Chapter 6
Review on “Expenditure on eligible projects or schemes”-Section 35AC of the Income Tax Act, 1961

Review Summary

-    The review covers the projects/schemes approved by the National Committee since its inception in 1992. 253 projects/schemes out of 681 cases recommended by the National Committee for approval and notification to the Central Government till March 2000 were test-checked.

(Para 6.5)

-    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 introduction of section 35AC and the purposes for which National Committee was created have been fulfilled.

(Para 6.9)

-    The review revealed that 7 projects or schemes approved by the National Committee did not fall within the prescribed guidelines under the Income Tax Rules and as such, the approval granted by the National Committee was not in order. 26 projects were either not implemented at all or were incomplete or abandoned midway.

(Para 6.11 & 6.12)

-    There is no uniformity in the standards applied by the National Committee while granting/refusing extensions to projects. In 9 cases although the institution executing the project/scheme had no basic facility to implement the scheme, further extension was granted.

(Para 6.10, 6.16(ii))

-    In 5 cases donations received by the executing agencies of an eligible project or scheme were used for purposes other than on the respective eligible project or scheme. Further, in 5 cases donations were received after the expiry of the notified period.

(Para 6.23 & 6.25)

-    True and fair accounts were not submitted to the National Committee by 2 approved associations/institutions. Further, in 31 cases half yearly/annual reports either were not sent at all or were sent belatedly. It was also seen in 67 cases that no separate accounts were maintained for such projects or 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 with the return of income or furnished to the National Committee.

(Para 6.20, 6.22 & 6.28)

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

(Para 6.26)

-    Deductions under Section 35 AC were being allowed by the assessing officers 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 form business or profession.

(Para 6.30)

-    The review revealed certain lacunae in the Act such as absence of a provision requiring the approved association or institution to submit annual reports to the assessing officer. In the absence of this, the assessing officer is hampered by lack of information on the project/scheme.

(Para 6.32-1)

-    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 the projects/schemes that were subsequently abandoned. In the absence of this, the possibility of fraud cannot be ruled out.

(Para 6.32-2)

-    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 assessing officer would not be aware of this while giving the donor the benefit of deduction under Section 35AC.

(Para 6.32-3)

-    For the functioning of the Committee to be effective it is necessary to provide some kind of mechanism for regular coordination and exchange of information not only between the National Committee and the Income Tax Department, but also between the assessing officers themselves which would prevent the misuse of the Scheme and leakage of revenues due to loopholes in the Act.

(Para 6.33)

6.1    Introduction

With a view to promote reinvestment of profits, by suitable tax exemptions, in areas where massive investment is required such as low and middle income group housing, highways, roads and bridges, non-conventional energy, school buildings and supply of drinking water, a provision was made in the Income Tax Act, 1961 by the Finance (No.2) Act, 1991, to provide deduction in computing taxable profits of a taxpayer carrying on a business or profession in respect of the entire amount paid for financing projects or schemes promoting social and economic welfare. A similar deduction is also available in the case of 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.

6.2    Legislative background

Section 35AC was inserted in the Income Tax Act, 1961 by the Finance (No.2) Act, 1991 with effect from 01.04.1992, i.e. assessment year 1992-93. Under this provision, the entire expenditure incurred by a taxpayer by way of payment of any sum to a public sector company or local authority or to an association or institution approved by the National Committee, in accordance with the rules made under the Income Tax Act, for carrying out any eligible project or scheme for promoting social and economic welfare or upliftment of the public, qualifies for deduction in computing its income. Further, a company may also be allowed deduction in cases where expenditure is incurred by it directly on an eligible project or scheme. Direct expenditure on such projects or schemes by persons other than a company does not qualify for deduction.

Deduction under this section is to be allowed to the donor on the basis of a certificate in Form 58A issued by a public sector company, a local authority or an approved association or institution executing the eligible project or scheme. In the case of a company directly executing the eligible project or scheme, deduction would be allowed to the donor on the basis of a certificate issued in Form 58B by an accountant as defined in section 288(2) of the Income Tax Act.

In the case of taxpayers, other than those having income from business or profession, a deduction under section 80GGA(2)(bb) is allowed from the gross total income in respect of payments made to associations/ institutions approved by the National Committee.

6.3    National Committee and its functions

The National Committee consists of fourteen members appointed by the Central Government from amongst persons of eminence in public life with one member as Chairman. The term of office of a member is three years from the date of notification. Four National Committees have been constituted so far i.e. w.e.f. 2 January 1992, 2 January 1995, 2 January 1998 and 21 May 2001.

The functions of the National Committee are: -

1. to approve associations and institutions which may carry out eligible projects or schemes, and
2. to recommend to the Central Government, projects and schemes of any company including a public sector company, a local authority or an approved association or institution, for being notified as eligible projects or schemes for the purpose of section 35AC.

6.4    Audit objectives

The objective of the review is to find out how far the purpose behind introduction of section 35AC in the Income Tax Act, 1961 has been achieved by verifying:

1. Whether the benefit through section 35AC has flowed to the public in general and to the economically weaker sections of the society.
2. Whether the benefits from the project or scheme have been misused by the persons managing the affairs of the association/institution, and
3. To conduct a broad-based study of the role of the National Committee.

6.5    Scope of Audit

253 projects/schemes out of 681 cases recommended by the National Committee for approval and notification to the Central Government till 31-3-2000 were test-checked for the purpose of the review.

6.6    Period of review

The review covers the projects/schemes approved by the National Committee since its inception in 1992. However, projects/schemes approved for the first time and under execution in 1999-00 and beyond have not been covered in the review.

6.7    Constraints

The following constraints were faced in conducting the review:

a.    As the institutions/associations managing the affairs of such projects or schemes are private parties, audit has no authority to check their records or to visit the site of the projects in its official capacity. Hence, the original accounts of the institution/association could not be verified to check the correctness of receipt of donations and expenditure thereof on the approved scheme/project.

b.    The donors’ list(s) furnished to the National Committee by the institutions/associations only indicate the names of the donors and the amount of donation received. Other necessary details like permanent account number (PAN) of the donor, address of the donor, circle/range/ward where assessed, CIT charge etc. are not indicated. Hence, the assessment records of the donors could not be co-related to verify the correctness of the claims for deduction with reference to the certificates issued to the donors. No separate records of beneficiaries under section 35 AC are maintained in the Income Tax Department

c.    The deduction under section 35AC is available to a person on the basis of the certificate issued by the executing institutions/associations in Form 58A or in Form 58B. The Government/National Committee has no control over the issuance of certificates in Form 58A/58B. Also, the institutions/associations are not required under the Income Tax Act to enclose copies of the certificates issued to the donors with their return of income. Hence it cannot be verified whether certificates have been issued only to genuine donors and during the approved period.

d.    The Act does not provide for details like lists of donors, progress report of the project or scheme, details of donations received and expenditure incurred, copies of certificates issued to donors etc., to be enclosed with the return of income filed with the assessing officer. Hence the status of implementation of the project, its proper execution, correctness of accounts and whether expenditure was incurred only on the eligible project or scheme for which donations were received could not be verified.

e.    Most of the cases of the associations/institutions and donors are assessed in a summary manner wherein detailed accounts are not called for. Hence the correctness of the claim made under section 35AC in the case of the donors and proper utilisation of donations on approved projects or schemes by the associations/institutions could not be verified.

6.8    Results of Audit

6.8.1    Statistical information

• As per the information furnished by the National Committee 1162 applications for approval of associations or institutions and recommendation of projects/schemes were received since its inception upto 31.3.2000. The year-wise position of applications received, cases where recommendations were made, cases rejected and cases notified by the Government for the period from 1992-93 to 1999-00 are as under:

TABLE NO. 1    DETAILS OF CASES RECEIVED AND DISPOSED OF

Note:    The number of cases recommended for approval by the National Committee would not tally with the number of cases approved by the Government during the financial year as the process of notifying the projects/ schemes takes some time and some notifications may fall in the next financial year.

The above table reveals that while the National Committee, has, on an average, received about 145 cases every year, the cases remaining for disposal have been increasing year after year.

