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Editor: NAGARAJA.M.R… VOL.10 issue.29…… .20 / 07 / 2016

Editorial : Scams , Illegalities in Trusts

Trusts , Associations are ideally formed , funded by noble persons to work for achieving certain noble social objectives like education to deprived , health care to poor , etc. Ideally these trusts enjoy the faith , confidence of public and collect donations from them to achieve their stated objectives.

Of late , many NGOs , Trusts are formed by rich cunning people , corporate bodies solely to divert the black money. They lack accountability to the public , donors. Religious , charitable trusts which are formed to propagate religious preaching indulge in business of establishing hi fi medical , engineering colleges earning donations to the tune of millions of rupees every year. Most of the financial transactions of these trusts takes place by cash payments without proper documentation to by pass legal scrutiny.

Many office bearers / founders of these trusts treat their trusts as their personal fiefdoms and spend the resources of trust for their personal hi fi lifestyles. Administrative expenses of these trusts are much more than the expenses made towards the objectives of these trusts. There are also possibilities of siphoning off money to illegal activities.

The tax exemptions given to these trusts by government are in essence a donation made by public exchequer to the very same trust to the tune of tax amount if enforced. Government also gives land at concessional rates to these trusts , that subsidy amount is also a donation by public exchequer to the trust. So , naturally functioning of all religious , charitable , educational , political trusts must be brought under the ambit of RTI. A cap on administrative expenses of trusts must be enforced. Office bearers of trusts who violate the stated objectives of trusts must be charged for public cheating & money must be recovered from them. Such trusts should be superseded and brought under the control of government.

Jai Hind. Vande Mataram.

Your’s

Nagaraja.M.R.

PIL – Scams in Public Trusts

An Appeal to Honourable Supreme Court of India

IN THE SUPREME COURT OF INDIA ORIGINAL JURISDICTION

CRIMINAL WRIT PETITION NO. OF 2016

IN THE MATTER OF

NAGARAJA . M.R

editor , SOS e Clarion of Dalit & SOS e Voice for Justice
# LIG 2 , No 761 ,, HUDCO First Stage , Laxmikantanagar ,
Hebbal , Mysore – 570017 , Karnataka State
.
....Petitioner

Versus

Honourable Chief Secretary , Government of Karnataka & Others

....Respondents

PETITION UNDER ARTICLE 12 to ARTICLE 35 & ARTICLE 51A OF THE CONSTITUTION OF INDIA FOR ISSUANCE OF A WRIT IN THE NATURE OF MANDAMUS UNDER ARTICLE 32 & ARTICLE 226 OF THE CONSTITUTION OF INDIA.

To ,
Hon'ble The Chief Justice of India and His Lordship's Companion Justices of the Supreme Court of India.

The Humble petition of the Petitioner above named.

MOST RESPECTFULLY SHOWETH :

1. Facts of the case:

2. Question(s) of Law:

Why political trusts , religious trusts lack public accountability ? are they above law ?

3. Grounds:

Requests for equitable justice.

4. Averment:

Hereby , I do request the honorable supreme court of India to consider this as a PIL for : “writ of Mandamus” and to issue instructions to the concerned public servants in the following cases to perform their duties.

That the present petitioner has not filed any other petition (which are admitted by courts) in any High Court or the Supreme Court of India on the subject matter of the present petition.

PRAYER:
In the above premises, it is prayed that this Hon'ble Court may be pleased:

a . Hereby , I do request the honorable supreme court of India to consider this as a PIL for : “writ of Mandamus” and to issue instructions to the chief secretaries of all stae governments , the concerned public servants in the present case , to perform their duties.

b . to pass such other orders and further orders as may be deemed necessary on the facts and in the circumstances of the case.

c. to order all type of trusts to conduct their financial transactions through banks only.

d. to order all type of trusts to make their functioning public and to disclose their activities under RTI.

e. to order trusts not to indulge in activities other than the stated objectives of trust and not to spend trust money for the puroses other than mentioned in the objectives.

f. to put a cap on the administarative expenses , office bearers expenses of trusts.

g. to initiate criminal charges against the office bearers of trusts who have misused , diverted trust resources and recover such money from them with penal interest.

h. to supersede all the trusts which violate law and to bring thm under the control of government.

FOR WHICH ACT OF KINDNESS, THE PETITIONER SHALL BE DUTY BOUND, EVER PRAY.

Dated : 13^th July 2016 …………………….FILED BY: NAGARAJA.M.R.

