Section 12,12A, 12AA, 12AB: Analysis, Registration Procedure, Exemption & FAQs

Introduction: Navigating the complexities of the Income Tax Act, 1961, is crucial for non-profit organizations, trusts, and institutions aiming to secure tax exemptions. This guide delves into the income derived from such entities, the procedures for registration under Sections 12A, 12AA, and 12AB, and the related tax implications. By understanding these sections, organizations can ensure compliance and maintain their tax-exempt status, fostering transparency and accountability in their financial dealings.

♦ INCOME OF TRUST OR INSTITUTION, REGISTRATION, EXEMPTION AND FAQs 

♦ Section 12(1):

Voluntary Contributions: Any voluntary contributions received by a trust or institution, unless specifically directed to form part of the corpus (permanent fund), will be considered as income derived from property held under trust for charitable or religious purposes.

Tax Implications: Such contributions are subject to the provisions of section 11, which deals with the tax exemption for income from property held under trust for charitable or religious purposes, and section 13, which specifies conditions under which the exemption under section 11 is not available.

♦ Section 12(2)

Value of Services Provided: If a charitable or religious trust running a hospital or educational institution provides medical or educational services to certain specified persons (as referred to in section 13(3) (a) to (d)), the value of these services is considered as income of the trust.

Specified Persons: These are typically individuals connected with the trust such as founders, trustees, substantial contributors, or their relatives.

Tax Implications: The value of services provided free or at a concessional rate to these specified persons is treated as income for that year and taxed accordingly, overriding the general exemptions under section 11.

♦ Section 12(3)

• Specific Donations (80G): Any donations received by the trust or institution under section 80G (2) (d) for earthquake relief in Gujarat are addressed here.
• Conditions:

1. Accounts of income and expenditure related to these donations must be submitted to the prescribed authority.

2. Donations must be used for the specified purpose (earthquake relief in Gujarat).

3. Any unutilized funds should be transferred to the Prime Minister’s National Relief Fund by March 31, 2004.

• Tax Implications: If these conditions are not met, the unaccounted or misused donations are deemed as income for the year and taxed.

♦ Key Terms:

• Corpus: A fund permanently set aside for the basic endowment of the trust.
• Section 11: Provides for tax exemption of income derived from property held under trust for charitable or religious purposes, subject to conditions.
• Section 13: Specifies circumstances under which the exemptions under section 11 are not available, such as misuse of funds or benefiting certain related individuals.

♦ Summary:

1. Voluntary contributions are generally taxable unless directed to the corpus.

2. Services provided to specified persons are taxable as income.

3. Donations under section 80G (2) (d) must be accounted for and used as specified, or else they are taxable.

This ensures that trusts or institutions are transparent in their financial dealings and that the benefits intended for charitable or religious purposes are not diverted for personal gains.

♦ Section 12A Income Tax Act:

Under Section 12A of the Income Tax Act, 1961, non-profit organisations like charitable trusts, welfare societies, NGOs, religious institutions, etc. are entitled to tax exemptions.

This tax relief was introduced, keeping in consideration that non-profit entities work for social welfare and not for generating profit. Owing to their selfless contribution towards the society, they are exempted from taxes that come under the purview of Section 11 and Section 12.

Nevertheless, to claim such tax benefits individuals need to get registered as per the norms of Section 12A of IT Act, 1961. In case a non-profit organisation fails to register under 12A, all their future financial transactions and receipts will be deemed taxable.

All these make it essential for non-profit entities to become familiar with the components of Section 12A Income Tax Act in detail. They should also find out more about the eligibility requirements and documents, among others.

♦ Eligibility Criteria:

The Income Tax Department of India sets eligibility criteria for registering under Section 12A. Ideally, these following entities who are engaged with social welfare are considered eligible to register under 12A –

1. Incorporated Trusts

2. Section 8 companies and trusts

However, private or family-owned trusts and charities cannot qualify for this Act. Organisations and Trusts that are eligible to register under Section 12A of the Income Tax Act are required to fill a Form 10A online.

One must note that applicants are required to provide a digital signature to file form 10A. Alternatively, applicants can also file this form online through an electronic verification code.

