The Hindu Business Line : Scheming benevolence

THE Income-Tax Act, 1961 has a number of tax sops for assessees whose services are beneficial to the society/country. Section 35AC is one such example. To promote reinvestment of profits (by suitable tax exemptions) in areas where massive investments are required — such as housing, highways, roads and bridges, non-conventional energy, school buildings and supply of drinking water — the Finance (No. 2) Act, 1991 introduced a provision in the I-T Act, providing for deduction, while computing the taxable profits of a taxpayer carrying on a business/profession, the entire amount paid for financing projects or schemes promoting social and economic welfare. A similar deduction is also available for taxpayers not carrying on any business or profession. A `National Committee of Eminent Persons' was constituted to identify areas requiring support and for recommending specific projects and schemes.

Section 35 AC was inserted in the I-T Act with effect from April 1,1992, that is, assessment year 1992-93. Under this provision, the entire expenditure incurred by a taxpayer — by way of payment to a public sector company, local authority, or association/institution approved by the National Committee, in accordance with the rules made under the I-T Act, for carrying out any eligible project/scheme for promoting social and economic welfare or for the uplift of the public — qualifies for deduction while computing income. Further, a company may also be allowed deduction where it incurs expenditure directly on an eligible project/scheme. Direct expenditure on such projects/schemes by persons other than a company does not qualify for deduction.

The working of this provision was examined by the Comptroller & Auditor General of India (CAG) in its report No. 12A for the year ending March 31, 2001. The report revealed several weaknesses in the provisions and irregularities in the working of the schemes. The review covered the projects/schemes approved by the National Committee since its inception in 1992. Of the 681 projects/schemes recommended by the National Committee for approval and notification to the Central Government till March 2000, 253 were test-checked.

The CAG's findings revealed the following with regard to the implementation of the section and the functioning of the National Committee, which comprises 14 members, including the chairman, appointed by the Central Government:

The Central Government has not undertaken any review of the functioning of the National Committee or the implementation of the scheme as a whole to ascertain whether the objective behind the introduction of Section 35AC and the purposes for which committee was created have been fulfilled.

Seven projects/schemes approved by the committee did not fall within the prescribed guidelines under the I-T rules, and 26 projects were either not implemented at all or incomplete/abandoned midway.

There is no uniformity in the standards applied by the committee while granting/refusing extension to projects. In nine cases, although the institutions had no basic facility to implement the schemes, extensions were granted.

In five cases, donations received by the executing agencies were used for purposes other than for the respective projects/schemes. Further, in five cases, donations were received after the expiry of the notified period.

True and fair accounts were not submitted to the committee by two approved associations/institutions. Further, in 31 cases, half-yearly/annual reports either were not sent at all or were sent late. It was also seen in 67 cases that no separate accounts were maintained for such projects/schemes by the executing institutions/associations. Instead, a combined income and expenditure statement of all the activities undertaken by the institution/association was prepared and submitted along with the return of income, or furnished to the committee.

Thirteen approved associations/institutions did not file their returns of income.

Deductions under Section 35AC were being allowed by the AO without proof of donations in the prescribed certificates, particularly in summary assessment cases. Further, deduction under this section was being allowed even when the assessee did not have income from business or profession.

Certain lacunae in the Act, such as absence of a provision requiring the approved association/institution to submit annual reports to the AO, were noticed. In the absence of this, the AO is hampered by the lack of information on the project/scheme.

No controls are prescribed in the Act to exercise check over issuance of certificates, especially after completion of the projects/schemes or in respect of those that were subsequently abandoned. In the absence of this, the possibility of fraud cannot be ruled out.

There is no provision in the Act for withdrawal of notification when a project is not implemented. Thus, if an institution continues to raise donations fraudulently, the AO is unaware of this even while giving the donor the benefit of deduction under Section 35AC.

For the committee to be effective, it is necessary to provide some kind of mechanism for regular co-ordination and exchange of information not only between the committee and the I-T Department, but also between the AOs themselves, which would prevent misuse of the scheme and leakage of revenues owing to loopholes in the Act.

The CAG report should come as an eye-opener. Tax revenues are being lost even as the objectives sought to be achieved by such schemes remain unrealised. It is time that all such schemes were reviewed immediately. And if there are revenue losses despite the schemes not achieving the purposes for which they were formulated, they should be discontinued forthwith.

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