CAG REPORTS Rs: 4384 Cr REVENUE LOSS

[Mr. Harish Chander Bhatia]

“Practice doesn't make perfect. Practice reduces the imperfection.”  ― Toba Beta

But the income tax department neither practices nor desires perfection 

• The CAG report is released about the functioning, perfection and performance of income tax department exemption section, which monitor, regularise the grant of exemption certificate and assessment of their financials. CAG in its report has found major mistake of wrong benefits given to the trust, societies, and NGOs, in granting and allowing application of income to the purposes other than charitable, but the so-called qualified officers and their monitoring bosses has approbated those deeds.
  

• In the recent seminar in New Delhi, the member CBDT when asked about the lack of knowledge ,discipline and punctuality of the income tax staff, had strongly brushed aside all the allegation against them and claim that the department is employing best educated and experienced people and could not have more than this. Her tone reeked of full arrogance and perhaps knowing all these, she took the favour of her spoiled brats 
  

• In my article MY COLLECTION OF BLUNDERS, I thought that would be the end of blunders by the departments, but the another CAG report has negated all the claims and boastful attitude of the CBDT and further established that the income tax department will continue to cause series blunders till it reaches to perfection, which further appears impossible .
  

• Before I come to the detail of CAG report, I discuss about the functioning of the exemption department. Hundreds of applications are filed daily for the grant of registration under section 12A and 80G of the Act. Every time when they learn from their mistakes, they introduce new procedure beyond the provisions of the Act. The entire work of processing, checking, and grant of certificate is monitored by the inspectors under the signature of the ITO and D.I. (exemption). It is difficult to understand why the inspectors are given this work, what for ITOs are posted there. The duty of the inspectors should be in the field to verify the genuineness of applicants and their activities to avoid bogus registration, but nothing is so, everything is finalized and admitted by the inspectors on the basis of documents filed and manipulated by the applicants. Under which provision the DI exemption has assigned them its own duty and powers ignoring the ITOs, because those ITO has no assessment work either. 
  

• There is flood of charitable institutions, it looks that every body is dedicated in charity from the heart, but it is not true, the more charitable institution, more is the growth of uncharity .  If all the charitable bodies start making charity in real sense, to commensurate with growth of bodies being granted registration, there would be no person left to get the relief and charity. The department should monitor these things through its so-called efficient staff, but with utmost dismay, it never happened
  

• It is easy way to convert unaccounted money into accounted money through these registered bodies. The department has no check. Thank GOD, that only 3 to 4% people of India files the return, if 20 or 30% people start filing the return, there will be chaos in the department and entire taxation machinery will get derailed resulting to policy paralysis.
  

• The CBDT has introduced compulsory e filing for the trust (ITR 7), but the main and major lapse is that any bogus registration number of 12A registration will make the taxpayer a charitable entity, there is no check. The easiest way the trust has followed to apply for the registration u/ s12AA, let the application be rejected for technical non-compliance. Not bothered, they keep on filing the ITR 7, No check, No Scrutiny, enjoying the tax-free income without any charity. The reason being the probability of getting scrutinized is less than 2.5%. Tax evaders are lucky enough to enjoy these lacunae, because the department has no exact data/statistics about number of registered charitable institutions.
  

• Barring few, the ITOs lobby is so inexperienced  and untrained that majority of cases, the assessments are pruned by the first appellate authority, where the department feel even ashamed to file the quick report under rule 46A .Many of the ITOs do not even know how to write a comprehensive assessment orders, they take assistance from their senior , friends and retired officers or at last apply the cut and paste formula from the old orders .Why the ITOs have been exempted for training when their seniors  and even IRS officers go for compulsory training.
  

• I have said and experienced that majority of ITOs have no knowledge of the Act and they should be sent either for training or by that time to be divested with the powers of making assessment independently to improve the quality of the work, minimize the appeals, and build reputation of the department. Alternatively, the ACIT should be independently made the assessment authority and 3-4 ITOs must work under him and assist him, to get the perfect training
  

• Every year the department publishes lot of books, compendium of case laws but I do not think if any ITO has gone through these materials and learned something. The department had provided laptop with internet connection, but rarely one will find the same being used by the ITOs, either it has been passed on the hands or lying idle at the homes. Why there is no check?
  

