RESOURCE MATERIAL FOR WORKSHOP ON Accountability & Compliances in Voluntary Sector
Item
- Title
-
RESOURCE MATERIAL FOR WORKSHOP ON
Accountability & Compliances
in Voluntary Sector - extracted text
-
CREDIBILITY
ALLIANCE
RESOURCE MATERIAL FOR WORKSHOP ON
Accountability & Compliances
in Voluntary Sector
Author & Resource Person :
DR. MANOJ FOGLA
email: mfogla@yahoo.com
I
(i)
rief Contents
Brief Contents
(i)
(H)
(viii)
01
13
Chapter-1 .
Chapter-2
Contents in Details
Index of Annexures
Overview of Governance & Board of VOs
Notice, Agenda, Meetings, Resolutions & Minutes
Chapter-3
Meetings through Video Conferencing
24
Chapter-4
Internal Control Procedures
31
Chapter-5
Chapter-6
Chapter-7
Chapter-8
Chapter-9
Reporting and Monitoring
Expenditure made at Field Level
Income Tax - Registration Procedure
Exemption of Income from Income Tax
Accumulation and Investment of Income
39
42
44
Chapter-10
Deemed Application
57
Chapter-11
Inter-Charity Donations &
Networking NPOs
62
Chapter-12
Forfeiture of exemption under
Section 13 an overview
Business Activities by a Voluntary Organisation
Treatment of Capital Gains
Income Tax - Privileges to the Donors u/s 80G
70
74
78
84
Chapter-16
Income Tax - Privileges to
the Donors u/s35AC
94
Chapter-17
Chapter-18
Chapter-19
Chapter-20
Chapter-21
Audit & Filling of Return
Permanent Account Number (PAN)
Tax Deduction Account Number (TAN)
TDS on Income of NPOs
Brief Analysis of FCRA 2010
99
103
105
109
112
Chapter-22
Frequently Asked Questions
(FAQs) on FCRA*
126
Legal Due Diligence for Donors
153
Annexures
162
Chapter-13
Chapter-14
Chapter-15
Chapter-23
48
51
di)
ontents in details
Chapter-1
OVERVIEW OF GOVERNANCE & BOARD OF VOs
Ownership &. Governance of VOs
Technical Overview of Governance in a VO
General Body and Its Importance
The Board and its Importance
.
Roles & Responsibilities of Board
Composition of the Board
Presence of Employees on the Board
Election/Selection of the Board Members
Board Processes
Legislative and Executive Functions
Grievance & Judicial Function
Closely and Widely held VO
Permanent or Long term Board Members
Executive Leadership & Legislative Leadership
Difference between A CEO & General Secretary
Advisory Committees
Chapter-2
01
01
02
03
04
04
05
06
07
07
07
08
09
09
09
10
CEO and Management Staff
Conflict of Interest
Independent Directors
Ex-officio Board Members
General Members
10
10
10
11
11
12
NOTICE, AGENDA, MEETINGS,
RESOLUTIONS & MINUTES
13
Introduction
General Members & Meeting
Board Meetings & Its Frequency
Notice & Agenda
Recommended Agenda for
Quarterly Board Meetings
Quorum
13
13
14
14
15
16
(Hi)
Proxy
Chairperson of the Meeting & Its Role
Casting Vote of the Chairperson
The Secretary and Its Role
Meetings through Electronic Medium
Minutes
Motion
Resolutions
Resolution by Circulation
Special Invitees to the Meeting
Chapter-3
Chapter-4
17
17
18
18
19
19
21
21
22
23
MEETINGS THROUGH VIDEO CONFERENCING
24
Introduction
Video Conferencing and Meetings
through Circulation
Circular issued by Ministry
of Corporate Affairs
Only Video-Conferencing is
permissible for Meetings
Issues for NPOs in using other
Electronic Mediums For Meetings
Convening and Notice for Such Meeting
Quorum for such Meeting
Place for such Meeting
Can a Trustee/ Director Totally
avoid Physical Presence
Can both General or Board Meeting be held
Recording Attendance & Signing of Records
Minutes & Recording of meeting
through Video Conferencing
Can Directors & Trustees
Participate through Intermediaries
Role & Responsibility of the
Chairman or Secretary
Adjournment of Meetings
through Video Conferencing
24
INTERNAL CONTROL PROCEDURES
Introduction
24
25
25
26
26
27
27
27
28
28
28
28
29
29
31
31
(iv)
Chapter-5
- * Basics of Good Interna! Control System
Important Features of Internal Control
Internal Control over Cash and Liquid Funds
Internal Control over Bank Transactions
Internal Control over Salary & Wages
Internal Control over Capital
Expenditures & Fixed Assets
Internal Control over Investments
Internal Control over Inventory
31
32
33
34
35
REPORTING AND MONITORING
Reporting
Reporting to the Board/
Governing Body/Executive Committee
Reporting to the Chief Functionary
Reporting to the Government
Reporting to Funding Agency
Monitoring
Monitoring through Internal Auditing
39
39
36
37
37
39
40
40
40
41
41
Chapter-6
EXPENDITURE MADE AT FIELD LEVEL
42
Chap ter-7
INCOME TAX - REGISTRATION PROCEDURE
44
Introduction
Application for Registration
Time Limit for making an Application
The Authority to whom Application is to be made
Granting & Refusal
Opportunity of being Heard
Can we appeal against Rejection
Time Limit for Passing the Order
What if no order is passed within the Time Limit
Can Registration once granted be Cancelled
Condonation of Delay
Registration of NPOs of National Importance
Chapter-8
EXEMPTION OF INCOME FROM INCOME TAX
Introduction
44
44
44
45
45
45
46
46
46
46
47
47
48
48
(V)
Types of Income &. their Treatment under the Act
Minimum amount required to be Utilised
Compulsory Audit
Flowchart showing Various Income
and their Treatment
Chap ter-9
Chapter-10
Chapter-11
48
49
49
49
ACCUMULATION AND INVESTMENT OF INCOME
51
Overview of Provisions related with Accumulation
Accumulation of Income
Forms of Investments Section 11 (5)
The two permissible types of Accumulation
Circumstances where Accumulation is permitted
Filing of Form 10 under Rule 17
Power of CIT to Condone the Delay
Guidelines for Condoning Delay
51
52
53
53
53
54
54
55
DEEMED APPLICATION
Deemed Application where Money is
n’ot entirely spent in Previous Year
57
The Methodology Involved
57
Overall Summary
61
INTER-CHARITY DONATIONS &
NETWORKING NPOs
Introduction
’
Donation to another Charitable
Organisation is Application
Donations to other Charitable Institutions
after 01.04.2002
Donation out of Current Income is not Banned
Ammendment in Finance Act, 2003
Tax planning through Deemed Application
Working through others only
NPOs providing Non Financial support only
Charging Remuneration or Administrative Cost
57
62
62
62
63
63
64
64
65
66
67
FCRA Issues for a Facilitating/
Networking Organisation
68
Overall Summary
69
(Vi)
Chapter-12
FORFEITURE OF EXEMPTION UNDER
SECTION 13 AN OVERVIEW
Outline of Section 13
70
Scope of Section 13
71
What happens if a Public Charitable Trust's
* Income is not Applied for the benefit of the Public
Law pertaining to Remuneration
& Benefits to Interested Person
Who are Interested Person
Chapter-13
BUSINESS ACTIVITIES BY A
VOLUNTARY ORGANISATION
Introduction
Overview of the law relating
to Business Activities of NPOs
Separate Books of Account for Incidental Business
The term Incidental is very Wide
Some Permissible Incidental Issues
Recent Changes including Finance Act, 2012
Chapter-14
Chapter-15
70
TREATMENT OF CAPITAL GAINS
71
71
73
74
74
74
75
76
77
77
78
Background
78
Insertion of Section 11 (1 A)
The provisions related with Capital Gains
Quantum of Gains deemed to have been applied
Can capital gains be applied for charitable purposes
Overall Summary
78
79
79
82
82
INCOME TAX - PRIVILEGES TO
THE DONORS U/S 80G
Introduction
Registration under section 80G
Documents to be filed with Form 1OG
Conditions to be fulfilled under section 80G
For Deduction Under 80G over
? 10,000 must be paid in other than Cash
84
84
84
84
85
85
Renewal & Permanent nature of Section 80G
86
Cases confirming the perpetual
effect from 1-4-2009
86
(vii)
Illustration of benefits under section 80G
Quantum of Deduction under section 80G(l)
Certain aspects related with donations
under section 80G
Overall Summary
Chapter-16
Chapter-17
INCOME TAX ■ PRIVILEGES TO
THE DONORS U/S 35AC
Introduction
Registration under section 35AC
National Committee
Where the application is to be made
The application and its Enclosure
Additional Information regarding the
Project/Scheme to be submitted
Certificate to be issued to the Donor
Deduction of contribution under section 80GGA
Overall Summary
AUDIT & FILLING OF RETURN
r
Chapter-18
Chapter-19
Requirement of an Audit Report
Filling of Return
Delayed Submission of Return of Income
Documents to be attached with the Return
Revision or Correction of Mistakes
Recapitulation
87
88
90
91
94
94
94
94
95
95
95
96
96
97
99
99
99
100
101
101
101
PERMANENT ACCOUNT NUMBER (PAN)
Introduction
Application Procedures
Necessity and uses of PAN
Penalties
103
TAX DEDUCTION ACCOUNT NUMBER (TAN)
105
Introduction
Procedure for obtaining Tax
Deduction Account Number (TAN)
105
103
103
103
104
105
(viii)
Chapter-20
Chapter-21
Mandatory Nature of Provisions
Types of payments requiring
Tax Deduction at Source
Deposit of Tax Deducted at Source
105
Issue of Certificate
107
Returns to be Furnished by the Organisation
107
Interest, Penalties and Punishment
108
TDS ON INCOME OF NPOs
When no tax needs to be deducted or
tax may be deducted at lower rate
BRIEF ANALYSIS OF FCRA 2010
106
106
109
109
112
Introduction
The Scope of FCRA Expanded
Does FCRA apply to Commercial or
Business Organisations
What is Foreign Contribution
Panchayat has been defined as Legislature
112
112
FC from Relatives or Scholarship, Stipend etc.
113
Organisation of the Political Nature
Transfer of Funds to FC Registered Organisations
114
Transfer of Funds to Unregistered Organisations
114
115
116
117
117
118
118
119
Administrative Expenses
Application for Registration & Prior Permission
Powers for Rejecting an Application
Suspension of Registration Certificate
Cancellation of Registration Certificate
Foreign Company & Foreign Source
Business/Consultancy Income of an NPO
Persons Specifically debarred from
Receiving Foreign Contribution
Renewal of Registration every 5 years
Power to Prohibit sources from which
FC can be accepted
Multiple Bank Account
112
113
113
114
119
120
121
121
Disposal of Fixed Assets on Dissolution
121
Speculative Activities
122
(ix)
Disclosure of Information if Receipts
Exceed one crore
122
Custody of Funds and Assets in the
Event of Cancellation
122
Reporting by Banks
123
Filing of Return & Method of Accounting
123
Which Return should be Filed for the Year 2010-11
124
Additional.Requirement of Filing Form FC-7
Preservation of Accounting records for 6 Years
124
124
Compounding of Offence
125
Chapter-22
FREQUENTLY ASKED QUESTIONS
(FAQS).ON FCRA*
126
Chapter-23
LEGAL DUE DILIGENCE FOR DONORS
153
Introduction
Declaration of an Organisation
to be of a 'Political Nature’
153
Administrative Expenditure
154
Validity of the Registration Certificate
154
153
Change in Members of Executive
Committee/Governing Council
155
Consultancy Income of an NPO
156
Requirement to put
Information in Public Domain
Inter Organisational transfer of FC Fund
157
157
Power to Notify Sources from
which FC can be Accepted
Bank Account related Issues
Prohibition of Speculative Investment
Suspension of Registration Certificate
Persons Specifically debarred from
receiving Foreign Contribution
General Legal Compliances
158
159
159
159
160
161
(X)
ndex of Annexures M..
Annexure-01
NOTICE AND AGENDA FOR A MEETING
162
Annexure-02
A MODEL OF PROXY FORM
163
Annexure-03
A MODEL FORMAT OF MINUTES & RESOLUTIONS
164
Annexure-04
CIRCULAR NO. 21 OF 2011 ISSUED BY MCA, DT.02.07.2011
167
Annexure-05
CIRCULAR NO. 27 OF 2011 ISSUED BY MCA, DT.20.05.2011
169
Annexure-06
CIRCULAR NO. 28 OF 2011 ISSUED BY MCA, DT.20.05.2011
172
Annexure-07
A MODEL FORMAT OF CHEQUE ISSUE REGISTER
176
Annexure-08
A MODEL FORMAT OF FIXED ASSETS REGISTER
177
Annexure-09
A MODEL FORMAT OF MUSTER ROLL FORM
178
Annexure-10
A MODEL FORMAT OF AGRICULTURE
INPUTS STOCK REGISTER
179
Annexure-11
A MODEL FORMAT OF AGRICULTURE
PRODUCE STOCK REGISTER - MILK ,
180
Annexure-12
TEXT OF FORM NO. 10A
181
Annexure-13
TEXT OF FORM NO. 56
182
Annexure-14
TEXT OF FORM NO. 10B
185
Annexure-15
TEXT OF FORM NO. 10BB
188
Annexure-16
TEXT OF FORM NO. 10
192
Annexure-17
MODES OF INVESTMENT OF ACCUMULATED
INCOME UNDER SECTION 11(5) AND
RULE 17C AND SECTION 10(23D)
194
Annexure-18
EXTRACT OF CBDT CIRCULAR NO. 8, DATED 27-8-2002
198
Annexure-19
CIRCULAR ON PERPETUAL NATURE
OF 10(23C) & 80G RENEWALS
200
Annexure-20
QUANTUM OF PENALTY ON
COMPOUNDED OFFENCES
203
1
'hapter 1
Overview of Governance & Board
of Voluntary Organisations
OWNERSHIP & GOVERNANCE OF VOs
1.01 Voluntary Organisations (VOs) deal in public money for public utility
purposes, however for legal and practical purposes the ownership of all funds
lie with a group of people. In other words, VOs are privately held and privately
managed organisations for public purposes.
1.02 A good VO should exemplify openness & transparency by having desirable
criteria for selection and rotation of Trustees/Board Members.
1.03 The VO law normally varies from country to country and normally within
the country also there are various kinds of registration which permit different
Board and trustee structure. For instance a public charitable trust can be formed
with two1 or more trustees who are permanent in nature. Such law belong to an
era when charities were entirely based on the funds/assets bequeathed by a
particular donor/author. But when such trust is registered for fund raising and
donor based projects, it raises a serious question on the public ownership of
the VO. Similarly various other forms & registration also provide the possibility
of the ownership being in the hands of a private group of persons.
1.04 VOs also struggle in defining the role and responsibilities of the Trustees
which results in a governance imbalance where the Board may hinge from being
dormant to overactive and interfering.
1.05 The different forms of registration also create different ownership
structures, for instance under trust law there is no provision for General Body,
but in case of a society there can be a General Body which appoints the Board.
1
In law there can even be a sole trustee, however for public trust the staiutoiy authorities
particularly the Charity Commissioner, Mumbai generally insists on min 3 tixistees
2
1.06 The diversity of skills and the ability of the Board member to assume
and exercise authority also require careful support from the policies and norms.
This issue endeavours to address some of such issues.
TECHNICAL OVERVIEW OF GOVERNANCE IN A VO
1.07 Adrian Cadbury Committee Report2 defined governance as a system which
directs and controls an organisation. A VO is an artificial legal person therefore,
it is governed by various group of people having a very clearly defined role to
play.
1.08 All registered voluntary organisations are a distinct legal entity and
therefore an artificial legal person. It may be noted that a trust is not considei ed
recognised.
as legal person under the general law and the trustees collectively are recognised.
However, for income tax and FCRA purposes a trust is also considered as a
legal entity. The legal status of an organisation comes with legal obligations
such as :
i)
Statutory audit of accounts
ii)
General & Board Meetings
iii)
Filing of Returns
iv)
Adhering'to the Bye-laws
v)
Area of operation .
vi)
Election of office bearers etc.
vii) Working only for the definite objectives
1.09 The above mentioned are some of the de jure aspects of the governance
system of a voluntary organisation. An organisation has to complement and
add upon these aspect to build a sound governance system, keeping in view the
size and the nature of the activities. The flow chart on the next page depicts an
overall picture of various person/committees which go on to build an effective
governance system.
2
In 1992 Adnan Cadbury Committee submitted a report on Corporate Governance and the social responsibilities of
corporate organisations. In tliis report the issue of effective and fair governance was i-aised internationally. Consequently,
raising tlie quality and standards of corporate governance has been taken as a very serious issue throughout the world
and lot of legal and managerial changes have come in order to ensure that the governance an organisations is just and
fair to all stakeholders. In the VOs sector similar efforts for refonn are also underway.
1
'hapter 1
Overview of Governance & Board
of Voluntary Organisations
OWNERSHIP & GOVERNANCE OF VOs
1.01 Voluntary Organisations (VOs) deal in public money for public utility
purposes, however for legal and practical purposes the ownership of all funds
lie with a group of people. In other words, VOs are privately held and privately
managed organisations for public purposes.
1.02 A good VO should exemplify openness & transparency by having desirable
criteria for selection and rotation of Trustees/Board Members.
1.03 The VO law normally varies from country to country and normally within
the country also there are various kinds of registration which permit different
Board and trustee structure. For instance a public charitable trust can be formed
with two1 or more trustees who are permanent in nature. Such law belong to an
era when charities were entirely based on the funds/assets bequeathed by a
particular donor/author. But when such trust is registered for fund raising and
donor based projects, it raises a serious question on the public ownership of
the VO. Similarly various other forms & registration also provide the possibility
of the ownership being in the hands of a private group of persons.
1.04 VOs also struggle in defining the role and responsibilities of the Trustees
which results in a governance imbalance where the Board may hinge from being
dormant to overactive and interfering.
1.05 The different forms of registration also create different ownership
structures, for instance under trust law there is no provision for General Body,
but in case of a society there can be a General Body which appoints the Board.
1
In law there can even be a sole trustee, however for public trust the statutory authorities
particularly the Chanty Commissioner, Mumbai generally insists on min 3 tivistees
2
1.06 The diversity of skills and the ability of the Board member to assume
and exercise authority also require careful support from the policies and norms.
This issue endeavours to address some of such issues.
TECHNICAL OVERVIEW OF GOVERNANCE IN A VO
1.07 Adrian Cadbury Committee Report2 defined governance as a system which
directs and controls an organisation. A VO is an artificial legal person therefore,
it is governed by various group of people having a very clearly defined role to
play.
1.08 All registered voluntary organisations are a distinct legal entity and
therefore an artificial legal person. It may be noted that a trust is not considered
as legal person under the general law and the trustees collectively are recognised.
However, for income tax and FCRA purposes a trust is also considered as a
legal entity. The legal status of an organisation comes with legal obligations
such as :
i)
Statutory audit of accounts
General & Board Meetings
ii)
iii)
Filing of Returns
iv)
Adhering to the Bye-laws
v)
Area of operation
vi)
Election of office bearers etc.
vii) Working only for the definite objectives
1.09 The above mentioned are some of the de jure aspects of the governance
system of a voluntary organisation. An organisation has to complement and
add upon these aspect to build a sound governance system, keeping in view the
size and the nature of the activities. The flow chart on the next page depicts an
overall picture of various person/committees which go on to build an effective
governance system.
In 1992 Adiian Cadbury Committee submitted a report on Corporate Govemance and the social responsibilities of
coiporate organisations. In this report the issue of effective and fair governance was raised internationally. Consequently,
raising the quality and standards of coiporate governance has been taken as a veiy serious issue throughout the world
and lot of legal and managerial changes have come in order to ensure that die govemance an organisations is just and
fail- to all stakeholders. In the VOs sector similar efforts for reform are also underway.
3
1.10 All VOs are accountable to the laws under which they are enacted and
avail subsequent registration. Some of such statutes in India are :
Societies Registration Act, 1860 (along with state enactment)
i)
ii)
The Companies Act, 1956 (for Section 25 company)
iii)
Income Tax Act, 1961
iv)
Foreign Contribution Regulation Act, 2010
v)
Various others statues as an when applicable.
GENERAL BODY AND ITS IMPORTANCE
1.11 General Body is the ultimate body which it regulates and controls through
the Board. A General Body is like the people of a democratic country who can
determine or replace the parliament, but cannot assume the functions of the
parliament. General Body constitutes and reconstitutes the Board and keeps
control over certain statutory issues and key functions of the Board. Major
legislative and statutory decisions are taken by the General Body, however, all
key issues are normally recommended by the Board for the approval of the
General Body.
1.12 Important and statutory nature decisions are taken at the General Body
level. Some of such decisions could be as under :
(i) Annual General Meeting
(ii) Appointment of Auditor
(iii) Election of Office Bearers
(iv) Amendment of bye-laws
(v) Purchase of large properties, etc.
(vi) Approval of Annual Secretaries Report.