Place : Mysuru , India……………………. PETITIONER-IN-PERSON

Donations Scam In Educational Trusts

- I-T Department Exposes scam worth crores

According to I-T officials, the operations were conducted mainly in Karnataka and Maharashtra (including Pune and Mumbai) that have clusters of universities and professional colleges.

Educational trusts that run professional colleges, primarily medical and engineering colleges, by collecting donations as high as Rs 1 crore have come under the Income-Tax (I-T) department's scanner. The I-T department has raised Rs 100 crore in tax demand from some trusts in Mumbai, Pune, Hyderabad and Bengaluru for irregularities and misusing tax benefits meant for charitable trusts. According to I-T sleuths, several institutions were surveyed in the last two months, and, in a few cases, searches were conducted as well. The findings of the survey have been sent to the Special Investigation Team (SIT) on black money. "The total amount of the scam is not yet quantified," said an official directly involved with the operation. A large chunk of unaccounted money, accepted as donations, is used for personal benefits, and, of course, do not get declared. This results in the generation of black money," said the official.

According to I-T officials, the operations were conducted mainly in Karnataka and Maharashtra (including Pune and Mumbai) that have clusters of universities and professional colleges. The action follows the government's move to curb black money generation within the country. The finance ministry is of the view that the bulk of black money is still within India. A senior I-T official said, "Investigations have revealed that several trust-run educational institutions accept donations for admissions and deposit them in multiple bank accounts. In some cases, demand draft/bank challans were purchased in favour of the trust president, and they used multiple challans to keep the amounts low."

"Nobody can object to charity or donations, but, at the same time, when large sums get donated, it rings an alarm bell unless the payments are made by account payee cheques with the donor's name and Permanent Account Number," a former DGIT told dna. "Some of these institutions are owned by big corporates and industrialists. In certain instances, it was found that trusts were created to divert funds," said another official.

Discreet investigations have revealed that there were 3-4 intermediaries, and, quite often, office-bearers of these colleges accepted donations in cash. Admissions to under-graduate and post-graduate programmes were the main focal points for such acceptance of cash donations and done with the knowledge of the president of the trusts.

"There are at 3-4 intermediaries in the entire process – right from office-bearers to trustee owners. The main concern is that, in all cases, co-operative banks are being used to channelise donations. Henceforth, involvement of banks will also be investigated," said an investigating officer. It has also been observed that many institutions do not specify the sources of income in their income statement and balance sheets.

In many cases, permissions were not taken from the appropriate authority for leasing out property for educational programmes. No plot or land can be leased out for any other purpose than education and without special permission from the leasing authority.

"In a few instances, the trustees have shown demand drafts received as donation from parents but we found that these drafts were from the same bank branch, indicating that they were breaking up cash into smaller drafts and depositing part of the donations back to the accounts maintained by the trust," said I-T officials.

According to I-T sleuths, trustees created 'proxy students' who would take admissions under the government quota, only to be auctioned by the college to the highest bidder. This practice is rampant in private medical institutions. The income of a charitable trust is exempt from I-T, according to the provisions of Section 11, 12 and 13 of the I-T Act. However, to avail of this exemption, the activities of such trust/society should fall within the definition of 'charitable purpose'.

It is often a topic of dispute among tax authorities whether high-end educational institutions, providing modern and state-of-the-art educational aid, should be allowed to undertake activities that are charitable or commercial in nature

Government seeks to tighten regulations for charitable trusts

The proposal will have implications for the way trusts claim tax exemptions and receive anonymous donations

Budget proposals to tighten the regulation of charitable trusts and institutions will have major implications for the way trusts currently claim tax exemptions and receive anonymous donations, experts said.

Aiming to prevent the abuse of tax exemptions, finance minister Arun Jaitley’s budget last week introduced provisions that seek to end the practice of trusts claiming double tax benefits, or tax exemption even when the income is not being used for charitable purposes. The budget also sought to make it easier for the tax department to cancel the registration of such trusts. And in an attempt to check money laundering, the government changed the tax treatment to discourage anonymous donations received by charitable institutions and trusts.

In December, the income tax department was hauled up by the Comptroller and Auditor General (CAG) of India over the alleged misuse of tax exemptions by trusts, pointing to lapses in the registration process, allowance of exemptions during assessment, non-monitoring of surplus income accumulations and foreign contributions received by trusts. The national auditor had also named a number of trusts who it said were misusing tax exemption provisions.

Rahul Garg, leader, direct taxes at consulting firm PwC, said the budget proposals are aimed at enhancing the compliance and reporting requirements by these trusts and plug some of the loopholes in the current laws.

