Institutions carrying charity and philanthropy should not be denied tax benefit merely due to some alleged misdeeds, of officials of such institutions.

[C.A. DEV KUMAR KOTHARI]

Links and references:

CIT, Bangalore Versus Baldwin Girls High School  2010 -TMI - 78457 - Supreme court of India.

S. 10(22) of the Income Tax act, 1961.

Charitable institutions and its officials:

Charitable institutions and its officials are different persons. Even a settler of trust, who starts trust with some money or property, is a different person and not the owner of trust, the property donated is no longer his own property. In large organizations different people work for the trust in different capacities. Many of them are remunerated and only few persons act voluntarily or honorary. The people who work on  honorary basis also have some satisfaction of being associated with such institutions and to get a platform for doing  some work for the society and to get some recognition or popularity. Therefore, if an official of charitable and philanthropic organization does some misdeeds for his personal gains, the institutions should not be penalized for such wrong actions of its official instead, the official concerned should be booked to compensate the institution. Tax payable for such actions should be recovered from the wrong doer.

Charity and philanthropy is carried out by human being:

Activities involving charity and philanthropy are carried out by human being. The persons engaged in such activities have also personal need and requirements as well as preferences. They are also governed by various natural aspects of human being and that includes greed for power and money.

The institutions and officials:

The institutions are established by some people with set objects. The institution is not a living person therefore the activities of institutions are carried by its officials who may be known by different names and designations like trustees,  treasurers, chairman, other office bearers etc.

Enlarged size of institutions:

Over a period of time the institution may become a large organization having provided employment to large number of people, large base of assets and large section of people getting its services so it's utility for the society increases. With a large organization, larger resources and more people being interested in the institution the people who are managing it get higher power to manage people, collect money and to spend money.

Power makes people corrupt:

It is well known and well accepted saying that power makes people corrupt. The corruption is not merely to gain personally but also to exercise undue powers to harass people. It is heard that at operational level, power is misused by officers, and simply to avoid harassment and illegal actions people have to pay bribes to let officers refrain from doing illegal things and act in illegal manner. Generally bribes are not for doing any illegal act.

Greed is an inbuilt- god made natural and real aspect of human being:

Greed is a very fundamental natural aspect of human being. Greed may be for power, popularity, or money.  Degree of greed and nature of greed are different in different people. Some may have more some may have less greed. Some people may have satisfaction on meeting of minimum requirements whereas other may have higher need. Greed may be satisfied or may increase further. Even a saint worshiping the god to get moksh is a greedy person- he want to be near the god and to get heaven or swarg.  Spirituality is the object of greed.

While doing charitable activities, even freely, the person doing so have greed of many types and shades like  recognition and popularity in the society, long-term remembrance   of the donor by way of his being an initiator or official of institution, getting chances of meeting people having wealth and power, having a common platform to meet and interact people. When the size of organization is enlarged, the greed can also be extended to become more powerful in the institution and also to use power to oblige other people and some time even misuse power for personal gains or for gains of near and dear. Still fact remain that in spite of some misuse of funds or property, the institution work for the benefit of society.  Therefore, for some wrong actions of officials of such institution, the institution should not be penalized.

Greed and corruption:

Greed and corruption goes hand in hand. Added with power which one command, the greed and corruption gets momentum. Even in charitable institutions people work and they are rewarded. When there is restriction on rewards which such institution can allow to its official, one may look for alternate means to get rewarded. Such alternate means, if encashed, may be called as personal gains. On study of subjects of power, greed, and corruption we find serious cases of corruption (the other name of personal gains) even in  name of institutions carrying charity.

We find corruptions of different types and at different levels  even in government run schools, colleges, hospitals and other institutions. Reading on websites shows that corruption is found even in relief work and  a substantial part of money spent by governments  and NGO's  is siphoned and does not reach the beneficiary. The websites of CBI would also show many cases of corruption. It is unfortunate that ultimately CBI may not be able to prove corruption in case of allegations against many of accused.

Corruption and charity:

Element of corruption even  in charity is found- this is result of power and  greed  which lead to  corruption. While doing charitable activities, people get power, money and other means of wealth for use or spent on charitable purposes. Many of people engaged in charity can be lured due to these factors. Some may be lured because they really need money and some may be lured because they want more and more money. It is said that charity began with corruption. For example see the following readings from a website:  

 

http://www.1115.org/2006/02/27/charity-begins-with-corruption/

"Charity Begins With Corruption

by matt at 6:00 am on February 27th, 2006 in Congressional Man Date

Charity Navigator:

Our data shows that 7 out of 10 charities we've evaluated spend at least 75% of their budget on the programs and services they exist to provide. And 9 out of 10 spend at least 65%. We believe that those spending less than a third of their budget on program expenses are simply not living up to their missions."

 

In India also we have a common feeling that a large portion of government spending does not reaches beneficiaries. Even if we examine simple aspect of spending on cleanliness in government hospitals , and offices and actual cleanliness noticed therein we will find evidence of corruption in form that people engaged for cleaning are not working but paid, cleaning materials shown consumed, is really not spent on toilets but is used otherwise. The expenses in private sector is much less yet they have very clean offices and toilets in comparison to government departments. If  man days and  cleaning material be properly used we can have  much better and  clean offices and toilets in government hospitals, schools, colleges and offices  in comparison to those in private sector.     

 

CIT, Bangalore Versus Baldwin Girls High School  2010 -TMI - 78457 (SC).

