FAQs by NGOS, Queries related to Income Tax Act, 1961

Q1 : Whether the Income-tax Act, 1961 is applicable to all the Voluntary Organisations who are engaged in socio-economic development programmes in India ? Please clarify.

Ans : The Income Tax Act, 1961, is applicable to Voluntary Organisations which are engaged in public charitable or religious activity. Hence, Voluntary Organisations which carry out socio-development programmes in India of a charitable nature for the benefit of the public shall get the benefit of the Act and the exemptions available therein.

Q2 : Whether the Income Tax Act, 1961 is applicable to NGO’s located in North East India or in District of Laddakh ? Please clarify.

Ans : Yes

Q3 : Whether it is necessary for an NGO to file a Return of Income with the Income tax Department? If so, under what circumstances are the NGOs totally exempt from filing the Return of Income with the tax authorities?

Ans : A Non-Government Organisation which is registered with the Income Tax Department under Section 12A of the Act is required to file a return of Income, if its total income, without claiming any deductions there from exceeds the maximum amount which is not chargeable to income tax (for assessment year 2003-04 the said amount is Rs. 50,000).

Q4 : What is the procedure for registration of an NGO with the Income Tax Department ?

Ans : The procedure for registering a Non-Government Organisation, which is a public charitable trust, is to file an application in Form 10A (As per Annexure 27) in duplicate. This application should be sent to the Commissioner having jurisdiction in the area where the trust is situated, and should be filed before the expiry of one year from the date of creation of the trust or the establishment of the institution. The enclosures referred to in the said form should also be attached to the application.

Q5 : Whether it is necessary for an NGO to be registered as a Charitable Society or a Public Trust for seeking registration under Section 12A of the Income tax Act, 1961?

Ans : An analysis of Section 12(a) and Rule shows that the fact to be established is the creation of the Trust and this fact is required to be established by producing constitution and evidential documents. Where the trust is not created under the instrument, the rule requires the production of evidential documents i.e. the instrument which has created the trust. The vidential document could not be limited to the document which directly proves the creation of the trust, they will include all documents which afford a logical basis of inferring creation of the trust and all such documents can be described to be “documents evidencing the creation of the trust” within rule 17A(a). Therefore, in Laxmi Narayan Maharaj vs. CIT (1984) 150 ITR 465 (MP) it was held thatall the documents, though not directly showing the creation of the trust, [for example : (a) revenue records relating to lands held by the trust ; (b) orders relating to assessment of property tax] afforded a logical basis for inferring the creation of the trust and therefore, could be described as documents showing creation of the trust for the purpose of Rule 17A.

Therefore, it is not necessary for an NGO to be either a society registered under the Societies Registration Act or a Public Charitable Trust for seeking registration under Section 12A(a) of the Income Tax Act, 1961.

Q6 : Whether all kinds of receipts (Capital or Revenue) are treated as a part of income ? Whether any category of receipt is exempted ? Please clarify. Whether donations to corpus Fund is a “Revenue receipt” or a “Capital Receipt” ? Further, whether it is exempted from being shown asincome in the Income-tax Return or not ?

Ans : All kinds of receipts, whether capital or revenue nature are treated as income in the hands of a public trust or religious trust, except donations made with a written direction from the donor that the donation made shall be treated as part of the corpus of the trust. Such a donation to corpus shall not be included in the total income of a trust or institution. However, it shall be shown separately in Part IV of the Return of Income Form 3A (As per Annexure 25), which is the partwhere exempted receipts by trusts or institutions are to be shown.

Q7 : Whether interest earned on investments of Corpus Fund is taxable or is it exempt from Income-tax Act ?

Ans : Interest earned on investment of Corpus Fund will be treated as income of a trust or institution. Such income may be applied to charitable purposes, thereby saving it from income tax.

Q8 : Whether a donor can make a contribution to the Corpus Fund with certain conditions and/or qualification to be fulfilled by the recipient ? If so whether same will be treated as donation to Corpus Fund or not ?

Ans : Donors may make a contribution to Corpus Fund with certain stipulations and conditions, such as the purpose of the fund and its utilisation, and such conditions and stipulations will not in any way change the nature of the Corpus Fund i.e. it will still be exempt from income-tax.

Q9 : Whether a donor who has made a contribution to the Corpus Fund has a right to call-back the amount of contribution to the Corpus Fund made by him ? If so what would be the treatment in the year of refund ?