“There was a perception that the charitable institutions are able to indulge in tax evasion due to the varied interpretation of the existing laws. The amendments clearly spell out what the law is. It will also help in reducing litigation,” he said.

He added that the changes will also address fears of money laundering raised by the home ministry because of the way foreign funds were coming into some charitable institutions. According to the memorandum explaining provisions under the Finance Bill 2014, a registered trust or institution which avails the benefit of exemptions under a specific exemption provision in Section 11 of the Income Tax Act meant for charitable purposes, cannot simultaneously take benefit of the exemption provided under any other provision of the Act.

Also, provisions have been introduced to ensure that a trust which uses tax-exempt income for acquisition of assets, cannot claim double benefit by using a notional depreciation of such assets.

To be sure, Parliament has to pass the Finance Bill 2014 for it to become an Act.

Law firm Khaitan and Co. in a post-budget note, said the changes in regulations around charitable trusts and institutions are aimed at rationalizing the taxation regime and eliminating certain loopholes and ambiguities. The note pointed out that the powers of the commissioner of income tax to cancel the tax exemption certificate of an institution have also been widened.

A commissioner can cancel the registration certificate if the trust does not use funds to benefit the general public; or uses them for a particular religious community or caste; or if the income of the trust is used for the benefit of any trustees.

The government has also moved to amend provisions to discourage anonymous donations to universities, hospitals and other charitable organisations. At present, though only that portion of anonymous donation that exceeds 5% of the total donations is taxed at 30%, the trust or society gets the benefit of reducing its total income by the entire amount that has been anonymously donated.

However, as per the amendment, only that portion of the anonymous donation that is taxed is eligible for reduction from the total income.

Dirty Money in Trusts

Money "laundering"

Only a fool holds dirty money in his own name. The world's financial system offers safer and friendlier ways to hide the proceeds of crime. Shell companies--those with no real operations--are one, phoney trusts and foundations are another (see "Trusts: The weak link").

Belatedly, life is getting a bit more difficult for tax evaders, money launderers and those who abet them. One big move--now backed by the British government--is to oblige limitedliability companies to give details of their real owners. This newspaper has argued in favour of such a duty: limited-liability status is a kind of public subsidy (if the firm goes bust, the shareholders are not responsible for its debts). It was never meant to be a means of concealing ownership. Yet in many places it is just that: only six of 69 jurisdictions surveyed last year by Eurodad, an anti-corruption network, required all types of firm to record beneficial-ownership information.

Spurred by complaints from the police, pressure from campaigners and public distaste for tax-dodgers, the British government wants not only to set up a proper registry of beneficial ownership, but also to make its contents public. If the detailed regime matches the promise, this will be an important breakthrough. But Britain should also coax its offshore dependencies into greater openness. Some are conscientious, others less so. Even official investigators can find it hard to get the information they need. America can do more to help, too: states such as Nevada apply scandalously little scrutiny to the identity of those forming companies. European governments are keen to collect more tax, but many have been less eager to make corporate ownership transparent.

Cleaning up corporate ownership will increase public confidence in the financial system. But it is only the start. The misuse of trusts and other non-corporate entities is also a big problem. These have proper purposes, such as managing charitable donations, ring-fencing employee pension plans, safeguarding assets for children or organising wills and bequests. But they too enjoy a legal advantage: they are a way of parking assets. That seems fine as long as the trusts pay tax on profits (just as companies do) and their beneficiaries pay tax on any disbursement or benefit (just as shareholders do).

Instead, trust law has become a murky world. In many places there is no rule that trusts must disclose their existence, let alone pay tax on their earnings. "Orphan assets", no longer legally owned by the person who put the money into the trust but not yet belonging to the trust's potential beneficiaries, offer plenty of room for abuse. Some trusts, revealingly, even have flee clauses, where the trustees are obliged to try to change the domicile of the trust if the tax police start asking questions. A structure that was set up to protect the wives of medieval crusaders has ended up being used by the sort of businesspeople who greet the Russian leader as "Vladimir".

Swiss knives

Far better to concentrate on two simple rules. First, all trusts and foundations should be registered, just as companies are, and their beneficiaries, both actual and potential, should be disclosed. Second, the trustees and the beneficiaries should be legally responsible for reporting any disbursements or benefits, and for making sure the tax is paid on them. Both the European Union and America are tiptoeing in this direction, but Luxembourg, Switzerland and some micro-states are resisting. It would be much better if they worked together. Trusts are a useful vehicle--but not for dodgy goods.

