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Legal heirs can raise contention that notice was issued in name of deceased person: SC

Ghanyashyam Anil Dhanani vs. Income-tax Officer Ward 17(1)(1) - [2024] 169 taxmann.com 327 (SC)[28-11-2024]

A notice under section 148A(b) was issued in the name of the original assessee who had died prior thereto. In response to the said notice, a reply was given by the son of the original assessee stating that his father, the assessee, had passed away.

Thereafter, another communication was issued seeking details of the original assessee's legal representatives. The Chartered Accountant of the legal representative responded to the same. On becoming aware of the legal representatives of the deceased original assessee, an order was passed under section 148A(d).

Subsequently, another order was passed under section 148A(d) in the name of the legal representatives of the deceased-original assessee. Aggrieved by the said order, the legal representatives of the deceased-original assessee filed a Writ Petition contending that the original assessee had died and accordingly, the proceedings for reassessment were vitiated as they were commenced against a dead person.

The High Court disposed of the Writ Petition by holding that the legal representatives could take all contentions available to them except the fact that the initial notice was issued in the name of a dead person.

Accordingly, the matter reached before the Supreme Court. The legal heir contended that the main impediment in the case was that the High Court curtailed the right of legal heirs to take a contention that the impugned Notices were initially issued in the name of a dead person. Solely because the appellant, as a legal representative, subsequently responded to the notices would not imply that the proceeding initiated was valid. It was sought to be contented that the proceedings in fact were vitiated on account of the initial Notices being issued in the name of a dead person and the subsequent participation of the legal representatives in the proceedings before the Assessing Officer would not have cured the initial defect.

The Apex Court held that it was found that the said request made to the Court was reasonable and in accordance with law and therefore, ‘paragraph 4’ of the impugned order contending that all rights and contentions other than the notice issued to a dead person, is kept open, was set aside and the appellant was permitted therein to take the contention with regard to the initial Notice being issued in the name of a dead person-original assessee being defective and also take all other contentions available to the appellant before the Assessing Officer. Consequently, the impugned orderwas set aside to that extent.

Thus, the appeal was allowed and disposed of in the aforesaid terms.

Anonymous Donations All Aspects- Accounting, Record Keeping, Taxation, etc.

CA Naresh Kumar Kabra & Shailly Chordia - [2024] 169 taxmann.com 353 (Article)

When someone makes a donation without revealing their identity, how does the law treat it? Are such contributions entirely private, or do they fall under specific rules to ensure transparency and accountability? In exploring these questions, we gain insight into the legal and financial framework that governs anonymous donations, particularly in the context of charitable and religious trusts, and how these contributions are treated under the law?

Let's begin by understanding what an anonymous donation actually means?

What is Anonymous Donation?

Under the Income Tax Act, 1961 (ITA), an anonymous donation is defined in Sec 115BBC(3) as a voluntary contribution which mentioned in sub-clause (iia) of clause (24) of section 2, where the recipient of the contribution does not keep a record of contributor's identity, including their name, address, and any other details that may be specified.

Essentially, it means that an anonymous donation is one where the organization receives a contribution but does not track or retain sufficient details about who the donor is.

Taxability of Anonymous Donation

Anonymous donations are regulated by Section 115BBC of the Income Tax Act, 1961. The taxation and exemptions for these donations depend on the nature of the receiving trust.

Before examining the taxability aspect, let us first gain an understanding of the various types of trusts.

• Charitable Trusts: Charitable trusts are established with the primary aim of serving social, educational, medical, or other public welfare objectives.
• Religious Trusts: Religious trusts are created for the promotion or practice of religion, including rituals, worship, or maintenance of places of worship.
• Partly Charitable and Partly Religious Trusts: These trusts serve both charitable and religious purposes, such as running schools or hospitals alongside promoting religious activities.

Having understood the different types of trusts, let us now delve into their taxability.

Taxability of Anonymous Donation

Where the total income of an assessee, being a person in receipt of income on behalf of any university, educational institution, hospital, or any charitable or religious trust referred to in section 10 or section 11 of the ITA, receives anonymous donations, the taxation on such donations is structured as follows:

1. Tax on Excess Anonymous Donations: The income-tax payable will be calculated as the sum of two components:

(i) Tax on the Excess Donations: The first part of the tax is calculated at the rate of 30% on the amount of anonymous donations that exceed the higher of the following two limits:

• 5% of the total donations received by the assessee.
• Rs. 1,00,000.

(ii) Tax on Reduced Total Income: The second part is the income-tax that would have been payable if the total income of the assessee were reduced by the amount of anonymous donations exceeding the limits mentioned above.

Let's understand the same through an example:

Suppose an educational institution receives Rs. 25,00,000 in total donations, including Rs. 8,00,000 as anonymous donations. In this case, the tax calculation will proceed as follows:

Step 1: Calculate the higher of the two limits.

• 5% of total donations: 5% of Rs. 25,00,000 = Rs. 1,25,000
• Rs. 1,00,000 (fixed threshold as per the law).
• The higher limit is Rs. 1,25,000.

Step 2: Determine the excess anonymous donations:

• Excess anonymous donations: Rs. 8,00,000 - Rs. 1,25,000 = Rs. 6,75,000.

Step 3: Apply the 30% tax rate on the excess donations:

• Tax on excess donations: 30% of Rs. 6,75,000 = Rs. 2,02,500.

