Concept of NGO and Income Tax Provisions

The World Bank defines NPO’s as “private organizations that pursue activities to relieve suffering, promote the interest of the poor, protect the environment, provide basic social services, or undertake community development.”

• These organizations do not exist for profit motive, hence called as Non Profit Organizations.
• These organizations do the work which ought to have been done by the government; therefore it is termed as Non Governmental Organizations.
• NGO’s has charitable objects. Doing something good to others without expectations is charity. It is a selfless act.

NGO’s in India

Number of NGO’s in country is estimated to be 31 Lakhs as compared to the total population of 1.28 billion. Comparatively, the number of NGO’s is highly inadequate.

Examples of NGO’s –

1. Child Rights and You commonly abbreviated as CRY is a non-profit organization working in India, which aims to restore children’s rights.
2. Help Age(NGO India) – A Non Profit Organization in India caring for disadvantaged elderly senior citizens

Formation of NGO

NGO’s have multiple options to select the form of constitution. The different forms of constitution which can be chosen:

a) Trust

b) Society

c) Section 8 Company

Selection of form depends on various factors. Some of the factors are as below:

I. Size of the institution

II. Cost

III. Number of persons required

IV. Compliances

V. Global Appearance

Apart from it there are various other factors which may be considered while selecting a particular form for NGO. Each form of constitution has its own enactment and the provisions contained therein would apply to the respective form:

a) Trust– Trust is created for the purpose of charitable and religious purposes. Trust can be constituted by Trust deed. In case of formation of trust there are no specific statues available. However, charitable endowment act’1890 and Charitable and religious act’1920 have bearing on the formation of a charitable trust.

b) Society– Society is an association of persons who come together by mutual consent to act jointly for common purpose. The compliance has to be made under the Societies registration act’1860.

c) Section 8 Company– Company Act’2013 applies in case of a registration of Section 8 Company. The main object of company is to give benefit to public. It is company formed for charitable objects.

It is important to note that NGO has to comply with the provisions of its governing act.

Registration of Trust under Section 12A

Trust, Society and Section 8 Company can seek registration u/s 12A to claim exemption under provisions of Income Tax Act’1961, if certain conditions are satisfied. Section 12A deals with registration of trust and section 12AA deals with procedure for registration of trust.

“It is important to note here that notwithstanding the fact that trust, society and section 8 companies are registered as per their respective acts, the registration under section 12A is necessary to claim exemption under Income Tax Act.”

Application for 12A registration is made in Form 10A. It is prescribed in Rule 17A of the income tax rules’ 1962. Below is the step by step procedure for applying Section 12A registration:

a) To whom application for registration u/s 12A is to be made?  

The application for registration has to be filed with the jurisdictional Principal Commissioner or commissioner of Income Tax (exemptions).

b) Documents to be furnished alongwith Form 10A for registration u/s 12A

1. Self-certified copy of Trust Deed or Instrument, where the trust is created under an instrument.
2. Self- certified copy of the document evidencing the creation of the trust, where the trust is created, otherwise than under an instrument.
3. Self-certified copy of registration with Registrar of Companies (RoC) or Registrar of Firms and Societies or Registrar of Public Trusts.
4. Self-certified copy of the documents evidencing adoption or modification of the objects, if any;
5. Where the trust has been in existence for during any year or years prior to the financial year in which the application for registration is made, self-certified copies of the annual accounts of the trust relating to such prior year or years (but not more than 3 years immediately preceding the year).
6. Note on the activities of the trust or institution.
7. Self-certified copy of the existing order granting registration under section 12A or section 12AA, if any.
8. Self-certified copy of the order of rejection of an application for grant of registration under section 12A or section 12AA, if any.

Note:

1. Form No. 10A shall be furnished electronically:

(i) under digital signature, if the return of income is required to be furnished under digital signature;

(ii) through electronic verification code in a case not covered under clause (i)

2. Form No. 10A shall be verified by the person who is authorised to verify the return of income under section 140, as applicable to the assessee.

c) Procedure for registration u/s 12A

Section 12AA of the Income Tax Act’ 1961 prescribes procedure for registration of Trusts or institution as follows:

1. The Principal Commissioner or Commissioner, on receipt of an application for registration of a trust or institution shall

(a) call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about

(i) the genuineness of activities of the trust or institution; and

(ii) the compliance of such requirements of any other law for the time being in force by the trust or institution as are material for the purpose of achieving its objects and may also make such inquiries as he may deem necessary in this behalf

2. After satisfying himself about the objects of the trust or institution and the genuineness of its activities and compliance of the requirements he

(i) shall pass an order in writing registering the trust or institution

(ii) shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution and a copy of such order shall be sent to the applicant

Please note that no order shall be passed unless the applicant has been given a reasonable opportunity of being heard.

d) Deemed Registration u/s 12A

As per Section 12AA(2) Every order granting or refusing registration shall be passed before the expiry of six months from the end of the month in which the application was received.

e) Renewal of registration

Once the registration is granted to the trust, it will be hold good till the cancellation of registration. There is no provision which requires any renewal of registration.

f) Audit of Accounts

Audit is also prerequisite for claiming exemption under section 11 and 12, where the total income of the trust computed without giving effect to the provisions of section 11 and 12 exceeds Rs 2,50,000 in any previous year, then the accounts of the trust for that year should be audited by a Chartered Accountant.