♦ Section 12A (1): General Conditions:

• Application for Registration:
  • Clause (a): The trust or institution must apply for registration in the prescribed form and manner to the Principal Commissioner or Commissioner.
    • Timing: The application must be made before July 1, 1973, or within one year from the creation of the trust or establishment of the institution, whichever is later. The trust or institution must be registered under section 12AA.
    • Late Applications:
      • Sub-Clause (i): If the application is late but the Principal Commissioner or Commissioner is satisfied with the reasons for the delay, the provisions of sections 11 and 12 will apply from the date of the trust’s creation or establishment.
      • Sub-Clause (ii): If not satisfied, the provisions will apply from the financial year in which the application is made.
    • Second Proviso: This timing requirement does not apply to applications made on or after June 1, 2007.
  • Clause (aa): For applications made on or after June 1, 2007, the trust or institution must be registered under section 12AA.
  • Clause (ab): If a trust or institution already registered under section 12AA (or previously under section 12A) modifies its objectives, an application must be made within 30 days of such modification for re-registration under section 12AA.
  • Clause (ac): Irrespective of the above clauses, an application must be made in the following scenarios:
    • Sub-Clause (i): For trusts or institutions registered before April 1, 2021, within three months from this date.
    • Sub-Clause (ii): For trusts or institutions registered under section 12AB, at least six months before the registration expires.
    • Sub-Clause (iii): For provisionally registered trusts or institutions under section 12AB, at least six months before the provisional registration expires or within six months of commencing activities, whichever is earlier.
    • Sub-Clause (iv): For trusts or institutions with inoperative registration under the first proviso to section 11(7), at least six months before the assessment year begins when the registration is sought.
    • Sub-Clause (v): For trusts or institutions modifying objectives not conforming to registration conditions, within 30 days from such modification.
    • Sub-Clause (vi): In other cases, either:
      • (A): At least one month before the commencement of the previous year if activities have not commenced.
      • (B): At any time after commencing activities, provided no part of the income has been excluded from total income under sections 10(23C)(iv), (v), (vi), (via), 11, or 12 for any prior year.

• Maintenance of Books and Audit:
  • Clause (b): If the total income exceeds the maximum non-taxable limit:
    • Sub-Clause (i): Books of account and other documents must be maintained as prescribed.
    • Sub-Clause (ii): Accounts for the year must be audited by a qualified accountant by the specified date, and the audit report must be furnished by that date.
• Return of Income:
  • Clause (ba): The return of income must be filed within the prescribed time under section 139(4A).

♦ Section 12A(2):

For applications made on or after June 1, 2007, sections 11 and 12 apply to the income of the trust or institution from the assessment year immediately following the financial year in which the application is made.

Special Provisions for Applicability:

• Sub-Clause (i) of Clause (ac): Sections 11 and 12 apply from the assessment year for which the trust or institution was earlier registered.
• Sub-Clause (iii) of Clause (ac): Sections 11 and 12 apply from the first assessment year for which provisional registration was granted.

Summary

1. Registration: Trusts and institutions must apply for registration in a timely manner and get registered under section 12AA or section 12AB.

2. Bookkeeping and Audit: If income exceeds the non-taxable limit, proper books of accounts must be maintained and audited annually.

3. Return Filing: Income tax returns must be filed within the prescribed time.

4. Special Cases: Specific conditions apply for modifications of objectives, provisional registrations, and cases of inoperative registration.

These conditions ensure that trusts and institutions maintain transparency, proper financial records, and compliance with tax regulations to avail of the tax exemptions under sections 11 and 12.

♦ Steps to File 10A Form Online:

By following these steps, one can easily file Form 10A online: –

Step 1 – Log onto the Income Tax Department’s e-filing platform.

Step 2 – Navigate to the page’s left side.

Step 3 – Click on the ‘Submit Returns/Forms’ option.

Step 4 – Use credentials like user ID and password to log in to the account.

Step 5 – Click on ‘e-file’ bar and select the ‘Income Tax Forms’ from the drop-down menu.

Step 6 – From the field ‘Form Name’ select Form 10A.

Step 7 – Select relevant ‘Assessment Year’ and ‘Submission Year’.

Step 8 – Provide the required details and verify it.

Step 9 – Click on the ‘Submit’ option.

One must note that just filing the Form 10A does not guarantee registration under Section 12A Income Tax Act as the application has to be verified by the commissioner. Applicants are required to submit necessary documents to complete the verification process.

♦ 12A Income Tax Act Registration – Documents Required:

Besides 12A Form, applicants need to submit a set of other vital documents. Here is a list of self-certified documents required to be shared by the societies, trusts and firms –

1. A document stating the establishment of the trust or organisation. (Certificate of incorporation)

2. A document that serves as proof of the creation or establishment of a trust or institution. (Trust Deed etc.)

3. Registration with the – RoC or Registrar of Companies, Registrar of Public Trusts or Registrar of Firms and Societies.

