Anonymous Donations under Income Tax

The Finance Act, 2006 with effect from 1^st April 2007 inserted a new section 115BBC wherein anonymous donations are taxable at the rate of 30% without any deduction or set-off under any other head. The said amendment led to harassment to several genuine NGOs that received anonymous donations through donation boxes and other sources. Thus, the section was amended by Finance Act, 2009 allowing some relief to NGOs exempting anonymous donations up to 5% of total donations or Rs. 1 Lakh whichever is higher. This article throws light on the term “anonymous donation” and the manner it is taxed under the provisions of the Income Tax Act, 1961.

According to the above definition, the NGOs are required to maintain a record of the identity of the donors i.e. name and address of the donor and additional details as prescribed. Thus, the NGOs should ensure that name and address of the donor is available on their record to avoid taxability under section 115BBC. The CBDT has recently notified Rule 17AA which specifies that trusts or institutions should maintain the following records of voluntary contributions, including corpus:

• Name of the donor;
• Address of the donor;
• Permanent Account Number (if available);
• Aadhar Number (if available);

Thus, it is desirable that the trusts or institutions should also collect PAN and Aadhar of the donor (if available).

Now, let’s have in-depth analysis of section 115BBC:

Analysis of Section 115BBC (1)

Section 115BBC deals with the two issues:

(a) Who is liable to pay income tax on anonymous donations?

(b) How is income tax calculated on anonymous donations?

Who is liable to pay income tax on anonymous donations under section 115BBC?

According to section 115BBC (1), the following entities are liable to pay tax on anonymous donations:

• University or educational institutions existing solely for educational purposes whose annual receipts do not exceed Rs. 5 Crores. [Section 10(23C) (iiiad)]
• University or educational institutions existing solely for educational purposes having annual receipts exceeding Rs. 5 crores and approved by the Principal Commissioner or Commissioner. [Section 10(23C) (vi)] This does not include university or educational institutions which are financed, wholly or substantially by the Government
• Hospital or medical institution having annual receipts not exceeding Rs. 5 crores. [Section 10(23) (iiiae)]
• Hospital or medical institution having annual receipts exceeding Rs. 5 crores and approved by the Principal Commissioner or Commissioner. [Section 10(23C) (via)] This does not include hospital or medical institution which is financed, wholly or substantially, by the Government.
• Any fund or institution established for charitable purposes and approved by the Principal Commissioner or Commissioner having regard to the objects of the fund or institution and its importance throughout India or any State. [Section 10(23C) (iv)]
• Any trust or institution wholly for public religious purposes or wholly for public religious and charitable purposes and approved by the Principal Commissioner or Commissioner, for ensuring that the income accruing thereto is properly applied for the objects thereof. [Section 10(23C) (v)]
• Any trust or institution as referred to in section 11.

In simple words, educational institutions, health institutions and trusts or institutions referred u/s 11 are required to keep record of the identity of donors to avoid taxability under section 115BBC. However, the following health or educational institutions are not affected by the said section:

• University or educational institutions which are financed wholly or substantially by the Government;
• Hospital or health institutions which are financed wholly or substantially by the Government;

How is income tax calculated on anonymous donations?

According to section 115BBC (2), the income-tax is chargeable on anonymous donations @ 30% on the aggregate amount of anonymous donations received in excess of the higher of:

(a) 5% of the total donations received or

(b) Rs. 1 Lakhs

Note:

• The donations are taxable under this provision only if the amount of anonymous donations exceed higher of (a) & (b) as above. The tax shall not be levied on the entire anonymous donations but shall be levied only on the amount of anonymous donation which exceeds the above referred limit.
• The word here used is ‘Total donations’ and not anonymous donations. Therefore, for calculating 5%, total donations are to be considered and not anonymous donations.
• For calculating income tax on other incomes of the institution, once the total income shall be taken inclusive of total anonymous donations and then anonymous donations already taxed @ 30% will be deducted. In other words, anonymous donations to the extent of 5% or Rs. 1 Lakhs shall form part of total income for calculating income tax.
• Please also note that rate of 30% shall also be subjected to applicable surcharge & cess.

What are the cases where anonymous donations are not subject to tax under section 115BBC?

According to sub-section (2) of section 115BBC, the following anonymous donations are not liable to tax:

• In case of wholly religious institutions, anonymous donations received shall not be subjected to tax u/s 115BBC.
• In case of partly religious and partly charitable institutions also, anonymous donations shall not be subjected to tax. However, if any anonymous donations are directed to be utilized for any educational institution or health institution of such entities, then the provisions of section 115BBC (1) shall apply and tax has to be paid on anonymous donations.
• In the case of wholly charitable institutions, anonymous donations shall be taxable to the extent of such donations as exceeds 5% of total donations or Rs. 1 Lakhs, whichever is higher.
• Further, we have already discussed that the tax on anonymous donations is not applicable on educational institutions or health institutions which are wholly or substantially financed by the Government.

