Section 115TD - Tax on Accreted Income of Charitable Trust
& Institution.
CBDT
has proposed Draft Rule (Rule 17CB) for computation of aggregate Fair Market
Value of Net Assets for the purpose of quantification of Accreted Income under
section 115TD.
Through
below stated analysis, I am of the view that in legislation of propose draft
rule 17CB under delegated legislation, the Executive Body is legislating
excessively, than mandated by the objective and policy spelt out in express
substantive provision of Section 115TD.
1.
Section 115TD
provides for levy of Exit tax on charitable trust/institution registered u/s
12AA, when such trust/institution :-
a)
Is converted into
any form which is not eligible for grant of registration u/s 12AA.
b)
Is merged with
any other entity, other than trust/institution having objects similar to it and
registered u/s 12AA.
c)
Upon dissolution,
failed to transfer the assets to other prescribed Trust/Society within period
12 months from the end of the month in which dissolution take place.
2.
In simple terms
for our analysis, section 115TD charges Exit Tax, when charitable
trust/institution ceased to purse charitable activities.
3.
The base for Exit
tax is accreted income on specified date and same is made taxable on maximum
marginal rate.
4.
The accreted
income is measured as excess of aggregate fair market value of assets over
liabilities on specified date, to be computed in accordance with method of
valuation as may be prescribed – Section 115TD(2)
5.
In exercise of
power u/s 115TD (2), CBDT has notified the Draft Rules 17CB for computing the
fair market value of assets.
6.
Among other
things, the propose rule 17CB prescribed the Current market value of Assets i.e Current share price for listed
securities, Current Market value for Immovable properties & so on.
7.
The question for deliberation is whether in prescribing
Current market value of assets, legislation of propose Rule 17CB is within the
framework of power vested under delegated legislation.
8.
Scope of
Delegated legislation –Judicial Precedents
a)
Essential
Legislative function consists of the determination of legislative policy and
its formulation as binding force. The legislature must retain in its own hands
the essential legislative function and what
can be delegated is the task of sub-ordinate legislation necessary for
implementing the purposes and objects of the Act – Municipal Corps. Of Delhi v Birla Cotton Spg. & Wvg. Mills, AIR 1968 SC 1232, 1244
b)
A delegated
legislation must also be read in a meaningful manner so as to give effect to
the provision of statue. In selecting
the true meaning of a word regard must be had to the consequences leading
thereto. If two constructions are possible to adopt, a meaning which would make
the provision workable and in consonance with the statutory scheme should be preferred.
– Ramesh Mehta V. Sanwal Chand Sighvi
(2004) 5 SCC 409, 426-427
9.
Section 115TD
uses the words “Fair Market Value” In order to understand the true meaning of
these words, it is necessary to evaluate the same in the context of objective
of section interwoven with basic interpretation rules.
10. Objective of Section
a)
Section 115TD
intends to place in statue a mechanism to tax past income of charitable
trust/institution, when it ceases to continue its charitable activities. The
criterion used to measure the past income is taken as accreted income, which is
defined as excess of asset over liabilities. The benchmark used is perfect as
all past income gets accumulated in net worth, which is same as accreted income
in accounting parlance.
b)
Memorandum
Explaining Finance Bill 2016 provides that “there
is a need to ensure that the benefit
conferred over the years by way of exemption is not misused and to plug the
gap in law that allows the charitable trusts having built up corpus/wealth
through exemptions being converted into non-charitable organization with no tax
consequences.”
11. Interpretation Rules
a)
Section Placement
– Section 115TD is put under chapter XII-EB. The entire series of sections
under chapter XII to XIIH deals with either special rate of tax for specified
income or special rate of tax for special income. Neither sections in these
chapters deals with taxation of any event or transaction, which is considered
as unlawful or penal in nature. Thus levy of exit tax u/s 115TD cannot be
treated as any penal tax, but rather it provides a situation to impose tax on
past income, when a charitable trust/institution voluntary decides to
discontinue charitable activities.
b)
Real Income –
Unless otherwise provided, person can be fastened with tax liability only on
real income.
c)
Double taxation –
Unless otherwise provided, section should be so interpreted that it does not
lead to double taxation of same income in the hands of same person.
12. Thus the words “Fair market value” should be so construed
that objective of Section 115TD is achieved in collocation with accepted
principles of interpretation of Real Income Theory and Prevention of Double
taxation.
13. The Propose Rule 17CB does not seems to be in
consonance with above-mentioned objective & policy emanating from section
115TD, expounded as under:-
a)
Against Objective of section and Real Income Theory – The objective of section 115TD is to tax the past
income of charitable trust/institution. By valuing the assets at current market
price, the rules intend to tax the present unearned income i.e. rule is
providing to tax imaginary unearned income, which is neither the mandate of
section nor in conformity with principle of taxation of Real Income.
b)
Double taxation –
i)
Suppose a
charitable trust is having an immovable property of Rs. 1,00,000, the market
value thereof is Rs. 10,00,000. If charitable trust stops charitable
activities, then by virtue of section 115TD read with propose Rule 17CB, it
will be made liable to pay tax of 10,00,000 @ 30%.
ii)
Finance Act 2016,
which put section 115TD on statue, nowhere provides for substitution of enhanced
value in the hands of trust upon inviting section 115TD. When in future, the
trust will actually sell the Immovable property, the cost will be taken as Rs.
1,00,000 as per section 48 and it will lead to double taxation of income of Rs.
10,00,000.
iii)
Thus in the
absence of express provision for double taxation, operation of section 115TD
along with propose rule 17CB culminate in double taxation under Income Tax Act.
14. Propose Rule 17CB seems to be exercise of excessive
delegation, as it is not supplementing, but rather supplanting section 115TD,
on following counts:-
a)
The Propose Rule
is in not in aligned with objective of section – to tax the past earned income.
The propose rule leads to taxation of present unearned income which dehors the
objective of section.
b)
The rules have
taken the Words “fair market value” in literal sense by prescribing current
market value of assets, leading to absurdity in working of section 115TD by introducing
the double taxation.
c)
By taxing the
imaginary income of charitable trust/institution, without having recourse in
Income Tax Act to avoid double taxation, the propose valuation methodology
place the provision of section 115TD at par with penal provision, which is also
against vowed objection of section.
15. Thus in present setting, rulemaking authority cannot advocate
the current market value of assets for computing accreted income, the same
needs to be confined to book value only or any suitable variant thereof.