How Indian companies are misusing public trusts to launder their CSR spending

The statutory corporate social responsibility (CSR) norms introduced two years ago were expected to revolutionise funding of social causes, but some sections of India Inc may now be abusing these for laundering of black money, according to sources privy to such transactions.

Some companies are using onhire charitable trusts to fabricate CSR spending, at least two sources who have helped craft and execute such transactions said. They spoke to ET on the condition of anonymity.

India is the first and only country to have statutorily mandated corporate social responsibility for certain class of companies but the law allows a lot of leeway. CSR spends disclosed by companies need not be vetted by statutory auditors unlike other spending. Moreover, financials of charitable trusts also come under little statutory scrutiny. This combination of factors has left the new CSR norms wide open for abuse.

"Such abuse in unlikely in trusts floated by companies themselves. But it is possible where they use external trusts," says Rusen Kumar, founder director of IndiaCSR, a portal that collates information and developments on CSR from across the country.

According to one person, the modus operandi is simple. If a company is obligated to spend, say, Rs 10 crore on CSR, it writes out a cheque in favour of a trust that works in education, healthcare, environment protection or any of the activities specified by the government. The trust, after deducting its commission, discreetly returns the money in cash to the officials or promoters, instantly turning Rs 10 crore of white money into black. The middleman gets a cut as well.

"Often the promoter pockets the money," says a chartered accountant who has also helped clients with such deals. Often set up by politicians or rich individuals, these trusts also serve as laundering mechanism for unaccounted money. For example, a politician would set up a trust to build an educational institution. CSR funds would flow into the trust through legitimate banking channels. These funds are returned to the promoters in cash and the actual expenditure on the institution is met with the politician's illicit hoard. The expenditure is then inflated helping launder the black money.

At the end of the year, the trust gives a report to the company which it duly incorporates in its CSR reporting form called AOC-4. "Though the financials are part of the directors' report which is audited by external auditors, the AOC-4 itself is not subject to external audit. It is a lacuna," says Bhaskar Chatterjee, director general and CEO, Indian Institute of Corporate Affairs (IICA).

ET met a middleman who had just concluded two deals—one for a well-known listed company and another for a smaller firm. He said he had already done cash-back deals worth about Rs 40 crore this year.

How Indian companies are misusing public trusts to launder their CSR spending

This is the first year that the CSR norms have come into play. Rules under Section 135 of the Companies Act, 2013, mandate that any company with a net worth of over Rs 500 crore or annual revenue of Rs 1,000 crore or net profit of Rs 5 crore has to spend 2 per cent of the average profit of the previous three years on CSR activities.

Public trusts are a favoured route to launder money because they are not adequately governed or monitored. Though some states such as Maharashtra have their own law such as the Bombay Public Trusts Act, 1950, trusts are not governed by a nationwide law. If a state law doesn't exist such as in Delhi, these trusts are governed by the Indian Trusts Act of 1882 that applies to private trusts. There is no centralized repository— like the registrar of companies for corporates—of information on public trusts.

They file annual accounts with the charity commissioner in states where it exists. Elsewhere, like Delhi, the only annual filing is income tax returns. An income tax official told ET that unless there is specific information, these are rarely scrutinized. In short, operations of public trusts remain opaque IICA's Chatterjee, who was instrumental in drafting the CSR law, says that there is no real system to track these trusts. "The law should be tightened to ensure that money reaches the people it is intended to. If there is any leakage it should be plugged."

Finance minister Arun Jaitley recently wrote in a Facebook post that bulk of the black money is within the country. He is probably right, but it would take tremendous political will and legislative imagination to choke the black money pipelines.

Who funds India's political parties? Report says most donors anonymous

It is the best known secret of Indian politics. And it comes as no surprise that India's national, state and regional parties earned Rs.4,662 crore in the last seven years, mostly in form of donations and contributions, but there is a huge cover of secrecy and lack of transparency in who gave the money to them, a report released by two NGOs has claimed.

The report shows that the Congress has earned the most, Rs. 2,008 crore, between 2004 and 2011 and its annual income has gone up steadily. At number two is the BJP, which in the same period made Rs. 994 crore. Its finances too improved steadily in the same period.

The report analyses income tax returns of political parties and donation documents made available to the Election Commission. The NGOs, Association for Democratic Reforms (ADR) and National Election Watch (NEW), campaign for transparency in the finances and funding of political parties.

The NGOs say that there is no standardised format for political parties to declare their incomes. A major source of income for all parties is the sale of "coupons" instead of receipts. Voluntary contributions and donations are also on top of the list of sources of income. None of these, the NGOs' report says, are transparent ways to making and declaring money.