4. Documents that serve as proof of adoption or alteration of objects. (MOA/AOA).

5. Trusts or institutions annual accounts.

♦ Section 12AA: Procedure for registration:

(1) The Principal Commissioner or Commissioner, on receipt of an application for registration of a trust or institution made under clause (a) or clause (aa) or clause (ab) of sub-section (1) of section 12A, 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; and

b) after satisfying himself about the objects of the trust or institution and the genuineness of its activities as required under sub-clause (i) of clause (a) and compliance of the requirements under sub-clause (ii) of the said clause, 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.

Provided that no order under sub-clause (ii) shall be passed unless the applicant has been given a reasonable opportunity of being heard.

(1A) All applications, pending before the Principal Chief Commissioner or Chief Commissioner on which no order has been passed under clause (b) of sub-section (1) before the 1st day of June, 1999, shall stand transferred on that day to the Principal Commissioner or Commissioner and the Principal Commissioner or Commissioner may proceed with such applications under that sub-section from the stage at which they were on that day.

(2) Every order granting or refusing registration under clause (b) of sub-section (1) shall be passed before the expiry of six months from the end of the month in which the application was received under clause (a) or clause (aa) or clause (ab) of sub-section (1) of section 12A.

(3) Where a trust or an institution has been granted registration under clause (b) of sub-section (1) or has obtained registration at any time under section 12A [as it stood before its amendment by the Finance (No. 2) Act, 1996 (33 of 1996)] and subsequently the Principal Commissioner or Commissioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution:

Provided that no order under this sub-section shall be passed unless such trust or institution has been given a reasonable opportunity of being heard.

(4) Without prejudice to the provisions of sub-section (3), where a trust or an institution has been granted registration under clause (b) of sub-section (1) or has obtained registration at any time under section 12A [as it stood before its amendment by the Finance (No. 2) Act, 1996 (33 of 1996)] and subsequently it is noticed that—

i) the activities of the trust or the institution are being carried out in a manner that the provisions of sections 11 and 12 do not apply to exclude either whole or any part of the income of such trust or institution due to operation of sub-section (1) of section 13; or

ii) the trust or institution has not complied with the requirement of any other law, as referred to in sub-clause (ii) of clause (a) of sub-section (1), and the order, direction or decree, by whatever name called, holding that such non-compliance has occurred, has either not been disputed or has attained finality, then, the Principal Commissioner or the Commissioner may, by an order in writing, cancel the registration of such trust or institution.

Provided that the registration shall not be cancelled under this sub-section, if the trust or institution proves that there was a reasonable cause for the activities to be carried out in the said manner.

(5) Nothing contained in this section shall apply on or after the 1st day of April, 2021.

♦ Analysis of Section 12AA:

• Procedure for Registration (Section 12AA)

1. Application Review: Upon receiving an application for registration, the Principal Commissioner or Commissioner will:

a) Call for Documents: Request necessary documents or information to verify:

i) The genuineness of the trust or institution’s activities.

ii) Compliance with relevant laws essential for achieving its objectives.

b) Inquiries: Conduct any additional inquiries deemed necessary.

2. Decision: After evaluating the documents and inquiries:

i) Approval: If satisfied with the objectives and activities, issue a written order registering the trust or institution.

ii) Rejection: If not satisfied, issue a written order refusing registration, giving the applicant a reasonable opportunity to be heard before the decision.

3. Pending Applications: Applications pending before June 1, 1999, will be transferred to the Principal Commissioner or Commissioner and processed accordingly.

4. Timeline: The registration decision (approval or rejection) must be made within six months from the end of the month in which the application was received.

5. Cancellation of Registration:

a) Genuineness and Object Compliance: If the activities are found not genuine or not aligned with the trusts objectives, the Principal Commissioner or Commissioner can cancel the registration, after giving a reasonable opportunity to be heard.

b) Non-Compliance:

• • • If activities lead to inapplicability of sections 11 and 12 due to section 13(1).
    • If there is non-compliance with other relevant laws, confirmed by a final order or decree.
    • Opportunity to Explain: Registration will not be cancelled if the trust or institution proves there was a reasonable cause for such activities.