• What is the logic and fun of allotting 200 -300 cases for scrutiny to one ITO, Who is monitoring their performance? It appears that except the money multiplier everything is just a formality and eyewash. No assessing officer can make 300 assessments in real manner (not only typing of orders) just in full fledged working of about six months in all, more over where the officer is allowed to maintain flexi timing, (as admitted by the member CBDT in seminar on Administrative Reforms) they come to the office when they wish, and go when they desire. No check, no question, no explanation, no permission, in fact, there is no body to check, ultimately who will check? His/her senior officer! If he too comes in time. 

• CBDT vide instruction No:F.No 255/93/2009 ITA-II dated 08-09-2010, prescribed that if gross receipts of an assessee submitting return in ITR 7 is more than Rs:5.00 crores,. it should be selected for compulsory scrutiny.
  

• In CAG report, it is stated that ITD selected only 2% of total returns for scrutiny of Trust cases.
  

• However, other states did not follow the CBDT instructions. In Maharashtra return of five trusts whose gross receipts were Rs: 9.27 crores to Rs: 61.90 crores and seven cases of ADIT Bangalore having receipts more than Rs: 5.00 crores for AY 09 to AY 11were not selected for scrutiny. In ADIT Ahmadabad, 73 assessee trusts who received foreign contributions to the tune of Rs: 272.35 crores during the FY 07 and FY 09 were not selected for scrutiny.
  

Some of the glaring lapses by the assessing officer while making hasty assessment orders:

• There is no enabling provision in the Act to deduct TDS in case of Trusts, in absence of that CAG noticed that in seven cases, AOs irregularly allowed expenditure incurred without deduction of TDS which involved a tax effect of Rs: 9.49 crores. One such example is of DIT-E Hyd in RE: A.P.State Housing Corporation Ltd for AY 03 to AY 07 and AY 09, the expenditure without deduction of tax was allowed, involving a tax effect of Rs; 4.57 Crores..
• There is no provision in Act to invest Corpus funds in specified mode and whether interest earned thereon is to be treated as income of the trust, in absence of the same In DIT (E) Delhi, In the case of Price Stabilization Fund Scheme for AY 10, the AO allowed Rs 43.09 crores interest income as deemed application u/s 11(1) (2) (i), resulting to loss of tax Rs: 16.42 Crores.
• There is NO system to reconcile and monitor donation u/s 80 G and CBDT accepted that cross verification cannot be done all the cases. CAG has pointed irregularities in many cases one of which is:
• In DIT (E) Mumbai, Shri Lalji Velji Charitable Trust during AY10 had received Rs 4.98 crores as corpus donation from five realted parties; interestingly the account of donors did not have any such transaction.
• There have been severe inconsistencies in allowing repayment of loans. The trust took loan for acquistation of assets, and it was shown as income as well application, but in later years the loan was returned and it was again considered as application of Income. The illustrative case ids of Divine Trust, AY 08 to AY10, CIT Trissur (Kerala), wrong application was allowed Rs: 2.31 crores,
• The department is NOT taking a uniform stand to allow or disallow deficit of earlier years and it happened with 110 Trusts involving a tax effect of Rs: 327.48 crores. The Act does not allow carried forward of deficit in case of trusts and exempted entities.
• Further noticed that CIT vs Matriseva Trust 1999 (3) TMI 34 - MADRAS High Court,  CIT vs Maharana of Mewar Charitable Foundation 1986 (7) TMI 56 - RAJASTHAN High Court,  CIT vs Shri Plot Sweatambar Murti Pujak Jain Mandal 1993 (11) TMI 17 - GUJARAT High Court and CIT vs Institute of Banking Personnel selection 2003 (7) TMI 52 - BOMBAY High Court allowed the deficit to be carried forwarded and set off in succeeding years. Although the ITD in few cases has allowed the carried forward of deficit, the detail is under:
• In DIT (E) Mumbai, ITD allowed deficit of Rs: 245.72 Crores in 38 cases to be carried forwarded involving a revenue impact of Rs; 83.52 crores, however the same DIT (E) disallowed the carried of deficit of Rs: 420.42 crores in 36 cases
• In DIT (E) Hyderabad, the A.P.State Housing Corporation, carried forward of deficit was allowed on provisional accounts for the year AY 03 to AY 09 (except AY 08) amounting to Rs: 157.00 crores.