(vii) Such other decision as may be provided in the Memorandum of
Association
1.13 The general members play a very effective role in the governance of an
organisation. A large and empowered General Body'can only ensuie that the
organisation functions on democratic principles. Many organisations have a very
small General Body or even a co-terminus committee i.e. both the Board and
the General Body comprise same set of persons. Such organisations do not
reflect sound democratic structure of governance.
4
THE BOARD AND ITS IMPORTANCE
1.14 The Board happens to be the de facto most powerful body of an
organisation and in the absence of an effective Board it is very difficult to ensure
good governance in any organisation. The Board is legally accountable for the
legislative and executive functions. The Board is responsible for determining all
the policies, systems and processes. The Board is also resposnsible for the safe
guard and optimum utilisation of the funds, assets and resources. All decisions
of enduring nature are taken at the Board level and the Board delegates authority
and responsibilities to the CEO and other managerial persons.
ROLES & RESPONSIBILITIES OF BOARD
1.15 The Board should formulate the mission statement of the organisation
and should revisit it every three years in order to ensure that the programmes
and resources are in consonance with it.
1.16 The Board should formulate the structure of authority and responsibility
to be delegated to the CEO and other staff.
1.17 The Board should determine the procedure of electing/selecting the CEO
and the compensation thereof.
1.18 The Board should formulate important policy documents and guidelines
on gender, human resource, finance etc.
1.19 The Board should appoint the statutory auditor and the internal auditor
if required. Both the auditors should directly report to the Board. The
appointment of statutory auditor should be finally approved by General Body
on recommendation of the Board.
1.20 The Board should determine and approve the annual budget and
allocations.
1.21 The Board should determine and approve the bank accounts to be
operated and the signatories thereof.
1.22 The Board should develop proper policy and systems regarding the title,
safeguard, location and verification of fixed assets.
5
1.23 The Board should ensure strict adherence with all statutory compliances.
It should also ensure that requirements/obligations towards other stakeholders
is diligently done.
1.24 The Board should constitute Advisory Committees for special functions
or for specific purposes.
1.25 The Board should review the performance of the CEO and other senior
management staff on annual basis.
1.26 The Board should prepare a position paper every three years on issues
such as (i) Resource Mobilisation (ii) Financial and Institutional Sustainability,
(iii) Programmatic relevance, reach and impact, (iv) Risk and contingencies.
1.27 The Board should carefully position its involvement in the management
of the affairs of the organisation. Generally the Board should not be interfering
in nature, however, certain powers of approval should be retained by the Board
depending on the size of the VO. A suggested list of the additional functions of
Board could be as under :
•
approval of projects and activities to be undertaken
periodical perusal of the reports from the Secretary/CEO and other
key functionaries
approval of purchase of assets for large financial transactions
•
approval of project budgets and investments
•
finalising annual financial statements
•
staff capacity building measures
•
•
•
appointment of staff
internal control measures
resourcfe mobilisation, etc.
•
control over admin, expenses
•
corpus and institutional sustainability
•
•
COMPOSITION OF THE BOARD
1.28 The Board should be ideally between 5 to 12 members unless the legal
requirements are different.
6
1.29 The Board should, normally, not have members who are permanent in
nature except the case of institutional nomination. In case of a trust normally a
clause regarding permanent trustees is found, in such instances it is desirable
that the total voting right of the founder trustees is less than 50%.
1.30 The composition of the Board should be clearly defined in terms of the
diversity of the skills required for discharge of the Board functions. The balance
of the Board should be maintained in terms of gender, finance & other specialised
skills, stakeholders and distance & availability.
PRESENCE OF EMPLOYEES ON THE BOARD
1.31 Not more than 2-3 employees should be Board members with voting
rights or at any point the employees participation should not exceed 40-50% of
the Board members. If two or more employees are on the Board then they
should not be relatives. The main issue is to keep the Board independent of the
execution functions. If people involved in execution and implementation are
dominating the Board then the Board shall cease to be an independent body.
1.32 In the context of the issue of employees on Board it is generally
misunderstood with participation of employees on Board as a stake holder.
However, this issue is much larger than inviting representatives from the
employee fraternity on Board. This issue is about the presence of members who
are compensated for the services rendered on whole time basis. Such members
could be :
Representatives of employees who become Board member by virtue
of being an employee.
Elected Board members who are in whole time service in terms of
the bye laws.
Pre-defined executive heads like CEO or ED who find an ex-officio
position in the Board.
1.33 One or more of the above circumstances may be relevant depending on
the bye laws and governance structure of the organisation.
1.34 It may be noted that the sum total of all such Board members should not
have any material influence on the decision making of the Board. Further there
should be a clear & written policy on conflict of interest where trustees and
staff (or any stake holder) are involved.
7
ELECTION/SELECTION OF THE BOARD MEMBERS
1.35 There should be a clearly defined policy for recruitment, election,
selection of trustees or Board members.,The induction of new trustees should
be through an open process providing the opportunity of being elected/selected
to a wider group of stakeholders. The process should include use of
methodologies such as advertising for new trustees through various medium.
1.36 The Board members should retire and be re-elected on the basis of
rotation. For instance every two years a third of the Board can retire. Though
the Board members usually get re-elected but the technical possibility of replacing
the entire Board in an election process should be avoided.
BOARD PROCESSES
There should be a aprocess for orienting and sensitising
of the trustees
1.37 L
.
regarding their responsibilities in particular as well as in general.
1.38 There should be a process through which clear distinction between
strategic matters and operational matters should be made and a position paper
should be drafted and revisited annually.
1.39
The Board should set key performance indicators for themselves.
1.40 The Board should, ideally, meet once in every quarter, however, it is
recommended that the Board should meet at least twice in a yeai i.e. once in
every six month.
1.41 An annual report on the financial or other contributions of the Board
members should be prepared to assess the stakes and ownership of the Board
members.
LEGISLATIVE AND EXECUTIVE FUNCTIONS
1.42 A legislative body or function generally pertains to something legal or
statutory in nature. In a country the parliament is the legislative body and the
bureaucracy generally implements or executes the legislations passed by the
parliament. However, in context of a VO a legislative body does not imply creating
8
statutory legislations which in any case are binding on everybody. The legislative
functions imply creating legislations and policies for the organisations which
may or may not be statutorily required by the law of the land. Some legislative
documents of an VO are :
Memorandum of Association
Articles of Association
Various policy documents
Various resolutions passed by the General Body and Board etc.
1.43 The General Body is the highest body for legislative decisions and the
Board is the highest body for executive decision making. However, for all practical
purposes both the legislative and executive functions are held by the Board,
though certain key and statutory legislative decisions are approved by the general
members only. The legislative functions cannot be delegated, they include :
Legal compliances
-
Custodian of assets and functions
Amendment and Compliance with the stated Memorandum of
Association, Trust Deed etc.
Compliance with the stated Articles of Association, By laws etc.
Laying down policies and norms of execution.
1.44 The Board is also responsible for effective and optimum execution of all
the activities and responsibilities of the VO. Normally the management team
headed by the CEO is delegated the executive functions. The Board plays an
oversight role in the execution. The Board delegates the executive functions
depending on the size of the VO and operations. In very small organisations the
Board may play a more proactive role in the execution/implementation. However,
it is generally expected that the Board should play the role of controlling and
directing the various activities and processes without itself being involved in
the direct execution.
GRIEVANCE AND JUDICIAL FUNCTION
1.45 The governance structure, as per the registration, provides the legislative
and executive powers to the Board. However, inherently the Board also posseses
judicial or conflict resolution powers which are generally not very well
articulated.
9
1.46 All accountable VOs should have a conflict resolution and grievance
mechanism within the organisation. It could be through constitution of 'grievance
committees'. However, it has to be ensured that all employees and stake holders
have an equal opportunity in representing themselves in such committees. If
the complaints are against the CEO or any Board member then there should be
a mechanism in place to ensure a fair trial to the complainant.
CLOSELY AND WIDELY HELD VO
1.47 When an organisation has a Board of less than 7 members and General
Body of less than 12 members for long periods, (say 7 yeans) it can be considered
as a closely held organisation. A closely held organisation is legally permissible,
however, such structure are generally created when a corporate, family or group
of people create a VO for public purposes from there internal properties and
funds. A VO which accesses donations and grants from organisations and public
at large should not be closely held by a small group of people.
PERMANENT OR LONG TERM BOARD MEMBERS
1.48 As discussed in the above para organisations should not have a majority
of long term or permanent Board members unless it is privately funded.
1.49 The name and percentage of trustees or Board members who have served
for more than 15 years on the Board either continuously or through intermittent
tenures should be separately declared.
EXECUTIVE LEADERSHIP &
LEGISLATIVE LEADERSHIP
1.50 A good governance structure should maintain a clear distinction between
executive leadership and legislative leadership. The examples of such distinctions
are :
The Chairman should not be the Executive Director or CEO
The employees should not have an influencing impact on the Board
decision making.
10
DIFFERENCE BETWEEN A CEO & GENERAL SECRETARY
1.51 A General Secretary of a VO is the legal representative of the Board as
far as its legislative functions of are concerned. The General Secretary may or
may not retain the executive functions. A CEO is the highest executive position
and it does not possess legislative powers.
1.52 The General Secretary is an integral part of the Board of a VO. A CEO
may or may not be provided an ex-officio position on the 'Board as the
representative of the employees responsible for execution and implementation.
ADVISORY COMMITTEES
1.53 The Board is normally supported by advisory committees which consists
of members possessing specialised expertise and mandate. An organisation may
have, for example, committees on finance, purchase, specific programme, etc.
Certain VOs also have advisory Boards which are independent and external.
CEO AND MANAGEMENT STAFF
1.54 The CEO and staff members are responsible for the day to day
management of the organisation. The CEO happens to be the focal point around
which the entire organisation revolves. He is the executive head of the
organisation, the CEO generally does not possess legislative powers. The CEO
interacts with most of the stakeholders such as donors, alliance partners,
communities and also with the Board etc.
CONFLICT OF INTEREST
1.55 There should be a clearly defined policy to ensure that any conflict of
interest is properly dealt with. The issues which may be regarded as material
interest are as under :
•
Appointment of relatives in Board or senior management.
•
Ownership or partial ownership in organisations which are engaged
or may seek business or consultancies.
11
•
•
•
•
•
•
Payment of fees and remuneration.
Directorship or management position in other VOs.
Providing consultancies in personal capacities.
Having commercial interest in any decision or resolution.
Having direct or indirect relationship with the donor or donee
organisations.
When contracts are awarded to relatives of the Board members.
1.56 The Board of Directors of the trustees should declare such interests.
The interested trustees and directors should not participate in the decision
making and voting process for that particular resolution. An annual declaration
of such interests should be placed in the annual general meeting.
INDEPENDENT DIRECTORS
1.57 The term 'independent director' is more relevant in the corporate world.
In the voluntary sector most of the directors are in any case expected to be
independent. Clause 49 of the listing agreements on corporate governance defines
independent directors as follows: "For the purpose of this clause the expression
‘independent directors’ means directors who apart from receiving director’s
remuneration, do not have any other material pecuniary relationship or transactions
with the company, its promoters, its management or its subsidiaries, which in
judgment of the Board may affect independence of judgment of the directors.
1.58 The non-executive independent directors are not supposed to receive
any financial consideration except the sitting fees.
1.59 In case of VOs all the directors are not supposed to take any kind of
benefit or privilege from the organisation. Therefore, in letter and spirit all the
directors in case of VOs are independent in nature. However, as a concept it
needs to be ensured that the directors or trustees are not enjoying any undue
benefit or are not involved in any conflict of interest transaction. One of the
ways of keeping the independence of the Board is to have a well aiticulated
'conflict of interest’ policy.
EX-OFFICIO BOARD MEMBERS
1.60
The memorandum of association of the society can be suitably drafted
12
so as to have provision regarding Ex-officio Board members. An Ex-officio Board
member denotes the right of a particular formal position holder to participate
and vote in the Board proceeditigs. For instance, an VO may provide that the
District Magistrate will be one of the Board members, then who ever is the
District Magistrate will automatically have the right of a normal Board member.
GENERAL MEMBERS
1.61 The VOs registered under the Societies Registration Act or under the
Companies Act or any other law which require both the General Body and the
Board, should ensure that there is a transparent & appropriate policy regarding
general members and general meetings.
1.62 The General Body should be the body of general members with equal
voting rights. The membership should be open to all section of stakeholders.
The size of the General Body is determined by the nature of VOs work, generally
movement based VOs have larger General Body. However normally the size of
General Body shouldVary between 10 to 30 members. The General Body should
always be larger than the Board, ideally 3 times or more the size of the Board.
13
'hapter 2
Notice, Agenda, Meetings,
Resolutions & Minutes
INTRODUCTION
2.01 Sound governance largely depends on the effective interaction between
the decision making persons of the organisations. It is very important that regular
meetings are conducted for various policy matters and legislative and executive
decision making.
2.02 The general members and the Board/trustees exercise the power
entrusted to them as per the governing documents such as Trust Deed,
Memorandum of Association and Articles of Association. The provisions of the
statute of registration also regulate the procedure for conducting Board and
General Meetings.
2.03 In an VO two types of meetings are normally held, (i) General meetings,
(ii) Board meetings. The VOs which are formed as companies or registered under
the Societies Registration Act, normally have both General Body and the Board.
But VOs registered as trusts normally do not have a General Body and therefore
the trustees happen to be the ultimate body.
GENERAL MEMBERS’ MEETING
2.04 A meeting of the general members normally should be held at least once
in a year to discuss and approve important matters like approval of audited
accounts, appointment of statutory auditors, review of activities during the year,
election of the Board members. This meeting is called Annual General Meeting
(AGM). It is normally conducted within six months from the end of the financial
year and all the activities and accounts for the previous financial year are placed.
A
14
2.05 Apart from the AGM, General Meetings can also be called during the
year if the circumstances so demand. All General Meetings other .than the AGM
are normally called as Extraordinary General Meeting (EGM) or Special General
Meeting (SGM).
2.06 Whether it is an Annual General Meeting or Special General Meeting, all
the members of the organisation have a right to participate and vote. Therefore
all the decisions of enduring significance should be taken in a General Meeting.
BOARD MEETINGS
& ITS FREQUENCY
2.07 The meeting of the governing body or the Board of an organisation should
ideally be held at least once in every three months. The Board may meet more
frequently if it is required.
2.08 A Board meeting in every quarter is not legally mandated under any
central statute. Even Section 25 company registered under the Companies Act
are allowed to have only Board meeting once in every six months. All other
registered companies are required to hold Board meetings at least once in every
three months and four meetings in a year. However Section 25 companies are
exempted from the four meeting clause [vide Notification No. SO 1578 dated 17-1968] as they can have Board meetings only once in every six months.
2.09 The Trust Deed or Articles of Association may specifically provide for
the number and procedure of Board meetings to be held during the year.
NOTICE & AGENDA
2.10 A notice of every meeting is required to be given in writing. Care should
be taken to provide for the length of the notice while framing the bye laws of
the organisation. In the absence of any time limit of notice in the bye-law, it is
desirable to give 21 days notice for a General Meeting and 7 days notice for a
governing body meeting.
2.11 Alongwith the notice of a meeting; it is necessary to enclose of list of
items to be discussed/resolved, such list is known as AGENDA. It is very important
that the agenda of a meeting is sent in advance preferably with the notice, it helps
A
15
a member to prepare for the meeting. Issue of a meticulous agenda in advance
shows the transparency and democratic functioning of an organisation.
2.12 Some matters which normally may form a part of the agenda are as
under:
♦ Reading and confirming minutes of the previous meeting.
♦
Any matter arising out of the previous minutes.
♦
Issues which were defered in the previous meeting.
♦
Various specific matters planned to be discussed in the meeting.
♦
Any matter involving related party transactions requiring confidential
or restricted decision making.
♦
Matters requiring special or unanimous resolutions.
♦
♦
Listing out the action points.
Date of next meeting and deadlines of documentation.
♦
Closure or adjournment of meeting.
A format of notice and agenda is enclosed as per Annexure-1.
RECOMMENDED AGENDA FOR
QUARTERLY BOARD MEETINGS
2.13 The Board of an organisation should perform specific task in various
quarters of the year. Apart from the various mandated and disci etionaiy
functions, the Board should preferably include the following issues in the agenda
for various quarters :
♦ In the Board meeting held during the January-March quarter the
Board should include in the agenda issues such as (i) approving
programmes/budgets of forthcoming year (ii) status of statutory
compliances to be done within 31st march (iii) major deviation in
planned and actual activities.
♦
In the Board meeting held during the April-June quarter the Board
should include in the agenda issues such as (i) Review of the previous
year, (ii) Performance appraisal (iii) Pay determination for CEO/key
personnel (iv) Status of closing and finalisation of accounts and
reconciliations.
16
♦
In the Board meeting held during the July-September quarter the
Board should include in the agenda issues such as (i) Recommending
audited accounts and annual report of previous year for the General
Body for approval (ii) Nominating directors/Board members to be
approved at AGM (iii) Recommending auditor for AGM to approve.
♦
In the Board meeting held during the October-December quarter the
Board should include in the agenda issues such as mid year review of
programmes, financials etc.
QUORUM
2.14 The term quorum implies the minimum number of members that must
be present to make the proceedings of a meeting valid. Normally the bye-laws
of an organisation specify the quorum required for different meetings. An
organisation should carefully devise the requirement of Quorum for general
and Board meetings.
2.15 In case of Board meetings if the quorum is high (example : 5096 of Board
members) then it may become difficult to hold valid meetings. And if it is too
low (example : 2 of Board members) then important decision may be taken
without the involvement of the majority. Therefore, the bye-laws may be drafted
or amended accordingly.
2.16 In case of General Meetings even a small percentage of the quorum may
prove to be very high (example : 2596 of members in case of an organisation
having 1000 members) then it may become difficult to hold valid meetings. And
if it is too low (example : 3 of general members) then important decision may be
taken without the involvement of the majority. Therefore, the bye-laws may be
drafted or amended keeping in view the size of the General Body.
2.17 If the bye laws or trust deed is silent then it is suggested that the quorum
for General Meeting should be at least one third of'.the total members in case
where the total members are less than 30. For VOs with larger General Body a
suitable basis quorum may be fixed depending on the size and nature of the
organisation. For Board meetings at least 3396 of the Board members should be
present to form the quorum. If the quorum is not present in any particular
meeting then the meeting should be adjourned to a future date by the members
present on that day. It is not advisable to convene a meeting without quorum on
the same day after'allowing an adjournment of 30 minute or 1 hour. If on the
adjourned future date again the quorum is not present then the members present
17
(not less than 2) should be considered as valid quorum. The future date for the
adjourned meeting should ideally be within 7 to 14 days.
2.18 It may be noted that proxies are not permissible for the determination
of quorum both in general and Board meeting.
PROXY
2.19 Proxy refers to a person or a representative empowered to attend a
meeting on behalf of a member. Any member of an organisation who is entitled
to attend and vote at meetings is also entitled to appoint a proxy who can also
attend & vote. A proxy has to carry an authorisation form ; the member entitled
to attend the meeting should authorise his/her representative in writing in a
proxy form, see Annexure-2.
2.20 A proxy form should be deposited in advance at the registered office of
the organisation atleast two days before the date of the meeting.
2.21 A proxy is not permissible for Board meetings and should be used in
General Meetings only. Proxy should preferably be avoided in a voluntary
organisation.
CHAIRPERSON OF THE
MEETING & ITS ROLE
2.22 All meetings are normally facilitated and directed by a Chairperson. The
bye-laws of the organisation normally provides for the person who would be
the Chairperson and preside over the meetings. In the absence of any such
provision in the bye-laws, one of the members present should be elected as the
Chairperson for that particular meeting. A Chairperson as the leader of the
Board provides in effective decision making.
2.23 The Chairperson should ensure that the notice and agenda for the meeting
were properly served prior to the meeting.
2.24 The Chairperson should ensure that the time is managed to complete all
the agenda items, he/she should also ensure that all the present members get a
fair opportunity to participate and express their views.
18
CASTING VOTE OF THE CHAIRPERSON
2.25 The Chairperson shall have a Casting Vote ip all meetings. It is desirable
that the bye laws should also provide for such a casting vote. The Chairperson
can pass or reject a resolution in case of a tie in the. number of votes. In other
words, whenever there is a tie over a resolution the Chairperson can vote once
again and resolve the issue.
2.26 The Societies Registration Act is silent about the casting vote of the
Chairman but clause 54 of table A to schedule 1 of the Companies Act, 1956
clearly provides that in case of equality of vote, the Chairperson shall be entitled
to second or casting vote. This convention is normally followed by all types of
organisation.
THE SECRETARY AND ITS ROLE
2.27 The Secretary of the organisation is generally responsible for the
convening of the meeting. He is required to send the notices, agenda, and making
relevant document prior to the meeting.
2.28 The secretary is responsible for the planning of various factors, timelines
and procedures related to the meetings and resolutions. Some examples are as
under :
♦ Identifying an appropriate venue and time.
♦
In case of election sharing the nomination procedures prior to the
meeting.