6. Post-April 1, 2021: The provisions of this section do not apply after April 1, 2021.

♦ Section 12AB: Procedure for fresh registration:

(1) The Principal Commissioner or Commissioner, on receipt of an application made under clause (ac) of sub-section (1) of section 12A, shall,—

a) where the application is made under sub-clause (i) of the said clause, pass an order in writing registering the trust or institution for a period of five years;

b) where the application is made under sub-clause (ii) or sub-clause (iii) or sub-clause (iv) or sub-clause (v) 66[or item (B) of sub-clause (vi)] of the said clause,—

i) call for such documents or information from the trust or institution or make such inquiries as he thinks necessary in order to satisfy himself about—

a) the genuineness of activities of the trust or institution; and

b) 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;

 ii) after satisfying himself about the objects of the trust or institution and the genuineness of its activities under item (A) and compliance of the requirements under item (B), of sub-clause (i),—

A. pass an order in writing registering the trust or institution for a period of five years; or

B. if he is not so satisfied, pass an order in writing,—

1. in a case referred to in sub-clause (ii) or sub-clause (iii) or sub-clause (v) of clause (ac) of sub-section (1) of section 12A rejecting such application and also cancelling its registration;

2. in a case referred to in sub-clause (iv) or in item (B) of sub-clause (vi) of sub-section (1) of section 12A, rejecting such application, after affording a reasonable opportunity of being heard;

c) where the application is made under item (A) of sub-clause (vi) of the said clause or the application is made under sub-clause (vi) of the said clause, as it stood immediately before its amendment vide the Finance Act, 2023, pass an order in writing provisionally registering the trust or institution for a period of three years from the assessment year from which the registration is sought, and send a copy of such order to the trust or institution.

(2) All applications, pending before the Principal Commissioner or Commissioner on which no order has been passed under clause (b) of sub-section (1) of section 12AA before the date on which this section has come into force, shall be deemed to be applications made under sub-clause (vi) of clause (ac) of sub-section (1) of section 12A on that date.

(3) The order under clause (a), sub-clause (ii) of clause (b) and clause (c), of sub-section (1) shall be passed, in such form and manner as may be prescribed, before expiry of the period of three months, six months and one month, respectively, calculated from the end of the month in which the application was received.

(4) Where registration or provisional registration of a trust or an institution has been granted under clause (a) or clause (b) or clause (c) of sub-section (1) or clause (b) of sub-section (1) of section 12AA, as the case may be, and subsequently,—

a) the Principal Commissioner or Commissioner has noticed occurrence of one or more specified violations during any previous year; or

b) the Principal Commissioner or Commissioner has received a reference from the Assessing Officer under the second proviso to sub-section (3) of section 143 for any previous year; or

c) such case has been selected in accordance with the risk management strategy, formulated by the Board from time to time, for any previous year, the Principal Commissioner or Commissioner shall,—

i) call for such documents or information from the trust or institution, or make such inquiry as he thinks necessary in order to satisfy himself about the occurrence or otherwise of any specified violation;

ii) pass an order in writing, cancelling the registration of such trust or institution, after affording a reasonable opportunity of being heard, for such previous year and all subsequent previous years, if he is satisfied that one or more specified violations have taken place;

iii) pass an order in writing, refusing to cancel the registration of such trust or institution, if he is not satisfied about the occurrence of one or more specified violations;

iv) forward a copy of the order under clause (ii) or clause (iii), as the case may be, to the Assessing Officer and such trust or institution.

 Explanation.—For the purposes of this sub-section, the following shall mean “specified violation”,—

a) where any income derived from property held under trust, wholly or in part for charitable or religious purposes, has been applied, other than for the objects of the trust or institution; or

b) the trust or institution has income from profits and gains of business which is not incidental to the attainment of its objectives or separate books of account are not maintained by such trust or institution in respect of the business which is incidental to the attainment of its objectives; or

c) the trust or institution has applied any part of its income from the property held under a trust for private religious purposes, which does not ensure for the benefit of the public; or

d) the trust or institution established for charitable purpose created or established after the commencement of this Act, has applied any part of its income for the benefit of any particular religious community or caste; or

e) any activity being carried out by the trust or institution,—

i) is not genuine; or

ii) is not being carried out in accordance with all or any of the conditions subject to which it was registered; or

 f) the trust or institution has not complied with the requirement of any other law, as referred to in item (B) of sub-clause (i) of clause (b) of sub-section (1), and the order, direction or decree, by whatever name called, holding that such non-compliance has occurred, has either not been disputed or has attained finality; or

g) the application referred to in clause (ac) of sub-section (1) of section 12A is not complete or it contains false or incorrect information.

(5) The order under clause (ii) or clause (iii) of sub-section (4), as the case may be, shall be passed before the expiry of a period of six months, calculated from the end of the quarter in which the first notice is issued by the Principal Commissioner or Commissioner, on or after the 1st day of April, 2022, calling for any document or information, or for making any inquiry, under clause (i) of sub-section (4).