• In DIT (E) Delhi, the AO allowed setting off the deficit of previous year in case of Ram Sewa Swami Satyanand Trust for AY 10 but the same AO DID NOT ALLOWS the deficit in case of Rameshwar Dayal Trust.
• The department despite losing the SLP has yet to come with uniform guidelines for treatment of the deficit.
• As per section 11(2) of Act, the trust are allowed to accumulate up to five years, if the application of funds is less than 85%, subject to filing of for 10 to the Assessing Officer, However Act is silent over the quantum of unspent to carried forwards beyond 15%, from year to year. Nevertheless some rational has to be there to monitor if the trust is meeting with objectives in applying the funds. When the accumulations more than 15% is a regular feature, the same should be examined in depth. In the following cases, the accumulation from the year is at an alarming percentage, which is prima facie suspicious. ( Total such cases 22)
  

Trust Name	Charge	AY	Income( in lac)	Exp ( in lac)	Surplus ( in lac)	% of surplus
Tatwajnana   Vidyapeeth	DIT-E, Mum	08	495.37	75.19	420.18	84.82
Tatwajnana   Vidyapeeth	DIT-E, Mum	09	557.32	128.49	428.83	76.94
Tatwajnana   Vidyapeeth	DIT-E, Mum	10	508.41	78.46	429.95	84.57
Ishaan Educational Research Society	DIT-E Delhi	07	358.90	168.58	190.32	53.02
Ishaan Educational Research Society	DIT-E Delhi	08	488.14	203.75	284.38	58.26
Ishaan Educational Research Society	DIT-E Delhi	09	588.98	206.83	382.15	64.90
Ishaan Educational Research Society	DIT-E Delhi	10	907.51	268.38	639.13	70.42
Symbiosis open Edu Society	DIT-E Pune	10	9554.51	1599.43	7955.08	83.26
Symbiosis Society	CIT-I Pune	09	31087	12053	19034	61.23
Symbiosis Society	CIT-I Pune	10	30626	15369	15257	49.82
Symbiosis Society	CIT-I Pune	11	33339	16140	17199	51.59
Shanti Education Society	DIT-E Delhi	09	612.92	299.25	313.67	51.17
Ritanand Balved Education Foundation	DIT-E Delhi	10	50066.62	31860.37	18206.25	36.36

Another controversial point in assessment of exempted entities is of allowance of depreciation. However , The Apex Court in Escorts Ltd vs UOI 1992 (10) TMI 1 - SUPREME Court , held that where a full deduction has been allowed in relation to capital assets, no depreciation is to be allowed on the same asset under section 32 of the Act . However, despite knowing the law and ignoring the law the ITD allowed depreciation in 240 cases involving tax effect of Rs: 248.39 crores, for example: (Total such cases 240)

• In DIT, (E) DELHI AO did not allow Vivekananda Shiksha Samiti for AY10. However, the same AO for the same AY10 allowed the depreciation to Institute of Chartered Accountant of India
• In DIT, (E) Ahmadabad AO allowed depreciation of Rs: 52.25 crores AY 09 to BAPS Swaminarayan Sanstha.
• In DIT (E) Mumbai AO allowed depreciation of Rs: 256.66 crores in 50 cases involving revenue impact of Rs: 90.30 crores
• In Kerala CIT Kottyam Matha Amrithanandamayi Math was allowed depreciation of Rs: 138.46 crores during AY 07 to AY 09
• In DIT (E) Delhi, In the case of Technology Development Board, notified u/s 10(23C)(iv) received voluntary contribution of Rs: 14.42 crores during AY 09, which was added to Corpus Fund and escaped the attention of the AO, resulting to loss of tax Rs: 5.49 crores. ( Total such cases 30)
• In DIT (E) Mumbai, Breach Candy Hospital, CCIT rejected the approval u/s 10(23C) on 25.4.2013 for AY 03 to AY11 on the ground of profit, motive.ITD did not take action to cancel the registration u/s 12A. This resulted in under assessment of income of Rs:14.56 crores.( total such cases 60)
  In case of Mumbai Railway Vikas Corporation, AY10, the trust deed was silent about dissolution clause. Assets and surplus were distributable among the share holders (total such cases 457)
• The ITD allowed exemption of income from the year prior to their registration u/s 12 A of the Act .1) OM charitable Chikitsa Gwalior 2) Kerala State Higher Education Council (total such cases 161)
• In Maharashtra DIT (E ) Mumbai , Jamshetji Tata Trust and Navajbai Ratan Tata Trust earned Rs:1905.00 crores and Rs:1234.00 Crores on account of capital gain during AY 09 and AY 10 respectively and invested the same in prohibited mode of investments, in contravention to section 13(1)(d) of Act. AO failed to tax the investment on account of capital gain at MMR as per section 164(2) of Act. It resulted in short levy of tax Rs: 1066.95 crores, ( total such cases 14)