Finance (no.2) Bill 2019- clause 7 – increased powers of CIT ( E ) about registration and cancellation of Trust or institution u.s. 12AA - observations and reservations of author.

[CA DEV KUMAR KOTHARI]

Proposed amendment in S.12AA:

The proposed amendment in S.12AA is in relation to enquiry which the Pr. CIT(E) can make before granting registration and which he can make after granting registration in some situations which can lead to cancellation of Registration.

The power of CIT (E) is being increased to include power to enquire whether requirement of any other law applicable to the trust or institution is being complied with, if such enquiry is material for the purpose of registration and continuation of registration. The existing scope of enquiry and power to enquiry is continuing.

Therefore, we find that the amendment has effect to increase scope of enquiry to be made or which CIT (E) can make.

Therefore author feels that the placement of observation of honorable FM in her budget speech under heading “Preventing tax abuse”, is not at all proper. Such provisions can be put under some other suitable heading.

In fact heading like Preventing tax abuse is not at all proper in speech or explanatory notes etc. Use of such words cast a question mark on integrity of tax payers. Whereas it is proven fact that the tax payers are having higher integrity than tax officers. This is proved by the following illustrative facts:

that major portion of tax is paid voluntarily and honestly by tax payers.

That additions made by tax officers in assessment are vacated mostly.

We find cases of additions made under different heads and for huge sums, and such additions are mostly vacated in respect of various heads and also in terms of quantum, in appeals if the tax payer properly pursue the matter.

Therefore, there must also be action against AO / tax officers who make un-necessary additions and CIT (A) who confirms additions made by AO and also CIT who un-necessrily pass revision orders.

Amendment for granting or increasing powers of any tax officer is well within powers and intention of legislators however, branding any such amendment for preventing tax abuse is not proper. Placing such proposals under head “Preventing tax abuse” is not proper because:

This indicates that there are doubts about honesty of tax payer

There is presumption that public of India will abuse tax and will avoid tax.

In fact due to many of government officers having attitude of doubting everyone else and particularly assuming that the tax payers is chor, there is lot of harassment of taxpayers and there is un-necessary litigation.

Guidelines is required:

In view of increased power of CIT (E), it is desirable that there should be guidelines for CIT (E) and they should not have free hand to make roving enquiry to harass Trusts and Institution merely based on doubt, suspicion, bias, presumption and conjecture. In this regard it is worth to note that many CIT (E) have refused to grant Registration and cancelled Registration. On appeal, Registrations have been granted and orders cancelling registration have been set aside by Tribunal. Still not satisfied, the IT department has filed large number of appeals before High Courts.

There should also be action against government officers who act in illegal and whimsical manner and exercise powers in unreasonable and illegal manner. However, unfortunately CBDT is promoting such actions by announcing incentives to officers.

Budget proposal and related notes, explanations and budget speech are reproduced below with highlights, highlighted catch words, underlining, italicizing and coloring , added by author for easy analysis and understanding:

Statutory Provisions

FINANCE (No. 2) BILL, 2019

Amendment of section 12AA.

7. In section 12AA of the Income-tax Act, with effect from the 1st day of September, 2019,––

(I) in sub-section (1),––

(i) for clause (a), the following clause shall be substituted, namely:––

“(a) call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about,––

(i) the genuineness of activities of the trust or institution; and

(ii) the compliance of such requirements of any other law for the time being in force by the trust or institution as are material for the purpose of achieving its objects, and may also make such inquiries as he may deem necessary in this behalf; and”;

(ii) in clause (b), after the words “genuineness of its activities”, the words, brackets, figures and letter “as required under sub-clause (i) of clause (a) and compliance of the requirements under sub-clause (ii) of the said clause” shall be inserted;

(II) in sub-section (4), for the portion beginning with the words “the activities of the trust or the institution” and ending with the words “cancel the registration of such trust or institution”, the following shall be substituted, namely:––

“(a) the activities of the trust or the institution are being carried out in a manner that the provisions of sections 11 and 12 do not apply to exclude either whole or any part of the income of such trust or institution due to operation of sub-section (1) of section 13; or

(b) the trust or institution has not complied with the requirement of any other law, as referred to in sub-clause (ii) of clause (a) of sub-section (1), and the order, direction or decree, by whatever name called, holding that such non-compliance has occurred, has either not been disputed or has attained finality,

then, the Principal Commissioner or the Commissioner may, by an order in writing, cancel the registration of such trust or institution”.

Notes:

Clause 7 of the Bill seeks to amend section 12AA of the Income tax Act relating to procedure for registration.

Sub-clause (a) of sub-section (1) of the said section, inter alia, provides that while considering the application of a trust or institution, the Principal Commissioner or Commissioner may call for documents or information necessary in order to satisfy himself about the genuineness of its activities.

It is proposed to substitute the said sub-clause so as to provide that besides the genuineness of its activities, the Principal Commissioner or Commissioner shall also satisfy himself about compliance to the requirements of any other law which is material for the purpose of achieving its objects.

Sub-clause (b) of sub-section (1) of the said section, inter alia, provides that after satisfying himself about the objects of the trust or institution and the genuineness of its activities the Principal Commissioner or Commissioner shall pass an order registering or refusing to register the said trust or institution.

It is proposed to amend the said sub-clause so as to provide that the Principal Commissioner or Commissioner, besides satisfying himself about the objects of the trust or institution and the genuineness of its activities, shall also satisfy himself about the compliance to the requirements of any other law which is material for the purpose of achieving its objects.

Sub-section (4) of the said section, inter alia, provides for cancellation of registration if it is noticed that the activities of the exempted entity are being carried out in a manner that either whole or any part of its income would cease to be exempt.

It is proposed to amend the said sub-section so as to provide that besides the existing ground of cancellation, the trust or institution has not complied with the provisions of any other law that it was required to comply with due to the reason that the same was material for the purpose of achieving its objects and the order, direction or decree, by whatever name called, holding that such non-compliance has occurred, has either not been disputed or attained finality, shall be an additional ground on which the registration may be cancelled.

These amendments will take effect from 1st September, 2019.

From budget speech:

6. Preventing tax abuse

6.2 In order to ensure that a trust or institution complies with local laws that are material for the purposes of achieving its objects, it is proposed to provide for cancellation of registration of the trust or institution under the Act for violation of such provision of any other law, where an order holding that such violation has occurred is either not contested or has become final. It is proposed to provide that at the time of registration it shall also be examined whether there has been any such violation by the trust or institution seeking registration.