To bring some transparency into political funding, the Representation of People Act of 1951 says that political parties must declare details of contributions of more than Rs. 20,000. This report though points out major loopholes, like parties declaring every single contribution ofRs. 20,000 made by any person at one time. But if several donations totalling to more than Rs.20,000 are made by one person or company in one year, then parties interpret it differently. That leaves them the option of breaking up donations into amounts less than Rs. 20,000.

The BSP (which is third on the list in terms of income) for instance, has shown an income ofRs. 172 crore in between 2009 and 2011 but not declared a single contribution of more than Rs.20,000. The CPM, which made almost Rs. 150 crore in that period, has shown only 1.39 per cent of contributions of more than Rs. 20,000. For the same period, Congress has shown 11.89 per cent and BJP 22.76 per cent.

The parties with highest "donations" are the Telengana Rashtra Samiti at 99.98 per cent and Lok Janshakti Party at 89.88 per cent.

The other major source of income for the major parties is also donations from corporate houses. The report has a list of which corporate house made how much donation and to which party. Most of them contribute to both the major national parties, the Congress and the BJP. For instance, the General Electoral Trust made a donation of Rs. 36.41 crore to Congress and Rs. Rs. 26.07 crore to BJP between 2004 and 2011. Torrent Power similarly gaveRs. 14.15 crore to Congress and Rs. 13 crore to BJP. And a lot of the companies are new ones involved in infrastructure like power, steel and construction, beating the traditional firms of Tatas and Birlas.

Why are political parties not under RTI ambit: Supreme Court asks Centre, EC

The Supreme Court on Tuesday sought responses from the Centre, the Election Commission and six political parties, including Congress and BJP, on a plea to declare all national and regional political parties "public authorities" to bring them under the ambit of the Right to Information (RTI) Act.

"Issue notice," a bench comprising Chief Justice HL Dattu and justices Arun Kumar Mishra and Amitava Roy said.

The Association for Democratic Reforms, an NGO, has also sought a direction that the political parties be asked to declare all donations, including those below Rs 20,000 also.

Lawyer Prashant Bhushan, appearing for the NGO, contended that political parties were public authorities and hence amenable to the RTI Act.

The Central Information Commission, in its detailed order, had held that political parties were public authorities and hence should disclose the information under RTI Act.

"Political parties do not have to pay the income tax on the donations and, moreover, the donations below Rs 20,000 are not to be disclosed under the law by them," the lawyer said, adding that these parties also controlled the legislature and the law-making process.

Earlier, the NGO had approached SC seeking transparency and accountability in functioning of recognised national and regional political parties.

It had claimed that the political parties received huge sums of money in form of donations and contributions from corporates, trusts and individuals but do not disclose complete information about the source of such donations.

In its plea, the NGO had urged the apex court to direct all national and regional parties to mandatorily disclose details about their income as well as expenditure.

It had also sought declaration of entire details of donations and funding received by the political parties, irrespective of the amount donated and details of donors making donations to them and to electoral trusts.

The petition had claimed that political parties enjoyed a stronghold over their elected MPs and MLAs under Schedule 10 of the Constitution that makes it compulsory for members of either Houses of Parliament or state legislatures to abide by the directions of their parties, failing which they stand to be disqualified.

RTI applicable to Trusts, institutions indirectly funded by govt

In a recent judgement, the State Information Commissioner Vijay Kuvalekar has said that Trusts or institutions that are not directly substantially funded by the government, but still indirectly receive funds to run schools, courses, colleges, come under the Right to Information (RTI), Act.

Kuvalekar, in his judgement said that indirectly, since the parent institute is getting the funds for institutes run by them, the RTI is applicable.

The judgement came in the wake of former member of Shikshan Prasarak Mandali (SPM), B B Jambhulkar who raised an RTI query with the SPM to get details on admission having cited corruption.

Jambhulkar said, "The SPM, however, denied to reveal the information as the SPM Trust was not funded by the government. Besides, I asked the Trust to give me details of the appointment of over 400 members of the Trust."

The information commissioner, however, said that, "It is clear that the Trust is receiving funds to run other institutes as seen in the books of accounts. In such a case, it is liable to reveal any information as sought by the RTI applicant."

Incidentally, the Income Tax department recently cancelled the registration of SPM as a charitable trust'. Jambhular had asked the query regarding a list of names of the students who have sought admission at Ramnarian Ruia college and R A Poddar college of Commerce and Economics, Mumbai.

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