• The state-wise break-up of the number of projects approved by the National Committee along with the approved cost of the projects is depicted below:

• From the above, it can be seen that Maharashtra and Gujarat accounted for 43% of the total number of projects approved while in terms of cost of approved projects, these two states accounted for 32%.
• Approximately 64% of the projects approved were for the benefit of the general public, while 26% were for rural areas. Only 3.8% were for promoting scientific activity.
• There is no case where the approval granted by the National Committee to an association/institution or project/scheme was subsequently withdrawn.
• The National Committee granted extensions for execution of various projects/ schemes in 280 cases during the period 1992-93 to 1999-00 as depicted below:
• During the period under review i.e. from its inception in 1992 to 1999-00, the Committee held 53 meetings, averaging one meeting every two months.
• The National Committee has not formed any sub-committee to look into specific areas of activity during the period under review, although it is empowered to do so under the Income Tax Act, 1961.

6.9    Functioning of the Committee not reviewed by the Government

Section 35AC was inserted by the Finance (No.2) Act, 1991 with effect from 1.4.1992. In the first business meeting of the National Committee held in March.1992, the Minister of State (Revenue) underlined the desire of the Government to see that the Committee works as a non-official body, free from Government controls, so that it can take decisions at a fast pace. However, 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 introduction of this section and the purposes for which National Committee was created have been fulfilled.

6.10    Uniform standards not adopted while granting approval/extension

It is observed that there is no uniformity in the standards applied by the National Committee while granting/refusing approvals/extensions to projects/schemes.

Audit scrutiny of records revealed that the National Committee in its 4th Business meeting on 20.7.92 did not approve a project for construction of an indoor stadium by Jan Mangal Public Charitable Trust stating that this did not come within the criteria stipulated by the Income Tax Act and the Rules thereunder. On the same logic, the project for “Construction of basket ball complex at Indore” by Corporation (Area) Basket Ball Trust, Indore which was approved vide Notification No. S.O. 839(E) dated 22-11-1994 and extended twice in March 1997 and May 1999 should also not have been accorded approval. However, it is observed that as promotion of sports is one of the objectives, expenditure on which qualifies for deduction under section 35AC, the action of the Committee to deny approval was not justified.

To cite another instance, the Committee approved a project “Construction and running of a hospital at Arasur Village” by Arasur Rural Welfare Organisation Arasur, Vellore vide Notification No. S.O.839(E) dt.22.11.94 at an approved cost of Rs.2.35 lakh. However, the organization could not raise any funds during the notified period and hence applied for extension which was denied by the National Committee on the grounds that the institution failed to raise donations. On the other hand, in the case of Indian Crafts Village Trust, Calcutta, the Central Government notified, on the recommendation of the National Committee, a project “Construction, furnishing and running of Indian Craft Village at Calcutta” vide notification No.116(E) of 23.2.95 at a cost of Rs.650 lakh for the assessment years 1995-96 to 1997-98 under Section 35 AC. Extension for a further period for assessment years 1998-99 to 2000-2001 was granted vide notification No.921(E) dt. 29.12.97. However, as the land on which the project was to be executed had not been handed over, donation under section 35AC could not be collected due to the fact that the proposed donors were insisting on possession of the land. It was evident from the fact above that upto the assessment year 1997-98, i.e. the first spell of approval, the organisation could neither acquire the land on which the proposed Indian Craft Village would be constructed nor collect donations under section 35 AC of the Act but extension was granted for a further period of three years.

6.11    Projects/schemes beyond the ambit of Rule 11K(i)

The National Committee has to satisfy itself that the eligible project or scheme conforms to the prescribed guidelines laid down in Rule 11K(i) of the Income Tax Rules, 1962 before recommending the same for notification by the Central Government.

Test check in audit revealed that the projects or schemes approved by the National Committee do not fall within the prescribed guidelines of Rule 11K(i) and as such, the approval granted by the National Committee was not in order.

TABLE NO. 2    PROJECTS/SCHEMES BEYOND THE AMBIT OF RULE 11K(i)

6.12    Projects not implemented / abandoned

Rule 11N of the Income Tax Rules, 1962 prescribes the manner in which a company directly undertaking the execution of a project or scheme, shall divest itself of the ownership of the assets created on completion of the project. The Act or the rules are however silent about the treatment/utilisation/ownership of assets of projects undertaken by institutions or associations or in respect of projects abandoned midway. Therefore, while the donors would have claimed deduction under section 35AC in their income tax assessments, the very purpose of raising the donation would not be fulfilled. Further, there is a need on the part of the National committee and the Central Government to give wide publicity to the project/schemes which are notified, in order to attract donations from the public which would enable the institution to take up the project In the absence of funds, the projects cannot be taken up and the efforts undertaken by the Committee to recommend the project are rendered infructuous.

Test-check revealed that the following projects were either not implemented at all or were incomplete or abandoned midway. The details of these projects/schemes are as under:

TABLE NO. 3    (A) PROJECTS NOT IMPLEMENTED DUE TO LACK
OF / NON-UTILISATION OF DONATIONS

TABLE NO. 4    (B) PROJECTS WHERE DONATIONS WERE
NOT RECEIVED AT ALL

C.    Projects not completed or abandoned

There is no mechanism prescribed in the Income Tax Act, 1961 for compulsory and automatic withdrawal of notification issued in cases where a project is not implemented. In the absence of this provision, fraudulent collection of donations cannot be ruled out. The assessing officers all over the country would not be in a position to know that the project was not actually implemented and would continue to grant the benefit of deduction under Section 35AC which could be denied otherwise had the assessing officer been aware of the latest developments of the project/scheme. Further, the purposes behind notification of the project would remain unfulfilled.

A few cases noticed in audit are cited below:

1.    Gandhigram Trust, Tamil Nadu had submitted a proposal to the National Committee for construction of a development center for training women. The project was approved vide Notification No. S.O. 878(E) dated 30.11.92 at a cost of Rs. 6.35 lakh. Subsequently, on 28.6.94, the Trust informed the National Committee that it would not be undertaking the project and hence would not be approaching any person/benefactor for donations. No reasons were assigned for not taking up the project. The Trust also undertook to return any donation that may be received in future.

2.    Tamil Nadu Urban Finance & Infrastructure Development Corporation Ltd., Chennai undertook a project for “Low cost sanitation cum scavenger scheme in Tamil Nadu” which was approved vide S.O.225(E) dt.16.3.1994 Rs.70 lakh. However, the beneficiaries constructed the toilets at their own cost and hence the company did not implement the project nor claim deduction under Section 35AC.

3.    The South India Paper Mills Ltd., Nanjangud Mysore District Karnataka was to undertake a project for “Construction of an overhead tank and laying pipelines for a drinking water project” which was approved vide Notification No. S.O.187(E) dt.12.3.1997 for approved cost of Rs.6 lakh. However, owing to a delay of one year in notifying the project, the gram panchayat which had requested for the project, made alternative arrangements and hence the project was not taken up.

4.    Other cases of projects which were not completed or abandoned midway are given below:

TABLE NO. 5    PROJECTS NOT COMPLETED/ABANDONED

6.13    Approval granted without verifying the availability of basic requirements for implementing the project/scheme

Before recommending an eligible project or scheme to the Central Government for notification under section 35 AC National Committee makes such enquiries as it deems fit. The Committee may also make recommendations for extension after being satisfied that the project is being executed properly. For this purpose the Committee may monitor the execution of the project and call for such information, as it deems necessary.

A composite project for “Development of Kukru village in Betul district, Madhya Pradesh” under CIT Bhopal charge was undertaken by Santulan Society, Bhopal, vide notification No.973 (E) dated 14.12.1995 for assessment years 1996-97 to 1998-99 which was extended in May 1998 for a further period of two years. The project included: -

(Rs.in lakh)

(i)    Audit scrutiny revealed that though the construction of the building was completed in January 1997 at a cost of Rs.2.05 lakh, it was not being utilised and was lying vacant. In response, the society stated that due to acute shortage of water for almost 7 months in a year and due to other economic compulsions, the villagers migrate to neighbouring states for livelihood and return only during the cultivation season. Further, the villagers were not even willing to attend classes, the nearest veterinary doctor was located at a distance of more than 90 kilometers and did not have a vehicle to visit the village and the Gram Panchayat refused to run the fair price shop. Therefore, extension was granted to the project in May 1998 without taking cognizance of these facts.