Step 4: Calculate tax on reduced total income:

• The total income of the institution would be reduced by the excess anonymous donations, i.e., Rs. 6,75,000.
• The tax is then calculated on this reduced income (if applicable, as per the provisions of Income Tax Act).

So, in this case, the institution would pay Rs. 2,02,500 in tax on the anonymous donations exceeding the higher limit of Rs. 1,25,000. Additionally, the total income would be reduced by Rs. 6,75,000 for the calculation of the remaining income tax payable on the reduced income.

However, there are certain exemption to the taxability of anonymous donation.

Sub-section (2) of section 115BBC provides that the above provisions do not apply to any anonymous donations received by-

1. Religious trusts or institutions, where donations used solely for religious purposes are exempt from the higher tax rate. Reason for Exemption: Taxing religious donations at a higher rate could make people feel the government is interfering with their faith, leading to reduced support. Moreover, tracking small, anonymous donations in religious settings is difficult, making enforcement of such taxes impractical. Imposing taxes or identification requirements could also violate religious freedoms, disrupting long-established practices.

2. Trusts with both religious and charitable purposes. However, donations directed towards educational or medical institutions run by the trust will still be taxable under 115BBC, if they exceed 5% of total donations or Rs. 1 lakh, whichever is higher. Donations for religious purposes within the same trust remain exempt.

Let's understand the same through an example:

A Trust runs both a school and a temple and receives an anonymous donation.

• Case 1: An anonymous donation of Rs. 2 lakhs is received with no specific direction. Since the donation is unspecified, it shall be outside the purview of section 115BBC. However, the trust shall be required to maintain proper books of accounts, to prove that the donation is used for religious purposes only, in order to remain outside the coverage of section 115BBC.
• Case 2: An anonymous donation of Rs. 10 lakhs is received, with Rs. 6 Lakhs specified for the school.

In essence, these exemptions provide tax relief to religious and religious-charitable trusts, as long as the donations are utilized for the specified purposes and not for educational or medical institutions.

Intent behind Higher Tax Rate

Anonymous donations are taxed at a higher rate under Section 115BBC to prevent the channelization of unaccounted money to Charitable organizations by way of anonymous donations The law requires that even charity should be made through tax paid money. If tax is not paid by the taxpayer and he uses that black money for charity, tax on that black money is recovered from the recipient charitable trust under section 115BBC at the rate of 30%.

Eligibility for Deduction under Section 80G

Donations made anonymously do not qualify for deductions under Section 80G because they lack proper documentation and identification of the donor, which is required for the deduction to be applicable.

Impact on Books of Accounts

In addition to the other books of accounts required to be maintained by any other type of entity, trusts are specifically required to maintain a Donation Register, which should include the following details:

• Date of Donation,
• Name of Donor,
• Purpose of Donation, and
• Amount.

However, in the case of anonymous donations, where the donor's identity and purpose are not known, the trust must still record the following details for such donations:

• Date of Donation.
• Total Value of Donation.
• Nature of Donation. (Cash, Cheque or in-kind).

Accounting of Anonymous Donation

When accounting for anonymous donations, two distinct aspects need to be considered.

When a trust receives an anonymous donation, whether in cash or by cheque, it is considered part of the trust's income for the relevant accounting period. These donations are recorded in the Donation Received Account or an equivalent income account in the trust's books.

• Cash or Cheque Donations: The cash or cheque amount is recorded in the Cash or Bank Account as an asset. However, it is treated as income in the trust's financial statements.
• Donations in Kind: Donations received in kind, such as goods or services, are also recognized as income under Section 11 of the ITA, provided they are used for the charitable or religious purposes for which the trust or institution is established.

This ensures that all forms of donations, whether monetary or in kind, are properly accounted for and comply with the provisions of the ITA.

According to CBDT Circular No. 580 dated 14.09.1990, donations in kind, such as books, medicines, or clothes, should be recognized as income for charitable and religious institutions upon receipt. The following outlines the process for handling both types of donations:

Reporting Requirements for Anonymous Donations in brief

• Form 10BD

■ Form 10BD is used to file the annual return of donations for trusts and institutions.

■ Key details to include:

• Total amount of donations received.
• Donor information (where available).
• Purpose for which the donations were received.
• Any exemptions or tax benefits claimed.

These details are also required to be furnished in both Form 10B under Clauses 21 to 23 and 10 BB under clauses 12 to 14 as evident from screenshots attached:

Form 10BB

Form 10B

• Audit Report

Form No. 10B and 10BB are audit reports furnished by fund or trust or institution.

The trust has to report the anonymous donation received by it under Clause 23 (vi) of the said form in the manner as evident form the screenshot attached of Form 10B:

In Form 10BB, the trust has to report the anonymous donation received by it under Clause 18 of the said form in the manner as evident form the screenshot attached below of Form 10BB:

• Return Form

Anonymous donations are also required to be separately disclosed in the Return Form by the trusts or charitable institutions.

Conclusion

In conclusion, anonymous donations to charitable and religious trusts are governed by the Income Tax Act, 1961, with specific rules under Section 115BBC. These donations are subject to higher tax rates if they exceed certain limits, but exemptions exist for donations used solely for religious purposes. Trusts must maintain proper accounting records, including for anonymous donations, and report them through forms like 10BD, 10B, and 10BB.

While anonymous donations are not eligible for Section 80G deductions due to the lack of donor identification, the legal framework ensures transparency, accountability, and the proper use of funds for their intended purposes, while minimizing the risk of unaccounted money entering the system.

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