The Finance Act, 2022 and Rule 17AA that was inserted with effect from the assessment year 2022-23 specifies the requirements for maintaining books of accounts and other documents for trusts and institutions. Charitable institutions are now obligated to maintain specific books of accounts and other essential documents. These sections dictate that if a trust or institution has not maintained books of account, the income chargeable to tax will be computed after allowing a deduction for only those expenditures specified in these sections. The notified Rule 17AA, which came into effect on 10th August 2022 outlines the form and manner in which books of account should be maintained, the place where such books should be kept, and the duration for which books of account and other documents should be preserved. Rule 17AA contains four subsections, addressing various aspects such as
A. Books of Accounts and Other Documents required to be maintained.
Section 2(12A) of the Income Tax Act defines “books of account” as including various types of books and records, whether kept in written form, electronic form, digital form, print-outs of electronically stored data, or other forms of electromagnetic data storage devices. The amendment to Section 12A(1)(b) specifies that if the total income of a trust or institution, calculated without considering the exemptions under Section 10(23C) or sections 11 and 12 of the Income Tax Act, exceeds the maximum amount not chargeable to tax, that trust or institution is obligated to keep and maintain books of account and other documents.
Section 12A(1)(b):
“(b) where the total income of the trust or institution as computed under this Act without giving effect to the provisions of sections 11 and 12 exceeds the maximum amount, which is not chargeable to income-tax in any previous year,—
(i) the books of account and other documents have been kept and maintained in such form and manner and at such place, as may be prescribed; and
(ii) the accounts of the trust or institution for that year have been audited by an accountant defined in the Explanation below sub-section (2) of section 288 before the specified date referred to in section 44AB and the person in receipt of the income furnishes by that date the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars, as may be prescribed.”
Under Rule 17AA(1), organizations subject to the conditions mentioned in Section 10(23C) or Section 12A of the Income Tax Act are required to maintain specific books of account, which include:
- Cash book
- Ledger
- Journal
- Copies of bills and receipts
- Original bills issued to individuals and receipts for payments made
- Any other book required to provide an accurate view of the organization’s affairs and transactions.
Separate Books for Section 11(4) and 11(4)(a) Income: Organizations with income subject to Section 11(4) and 11(4)(a) must maintain separate books of account for such income, as per the provisions of the Income Tax Act.
Additional Condition for Exemption:
It’s important to note that the requirement to maintain books of account is an additional condition imposed on charitable institutions. In addition to maintaining books of account, these institutions must also meet other conditions, such as obtaining registration, auditing the books of account, and filing the income tax return. Failure to comply with any of these conditions can result in the loss of the benefit of exemption under Section 11 and 12.
Applicability Based on Total Income:
This provision concerning the maintenance of prescribed books of account and other documents applies only when the total income of the charitable institution, as computed under the Income Tax Act, without taking into account the provisions of sections 11 and 12, exceeds the maximum amount that is not chargeable to income tax in the previous year.
These changes are aimed at enhancing transparency and accountability in the financial operations of charitable institutions, ensuring that they meet specific conditions to continue enjoying tax exemptions under Section 11 and 12.
Mode in Which Documents May be Kept:
According to the rule, the books of account and other relevant documents can be maintained in any of the following forms:
- Written form
- Electronic form
- Digital form
- Printouts of data stored digitally
To ensure transparency & compliance:
In addition to the books of accounts, there are specific requirements for maintaining records of ten specific items, including details about projects and institutions, income, application of income, loans and borrowings, properties held, and more.