Maintaining ‘Record’ of identity of donors

Section 115BBC (3) states that where a person does not maintain a record of identity of name, address and other prescribed particulars of donor, such donations shall be treated as ‘anonymous donations’.

However, the word ‘record’ has not been defined anywhere in the Act. Therefore, we can simply interpret that maintaining a list/ register showing name and address of the donor is a sufficient compliance.

As already discussed, the CBDT has recently notified Rule 17AA which specifies that the trusts or institutions should maintain the following records of voluntary contributions, including corpus:

• Name of the donor;
• Address of the donor;
• Permanent Account Number (if available);
• Aadhar Number (if available);

Thus, it is desirable that the trusts or institutions should also collect PAN and Aadhar of the donor (if available).

It should be further noted that Section 115BBC is silent regarding the period for which such ‘record’ of donors has to be kept. However, section 44AA read with Rule 6F(5) requires that the books of accounts in respect of a business or profession shall be maintained for a period of 6 years from the end of the relevant assessment year. Thus, the period of 6 years can be considered reasonable in the case of maintenance of record of donors also.

Whether record of voluntary donations in kind is also to be maintained?

Section 115BBC does not differentiates between voluntary contributions received in cash or kind. Therefore, it can be interpreted that details of donors need to be maintained even in the case where donations or contributions are received in kind.

From Judiciary

M/s Ramadevi Memorial Charitable Trust v. ACIT (E), Jaipur [ITA No. 1023/Jp/2016:

The tribunal held that proper name and address were not available and the donation were of identical amount of Rs. 5,000, the Assessing Officer was justified in taxing it as anonymous donation.

ACIT vs. Siddhartha Academy of General & Technical Education [2022] taxmann.com 287 (Vishakhapatnam- Trib.)

The Tribunal held that where assessee-trust provided details of donors along with names and addresses and furthermore confirmation letters from donors were also provided to Assessing Officer in respect of donation received, mere absence of PAN in confirmation letters of donors would not give rise to suspicion that they were anonymous donations; maintenance of name and address details of contributors would be a sufficient document to establish identity of donors as prescribed under section 115BBC.

Shri Girraj Educational and Welfare Society v. Income-tax officer (2013) 81 DTR 257:

The Tribunal observed that the assessee did not maintain records of the identity indicating the names and addresses of the donors. Merely filing list of donors containing names and addresses/ incomplete addresses does not satisfy the conditions laid down in section 115BBC (3) of the Act. The sub-section (3) of section 115BBC has explained the meaning of anonymous donation clearly that such institution is required to maintain records of identity indicating names and addresses of the person making the donations or contributions.

Admissibility of affidavit or video footage as evidence for donation

In the case of Commissioner of Income Tax (Exemptions) vs. Patanjali Yogpeeth (NYAS) ITA 886/2017, it was held by Delhi HC that donations collected through sale of coupon from various yoga camp shall not be treated as anonymous based on the affidavits of the President of the Camp and the video footage available. It means that even in the absence of the name and address of the donor, an affidavit by the organization and corroborative evidence shall be admissible.

Small donations collected through donation boxes- whether section 115BBC applicable?

It is a usual practice in throughout India where small donations are collected through donation boxes placed at shop counters, hospital counters and other places. These donations are anonymous in nature. So a question arises whether these will also be hit by the provisions of section 115BBC or not. Let’s see various judicial precedents:

ITO (E) vs. Bombay Panjrapole [ITA No. 5414/M/2010 dated 25-07-2012] The Tribunal held that in the case of a charitable trust engaged in maintaining gaushalas and veterinary hospital for treatment of wounded and sick animals and birds, the donations received from public through donation boxes could not be taxed under section 115BBC.

Similar decision was rendered by ITAT Amritsar in case of Dy. CIT vs. All India Pingalwara Charitable Society [2016] 158 ITD 410/67 taxmann.com 338 where the Tribunal held that the intent of section 115BBC was to tax unaccounted money but it was never intended to tax small and petty collections through donation boxes.

Impact of Section 115BBC on anonymous donations in the nature of project donations

Project donations are given to trusts or institutions for implementation of various projects with charitable objects. These project donations may be voluntary contributions or specific contributions based on directions of the donor. However, in order to demonstrate that a donation is intended for a particular project, it must be accompanied by some specific instructions from the donor. In the case of anonymous donations, it will be difficult to prove that the donor has given a specific instruction for the donations.

