Charitable Endowment Act 1890: FBR asked to initiate audit of trusts

The Appellate Tribunal Inland Revenue (IR) Islamabad has directed Chairman Federal Board of Revenue (FBR) to initiate a meaningful audit of trusts established under charitable endowment Act 1890, trusts registered with government ministries/divisions and cases of exempt/Final Tax Regime (FTR) having significant turnover/payments by prescribing uniform audit parameters and not to adopt a pick and choose policy.

A division bench of the Appellate Tribunal IR Islamabad has issued an order (January 20, 2020) in favour of an Islamabad-based foundation-a trust, established under charitable endowment Act 1890 and vacated orders of Commissioner Appeal-I Islamabad. The Commissioner Inland Revenue Large Taxpayer Unit (LTU) Islamabad was respondent in the case.

The bench of Appellate Tribunal IR has also directed the FBR to ensure compliance to taxation/financial laws, statutes and regulations even if the status granted to the taxpayer is that of a NPO/trust, established under charitable endowment Act 1890, and registered with the government.

"In view of the significance of such public exchequer matters, we direct Chairman FBR to consider to initiate a meaningful audit of such trusts established under charitable endowment Act 1890, and registered with Government of Pakistan, Ministry of Health, Welfare and Population Planning/exempt/FTR cases having significant turnover/payments and to prescribe uniform parameters for meaningful audit and not to adopt a pick and choose attitude in view of the sensitivities involved and the contribution of such class of taxpayers towards national integrity, cohesion and stability", Appellate Tribunal IR said.

According to the order, the financial statements of the taxpayer/appellant are based on accrual basis and there is apparently no inconsistency in the method of accounting as stipulated in section 32 of the Income Tax Ordinance 2001.

"The Commissioner Appeals did not discuss the matter elaborately, therefore both the orders are found not to be speaking orders. It would be appropriate in the interest of justice to vacate orders of both the authorities and remand the case to Assessing Officer with the direction to re-examine the case and to pass speaking order after providing adequate opportunity of hearing to taxpayer(foundation)", bench ordered.

Appellate Tribunal IR bench stated that the grounds are concerning exemption from withholding and about non-applicability of withholding of tax on salaries of project individuals. The appellant taxpayer status is that of a trust, established under charitable endowment Act 1890, and registered with Government of Pakistan in the return of income produced before us the income/receipts are claimed as attributable to Final Tax Regime (FTR) or exempt from tax or taxable which does not exempt it from carrying out its duties as a withholding agent.

The department is required to verify if payments claimed have been actually made to the withholders and the fiduciary duty cast on such taxpayers is on a higher pedestal then other class of taxpayers. As the status of the appellant is that of a trust, established under charitable endowment Act 1890, and registered with Government of Pakistan, Ministry of Health, Welfare and Population Planning and being accorded such a status or deriving income under FTR or exempt status does not absolve any such taxpayer from strict compliance of withholding provisions and statutory financial reporting requirements particularly wherein it is not selected by the department for audit and income is not assessed/computed as a class.

The assessment order reveals that the amounts of payment are including substantial receipts/disbursement warranting stringent fiscal screening in addition to the internal audit control mechanisms which are presumed to be in place.

Such entity upon being accorded status of a trust, established under charitable endowment Act 1890, and registered with Government of Pakistan, Ministry of Health, Welfare and Population Planning or enjoying exempt status has to a certain degree public trust reposed in them under any fiscal requirements.

In a generic view in case withholdee is exempt from deduction of tax the withholding agent will have to either provide a valid exemption certificate or be covered under a specific provision of the Income Tax Ordinance, 2001 and in either condition the name of withholdee has to be specified yet not in general terms and each and single payment found to be below taxable limit has to be documented.

In the instant case it has also to be determined if the withholdees are filers of returns of income and withholding is to be made on taxable income of the employers, Bench said.

Appellate Tribunal IR bench further elaborated that it is a misnomer that expenses/salary payments of a trust, established under charitable endowment Act 1890, and registered with Government of Pakistan, Ministry of Health, Welfare and Population Planning to even its projects are exempt from applicability of withholding provisions and consequential applicability of section 21 (c).

The only exemption from taxation and/or withholding of tax by a withholding agent can be derived from an explicit provision in a statute which in this case is available in the relevant Schedules of the Income Tax Ordinance, 2001.

Bench is not going into the exemption status except we will observe that exemption from taxation on any class of income is allowable when there is no discrimination amongst the beneficiaries of the taxpayer/trust and any deviation from equitable distribution of the benefits irrespective of status of the beneficiaries of the taxpayer trust, of any sort or in any manner whatsoever whether capital or recurring , would disentitle the taxpayer/ a trust, established under charitable endowment Act 1890, and registered with Government of Pakistan, Ministry of Health, Welfare and Population Planning from exempt status.

There is a duty cast upon the FBR and its field formations, being the premier fiscal/audit and revenue agencies of the Federal Government to ensure compliance to taxation/financial laws, statutes and regulations even if the status granted to the taxpayer is that of a NPO/trust, established under charitable endowment Act 1890, and registered with government, division bench of the Appellate Tribunal IR Islamabad added.