(ii)    The Project Report envisaged a scheme of goat rearing at a cost of Rs.5.20 lakh to improve the economic conditions of the villagers by providing them an assured income of Rs.10,000 per annum per family. As per this scheme, a cooperative society consisting of tribals of the village would be created which would be provided with a loan of Rs.5.20 lakh for disbursement to 52 families whereby 10 female goats and 1 male goat at an average cost of Rs.10,000 could be procured. The Scheme also contemplated compulsory insurance of goats so that on the death or loss of a goat, its cost could be recovered from the insurance company. Further, on sale of kids of goats on attaining maturity, the beneficiaries were required to deposit 10 percent of the sale consideration to the cooperative society and to give Rs.100 per goat to the Santulan society towards loan repayment. Audit scrutiny revealed that:

1. Against a provision of Rs.5.20 lakh, an expenditure of Rs.3.20 lakh was incurred for purchase and distribution of 178 goats to the villagers;
2. None of the goats were insured as contemplated in the scheme. Mortality rate of goats was as high as 21 percent;
3. The recovery of loan @ Rs.100 per goat sold was not made in respect of any of the 209 new-born goats sold upto March 2000.

The implementing society stated that (i) as the insurance premium was very high the goats were not insured and instead it was proposed to purchase new goats every year, (ii) it was later realized that the post mortem report was to be furnished within 24 hours to the insurance company which was not possible due to lack of telephone facilities, transportation and non-availability of a veterinary surgeon within a radius of 90 kms, and (iii) the amount at the rate of Rs.100/-per goat sold was not recovered as it was treated as grant-in-aid.

This indicates that the project was not properly conceived and executed. The National Committee failed to take cognizance of these factors while granting extension to the project in May 1998.

6.14    Irregularity in implementing the projects/schemes

(i)    M/s Natco Pharma Limited, Hyderabad was approved by the National Committee vide notification No. SO 220(E) dated 19.3.1996 to carry out a project for laying of a road at an estimated cost of Rs. 15 lakh. The company was permitted to spend Rs.5 lakh from its own funds during the assessment year 1997-98.

Audit scrutiny revealed that the company got a work order of Rs.15 lakh from Panchayat Raj Department to renovate the existing road. The work was completed in December 1996 as per specification and the company received progressive bills from the Panchayat Raj Department for Rs.9.70 lakh after deducting the company’s own contribution of Rs.5.30 lakh. The company however incorrectly claimed deduction of Rs.5 lakh under section 35AC in the assessment year 1996-97 itself instead of in the assessment year 1997-98. Further, getting a work order of Rs.15 lakh from Panchayat Raj Department for completing an eligible project under section 35AC instead of executing the same was not in order.

(ii)    The object of collecting donation under section 35AC is to execute an eligible project or scheme for the benefit of the public in general and economically weaker sections of the society. An institution “Mahavir Heart Research Foundation, Mumbai,” was approved vide Notification No. SO 469(E) dated 2.7.96 for providing assistance for medical treatment to patients suffering from cardiac problems. As per the objectives of the Foundation, the cost of operation and treatment of the persons whose income was less than Rs. 15,000 per annum was to be borne by it fully and in cases where the income was more than Rs. 15,000 but less than Rs. 25,000 per annum, the cost was to be borne to the extent of 80 per cent.

During test-check of 28 beneficiaries who had received financial assistance in February 1999 it was noticed that almost 90 per cent of them were paid financial assistance ranging from Rs.5000/- to Rs.55000/- without verifying their income criteria. Income certificates in respect of only 3 persons were obtained from the gram panchayat. In the absence of any certificate of income it could not be seen in audit whether the benefit has accrued to the weaker sections of the society.

(iii)    A project for construction of a hospital building at Ujjain by Ujjain Charitable Trust Hospital and Research Centre, under the charge of CIT, Bhopal at a cost of Rs.150 lakh was approved by the National Committee in August 1993 with the condition that 25 percent of wards (beds) should be kept reserved for economically weaker sections of the society. Audit scrutiny however revealed that the percentage of the persons belonging to weaker sections and treated in the hospital as indoor patients during the period from 1994-95 to 1999-00 ranged between 9.22 per cent and 11.52 per cent only. Thus the project had not benefited the weaker sections of society to the desired extent.

(iv)    The National Committee in its 29th Business Meeting held in February 1996 considered the proposal of the Bahadur Chand Munjal Trust that the beneficiaries of the project would be children of weaker sections of the society i.e. people whose incomes average Rs.1500 p.m.

Test check of the records of the trust revealed that (i) Rs.39.80 lakh from 17 donors in assessment year 1997-98 and Rs.12.81 lakh from 8 donors in assessment year 1998-99 were collected under section 35AC of Income Tax Act, 1961 and (ii) a total 204 students in 1997-98 and 173 students in 1998-99 were enrolled in the school in various classes, out of which only 4% to 8% students belonged to weaker section of society. Thus the purpose for which the scheme was approved could not be achieved.

6.15    Delay in notifying project

In its 4th Business Meeting held on 20.7.92, the National Committee had noted the delay in issue of notifications under Section 35AC by the Central Government in respect of cases approved by the Committee in earlier meetings and the Chairman desired that the matter should be sorted out with the Law Ministry so that the notifications are cleared by the Law Ministry without undue delay. Delay in issue of notification often leads to non-implementation of the projects or denial of the benefit of deduction under Section 35AC, besides rendering the process of approval and notification infructuous.

(i)    A project “Construction of Mandal Primary Health Centre at Kavuru village of Chirukupalli Mandal in Guntur District” by M/s Natco Pharma Ltd. was approved at an estimated cost of Rs.4.47 lakh vide notification No.187(E) dated 12 March 1997 for the assessment years 1997-98 and 1998-99 on the basis of application dated 10.11.1995. Audit scrutiny revealed that the company completed the project at a cost of Rs.14.46 lakh in the financial year 1995-96 i.e. assessment year 1996-97 itself. This was not communicated to the National Committee nor was the status report submitted by the company. The company could not however claim any deduction under section 35AC of the Income Tax Act, 1961 for the expenditure incurred on the above project in assessment year 1996-97 as the project was not notified.

(ii)    The Committee approved a project for “Construction of an overhead tank and laying pipelines for a drinking water project” to be executed by The South India Paper Mills Ltd., Nanjangud Mysore District Karnataka vide Notification No. S.O.187(E) dt.12.3.1997 for approved cost of Rs.6 lakh. However, owing to delay of one year in notifying the project, the gram panchayat which had originally requested the company to undertake the project, made alternative arrangements and hence the company did not take up the project at all.

6.16    Extensions granted to projects/schemes

Rules 11M(4) of the Income Tax Rules, 1962 inter-alia states that subsequent approval to an eligible project or scheme, if required for a further period, can be granted only if the National Committee is satisfied that the project is being executed properly.

(i)    For the purpose of the review 160 schemes where extensions were granted were test checked which revealed that: -

• In five cases, though the institutions had not received any donations yet extensions for a period of one to three years were granted. The prescribed amount for raising donation was Rs.925.60 lakh.
• In forty-five cases the institutions could raise donations upto ten percent of the prescribed amount of Rs.29416.83 lakh but extension for further period from one year to six years were granted.
• In thirty-five cases, the donation raised was between ten to twenty five percent of the maximum ceiling of Rs.4439.06 lakh at the time of granting first extension but extensions for periods ranging from one to six years were granted.