It should be noted that “Specific” instruction could be given by the donor only through some instrument like a letter or agreement. In either case, such instrument needs to have name and address of the donor. Therefore, project donations (without name & address of donor) which are anonymous in nature will be hit by the provisions of section 115BBC.

Is section 68 relating to cash credits applicable in case of anonymous donations?

There are a number of judicial precedence that section 68 relating to “cash credits” can not be invoked on charitable institutions receiving the anonymous donations.

Kalyan Memorial & Charitable Trust vs. ACIT (2009) 121 ITD 525 (Agra) (TM)

Held that when the assessee had furnished the details of the bank account, returns of income filed, PAN of all its creditors, the question of invoking section 68 does not arise. When the voluntary contributions are treated as anonymous donations and brought to tax, then again it cannot be treated as unexplained cash credit and be brought to tax by invoking section 68.

Director of Income Tax (Exemptions) v. Keshav Social & Charitable Foundation (2005) 278 ITR 152 (Del):

The court observed that to obtain the benefit of the exemption u/s 11 of the Act, the trust is required to show that the donations were voluntary. In the present case, the assessee had not only disclosed its donations, but has also submitted list of donors. The fact that the complete list of donors was not filed or that the donors were not produced, does not necessarily lead to the inference that the assessee was trying to introduce unaccounted money by way of donation receipts. Section 68 of the Act has no application to the facts of the case because the assessee had in fact disclosed the donations of Rs. 18,24,200 as it income.

Can registration under section 12AA or approval under section 80G be denied on ground of anonymous donations?

Registration under section 12AA or approval under section 80G are subject to the genuineness of the activities of the trust in conformity with its objects. Mere receipt of anonymous donations will not change the character of charitable objects. Therefore, the anonymous donations taxed under section 115BBC shall not impact the registration or approval of the trust or institution. Thus, it would not be a reason to deny registration under section 12AA or approval under section 80G. Refer related judicial precedent: PIMS Medical & Education Charitable Society v. CIT (2012) 080 DTR 153

Applicability of provisions of application and accumulation in case of anonymous donations

A new sub-section (7) has been inserted to section 13 of the Income Tax Act, 1961 as follows:

Analysis

Anonymous donations are subject to tax separately under section 115BBC. Once, the donations are taxed under section 115BBC, it can not be subjected to tax again following the other provisions of the Income Tax Act. If the law intends to do so, it will lead to double taxation. Sub-section (7) of section 13 is inserted with an intention to clarify this position of the law.

Thus, the requirements relating to application and utilization of income as applicable under section 11(1), 11(2) and clause (a) to third proviso to section 10(23C) will not be applicable. It means that the requirement of 85% mandatory application for charitable objects will not be applicable on anonymous donations on which tax has been paid u/s 115BBC. However, in case of the part of the anonymous donations  not taxable u/s 115BBC by virtue of clause (i) of sub-section (1) of the said section, the requirement of 85% application shall be applicable.

Difference between Anonymous Donations & Unaccounted Donations

The character of anonymous donations is altogether different from unaccounted donations. Anonymous donations represent donations which have been recorded in books of a trust or institutions but the identity of donors is not available. Whereas, Unaccounted donations are the donations which has not been accounted in the books of accounts.

Anonymous donations will lead to taxation u/s 115BBC but will not result in forfeiture of exemption u/s 11 & 12. However, unaccounted donations will be subject to tax and penalty and there might be chances of forfeiture of exemption u/s 11 & 12.

Vidyavardhini vs. ACIT, Central Circle-2, Thane (2012) taxmann.com 81 (Mum.):

Held that since trust is an artificial judicial person and has to act through trustees or anybody authorized by trustees, acts of trustees or person so authorized have to be considered as acts on behalf of trust. Therefore, considering material on record and entire surrounding circumstances, it was to be held that unaccounted donations collected by Secretary were on instructions of trustees on behalf of trust and had been rightly assessed as income of assessee trust. It was further held that having regard to fact that donations were not accounted in books of assessee trust and had been used by trustees and secretary who were persons specified in section 13(3), provisions of section 13(1)(c) were applicable and exemption u/s 11 would not be available.

About Author: The above article has been contributed by CA Naveen Goyal who has an experience of more than 16 years in the field of direct taxation and indirect taxation with specialisation in taxation of NGOs. He can be reached at admin@taxwink.com

Disclaimer: The above article is meant only for educational purposes. The article is merely the views and opinion of the author and it does not have any legal or corroborative value. Taxwink is not responsible for any loss or damage caused to any person on the basis of use of the above information. Readers are requested to consult a professional before placing any reliance on the above article.