Contribution By Charitable Trusts – Current Legal Status In Maharashtra

CA Anilkumar Shah has explained whether the collection by the Charity Commissioner of contribution on surplus from Charitable Trusts in the state of Maharashtra is legal or not in the light of the statutory provisions and the judgement of the Supreme Court in State of Maharashtra vs. The Salvation Army 1975 AIR 846

Background

Before the enactment of Bombay Public Trusts Act, 1950 in the state, i.e. in the pre-freedom era, there were as many laws as the Princely states. Added to it were laws for various communities, e.g. Parsi, Muslims etc. and those enacted under the British rule.

All this chaos was also in Maharashtra. Hence there was a need to have a structured and systematic way to administer the Trusts and Trust Properties. To achieve this in the State of Maharashtra, a committee in the chairmanship of the then Hon. Judge of Hon. Bombay High Court Shri. S. R. Tendolkar was formed on 15th January, 1948. It submitted its elaborate report spanned in 17 parts to the then Mumbai Govt. which was presented to the Vidhan sabha. Based on this report the Bombay Public Trust Act’s draft was prepared and presented to public at large for its opinions and suggestions.

Based on the feedback a comprehensive bill on Bombay Public Trust Act, 1950 (the Act) was prepared and passed. The bill received Hon. President of India’s accent on 31st May, 1950, and was published in the State Gazette on 14th August, 1950 (part IV)

Object of the law

In a summarised manner we may state that the object of the law is to make a better provision for administration of Public Charitable and Religious Trusts in the State (then Bombay now Maharashtra). It aims to administer the Trusts and Trust properties left by the original donors for the purpose and objects for which the Trusts were formed and the property donated.

What is Contribution and why

According to the Act, a system for administration of the Trust in the state was set in force. The law itself provides for the expenditure of the system. Sec. 58 provides that the trusts shall contribute 2% of their net income as a Fee (not a tax) to meet the cost of rendering the administration services and a fund of this contribution will be set u/s 57 of the Act.

This is a fee to meet the cost of rendering administrative services. This means fee only to the extent to meet the expenditure can be collected. The Charity Commissioner has no right to collect any amount over and above the costs of the administration expenditure. If the collected contribution exceeds the expenditure then either the rate of contribution (which is 2% at present) has to be reduced, or if sufficient balance is lying in the said fund, then it has to be stopped. The amount in the said fund can be utilised only for the purpose of the administration expenditure and not for any other purpose.

This is not the case of Tax. A tax can be utilised for any purpose without any strings attached to it. Further there is no restriction to its collection whether it is spent or not.

Who is not liable to pay contribution

Sec.58 of the Act empowers the State Govt. to exempt the trusts from which contribution cannot be collected, which are briefly as follows, if the trust is exclusively for the purpose of –

1) Advancement and propagation of education, 2) water conservation, 3) development of forest, horticulture or agriculture, 4) welfare of the Scheduled Castes, Scheduled Tribes, Denotified Tribes, Normadic Tribes or women, 5) medical relief or veterinary treatment of animals, 6) relief of distress caused by scarcity, drought, flood, fire or other natural calamity, 7) any donations forming part of gross annual income and which are actually spent on the relief of distress caused by scarcity, drought, flood, fire or other natural calamity

Rule 32 contains those exceptions.

This means if any trust is exclusively for the purpose mentioned in Sec.58 read with Rule 32, then contribution from those trusts cannot be collected. In case the trusts are for more than the purposes mentioned above, then contribution cannot be collected on the income from those purposes and can be collected only from the balance income after deducting income from exempt purposes.

Similarly, contribution cannot be collected on the amounts of donations received from other trusts and on grants received from Govt. or local authorities.

At present various offices of Charity Commissioner at places in the State of Maharashtra are orally insisting some trusts to pay the contribution and threatening that a penalty also may be levied. Some unwarranted things are also going on leading to corruption.

Trusts listed in Sec. 58 read with Rule 32 are not liable to pay contribution. Such trusts are exempted even if the certificate in Schedule IX C certified by a C.A. may show a surplus.

Important judgment of Hon. Supreme Court

After the enactment of the Act, efforts for recovery of the contribution commenced in the State of Maharashtra. One such trust, “Salvation Army of Western India”. This is a part of a worldwide Charitable organisation “Salvation Army” having presence in about 131 countries. In India it was registered under the Companies Act 1913 as a non-profit company. After the enactment of the BPT Act, it is registered under the Act also.

This trust received donations from its international headquarters in London in the years 1954, 1955, 1956 totalling Rs. 7,15,262. Besides these amounts, the trust had made collections in India. Upon all these amounts it was called upon to, pay contribution of 2 per cent as required by s. 58 of the Act read with rule 32 of the Bombay Public Trust Rules. Charity Commissioner (CC) ordered accordingly.

The trust opposed it and challenged the levy in a writ petition before Hon. Bombay High court. A single member bench decided in favour of the trust, declaring the collection as tax and not a fee. CC challenged this before a division bench of Hon. Bombay High court. Hon. court noted that on 31-3-1958 the fund with CC had a balance of Rs.30,44,541 and held that the levy assumed the character oftax and was illegal from that date. The levy collected being in excess of the expense, assumed the character of a tax including on those 3 donations and hence is ultra-virus.

The State challenged this before Hon. Supreme Court. An important question before Hon. SC was that whether the levy is a fee or a tax. Hon. SC analysed the provisions of Sec.57, 58 and Rule 32 and also the scheme of the Act.

Hon. SC analysed the income and expense of the fund with CC and observed that at the end of FY 1970, there was a balance of over Rs.54 lakh and income there from. It held that, “We think that the contribution at the rate of 2 per cent on the gross income of the trusts after March 31, 1970 onwards undoubtedly assumed the character of a tax as that merely augmented the income of the Charity Organisation (CC), If, the Organisation(CC) is allowed to go on increasing its surplus year after year out of the amount of fee collected under s. 58 of the Act, it would demonstrate that the fee levied was unjustifiably disproportionate to the service rendered. We are, therefore, of the opinion that before levying any fee or determining its rate after March, 1970. the Charity Organisation (CC) has to balance its budget in the light of this judgment” and confirmed the judgment of Hon. Bombay High Court on the issue.

[State of Maharashtra & Ors. vs. The Salvation Army, Western India, 1975 AIR 846, 1975 SCR (3) 475]

Contributions- Current Status in the State of Maharashtra

Taking cue from judgment of Hon. SC as above, a PIL is filed before Hon. Bombay High Court (PIL 40/2007) to decide that the contribution collected by CC in the state is illegal and must be stopped. Two more PILs (1780 and 1864 of 2007) were also filed for the same matter by two different trusts and all the cases are tagged together.

According to the affidavit filed by the State Govt. and CC before Hon. High Court in the PIL, an amount of Rs.248 crores is lying with the CC in the fund. On questions asked by Hon. High Court about the proposed expense from the said fund, the State Govt. and CC could not file any explanation apart from repeated opportunities given.

After passing strictures on the administration of State Govt. and offices of CC, Hon. High Court has passed an interim order on 25-9-2009, restraining CC from collecting any fee hence forth in the State until further orders in the matter. Until last hearing on 17-10-2018, no explanation from either the State Govt. or CC is filed before the Hon. High Court and the interim orders passed on 25-9-2009 continue to-date.

Hence, whatever the CC offices or the officers in those offices are conveying to anybody, the fact is, the Contribution cannot be collected by the CC in the State of Maharashtra till further orders in the matter by Hon. High court.