(ii)    Extension granted although project lacked basic requirements

The National Committee ordinarily recommends to the Central Government a project or scheme as an eligible project or scheme for an initial period upto three years. In exceptional cases the National Committee may extend the project or scheme beyond three years subject to the scheme being executed properly. For this purpose the National Committee may monitor the execution of the project or scheme. In their meeting held on 09.06.93 the National Committee emphasised the need for inspection of all ongoing projects or schemes. For this purpose the Committee decided that the members of the Committee/Officers of the Secretariat would conduct regular inspection of all the projects or schemes, specially in the cases where the approval for extension of the project or scheme for a further period is granted with a view to ensure that the purpose behind insertion of section 35 AC of the Income Tax Act, 1961 is fulfilled.

In nine cases involving estimated cost of Rs.2365.95 lakh for the assessment years ranging between 1993-94 and 1997-98 despite the fact that the institution executing the project/scheme have no basic facility to implement the scheme, further extension was granted. Four illustrative cases are given below:

1.    M/s. Lalaram Gupta Charitable Trust, Agra was notified vide SO 216(E) dated 30.3.1993 and SO/224(E) dated 16.3.94 for implementation of two projects: (I) Construction and running of school for economically weaker sections of society and (II) Construction and running of a sports centre at Agra at an approved cost of Rs.100 lakh and Rs.75 lakh respectively from assessment years 1993-94 to 1996-97. The Committee extended the period vide notification No.413 (E) dated 7.6.96 with an approved cost of Rs.155 lakh upto assessment year 1999-00 for both the projects.

The institution had received donations of Rs.79.80 lakh for both the projects upto March 1999. The land on which the projects were to be carried out could however be acquired only in June 1998. While the project of construction and running of the school for economically weaker sections of society was abandoned midway, the other project for construction and running of the sports centre was also not completed by 31 March 1999. The institution requested the National Committee in October 1999 to revalidate the notification No.413 (E) dt.7.6.96 for a further period and also to allow the institution to develop only the sports centre. It was considered and the Central Government vide notification SO 415 (E) dated 26.4.2000 notified the project of construction and running of sports centre at Agra at an approved cost of Rs.155 lakh for a further period of 3 years from assessment year 2000-01 to 2002-03.

Thus, the projects were not completed within the stipulated time of March 1999. It was thus a case warranting withdrawal of the approval granted, which was not done by the National Committee. As regards approval for sports centre only, the matter should have been considered afresh.

2.    Dr.Vidya Sagar Hospital, New Delhi was allowed to raise a maximum amount of donation of Rs.58.60 lakh vide notification S.O.711 (E) of September 1992 valid for the assessment years 1993-94 to 1995-96 which was subsequently raised to Rs.100 lakh vide notification No.S.O.573 (E) of June 1995 for assessment years 1996-97 to 1998-99 for awareness programme for drug addicts and alcoholics. While approving the extension, the Committee noted that the said project was being executed properly.

Audit scrutiny revealed that the Hospital had collected donations of Rs.65.52 lakh upto March 1997 but had not incurred any expenditure. It was further noticed that in March 1999 the Trust made an application for further extension for a period of five years stating that they had launched some new schemes. However, the National Committee desired (May 1999) that the Trust should revise its project and apply afresh for the new activities being undertaken as it had not been able to acquire the land for the proposed project. Since the project was not being properly carried out the extension accorded in June 1995 was not justified.

3.    The PAC Ramasamy Raja Centenary Trust, Rajapalayam obtained a sanction from the National Committee for Rs.386 lakh for construction of a fully equipped hospital “Ramco Apollo Diagnostic Centre” at Rajapalayam. Sanction was originally obtained for the assessment years 1994-95 and 1995-96 vide SO 267(E) dt.29.3.94 and further extension was obtained vide S.O.180 (E) dt.9.3.1995 for assessment years 1996-97 and 1997-98.

Audit scrutiny revealed that the Trust collected a sum of Rs.292.20 lakh (upto 30.9.99) and the amount was classified as Corpus Fund in the Balance Sheet. The foundation stone for the project was laid on 24.4.1994 and a sum of Rs.13.12 lakh spent for project consultancy works and advertisement charges, architect’s fees, franchise fees etc. However, even after a lapse of five years from the date of laying of the foundation stone, civil works on the project was not commenced. The National Committee however extended the period of sanction for assessment years 1998-99 to 2000-2001 vide S.O.433 (E) dated 20.5.98 at a cost of Rs. 386 lakh.

4.    Indian Craft Village Trust, Calcutta was promoted by the Bengal Chamber of Commerce & Industries. The organisation was approved under section 80-G and its income was exempt from tax under section 11 of the Income Tax Act, 1961. In their notification No.116(E) of 23.2.95 the Central Government notified, on the recommendation of the National Committee, a project “Construction, furnishing and running of Indian Craft Village at Calcutta” at a cost of Rs.650 lakh for the assessment years 1995-96 to 1997-98 under Section 35 AC. On the recommendation of the National Committee, the Central Government notified the extension of the project for a further period for assessment years 1998-99 to 2000-2001 vide notification No.921(E) dt. 29.12.97.

Scrutiny of the assessment records revealed that the organisation proposed to construct an Indian Craft Village at Calcutta on leasehold land measuring 19.60 acres. The land was proposed to be acquired on lease from the Calcutta Municipal Corporation. On 31.5.94 a lease agreement was signed with the Calcutta Municipal Corporation and a sum of Rs.8 lakh was paid to the CMC on account of compensation for crops. Upto the assessment year 1999-00 the organisation had incurred expenditure of Rs.37.83 lakh on the project, which was met from the corpus fund of the organisation. It was stated by the organisation that as the land had not been handed over, they could not collect any donation under section 35AC due to the fact that the proposed donors were insisting on possession of the land. It was evident from the fact above that upto the assessment year 1997-98, i.e. the first spell of approval, the organisation could neither acquire the land on which the proposed Indian Craft Village would be constructed nor collect donations under section 35 AC of the Act but extension was granted for a further three years. The approval as well as extension of the project was unwarranted in the absence of basic infrastructural facility required for carrying out the project.

(iii)    Other cases of irregular grant of extension

(a)    A project for construction of “Saraswati Vidya Mandir”, a residential High School for tribals, Harijans and economically backward classes with vocational training center, to be implemented by Shri Hari Vanvasi Vikas Samiti Kalyan Ashram, Ranchi was approved by the National Committee and notified vide SO No.402(E) dated 3.5.1995 at a cost of Rs.93.98 lakh for assessment years 1996-97 to 1998-99. The project got extension for a further period of three years upto 2001-2002.

Audit scrutiny revealed that institution received donations of Rs.10 lakh upto 31.3.96 and the expenditure incurred on the project was Rs.0.32 lakh as on 31.3.95 and also as on 31.3.98. Thus the project work remained unexecuted since 31.3.95 and the donation money amounting to Rs.9.68 lakh unutilised on the approved project was lying with the executing agency. However, the appraisal report submitted by the trust to the National Committee in October 1995 stated that it had incurred an expenditure of Rs.4 lakh on the project, which was not borne out by the accounts. Thus, the Committee did not properly monitor the execution of the project before granting extension.

(b)    Other cases where the grant of extension to the project was found to be irregular are summarised below:

TABLE NO. 6    IRREGULAR GRANTS OF EXTENSION

Sl. No.	Name of  Institution	Approved cost (Rs. in lakh)	Period (Assessment years)	Irregularity noticed
1	2	3	4	5
1.	Baramati Agricultural Development Trust	38.50	1994-95 to 1995-96 1996-97 to 1998-99	Maximum admissible donations were already collected and hence extension was not justified
2.	Bombay Young Men’s Christian Association Bombay	42.73	1996-97 to 1997-98 1998-99 to 2000-01	As the project was already completed, extension was not justified
3.	Tiruvarur Lion’s Eye Hospital Tiruvarur	10.00	1996-97 to 1997-98 1998-99 to 2000-01	Maximum admissible donations were already collected and hence extension was not justified.