♦
In case of General Meeting there might be matters which needs to be
first approved at a Board meeting; approval of accounts, appointments
of auditors etc.
♦
Setting a time table for the agenda items.
♦
Availability of the necessary bye laws, documents and records at the
time of the meeting.
♦
The necessary logistic arrangements for special resolution and voting
wherever necessary.
♦
Preparing proper records of the meeting which later could be
minuted.
19
♦
♦
♦
Preparing a proper attendance register to be signed by all the members
present, such formal attendance is the most important evidence of a
meeting.
Verifying and Recording proxies, quorum, absence, special invites
etc.
Keeping track of the various decisions taken by the Board and the
implementation thereof.
MEETINGS THROUGH
ELECTRONIC MEDIUM
2.29 The various statute governing the charity law are silent about the various
modern forms of meeting through electronic mode such as video conferencing
etc.. However, under section 2, 4, 5 and 81 of the Information Technology Act,
2000 various electronic medium/platform used for meeting, communication,
voting etc. shall be valid. The Section 81 of the Information Technology Act,
2000 provides that the provisions shall have an overriding effect on all existing
provisions. In other words it shall be legally permissible to conduct meeting
through electronic mode.
2.30 The Ministry of Corporate Affairs, Government of India has also issued
various circulars* regarding the validity of General meeting and Board meetings
through electronic mode.
2.31 Under Section 13 of the Information Technology Act, 2000 it shall be
permissible to send notices and agenda through electronic medium such as
email. However, the time period of notice should be as per the bye laws or the
applicable statute of the organisation. (The detailed procedure of Board and General
meeting through Electronic Medium shall be elaborately discussed in an
independent issue of CA Learning Series.)
MINUTES
2.32 Minutes is the formal record of the proceedings of the meeting. It is
important to record the summary of the proceedings of the meeting in a written
*
Cu cularNo.21/2011, dated 02.05.2011 issued by Ministry of Corporate Affairs, Government of India.
Circular No. 27/2011. dated 20.05.2011 issued by Ministry of Corporate Affairs, Government of India.
Circular No. 28/2011, dated 20.05.2011 issued by Ministry of Corporate Affairs, Government of India.
20
form. A minutes book can be of loose sheets chronologically bound together or
a bound register. The pages of the minutes should be-consecutively numbered.
2.33 Minutes of the previous meeting should be read and confirmed at the
beginning of the meeting. The confirmed minutes should be signed by the
chairperson and subsequently it cannot be altered or corrected. A minutes
remains informal and unconfirmed until they are approved in the subsequent
meeting. A confirmed minutes have to be signed by the chair person in order to
become a legally valid document enforceable in the court of law.
2.34 The minutes should be written by a person who is not directly involved
in the decision making process.
2.35 Minutes are not considered to be open documents available for
inspection for the public at large, unless the bye-laws provides for any such
requirement. The minutes should be available to all the Trustees and formal
persons such as statutory auditors or the evaluator or auditor appointed by a
donor or government who substantially contribute to the organisation. The
general members are entitled to inspect the minutes of all the General Meetings.
Generally outsiders do not have legal rights to access Board and General minutes,
however, an organisation may consider providing access to such outsiders as it
may deem fit in the interest of transparency.
2.36 The minutes book can be broadly divided into two types of recording of
discussions, endorsements and approvals :
♦ Minutes of discussions.
♦ Minutes of resolutions.
2.37
Minutes of discussions: A minute book should also includes the various
discussions and happening along the agenda items, apart from the resolutions.
The recording of such discussions should be on the following principles and
procedure :
♦
A brief overview of the circumstances or relevant facts around the
item of discussion.
♦
♦
♦
Summary of the views and counter views on the matter of discussion.
Summary of the reasons leading to a decision or rejection of a motion.
Summary of the procedure followed for the approval, endorsement
or rejection of a motion; voting, unanimous etc.
2.38 Minutes of resolutions : The main part of the minutes is to record the
formal resolution. A resolution is a motion which ha^ been approved or endorsed
21
by the required majority. A resolution should be recorded in "inverted commas"
preferably in Italics.
2.39 All the members are required to sign in an attendance register during
the meeting, but if the number is small then the members can sign in the minutes
itself. A model format of minutes with resolutions is given as per Annexure-3.
MOTION
2.40 A motion is a proposed resolution or a recommendation which is formally
placed by any member for the consideration of the members present. Normally
a motion would become a resolution if it is approved through voting or
unanimously.
2.41 The members present may formally approve, endorse or just take note
of the various motions moved during the meeting. A motion is formally approved
only when the committee or the Board have the final authority for such approval.
For example the Board may approve a motion regarding purchase of an asset
but it can only endorse a motion regarding appointment of auditor which can
be finally approved by the General Body only.
RESOLUTIONS
2.42 A resolution is a formal expression of the decision taken by the members
in a meeting. It is required to specifically mentio.n the decision or opinion in the
shape of a resolution alongwith the number,of members voting in favour and
against that particular resolution.
2.43 There are two kinds of resolutions i) General Resolution where a simple
majority is required to pass, ii) Special Resolution, where a higher percentage
of support is expected to pass the resolution. Normally the support of 3/4th of
the members present is sufficient for a special resolution. However one should
verify its bye-laws for the numbers required to pass a special resolution. A
resolution should be written in a short, unambiguous and affirmative language.
If there is any document or policy which is relied upon then the mention of
such policy should be made inside the resolution itself. Few examples are as
under :
- RESOLVED "to change the registered office of the society from
to.............................. under
22
the power conferred upon the Board under clause xx of Articles of
Association, subject to the approval of the'.Registrar of Society under
section xx of the Societies Act".
Further Resolved "that the Mr./Ms.......................................................... be
authorised to do the necessary documentation and representation in
this regard".
RESOLVED "to purchase 2 acres of land for a consideration of
in ‘X’district for the organic nursery for the ’Y’project
under the power conferred upon the Board under clause xx of Articles of
Association". Further resolved "that the recommendation of the purchase
committee regarding the price and procurement parameter be approved.
[Encl purchase committee]
Further Resolved "that the Mr./Ms.......................................................... be
authorised to do the necessary documentation and representation in this
regard".
RESOLUTION BY CIRCULATION
2.44 The Board or the Trustees may pass resolutions by circulation when it is
not possible to call a physical board meeting. The relevant issues in this regard
as discussed hereunder.
2.45 The organisation can circulate the copy of a resolution to all the members
of the Board/Trustees for approval by circulation. The Board members should
give their consent by way of physically signing on the resolution and send it
back to the organisation. The resolutions which are passed by circulation are
required to be noted and ratified by the Board in its next meeting.
2.46 No 'resolution by circulation’ can be passed if the number of Trustees/
Directors available at less than the number which is necessary to form the
quorum.
2.47 The passing a resolution by circulation does not involve any meeting,
therefore serving of notice or agenda is not necessary. However, it is important
to send all the relevant papers and informations explaining the purpose and
need of passing the resolution by circulation.
2.48 The various statutes, under which the voluntary organisation are register,
are silent about the types of resolution which could be passed by circulation.
23
However, under Section 292 of the Companies Act, it is provided that various
key decision cannot be taken by a circulatory resolution. In context of NPOs
some issues which should not be decided through circulation are suggested as
under:
♦ Issue related with recommendation regarding admission or removal
of members or board members.
♦ To invest, borrow or to give loan.
♦ Giving grant to other voluntary organisation.
♦ Related party transaction where any director is interested.
♦ Shifting of the registered office.
♦ Appointment for removal of senior staff.
♦ Appointment of Internal auditor/project auditors.
♦ Approval of half yearly or annual accounts.
♦ Approval of annual budget.
♦ Sale on purchase of high value assets.
♦ Legal matters of material nature.
SPECIAL INVITEES TO THE MEETING
2.49 The Board or the Trustees may invite special invitees to some of the
meetings. The following issues are pertinent in this regard :
♦ A Board member should not send representative as special invitee.
♦ A special invitee may be a technical or a professional person who is
invited for specific agenda items. In such cases the special invitee should
normally participate for that particular agenda item only.
♦ The statutory auditor, advisors, donor representative etc. may be invited
as special invitees. Such special invitees should participate in the
discussions but should not vote against or in favour of a motion.
♦ As a principle special invitees should not possess any voting right and
the organisation should formulate a policy regarding the role and
participation of special invitees in a meeting.
24
hapter 3
Meeting through
video conferencing
INTRODUCTION
3.01 The Board Members of an NPO can be located in different geographical
location and it is always difficult for member staying in far away places to
attend Board meetings regularly. The administrative and travel cost is also an
important issue in case of NPOs. Therefore, it becomes important to understand
the legally acceptable ways of conducting general and Board meetings with the
help of technology and video conferencing.
3.02 There is no rule or guidance under the Societies or Trust Act regarding
holding meetings through video conferencing. However, the Ministry of
Corporate Affairs, Govt, of India has issued directions and guidelines regarding
holding of meetings through electronic means and video conferencing. The
guidelines issued by the Ministry of Corporate Affairs, Govt, of India can be a
gi eat reference document for conducting meetings through electronic medium
in the NPO sector. In this issue the relevant issues in context of NPOs are
discussed. The Information and Technology Act, 2000 recognisation electronic
record and electronic means of communication.
VIDEO CONFERENCING AND
MEETINGS THROUGH CIRCULATION
3.03 In this issue we are discussing meetings held through video conferencing,
various other modes of meeting such as Tele conference, Meeting through
Ciiculation, Skype etc. shall be discussed in another independent issue.
3.04 It may be noted that, meeting through video conferencing demand
adequate infrastructure and technology, such meetings do not come in the
25
category of meetings through circulation, because the resolutions are not required
to be circulated again for confirmation of the participating members. However,
in other forms of meetings such as Tele conference, Skype etc. it would be
necessary to circulate the resolutions for confirmation.
CIRCULAR ISSUED BY
MINISTRY OF CORPORATE AFFAIRS
3.05 The Ministry of Corporate Affairs has issued 3 circulars in this regard.
The 1st Circular No. 21/2011, dt. 02.05.2011 clarifies the legal validity of using
electronic platform under section 2, 4, 5 and 81 of the Information Technology
Act, 2000. The 2nd Circular No. 27/2011, dt. 20.05.2011 clarifies the legal validity
and’ the procedures to be followed in use of electronic mean with regard to
general meetings. The 3rd Circular No. 28/2011, dt. 20.05.2011 claiifies the legal
validity and the procedures to be followed in use of electronic mean with regard
to Board meetings. All the three circular are provided Annexure 4, 5 & 6. It may
be noted that any meeting which is not in conformity to the above said circulars
does not become illegitimate or void as these circulars do not apply to NPOs,
they are for reference purposes only.
ONLY VIDEO CONFERENCING IS
PERMISSIBLE FOR MEETINGS
3.06 It has been clarified that only Video Conference facility i.e. audio-visual
electronic communication facility is allowed for conducting meetings. Any other
mode of meeting such as Tele-conferencing or Audio Conferencing or
participation through Telephone/Mobile shall not be permissible. However, any
such meeting through Tele-conferencing or Audio Conferencing may also be
legitimatised by getting the resolution approved through circulation.
3.07 NPOs who have Directors in different parts of the country or even
international Directors, can employ video conferencing for their Board meetings.
Such meetings should be recorded, currently only NSDL & CSDL have been
approved as approved video-conferencing facility. Any such audio-visual
electronic meeting should enable all persons participating in that meeting to
communicate simultaneously with each other without an intermediary, and to
participate effectively in the meeting.
26
3.08 However, as the above guidelines are in context of companies, the NPOs
may devise practical and legitimate ways of holding e-meetings. Some suggested
practices are discussed here under.
ISSUES FOR NPOS IN USING OTHER
ELECTRONIC MEDIUMS FOR MEETINGS
3.09 It has to be understood that the minutes of a meeting are the most
important evidence for legal purposes. Therefore, an organisation should be
careful about ensuring the evidence value of all the meetings.
3.10 The legal frequency of NPOs is also important, the NPO registered as
section 25 Companies are required to have minimum two board meetings in a
year. The remaining forms of organisation i.e. are subject to various state laws
and their own bye laws are required to have one or two compulsory board
meetings. Therefore, an NPO should confine to the legitimate and approved
methods of board meeting for at least 2 meetings in a year.
3.11 For fast decision making, NPOs may also have electronic meetings through
Skype, Tele-conference, Video conference etc. But from an evidence point of
view Skype and Tele-conference might be difficult to record. In case of Tele
conference one may have voice recording but such voice recording has not
been recommended under the circulars issued by MCA as an approved means.
However, an organisation may consider conducting additional board meetings
(over and above the minimum requirement) through Tele-conference or Skype
by keeping voice recording as well as create transcript based minutes as
evidence. The minutes should be signed by circulation or in future meetings for
legitimacy.
CONVENING AND NOTICE
FOR SUCH MEETING
3.12 The notice for such meeting should be made as per the bye laws of the
organisation. All the Board members should be informed and confirmation should
be obtained. In the absence of confirmation it may be presumed that the
27
particular Trustee/Board member may physically attend the meeting. The notice
should contain contact number, email address of the Secretary or designated
person responsible for convening the meeting.
3.13 The notice should provide information regarding the available facility of
video conferencing and also about the access and participation in the meeting.
QUORUM FOR SUCH MEETING
3.14 The participation through Video conferncing should also be counted for
the purposes of quorum. A roll call should also be made at the conclusion of the
meeting or at re-commencement of the meeting after every break to ensure
presence of quorum throughout the meeting.
PLACE FOR SUCH MEETING
3.15 Ideally the Board meeting should be held at the registered office or
approved place, however, all the Board members need not physically participate.
Therefore, the legally approved place for holding such meeting as per the trust
deed or bye laws of the registered office should be the locus/place of such
meeting. If there is no specific bar in the trust deed or bye laws regarding the
place of meeting, then the organisation may also resolve to consider the place
of the Chairperson and Secretary as the place of the meeting.
3.16 The place of the Chairperson and Secretary should be considered as the
place of the meeting only in the cases of Board meeting. In case of general
meeting the registered office or approved place should only be used for
conducting meetings.
CAN A TRUSTEE/DIRECTOR
TOTALLY AVOID PHYSICAL PRESENCE
3.17 All Trustee/Directors should attend at least one meeting in a year
physically. The organisation should ensure that the Directors are not skipping
the physical presence through out the year.
28
CAN BOTH GENERAL OR
BOARD MEETING BE HELD
3.18 There is no legal bar in holding both general and Board meetings through
video conferencing. However, in both the cases it needs to be ensured that all
the persons eligible for attending the meeting should have appropriate access
to the technology and infrastructure for such meetings.
RECORDING ATTENDANCE
& SIGNING OF RECORDS
3.19 All the members or Trustees who have given consent for attending the
meeting and have participated in the meeting, will be deemed to have signed the
attendance and the records and minutes as may be required. All the records
pertaining to minutes shall be placed and signed by the Chairperson who has to
be physically present. In the Subsequent meetings the minutes of the last meeting
should be placed before-the Chairperson and should be the first agenda item
for confirmation.
MINUTES & RECORDING OF MEETING
THROUGH VIDEO CONFERENCING
3.20 All meetings made through video conferencing should be recorded and
proper arrangement should be made for storing the soft copies with adequate
back up. In addition to the video recording the minutes of the meeting should
be written as usual. The draft minutes of the meeting should be circulated in
soft copy within 7days to all the members/Directors/Trustees who participated
and doubts or clarification should be incorporated.’If the doubts or clarification
are serious and have a direct bearing on the resolution then such issues should
be taken up in the next meeting.
3.21 The minutes should also disclose the mode of attendance of various
members/Directors/Trustees in all the past meetings.
CAN DIRECTORS & TRUSTEES PARTICIPATE
THROUGH INTERMEDIARIES
3.22
It is not permissible to participate through electronic mode with the
29
help of an intermediary. The persons who are not tech-savvy cannot be allowed
any support person for participation in such meeting. Such persons have to be
physically present.
ROLE & RESPONSIBILITY OF THE
CHAIRPERSON OR SECRETARY
3.23
The Chairperson or Secretary of the Meeting should ensure the following:
•
•
•
•
•
To take attendance at the beginning of the meeting and ensure the
quorum throughout the meeting. The name of the persons absent
should also be declared and confirmed. If the meeting gets
disconnected then the quorum and attendance should be taken again
at the time of re-commencement.
Every member, Trustee, Director should provide the full name,
location and a declaration that no other person is participating in
the meeting.
Every member, Trustee, Director should confirm that the audio and
video quality is good and they are confortable with it.
In case of dissent over any motion the Chairperson or Secretary should
make another roll call and record the dissent and assent.
Should safeguard and ensure the integrity and decorum of the
meeting.
•
Should ensure that the video conference facility and equipments are
available to all the participating persons.
•
To ask for repetition or reiteration of any statement if it is not clear
or any participant request for such repetition or reiteration.
•
•
To prepare the minutes of the meeting.
To provide a summary of the meeting in the end of the meeting. The
chairman of the meeting shall announce summary of decisions taken
at the meeting in respect of each agenda item and names of the
directors who have consented/dissented to those decisions.
ADJOURNMENT OF MEETINGS THROUGH
VIDEO CONFERENCING
3.24
Normally Board meetings are adjourrted to future date if the quorum is
30
not present and the number of persons present in such future meeting
automatically form the quorum. The question arises whether in the meetings
through video conferencing also the same norm for quorum apply in case of
adjournment. It is desirable that if a meeting through video conferencing is
adjourned even then the quorum requirement should not be lifted in an adjourned
meeting. It may be noted generally in an adjourned Board meeting the quorum
requirement are waived and the members present form the quorum. Such
waiver should not be given in case of adjourned meetings through video
conferencing.
3.25 If the quorum is not complied in an adjourned meeting held through
video conferencing then such meeting should be adjourned to a further date
and physical Board should be convened. In such physically present meeting the
norms pertaining to quorum in case of adjourned Meeting can be applied. In
other words, the norms pertaining to quorum in case of adjourned meeting
should not be applied to meeting through video conferencing but can be applied
in meetings where members are physically present.
31
'hapter 4
Internal Control Procedure
INTRODUCTION
4.01 Internal Control implies development of systems within the
organisation to ensure efficient functioning and minimise the possibilities of
mismanagement and inefficiency.
4.02 The nature and extent of Internal Control can,be developed on the
basis of size and activities of the organisation. It is very difficult to recommend
any universal system of internal control for all organisations. Therefore it is
important to understand the features and mechanism of Internal Control. All
organisations should develop their own systems of Internal Conti ol depending
on their needs and resources.
BASICS OF GOOD INTERNAL
CONTROL SYSTEM
4.03
i) Proper allocation of functional responsibilities within the
organisation.
ii) Proper operating and accounting procedures to ensure the accuracy
and reliability of accounting data and safeguard of assets.
iii) Quality and competence of personnel with regard to their duties and
responsibilities.
iv) The review of the work of one individual by another whereby the
possibility of fraud or error is minimised.
32
IMPORTANT FEATURES OF
INTERNAL CONTROL
4.04
i) An organisational chart depicting the hierarchy of the authority and
responsibilities.
ii) The organisational chart showing a clear allocation of duties and
responsibilities of officials and employees.
iii) Rotation of duties of employees dealing with cash, stocks, stores and
other valuables and also at various projects.
iv) Preparation of an accounting manual.
v) The budget covering all aspects of expenditure/allocation of funds
and receipts of funds.
vi) System of budgetary control, periodical review of actual expenditures
and receipts.
vii) Where an organisation has more than one project or office expending
or receiving funds, all the above six points stated are required to be
adhered to at each centre/office.
viii) Further the branches or smaller offices are required to send at
predetermined intervals i.e. depending upon the size of the
organisation daily/weekly/fortnightly/monthly/statements of all
receipts, expenses, stocks etc.
ix) Complete reconciliation of figures between different project offices
and head office. Any unreconciled element should be looked into
immediately.
x) Advances given to the staff for expenses etc. should be entered as
advance in the name of the employee. The entire money unutilised
should be returned immediately to the cashier. Regular review of
advances should be done to ensure timely settlement.
xi) Surprise verification of cash, stock, assets, investments etc. by the
internal auditor or the organisation executives.
xii) Maintenance of records as per the requirements of statute in force
and as directed/desired by funding agencies, government grant
authorities.
xiii) All the work should be completed within the time frame stipulated
and records should be authenticated.
33
xiv) All the surplus funds should be properly invested keeping in view
the provisions of income tax as well as the safety and return on
investments.
xiv) The organisation should have adequate insurance! cover for all its
assets including cash in safe and in transit. It is advisable to get fidelity
cover for employees handling cash.
xv) Regular board meetings and the involvement of the board members
in decision making and review of work.