Ans : A donation is by its very nature a completed gift and once the donation has been accepted by the donee, the donor has no right to ask for the amount to be refunded. Donations to Corpus will also be similarly treated.

Q10 : What is the method of calculation of the application of income for charitable or religious purposes in a particular year ?

Ans : The method of calculation to be employed for arriving at the application of income to charitable or religious purpose is very simple. All expenditure of a capital nature incurred by a trust or institution shall be added to the expenditure appearing in the income and expenditure account and the same shall be thereafter deducted from the gross income of the trust.

Q11 : Whether 100% of the income (receipts) during a particular year is to be utilised in that same year or whether it can be accumulated ? If so under what circumstances and to what extent ?

Ans : Section 11 of the Act requires a trust to utilise atleast 85% of its income for charitable or religious purposes, and the remaining balance is permitted to be accumulated. Also, if a situation arises where it is not possible to spend 85% of the income in the same year, then a trust or institution may make an application to the Assessing Officer in Form 10 (As per Annexure 26) for accumulating its income for future application to charitable or religious purposes. This applicationshould be made on or before the last date for the filing of the return of income which is the 31st October, of the relevant year, for Institutions having the income over Rs. 50,000. In other cases, Form 10 should be filed by the 30th day of June in the relevant assessment year.

Q12 : If the income cannot be utilised during a particular year, upto how many years can it be accumulated ? Furthermore, if the income can not be applied subsequently what will be its treatment for income-tax purposes ?

Ans : After complying with formalities discussed above, the income may be utilised in the next 5 year for the purposes mentioned in Form 10. However, if the income is not so utilised in this period, then it will be treated as income in the eleventh year.

Q13 : Whether depreciation on Fixed Assets can also be charged as application of income? If so, the relevant case laws be given to support the contention.

Ans : Depreciation on Fixed Assets can also be claimed as application of income to charity, if the capital expenditure (on which depreciation is claimed) has not been claimed as income applied to charitable or religious purposes. Although various Income Tax Appellate Tribunals and also the High Court (in CIT v/s Society of Sister of St. Anne 146 ITR 28) had allowed depreciation in addition to capital expenditure to be claimed as income applied to charitable/religiou s purposes, this may not be possible, now, in view of the decision of the Supreme Court [Escorts Ltd. vs. Union of India in 199 ITR 43], which has ruled that a double deduction in respect of the same outgoing (i.e. depreciation and capital expenditure) cannot be allowed. This was subsequently followed by the Income Tax Appellate Tribunal [IAC vs. Mahila Sidh Nirman Yojna (ITR No.1880 and 2020 DEL/1989 dated 6.7.1994)].

Q14 : Whether purchase of Fixed Assets can be applied against revenue income in a particular year ? Please clarify. What is the treatment of income received on account of sale of Fixed Assets in the Income-tax Act, 1961?

Ans : The purchase of fixed assets can also be claimed against revenue as income applied to charity. On the sale of Fixed Assets, the capital gain, if any, arising therefore shall be treated in accordance with the requirements of Sections 11(1A) of the Act :

a) Where the whole of the net consideration received on the sale of the asset is utilised for acquiring a new capital asset, then the whole of the capital gain arising therefrom shall be exempted.

b) Where only a part of the net consideration from the sale proceeds is utilised for acquiring a new capital asset, then so much of the capital gain as is equal to the amount, if any, by which the amount so utilized exceeds the cost of the transferred assets will be exempted. It may benoted here that it is not necessary to acquire a new capital asset in order to avail of the exemption from income-tax on capital gains. Instead, the capital gains arising as aforesaid may also be applied to the charitable purposes of the trust (if the Trust Deed so permits),whereupon it shall get the benefits of exemption from income-tax to theextent it is so applied.

Q15 : Whether the amount shown under the “Income and Expenditure Account” is to be taken for the purposes of calculation of application of income, or the figures from the “Receipts and Payments Account” are to be taken for the said purpose ? Please clarify.

Ans : The Income and Expenditure Account reflects the transactions of a revenue nature i.e. revenue receipts and payments, and all capital receipts and payments are generally reflected in the Balance Sheet. On the other hand, the Receipts and Payments Accounts reflects alltransactions (other than journal entries for provisions made in the accounts, such as for depreciation, provision for gratuity, etc.) Therefore, it will be more convenient to use the Receipts and Payments Account for the purpose of preparing a return of income since all types of receipts (capital or revenue and all types of payments (capital and revenue) are reflected therein. There should also be no difficulty in preparing a return of income by adopting the figures appearing in the Income and Expenditure Account, and adding thereto the capital receipts and payments appearing directly in the Balance Sheet.

