CA M. Kandasami, FCA, DISA

Chennai, India

mksami.india@gmail.com

SIRC, Chennai

19th

July 2014

S.No.

Topics

1 Current status of NPO Sector in India

2 An overview of provisions of the IT Act

3 Computation & Accumulations in IT Act

4 Questions, Clarifications & Interactions

A Plan of this Presentation

Government Sector

Corporate Sector

VolunatoryOrganisations

Government Sector

Corporate Sector

Non Profit Sector

Different Dimensions to the NPO Sector

Evolution (Programme)

Economic

Entity (Legal)

Evolution (Programme)

Dimension

Conventional Classification

Educational Institutions

Health sector Organisations

Social Welfare Organisations

Evolution of new types of NPOs

Rights based Organisations (Human

Rights,Child Rights, Women Rights etc.

Networks, Forums, Collectives,

Coalitions etc.

Disaster Relief/Rehabilitation NPOs

A pledge by a women’s group

for Women Empowerment

Consumer Protection Monitoring

Economic Dimension

A Study by John Hopkins in 2000

India has 1.2 Million NGO’s: 53% in rural and 47% in urban

Of the 20 million persons involved, 85% are volunteers, rest are paid staff

73.4% of these have less than one paid staff, 8.5% have above 10 paid staff

Total receipts as on year 2000 INR 179,220 million (US $ 4000 million)

Another Study in 2012

A Study of Non Profit Institutions

By

Central Statistical Organisation

(CSO)

Entity (Regulatory)

Dimension

Three

Sectors

Not for PROFIT ORGANISATIONS

LEGAL FORMS FOR NPOs IN INDIA

MUTUAL SELF HELP

for PROFIT ORGANISATIONS

NPOs

SOCIETY

THREE LEGAL FORMS OF NPOs in INDIA–

TRUST Non Profit Company

Classification of Trusts3

Private Trust

Public Trust

Charitable or Religious Trust

Public Trusts

Meaning of Trust – Author, Property & Trustees

Applicable Legislations Charitable Endowment Act, 1890

Indian Trust Act, 1882

Bombay Public Trust Act, 1950

Charitable and Religious Trust Act, 1920,

Societies under SR Acts

What is a Society?

Membership, Governance

Applicable Legislations

Societies Registration Act, 1860

Religious Societies Act, 1880

Respective State Societies Registration Act

Purposes for which society can be formed

Sec 8 of Companies Act 2013 (Sec

25 of Companies Act 1956)

Meaning , Purpose, Procedure

for incorporation

License to be obtained

Incorporation

Managing the Company

Regulatory Framework

Incorporation Laws

Other laws and Regulations

Social Security Laws

Incorporation Laws

Indian Trusts Act, 1882

Societies Registration Act,

1860 or respective State Laws

Section 25 companies under Companies Act,

1956

Cooperative Societies Act / Mutually Aided

Cooperative Societies Act (MACs)

Other Laws and Regulations

Service Tax

Foreign Contribution

(Regulation) Act, 1976

Income Tax Act, 1961

Social Security Laws and Regulations

The Employees’ Provident Fund And Miscellaneous

Provisions Act, 1952

Payment of Gratuity Act, 1972

The Employees State Insurance Act, 1948

The Payment of Bonus Act, 1965

The Minimum Wages Act, 1948

Stakeholders and Accountability dimensions

State & CentralGovernment

Governance andManagement of the NPO

Public

BeneficiariesDonors

NPO

Central and Statement Government Laws

Income tax Act

Provident Fund

Act

Registration with

Social Welfare

Department

Foreign

Contribution

Regulation

Act

Registrar of

Companies

Societies

Registration Act

NPO

Brief Overview of

provisions in the Income Tax relating to Exemption

Definitions of key terms

S. 2(15), 2(24)

Organisational Exemptions

S. 10(23C), 11 – 13

Donor Exemptions

S. 80G & 35, 35AC

E-filing of Income Tax

Returns

Brief Overview of Provisions

Charitable Purpose – Sec 2(15)

Relief of the poor

Education

Medical Relief

Preservation of environment and

Preservation of monuments or places or objects of artistic or historic interest

Advancement of any other general public utility – Proviso (Trade, commerce or business)

Religious Purpose

A system of belief and worship usually in a supreme being

A religion is not merely an opinion, doctrine or belief but involves an outward expression in acts as well. AIR 1952 SC 282

Definition of "Income" Sec 2(24(iia)