INTERNAL CONTROL OVER
CASH AND LIQUID FUNDS
4.05 With regard to cash in hand and bank the following points should be
considered :
i) The physical custody of cash should remain in the hand of a
responsible person and if possible cash in hand should be kept
under dual custody.
ii) The amount of cash in hand should be kept at minimum possible
level and all surplus cash should be immediately deposited into
bank.
iii) Payments as far as possible should be made through account payee
cheques/drafts only.
iv) The authority to make payments should be defined in relation to the
amount involved. For bigger amount the authority to approve should
lie with the senior functionary of the organisation. The name of the
officials and the limits upto which they are authorised to sign
cheques and approve payments should be specified.
v) All payments and expenses should be supported by bills, cash memos,
invoices, challans with the authorisation of the competent authority.
vi) The internal auditor or the management should carry out random
physical verification of cash in hand, fixed deposits etc., periodically,
vii) Where separate petty cash is maintained for small expenditures then
a fixed predetermined (Imprest) amount should be given to the petty
• cashier. The cash holding limit should be low and reasonable.
34
viii) The overall cash holding limit including the petty cash for the
organisation should be fixed and proper insurance policy should be
taken against it.
INTERNAL CONTROL OVER
BANK TRANSACTIONS
4.06 In India it is mandatory to have a separate bank account for Foreign
Contributions notified by the Ministry of Home Affairs. It should be ensured
that only foreign contributions are received in this account and no domestic
receipts of any nature should be deposited in this account.
4.07 For local funds, separate bank accounts should be opened and such
funds should not be mingled with the FC account.
4.08 Bank accounts should be reconciled every month and bank reconciliations
statements should be prepared and filed for verification by the internal auditors
and statutory auditors.
4.09 Bank account should be operated on joint signatory basis. Postdated
cheques should not be issued. Further the authorised signatories should never
sign blank cheques in any case.
4.10 It is desirable to have two or three approved authorised signatories for
operation of bank accounts. No person should be allowed to operate the
accounts individually even for small amounts.
4.11 The NGO should maintain a cheque issue register. In Annexure-7 the
proforma of Cheque issue register is provided.
4.12 Cheques issued should only be "Account Payee cheques” unless it is
office cash withdrawal.
4.13 Cheque books should be under the lock and key of some responsible
and accountable person.
4.14 Cheques received should always be deposited on the same day or the
next day. Any delay should be reported with reasons.
4.15
The organisation should issue cheques only if sufficient balance is there
35
in the bank account. It may be noted that bouncing of the cheque is a serious
crime as per Indian laws.
4.16 At the end of the year Bank Balance Confirmation Certificate should be
obtained from each of the banks for the purpose of audit.
INTERNAL CONTROL OVER
SALARY & WAGES
4.17 The employment should be approved by competent authority and the
pay structure and all other perks of each employee should be given in writing
to the accounts departments.
4.18 All adjustments from payroll on account of new appointments, leave,
allowances, recoveries, deductions, termination, suspensions etc., shall be made
only after receiving proper authorisation from the competent authority.
4.19 The Accounts Department/Head of Accounts/Accountant shall be
responsible for accounting of all payroll adjustments, monthly payroll processing
and payment of salaries to the staff.
4.20 All information relating to the payroll is confidential and care must be
taken to maintain confidentiality.
4.21
Records for each employee showing following particulars should be kept:
i) Date of Employment
ii) Complete resume of employee with references.
iii) Rates of pay.
iv) Increments & promotions.
v) Leave availed/encashed.
vi) Retireme,nt/dismissal.
vii) Advances outstanding.
4.22
Attendance Register with checking in and out time.
4.23 All payments of salaries and wages is preferably to be made in account
payee cheques or otherwise cash. Salary register is to be maintained.
36
INTERNAL CONTROL OVER CAPITAL
EXPENDITURES & FIXED ASSETS
4.24 Purchase of fixed assets and capital expenditures should be approved
by the board and should be as per the budget.
4.25 The purchase should be done after inviting tenders/quotations. The
most suitable supplier should be identified after making comparative statements
and accordingly purchase order should be issued.
4.26
The fixed assets should be recorded at actual cost in the books of
accounts. The following are a part of the actual cost of a fixed asset:
i) Taxes, Customs/Excise Duties and or other Duties/Levies incurred
on the asset.
ii) Cost of Insurance and Freight.
iii) Cost of Commissioning and erection, if any.
iv) Legal Charges.
v) Consultancy Fees.
vi) Architectural Fees.
vii) Interest on Loans taken specifically for the project until completion
of the Project.
4.27 When land is purchased, the actual cost of land shall include stamp duty,
legal fees and cost of development of the land.
4.28 In case of additions or repair to the assets, it should be noted that large
amounts which result in creation of new asset or increase the capacity of the
asset should be added to the actual cost. Small amounts spent on repair
maintenance etc. should not be capitalised and should be treated as revenue
expenditure.
4.29 Record of fixed assets should be maintained in a register. The format
of such register is available as per Annexure-8.
4.30 The location of each asset should be explicitly mentioned in the register
and any changes therein should be noted.
4.31 Physical verification of all assets, with correctness of location is to be
annually made by the internal auditor or organisation personnel.
4.32
All assets requiring insurance should be insured and periodically renewed.
37
INTERNAL CONTROL OVER INVESTMENTS
4.33 All NGOs should pay careful attention with regard to the investments.
Firstly under Section 11 (5) of the Income Tax Act investments are to made
in specified securities only. Secondly judicious planning and use of funds depends
largely on proper investment decisions. It has been seen that huge amount lie
in savings bank and current account yielding negligible interest.
4.34
An investment register should be maintained, showing :
a) the nature and description of the investments.
b) in the case of investments in companies, the name of company in
which the investment has been made.
c) certificate numbers.
d) distinctive numbers.
e) cost, amount paid-up and face value.
f) the names in which the investments have been made.
g) due dates for receipt of interest.
h) date on which dividends are ordinarily received.
i) maturity dates.
j) All the investments kept by an authorised official with adequate
security measures.
k) All investments should be periodically verified physically with the
Register.
l) Periodic review of all investment income, to ensure timely receipt.
m) All transactions of investments should be authorised by the board or
a person to whom power has been delegated.
INTERNAL CONTROL OVER INVENTORY
4.35 In the context of an NGO, inventory means items such as consumables,
durables which are normally used/exhausted within a year.
1) Even though the consumables and durables are to be used in a year
there should be a proper inventory control.
38
2) NGOs should maintain a stock register showing the opening balance,
receipts, issues and closing balance.
3) The purchases and issues should be based on proper requisition slips.
4) It should be ensured that valuable funds of the society are not locked
unnecessarily in slow moving stocks.
5) If large inventories of blankets, food packets etc, for distribution
are held they should be under the proper custody of one/two person,
who should be accountable for it.
39
'hapter 5
Reporting & Monitoring
REPORTING
5.01 Reporting is a process through which an organisation presents a
reflection of its current status, especially the financial situation. Reporting is
important because it enables not only those in authority but also the public at
large to know whether activities planned have been carried out including
reporting on any deviations. Further, the existence, of standards of efficiency
and accountability needs to be reported.
5.02 There are several ways of reporting depending on the types of
organisation and the sort of information required. The following are some of
the bodies/stake holders for reporting purposes :
- Board / Governing Body / Executive Committeee
- Chief Functionary
- Government e.g. FCRA, IT Deptt. and Registrar of Society
- Funding Agency
- The public at large e.g. by publishing the Annual Report.
REPORTING TO THE BOARD/GOVERNING BODY/
EXECUTIVE COMMITTEE
5.03
The following are the common reports submitted to the board :
- Half yearly Financial Report
- Annual Financial Report
- Legal Compliance Status Report
- Projects' Status Report
40
- Budget Comparison Report
- Investment Status Report
- Donor Agency Status Report
- Management letter from statutory auditors
REPORTING TO THE CHIEF FUNCTIONARY
5.04
While it is the board which frames Board policies, it is the Executive
Director/Secretary (Chief Functionary) who implements such policies and takes
care of the day to day affairs of any organisation. Therefore, the following reports
would be required for the Executive Director more frequently than they are
required by the Board.
- Monthly Financial Report
a) Receipt and Payment Account
b) Income and Expenditure Account
c) Balance Sheet
- Budget Comparison Report
- Investment Status Report
- Donoi' Agency Status Report
- Bank Reconciliation Statement
- Legal Compliance Report
- Project Progress Report
REPORTING TO THE GOVERNMENT
5.05
Kindly refer to the legal chapters in this regard.
REPORTING TO FUNDING AGENCY
5.06 Every agency may have specific requirements depending on the contract
between the agency and the organisation. Normally the donors require narrative
as well as finance reports on a half yearly interval.
41
MONITORING
5.07 Monitoring is'a process to ensure that the people who are connected in
various capacities to the organisation implement project/carry out activities in
accordance with the planned objectives.
5.08 Project planning and control are two sides of the same coin. Monitoring
ensures that one side of the coin, namely control is adequately exercised.
5.09 There are various levels of monitoring depending on the relationship of
the people connected to the organisation e.g. The Board being the legal body is
the first level of monitoring authority which is accountable and fully responsible
for all the good deeds and misdeeds of the organisation.
5.10 Similarly the Government, both at the State and Central levels, monitors
the activities of the organisation through various laws which cover the
organisation e.g. FCRA, taxation, etc.
MONITORING THROUGH INTERNAL AUDITING
5.11 It is suggested that periodic checking by way of internal audit be carried
out to ensure that the NGOs comply with the various laws and the activities
being carried out are effectively moving in the direction of achieving the proposed
objectives. This internal audit must be carried out by a competent Chartered
Accountant, who is to report to the management. The Statutory auditor’s duty
is to report to the Board hence his prerogative is to report on important matters
and policies. The way the day to day and routine matters are being carried out
and deviations, if any, are to be corrected is the prerogative of the internal
auditors. The internal auditor should make monthly visits to ensure that systems
are in place and operational.
42
'hapter 6
Expenditure made at Field Level
6.01
Normally NGOs work in the remote village area for which most
expenditures are made at the field/village level. NGOs should utilise the funds
at the field level with proper documentation and records.
- Self-prepared vouchers should be used and authorised in case of non
availability of third party supporting bills / cash memos etc.
- Payment made towards labour, wages etc. should be on the basis of
muster roll.
- Muster roll should be prepared by the field level supervisor and
approved by the CBOs or SHGs etc. Further, it should be countersigned
by the programme coordinator and verified by the accountant.
- Certified Seeds/saplings should be purchased from Agriculture/
Horticulture Department or Registered dealer instead of individual
villager.
- Ih case programme is implemented by the organisation itself, then
advance to the field level staff should be paid against proper requisition
submitted by them for regular expenses at field level.
- Funds should be transferred to CBO account by cheque instead of
‘ cash payment.
6.02
The following records should be maintained at the field level.
- Funds
Petty Cash book
Seed /Sapling distribution register
Meeting or workshop register
List of participants
43
List of beneficiaries.
Muster Roll (See Annexure-9)
Agriculture Inputs Stock Register (See Annexure -10)
Agriculture Produce Stock Register (See Annexure -11)
44
'hapter 7
Income Tax - Registration Procedure
INTRODUCTION
7.01 Income tax was first introduced in India in 1860. In those days income
related with charitable purposes were totally exempt from tax. Over the years
the Income Tax Act underwent radical changes, basically to ensure that such
exemptions are not misused by unscrupulous elements. Currently extensive
exemptions are still available to NPOs but a host of regulatory provisions have
been incorporated in the act, which are to be adhered to, in order to claim
exemptions.
APPLICATION FOR REGISTRATION
7.02 In order to claim exemption an NPO should make an application to the
Commissioner of Income Tax for registration of the NPO. Such application is to
be made in Form 10A As per Annexure 12. The following documents are required
to be submitted :
i) Form 10A
ii) The original instrument under which the NPO is established, or the
Bye Laws & Memorandum of Association evidencing the creation of
the NPO should be enclosed.
iii) Two copies of the Accounts of 3 previous years should be enclosed.
Where the NPO was not in existence in any of three prior years, copies
of the accounts of lesser No. of years may be submitted.
TIMELIMIT FOR MAKING
AN APPLICATION
7.03
The application for registration should be made before expiry of one
45
year from the date of creation of the NPO. NPOs which make a delayed application
are allowed exemption with effect from the 1st day of the financial yeai in
which application is made. The Commissioner of Income Tax has no power to
condone the delay in submitting the application. Therefore, NPOs should be
careful and apply for Income Tax registration immediately after registration
and commencement of activities.
THE AUTHORITY TO WHOM
APPLICATION IS TO BE MADE
7.04 The application is to be submitted to the Commissioner of Income Tax
in whose area the NPO is located. However, in respect of the four metropolitan
cities of Calcutta, Chennai, Delhi & Mumbai, the applications are to be made to
the Director of income Tax (Exemption).
GRANTING & REFUSAL
7.05 The Commissioner of Income Tax, on receipt of an application for
registration of an NPO, shall call for such documents or information, as he
thinks necessary. While processing such application, the concerned authority
normally concentrates on the genuineness of the NPO. Once the genuineness of
the activities & creation is established, then it is incumbent upon the authority
to pass an order in writing, registering the NPO. The order of registration or
refusal has to be passed within a period of six months.
OPPORTUNITY OF BEING HEARD
7.06 The Commissioner of Income Tax has the power to reject an application
for registration. It may be noted that such powers cannot be used arbitrarily
without subtantiating adequate reasons for such rejection. Under the current
laws it is statutorily required that, an opportunity of being heard should be
provided to the applicant, before rejection of any application. And the CIT should
provide the reasons in writing. The powers of the C1T are limited to the
genuineness of organisation and the existence of valid charitable or religious
purposes.
46
CAN WE APPEAL AGAINST REJECTION
7.07 Under the provisions of Section 253 of the Income Tax Act an appeal can
be made to the Income Tax Appellate Tribunal against an order rejecting the
application for registration. Under such circumstances if an NPO sincerely
believes that an unjust order has been awarded against it, then it can file an
appeal.
TIME LIMIT FOR PASSING THE ORDER
7.08 Under income tax laws the order for either granting or refusing
registration shall have to be passed within six months from the end of the month
in which the application was made.
WHAT IF NO ORDER IS PASSED
WITHIN THE TIME LIMIT
7.09 It has been clearly mentioned in the Income Tax Act that an order has to
be passed within 6 months but nothing has been mentioned about the fate of
the application if it is not cleared within 6 months. There are cases where High
Courts have held that if the Commission of Income Tax fails to either grant or
reject the application within a period of six months, then such inaction will
result in deemed registration.
CAN REGISTRATION QNCE
GRANTED BE CANCELLED
7.10 The Finance Act, 2004 has inserted a new sub-section to section 12AA. By
virtue of this newly inserted sub-section 3, the Commissioner with effect from
1st day of October, 2004 shall have the power to cancel the registration, if he or
she is satisfied that the acitivities of such trust/institution are not genuine or
are not being carried out in accordance with the objects of the trust or institution.
Before such cancellation, the Commisioner has'to provide a reasonable
opportunity of being heard and an order in writing has to be passed for such
cancellation.
47
CONDONATION OF DELAY
7.11 The application for registration should be made within one year from
the date of creation of trust. If application is filed after the period as said, then
the Chief Commissioner or Commissioner cannot condone the delay even if
there are sufficient reasons for such delay. The trust or institution would be
eligible for exemption from the first day of the financial year in which the
application is filed.
REGISTRATION OF NPOs OF
NATIONAL IMPORTANCE
7.12 Government of India notifies few NPO's in the official gazette each year.
Such notified NPO's are totally exempted from tax even if they are not registered
under section 11 of the Income Tax Act. All NPO's are open to apply for this
recognition. Currently the Central Government has exempted various
organisations including universities, sport institutions, medical institutions, NPO's
etc, under these provisions. An NPO can apply for such exemptions under section
10(23Xc)(iv).
7.13 In order to claim exemption an application in Form No. 56, as per
Annexure 13 is to be submitted to the Director General (Income Tax Exemption),
Calcutta through the Commissioner of Income-Tax having jurisdiction over the
Trust or Institution in four copies alongwith the following documents :
a) copies of the Deed of Trust/Rules and Regulations/Memorandum and
Articles of Association ;
b) a List of Members of the Governing Council/Body ;
c) photocopies of the latest certificate under Section 80G issued by the
Commissioner of Income Tax, if applicable ;
d) photo-copies of the assessment orders passed for the last three year
(or to the extent applicable)
e) photocopy of communication from the Commissioner of Income Tax
with reference to the application of the fund/trust/institution for
registration.
48
l/hapter 8
Exemption of
Income from Income Tax
INTRODUCTION
8.01 We have to understand that registration of an NPO does not automatically
allow exemptions. The income of an NPO may still be taxable unless it is properly
utilized.
TYPES OF INCOME & THEIR
TREATMENT UNDER THE ACT
(a) Contributions to Corpus of the Trust or Institution : Any voluntary
contributions received by a trust or an institution created wholly for
charitable or religious purposes with a specific direction that they shall
form part of the Corpus of the trust or institution shall not be included
in the total income of the previous year of the NPO in receipt of such
income.
(b) Other Contributions and Donations : However, all other voluntary
contributions and donations received by an NPO established wholly
for charitable or religious purposes shall for the purposes of Income
Tax be deemed to be income of the NPO subject to tax and the provisions
of exemption will apply accordingly. It may be noted that restricted
funds and contractual obligations are not treated as income.
(c) Income from Business: An NPO cannot carry on a business unless the
business is incidental to the attainment of its aims and objects and
separate books of account are maintained in respect of such business.
In other words, for example, if the income arises by way of fees or
from sale of produce of demonstration farms or sale of goods made
from sewing machines, handlooms, knitting machines etc. kept for
training to the poor and marginalised beneficiaries for the purposes of
relieving poverty, such income will be exempted, provided that separate
49
books of account are maintained in respect of these activities and the
income is wholly and exclusively applied for charitable purposes. In
the recent past there have been radical changes with regard to the
business activity of charitable organisations. Kindly refer the Chapter 7.
(d) Capital Gains : If there is a transfer of capital asset such as land,
building, furniture etc. which results in a capital gain, then the capital
gain arising therefrom may be applied for charitable or religious
purposes in the same manner as any other income. Alternatively, where
the whole of the sale proceeds realised from the sale of the capital
asset is utilised in acquiring a new capital asset, then the whole of such
capital gain shall be treated as exempted. If only a part of the sale
proceeds is utilised for acquiring a new capital asset then only so much
of capital gain as equal to the amount, if any, by which the amounts so
utilised exceeds the cost of the transferred asset shall be exempted. An
organisation may also apply the capital gains for charitable purposes
alongwith other income.
MINIMUM AMOUNT REQUIRED
TO BE UTILISED
8.02 In order to be eligible for tax exemption an NPO is required to apply
atleast 85% of its income for charitable purposes. While computing 85% of the
income, repayment of Ioan and purchase of capital assets are also treated as an
application of income, prdvided they are for charitable purposes.
COMPULSORY AUDIT
8.03 If the total income of the trust or institution as computed exceeds two
lakh rupees in any financial year, the accounts are required to be audited by a
Chartered Accountant and their audit report in Form No. 10B & 10BB as per
Annexure 14 & 15 duly signed and verified and setting forth such particulars as
may be prescribed, are to be submitted alongwith the return of income foi the
relevant assessment year.
FLOW CHART SHOWING VARIOUS
INCOME AND THEIR TREATMENT
8.04 For greater clarity regarding the treatment of various income under
section 11 the flow chart has been provided.
50
FLOW CHART SHOWING VARIOUS INCOME AND THEIR TREATMENT
______ Y
Income from property
held under trust
including voluntary
contributions section
11(1)(4)
Either
Income from
property partly held
under trust, for trust
formed before 01-0462 section 11( 1 )(Z?)
Income from
voluntary
contributions
towards CORPUS
section 11 (1 )(</)
Capital Gains
Section 11(1 A)
option to apply
under section
11 (1 )(a) can also
be exercised
Or
V
X
I
Less than 85 per cent
is applied for
charitable purposes in
85 per cent or more is
applied for charitable
purposes in India
Income from
permissible
business
activity
section 1 i(4A)
Y
Investment of the
capital gain in
new capital assets
The total amount to
be accumulated being
more than 15 per cent
Y
V
Permission under
section 11(2) for
accumulation in excess
of 15 per cent
' Accumulation of
income up to 15 per
cent
X
V
Accumulation for indefinite period
Accumulation for a
period of 5 years only
<
Y
Application for
charitable purposes in
5 years
I........... ~
>
Mode of Investment as specified under
section 11(5)
Mode of Investment can be other than as
specified by section 11(5) to the extent the
-> income remains invested in business as per
clause (Hi) of the proviso to section
51
'hapter 9
Accumulation and
Investment of Income
OVERVIEW OF PROVISIONS
RELATED WITH ACCUMULATION
9.01 The following is a brief overview of the provisions related with
accumulations and the consequential treatment thereof. Discussion in detail has
been made thereafter :
(0 Under section 1 l(l)(a), an organisation has the liberty to accumulate 15
per cent of its income. Such accumulations are not required to be
applied for charitable purposes within any specific time-frame, i.e. they
can be accumulated indefinitely. The Finance Act, 2002 has reduced the
option to accumulate to 15 per cent, earlier it used to be 25 per cent.
(zz) In the case where the income is derived but not received, the
organisations have the option, with the consent of the Assessing Officer,
to consider the income accrued but not received as deemed application.