6.17    Incorrect issue of notification

(i)    In notification number S.O.617(E) dated 10th August 1992 the Central Government, on the recommendation of the National Committee approved the scheme/project titled “Rehabilitation Centre for the handicapped” of Manovikas Kendra, Calcutta at an estimated cost of Rs.400 lakh as an eligible project or scheme under section 35AC, for the assessment year 1993-94 to 1995-96. The scheme/project was extended twice for further period without change in approved cost, once vide notification No.S.O.580(E) dated 27.6.95 for assessment years 1996-97 to 1998-99 and again vide notification No.S.O.702(E) dt.3.10.97 for a further period of three assessment years commencing from the assessment year 1997-98.

It is evident from the above that the approval for extension for further period of three years vide notification No.SO 702(E) dated 3.10.1997 of assessment years 1997-98 to 1999-00 was given without verifying the factual position that extension for assessment year 1996-97 to 1998-99 was already granted vide notification SO 580(E) dt.27.6.1995. Thus extension to the project for assessment year 1997-98 to 1998-99 was given by two different notifications.

(ii)    Ahmedabad Govt. Employees Tennis Association was originally notified vide Notification No. SO 521(E) dated 14.7.94 for construction and furnishing of sports complex building for the assessment years 1995-96. Subsequently extension was granted vide notification SO 976 (E) dated 14.12.1995 for assessment years 1996-97 to 1997-98 and again for assessment years 1999-00 to 2001-2002 vide SO 915(E) dated 29.12.1997 which was erroneous as it should have been for assessment years 1998-99 to 2000-2001.

6.18    Non-accrual of benefit due to delay in completion/non-completion of project and non-withdrawal of approval

As per the provisions of section 35AC the National Committee is empowered to withdraw the approval granted for execution of a project or scheme after giving a reasonable opportunity to the executing agency when it is satisfied that the project or scheme is not being carried on in accordance with all or any of the conditions subject to which approval was granted.

A project for “Construction of Building for Community Centre” at Nadiad by M/s Mafatlal Industries Ltd. for Rs.120 lakh, approved in July 1994 for the period upto 31.3.1996, was not completed upto November 1999 even after incurring expenditure of Rs.221.30 lakh. The entire expenditure of project was to be met through the funds of the assessee company itself and not from any other source. The scrutiny of assessment records of the company revealed that during assessment years 1995-96 and 1996-97 the assessee claimed deduction of Rs.116.58 lakh under section 35 AC. The inordinate delay in completion of the approved project even after a lapse of over four years from the target date for completion of the project has resulted in depriving the weaker sections of society of the benefits of the project. The National Committee also did not take action for withdrawal of approval.

6.19    Abuse of the provisions of section 35AC

The Income Tax Act, 1961, provides for deduction of the entire amount of donation made for execution of an eligible project approved by the National Committee for providing social and economic welfare. The amount of donation received in excess of the approved cost of the project is not allowable as deduction under section 35AC.

(i)    A project “Construction of basket ball complex at Indore” to be undertaken by Corporation (Area) Basket Ball Trust, Indore under the charge of CIT Indore at a cost of Rs.443 lakh was approved and notified vide S.O.839(E) dated 22.11.1994 initially for three assessment years which was extended in March 1997 and again in May 1999 upto the assessment year 2002-2003.

Audit scrutiny revealed that the cost of project which was initially approved at Rs.443 lakh in November 1994 was subsequently revised and approved at Rs.1600 lakh. The implementing agency, however, attributed (June 2000) this escalation to the upgradation of the project from that of a normal standard stadium to a stadium of advanced international technological standard. Some other reasons like increase in construction cost etc. were also given.

An area of 1,72,000 square feet was to be covered at a cost of Rs.718.06 lakh. Out of this, 63,000 square feet only pertained to basketball complex (approportionable cost Rs.263 lakh) and the rest of the construction included a commercial complex adjoining the stadium. Scrutiny of income tax records revealed that some offices in which trustees of the implementing agency had interest were accommodated in this commercial complex but no rental income, etc was reflected in the account.

The implementing agency mobilized fund of Rs.136.52 lakh in May 1997 by issue of a debenture called “Basket” under the guarantee of the companies in which the managing trustee was interested, at interest rates of 18 to 21 percent per annum. Further,  the expenditure on issuing these debentures (Rs.3.57 lakh) and interest payable/paid upto 31.3.1999 (Rs.30.65 lakh i.e. 1996-97 Rs.2.67 lakh’ 1997-98 Rs.11.13 lakh and 1998-99 Rs.16.85 lakh) were irregularly debited to the cost of project. The implementing agency stated (June 2000) that fund was mobilized for early completion of project and that the interest paid was capitalized as per Income Tax Act as the project was not completed.

It was further seen that the implementing agency obtained secured loans (against building) and unsecured loans, balance of which on 31st March 1999 stood at Rs.320.88 lakh and Rs.1314.56 lakh respectively. Interest of Rs.235.38 lakh was paid on these loans during the year 1998-99 from the building fund, which was irregular. At the same time the implementing agency was holding a bank balance of Rs.505.18 lakh and Rs.140.49 lakh was advanced to a trustee.

(ii)    The Ambuja Cement Foundation, Calcutta was notified by the Central Government vide SO 521(E) dated 14.7.94 for execution of a project “Integral Rural Development Programme relating to irrigation, agriculture, animal husbandry, mobile dispensary, environment conservation etc at Kodinar Taluka, Amreli District of Gujarat” at a cost of Rs.76.42 lakh for assessment years 1995-96 and 1996-97 (extended for assessment years 1997-98 and 1998-99 vide SO 96(E) dated 7.2.1997 and for assessment years 1999-00 and 2000-01 vide SO 681 (E) dated 11.8.98).

Scrutiny of the assessment records for assessment years 1995-96 to 1999-00 revealed that the Foundation received donations of Rs.125 lakh in assessment year 1995-96 and Rs.100 lakh each year in assessment years 1997-98 to 1999-00 from Gujarat Ambuja Cement Ltd. The Foundation kept the donations received in Rural Development Fund as shown in liability side of Balance Sheet. In the assessment year 1995-96 the Gujarat Ambuja Cement Ltd. claimed deduction of Rs.125 lakh under section 35AC as against the approved cost of the project of Rs.76.42 lakh (i.e. in excess of Rs.48.58 lakh), which was allowed erroneously. However, no deduction under section 35AC was claimed in assessment years 1997-98 to 1999-00.

It was further noticed that the Foundation acquired 54000 fully paid equity shares of Rs.10 each of Gujarat Ambuja Cement Ltd. on 31.10.94 at a cost of Rs.121 lakh out of Rural Development Fund of Rs.125 lakh created from donations received from Gujarat Ambuja Cement Ltd. as it had no other fund. On issue of bonus shares (February 1995) in 1:1 ratio by Gujarat Ambuja Cement Ltd. the Foundation was allotted 54000 additional bonus shares. Out of 1,08,000 shares the Foundation sold 12000 shares in assessment year 1996-97 at consideration of Rs.34.83 lakh resulting in capital gain of Rs.7.71 lakh and as per Income and Expenditure Account (year ending 31.3.1996) the Foundation donated the balance 96000 shares worth Rs.94.50 lakh to Ambuja Educational Institution, in the same year.

Thus Gujarat Ambuja Cement Ltd. was allowed excess deduction of Rs.48.58 lakh than the approved cost of the project and the Foundation donated 96000 equity shares worth Rs.94.50 lakh transferred to another agency for execution of other projects, which was irregular and amounts to abuse of the provisions of section 35AC of the Income Tax Act, 1961.

6.20    Non-submission of true and fair statement of accounts

Under Rule 11-O (iii) of the Income Tax Rules 1962, every public sector company or a local authority or an association or institution shall in respect of 31 March in each financial year deliver or cause to be delivered to the Secretary, National Committee, an annual report indicating the progress of work during the year as well as the details like permanent account number, amount of contribution received, name of contributors and their addresses etc. in respect of each contributor.

