By Chandan Goswami
A Non-Governmental Organization (NGO)/charitable institutions/ voluntary organizations is any nonprofit community, legally constituted, organized and operated by a group of citizens, on a local, national or international level.
The competency to legislate on charities or charitable institutions is provided under schedule VII of the Indian Constitution. It falls under concurrent list and thus, can be legislated upon by both centre and the state. There are three basic legal forms of charitable entities under Indian law: trusts, societies, and section 8 companies (under Companies Act, 2013) or the erstwhile section 25 companies (under Companies Act, 1956). The legal framework governing the charitable institutions will depend on the form of business organization the charitable institution takes. It is pertinent to mention here that there is no comprehensive central law for legal incorporation of nonprofit organizations which applies to trusts, registered societies and section 8 companies alike.
Constitutionality of NGOs/Charitable institutions:
The Indian Constitution provides a recognition to social/ civil society institutions (a) through its Article on the right to form associations or unions – Article 19 (1)(c); (b) through Article 43 which talks of States making endeavor to promote cooperatives in rural areas; and (c) through explicit mention in entries made in the Seventh Schedule. It provides for Incorporation, regulation & winding up under List II, trusts & trustees, charities & charitable institutions, charitable & religious endowments & religious institutions under List III.
Now, since forming associations is a constitutional right guaranteed under Article 19(1) (c), it is viable to set up such voluntary organizations without registrations or recognition. However, such unregistered organizations are not allowed to own property, plead tax benefits or insist any foreign fundings.
If the charitable institution is formed as a Public Trust, it will be governed by the Public Trust Act applicable in the relevant State. However, if no Public Trust Act exists in that state, then the applicable legislation will be the Indian Trusts Act 1882. If the charitable institution is formed as a Society, it will be governed by the Societies Registration Act, 1860. The charitable institution can also be formed as a non-profit company under section 25 of the Companies Act, 1956. Additionally, the Income Tax Act 1961 will be applicable to charitable institutions. And in the case of foreign contributions to these charitable institutions, the Foreign Contribution (Regulation) Act, 2010 will be applicable. Various State Laws too are applicable to Charitable Institutions. For example, all public charitable trusts in the state of Maharashtra are governed by the Bombay Public Trusts Act, 1950. The same Act, with minor changes, is also operational in the state of Gujarat. Rajasthan, too, has a Trusts Act of 1959, while Madhya Pradesh had an Act of 1951.
Moreover, many state and central government agencies have regulatory authority over these not-for-profit entities. At the state level, these agencies include the Charity Commissioner (for trusts), the Registrar of Societies (referred to in some states by different titles, including the Registrar of Joint Stock Companies), and the Registrar of Companies (for section 25 companies). At the national or federal level, the regulatory bodies include the income tax department and Ministry of Home Affairs (only for not-for-profit organizations receiving foreign contributions).
|TYPE||TrustS||Society||Section 8 Companies|
|Definition||Trusts are formed when the settler (‘trustor’) of the property transfers any property and offers its benefits for the well-being of recipients or for the practice of public purposes. Such property is transferred to a second party ‘trustee’ for the benefit of the third parties called ‘beneficiaries’. According to Section 3 of the Indian Trusts Act, a Trust is an obligation annexed to the ownership of property and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner. The Supreme Court of India in W. O. Holdsworth And Others vs The State Of Uttar Pradesh, AIR 1957 SC 887 (891) held that “A trustee is legal owner of trust property and the property vests in him. He holds trust property for the benefit of beneficiaries but does not hold it on their behalf.” In Duli Chand v Mahabir Prasad etc. Trust, AIR 1984 Del 145 (DB) the court has observed that a trust is “not like a corporation which has a legal existence of its own and therefore, can appoint an agent. A trust in not in this sense a legal entity. It is possible for some of the trustees to authorize the others to file a suit but this could only be done by the execution of a power of attorney.” It has been held in H. N. Bhiwandiwala v Zoroastrian Co-op. Bank, AIR 2001 Bom 267 that, a suit against a trust is not maintainable as it is not a legal entity. It has been observed that “all the trustees must be made a party.” It was further held in N. T. P. C. v Canara Bank (1999) 97 Comp. Cas. 930 at Pages 937-38 that “Trusts created under Indian Trusts Act, 1882 are not legal entities as public trusts registered under the Societies Registration Act are.||An entity created by a group of individuals united in their cause for promoting science, arts, literature, social welfare and useful information.||A non profit organization promoting arts, commerce, education, charity, protection of environment, sports, science, research, social welfare, religion and intends to use its profits (if any) or other income for promoting these objectives.|