For instance if an organisation's income is. 1,00,000 but the actual
receipt is only 70,000, then if the organisation exeicises the option
under Explanation to section 11(1), the unavailable amount of ? 30,000
will be deemed to have been applied in the previous year. But the
organisation has to apply such income in the previous year in which
such income is received or in the year immediately following the year
of receipt, as the case may be.
(Hi) If the organisation is unable to apply 85 per cent of its income, it can still
accumulate by applying to the Assessing Officer in Form No. 10, under
section 11(2), before the time-limit prescribed in section 139(1). Such
accumulations are required to be applied for charitable purpose (which
must be specified in the application) within a maximum period of
5 years.
(zv) All accumulations are required to be invested in the modes of investment
provided as per section 11(5).
NGiO-’OO
ISSIO
52
(v) The exemptions availed on accumulated income will be withdrawn
under the following circumstances under section 11(3):
(«) If they are applied for purposes other than for which they were
accumulated. [Section 11 (3)(tz)].
•(^) If the accumulated income ceases to remain in any of the modes of
investment prescribed under section 11(5). [Section 11 (3)(Z?)].
(c) If the accumulated income is not utilised within the period of
accumulation. [Section 1 l(3)(c)].
(d) The Finance Act, 2002 has inserted another clause wherein any
donation given to another charitable organisation out of such
accumulated income will also disentitle the donor organisation of
the exemptions [Section 1 l(3)(c/)]. In this regard, the Finance Act,
2003, has further inserted a proviso to section 11(3A) wherein inter
charity donation out of accumulated funds will be permissible in
the case of dissolution of a charitable organisation, in the year of
dissolution.
ACCUMULATION OF INCOME
9.02 Where 8596 of the income is not applied for charitable purposes the NPO
is required to accumulate or set apart such income for future application. The
incomes so accumulated will not be included in the total income of the NPO if
the following conditions are applied :
i) the NPO has to give a notice to the assessing officer in Form No. 10, As
per Annexure 16 alongwith a certified copy of resolution passed by
the governing body. This resolution should specify the purpose and
the period for which the income is so accumulated. The period of
accumulation cannot exceed five years under any circumstances, this
period used to be ten years but has been reduced to five years with
effect from 01.04.2002.
ii) the NPO has to enclose copies of annual accounts alongwith the details
of investments of the money so accumulated before the expiry of six
months from the end of each relevant previous year.
iii) the amount so accumulated should be invested in any one or more
forms specified in section 11(5) within six months from the end of the
each of the previous year.
53
FORMS ON INVESTMENTS
SECTION 11(5)
9.03 The forms and modes of investing or depositing the money for
accumulated income as per Income Tax Act is provided in Annexure 17. It may
be noted that an NPO may lose Income Tax exemption if it makes investment
which are not permissible. Further FCR.A 2010 also restricts investments in
speculative assets for details FCRA section may be referred.
THE TWO PERMISSIBLE TYPES
OF ACCUMULATION
9.04 It may be noted that under the existing provisions, two kinds of
accumulation are possible :
(?) Accumulation upto 1596 of income under section 11(1). Such
accumulations are not subject to application within a maximum
permissible period of 5 years. In other words, 15% of income can be
retained by. a charitable organisation without applying it for charitable
purposes in the year in which the income accrued. This 15%
accumulation is an indefinite accumulation and the organisation does
not have to apply it for charitable purposes in subsequent years. It can
be retained as a part of its corpus of capital.
(2) Accumulation beyond 15% of income under section 11(2). Such
accumulations are subject to application within a»maximum permissible
period of 5 years. In other words income in excess of 15% cannot be
retained by a charitable or religious organisation. If the income is not
spent in the current year then the assessee is permitted to spend it
within the next 5 years.
CIRCUMSTANCES WHERE
ACCUMULATION IS PERMITTED
9.05 It has been held that accumulation under the provisions of section 11(2),
is to be specifically made only under those circumstances where 85% of the
income of the trust could not be applied. Section 11(2), only becomes operative
beyond the 15% of the accumulation of income which is otherwise allowed
under section 11(1).
54
Illustration - For instance, the total income of an organization is 1,00,000 and
it applies 20,000 only for charitable purposes during the year, ? 80,000 remains
unutilized subject to accumulation. In this case, the assessee would be required
to accumulate only ? 65,000 under section 11(2). As the deemed application
under section 11(1) would be 35,000 20,000 actually applied + T 15,000 - 15%
of total income allowable for accumulation].
FILING OF FORM 10 UNDER RULE 17
9,06 The organisation desiring to accumulate funds has to give a notice in
writing to the Assessing Officer of its intention and reasons for such accumulation
in Form 10 under Rule 17 of the Income-tax Rules; 1962. This notice has to be
made before the expiry of the due date of filing return under section 139(1). The
following enclosures and details should be submitted with Form 10 :
/) A resolution has to be passed by the governing body of the organisation
and such resolution has to be filed with the Form 10.
2) Copies of the an filial accounts of the organisation along with the
details of investment and utilization, if any, of the money so accumulated
or set apart have to be furnished before the Assessing Officer before
the expiry of six months commencing from the end of each relevant
previous year.
3) For accumulation of income, it is necessary that the organisation/
trust must indicate specific purpose or purposes for which it wants to
accumulate the funds. A general decision to accumulate listing all the
objects of the organisation would not be sufficient.
POWER OF CIT TO CONDONE
THE DELAY
9.07 The Commissioner of Income-tax is authorized to condone the delay in
deserving circumstances. (Re: CBDT Circular No. 273, dated 3-6-1980). Normally
trusts/organisation make delay in filing Form 10 and the Commissioner condones
the delay after ensuring that the failure to apply in time was not deliberate and
did not benefit the settlor, trustee and founders in any manner and the
accumulation of income was necessary for carrying out the objects of the
organisation. The condonation of delay by the CIT has become even more
55
important, in the light of the Supreme Court ruling in Nagpur Hotels case,
(supra), where it was held that the time limit to file Form 10 is mandatory. The
CBDT circular no. 273, dt. 03.06.1980, has empowered the CIT under section
119(2)(b) to condone the delay in filing of application in Form 10.
GUIDELINES FOR
CONDONING DELAY
9.08 Further, in addition to the above circular, an order No. 120/57/80-IT (AI) dated 3-6-1980 was issued providing the guidelines for the Commissioner of
Income-tax, while exercising the powers conferred under section 119(2)(b) to
admit application under section 11(2) filed beyond the time stipulated. As per
this order, the following conditions were required to be fulfilled in order to
avail condonation of delay in filing Form 10 under section 11(2):
i) that, the genuineness of the trust is not in doubt,
it) that, the failure to give notice to the Income-tax officer under section
11(2) of the Act and investment of the money in the prescribed
securities was due only to oversight,
Hi) that, the trustees or the settlor have not been benefited by such failure
directly or indirectly,
iv) that, the trust agrees to deposit its funds in the prescribed securities
prior to the* issue of the Government sanction'extending the time
under section 11(2), and
v) that, the accumulation or setting apart of income was necessary for
carrying out the objects of the trust.
56
FLOW CHART SHOWING ACCUMULATION & INVESTMENT OF INCOME
Incomeof Charitable
Organisations
Income under section 1 l(l)(<t),(W
and (c)& Voluntary Contribution
undersection 12(1)
Voluntarycontribution
towards corpus under
section 11(1 )(<■/)
Y
■
Less thari.85% income is
applied
85% or more income is
applied
Y
I
X
15% of income
available for
accumulation
Inform the AO for
accumulation for 1 year in
excess of 15% under
Explanation to
section 11(1)
Apply to AO in Form 10 for
accumulation in excess of
159oof income undersection
11(2)
v
V
Y
Y
Accumulate the income fora maxi
mum period of 5 years witltin wltich it
has to be applied for charitable pur
poses
Accumulation forindefinite period
V
y_____________ :Y
Utilise within the
subsequentyear
Investment as specified under section 11(5)
r
Y
Applied for other
puiposes under
section 1 l(3)(n)
zzz
Cease to remain as
investment under
section 11 (5) and
11(3)(Z>)
Not utilised
within 5 years
under section
y
I
Y.
11(3X0
Donation toother
charitable
organisations under
section 1 l(3)(r/)
Y____________
Option to ask for permission
under section 11 (3A) to apply for
other purposes
Taxable under section 11(3) as
deemed income
Unable to
utilise
V
Taxable under section 11( IB)
as deemed Income
57
'hapter 10
Deemed Application
DEEMED APPLICATION WHERE MONEY IS
NOT ENTIRELY SPENT IN PREVIOUS YEAR
10.01 According to Explanation 2 to section 11(1), if in the previous year, a
charitable organisation is not able to utilise 85% of its income (75% prior to 1-42003), as aforesaid due to the fact that such income has not been received in the
previous year or for any other reason then the organisation has an option to
apply such income in the year of the receipt or in the year, immediately following
the year of accrual of income.
10.02 It may so happen that an NPO is unable to utilised the 85% of income due
the fact that such income is not received in the previous year or is received
towards the end of the year. In such curcumstances the NPO has an option to
apply the income in succeeding year but it will be treated as deemed to have
been spent in the previous year.
THE METHODOLOGY INVOLVED
10.03 Under accrual system of accounting, charitable organisations may have
accrued income which actually is not received in the year of accrual. In such
circumstances, there is a genuine problem which prevents the organisation from
applying the income in the year of accrual. By exercising the option available
under explanation - 2 to section 11(1), the organisation can apply such income in
the year of receipt or the year immediately following the year in which the
income accrued. Similarly, in some circumstances where the income was received
but could not be applied for charitable purposes for any other reason -for instance
income received towards the end of the financial year- such income could also
be applied in the immediately following year after exercising the option available
58
under explanation 2 to section 11(1). In both the above cases, the income will be
deemed to have been applied in the year in which it accrued. Some illustration
have been given to have a clearer understanding of the issue
Illustration-1: The income of an organisation for the year, 2012-13 is ? 1,00,000/out of which only ? 60,000/- was received during the year and 40,000/- was
received in the year 2013-14. The organisation has actually applied ^55,000/during the year. The organisation wants to exercise option available under Expln.2 to section 11(1).
Solution:
Income during the year 2012-13
Less : Application during the year
1,00,000
55,000
Remaining income
Less : Deemed application u/s. 11(1) Expl. 2(ii)
45,000
40,000
Income accumulated u/s. 11(2) or subject to tax
5,000
When the organisation exercises option under Explanation-2 to section
11(1) it cannot retain 15% of income for indefinite accumulation. In this
above case when the organisation receives 40,000/- in 2013-14 it will have
to apply 25,000/- and the remaining 15,000/- can be accumulated
indefinitely on account of the year 2012-13. The amount of ? 25,000/- applied
in 2013-14 will be deemed to have been applied in the year 2012-13. The
total application will be as under :
Income during the year 2012-13
Less : Application during the year 2012-13
Less : Accumulation u/s. 11(2)
or income subjected to tax
1,00,000
55,000
45,000
5,000
Remaining amount
Less : Application during the year 13-14
(Deemed to be applied in 2012-13)
40,000
25,000
Indefinite Accumulation for 2012-13
15,000
59
In the above illustration ? 5,000/- will become subject to tax, in the year
2012-13 unless the assessee also exercises the option of accumulating the
income for 5 years by applying section 11(2). In 2012 the organisation will
either pay tax on 5,000/- or accumulate it. If the income is accumulated
then the organisation can spend it in the next 5 years. There is one more
possibility with regard to the amount of 5,000/- which remained unutilised
in 2012-13, the organisation, if it has valid reasons, can also apply for the
option under explanation -2(ii) i.e. income received but could not be utilised
for some other reason.
Illustration-2 : The income of an organisation for the year, 2012-13 is T 1,00,000/out of which only T 90,000/- was actually received during the year. Out of the
income actually received, 20,000/- was received on the last day of the year.
? 10,000/- was received in the year 2013-14. The organisation has actually applied
50,000/- during the year. The organisation wants to exercise option available
under Expin.- 2(i) and (ii) to section 11(1).
Solution:
Income during the year 2012-13
Less : Application during the year
1,00,000
50,000
Remaining income
Less : Deemed application u/s. 11(1) Expl. 2(i)
50,000
10,000
Remaining income
Less : Deemed application u/s. 11(1) Expl. 2(ii)
40,000
20,000
Remaining Income
Less : Appropriate portion of
15% indefinite accumulation
20,000
Accumulation under section 11(2)/subject to tax
15,000
5,000
In the above illustration, though 20,000/- is available but the oi ganisation
will not be entitled to accumulate 15% indefinite accumulation which is
otherwise available, in view of CBDT circular no. 204, dt. 24.07.1976, which
provides that to avail the option under explanation-2(i) the organisation
has to spend all the income received for charitable purposes and the
indefinite accumulation will be allowed from the income accrued but not
received, when it is received in the next year.
6
60
Illustration-3: The income of an organisation for the year, 2012-13 is 1,00,000/out of which only (i) 80,000/- was received during the year and 20,000/- was
received in the year 2013-14. The organisation has actually applied^ 80,000/- during
the year. But, the organisation wants to spend 85% of its income, (ii) ? 80,000/- was
received during the year and ^20,000/- was received in the year 2013-14. The
organisation has actually applied 80,000/- during the year. But, the organisation
wants to spend 100% of its income, (iii) ? 90,000/- was received during the year
and 10,000/- was received in the year 2013-14. The organisation actually applied
80,000/- But, the organisation wants to spend 85% of its income, (iv) 90,000/- was
received during the year and 10,000/- was received in the year 2013-14. The
organisation actually applied 90,000/- But, the organisation wants to spend 100%
of its income. The organisation wants to exercise option available under expin.- 2
to section 11(1).
Solution : The illustration has been solved on the basis of two different
circumstances available to the organisation, one when the organisation
wants to apply 85% of its income, second when the organisation wants to
apply 100% of its income :
(iv)
(i)
(iii)
Income actually received
during the year 2012-13
Income accrued during
the year 2012-13
Less : Application during
the year
Remaining income
Less : Deemed application
u/s. 11(1) expl. 2
80,000
80,000
90,000
90,000
1,00,000
1,00,000
1,00,000
1,00,000
80,000
80,000
80,000
90,000
20,000
20,000
20,000
10,000
5,000
20,000
Nil
10,000
In case (i) the organisation has received only 80% of accrued income therefore,
it will be allowed to apply 5,000/- in the year of receipt, (ii) the organisation
has received only 80% of accrued income but if the organisation wants to
forego the indefinite accumulation and apply 100% of income then it can
avail the benefit of deemed application to the extent of ? 20,000/- provided
it has to spent the entire outstanding income in the year of receipt, (iii)
the organisation has received ^90,000/- but has only applied 80,000/which is 80% of income therefore, the organisation will be liable to pay
tax on 5,000/- and the benefit of deemed application will not be available.
61
(iv) the organisation has received and applied ? 90,000/- but if it wants to
forego the benefit available for indefinite accumulation then it can make
deemed application to the extent of 10,000/-. The 8596 requirement is
the basic limit and the organisation can always go beyond it. In this case,
the organisation by opting to apply 10096 of’income has not transferred
1596 to its corpus.
OVERALL SUMMARY
10.04 The provisions of this chapter can be summarised as under :
i) When an organisation is unable to apply 8596 of its income because it
has not been received any portion thereof or for any other reason,
then it can exercise the option under explanation-2 to section 11(1).
Then such unutilised/unapplied income would be treated as deemed
application.
ii) The organisation can exercise this option when the income is accrued
but not received. In such cases, the organisation can spend it in the
year of receipt or the year succeeding the year in which the income
accrued, which ever is later.
iii) The organisation can also exercise this option when the income is
received but it could not be applied due to some valid circumstantial
reasons. In such cases the organisation can spend the income in the
year succeeding the year in which the income accrued.
iv) To exercise this option the organisation has to apply to the assessing
officer in writing before the time limit specified under section 139(1)
for filing return of income.
v) It has been held that the time limit to exercise this option is not
mandatory and only directory in nature and therefore, the assessing
officer can condone the delay.
vi) If the income is not applied in the year of receipt or the year succeeding
the year of accrual of income, as the case may be, then such income
will become taxable in the year succeeding the year in which it was
received or it was required to be applied.
vii) If the income is not applied in the year of receipt or the year succeeding
the year of accrual of income, as the case may be, then such income
will not be eligible for accumulation under section 11(2) for 5 years.
62
faapter 11
Inter-Charity Donations
& Networking NPOs
INTRODUCTION
11.01 In the current milieu of corporatisation of the charity sector and the
increasing influence of CSR various new model of NPOs are emerging. One of
the new model of charitable work is the concept of mother NPO or a Facilitating
NPO which does not implement programmes directly but generates funds and
resources for its downstream NPOs. The issue here is that, can such NPOs be
considered as charitable in nature when they work through others. Is inter
charity donation valid ? Can an NPO charge a facilitation cost without being
deemed as a commercial entity.
DONATION TO ANOTHER CHARITABLE
ORGANISATION IS APPLICATION
11.02 It has been held in various cases that donation made by one charitable
organisation to another shall be considered as application of income for the
objectives of the organisation provided the donee organisation also has objects
similar to the object donor organisation. Few relevant issue in this regard are
discussed below.
11.03 Can intercharity donation be treated on par with direct implementation
of charitable activities : ‘End justifies the means' is what the courts have
consistently held in determining the charitable nature of an organisation. In CIT
v. J. K.Charitable Trust [1992] 196 ITR 31 (AIL), it was held that a charitable
purpose may be served in more than one way. One is to directly contribute for
the promotion of that cause, the other is to contribute money to another
charitable organisation which advances that cause. In other words the Allahabad
high court laid down the principles of treating the work done through another
e
63
charity at par with doing the work directly. The Supreme Court in CITn. Thanthi
Trust [1999] 239ITR 502, has also upheld the treatment of inter-charity donations
as valid application of funds. In this case Supreme Court further held that the
Assessing Officer cannot deny exemptions even if the donee trust had not
expended the amounts received in the year of receipt. Similar views were also
taken in CITn. Aurobindo Memorial Fund Society [2001] 247 ITR 93 (Mad.) and
CTTn. Matriseva Trust [2003] 128 Taxman 261 (Mad.). To sum up, inter-charity
donation have been held as application for the purposes of section 11(1 )(a).
DONATIONS TO OTHER CHARITABLE
INSTITUTIONS AFTER 1-4-2002
11.04 The Finance Act, 2002 has inserted an Explanation to sub-section (2) of
section 11. This Explanation prohibits donations to other charitable organisations
out of the accumulated funds. This amendment can have far-reaching practical
implications. The new amendment puts restriction on donations to other
charities only out of accumulated funds. In other words, funds once accumulated
under section 11(2) can only be applied for charitable purposes directly by the
concerned organisation and any inter-organisation transfer would not be possible.
DONATION OUT OF CURRENT
INCOME IS NOT BANNED
11.05 However inter-organisation donations are possible from current year’s
income, but the newly amended provision will certainly create hurdles for
organisations, which were used as conduct for channellising funds to other
organisations. The new Explanation inserted by the Finance Act, 2002, to section
11(2) has debarred organisations from applying its accumulated or set-apart
income by way of payment or credit to other such organisations. Now, payments
or credits out of accumulated funds to any other organisation would not be
treated as application for charitable or religious purpose. There is no apparent
bar on payment or credit to such other organisations out of previous year s
income subject to the provisions of section 11(1).
11.06 In the light of the above, funds once accumulated are no longer available
for credit or payment to any other charitable organisation, though such transfer
may still be possible out of the current year's income under section 11. CBDT
has also issued a clarificatory circular no. 8, dt. 27.08.2002 the relevant text of
the circular is provided in Annexure-18.
64
11.07 In the light of the aforesaid and the amendments by virtue of Finance
Act, 2002, donations to other charitable organisation are still possible but only
out of the current years income. Once the funds are accumulated then it will
not be permissible to make inter-trust donation and treat them as application.
AMENDMENT IN
FINANCE ACT, 2003
11.08 The Finance Act, 2003 has inserted another proviso to sub-section (3A)
of section 11 which provides that inter-charity donation out of accumulated
funds will be permissible in case of dissolution of a charitable organisation.
This amendment has been made to reduced the hardship of charitable
organisation on the brink of dissolution.
TAX PLANNING THROUGH
DEEMED APPLICATION
11.09 In the light of what is discussed in this chapter, the amended provisions
with regard to inter-charity donations will cause hardship to those organisations
which act as a mother NPO to many small charitable organisations and funds
through various foreign and domestic sources are routed through them. Many
donors prefer to fund through one mother NPO which subsequently distributes
the funds to smaller NPOs. After the amendment made in 2002 there is an
apprehension in the fraternity of charitable organisations that it may become
difficult to disburse funds received towards the end of the year. And since
accumulated income is not available for inter-charity donations, the funds could
neither be applied nor could be donated to bther charities.
11.10 For instance if a charitable organisation receives funds in the month of
March - which is required to be distributed to other charitable organisations and is unable to make inter-charity donations within the year of receipt, then it
has to accumulate the same. Once the income is accumulated under section
11(2) then it is not permissible to make inter-charity donations.