Q16 : If an organisation has surplus funds, how should they be invested so that it may continue to have registration under the Income-tax Act, 1961 ? What are the consequences of non-compliance ? Whether a NGO can make investments in shares and debentures of a Government Company, Public Sector Undertaking, Public Limited or a Private Limited Company or not ?

Ans : The types of investments and deposits permissible to the charitable trusts or institutions are given in Section 11(5) of the Income Tax Act, 1961. No other types of investments or deposits arepermitted.

Q17 :What is the time limit within which the income-tax has to be filed with the Income tax Department ? What is the Income-tax Return number to be filed and what documents are to be attached alongwith it ? Whether the audit of the accounts of NGO organisations is compulsory required under the Income-Tax Act, 1961 ? If so the limits and conditions in this regard.

Ans : In the case of a public trust or institution whose gross Income exceeds Rs. 50,000 in any financial year, it will be necessary for the public trust to get its accounts audited by a chartered accountant, and consequently the last date for filing its return of income shall be 31stOctober, of the relevant assessment year. In all other cases, i.e. where the gross income is Rs. 50,000 or less, the last date for filing the return of income shall be 30th June of the relevant assessment year. The return shall be filed in Form 3A. The PAN and/or GIR No. of the trust or institution shall be stated on page 1 of the return of income and also on the acknowledgement form (in duplicate). Please attach the following to the return of income. (i) Audited statement of accounts, (ii) Audit report in form 10B(As per annexure 28), wherever applicable, (iii) Income-tax Deduction certificates, if any, for obtaining a refund of Income-tax, (iv) Statement showing computation of income (v) List of Trustees.

Q18 : Whether an NGO can carry on business with or without profit ? What are the consequences as per Income-tax Act, 1961 ?

Ans : A charitable trust or institution can carry over a business which is incidental to the attainment of the objects of the trust or institution, and provided that separate books of account are maintained for such business transactions. For e.g. a charitable trust or institution which has the object of training widows and destitute women in tailoring or handicraft may sell their output, if any, surplus profit arising therefrom will not be taxable since the objects of the trust is to assist destitute and under privileged women to become useful members of the Society, and since it is not a part of the objects of the trust to generate profits, as such. Separate books of accounts of such activities should be maintained in order to claim income tax exemption available to it under Section 11(4A) of the Act.

Q19 : Whether an NGO can give loans to another NGO under the provisions of the Income-tax Act, 1961 ?

Ans : It is possible for a charitable trust or institution to advance monies to any other public trust or institution having similar objects, for the purpose of furthering those objects.

Q20 : Please give us a list of Do’ and Don’t in check-list form which should be followed by the NGOs so as to comply with the provisions of the Income tax Act as applicable to them ?

Ans : What an NGO should DO

1. Get your account audited.

2. File the return of income by the due date together with the annexures.

3. Deduct income tax at source from salaries paid to employees and from payment to contractors and fees to professionals.

4. Deposit the tax so deducted within time allowed.

5. File annual return of salary Form No. 24 and contractor’s payments Form No.26 within the time allowed.

What an NGO should NOT DO

1. File an incomplete return of income or salary or contract payments.

2. Wait till the last date for doing the above Dos !

Q21 : What are the obligations of NGOs as an “Employer” under the Income Tax Act, 1961 ? Please furnish a calendar of obligations together with their due dates, which an NGO as an “Employer” has to keep in mind so as to comply with the various provisions of the Income-tax Act, 1961.

Ans : A charitable trust or institution having employees with taxable salaries shall have to deduct income tax at source from the salaries of its employees at the rates applicable to the employee, and the income tax so deducted shall be paid to the Central Government within seven days from the date of deduction. Challan No. 8 shall be used for payment of such deduction of income tax. Challan No. 9 shall be used for other deductions. For this purpose such charitable trusts should apply for a tax deduction account number in Form 49B (As per annexure 36). At the end of the financial year, a certificate in Form 16 shall be issued to the employees from whose salary income tax has been deducted. This certificate shall be issued within one month from the close of the financial year. Furthermore, an annual return of salaries shall have to be filed by the trust in Form 24, and this return should be filed by May 31st each year in respect of the preceding financial year.