(i)Profits and Gains

(ii) Dividend

(iia) Voluntary Contributions received by a

Trust wholly or partly for charitable or religious purposes

Association exempted u/s 10(21) and 10(23)

Fund / Trusts / Associations referred u/s 10(23C)

Organisational

Exemptions

Total

Exemptions

Annual /

Conditional

Exemptions

Income Tax

Income Tax

• Research Institutions - U/s 10(21)

• Educational Institutions - 10(23C)(iii ab )(iii ad)(vi)

• Medical Institutions - 10(23C)(iii ac )(iii ae)(via)

• Public Charitable Institutions - 10(23C)(iv)

• Public Religious Institutions - 10(23C)(v)

Income Tax

Sec Education Medical Conditions

10 (23C)

(iii ab) (iii ac) Substantially financed by Government

10 (23C)

(iii ad) (iii ae) Gross Receipts below 1 Crores

10 (23C)

(vi) (via) Gross Receipts above 1 Crore

10 (23C)(iv)

Charitable Institution of importance through out India or through out the state

10 (23C)(v) Religious institution

Total Exemption

Income Tax

Total Exemptions-Section 10 (23C) Continued…

Section 10(23C) - Proviso 14 to 17

14 – Application on or before 30th Sept.

15 - Anonymous donation u/s 155BBC

16 - Prescribed Authority CCIT wef 1-6-07

17 - Applicability of 1st Proviso to amended section 2(15) of the Income Tax Act 1961

Annual / Conditional Exemptions

Income Tax

Sl. No.

Annual Exemptions Sections

1 Registration 12A / 12 AA

2 Compulsory Audit of Accounts 12A(b)]

3 Application of Income (85%) 11(1)(a)

4 Accumulation of Income 11 (1) and 11(2)

5 Investment under section 11(5)

6 Filing Return of Income 139(4A)

Annual Exemptions

Income Tax

12A – Historical Development

• First introduced by Finance Act 1972 w. e. f 1.4.1973

• Application in Form 10A

• Time limit within one year from the constitution of the trust/ society/ institution

• No procedure prescribed

• No time limit for passing order

12AA – Subsequent Amendments

• Inserted by Finance Act 1996 with effect from 1.4.1997

• Procedure for granting registration prescribed

• Time limit for passing order six months

• Power for cancellation expanded

Registration u/s 12A / 12AA

Income Tax

Latest Amendments

• Conditions for applicability of section 11 and 12 as against conditions as to registration

• New sub section 12A(aa) inserted by the Finance Act 2007 w.e.f 1.6.2007

• One year time limit before the application is dispensed with

• Power for condonation removed

Consequences

• Registration from the financial year in which application is made –Section 12A(2)

• The income of earlier years will be taxed

• No condonation is allowed

Conditions for Applicability

Income Tax

Requirements

• Form No. 10 B to be certified by the auditor

• Limit was Rs.50,000 up to assessment year 2005-06

•Maximum amount not chargeable to tax

Latest Amendments

• Limit for compulsory audit maximum amount not chargeable to income tax – TLA 2006 w.e.f 1.4.2006

• Form No. 10BB in the case of Educational and Medical Institutions [Exemption u/s 10(23) iv, v, vi and via ]

Compulsory Audit U/s 12A(b)

Income Tax

44

Mandatory audit Compliance

Limit

Basic Exemption

Corpus donations includible

Time limit for filing the Report

can be filed anytime before completion of

assessment or even at the time of appeal

(Electronic filing regime – 10B filed before

uploading return)

Computation

Gross income

Minus

Automatic Accumulation

15%

Minus

Application of income

(Expenses)

Balance

Can be FULLY accumulated

and spent over 1 or 5 years

S. 11

Operation of Section 11 Exemption

Particulars Rs. lacs

Gross receipts 100

Less: Deduction u/s 11(1)(a) (15)

Balance income to be applied 85

Less: Income applied

Revenue expenses 70

Capital expenses 15 (85)

Total Income Nil

Computation of income Fully spent

Gross receipts 100

Less: Deduction u/s 11(1)(a) (15)

Balance income to be applied 85

Less: Income applied

Revenue expenses 50

Capital expenses 25 (75)

Balance Income 10

Less: Acc. & set apart – Exp 2 to Sec 11(1)(a) for 1 year

10

Total Income Nil

Acc. 1 yearComputation of income

Gross receipts 100

Less: Deduction u/s 11(1)(a) (15)