11.11 Under the above mentioned circumstances a charitable organisation may
exercise the option available under Explanation to section 11. The Explanation
to the section 11 refers to two situations where the income applied falls short
of 85% and still can be deemed to have been applied in the previous year. The
65
two situations are (i) when the income is not received but accrued (ii) for any
other reason. Under the second situation, the assessee may exercise its option
by applying in writing before the expiry of the time allowed under section 139(1)
for filing of return. After exercise of the option the income will be deemed to
have been applied in the previous year even though it is spent in the succeeding
or the year of receipt.
11.12 Inter-charity donations being valid application of income, there is no
reason why option under Explanation 2 to section 11(1) could not be applied
and the income be actually spent/disbursed in the succeeding year. But the
reasons have to be genuine, the organisation must have valid reasons for not
being able to apply the income as inter-charity donations.
WORKING THROUGH OTHERS ONLY
11.13 Can a charitable organisation be said to be existing for a particular
purpose when it is directly not engaged in such purpose but is working through
various other charitable organisation : In the case Aditanar Educational
Institution v. Additional Commissioner of Income-tax [1997] 90 TAXMAN 528 (SC)
the hon’ble Supreme Court laid down the ratio for determining the purpose for
which an organisation exists. In this case, the assessee was registered solely for
educational purposes but it imparted education through various tegisteied
schools and colleges. The department contended the the assessee itself was not
providing any education directly therefore it cannot be considered as existing
solely for educational purposes. The court observed that it will be rather unreal
and hyper-technical to hold that the assessee-society is only a financing body
and will not come within the scope of 'other educational institution* as specified
in section 10(22). The relevant observation is as under;
"It will be rather unreal and hyper-technical to hold that the assessee-society
is only a financing body and will not come within the scope of 'other
educational institution 'as specified in section 10(22). The object of the society
is to establish, run, manage or assist colleges or schools or other educational
institutions solely for educational purposes and in that regard to raise or
collect funds, donations, gifts, etc. Colleges and schools are the media through
which the assessee imparts education and effectuates its objects. In substance
and reality, the sole purpose for which the assessee has come into existence
is to impart education at the levels of colleges and schools and so, such an
educational society should be regarded as an educational institution 'coming
within section 10(22).
11 14 The other relevant cases in this regard are; Addl. CIT v. Aditanar
Educational Institution [1979] 118 ITR 235/[1980]3 Taxman 56 (Mad.), CIT v.
66
Rajagopal Educational Trust [Special Leave Petition No. 6281 of 1986], Katra
Education Society v. ITO[1978] 111 ITR 420 (All.), CIT v. Doon Foundational'S}
154ITR 208/22 Taxman 9 (Cal.), Agarwal Shiksha Samiti Trust v. CIT[ 1987] 168
ITR 751/[1988] 36 Taxman 165 (Raj.), Governing Body of Rangaraya Medical
Colleges. ZTO[1979] 117 ITR 284 (AP) and Secondary Board of Educations v. ITO
[1972] 86 ITR 408 (Ori.).
11.15 Can a charitable organisation be considered as charitable in nature
when the entire donation mobilised is given as intercharity donation : This
issue was brought before Delhi High Court in Commissioner of Income-tax v.
Hps Social Welfare Foundation [2010] 235 CTR 330 (Del), (2010) 235 CTR 0330
(Del), (2010) 043 DTR 0067 (Del). In this case, the assessee had received 2 crore as
donation during the year and had donated 2.07 crore to various NPOs and
institutions. The AO argued that giving money to various organisations could
not be considered to be a charitable activity. He further argued that the funds
given as inter charity donation might not have been applied for charitable
purposes. It was held that the Assessing Officer had not pointed out violation of
any provision of section 13 by the assessee. The Commissioner (Appeals) as well
the Tribunal, both, had found that the organisations, to which donations were
given by the assessee during the assessment year in question, were genuine
charitable organisations. There was absolutely no material before the Assessing
Officer to show that the funds given to those NPOs/institutions were used for
personal benefit of the Donor or any of its Directors.
NPOs PROVIDING NON
FINANCIAL SUPPORT ONLY
11.16 Is it possible to create a charitable organisation which acts as a support
organisation to another charitable organisation, such support need not be
financial in nature : Charitable purpose has never been confined or given a
narrow interpretation of expecting charities to physically implement the
programs themselves. The courts have always held that any activity which directly
or indirectly supports charitable activities or even charitable organisations
should be considered as a charitable activity. There was an interesting case in
Delhi Court where one NPO formed a charitable trust to manage its properties.
The CIT denied registration because according to him, managing the properties
of another NPOs was not a charitable purpose. The Delhi High Court in the case
DIT(Exemption) v. PRADANProperty Holding Trust, ITA No. 361 /2007 dt. August
16, 2010, ruled that a trust constituted for the management of properties of
another charitable society should be considered as charitable in nature. The
court observed that the stated fact that, the assessee does not carry out any
67
independent charitable activity/ was not enough to deny the 12AA registration.
It further observed that there was no reason why holding of properties cannot
be said to be charitable object.
CHARGING REMUNERATION
OR ADMINISTRATIVE COST
11.17 Can any remuneration or fee charged against any charitable project be
considered as commercial activity : In the case ICAI Accounting Research
Foundation v. Director General of Income-tax (Exemptions) [2009] 183 TAXMAN
462 (DELHI), the assessee was a foundation set up by Institute of Chartered
Accountants of India (ICAI) with main objective to make it an academic
institution for imparting, spreading and promoting knowledge, learning,
education and understanding in various fields related to profession of
accountancy. It was a deemed company under Section 25 of Companies Act,
1956 and was having a status of an academic institution. Assessee filed application
for claiming exemption under section 10(23C)(iv) taking plea that it was covei ed
by expression 'charitable purposes' as defined in section 2(15). The application
was rejected on grounds : (i) that assessee had undertaken three research projects
on behalf of local bodies and had also received remuneration for those projects
which amounted to doing business of providing professional services; and (ii)
that assessee had received funds from Infosys Technologies Limited in form of
Infosys Fellowship Fund and though it was for grant of fellowship to deserving
candidates for undertaking research projects, yet if a fellow would leave in
middle of programme, or would finish his research early with funds left in
account, only Infosys would decide how funds was to be spent and, hence,
assessee could not be said to be doing any charitable activity in that regard.
"The issue raised was whether merely on undertaking research projects at the
instance of the Government/Local bodies and receiving remuneration thereof
changes the essential character of the assessee-foundation into a commercial
or business nature activity and therefore engaged in trade, business or commerce.
It was held by the Honourable Delhi High Court that the charitable character
would not change even if the Foundation had charged fees against various
projects”.
11.18 Supreme Court on Commerciality and existence of profit for Charitable
Organisations : With regard to the issue of surplus generated by charitable
organisation, it is important to study the observations of the Hon’ble Supreme
Court in TM.A. Pai Foundation v. State of Karnataka [2002] 8 SCC 481: The 11Judge Constitution Bench has held that the private educational institutions are
bound to generate funds for betterment and growth of the institutions and for
68
which there may be a surpluses for furtherance of education. Therefore, it is
not only permissible but an important requirement to run the institutions of
such strength. Further, in Aditanar Educational Institution's case (supra), Hon'ble
the Supreme Court has observed that when surplus is utilized for educational
purposes ie., for infrastructure development, it cannot be said that the institution
was having the object to make profit. Hon'ble the Supreme Court has rightly
observed time and again that surpluses used for management and betterment
of the institutions could not be termed as profit. If the stand of the Department/
revenue is accepted to be correct, especially in the wake of the methodology
adopted by the AO in ascertaining profits, then no educational institution like
the petitioner-society could be said to be existing solely for educational purposes
as in case of every educational institution there is a possibility of profit. The
Court further held that no profiteering does not imply that the institutions cannot
have reasonable surplus for future sustenance and expansion of the institute. It
was held that upto 6-15% of profit could be considered as reasonable and
legitimate. This issue was further reaffirmed by the Supreme Court ruling in the
case of P.A, Inamdar v. State of Maharashtra AIR 2005 SC 3226/[2005] SCC 537.
FCRA ISSUES FOR A FACILITATING/
NETWORKING ORGANISATION
11.19 Inter charity donation is treated at par with direct implementation of
charitable activities, however under FCRA the funds are received by the donee
as subsequent recipient. Under the Rule 24 of FCRR, 2011 donation to subsequent
organisation can only be given if such organisation is also registered under
FCRA and has not been proceeded against. In other words all facilitating
organisation providing grant should ensure two things (i) that the donee
organisation is also having FCRA registration (ii) the donee organisation has not
violated any provision of FCRA and has not been proceeded against by the
FCRA department. To ensure this compliance the donor organisation should
collect-an undertaking from the donee organisation that it has not been
proceeded against. Further, under the Rule 24 of FCRR, 2011 donations can also
be given to organisations not registered under FCRA by taking prior permission
in Form 10.
11.20 Further the new FCRA law requires that the administrative expenditure
should not exceed 50% of total utilisation. As per the various judicial rulings
discussed in this article, the entire amount transferred to other charitable
organisations is treated as applied towards charitable purposes. Therefore, the
donor organisation should ensure that the administrative expenditure does not
exceed 50% of the total utilisation including the amount given as inter charity
donation.
69
OVERALL SUMMARY
11.21 To sum up the discussions :
i) Donation to another charity with similar objects is considered as an
application of income for charitable or religious purposes. A charitable
organisation be said to be existing for a particular purpose even if it is
directly not engaged in such purpose but is working through various
other charitable organisation
ii) Inter charity donation is treated at par with the direct implementation
of charitable activities
iii) ‘A charitable organisation can be considered as charitable in nature
even if the entire donation mobilised is given as inter charity donation
iv) The Income Tax Officer cannot argue that the funds given as inter
charity donation might not have been applied for charitable purposes
in the absence of any evidence
v) CBDT Instruction No.1132 (1978), has clarified that if the donee
organisation does not utilise in the year of receipt, then the exemption
to donor will not be affected.
vi) The Assessing Officer should be satisfied that the donation is a bonafide
initiative and would be used by the donee for charitable purposes only.
In other words, unqualified benefit to the donor is not available.
Viii) High Courts have held that even inter-charity donations towards corpus
is a valid application. But this contention may require re-consideration.
viii) After 01.04.2002, inter-charity donation out of accumulated funds is
not possible except in the case of dissolution of the donor organisation.
ix) Organisations receiving funds towards the end of the year can still
make inter-charity donations by applying the option under Explanation
to section 11.
x) It is possible to create a charitable organisation which acts as a support
organisation to another charitable organisation, such support need not
be financial in nature
xi) Reasonable remuneration or fee charged against any charitable project
cannot be considered as commercial activity
xii) Existence of surplus or profit as a part of charitable activity is
permissible.
xiii) Under FCRA inter charity donation can be given only to organisations
registered under FCRA, for other organisation piioi pei mission is
necessary.
70
'hapter 12
Forfeiture of exemption under
section 1 3 an overview
OUTLINE OF SECTION 13
12.01 Section 13 of the Act, specifies the circumstances under which the
benefits under section 11 would not be available to an organisation. Section 13
has been enacted as an exception to section 11, thereby, the benefits which are
otherwise available under sections 11 and 12, will not be available under the
circumstances stated in section 13. An organization, under the following
circumstances, may risk losing its exemptions under section 11 :
(z) If the income is not applied for the benefit of the public [section 13(1)(«)].
(n) If the income is applied for the benefit of any particular religious
community or caste [section 13( 1 )(i)].
(z'zz) If the income or property of the trust or institution is applied/used for
the benefit of the persons specified in section 13(3) who may be the
founders, trustee, manager, chief functionary, major donors, relatives
of the founders or persons who have a substantial interest in the
organization [section 13(l)(c) read with sections 13(2) and 13(3) ].
(fv) If the funds are applied in modes other than those specified in section
11(5) or shares of companies other than a government company are
held (not being a part of the corpus as on 1-6-1973). [section 13(1 )(d)].
12.02 The provisions of section 13 specify complete withdrawal of the
exemptions available under section 11, in respect of various incomes. In other
words violations as specified under section 13 will have the effect of forfeiting
exemptions on incomes which are otherwise available under section 11(1). Sub
section (1) of section 13 specifies various circumstances where the organization
will lose exemption if the income is applied in the manner specified under
section 13(1).
71
SCOPE OF SECTION 13
12.03 Section 13 is over and above the conditions and provisions provided for
exemption under section 11 and 12. The income of a charitable or religious
organisation will be forfeited if any of the provisions of section 13 are violated
even if other conditions of section 11 and 12 are complied with. In M. A. Namazie
Endowment v. CIT [1988] 174 ITR 58 (Mad.), the Madras High Court held that
Section 13 is only an exception to section 11 of the Act If a trust is covered by
the provisions of section 11 of the Act, the income thereof will not be exempt
from liability to tax under the circumstances set out in section 13 of the Incometax Act. Section 13 begins with the words "nothing contained in section 11 or
section 12 shall operate so as to exclude from the total income of the previous
year
", The implication of the section is that incomes which are otherwise
exempted
under section 11 or section 12 will not be exempted if the provisions of
exe
section 13 are contravened. The applicability of section 13 arises only when an
organization is eligible for exemption provided under section 11. Therefore, only
those organisation which are claiming exemption under section 11 are subject to
the provisions of section 13.
WHAT HAPPENS IF A PUBLIC CHARITABLE
TRUST’S INCOME IS NOT APPLIED FOR
THE BENEFIT OF THE PUBLIC
12.04 It is interesting to note that there is no clause for forefeiture of exemption
under section 13 if a public charitable trust does not apply its income for the
benefit of the public. Therefore, even if certain amount is found as not applied
for charitable purposes, section 13 cannot be invoked. However, under section
12(1) if the voluntary contributions are not received for charitable or religious
purposes they cannot be considered as income for the purposes of section 11.
Therefore, any such voluntary contribution which is not applied for public
benefit shall be taxed under section 12(1). Further, the CIT has the power to
cancel the registration under section 12AA(3) if income is not applied for public
benefit.
LAW PERTAINING TO REMUNERATION
& BENEFITS TO INTERESTED PERSON
12.05(i) Under section 13(l)(c), if the income of a voluntary organisation is
. ......................................... ........................... ........................... ......................................... ............... ...................... ■-.................................. -................... .
12
applied for the benefit of certain specified interested persons then the
exemptions available under section 11 will be lost.
(zt) The provisions of section 13( 1 )(c) will not apply to organisations formed
before 1 -4-1962 which provide benefit on the basis of the trust deed. But
such organisations cannot amend their deed to take advantage of this
exception.
(zv) The following benefits have been listed, which can be treated as
violation under section 13( 1 )(c):
(a) lending of income or property to specified persons without ad
equate security or adequate interest, or both,
(Z?) making available building or property of the trust for the use of the
specified persons without charging adequate rent or other compen
sation,
(c) payment of salaries or remuneration to specified persons, in excess
of what may be reasonably paid for the services rendered by such
persons,
(cf) providing services of the organization to the specified persons
without adequate remuneration or compensation,
(e) purchase of shares, securities or other properties from specified
persons for consideration which is more than adequate,
(/) sale of shares, securities or other properties to specified persons for
inadequate consideration,
(g) diversion of income or property of the organization in excess of
1,000 to any of the specified persons, and
(A) investment of funds of the organization in concerns where the
specified persons have substantial interest.
It may be noted that the above list is only illustrative in nature and
not exhaustive. If it is found that certain other benefits are being
extended to excluded persons as specified in section 13(3), then the
exemption will.be lost.
(v) When loan is advanced to interested persons without adequate security
then the term 'adequate security’, will imply equal or nearly equal value
‘ of security.
(vi) When loan is advanced to interested person without adequate
appropriate interest, the term 'appropriate interest' will imply the rate
of interest paid by banks on deposits and not the rate of interest charged
by them.
73
(vn) There can be confusion between the term 'lending' and the term
'investment'. It has been held that 'investment' implies investment in the
capital of the organisation and therefore, debentures should be
considered as a loan and not investment.
(lx) Letting out of property for little or meagre rent will be considered as
a violation of section 13(l)(c).
WHO ARE INTERESTED PERSON
12.06(f) Under section 13(3), the following are considered as interested persons :
(d) author of the trust or founder of the institution ;
(Z?) person who has made a substantial contribution to the trust or
institution, that is to say, any person whose total contribution up to
the end of the relevant previous year exceeds fifty thousand rupees;
(c) where such author, founder or person is,a Hindu undivided family,
a member of the family;
(d) any trustee of the trust or manager of the institution (by whatever
name called);
(e) any relative of any such author, founder, person, member, trustee or
manager as aforesaid;
(/) any concern in which any of the persons referred to in clauses (a), (h),
(c), (cc) and (d) of section 13(3) has a substantial interest.
(iz) Subscribers to the memorandum are considered as founders, recently,
it was held that a founder need not necessarily have funded the
organisation.
(Hi) The benefits derived by employees who are the trustees or their
relatives cannot be held as income applied for the benefit of interested
persons.
14
wapter 13
Business Activities by a
Voluntary Organisation
INTRODUCTION
13.01 There is a considerable amount of confusion and controversy with regard
to business and profit oriented activities of a voluntary organisation. Business
activities may be undertaken as long as they are incidental to the main objects
of the organisation, provided the profit generated are not otherwise distributed.
However, there are various limitations and intricacies in this regard which have
been discussed in this chapter.
OVERVIEW OF THE LAW RELATING
TO BUSINESS ACTIVITIES OF NPOs
13.02 There were radical amendments in the definition of 'charitable purpose'
under section 2(15) in the year 2.008 which had far reaching implications on the
business income of charitable organisations.
13.03 The definition of 'charitable purpose' can be divided into 6 parts, viz. (i)
relief of poor, (ii) education, (iii) medical relief, (iv) preservation of environment,
(v) preservation of monuments or places or objects of artistic or historic
interest, (vi) advancement of any other object of general public utility. It may be
noted that the NPOs engaged in advancement of any other object of general
public utility, are not allowed to have any incidental business activity. In other
words only the NPOs engaged in the sixth category i.e. advancement of any
other object of general public utility cannot have business activity beyond T 25
lakh. This limit to 25 lakh is applicable from the assessment year 2012-13,
earlier 10 lakh.
13.04 It is worthwhile to recall that Finance Act, 2008 w.e.f. 1-4-2009 had
excluded any trade, commerce or business related activity by any trust or NPO
75
engaged in the sixth category i.e. advancement of any other object of general
public utility, from the purview of 'charitable purpose'. In other words an NPO
exclusively engaged in the field of education, medical relief, relief of poor,
preservation of environment & preservation of monuments can have incidental
business activity without any monetary ceiling.
13.05 Therefore, w.e.f. 01.04.2009 the income from trade, commerce or business
pertaining to those NPOs which come under the sixth category of 'charitable
purpose' were not be treated as charitable activity and the entire exemption of
such NPOs was at stake. Consequently, such organisations were not eligible for
any exemption Under section 11 or other provisions which provide exemptions
towards charitable purpose. Il may be noted that the issue of incidentality of
business will not be relevant to such group of NPOs. Whether the business
activity is incidental or not, is of no consequence, as this sixth category of NPOs
would lose the charitable status. However, the Finance Bill, 2011 had provided
a great relief to the sixth category NPOs as NPOs having business activities to
the extent of rupees 25 lakh (receipt) will not be affected.
13.06 It is pertinent to note that all other NPOs (other than the NPO coming
under the sixth category) can have business related activity beyond 25 lakh,
as permitted under section 11(4A), and other provisions pertaining to business
activities shall be applied without any changes.
13.07 Hitherto the law was very liberal with regard to the business activities
of NPOs and even income from unrelated businesses (for example, publishing
newspapers) held by them was eligible for exemption if the entire income was
used for charitable purposes. The law would continue to remain liberal for the
first five categories of NPOs. The NPOs were facing problem during the
assessment stages where in many cases the AO was withdrawing the charitable
status of the NPOs, if violation of the aforesaid provisions regarding business
activities was noticed. Now the Finance Bill 2012 has provided great relief by
making appropriate amendments which provide that the AO has no power to
ignore charitable status of an NPO unless the registration is cancelled by the
Commissioner of Income Tax under section 12AA(3). The AO can only withdraw
the exemption for that particular year.
SEPARATE BOOKS OF ACCOUNT
FOR INCIDENTAL BUSINESS
13.08 All NPOs should maintain separate books of account for incidental
76
business activities. Where the organisation is engaged in various business
activities then separate books for each of such activities are required to be
maintained. The Assessing Officer has the power to determine the income on
commercial basis based on the books of account or other records as may be
applicable. Any excess profit determined by the Assessing Officer shall be subject
to tax; however, if such excess profit has already been applied for charitable
purposes then it will not be taxed. Under section 11(4) business carried on by a
charitable or religious organisation is considered as property held under trust by
the organisations and, therefore, the exemptions under section 11(1) are available
subject to the provisions of section 11(4A).
THE TERM INCIDENTAL
IS VERY WIDE
13.09 After the Supreme Court's ruling in 2001 in the Thanthi Trust's case the
phrase ‘incidental to purpose’has become very wide in its ambit. The Supreme
Court has held that the requirement of business being incidental to attainment
of objectives would apply to businesses, both under section 11(4) and 11 (4A).