|Laws/Acts/Statutes/Authority||administration of public trusts although some state legislations does exist in this regard which requires a formal registration before the Charity Commissioner / Inspector General of Registration. If the trust property includes immovable property, registration of the documents of title is required to be done under the Registration Act, 1908. State enactments: Maharashtra and Gujarat (The Bombay Public Trusts Act of 1950), Madhya Pradesh (Madhya Pradesh Public Trusts Act, 1951), Rajasthan (Rajasthan Public Trusts Act, 1959), Andhra Pradesh (Andhra Pradesh Charitable and Religious Institutions and Endowments Act 1966), and Tamil Nadu (Hindu Religious and Charitable Endowments Act, 1959) Regulatory Authority: Registrar/Charity Commissioner||Society Registration Act, 1860 Regulatory Authority: Registrar of Societies||Companies Act, 2013 Regulatory Authority: Registrar of Companies|
|Nature of entity & Formation||A trust is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him for the benefit of another, or of another and the owner. A trust could be a private trust or a charitable trust. A public trust means an express or constructive trust for either a public, religious or charitable purpose.Relatively simple to form. A Trust may be set up within a week of the execution of the trust deed||• Association of seven or more persons for literary, scientific or charitable purposes. • Takes 7-10 days to get registered.||Section 8 Company is a legal entity in which the liability of members or subscribers is limited to what they have invested or guaranteed to the company. Such companies are incorporated for the promotion of charitable activities. Relatively complicated to form. Takes 1-2 months for incorporation, license and registration from the Registrar of Companies.|
|Structure||Members: Trustee & settlor Governing Structure: Single tier structure as the trustees is the ultimate authority. The trustee has absolute rights to govern and administer the trust and its activities, subject to the provisions of the trust deed.||Member: Seven or more members. Governing Structure: Two tier structure – (a)General body (b) Board of Directors||A minimum number of two members are required for setting up of a Section 8 Company. Two tier structure: (a)General body (b) Board of Directors The Board of Directors are responsible for administration and management of the company and its operations.|
|Fundraising Compliance||Donation from Government under NGO Darpan (Niti Aayog Registration). CSR Committee, CSR Activities [ Business (Corporate Social Responsibility Policy) Laws, 2014]and CSR Expenses FCRA, 2010 Alternative Investment Fund (“AIF”) under SEBI||Donation from Government under NGO Darpan (Niti Aayog Registration). CSR Committee, CSR Activities [ Business (Corporate Social Responsibility Policy) Laws, 2014]and CSR Expenses FCRA, 2010||Donation from Government under NGO Darpan (Niti Aayog Registration). CSR Committee, CSR Activities [ Business (Corporate Social Responsibility Policy) Laws, 2014]and CSR Expenses FCRA, 2010 Foreign Contribution (Regulation) Amendment Bill, 2020|
|Compliance laws||Section 11 of Indian Trusts Act, 1882 Preservation of trust property is one of the essential functions of trustees under the trust laws in India. Therefore, Subject to the provisions of the Indian Registration Act, 1877, the trustee’s duty is to cause the instrument of trust to be registered Section 14 makes it a duty of the trustee not to set up any claim to the property either for himself or in favor of third person. Section 15 [standard of care expected from trustee] Section 20 [Trust securities] Finance Act, 2020||Section 8 (2) of Companies Act 2013Section 8 (4) (i) of Companies Act 2013Section 173(1) and 174(1)|