The detailed requirements for maintaining other documents, in addition to books of accounts, as specified in Rule 17AA(1)(d) under the Income Tax Act, are comprehensive and crucial for organizations, trusts, and institutions subject to these provisions. These documents are necessary to ensure transparency and compliance with tax regulations.
a. Record of Projects and Institutions: Contains details of the name, address, and objectives of all the projects and institutions run by the organization.
b. Record of Income: Contains details of income for the previous year, including: Voluntary contributions with donor details (name, address, PAN, and Aadhaar number if available), income from property held under trust and Income of the organization other than the contributions mentioned above.
c. Record of Application of Income: Details the application of income in India, including recipients and purposes, application of income outside India, deemed application of income, as per the provisions of the Act, income accumulated or set apart, with details on the purpose and Money invested or deposited in various forms and modes.
d. Record of Application from Previous Years: Application of income accumulated or set apart from previous years, application of deemed income referred to in the Act, application from income accumulated in previous years and money invested or deposited in specified forms and modes.
e. Record of Voluntary Contributions with Corpus Direction: Contains details of voluntary contributions received, with specific directions to form part of the corpus includes details of contributors, application of such contributions, and investment details and money invested or deposited in forms and modes specified in the Act.
f. Record of Contributions for Renovation or Repair of Places: Contains details of contributions received for the renovation or repair of specific places, such as Temples, Mosques, Gurudwaras, Churches, etc and Includes donor information, application of contributions, and investment details.
g. Record of Loans and Borrowings: Contains information about loans and borrowings, including the amount, date, and repayment details includes lender information, such as name, address, PAN, and Aadhar (if available) and Details applications from loans and borrowings and repayments of such loans.
h. Record of Properties Held: Includes details of immovable properties, including their nature, address, cost of acquisition, and registration documents, records property transfers and net considerations and Movable properties are also documented.
i. Record of Specified Persons: Contains details of specified persons, as referred to in sub-section (3) of Section 13 of the Act , Includes their name, address, PAN, and Aadhaar (if available) and Documents transactions with these specified persons, detailing dates, amounts, nature of transactions, and evidence that such transactions are not for the benefit of specified persons.
j. Any Other Relevant Documents: This category allows for the inclusion of any other documents that contain relevant information.
Compliance with these requirements is essential for organizations to meet their tax obligations and demonstrate transparency in their financial operations. It ensures that they are following the regulations set forth by the Income Tax Act regarding the maintenance of records and documentation. Further, the newly introduced Form 10 B & 10 BB sought the abovementioned requirements.
B. Form of keeping Books of Accounts and Other Documents (Rule 17AA(2)):
Books of account and other documents can be maintained in various forms, including written, electronic, digital, or as print-outs of data stored in electronic or digital form. This flexibility allows organizations to keep their records in a more digital or electronic format, simplifying record-keeping processes. However, it’s important to ensure the admissibility of supporting documents in electronic or digital form, and physical copies should be retained where necessary.
C. Place of Maintaining Books of Account & Other Documents (Rule 17AA (3)):
The books of account and other documents specified in Rule 17AA(1) can be maintained in various forms, including written form, electronic form, digital form, print-outs of data stored electronically, or any other form of electromagnetic data storage device. According to Rule 17AA(3), these books of account and documents must be kept and maintained at the organization’s “registered office.” Books of account and other documents must be kept at the organization’s registered office. However, with approval through a board resolution, they can be kept at other places in India. If books are kept at a place other than the registered office, the organization must notify the jurisdictional Assessing Officer in writing within seven days, providing the full address of the other place. This notification should be signed and verified by the authorized person.
If the accounts are maintained at locations other than the registered office or at various project locations, the organization must inform the Assessing Officer in writing for each and every project undertaken.. The written intimation should provide the full address of the other places where the books are maintained. This written intimation should be duly signed and verified by the person authorized to sign the return, and it should be supported by a resolution of the board.
D. Period for Which Books of Account & Other Documents Should Be Kept (Rule 17AA(4)):
Books of account and other documents specified in Rule 17AA(1) should be kept and maintained for a period of ten years from the end of the relevant assessment year.If an assessment for a particular year is reopened under section 147 of the Income Tax Act within the specified period, the books of account and documents maintained at the time of reopening must continue to be kept until the assessment is finalized.
These provisions emphasize the need for organizations to maintain records for an extended period to ensure compliance with tax regulations. The books of account and other documents specified in Rule 17AA (1) must be maintained for a specific period.
