.

Third, the non-distributions constraint should be made explicit and universal. The proposal in the Finance Bill, 2006 may be the first step in the process of revisiting the tax on trusts. More may follow in the new Act that will emerge may be in end-2006.

(The author is a Chennai-based chartered accountant.)