Cancellation of Registration granted under Section 12A

Registration granted u/s 12A can be cancelled in below circumstances:

I. The activities of such trust or institution are not genuine.

II. The activities are not being carried out in accordance with the objects of the trust or institution.

III. Trust’s income does not endure for the benefit of general public.

IV. It is for the benefit of any particular religious community or caste.

V. Any income or property of trust is applied for the benefit of specified persons like author of trust, trustees etc.

VI. Its funds are invested in prohibited modes.

“It is however provided that registration will not be cancelled if the trust institution proves that there was reasonable cause for carrying out activities in said manner.”

Important Note: Where a trust or an institution has been granted registration and subsequently it has adopted or undertaken modifications of the objects which do not conform to the conditions of registration, it shall be required to obtain fresh registration by making an application within a period of thirty days from the date of such adoption or modifications of the objects in the prescribed form and manner.

Filing of Income Tax Return

Every trust, shall, if the total income before exemption under section 11 and 12 exceeds the maximum amount which is not chargeable to income-tax, furnish a return of such income of the previous year.

a) Form of Income Tax Return:

ITR 7 – ITR-7 is filed when persons including companies fall under section 139(4A) or section 139 (4B) or section 139 (4C) or section 139 4(D).

b) Whether e-filing of return is mandatory for a trust?

It is mandatory for a trust to file return of income electronically with or without digital signature. A trust may also file return of income under Electronic Verification Code. However, a trust liable to get its accounts audited under section 44AB shall furnish the return electronically under digital signature.

c) Due dates for filing of return?

A trust who is required to get its accounts audited under the Income-tax Act or under any other law – September 30 of the assessment year

A trust who is required to furnish a report in Form No. 3CEB under section 92E – November 30 of the assessment year

In any other case – July 31 of the assessment year

Important Note:

Please note that due to COVID-19 pandemic, the due dates of AY 2020-21 has been extended the revised dates are as under:

A trust who is required to get its accounts audited under the Income-tax Act or under any other law – 31^st October, 2020

A trust who is required to furnish a report in Form No. 3CEB under section 92E – 31^st October, 2020

In any other case – 30th November, 2020

d) What is the tax rate?

A trust is chargeable to tax as per the slab rates which are applicable to an individual (not being a senior citizen or super senior citizen).

e) Penalty for delay in furnishing return of Income

It shall pay by way of penalty a sum of Rs. 100 for everyday during which the failure continues.

Important Note:

Entities registered under section 12AA are required to file their return of income within the time allowed under section 139 of the act.

Section 80G Donations

Section 80G of the Income Tax Act’1961 provides deduction while computing the total income in the hands of donor.

It is important to note that when registration is granted under section 12A, it does not mean that section 80G approval is to be given i.e. registration under section 12AA will not provide automatic approval under section 80G. Section 80G applies only to charitable trusts or institution. It does not apply to religious trust or institutions.

The recipient of money or the donee gives a receipt of donation, based on which the donor is entitled to claim deduction provided, the donee institution is approved under section 80G of the Income Tax Act’1961.

The institution or fund should be established for charitable purposes in India.

Registration Procedure under section 80G:

Rule 11AA of the Income Tax Rules’1962 provides procedure for seeking approval under section 80G.

(1) The application for approval of any institution shall be made in form no. 10G which shall be verified by the person who is authorised to verify the return of income under section 140, as applicable to the assessee

(2) Form No. 10G shall be furnished electronically,—

(i) under digital signature, if the return of income is required to be furnished under digital signature; or

(ii) through electronic verification code in a case not covered under clause (i).

(3) The Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems), as the case may be, shall lay down the data structure, standards and procedure of furnishing and verification of Form No. 10G and shall be responsible for formulating and implementing appropriate security, archival and retrieval policies in relation to the said form so furnished.

(4) The Principal Commissioner or Commissioner may call for such further documents or information from applicant or cause such inquiries to be made as he may deem necessary in order to satisfy himself about the genuineness of the activities of the applicant.

(5) Where the Principal Commissioner or Commissioner is satisfied that all the conditions laid down in section 80G(5) are fulfilled by the applicant, he shall record such satisfaction in writing and grant approval under clause (vi) of sub-section (5) of section 80G.

(6) Where the Principal Commissioner or Commissioner is satisfied that one or more of the conditions laid down in section 80G(5) are not fulfilled, he shall record the reasons in writing and reject the application for approval after giving the applicant an opportunity of being heard.

Documents to be furnished:

I. Copy of registration granted under section 12A.

II. Notes on the activities of institution since its inception.

III. Copies of accounts of the institution.

The commissioner may call for such further documents or information from the institution as he deem necessary to satisfy himself about the genuineness of the activities of such institution.

Where the commissioner is satisfied that all the conditions are fulfilled, he shall grant approval to the institution. When the commissioner is satisfied that conditions are not fulfilled. He shall reject the application for approval.

The time limit within which the commissioner shall pass an order either granting the approval or rejecting the application shall not exceed six months from the date on which such application was made.

Renewal of 80G Registration:

Prior to 01.10.2009, there was a requirement that before the expiry of the date as mentioned in the section 80G approval, renewal had to be sought for. However finance act 2009 made change in this regard. After such change, only those institutions require renewal whose expiry is due before 01.10.2009.

For the remaining cases, the perpetuity of approval has been provided until the commissioner withdraws the exemption. Therefore, there is no need for periodical renewal under present law.

Important Note:

Under section 80G so as to provide that no deduction shall be allowed under the section 80G in respect of donation of any sum exceeding Rs. 2000/- unless such some is paid by any mode other than cash. Government has taken this step in order to provide cash less economy and transparency.

(Submitted by – Tarun Kumar (B.Com, ACA) Mobile: +91-888-282-8112- Email-ID: [email protected])

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(Republished with Amendments by Team Taxguru)