(i)    Audit scrutiny of the case of an approved project for construction of a Tennis Stadium at DTA Complex, New Delhi (notification No.267 (E) dated 29.3.94) by All India Tennis Association revealed that during the assessment years 1995-96 and 1996-97 donations amounting to Rs.20 lakh and Rs.40 lakh respectively were received from M/s. Flex Industries Ltd., which was duly reflected by the Association in their accounts. However, the profit and loss account of M/s. Flex Industries Ltd. for the assessment years 1995-96 and 1996-97 revealed that only an amount of Rs.0.41 lakh and Rs.3.10 lakh respectively were paid by it as donations qualifying for deduction under section 80G and no expenditure was shown as deductible under section 35AC of the Act. The donor company has in fact incurred loss in both the years and no receipt of donation in Form 58A were appended along with the accounts. There was nothing on records to verify that donations had been paid to the All India Tennis Association.

(ii)    A project “Training for Coordination in Integrated Rural Development” undertaken by M/s ACIL-Navasarjan Rural Development Foundation, Mumbai was approved for Rs. 300 lakh vide notification of July 1996. Audit scrutiny of the accounts revealed that donations collected in March 1999 amounting to Rs.5.89 lakh were not included in the total amount of donations of Rs.99.95 lakh shown as received and reported to the National Committee. The amount of Rs.5.89 lakh was thus kept out of the accounts and not utilised for the approved project. It was further noticed that there was unreconciled difference of Rs.2.60 lakh between the amount of donation shown in Form 58A, and that shown in the accounts communicated to the National Committee.

6.21    Expenditure on eligible project/scheme before its approval

It was decided in the meeting of the National Committee held on 22 May 1992 under the Chairmanship of Justice P.N. Bhagwati, that the expenditure made prior to the recognition of a project or scheme as an eligible project or scheme by the National Committee should not be treated as expenditure incurred for the project or scheme ibid.

The project/scheme “Rehabilitation centre for the handicapped” of Manovikas Kendra, Calcutta at an estimated cost of Rs.400 lakh was notified as an eligible project/scheme for the assessment years 1993-94 to 1995-96 vide notification No.S.O.617(E) dated 10.8.1992. It was extended without change in the approved cost vide notifications No.S.O.580(E) dated 27.6.1995 and S.O.702(E) dated 3.10.1997 for a further period of three years in each spell commencing from the assessment year 1996-97. Audit scrutiny revealed that as per progress report of 31.3.1999 submitted to the National Committee the Kendra collected donation of Rs.299.76 lakh and made expenditure of Rs.330.86 lakh upto 31.3.1999 on the project/scheme. This expenditure included Rs.35.52 lakh spent on purchase of land for construction of rehabilitation centre out of funds collected before approval of the project/scheme by the National Committee. In view of the decision taken by the National Committee in the meeting held on 22.5.1992 this amount should not be treated as expenditure on the above project/scheme. Hence the organisation utilised Rs.295.34 lakh only, out of Rs.299.76 lakh collected as donation under section 35AC upto 31.3.1999 leaving a balance of Rs.4.42 lakh yet to be utilised on the project.

6.22    Half yearly/yearly status report

The National Committee while conveying the approval of the project or scheme to the implementing agencies required that they should furnish half yearly/yearly returns for the period ending on 30 September and 31st March each year so as to reach National Committee by 31st December and 30 June respectively.

Test check of records in respect of 31 projects/schemes in UT Chandigarh, Haryana, Mumbai, Andhra Pradesh, Bihar, Madhya Pradesh, West Bengal and New Delhi charges revealed that half yearly/yearly reports either were not sent at all or were sent belatedly as follows.

TABLE NO. 7    HALF YEARLY/ANNUAL STATUS REPORT

Test check of West Bengal charges further revealed that out of 18 projects/schemes where extensions were granted, the required progress reports were not regularly submitted to the National Committee in respect of 14 projects/schemes

6.23    Donations not used on eligible project or scheme

Under Section 35AC of the Act donations collected for a particular eligible project or scheme has to be used on the project and cannot be used on purposes other than a charitable purpose. In the following cases, the donations were used for purposes other than on the respective eligible project or scheme:

TABLE NO. 8    DONATIONS NOT USED ON ELIGIBLE PROJECTS

Sl.No.	Name of association/institution	Name of project/ scheme	Notification No. date, assessment years and approved cost	Donation received	Amount kept in fixed deposit	Amount used other than on project	Retained by assessee	Remarks
1	2	3	4	5	6	7	8	9
1.	Child Relief and You, New Delhi	CRY Supported develop-ment project	SO 388(E) dt.19.5.97 AY 1998-99 to 2000-01 at a cost of Rs.1650 lakh	1006.72 lakh	-	Rs.196.08 lakh		Rs.196.08 lakh was utilised towards fund raising, programme support and monitoring and donation to child development fund etc.
2.	Janaki Devi Bajaj Gram Vikas Sanstha, Pune	Integrated Rural Develop-ment Project	SO 878(E)-dt.30.11.92 AY 1993-94 to 1995-96 at a cost of Rs.118 lakh extended up to 31.3.98	Rs.117.51 lakh	-	Rs.80.92 lakh		Rs.80.92 lakh was spent on pay and allowances of the staff of the institute.
3.	YWCA, Mumbai	Construct-ion of Hostel	SO 471(E) dt.26.5.95 AY 1995-96 to 1997-98 at a cost of Rs.300 lakh	Rs.39.11 lakh		Rs.1.90 lakh	Rs.5.57 lakh	Rs.5.57 lakh remained un utilised even after completion of the project and Rs.1.90 lakh deposited with municipal authorities.
4.	Bahadur Chand Munjal Charitable Trust, Ludhiana	Construct-ion, furnishing and equipment of Bahadur Chand Munjal (Hindi medium) School Building	SO 193(E) dt.14.3.96 (revised vide SO 485(E) dt.5.7.96 from Rs.33 lakh to Rs.52.61 lakh	Rs.52.61 lakh	Rs.1.78 lakh	Rs.10.96 lakh	-	For payment of salary to staff and Office expenses Rs.10.96 lakh and Rs.1.78 lakh in fixed deposit
5	Sri Sathya Sai Medical Trust Prashanti Nilayam	(i) Establish-ment of urology and nephrolo-gy unit (Rs.500 lakh) and (ii) neurology unit Rs.750 lakh in Super speciality Hospital Prashanti Nilayam	SO 244(E) dt.27.3.1992 AY 1992-93 to 1994-95 at a cost of Rs.1250 lakh. Extended vide SO 614(E) dt.23.8.94 for A.Ys.1995-96 to 1996-97 at an estimated cost of Rs.1200 lakh	Rs.1024.25 lakh on (i) Rs.159.07 lakh on (ii)	Rs.322.48 lakh Rs.159.07 lakh	- -	- -	(i) fixed deposit with State Bank of India and UTI (ii) Invested in UTI. Project was not implemented due to insufficient donation for the unit.

6.24    Donations received used for giving donation/grant

Under the Income Tax Act, donations received under section 35AC are to be used only on the eligible project/scheme and not for other purposes.

Audit scrutiny revealed that donations amounting to Rs.4.59 lakh were received by Ishwar Charitable Trust, New Delhi for expansion of outreach programmes for rural areas. Out of this, an amount of Rs.0.30 lakh was paid as donation/grants to others, which was in contravention of the provisions of the Act.

6.25    Donations received beyond the notified period

There is no provision in the Income Tax Act, 1961 prescribing control by the Government/National Committee over issue of certificates in Form 58A or Form 58B by the executing agency of an eligible project or scheme.

Test check in audit revealed that in the following cases donations were received by the executing agencies of an eligible project or scheme after the expiry of the notified period. As deductions under Section 35 AC are being allowed without proof of donations in the prescribed certificates, particularly in summary assessment cases, the claim and allowance of deduction in the hands of donors in the cases cited below cannot be ruled out.

