Weighted Deductions Under Section 35 (1) (ii) Of Income Tax Act - Vigilance And Care That Donors Must Exercise

This article has been penned by CAP Legal Intern Tanay Gandhi.Hw was with CAP for 4 weeks assisting the Legal Team and this article is based on his research and reflection. 

 

Studying At: The West Bengal National University of Juridical Sciences (WBNUJS)

At CAP: For 4 weeks

Assisted With: Researched Legal Compliance relating to labour laws, additional compliance applicable to NGOs working with environment causes & the applicability of tax deduction u/s 35(1)(ii). He also used his passion for photography to capture some images for our website.

Under the provisions of Section 35 of the Income Tax Act, certain institutions involved in scientific research which have been given prior approval, enjoy a special tax status. Donors making any donations to them under specific directions that such funds be used for scientific research are eligible for a weighted deduction of the donated amount from their taxable income. The Act therefore encourages donation and grant-making to institutions involved in scientific research, as a desirable social objective. It is with this in mind that the framers of the Act have allowed for a weighted deduction in such instances. However, there are stringent requirements, often not only from the IT Dept., that institutions wanting such approval must meet. In light of the complicated approval process as well as the complex procedures involved in renewal, it becomes very important for donors and those making grants, who seek this weighted deduction to know and understand if the organisation they are funding has the required approval or not. 

 

It is quite clear that an organisation that has approval for weighted deductions under Section 35 (1) (ii) will attract more donations, corporate grants, and general funding than one that does not. This may lead to organisations not being entirely honest with their status vis-a-vis Section 35 (1) (ii). It therefore is vital that those individuals or organisations making the grants, or the donations, be fully aware of the law regarding the weighted deductions and engage in diligent checks of the donee organisation to know if they have approval under the relevant provision of law. 

 

The first thing to look for while making a grant or donation to any such organisation that claims to have approval from the IT Dept. is whether that particular organisation involved in scientific research is an organisation recognised by the Department of Scientific and Industrial Research. The SIRO (Scientific and Industrial Research Organisation) certification that is granted by the DSIR is given to organisations after careful analysis and assessment. The DSIR is comprehensive in its assessment of organisations and it is made sure that the organisation is truly involved in innovative or useful scientific research. Thus, it helps potential grant-makers or donors to know whether the organisation they are funding is involved in genuine, quality research work. With regard to weighted deductions, the SIRO certification is a mandatory pre-requisite for any organisation attempting to gain approval under Section 35 (1) (ii). Therefore the SIRO certification is a useful first-step for donors and grant-makers, to know whether they can avail of the benefits of the weighted deduction by donating to the concerned organisation. If there is no SIRO certification, the question of approval for weighted deductions does not even arise. SIRO certifications are given for three-year periods and renewals must be before the expiry of the running period.

Once the SIRO certification of an organisation is verified, the donor can move ahead and check the organisation’s recognition as an institution involved in scientific research under the IT Dept. and its approval for weighted deductions. This is a little tricky. When an organisation approaches the IT Dept. for approval, it is in effect approaching the Dept. to be approved as a scientific institution under Section 35. This application goes through the local authority to the Ministry, where approval is either granted or rejected. Once an organisation has such approval, donors and grant-makers to it are entitled to weighted deductions. These deductions happen at the local authority level, thus it is important for the organisation also to have been certified by the local authority as one in which weighted deductions are available for donations or grants. 

 

The tricky part is that while at the Ministry level approval as a scientific institution involved in scientific research is given for a period of three years, the certification for weighted deduction from the local authority is given only for periods of a year. Thus, donors and grant-makers must be careful and vigilant that the organisation they are funding is not only an approved scientific institution but has also received certification from the local authority for weighted deduction.

Another aspect that must be noted by donors and grant-makers is that the IT Rules prescribe a period of up to 6 months for Dept. to either grant or refuse approval under Section 35 (1) (ii). However, in actual practice, it is almost unheard of for the Dept. to give its final verdict on an application before completion of 6 months from the date of submission of application. It is therefore advised that a delay in receiving approval from the Dept. is not necessarily due to the organisation not being suitable for such, but rather due to the Dept. wilfully and often unnecessarily stretching the process to 6 months.

 

The special provisions for weighted deductions under the IT Act are designed to encourage scientific research by increasing funding in that regard from outsiders. To that end, it is a useful provision of general public importance. However, the stringent norms to gain the certification required under the provisions of the law make it rather complicated a process. At the end of the day, it is up to the donors and grant-makers, who in the end will benefit from the weighted deduction, to ensure that the organisations they are supporting have the approvals from the IT Dept. and all other certifications that are pre-requisites for that.

CAP CEO Noshir Dadrawala's comments - "The concept of weighted tax deduction is quite unique and while it’s a major incentive for donors there are several fraudulent operators who mislead donors. This article by our intern Tanay is not just an eye opener for potential donors but provides due-diligence steps that should be taken by the donor as also kept ready by the donee organisations."