CONSEQUENCES OF FAILURE TO MAINTAIN
Failure to maintain prescribed books of account and other documents as required under the rules can lead to various consequences and penalties. Here are some of the potential consequences:
Denial of Tax Exemption: If an entity, such as a charitable organization, fails to maintain the prescribed books of account and other documents as required, it may be denied tax exemption under sections 11 and 12 of the Income Tax Act. These sections pertain to exemptions available to charitable and religious institutions.
Best Judgment Assessment: If an assessee fails to produce the required or prescribed books of account during the assessment proceedings, the assessing officer can make a ‘Best Judgment’ tax assessment under section 144 of the Act. This means that the officer will estimate the income and tax liability based on available information and may not give the benefit of doubt to the taxpayer.
Cancellation of Registration: Section 12AB of the Income Tax Act allows for the registration of public charities. Failure to maintain prescribed books of accounts separately in respect of the business carried on by the public charity (if it is incidental to its objectives) can result in the cancellation of the registration granted under this section.
Penalty under Section 271AAD: Section 271AAD provides for a penalty if there are omissions or incorrect entries in the books of account. The penalty is equivalent to the amount representing such omissions or incorrect entries. It’s a significant penalty and is imposed in cases where an assessee does not maintain proper records or manipulates them.
Imprisonment under Section 276D: Section 276D allows for imprisonment of up to one year and a fine for failure to produce or causing the non-production of books of accounts and documents in response to a notice issued under section 142(1) of the Income Tax Act.
It’s essential for individuals and organizations to comply with the record-keeping and documentation requirements of the Income Tax Act to avoid these penalties and legal consequences. Proper record-keeping not only ensures compliance with the law but also helps in the accurate computation of income and taxation.
ADAPTATION TO RULE 17AA
Adapting to Rule 17AA is crucial for charitable institutions to ensure compliance with the new requirements and maintain transparency in their financial operations. Here’s a more detailed breakdown of the steps to ensure a smooth transition:
Review Existing Accounting System: Start by conducting a comprehensive review of your current accounting systems and procedures. Assess whether your existing system can capture all the required information stipulated in Rule 17AA. Identify any gaps or areas that need modification to align with the new rule.
Modify Accounting Software: Consider modifying or upgrading your accounting software to accommodate the specific details mandated by Rule 17AA.Ensure that your accounting software can efficiently record and track information related to projects, voluntary contributions, income from property, and other relevant data.
Train Staff: Provide training to your accounting and finance staff to ensure they fully understand and are capable of implementing the new requirements of Rule 17AA. Educate your staff on the specific bookkeeping procedures and document maintenance guidelines introduced by the rule. Training will help your team adapt to the changes and carry out their responsibilities effectively.
Engage Professional Assistance: Consider seeking the assistance of professionals who are well-versed in the intricacies of Rule 17AA.These experts can guide your organization through the process of compliance, offer recommendations for system modifications, and ensure accurate adherence to the regulation. Professional assistance can be particularly valuable in navigating any complexities or uncertainties associated with the rule.
Document and Implement Changes: Document all changes and modifications made to your accounting and financial systems to ensure transparency and compliance. Implement the necessary changes in your organization’s accounting processes, including data collection, reporting, and documentation procedures.
Regular Compliance Monitoring: Establish a system for regular monitoring and internal audits to ensure ongoing compliance with Rule 17AA. Review and update your procedures as needed to address any evolving requirements or changes in the regulatory landscape.
Foster Trust and Transparency: Emphasize the importance of complying with Rule 17AA to strengthen financial control and foster trust with stakeholders, including donors, government authorities, and the public. Clearly communicate your organization’s commitment to transparency and compliance in your financial operations.
Adapting to Rule 17AA may require initial effort and investment, but it is essential for maintaining the tax-exempt status and credibility of charitable institutions. By following these steps and making the necessary adjustments, NGOs can navigate the new regulatory framework effectively and demonstrate their commitment to transparency and accountability.
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