TABLE NO. 9    DONATIONS RECEIVED BEYOND NOTIFIED PERIOD

Sl. No	Name of Association/ Institution	Name of the project	Notification No, date, assessment year and approved cost	Donation received beyond the approved period	Period of receipt of donation Relevant assessment year
1	2	3	4	5	6
1.	Bandhua Mukti Morcha New Delhi	Establishing a transitory rehabilitation centre at Sohna, in Haryana and running five non-formal education schools in brick kiln areas of Ghaziabad, (UP)	SO 471(E) dt.26.5.95 assessment years 1996-97 to 1998-99 at a cost of Rs.77.76 lakh	Rs.1 lakh	April 1998 to September 1998 AY: 1999-00
2.	All India Tennis Association, New Delhi	Construction of Tennis Stadium at DLTA Complex New Delhi	SO 267(E) dt.29.3.94 assessment years 1994-95 to 1996-97 at a cost of Rs.314.70 lakh	Rs. 0.08 lakh	April 1996 to September 1996 A.Y. 1997-98
3.	Bhadrajun Artisans Trust New Delhi	Construction of school building and Teachers Training Programme at Village Bali, Distt. Pali, Rajasthan for economically weaker section of society	SO 216(E) dt.30.3.93 assessment years 1993-94 to 1995-96 at a cost of Rs.100 lakh	Rs. 2 lakh Rs.2.84 lakh	April 1995 to September 1995, October 1995 to February 1996 A.Y.1996-97
4.	Literacy House.	Preparation, printing and supply of books for neo-literates in 1000 Jana Chai- tanya kendras in 23 districts of Andhra Pradesh	SO 602(E) dt.12.8.-1993, assessment years 1994-95 to 1996-97 at a cost of Rs.280.05 lakh	Rs.0.50 lakh	April 1996 AY: 1997-98 (expenditure made upto March 1999 was Rs.0.55 lakh)
5.	Belgaum District Badminton Association Belgaum	Construction of a badminton hall for running a badminton training school for coaches and players	SO 194(E) dated 13.3.95, assessment years 1995-96 to 1997-98 at a cost of Rs.40.61 lakh	Rs.4.30 lakh	During financial year 1997-98 i.e. assessment year 1998-99. No extension was granted beyond assessment year 1997-98

6.26    Return of income not filed by implementing institutions

According to Section 139(4A) of the Income Tax Act, 1961, a trust whose total income computed under the Act without giving effect to the provisions of Section 11&12 of the Act exceeds the maximum amount which is not chargeable to income tax is required to file a return of income as if such return was required to be filed under section 139(1) of the Act.

Audit scrutiny revealed that two assessees (Saurashtra Gandhiji Gramodhar Trust, Rajkot and Prashanti Medical Services and Research Foundation, Rajkot) under Commissioner of Income Tax, Rajkot charge, implementing approved eligible projects during the previous years relevant to assessment years 1995-96 to 1999-00, did not file their returns of income.

Returns of income were also not filed in the following cases:

TABLE NO. 10    RETURNS OF INCOME NOT FILED

Sl. No.	Name of institution /association	Project/scheme	Notification No. and date Approved cost
1	2	3	4
1.	Adarsha Seva Sangthan Anantapur, Dhenkanal, Orissa	Low cost housing cum latrine project	22.11.94 Rs.58.06 lakh
2.	Palli Vikas Kendra, Santhasara, Dhenkanal	Construction of 100 low cost sanitary latrines	30.3.93 Rs.2.13 lakh
3.	Rural Ladies Welfare Society Dharampur Darbhanga, Bihar	Construction of 500 low cost houses	SO 399(E) dated 6.6.96 for assessment year 1997-98 to 1998-99 at a cost of Rs.161.10 lakh
4.	Gramin Vikas Parishad Deogarh Bihar	Social forestry at three villages Jamunia Digai and Pone Sarayahat Block Dumka	SO No.611(E) dated 23.8.94 for assessment year 1995-96 at cost of Rs.11.97 lakh
5.	Khanapara Sports and Cultural Organisation, PO Khanapara, Guwahati	-	862(E)/12.12.97 Rs.336.00 lakh
6	Tribal Entrepreneurs Association Dr.E.P.AO Cottage, Nabarbaric, Dimapur, Nagaland	-	54(E)/16-1.98 Rs.100.00 lakh
7.	Manipur Tribal Development society Imphal, Manipur	-	402(E)/3.5.95 Rs.104.75 lakh
8.	The Backward Area Development Organisation, Hookip Veng Imphal, Manipur	-	180(E)/10.3.97 Rs.268 lakh
9.	The Social Environment and Rural Technology Council (SEARTC), Pallel Kotlenphai Chandel Distt. Manipur	-	388(E)/19.5.97 Rs.50 lakh
10.	Organisation for shifting cultivation and advancement of small scale industries, Balapura, Imphal, Manipur	-	973(E)/14.12.95 Rs.75.35 lakh
11.	Integrated Micro Industries Development Association, Imphal, Manipur	-	160(E)/10.3.93 Rs.41.00 lakh

6.27    Defect in certificates issued

Form 58A, inter alia includes the details of:

1. Amount received till date of donation from others prior to the present donation.
2. Amount received from donor
3. Total amount received for the project including the amount covered under the present certificate.

Audit scrutiny of the assessment records of M/s. Halar Salt and Chemical Works, assessed in CIT Rajkot charge, for the assessment years 1996-97 to 1998-99, revealed that the assessee claimed deduction of Rs.3 lakh on the basis of two certificates in Form 58A issued by ACIL-Navrajan Rural Development Foundation, Mumbai. Cross-checking of the records of the donee institution revealed that the certificates issued were defective as the amount of donations received from other donors prior to the issue of the certificate to the assessee was shown less by an amount of Rs.1.35 lakh than the donations actually received. The mistakes resulted in total short depiction of a sum of Rs.1.35 lakh. The mistake needs to be checked thoroughly as it may lead to issue of more incorrect certificates.

6.28    Non/incorrect maintenance of separate accounts in respect of projects or schemes by the executing institutions/associations

As per Rule 11J and K of the Income Tax Rules, the institutions/associations executing the projects/schemes approved under section 35AC should maintain separate accounts of such projects or schemes. Audit scrutiny of the accounts furnished with the return of income revealed that generally no separate accounts are maintained for such projects or schemes by the executing institutions/associations. Instead, a combined Income and Expenditure statement of all the activities undertaken by the institution/association is prepared and submitted with the return of income or furnished to the National Committee. Hence control over the receipt of donations and its expenditure on the specific project or scheme could not be checked.

Test check in audit revealed the following discrepancies in this regard.

TABLE NO. 11    NON/INCORRECT MAINTENANCE OF SEPARATE ACCOUNTS

6.29    Difference between Balance sheet and Receipts and Payments account

A project “Construction of Dev Sangha National School and Hostel building at Bompass Town, Deoghar, Bihar” was notified by the Central Government vide notification S.O.180 (E) dt.10.3.1997 for assessment years 1997-98 to 1999-00 at a cost of Rs.300 lakh to be undertaken by Dev Sangha Seva Pratishthan, Calcutta. The project was extended for a further period of three years commencing from the assessment year 2000-2001.

As per Receipts and Payments account the organisation had incurred expenditure totalling Rs.108.27 lakh upto the assessment year 1999-00 on the project. However, in the asset side of the Balance Sheet as on 31-03-99 the association showed a sum of Rs.113.97 lakh against “School building under construction” which is Rs.5.70 lakh more than the figure shown in the Receipts and Payments account. The difference of Rs.5.70 lakh represented other expenses not related to the approved project and was erroneously included in the sum of Rs.113.97 lakh shown in the Balance Sheet as on 31-03-99.

6.30    Incorrect allowance of deduction to donors

During test-check of the assessment records of the donors, the following irregularities were noticed:

(a)    Deduction allowed in the absence of required proof

Under the provision of section 35AC of the Income Tax Act, taxpayers are entitled to deduction of entire expenditure incurred in financing any eligible project/scheme only if the claim of deduction is supported by a certificate in Form 58A or Form 58B, as the case may be.

Audit scrutiny in 31 cases in Kerala, Gujarat, Karnataka, Maharashtra, Andhra Pradesh, Himachal Pradesh, Bihar, Rajasthan, West Bengal and Assam charges revealed that in the assessments for the assessment years 1994-95 to 1998-99 donations aggregating Rs.98.12 lakh were allowed as deduction under section 35AC without production of requisite certificates. Five such instances are cited below, where deduction was allowed although the prescribed certificates were not enclosed, even though the assessments were completed in scrutiny manner.