♦ Analysis of Section 12AB:

1. Application Review:

• Automatic Approval: If the application is made under sub-clause (i) of section 12A (1) (ac), the trust or institution is registered for five years.
• Detailed Review: For applications under sub-clauses (ii), (iii), (iv), (v), or item (B) of sub-clause (vi):

i) Request Documents: The Principal Commissioner or Commissioner may request necessary documents or information to verify:

• • The genuineness of the trust or institution’s activities.
  • Compliance with relevant laws essential for achieving its objectives.

ii) Decision:

• • Approval: If satisfied, register the trust or institution for five years.
  • Rejection: If not satisfied, reject the application and cancel existing registration if applicable, after giving a reasonable opportunity to be heard.
• Provisional Registration: For applications under item (A) of sub-clause (vi) or the old sub-clause (vi) before the Finance Act, 2023 amendment, provisionally register the trust or institution for three years.

2. Pending Applications: Applications pending on the commencement date of this section are treated as applications under sub-clause (vi) of section 12A (1) (ac).

3. Decision Timeline:

• Automatic Approval: Within three months.
• Detailed Review: Within six months.
• Provisional Registration: Within one month.
• All timelines are calculated from the end of the month in which the application is received.

4. Cancellation of Registration:

• If specified violations occur, the Principal Commissioner or Commissioner may cancel the registration, after a reasonable opportunity to be heard.
• Specified Violations Include:

i. Using income for non-charitable purposes.

ii. Business income not incidental to objectives or without separate books.

iii. Income used for private religious purposes.

iv. Income benefiting a particular religious community or caste.

v. Activities not genuine or not in accordance with registration conditions.

vi. Non-compliance with other relevant laws.

vii. Incomplete or false application information.

5. Cancellation Decision Timeline: The decision to cancel or not cancel registration must be made within six months from the end of the quarter in which the first notice was issued after April 1, 2022.

♦ Some FAQ’s on Section 12AA/12AB:-

Q.1 Difference between Section 12AA and newly introduced Section 12AB?

Ans:-

Section 12AA	Section 12AB	Remarks
Benefits under section 80G be available to all NGOs registered under section 12AA. These benefits are    available permanently.	NGOs registered u/s 12AA shall reapply to obtain  new Registration u/s 12AB.	NGOs would be required to reapply before 31st December, 2020 for getting registration u/s 12AA.
Exemption be valid for lifetime.	Exemption be provided for a period of 5 years; however,      in case  of new registration, a Provisional Registration be provided for a period of 3 years.	NGOs to provide evidence for convincing the income tax authorities, Regarding         activities Undertaken by them during the 5 years or 3 years, in order to renew their registration.
Details of overseas contributions/ Donations be required to be disclosed.	Donor-wise details be maintained and the same be furnished in a press release.	NGOs will be required to maintain a complete record of their donors.
80G benefits are available to donors From their Income.	80G donations is under uncertainty in respect of exemption.	Donors are required to obtain the certificate in the Form 10BE from the NGOs for getting the exemptions.

In India, the varied privileges are available to NGO/Charitable Trusts within the context of tax exemption. Now to avail the advantages of tax exemptions the NGO/ trust should register themselves with income tax under section 12A, Section 12AA & Section 80G of the tax Act, 1961.

Q.2 For how long will the registration granted under section 12AB be valid?

Ans:- Where the trusts or institutions are already having registration u/s 12AA, they shall apply for registration u/s 12AB, latest by 30-06-2021 in Form 10A and the validity of said registration shall be for a period of five years. However, in the case of new registration, the same would be granted a provisional registration, which shall be valid for a period of three years.

Q.3 Is digital signature are compulsory for filling Form 10A?

Ans :- Form 10A is not necessarily required to be digitally signed. It can also be verified by OTP.

Q.4 Can approval granted under section 12AB be cancelled?

Ans :- Where, at any time, Form No. 10A is found to be incomplete or was filled by providing false or inaccurate information or documents, the PCIT or CIT has the full authority to cancel the registration in Form No. 10AC. However, a chance of being heard are allowed before cancellation. In case of cancellation of registration, it shall be deemed that URN (Unique Registration Number) is never granted or issued to the said entity.

Conclusion: Ensuring compliance with Sections 12A, 12AA, and 12AB of the Income Tax Act is vital for trusts and non-profit institutions to benefit from tax exemptions. Proper registration, diligent bookkeeping, and adherence to specified conditions not only safeguard their tax-exempt status but also promote financial transparency and trustworthiness. By staying informed about these regulations, non-profit entities can continue to focus on their charitable missions without the burden of undue tax liabilities.