|Compliance norms||Auditing of Accounts– if the income of private trust for the financial year exceeds Rs.2, 50, 000/- (limit under the Income Tax act for non-taxable income) then the trust must be audited by CA compulsorily. Filing of Annual Returns– after the auditing by CA the audit report is prepared in the form of Form No. 10B along with annual return of Income under Form ITR-7. Foreign Contribution Report- is submitted by every trust duly certified by CA and accompanied by Income and Expenditure Statement, the Receipts and Payments Account and the Balance Sheet within 9 months of the closure of the financial year. This report is submitted to Secretary, Ministry of Home Affairs, Government of India, New Delhi when the trust receives foreign contribution. TDS Certificate– When a Private Trust is deducting tax at source for payment of salaries to the employees who are managing the Trust Property and other such allied purposes, it needs to furnish certificates of TDS to the persons on whose behalf TDS had been collected. This has to be done within a month from the date of closure of the financial year. Publication of Accounts– in newspaper if the annual income/receipts of the trust which have been generated from the trust property exceeds Rupees One Crore VAT & Service Tax Returns– if the gross turnover of trust exceeds Rs. 15, 00, 000/-, then the trust is liable to file VAT (in every 3 months) and Service||Conduct of board meeting & general meetings Audit of books of accounts on annual basis Maintenance of accounts records Intimation of governing body list on annual basis Not using of society funds for personal use||Annual compliances: At the end of every assessment year, before 30th September, tax returns are to be filed. The financial statement shall be filed in the appropriate form ( E-FORM AOC-4), within 30 days from the last general body meeting, Limited companies need to file the Form MGT-7 with Registrar of Companies (RoC), for filing returns within 60 days of the annual general meeting. The balance sheet, profit and loss A/C, cash flow statement and other financial statements to be filed by the company for the previous financial year. Directors of the company shall file their annual report in an appropriate manner, consisting of fiscal data and corporate social responsibility. The board directors are responsible for this report. Annual general body meeting and other statutory meetings have to be conducted The company shall maintain a statutory register consisting of loans obtained, charges created, its members, etc as enumerated under section 8 of the companies act 2013. Under section 139 of the Companies Act 2013, it is mandatory for companies to appoint an auditor. The book of accounts and annual returns of the company shall be maintained. Notice as to the appointment of Auditor within 15 days of the appointment – Form ADT-1 Director’s consent form (Form DIR 2) to occupy the office within 30 days from the director’s appointment. Returns form (Form MR-1) within 60 days from the appointment of Managing Director, manager or key managerial person Tax Compliances: The Section 8 company shall be registered under Section 12A of the Income Tax Act, with the Principal Commissioner using form 10A. It must comply with the conditions specified under Section 11, so as to be eligible for the exemption The company has to be approved under Section 80G, through Form 10B|
|Relevant Documents||For registration: Trust Deed Identity proof such as Voter ID, Driving License, Adhaar Card, Passport Two photographs of which one must be of passport size Copy of the ID proof of the settlor Copy of the ID proof of each of the two witnesses and their photographs Address Proof Trust Deed on stamp paper of the requisite value Consent Letter signed by all the trustees Affidavit/Declaration signed by the settlor. No Objection Certificate (NOC) from the property’s owner that is proposed as the Registered Address for the Trust. For FCRA registration: Under Section 6(1), Foreign Contribution (Regulation) Act, 2010 (“FCRA”)||MOA & AOA Identity proof such as Voter ID, Driving License, Adhaar Card, or Passport Passport sized photographs Proof of registered address such an electricity or water bill Cover Letter requesting registration of society signed by all the founding members Non Objection letter signed by the landowner Certified copy of duly passed resolution for registration of society Declaration by the President of the Society List of all the members of the governing body along with their signatures||MOA & AOA Identity proof such as Voter ID, Driving License, Adhaar Card, Passport Passport sized photographs Proof of registered address such an electricity or water bill Digital signature certificate MOA & AOA Details of Director (When the Members Are Other Companies/LLPs) Directors Identification Number (DIN)|
Charitable institutions under Finance Act, 2020
- An electronic process of registration of charity institutions in which a Unique Registration Number (URN) will be issued to all new and existing charity institutions.
- A provisional registration (valid for three years) to be extended to new charity institutions which are yet to commence charitable activities.
- The approval/registration/notification of trusts, institutions, funds, universities, hospitals and so on under relevant provisions of the ITA for exemption from income tax will now be valid for five years. Accordingly, exempt entities would be required to approach the authorities and seek re-approval to ensure that the conditions of approval or registration or notification continue to be adhered to and they still qualify for tax exemption.
- A one-to-one matching between the donation/sum received by the exempt entity and what is claimed as deduction by the donor (assessee).