Q22 : Whether an office-bearer of an NGO organisation can take salary and other allowances out of the Income of the trust/society ?

Ans : Yes, provided that, if any of the office-bearers are persons covered under Section 13(3) of the Act, the payment made to such persons for services rendered should not be excessive or unreasonable.

Q23 : What are the benefits available to donors who make Voluntary Contributions to the NGOs under the Income-tax Act, 1961?

Ans : Donors who make voluntary contributions to a charitable trust (and not to a religious trust) shall be entitled to claim fifty percent of the amount of the donations as a deduction from their income, provided that the trust or institution holds a valid certificate of exemption under Section 80-G of the Income Tax Act, 1961. If the donor is a charitable trust or institution with similar objects as the donee trust, then it will be able to claim the donation as its income applied tocharity.

Q24 : Whether a Voluntary Organisation can undertake any business activity incidental to the object of the Trust ?
Ans : Please refer to the answer of question 26.56 above.

Q25 : Define Corpus Fund.Whether Corpus Fund can be collected in a box written and marked”Corpus Donation” ?

Ans : The term “Corpus Fund” has not been defined in the Income Tax Act, 1961. It is the amount donated by a donor with a specific direction that it shall form part of the Corpus of the Trust or institution. The corpus is considered to be the capital of the trust or institution which should be kept intact. It may be utilised for the purchase of assets such as land, buildings, furniture, fittings, equipment etc. or it may be invested or deposited as per Section 11(5) of the Act, and the incomearising therefrom may be utilised for the objects specified by the donor to the Corpus Fund. Corpus Fund cannot be collected in a box, since the Act requires the donor to give a direction (in writing) for treating the donation as corpus.

Q26 : Is there any tax liability for a Voluntary Organisation which is not registered u/s 12A and

i) Its receipt are less than minimum taxable limit.

ii) Its net income is less than minimum taxable limit.

iii) If there is only corpus fund donation.

Ans :

i) No

ii) The Income Tax Act, 1961, has defined income to include voluntary contributions received by a trust, or institution created for charitable or religious purposes. Consequently, if the trust or institution is not registered under section 12A of the Act, then it cannot avail of the benefit of Section 11(1) of the Act, which permits a registered trust or institution to claim exemption of its income from income tax to the extent that it has applied 75% of it’s income and for accumulating it’s income for future application, as aforesaid. Hence, if the gross income is more than minimum taxable limit then it shall have to suffer tax on the amount in excess thereof.

iii) Corpus fund donation have been exempted from the income-tax under Section 11(1)(d) of the Act. Since the benefit of Section 11 will not be available to an unregistered trust as discussed above, such donations will be taxable if they exceed the minimum taxable limit.

Q27 : Whether under the scope of Article 371 A of the “Constitution of India” Charitable Voluntary Organization or trust or any association of person in North East area would be outside the purview of Income tax Act and accordingly such charitable body would be exempt from income-tax provisions ?

Ans : No

Q28 : Whether loans can be given by trust.

i) To staff (to what extent)

ii) To students for study.

iii) To undertake R & D programme of general nature or specific nature.

iv) To another trust.

a) Would any of the above loan in violation of investment of funds under Income Tax Act, which could affect its registration ?

b) What would be the treatment in accounts at the time of payment or receiving back of the loan amount ? Whether it should be shown in the balance sheet as an asset in all the above cases ?

Ans :

i) Yes, however, loans given to staff will not be considered as income applied to charity.

ii) Yes, provided that the objects of the trust is the advancement of education, and granting of scholarship is one of the activities carried on for the fulfilment of the objectives of the trust. This will be treated as income applied to charity.

iii) Yes, if the Research and Development programmes are germane to the objects of the trust or institution.iv) Yes, if the borrowing trust has similar objects as the lending trust, the above loans will not in any way violate the investment/deposit pattern described under Section 11(5) of the Act,1961. Since they are neither investments nor deposits. However, the repayment of scholarship loans and loans to other trust, as aforesaid, will be treated as income when the loans are repaid. (See Departmental circular No. 100 date 24th January, 1973, also followed in [CIT v/s. Cutchi Memon Union (1985) 155 ITR page 51 (Karnataka)] , Naturally, since staff loans are not considered as income applied to charity, the refund of such loans will not be assessed as income, under the above circular.