Balance income to be applied 85

Less: Income applied

Revenue expenses 40

Capital expenses 10 (50)

Balance Income 35

Less: Acc. & set apart – Sec 11(2) 5 years

(35)

Total Income Nil

Acc. 5 yearsComputation of income

Accumulation of Surplus Income Tax

Option 1: Exp 2 to Sec 11(1)(a)

Accumulate and spend in one year

Option 2: 11(2)

Accumulate for 5 years – for specific purposes GB resolution, application in Form 10, invt. In specified modes

If not spent in this time span, then taxable as income

Earlier Provision

• Minimum application was 75% of the total income up to AY 2002-03

• Accumulation was possible up to 5 years from the year of accumulation

• Inter trust transfer was possible up to assessment year 2002-03

Later developments

• The minimum application was raised to 85% from the AY 2003-04 by the Finance Act 2002

• The limit of 10 years for accumulation was decreased to 5 years w.e.f. 1.4.2002 by the Finance Act 2001

• Inter trust transfer from the accumulated surplus is prohibited from 1.4.2003 by the Finance Act 2002

Accumulation of Surplus

Income Tax

U/s 11(1) for one year

• Mere intimation to spend the subsequent year is sufficient

• No further formalities

U/s 11(2) for 5 years

• Resolution of the Governing Body or Board of Trustees

• Investment of surplus in modes prescribed U/s 11(5)

• Filing of Form No. 10 along with the Return of Income

• Tracking timely utilisation

Accumulation of Surplus U/s 11

Income Tax

Earlier Provision

• Filing of return of income was mandatory under section 139(4A) of the Act w.e.f 1.4.1973 for Trusts and institutions claiming exemption under section 11 of the Act

Later developments

• Finance Act 2002 inserted section 139(4C) making filing of return mandatory for Scientific research Association Sec 10(21) and Fund or institution exempted under section 10(23C)(iv), (v), (vi) and (via)

• Taxation Laws (Amendment) Act 2006 made filing of return mandatory for institutions exempt under section 10(23C)(iiiad) and (iiiae)

Filing of returns U/s 139(4C)

Income Tax

Donor

Exemptions

Section 80G

Section 35 AC

&

Section 35 (1) (ii)

Income Tax

Recognition u/s 80 G (50%, 100%)

Exemption u/s 35 (1) (iii)

Expenditure on eligible project or scheme u/s 35AC

Income Tax

DONOR EXEMPTIONSTYPES OF DONOR EXEMPTIONS AND REBATES

S. No.

Section Particulars Eligibility for Donor

Amount of relief for donor

1 35(1) (iii) Expenditure on research in Science/ Social Science

Assessees carrying on business

175% / 125%

2 35AC Expenditure on eligible projects or schemes for promoting social and economic

Assessees carrying on business

100%

3 80G(50% RELIEF)

Donations to charitable Institutions

All assessees 50% Restricted to 10% of Gross Total Income

Income Tax

TYPES OF DONOR EXEMPTIONS AND REBATESS. No

Sec Particulars Eligible Donors Amount of relief for donor

4 80G (100% relief)

Donation to

• P.M. National Relief Fund

• P.M. Armenia Earthquake fund

and others;

• approved university or educational Institution

All assessees 100%

5 80GGA Donation for Researchin social science or inRural Development

For non businessassessees

100%

Income Tax

Tax Deduction at Source and

Non Deduction

On Payments On Receipts

Income Tax

Tax Deduction at Source

Assessee expected to comply with all TDS provisions

No special exemptions to charitable organisations

However, Sec 40 (a) (ia) disallowance doesn’t apply as on date

Interest and Penalty (incl. late filing fee u/s 234E) applicable

Income Tax

Issue of Certificate u/s 197 for Non deduction of Tax at Source

Assessee Files application in Form No. 13

Certificate u/s 197 for non deduction issued by TDS ward

Assessee provides certificate to deductor

IF not obtained by assessee then refund claim submitted along with return

Income Tax

Evolution Of Definition Of Charitable Purpose

Section 4(3) of the IT act 1922 corresponds with Section 2(15)

Section 2(15) at the time of enactment of the 1961 act:

“Charitable purpose includes“relief of the poor, education, medical relief and

advancement of any other object of general public utility not involving the carrying on of any activity

for profit”.

Only one amendment to section 2(15) so far in 1983.