1.    The assessments for the assessment years 1995-96 and 1996-97 of M/s. Himachal Futuristic Communication Ltd., assessed in CIT Shimla charge, were completed after scrutiny, in September 1997 and July 1998 respectively. Audit scrutiny revealed that a deduction of Rs.7.50 lakh (Rs.3 lakh in assessment year 1995-96 and Rs.4.5 lakh in assessment year 1996-97) was allowed for donation given to an institution for executing an eligible project which was not supported by requisite certificate in Form 58A. The irregular deduction resulted in underassessment of income aggregating Rs.7.50 lakh involving tax effect of Rs.5.44 lakh.

2.    The assessment for the assessment year 1997-98 of M/s Associated Cement Company Ltd. was completed in March 2000 after scrutiny. Audit scrutiny revealed that deduction of Rs.61 lakh was allowed incorrectly by the department as the prescribed certificates in support of the claim was not furnished. The deduction allowed involves tax undercharge of Rs.18.30 lakhs.

3.    The assessment of M/s CESC Ltd., Calcutta for the assessment year 1994-95 was made after scrutiny in March 1997 at `Nil’ income. It was noticed that in computing income from business the assessee company was erroneously allowed deduction of Rs.10 lakh under Section 35AC for donation made to the project “Drug treatment cum rehabilitation centre for drug addicts” being executed by General Medical and Scientific Research Centre, Calcutta without production of the requisite certificate in Form 58A.

4.    An assessee, M/s Karnataka Breweries and Distilleries (P) Ltd., donated an aggregate sum of Rs.30.18 lakh during the previous year relevant to assessment year 1993-94 to various charitable associations/institutions. Out of this a donation of Rs.30 lakh was made to Sri Satya Sai Medical Trust, Prasanthi Nilayam, Andhra Pradesh. The assessee claimed deduction under section 35AC of the Act in respect of the above donation which was allowed in the assessment for the assessment year 1993-94 completed after scrutiny in March 1996. A perusal of the assessment records however, revealed that the claim of deduction under section 35AC was not supported by the certificate in Form 58A required to be issued by the organization but was allowed on the basis of a receipt dated 29.3.93 issued by the Sri Satya Sai Medical Trust to the assessee in support of donation made to it, which was irregular. The mistake resulted in underassessment of income of Rs.30 lakh with consequent undercharge of tax and interest of Rs.23.32 lakh.

5.    An assessee, M/s Brook Bond Lipton India Ltd., assessed in CIT WB II charge was allowed deduction of Rs.7 lakh under section 35 AC in the assessment for the assessment year 1995-96 completed after scrutiny in March 1998 for donation made to a project being executed by Sarbanandha Singha Stadium Committee, Assam on the basis of a receipt dated 30.5.95 issued by the latter and not on the basis of certificate in Form 58A which was irregular.

(b)    Incorrect allowance of deduction under section 35AC

An assessee having income from business or profession is allowed deduction under Section 35AC of the amount of donations made to eligible projects or schemes, to the extent that this does not exceed his income from business or profession. Taxpayers, other than those carrying on business or profession, are eligible to get deduction on donations made for executing eligible project/scheme under section 80GGA of the Income Tax Act, 1961.

(i)    The income tax assessments of an individual, Shri Janak Gandhi, in CIT Indore charge, for the assessment years 1995-96 to 1999-00 were completed in summary manner in March 1997, November 1998, September 1999 and December 1999 respectively. The assessee incurred an expenditure aggregating Rs.137 lakh as donation during these years to an eligible project and claimed and was allowed this amount as deduction under section 35AC. Audit scrutiny revealed that the aggregate income of the assessee from business or profession for these years was Rs.28.78 lakh only. Thus the assessee had claimed and was allowed deduction under section 35AC in excess by Rs.108.22 lakh, which involved tax effect of Rs.47.16 lakh (including additional tax and interest).

(ii)    The assessment of an individual, Shri S.K.Arun Kumar, under the charge of CIT Kochi, for the assessment year 1996-97 was completed after scrutiny in March 1999. Audit scrutiny revealed that the assessee was incorrectly allowed Rs. One lakh as deduction under section 35 AC of the Act though he had no income from business or profession. The mistake resulted in under assessment of income by Rs. One lakh with tax undercharge of Rs.0.30 lakh.

(iii)    The assessment of an individual, Prof. Shyam Sunder, a state government employee assessed in CIT Shimla charge, for the assessment year 1997-98 was completed in a summary manner in December 1997. Audit scrutiny revealed that although the only income of the assessee was from salary a deduction of Rs. One lakh was incorrectly allowed to the assessee under section 35AC while computing his salary income. The mistake resulted in short levy of tax of Rs.0.23 lakh.

6.31    Incorrect computation of income

Under Section 35AB of the Income tax Act, 1961, in respect of Tea Development Account Scheme, a deduction not exceeding 20 per cent of the profit of business of growing and manufacturing tea in India shall be allowed before making any deduction under Tea Development account.

The assessment of a tea growing and manufacturing company, M/s Chotatingrai Tea Estate (P) Ltd., assessed in CIT Shillong charge, for the assessment year 1995-96 was completed in a summary manner in February 1996. Audit scrutiny revealed that the assessee had claimed deduction of Rs. 25 lakh in respect of donation made to an eligible project executed by an institution (Murlidhar Jalan Foundation, Calcutta) after claiming deduction under Tea Development account instead of before the deduction under Tea Development account. The information was available from the records furnished along with the return and was thus covered under prescribed adjustment. The mistake resulted in underassessment of income of Rs.2 lakh with consequent short levy of tax of Rs.1.31 lakh (including additional tax and interest).

6.32    Lacunae in the Act

1.    Every association or institution approved under section 35 AC is required to submit to the National Committee half yearly reports for the period 1st April to 30th September and 1St October to 31st March every year by 31st December and 30th June respectively and an annual report for each financial year indicating details of donations received, the amount spent on the project/scheme and the extent of work carried out/progress made. However, the Act does not contain any provision requiring the approved association or institution to submit these reports to the assessing officer having jurisdiction over the association/institution. In the absence of this important requirement, the assessing officer is unable to ascertain the extent of donations received, expenditure incurred out of it and work carried out/progress made by the association/institution on the eligible project/scheme.

2.    No controls are prescribed in the Income Tax Act, 1961 to exercise check over issuance of certificates in Form 58A or 58B, especially after completion of the projects/schemes or in respect of the projects/schemes that were subsequently abandoned. The unutilized certificates lie in the custody of the associations or institutions. In the absence of suitable provisions in the Act providing for any control mechanism, the possibility of fraud cannot be ruled out.

3.    There is no provision in the Income Tax Act, 1961 for withdrawal of notification when a project is not implemented. Lack of this may give rise to a situation where an institution could continue to raise donations. The assessing officer would not be in a position to know this while giving the donor the benefit of deduction under Section 35AC. This further highlights the need for coordination between the National Committee and the Income Tax Authorities.

4.    The donors and the donees are assessed in different assessment charges, often in different states. Thus, there is a need for exchange of information not only between the National committee and the assessing officers but also between the assessing officers themselves to ensure that the deductions claimed and granted on account of donations to eligible projects are genuine and there is no leakage of revenue.

6.33    Conclusion

The review on the functioning of the National Committee revealed several lacunae in the law, which led to situations where the very purpose behind the creation of the Committee to act as an agent of social change in order to further the socio-economic objectives of the Government has not been fully met. Although the Government had intended that the National Committee should be an independent, autonomous, high-powered body consisting of illustrious personalities to act as a catalyst for galvanizing the non-government organizations to a higher level of activity so that the task of development could progress speedily, there has been no review of the functioning of the Committee since its inception that could have helped to detect and plug these loopholes. For the functioning of the Committee to be effective it is necessary to provide some kind of mechanism for regular coordination between the National Committee and the Income Tax Department, which would prevent the misuse of the Scheme and leakage of revenues due to loopholes in the Act.