Legally Correct, Ethically Unsound

There are many business, administrative and other practices that are pursued and implemented, with no objections on legal grounds and therefore, they continue to prevail. However, occasionally, some of these are found to be undesirable on the touchstones of propriety, morality and ethics. One such practice, is that of employees getting advertisements for their associations souvenirs, from persons with whom they have day to day dealings during the course of their work. One such instance was recently considered by the Andhra Pradesh high court.

The high court in its decision in CIT vs SRMT Staff Association(1996) 221 ITR 234 has, in a way, sanctified this practice of raising funds by staff associations. The court decided that such funds would not be liable to taxation because such activities cannot categorised as either trade or a venture in the nature of trade. The decision is based on technical interpretation of the provisions of the IT Act.

 

The facts indicate that the assessee (staff association) was a society formed by employees and it collected a certain amount of money from various businessmen, for bringing out a souvenir. The assessing officer taxed the difference of the amount received and the expenses amounting to Rs 99,001, treating the same as revenue receipts in the hands of the association. He rejected the claim that it was a charitable institution, entitled to tax exemptions and that the amounts paid to the association by the businessmen were voluntary contributions.

The association appealed before the Commissioner of IT (appeals), who held that the amounts paid by the businessmen towards advertisements could not be considered as donations. However, on further appeal, the IT Appellate Tribunal held, following the judgement of the Mumbai high court in CIT vs Trustees of Visha Nima Charity Trust(138)ITR 564), that the amounts received by the association could not be treated as trading receipts and they were mere voluntary contributions or donations.

On a reference, the high court held that the association collected the money with a view to bring out a souvenir, to augment the funds for the purpose of the association and not as a trading activity.

The court analysed the provisions of Section 2(24), defining income, which inter-alia, includes as income voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly or partly for such purposes or by an association or institution referred to in Sections 10(21) i.e a scientific research association approved u/s 35(1)(ii) or an association or institution established in India, which would be notified by the central government for encouragement of cricket, hockey, football, tennis or such other games or sports or a fund/trust institution notified under Section 10(23C) (iv) or (v) etc.

It was noted by the court that the association was not held as a charitable institution. It was not even one of the institutions specified above. Only voluntary contributions received by such institutions specified above, are treated as income within the meaning of Section 2(24) of the Act. Therefore, the court opined that the voluntary contributions received by the association could not be treated as income or trading receipts.

The courts decision can be counter effective, for it may encourage service associations to solicit contributions from people they come in contact with during the course of work. Obviously, strangers are not expected to give donations to entities not know to them.

The court said that a businessman would no doubt like to have his concern advertised in magazines and newspapers. However, releasing an advertisement in a souvenir to be published by an association of employees, which has no circulation or demand in the market, cannot be seen in the same light as an advertisement meant for earning profits. It could only be treated as a mere voluntary contribution or donation with a view to help the association.

Getting such ex-gratia payments, it is feared may further deteriorate work culture, as there could be temptation for quid pro-quo, which cannot be considered a healthy practice. Further, persons not complying with requests for advertisements may be made to unnecessarily suffer because of their reluctance to pay. The practice may, in due course, get converted into an unfair or undesirable practice. To stop such an eventuality the following suggestions can be considered.

nIn case of those employees who are governed by service conduct rules, and their service rules do not prohibit soliciting such contributions, the conduct rules should be amended to prohibit taking contributions for advertisements in souvenirs and a breach thereof, should be punished.

nTo take care of those who are not governed by such rules and have public dealings, the law should be amended to tax such receipts.

nThe payer should be disentitled to claim deduction for such expenditure in its IT assessment under Section 37(2B), in the same manner as advertisements in souvenirs, brochures, pamphlets etc, published by political parties are disallowed.

Given todays atmosphere of ever falling morals, it is necessary that those who deal with the public should not only be above board but, like Ceasers wife, appear also to be so. It would certainly be more honourable to manage and run associations with members own voluntary contributions and employees fund, rather than getting funds from those with whom they have to deal with in their day to day functioning.

The HCs decision can be counter effective, for it may encourage service associations to solicit contributions from non-members