Further, the Supreme Court stated that if the income from business is wholly
utilised for the purpose of achieving its objectives then such business should be
considered as incidental to the objectives of trust. Similar views were held in
the Gujarat Maritine Board case in 2008.
13.10 In the light of the Supreme Court's ruling in the Thanthi Trust's and
Gujarat Maritine Board case, it seems that the use of the income generated from
business for charitable purposes will determine the incidentality of business
rather than the nature of business itself. In other words, if the trust or NPO is
under a legal obligation to apply the income from business for charitable purpose,
such legal obligation itself will be enough to treat it as incidental business.
13.11 Even after the amendments made by the Finance Acts, 2008,2009 & 2010
w.e.f. 1-4-2009, the legal and judicial position should remains intact as far as the
business or trade related income is concerned, including the Supreme Court’s
ruling in Thanthi Trust and Gujarat Maritine Board. The controversy is around
the nature of charitable purpose of a trust if it does not fall in the category of :
(z) relief of poor, (zz) education, (zzz’) medical relief, (zv) preservation of
environment, (v) preservation of monuments; then any trade or business related
activity, whether incidental or not, shall result in revocation of the entire
exemption.
77
SOME PERMISSIBLE INCIDENTAL ISSUES
13.12 Charity shows and collections through advertisements have been
considered as activities of voluntary nature towards the objects of the organisation,
therefore, they cannot be termed as incomes from business.
13.13 Letting out of dharamshalas, auditorium, running of libraries are considered
as income from house properties and not beyond the definition of 'charitable
purpose' as defined in section 2(75). Similarly, renting out of properties for
marriage ceremonies is also not considered as business income.
13.14 Printing and selling of new year cards for charitable purposes have been
considered as an activity in the normal course of functioning of a charitable
organisation and the provisions of section 11(4A) are not attracted.
RECENT CHANGES
INCLUDING FINANCE ACT, 2012
13.15 The summary of the impact of the recent changes including Finance Act,
2012 is as under:
- The organisation falling in the sixth limb shall lose its exemption, for
that particular year, if the gross receipts from trade, commerce or
business exceeds rupees 25 lakh.
- The Finance Act 2012 has clarified that the AO does not have any power
to question the charitable status of an organisation. He can only deny
‘the exemption for that particular year.
-
-
-
The exemption shall be lost only if commercial or business activities
are found in excess of rupees 25 lakhs. There may be various business
or profit oriented activities which may not be treated as commercial
or business activity. For the purposes of computing ? 25 lakh, the gross
receipt shall be considered and not the net income.
Even if an organisation is found to ‘be doing commercial or business
activity in excess of rupees 25 lakhs, it will not affect its charitable
status. It will continue to remain a charitable organisation, unless such
status is withdrawn by the CIT under Section 12AA(3).
The organisations falling in the first 5 limbs can continue to have
incidental business activity even beyond rupees 25 lakhs. The first 5
limbs are (i) relief of the poor, (ii) education, (iii) medical relief, (iv)
preservation of environment (including watersheds, forests and wildlife)
(v) preservation of monuments or places or objects of artistic or historic
interest.
78
'hapter 14
Treatment of Capital Gains
BACKGROUND
14.01 The definition of income under section 2(24) includes capital gains and
therefore for the purposes of section 11, capital gains should form part of the
income and consequently it should be treated on par with any other income
under section 11. Section 11(1 A), which deals with treatment of capital gains,
was not there during the inception of the Act. In the absence of any provision
related with capital gains, all charitable or religious organisations were required
to apply the capital gains for charitable purposes under the provisions of section
11 (l)(a). The requirement of utilising capital gains on fulfillment of the objects
of the organisation resulted in depletion of the corpus. Necessity was felt to
allow an option to the charitable and religious organisations whereby they can
re-invest the sale proceeds from capital assets in new capital assets, so that, in
the long run, the corpus would remain intact. The concerns of charitable
organisations were recognised in Circular No. 2-P(LXX-5), dt. 15-05-1963. In this
circular, it was stated that when the capital assets, so that forming part of the
corpus are transferred with a view to acquire further capital assets for the use
and benefit of the trust, the amount of capital gains should be regarded as
having been applied for religious and charitable purposes within the meaning
of section 11(1). Further, CBDT Circular No. 52, dt. 30-12-1970, clarified that the
intent of the legislature was not in favour of imposing tax liabilities in cases
where the capital gains as well as the consideration is applied for acquisition of
new capital assets. The charitable organisations were afforded an advantage in
getting an option of claiming benefits of re-investment with regard to capital
gains.
INSERTION OF SECTION 11(1 A)
14.02 The Finance (No.2) Act, 1971, inserted sub-section (1A) in section 11
79
regarding the treatment of capital gains. It provided that the capital gains will
be deemed to have been utilised for the purposes of section 11 (1 )(a), if the net
consideration received is re-invested in another capital asset. The insertion of
section 11(1A) seemed to be the logical outcome of the two circulars issued
earlier, as discussed above. More so, because the newly inserted sub-section
(1A) in 1971 was made retrospectively effective from 01-04-1962 i.e. the date of
commencement of the Act.
THE PROVISIONS RELATED
WITH CAPITAL GAINS
14.03 Section 11(1 A) first caters to two main situations, viz.,
(i) where the capital asset is property held under trust wholly for charitable
or religious purposes;
(ii) where the capital asset is held under trust in part only for such purposes
Within these main situations, the provision also caters to the following sub
situations:
(i) where the Whole of the net consideration is utilised in acquiring the
new capital asset;
(ii) where only a part of the net consideration is utilised for acquiring the
new capital asset.
In respect of each of these sub-situations under the main situations, the section
spells out the quantum of income which will be deemed to have been applied to
charitable or religious purposes.
QUANTUM OF GAINS DEEMED
TO HAVE BEEN APPLIED
14.04 The computation will depend upon whether the property is wholly held
under trust or partially held under trust.
14.05 Where property is wholly held under trust .'Under clause (a) of sub-section
(1A), capital gains arising from transfer of capital assets shall be deemed to have
been applied for charitable or religious purposes as indicated in the chart given
below:
80
Situation
The quantum of capital gains deemed
to have been applied for charitable
or religious purpose
■
The whole of capital gains
Whole of net consideration is utilised
in acquiring the new capital asset
■ Only a part of the net consideration
is utilised in acquiring the new capital
asset
Capital gains equal to excess of
utilised amount over cost of the
transferred asset. [In effect, capital
gains minus shortfall in reinvestment.]
Illustration : 1 - Showing treatment of capital gains
The following illustration clarifies the treatment of capital gains under section
11(1 A).
Cost of the Asset
? 40,000/? 1,00,000/-
Sale Proceeds/Net consideration
Re-investment in Capital Assets
(i)
?
(ii)
? 1,00,000/-
80,000/-
The computation of capital gain deemed to have been applied for the purposes
of section 11 (l)(a) is as under :
(i)
(ii)
(Hi)
(iv)
(v)
(vi)
Net consideration
Cost of the Asset
Capital gains
•
Investment in New Asset
Shortfall in re-investment (i) - (iv)
Capital gains deemed to have been applied
for charitable purposes (Hi) - (v)
(i)
1,00,000
40,000
60,000
80,000
20,000
(ii)
1,00,000
40,000
60,000
1,00,000
Nil
40,000
60,000
14.06 Where property is partly held under trust - As per clause (b) of section
11(1 A), when capital gain is derived out of property partly held for charitable or
religious purposes then appropriate fraction of the net consideration is required
to be re-invested in new capital assets. Here it may be noted that income from
trust property partly held for religious or charitable purposes is eligible for
81
exemption under section 1 l(l)(b) provided such trust was created before the
commencement of the Act.
Situation
The quantum of capital gains deemed
to have been applied for charitable
or religious purpose
■
The whole of capital gains
■
Whole of net consideration is utilised
in acquiring the new capital asset
Only a part of the net consideration
is utilised in acquiring the new
capital asset
Capital gains equal to excess of appropri
ate of utilised amount over appropriate
fraction of cost of transferred asset.
Illustration :2 - Showing treatment of capital gains
The following illustration clarifies the treatment of capital gains under section
11(1A).
[It has been assumed that 50% of the income from the asset was used for charitable
purposes]
Cost of the Asset
Sale Proceeds/Net consideration
Re-investment in Capital Assets
(i)
(ii)
.
? 40,000/? 1,00,000/? 80,000/? 1,00,000/-
The computation of capital gain deemed to have been applied for the
purposes of section 11 (l)(b) is as under :
(ii)
1,00,000
1,00,000
(i) Net consideration
40,000
40,000
(ii) Cost of the Asset
60,000
60,000
(Hi) Capital gains
(iv) ■ Investment in New Asset
80,000
1,00,000
(v)
Appropriate fraction of (ii)
20,000
20,000
(vi)
Appropriate fraction of (Hi)
30,000
30,000
40,000
50,000
20,000
30,000
(vii) Appropriate fraction of (iv)
(viii) Capital gains deemed to have been applied
for charitable purposes (vii) - (v)
I
82
CAN CAPITAL GAINS BE APPLIED
FOR CHARITABLE PURPOSES
14.07 The capital gains can also be applied for charitable purposes. It is at the
discretion of the organisation to apply the capital gains for charitable purposes
or towards purchase of a new capital asset. The definition of income under
section 2(24), includes capital gains and therefore, income for the purposes of
section 11( 1 )(a) includes capital gains. The historical background under which
section 11 (1 A) was enacted and the statute as it existed before 01 -04-1971 provides
ample testimony to the fact that capital gains form a part of the income available
for application under section 11(1 )(a). Circular No.2-P(LXX-5), dt. 15-05-1963 and
Circular No. 72, dt. 06-01 -1972 discussed the problem^ faced by the organisations
and the gradual erosion of the corpus, prior to the insertion of section (1 A). The
purpose behind insertion of section (1 A) was to provide an option to the assessee,
in order to keep its corpus intact. This option did not imply withdrawal of
exemption of capital gains under section 1 l(l)(a). An organisation, therefore can
utilise the capital gains for charitable purposes under section 1 l(l)(a). The portion
of capital gains which was not considered as deemed to have been applied for
charitable purposes under section 11(1 A), can also be applied for charitable
purposes under section 11 (1 )(a).
OVERALL SUMMARY
14.08 To Sum up the disucussions :
i) 'Income', as defined under section 2(24), includes capital gains, therefore,
for the purposes of section 11 (1 )(a), capital gains are also considered
as a part of the income.
ii) Since, capital gains are also considered as a part of the income,
therefore, they can be applied for charitable or religious purposes.
iii) But, if capital gains are also applied for charitable and religious
purposes, then it will amount to depletion of the corpus of the
organisation. In order to overcome this disadvantage, the Income tax
act has provided another option under section 11(1 A),by virtue of which
capital gains can be re-invested in another capital asset without loosing
exemptions.
iv) Under section 11(1A), if the entire amount of net consideration is
invested in another capital asset then, the entire capital gain will be
deemed to have been applied for charitable or religious purposes.
83
v) Under section 11 (1 A), if a part of the entire amount of net consideration
is invested in another capital asset.then, the appropriate fraction of
the capital gain will be deemed to have been applied for charitable or
religious purposes.
vi) The capital gain have to be re-invested in another capital asset in the
same year, unless the assessee exercises the option available under
explanation to section 11(1), to apply the income in subsequent year.
vii) Investment in fixed deposit is considered as an investment in capital
asset. The CBDT instruction no. 883, dated 24.09.1975, specifies that,
such fixed deposits should be for 6 months or more. But, various High
Courts have held that, such 6 months time limit is legally not valid. The
nature of asset is important and not the time frame. ■
viii) No time limit has'been provided under section 11(1 A), for retention of
the new asset. Under the prevailing provisions each years income and
application are treated separately for the purposes of exemptions,
therefore, if the asset is held till the end of the relevant previous year
and is disposed of in the subsequent year, then the exemptions cannot
be denied nor can they be withdrawn in the next year.
84
'hapter 15
Income Tax - Privileges
to the Donors u/s 80G
INTRODUCTION
15.01 As we already know that an NPO can avail income tax exemption by
getting itself registered and complying with certain other formalities, but such
registration does nqt provide any benefit to the persons making donations. The
Income Tax Act has certain provisions which offer tax benefits to the "donors".
All NPO's should avail the advantage of these provisions to attract potential
donors. Section 80G is one of such sections.
REGISTRATION UNDER
SECTION 80G
15.02 If an NPO gets itself registered under section 80G then the person or the
organisation making a donation to the NPO will get a deduction of 50% from
his/its taxable income. The NPO has to apply in Form No. 10G to the
Commissioner of Income Tax for such registration. Such approval is granted on
permanent basis.
DOCUMENTS TO BE FILED
WITH FORM 10G
15.03 The application form should be sent in triplicate to the Commissioner of
Income Tax alongwith the following documents :
i) copy of income tax registration certificate.
ii) detail of activities since its inception or last three years whichever is
less
85
iii) copies of audited accounts of the institution/NPO since its inception
or last 3 years whichever is less;
CONDITIONS TO BE FULFILLED
UNDER SECTION 80G
15.04 For approval under section 80G the following conditions are to be
fulfilled:
i) the NPO should not have any income which are not exempted, such as
business income. If, the NPO has business income then it should maintain
separate books of accounts and should not divert donations received
for the purpose of such business.
ii) the bylaws or objectives of the NPOs should not contain any provision
for spending the income or assets of the NPO for purposes other than
charitable.
iii) the NPO is not working for the benefit of particular religious
community or caste.
iv) the NPO maintains regular accounts of its receipts & expenditures.
v) the NPO is properly registered under the Societies Registration Act
1860 or under any law corresponding to that act or is registered under
section 25 of the Companies Act 1956.
FOR DEDUCTION UNDER 80G OVER
? 10,000 MUST BE PAID IN OTHER THAN CASH
15.05 Amendment by Finance Act, 2012 : A new section has been inserted by
Finance Bill 2012 where no deduction shall be allowed under this section in
respect of donation of any sum exceeding ten thousand rupees, unless such sum
is paid by any mode other than cash.
15.06 As per the amended Act there is a new sub-section (5D) to Section 80G
which provides that any payment exceeding a sum of ten thousand rupees shall
only be allowed as a deduction if such sum is paid by any mode other than cash.
These amendments will take effect from 1st April, 2,013 and will, accordingly,
apply in relation to assessment year 2013-14 and subsequent assessment years.
86
RENEWAL AND PERMANENT
NATURE OF SECTION 80G
15.07 Income tax department used to issue this registration for period of around
2 to 5 years and after end of such period the NPO was required to apply for
renewal of 80G certificate. However, with effect from 01.10.2009 the 80G
certificate has become permanent in nature. In other words, all 80G certificates
valid on 01.10.2009 or issued after 01.10.2009 are permanent in nature unless it is
specifically withdrawp by the Income Tax Department.
15.08 All NPOs holding a valid 80G registration as one 01.10.2009 need not
apply for renewal even if such certificate is expiring on a date subsequent to
01.10.2009.
15.09 This issue was clarified by the Finance Minister in the Finance Bill, 2009.
However, appropriate amendent were not made in the Income Tax Act or the
Rules to effect the changes. Therefore, during the past 2 years there was an
environment of confusion and controversy and the Commissioner of Income
Tax (CIT) have been asking the NPOs to apply for renewal even after 01.10.2009.
15.10 To resolve the controversy the Central Board of Direct Taxes (CBDT) has
recently issued a circular clarifying that all 80G registration valid as on 01.10.2009
and issued thereafter shall be perpetual in nature unless specifically withdrawn
by the income tax department. The circular is provided in Annexure 19. In
other words all 80G registration which were valid as on Is' October, 2009 have
become perpetual and there is no need to apply for renewal. Organisations may
attached a copy of the circular with the 80G certificate.
CASES CONFIRMING THE PERPETUAL
EFFECT FROM 1-4-2009
15.11 In the case of Baku Hargovind Dayal Trust v. Income-tax Appellate
Tribunal, Lucknow[20], 1] 199 TAXMAN 138 (All.) the Allahabad High Court held
that the CBDT circular dated CBDT Circular dated 3-6-2010 on the 80G registration
becoming perpetual with effect from 1-4-2009, shall apply to all existing approvals,
which were to expire on or after 1-10-2009. All such existing 80G certificates will
be deemed to have been extended in perpetuity unless specifically withdrawn.
This means that the petitioner's approval/exemption granted under section
80G, which was to expire on 31 -3-2010, would be deemed to have been extended
in perpetuity unless specifically withdrawn. Therefore CIT was not correct in
87
asking for the application for renewal afresh, in accordance with law, as by
virtue of-operation of law, the exemption shall be deemed to be continued in
perpetuity and it will continue, so long it is not withdrawn, as pei the piovisions
of the Act.
15.12 In the case Harnam Singh Harbans Kaur v. Director of Income-tax
(Exemption), Delhi [2012], 17 taxmann.com 103 .(Delhi - Trib.) it was held that
after omission of proviso to clause (vi) of section 80G(5) existing approval
expiring on or after 1-16-2009 would be deemed to have been extended in
perpetuity unless specifically withdrawn.
15.13 In the case Association for Advocacy and legal Initiatives v. Commissioner
of Income-tax-I, Lucknow [2011] 11 taxmann.com 24 (Luck) it was held that in
view of omission of proviso to section 8OG(5)(vi) with effect from 1-10-2009
approval once granted under section 8OG(5) shall continue to be valid in
perpetuity unless and until a show-cause notice is issued by concerned
Commissioner, showing his intention to withdrew already granted such approval.
15.14 In the case Astha Foundation v. Director of Income-tax (Exemptions)
[2012] 17 taxmann.com 258 (Delhi - Trib.) it was held that a charitable institution's
application dated 27-12-2010 seeking renewal of approval under section 80G
could not be rejected by Director (Exemptions), unless approval was specifically
withdrawn. In in view of Circular No. 7/2010, dated 27-10-2010 existing approvals
expiring on or after 1-10-2009 shall be deemed to have been extended in
perpetuity unless specifically withdrawn.
ILLUSTRATION OF BENEFITS
UNDER SECTION 80G
15.15 The persons or organisation who donate under section 80G gets a
deduction of 5096 from their taxable income. Here at times a confusion creeps in,
that the tax advantage under section 80G is 5096, but actually it is not so. 5096 of
the donation made is allowed to be deducted from the taxable income and
consequently tax is Calculated.
15.16 The ultimate benefit will depend on the tax rates applicable to the
assessee. Let us take an illustration. Mr. X an individual and M/s. Y Pvt. Ltd., a
Company both give donation of ? 1,00,000/- to a NPO called Satyakaam. The
total income for the year 1999-2000 of both Mr. X and Ms. Y Pvt. Ltd. is
? 2,00,000/-. Now assuming that the rates are 3096 for the individuals and 4096
88
for the Companies without any minimum exemption limit. The tax benefit would
be as shown in the table :
MR. X
MS. Y PVT. LTD.
2,00,000.00
2,00,000.00
ii) Tax payable before Donation
60,000.00
80,000.00
iii) Donation made U/S 80G
1,00,000.00
1,00,000.00
iv) Taxable Income after deduction 5096
of Donation U/S 80G.
v) Tax payable after Donation
vi) Tax Benefit U/S 80G (ii)-(v)
1,50,000.00
45,000.00
15,000.00
1,50,000.00
i)
Total Income for the year 2003-04
60,000.00
20,000.00
Note : The tax rates and mode of computation is not actual.