 

In this case the Supreme Court ahs on appeal of the revenue referred back the matter to the Tribunal. The Supreme Court has observed and  noted as follows:

a.      From records, we find that the Assessing Officer has made serious allegations in the order of assessment.

b.      The Court did not  express any opinion on such allegations.

c.       The Court was of  view that a detailed factual exercise needs to be carried out by the Tribunal.

d.      Detailed  factual exercise is considered necessary particularly with regard to the ground which is mentioned in the Memo of Appeal before the High Court.

e.      The ground referred to is analyzed below:

   

(i)                  "The Appellate Authorities failed to appreciate that payments had been made towards Home Mission/SIRC, a religious institution.

(ii)                The son of the Bishop had been appointed as Principal of Baldwin Methodist College.

(iii)                The daughter of the Bishop was appointed as a High School Teacher.

(iv)              Several construction activity as well as purchase of items had taken place by the Bishop through one A.G. Hoover at prices more than the market value

(v)                advances had been paid for purchase of land at exorbitant rates without any agreements.

(vi)              All these clearly showed that the entire organization had systematically not utilised the funds exclusively for educational purposes but for profit of the Bishop and his family members

(vii)             therefore not entitled to an exemption under Section 10(22) of the Act."  

In view of the contents of the ground the  judgment of the High Court was set aside and the matter has been  remitted to the Tribunal for de novo consideration in accordance with law.

The Supreme Court has said that all contentions are expressly kept open.

Views of the author on the decision of the Supreme Court:

The order of the Tribunal and the High Court are not presently available to author. The Supreme Court has also not mentioned anything about facts found by the Tribunal. Whether the Tribunal has examined and considered all allegations made by the AO and then came to conclusion that the exemption was allowable is not clear. Whether the finding of Tribunal was challenged as perverse is not known.

Therefore, it appears that the Tribunal will have to reexamine all factual aspects and the revenue and the assessee both are free to make submissions and evidences to enable the Tribunal to arrive at proper and correct finding based on evidence. All issues are open.

It is very well known that the revenue authorities are expert in making adverse comments and allegations many times without any basis, many times contrary to actual facts, many time due to bias and prejudices, and many times just to make comments so as to disallow benefits to assessee. The revenue authorities have general tendency to presume   that the assessee is chor or is a tax avoider  or that assessee has adopted wrong means to avoid tax liability etc. The thinking of revenue officers is usually not broad enough to understand the ground realities of activities of assessee they would like to make such comments as to deny benefits to assessee as they fit.

It is ground reality that people in power of institutions like school and hospitals are in a position to exercise some influence on other persons and can also get some personal gains. Such personal gains can be considered their income but for that reason the school, hospital or similar  institution  should not be penalized by  denying the tax advantage otherwise available to them.

In this case allegations were as stated in first column and possible aspects for reply by assessee are stated in second column:

Allegations	Possible reason or aspects of reply
"The Appellate Authorities failed to appreciate that payments had been made towards Home Mission/SIRC, a religious institution.	Whether allegation is correct? Whether the contribution was conducive to the object of school. Any other purpose.
The son of the Bishop had been appointed as Principal of Baldwin Methodist College.	Whether the son was qualified and competent for such appointment, and whether terms of appointment were proper.
The daughter of the Bishop was appointed as a High School Teacher.	Whether the daughter  was qualified and competent for such appointment, and whether terms of appointment were proper.
Several construction activity as well as purchase of items had taken place by the Bishop through one A.G. Hoover at prices more than the market value	The truth of allegation to be examined. Whether allegation of higher price is due to wrong comparison? How and why higher price was justifiable?
Advances had been paid for purchase of land at exorbitant rates without any agreements.	Whether the allegation is correct. Whether allegation of higher price is due to wrong comparison? How and why higher price was justifiable? What is ultimate outcome of advance paid, purchase of land adjustment of advance etc.
All these clearly showed that the entire organization had systematically not utilised the funds exclusively for educational purposes but for profit of the Bishop and his family members.	Whether allegations of AO are due to prejudice, out of context, in disregard of purposes of school. Whether the bishop has really gained personally. It may be that his son and daughter worked at lower rate of salary than salary commensurate with their education, experience and transfer price. It may be that contracts were at reasonable rates and the AO ignored specialization of concerned parties and their quality of work etc.
Therefore not entitled to an exemption under Section 10(22) of the Act."	Even if it be assumed that the Bishop and his family members or close persons have made some personal gains the question is whether the school can be denied exemption. The enquiry to be made is whether the school is fulfilling its purposes of educational institution. Personal gains by officials, or say even if some fraud is committed by some of officials, for personal gains cannot be and should not be  ground to deny exemption to an institution like school or hospital which is rendering service to society. If the school is fulfilling its purpose and rendering services to the society, then the provision to allow exemptions to such institution should be liberally considered. The persons who have gained personally can be taxed on the income derived by them. For example if salary is paid excessively, the salary will be taxable in hands of recipient. In hands of school the excessive element can be disallowed if the recipient is covered by persons specified in section 40 in this regard. But for the reason of payment of excessive salary paid, exemption to school should not be denied.

 Moot question:

In this case moot question which arises is whether, an institution like a school can be denied tax advantages   or tax relief merely because some of its officials have used their institutional position for their personal gains?

In view of the author there should be proper examination of facts and circumstances, the persons who gained personally can be charged with tax on his income.

Guilty persons can also be charged with corruption and the undue advantage obtained by them should be returned to the school. In this regard, police and the charity Commissioner can play their roles.

The school, as such should not be denied the tax benefits merely for the reason that some of its officials have gained personally.