Charitable Organisations as per Income Tax Act, 1961
- Section 2(15) – Definition of charitable purpose;
- Section 2(24)(iia) – Income includes voluntary contributions;
- Section 10 – Incomes not included in total income;
- Sections 11,12, 12A – Income from property held for charitable purposes and income of trusts or institutions from contributions;
- Sections 12AA and 13 – Procedure for registration and non-applicability of Section 11 in certain cases; and
- Sections 35(1)(ii) and 35(i)(iii) – Expenditure on scientific research. (vii) Section 115BBC – Anonymous donations to be taxed in certain cases.
Courts on ‘Charitable purposes’
In the case Andhra Chamber of Commerce  55 ITR 722 (SC), it has been held that the word ‘Charity’ connotes altruism in thought and action. It involves an idea of benefiting others rather than oneself. In the case of Yograj Charity Trust  103 ITR 777(SC), it has been observed that a commercial concern is not an object of relief of the poor on the ground that it provides employment. The object should provide relief directly and not indirectly. The establishment of an industrial or commercial concern ordinarily envisages a profit making activity and cannot be said to be a charitable purpose on the ground that it will provide employment to some poor persons. In the case of Ahmedabad Rana Caste Association  82 ITR 704 (SC), it was observed that to serve a charitable purpose, it is not necessary that the object should be to benefit the whole of mankind or all persons in a particular country or state. It is sufficient if the intention to benefit a section of the public, as distinguished from a specified individual, is present. However, the section of the community sought to be benefited must be sufficiently defined and identifiable by some common quality of a public or impersonal nature.
Exemptions under Income Tax Act
It is to be noted here that any non profit organisation engaged in charitable purposes, can claim exemptions of its income from tax provided that it fulfils the conditions laid down in Sections 11, 12 A and 13 of the Income tax act. The conditions have been summarized as follows:
- The non-profit organization must utilize 85 % of its income in any financial year (1 April to 31 March) on the objects of the organization. In case the organization is unable to spend 85 % of its income in the previous financial year due to late receipt of income or any other reason, the trustees may exercise the option to spend the surplus during the immediately following 12 months. Surplus income can also be accumulated for a period ranging from 1 to 5 years, for specific projects.
- The funds of the organization are invested/deposited only in approved securities specified under section 11(5) of the Income Tax Act. · No part of the income or property of the organization is used or applied directly or indirectly for the benefit of the founder, trustee, relative of the founder or trustee, or a person who has contributed in excess of Rs.50,000/- to the organization in a financial year.
- The organization files its return of income annually within the prescribed time limit.
Special Exemption for Certain Institutions Under Section 10: In order to qualify for exemption under various clauses of Section 10, the association or institutions should
- Apply its income only for the purposes of scientific research, education and medical relief, etc.
- Should not operate for the purpose of making profit, however, if profits are incidentally earned the exemption would not be denied.
12 A Registration: The primary reason for getting this registration under section 12A is to get the benefit of exemption from the Income Tax on the Income/revenue, therefore it is not an obligatory registration. Documents required along with Form 10 A are:-
- A self-certified copy of the instrument used to establish the Institution .
- Three preceding financial years’ Annual financial statements and related Legal Compliances for NGOs
- MOA & AOA or the objectives & activities
Donations to Charitable Institutions: NPOs can also secure income tax exemption for other donations made to them by getting certificates under Section 80G, 35AC, 35(1)(iii), 35CCB of the Act.
- 80 G certificate:- A donor (whether an individual, association, company, etc.) is entitled to a deduction (in computing his total income) if he makes a donation to a nonprofit organization enjoying exemption under section 80G of the Income Tax Act. The amount donated, however, should not exceed 10% of the donor’s gross total income as reduced by the deductions (other than the deduction under section 80G) for the purpose of rebate. If the donation is in excess of 10% of the donor’s gross total income, the amount in excess of 10% cannot be considered for deduction under this section. Donations in kind (such as computers, medical equipment, vehicles, etc.) are not eligible for deduction under section 80G. The donation must be a certain sum of money. With an 80 G certificate donors can claim 50% deduction from their taxable income (as distinct from the tax payable) Almost any NPO who is exempt from income tax can be approved under this section. The NPO needs to obtain the approval of the Commissioner of Income Tax (CIT). The CIT issues a letter granting approval under section 80 G, with a number and period of approval (can be upto 5 years at a time).