“Not involving the carrying on of any activity for profit”

removed and thus pre 1962 position restored

Charitable purpose includes

Relief of poor

Education

Medical Relief

Advancement of any other object of

general public utility

Definition of Charitable Purpose prior to Amendment

Income Tax

Proviso to the definition 2(15) is inserted:

“Provided that the advancement of any other object of general public utility shall not be a charitable purpose if

It involves the carrying on of any activity in the nature of trade commerce or business, or

any activity of rendering any service in relation to any trade, commerce or business

for a cess or fee or any other consideration irrespective of the nature of use or application, or retention of the income from such activity.

Amendment to the definition of “Charitable Purpose”

Income Tax

Charitable purpose includes

relief of the poor,

education,

medical relief,

preservation of environment (includingwatersheds, forests and wildlife) and

preservation of monuments or places orobjects of artistic or historic interest, and

the advancement of any other object of generalpublic utility.”

63

Section 2(15) defines “Charitable Purpose”

Inserted by the finance act 2009

Section 2(15) First Proviso

Advancement of any other object of general publicutility shall not be a charitable purpose

carrying on of any activity in the nature of trade,commerce or business or any service to above,

for a cess or fee or any other consideration ,

irrespective of the nature of use or application , orretention of the income from such activity

Section 2(15) Second Proviso

First proviso shall not apply if the aggregate value of thereceipts from the activities referred to therein is twentyfive lakh rupees or less

64

65

Corpus Donation is not defined, written direction fromdonor is required.

Corpus Donations, is it income?

Corpus donations upto 1988-1989 were outside the purview ofincome u/s 2(24)(iia), from 1.4.1989, exempted u/s 11(1)(d).

Can corpus donations be received through offertoryboxes?

Corpus Donations (Section 11(1)(d)

Carry Forward of Deficit

There are no specific provisions for carry forward

of deficit.

The Court have held that if a trust has incurred adeficit during a particular year, then the surplusmade by it in a subsequent year to make up for thepast deficit should be allowed to be set off againstsuch deficit.

CIT vs Maharana of Mewar Charitable Foundation164 ITR 439 (Raj.),

CIT vs. Shri Plot Swetambar Murti Pujak JainMandal, 211 ITR 293 (Guj.),

67

Anonymous donation Section 115 BBC introduced w.e.f 1.4.2007

Section 115 BBC (3): Anonymous donation means

Where a person receiving contribution does not maintain a record of identity (Name and address of the donor), any other particulars.

Anonymous donations liable to be taxed at 30% plus SC.

Exclusions

- wholly religious trust.

- Wholly religious and charitable trust, (but will apply to donations made with specific direction that it is for any university, educational institute or hospital etc.)

Trust covered by s.10(23C)(iiiab)/(iiiac)

..the income tax payable shall be aggregate of

1) amount of income tax calculated at the rate of 30% on the aggregate of anonymous donations received in excess of the higher of the following, namely:

a) 5% of total donations received by the assessee; or

b) One lakh rupees, and

2) Amount of Income tax with which the assessee would have been chargeable, had his total income been reduced by the aggregate of anonymous donations received in excess of the amount referred to in sub clause A or B of clause (i)

68

69

Section 11 (4A) Business Income of a Trust

As per Section 11(4A), the income earned by a trustfromany business activity shall be exempted from taxprovided the following conditions are satisfied:

The business carried on is incidental to theattainment of the objects of the trust and

Separate books of accounts are maintained inrespect of such business

Audit is required if income is in excess of the maximumamount which is not chargeable to income tax .

This is an audit necessary under the Income Tax Actand is distinct from an audit, which may be necessaryunder the Bombay Public Trust Act or a similar statuteunder the relevant State law.

An audit has to be conducted under the Income taxAct and an audit report furnished in form 10B.

While computing the limit for conducting an audit,exempt gross receipts have to be considered

70

Section 11 (4A) Business Income of a Trust continued…

Allowable as per commercial concept of

income – Several decisions

Now allowable – Also decisions and

department has not been allowing

Finance Bill 2014If the capital asset already has been claimed

as application, then no depreciation canallowed

Status of Depreciation

7

2

Denial of exemption

Section 13(2) – Income /Property used for person mentioned in sec 13(3)

Lending funds without adequate security or interest.

Land, building other property made available withoutadequate compensation.

Salary / remuneration in excess of reasonable amount.

Services of the trust made available without adequatecompensation.

Sale or purchase of shares or security for other thanmarket value.

Funds invested in a concern in which the person has asubstantial interest.

73

7

4

Denial of exemption