- Approval of CIT:-An application in form 10G in triplicate is to be made, accompanied by documents like:- Copy of registration granted under section 12A or copy of notification issued under section 10(23) or 10(23C); Notes on activities of institution or fund since its inception or during the last three years, whichever is less; Copies of accounts of the institution or fund since its inception or during the last three years, whichever is less.
Any registered entity/ NGO, operating for five years or more and has made at least INR 10 Lakhs in the previous three years to attain its main objectives audited by a qualified chartered accountant, such NGO is eligible for FCRA registration. They also need to be registered with the Ministry of Home Affairs. The Foreign Contribution (Regulation) Act, 2010 consists of a framework for regulating and controlling the acceptance and utilization of foreign contribution and foreign hospitality. The FCR Rules require the NGOs receiving more than a crore rupees or equivalent of foreign contribution to disclose the information. Such disclosure is to be done through the direct efforts of the NGO as per Rule 13. The FCRA certificate is valid for a period of five years and must be thereafter renewed in the prescribed manner. NGOs not eligible for registration can seek prior approval from FCRA for receiving foreign funding. This permission is granted only for a specific amount of foreign funding from a specified foreign source for a specific purpose. It remains valid till receipt and full utilisation of such amount.
The Foreign Contribution Regulation (Amendment) Act 2020 provides:
1. any person seeking prior permission, registration or renewal of registration must provide the Aadhaar of its office bearers, directors or key functionaries, as an identification document,
2. not >20% Foreign funds to be used as administrative expenses, (currently the limit is 50%),
3. public Servants to be barred from receiving funds from abroad.
Amendment of S17: every person granted certificate or prior permission under S12 shall receive foreign contribution only in an account designated as FCRA Account to be opened in such branch of SBI at New Delhi as notified by govt.
Overseas Charitable Institutions:
Overseas charities seeking to establish their branch or liaison offices in India are required to obtain approval from the Reserve Bank of India (RBI) under the provisions of Foreign Exchange Management Act, 1999. Documents required are: –
- Name of the applicant charitable organisation.
- Date and place of incorporation or registration.
- Contact information.
- Details of the financial holdings of the organisation.
- Brief description of its activities.
- Details of the location and proposed activities of the organisation’s branch or liaison office.
- MOA, AOA or Bye-laws.
Once the RBI has granted its permission to establish a branch or a liaison office in India, the initial permission lasts for three years after which the organisation must apply for an extension. Additionally, it is mandatory to file Annual Activity Certificate as well as its audited balance sheets for every financial year showing that the activities undertaken by the said branch or liaison office are in accordance with the approval given by the RBI. If the overseas charitable organisation decides to register as a trust, society, or company in India, all the relevant laws applicable to a domestic trust, society, or company become applicable. Once the overseas charity has been properly set up in India, it is not generally treated differently in India as compared to charities set up under domestic law.
FURTHER READING LINKS:
A. REGULATION OF FUNDS COLLECTED FOR CALAMITY RELIEF http://lawcommissionofindia.nic.in/reports/Report191.pdf
B. A STUDY ON LAWS GOVERNING CHARITABLE ORGANISATIONS IN INDIA http://kb.icai.org/pdfs/PDFFile5b278125378c60.97365597.pdf
C. A REVIEW OF CHARITIES ADMINISTRATION IN INDIA https://ngosindia.com/images/planning-commission-review-charities-admn.pdf
D. FOREIGN CONTRIBUTION (REGULATION) AMENDMENT BILL, 2020 https://www.prsindia.org/billtrack/foreign-contribution-regulation-amendment-bill-2020
E. ASSESSMENT OF RELIGIOUS AND CHARITABLE TRUSTS https://eparlib.nic.in/bitstream/123456789/759928/1/pac_12_08_1998.pdf
F. STANDING COMMITTEE OF FINANCE (15th LOK SABHA) https://www.prsindia.org/sites/default/files/bill_files/Indian_Trusts_Amendment_Bill_2009.pdf
G. CHARITY AID FOUNDATION REPORT https://www.bain.com/contentassets/069bf9cf144e4b8bbdda8a85386a5611/bain_brief_india_philanthropy_report_2019.pdf
The contents in the document are only for informative purposes and must not be construed as legal advice. Every effort and care has been taken to avoid errors or mistakes. Omission, error or mistake, if any, may be brought to our notice. In no event the law firm shall be liable for any damage direct or indirect, special or incidental resulting from or arising out of or in connection with the use of the information provided in this document.