QUANTUM OF DEDUCTION
UNDER SECTION 80G(l)
15.17 Section 80G(l) provides the quantum of deduction available to various
organisations. Under section 80G, donations to certain specified organisations
are allowed 10096 deduction and donations to the remaining approved
organisations are allowed 5096 deduction, subject to certain limits. Section 80G(2)
provides the list of organisations, donation to which are eligible for deduction
under section 80G. The list of the organisations alongwith the quantum of
deduction available is provided as under :
10096
(3)
National Defence Fund set up by
Central Government, [clause (a)(i)]
Jawaharlal Nehru Memorial Fund, [clause (a)(ii)J
Prime Minister's Drought Relief Fund, [clause (a)(iii)]
(4)
Prime Minister's National Relief Fund, [clause (a)(iiia)]
10096
(5)
Prime Minister’s Armenia Earthquake
Relief Fund, [clause (a)(iiiaa)]
10096
(6)
The Africa (Public Contribution-India) Fund,
[clause (a)(iiiab)]
10096
(7)
The National Children's Fund, [clause (a)(iiib)]
5096
(8)
The Indira Gandhi Memorial Trust, [clause (a)(iiic)J
5096
(1)
(2)
5096
5096
89
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
The Rajiv Gandhi Foundation, [clause (a)(iiid)]
50%
The National Foundation for Communal
Harmony, [clause (a)(iiie)]
100%
Any approved University or educational institution of
National eminence, [clause (a)(iiif)]
100%
The Maharashtra Chief Minister’s Relief Fund,
[clause (a)(iiig)]
Gujarat Government's Earthquake Relief Fund,
[clause (a)(iiiga)]
Any Zila Saksharta Samiti, [clause (a)(iiih)]
100%
100%
100%
The National Blood Transfusion Council, [clause (a)(iiiha)] 100%
Any State Government Fund to provide Medical
Relief to the poor, [clause (a)(iiihb)J
100%
(17)
Central Welfare Fund of the Army, Naval Forces
or the Air Force, [clause (a)(iiihc)]
100%
(18)
Andhra Pradesh Chief Minister’s Cyclone
Relief Fund, [clause (a)(iiihd)]
100%
(19)
The National Illness Assistance Fund, [clause (a)(iiihe)]
100%
(20)
The Chief Minister’s Relief Fund or the
Lieutenant Governor's Relief Fund, [clause (a)(iiihf)]
100%
(21)
National Sports Fund set up by the
Central Government, [clause (a)(iiihg)J
The National Cultural Fund set up by the
Central Government, [clause (a)(iiihh)J
The Fund for Technology Development and Application
set up by the Central Government, [clause (a)(iiihi)]
100%
(22)
(23)
(24)
(25)
100%
100%
The National Trust for welfare of persons with Autism,
Cerebral Palsy, Mental Retardation and Multiple
Disabilities, [clause (a)(iiihj)]
100%
Any other fund or institution under section 80G,
[clause (a)(iv)]
50%
50%
(26)
The Government or Local Authority for purpose
other than promotion of Family Planning, [clause (a)(v)]
(27)
Any authority for planning development or improvement 50%
of Cities, Towns & Villages, [clause (a)(vi)J
90
(28)
Any corporation for promoting the interest of the
Minority Community set up by the Central Government
or the State Government [clause (a)(via)]
50%
(29)
The Government or Local Authority, Institution or
Association approved by the Central Government
for promotion of Family Planning, [clause (a)(vii)]
10096
Any payment towards repair or innovation of Temple,
Mosque, Gurudwara, Church and other places notified
by the Central Government, [clause (b)]
50%
(30)
(31)
(32)
Indian Olympic Association or any other association
notified by the Central Government under section
10(23), [clause (c)]
Any Trust, Institution or Fund providing relief to the
victims of Earthquake in Gujarat, [clause (d)]
100%
100%
CERTAIN ASPECTS RELATED WITH
DONATIONS UNDER SECTION 80G
15.18 The following aspects related with donations under section 80G are
important :
(z) Section 80G is applicable only to donations made in terms of money.
Explanation 5 clearly states that no deduction will be allowed in respect
of any donation unless such donation is in the form of money. In other
words donations in kind are not considered for deduction under section
80G.
(zz) Deduction under 80G is available only if the assessee has some income.
80G is not available in case of losses and the benefits under 80G cannot
be carried forward.
(Hi) Further the deduction is available against taxable income only. If some
part of the income is not taxable then it should be excluded for the
purposes of section 80G. In case the assessee has no taxable income
then the deduction under 80G will not be available even if the assessee
has other income, which is not subject to tax. Goodricke Group Ltd.
(No. l)v.CIT[l993] 201ITR 261 (Cal.).
(zv) It is not necessary for the donations to have any nexus with the business
prospects of the assessee. When a donation is claimed as expenditure
91
under section 37(1), it becomes necessary to establish a nexus of the
donation with thfc business. But deduction under 80G can be claimed
regardless of any nexus with business.
(v) It is not necessary that the donations should have been made out of
the taxable income of the assessee for the current year. If the assessee
makes donations out of reserve fund or previous years income, such
donations would be eligible for deduction under section 80G provided
the assessee has some taxable income. However, in Raja Shri Sailendra
Narayan Bhanja Deo v. CIT[ 1959] 36 ITR 94(Ori.), where the assessee
had both agricultural and non agricultural income, allocation of
donation as between them was considered unjustified. The assessee
was allowed full deduction inspite of the fact that a portion of the
contribution could have been made from agricultural income.
(vz) To claim deduction under section 80G it is necessary that the assessee
should produce adequate proof of the payment. In Golecha Properties
(P) Ltd. v. CIT [ 1988] 171 ITR 47 (Raj.), it was held that deduction under
section 80G would not be available in the absence of any proof of
payment. The Court observed that without any proper proof of
payment, the question of giving relief based thereon would not arise.
OVERALL SUMMARY
15.19 To sum up the discussions :
(i) Under section 80G, the donors get deduction from their taxable income
upto 100% of donation in certain cases.
(ii) Section 80G(l) specifies two categories of donations, one entitled for
10096 deduction and other entitled for 5096 deduction. In other words,
donations to certain organisations will fetch the donor 10096 deduction
and donations to remaining eligible organisation would qualify for 5096
deduction.
(iii) The maximum limit of qualifying amount under section 80G is 1096 of
the total income before allowing the deduction, unless the donation is
made to certain specific organisations such as Prime Ministers fund.
(iv) Section 80G is not applicable to donations in kind. Donations in the
form of money only are eligible.
(v) Deduction under section 80G is available only against positive income.
It cannot tie claimed against losses nor can it be carried forward.
92
(vi) Deduction is available against taxable income only. If some part of the
income is not taxable then it should be excluded for the purposes of
80G. However, in certain cases, it has been held that, full deduction
will be available even if the donation is made out of composite income
comprising both taxable and non-taxable income.
(vii) It is not necessary that the donation should have a nexus with the
prospects of business.
(viii) Donations need not necessarily be made out of current year’s income.
Donations out of the reserve fund or the previous year's income are
eligible for deduction.
(ix) To claim deduction under section 80G, it is necessary to produce
adequate proof of payment. All donation above 10,000/- should be other
than cash.
(x) For registration under section 80G, the organisation has to apply in
Form 10G to the CIT.
(xi) The approval is not permanent in nature w.e.f. 1-10-2009.
(xii) The CIT may call for such information and documents which may be
felt necessary for application.
(xiii) The time limit for processing the application is six months from the
date on which such application is made. In computing the period of six
months any time taken by the applicant direction of the CIT shall be
excluded.
(xiv) If the application is to be rejected opportunity of being heard should
be provided to the applicant and the reasons for rejection are also
required to be recorded.
(xv) The applicant has to comply with the following conditions, in order to
be eligible for approval :
(a) It must be established for charitable purposes.
(b) If the organisation has business income, then the donations received
should not be used for the purposes of business directly or indirectly.
(c) A certificate in this respect has to be issued to the donee specifying
that separate books of accounts are maintained and the donation
will not be used for the purposes of business directly or indirectly.
(xvi) The bye-laws shall not contain any provision for spending the income
or assets of the organisation for purposes other than charitable purpose.
93
(xvii) The organisation shall not be established for any particular religious
community or caste.This condition will not apply to organisations
established'for scheduled tribes, scheduled castes, backward tribes,or
for women and children. However, if less than 5% of income is used
for the benefit of any particular religious community or caste then
exemption and deduction under section 80G will not be affected.
(xix) The organisation shall maintain regular accounts of receipts and
expenditure.
(xx) The organisation should be properly registered under the various forms
of registration or should be a recognised university or an educational
institution.
94
'hapter 16
Income Tax - Privileges
to the Donors u/s 35AC
INTRODUCTION
16.01 As we already know that an NPO can avail income tax exemption by
getting itself registered and complying with certain other formalities, but such
registration doesn't provide any benefit to the persons making donations. The
Income Tax Act has certain provisions which offer tax benefits to the "donors".
All NPOs should avail the advantage of these provisions to attract potential
donors. Section 35AC is one of such sections.
REGISTRATION UNDER
SECTION 35AC
16.02 The Central Government approves certain NPOs and notifies them as
eligible for project or schemes for the purposes of, section 35AC. If an NPO
succeeds in getting such an approval for its projects then it stands a very good
chance of mobilising funds from the corporate and the business sector. Business
houses making contribution to such approved projects are allowed the benefits
of deducting such contribution as expenditure.
NATIONAL COMMITTEE
16.03 The Central Government has constituted a National Committee to identify
projects and schemes to be notified under section 35AC, such committee normally
consists of eminent persons. All NPOs are entitled to apply to the National
Committee to get its projects or schemes approved.
95
WHERE THE APPLICATION
IS TO BE MADE
16.04 The application for approval by the National Committee should be made
to the Secretary, National Committee for Promotion of Social & Economic
Welfare, Dept, of Revenue, Govt, of India, North Block, New Delhi - 110001.
THE APPLICATION AND
ITS ENCLOSURE
i) The application is to be made in 2 Sets, written either in Hindi or
English.
ii) Details such as name, address and status of applicant, the district/
’ward circle where assessed/PAN number. .
iii) Audited Balance Sheet, Profit & Loss Account or Income &. Expenditure
Account for the latest year and two preceding years.
iv) How constituted i.e. whether as a trust, society, etc supported by
relevant documents like trust deed, rules & regulation, memorandum
of association etc. and registration certificate, if any.
v) Name & Addresses of the persons managing the affairs of the
association or institution, including those who left the organisation
but were managing the affairs of the association or institution during
the 3 years preceding the date of application.
vi) If the association or institdtion is notified under section 10(23)(C)
or is approved for the purposes of section 80G, the particulars of such
approval granted.
Brief
particulars of the activities of the association or institution
vii)
during 3 years preceding the date of application or since inception
if the association or institution is less than 3 years old.
viii) Such other information as the association or institution may like to
place before the National Committee.
ADDITIONAL INFORMATION REGARDING
THE PROJECT/SCHEME TO BE SUBMITTED
(i) Title of project or scheme;
(ii) Date of commencement;
(iii) Duration and the likely date of completion;
96
(iv) Estimated cost of the project;
(v) Category or class of persons who are likely to be benefited from the
project or scheme;
(vi) Affirmation that no benefit from the project or scheme other than
remuneration or honorarium, will accrue to persons managing the
affairs of the NPO ;
(viii) Such other particulars as the applicant may place before the National
Committee.
CERTIFICATE TO BE ISSUED
TO THE DONOR
16.05 All approved NPOs are required to issue a certificate to the donor for all
contributions & receipts under section 35AC. The certificate is to be issued in
Form 5 8 A.
16.06 This certificate will enable the donor to claim exemption from its taxable
income. Further, the NPOs should also send an annual report to the National
Committee indicating the progress of the work relating to the project/scheme
and the following informations in respect of each contributor :
i) name of the contributors & their addresses.
ii) PAN.
iii) amount of contributions.
iv) the project/scheme for which the contribution is made.
v) total amount of contribution received during the year.
vi) total cost of the project approved by the National Committee.
16.07 Such annual report should reach the National Committee by 30th June,
following the financial year in which the amount is received.
DEDUCTION OF CONTRIBUTION
UNDER SECTION 80GGA
16.08 Section 35AC is available to assessees who have income from the head
'business' or 'profession'. Therefore, for the assessees who do do not have income
97
from business or profession, section 80GGA provides for deduction on donations
made to eligible projects under section 35AC. Section 80GGA, is a broader section
and deductions are also available for contributions made for scientific research
under section 35CCA & 35CCB, which have been withdrawn. 100 per cent
deduction is available under section 80GGA, subject to the available gross total
income under section 80A. Therefore, unlike section 35AC, deduction under
section 80GGA cannot be carried forward in the form of losses to next year. It may
be noted as per the Finance Act, 2012 there is a new provision which provides that
any payment exceeding a sum of ten thousand rupees U/s. 80GGA shall only be
allowed as a deduction if such sum is paid by any mode other than cash. These
amendments will take effect from 1st April, 2013 and will, accordingly, apply in
relation to assessment year 2013-14 and subsequent assessment years.
OVERALL SUMMARY
16.09 To sum up the discussions :
i) Under-section 35 AC, organisations having income from business or
profession can get 100 percent deduction. Charitable organisations can
get registered themselves u/s. SAC by applying to the National Committee
under rule 1 IF to 11-0, if they are carrying on any business.
ii) The Central Goverment has specified various types of projects of
national needs for which charitable organisations can make donations.
iii) Business houses making donations for the purpose of section 35AC,
should be careful that the donee organisation continues to enjoy
approval u/s. 35AC. As the approval under section 35(AC) is not
permanent in nature.
iv) To get approval u/s. 35AC two sets of application has to be made
alongwith specified enclosures to secretary of National Committee,
New Delhi.
v) The National Committee may recommend or reject the project but
when the approval is recommended then it is for a period of maximum
3 years and it could be further extended if the National Committee is
satisfied with the performance during the period.
vi) A certificate has to be issued to the donor in Form 58A. This certificate
will enable the donor to claim exemptions.
vii) The National Committee may withdraw the approval if the project is not
carried out in accordance with the approved conditions. To withdraw
98
a project National Committee should provide an opportunity of being
heard to the aggrieved organisation.
viii) Section 35AC provides deduction from income from business and
profession. Similar deduction is also available u/s. 80GGA, for assessees
having income from other heads.
99
'hapter 17
Audit & Filing
of Return
REQUIREMENT OF AN AUDIT REPORT
17.01 Section 12A states two conditions for availing the exemption under the
Act - the first condition is regarding application for registration and the second
condition is regarding audit by an accountant as defined in the Explanation to
sub-section (2) of section 288. All organisations are required to apply for
registration within one year from the date of their creation. If thei e is delay in
applying, for registration then the organisation should submit audit reports for
the past three years or as may be available.
17.02 Monetary limit: The monetary limit for compulsory audit under section
12(6) was raised from ? 2 5,000 to ? 50,000 by the Finance Act, 1994. It may be noted
that the Taxation Laws (Amendment) Act, 2006 has amended the clause (b) of
section 12 A w.e.f. the assessment year 2006-07. As per the amended provisions the
words ‘fifty thousand’h^ve been replaced by‘the words ‘the maximum amount
which is not chargeable to income tax', which implies that for the time being the
fifty thousand limit has been raised to rupees two lakh. The audit report shall be
filed in Form 10B and 10BB respectively.
FILING OF RETURN
17.03 All charitable organisations having income exceeding the maximum
amount which is not chargeable to income tax during the previous year are
required to file their returns of income. The 'income' for the purposes of filing
the return should be computed without giving effect to the provisions of sections
11 and 12 of the Act. Such returns are to be filed with the Income-tax Officer or
the Assessing Officer under whose local jurisdiction they fall. The return is to be
filed as per the provisions of section 139(4A) and (4C) in the1 manner provided in
100
section 139 of the Act. The Taxation Laws (Amendment) Act, 2006 has amended
section 139(4C)(e) and also inserted a new sub-section (4D) in section 139, as a
consequence medical institutions under section 10(23 QO'zwe) having gross receipts
of ? 1 crore or less are also required to file return if the income exceeds the
maximum amount which is not chargeable to income-tax during the previous
year. Further, the organisations notified under section 35(1 )(zz) & (izi) are also
required to file annual return if the income exceeds the maximum amount which
is not chargeable to income-tax during the previous year.
17.04 Filing of return made mandatory : The Finance Act, 2002 has inserted
sub-section (4C) in section 139 making it mandatory for the organisations
registered under section 10(27), 10(2223), 10(23/1), 10(2323)and 10(23Q,etc., to file
annual return under section 139(1). Further, the recent amendments by the
Taxation Laws (Amendment) Act, 2006 to section 139(4C)(e) and the insertion of
new sub-section (4D) in section 139 more or less brings most of the charitable
organisations under the obligation of filing return. Earlier no clear provision for
filing of return by these organisations was available, and it was not very clear
whether these organisations were required to file returns or not, though Bombay
High Court held in a case that returns were required to be filed. Now this
controversy seems to be resolved.
17.05 Forms and due dates: All organisations or trusts are required to file the
return in ITR-7 by the 30th September of the assessment year. The return must
be accompanied by an audit report in Form No. 10B prescribed under rule 17B
of the Income-tax Rules, 1962.
17.06 Filing of return by unregistered organisations: Organisations which are
not registered under the provisions of the Act, do not enjoy any exemption on
their income, hence, they are liable to file a return if the voluntary contribution
received by them or their income exceeds the maximum amount which is not
chargeable to income-tax in any previous year. Such organisations should file
their income-tax return in ITR-7.
DELAYED SUBMISSION OF
RETURN OF INCOME
17.07 An organisation which fails to furnish its return of income within the due
date can still submit its return of income any time before the expiry of one year
from the end of the relevant assessment year or before the completion of the
assessment, whichever is earlier. For instance, a return of income for the
financial year 2010-11 can be submitted upto 31 st March, 2013.
101
Under section 272A(2)(e), any voluntary organisation which fails to furnish the
return of income which is required to be furnished under sub-sections (4A) and
(4C) of section 139 or fails to furnish it within the time allowed and in the manner
required under that sub-section, it shall pay by way of penalty a sum of T 100 per
day during which the failure continues. Before imposing such penalty, an
opportunity of being heard shall be given to the organisation.
DOCUMENTS TO BE ATTACHED
WITH THE RETURN
17.08 One set of the following documents is required to be attached with the
return :
(t) Audit report in Form No. 10B.
(zz) Balance Sheet.
(Hi) Income and Expenditure Account.
(zv) Receipt and Payment Account.
(v) Copy of the registration certificate.
(vi) In case the organisation has accumulated income, resolution for
accumulation.
(viz) Form No. 10 in which application for accumulation is made.
REVISION OR CORRECTION OF MISTAKES
17.09 The concerned organisation can file a revised return at any time before
the expiry of one year from the end of the assessment year or completion of the
assessment, whichever is earlier, only if there is any mistake or omission in the
return. For instance, if the financial year for which the return is filed is 2007-08
then a revised return can be submitted any time on or before 31st March, 2010,
provided the Assessing Officer has not completed the assessment in the intervening
period.
*
RECAPITULATION
17.10 To sum up the discussions :
(i) Under section 12A, all charitable organisations have to get their
fxifio >oo
ISSIO
102
accounts audited if the total income exceeds the maximum amount
which is not chargeable to income-tax. Such audit report has to be in
Form No. 10B.
(u) Further, all charitable, organisations having total income exceeding the
maximum amount which is not chargeable to income-tax during the
previous year are required to file their returns of income. The return of
income is required to be filed in ITR-7, as per the provisions of section
139(4A)and(4C).
(Hi) An organisation can submit a delayed return under section 139(4), any
time before the expiry of one year from the end of the relevant
assessment year.
(zv) An organisation can file a revised return at any time before the expiry
of one year from the end of the relevant assessment year or completion
of the assessment, whichever is earlier, only if there is mistake or
omission in the return.
(v) One set of the following documents is required to be attached with the
return :
(a) Audit report in Form No. 10B.
(b) Balance Sheet.
(c) Income and Expenditure Account.
(d) Receipt and Payment Account.
(e) Copy of the registration certificate.
(/) In case the organisation has accumulated income, resolution for
accumulation.
(g) Form Np. 10 in which application for accumulation is made.
103
'hapter 18
Permanent Account Number (PAN)
INTRODUCTION
18.01 All organisations which are required to furnish returns of income under
section 139 should apply for a Permanent Account Number (PAN). As the name
suggests, it is a taxpayer’s permanent identification number allotted by the
income-tax department. PAN once allotted remains valid forever unless it is
cancelled or changed by the department. Explanation to section 139A(8) defines
PAN as "permanent account number under the new series means a permanent
account number having 10 alphanumeric characters and issued in the form of a
laminated card".
APPLICATION PROCEDURES
18.02 The application for allotment of PAN is required to be made in Form No.
49A; the acknowledgement of the application is returned to the applicant. The
application for PAN should be accompanied by the proof of identity and
address of the applicant.
NECESSITY AND USES OF PAN
18.03 Under the existing law it is absolutely necessary for all income-tax
assessees to quote PAN in the following documents.:
(/) in the income-tax return and in all other correspondences with the
income-tax department.
(n) in all challans for payment of any tax, interest and penalty due under
the Income-tax Act.
104
(Hi) in all documents related with the following transactions :
*
(a) Is in occupation of an immovable property exceeding a specified
floor area, whether by way of ownership, tenancy or otherwise, as
may be specified by the Board in this behalf;
(b) Is the owner or the lessee of a motor vehicle other than a two
wheeled motor vehicle, whether having any detachable side car
having extra wheel attached to such two wheeled motor vehicle;
(c) Has incurred expenditure for himself or any other person on travel
to any foreign country;
(d) Is the holder of a credit, not being an "add-on" card issued by any
bank or institution;
(e) Is a member of a club where entrance fee charged is twenty -five
thousand rupees or more.
Further, if any part of the income of the assessee is liable to deduction of tax at
source, the assessee is required to intimate his PAN to the person responsible
for deducting tax at source.
PENALTIES
18.04 The voluntary organisations which fail to comply with the provisions of
section 139A are subjected to penalty under section 272B, which was inserted
by the Finance Act, 2002. A sum of ? 10,000 by way of penalty can be levied on
such organisations after giving a reasonable opportunity of being heard. It may
be noted that penalty is leviable not only for not applying for PAN, but also for
(i) failure to quote PAN in the prescribed documents, or (zz) failure to intimate
such PAN when required, or (Hi) quoting or intimating a number which is false.
Penalty is, however, not leviable if the assessee proves that there was reasonable
cause for the failure.
105
Tiapter 19
Tax Deduction
Account Number (TAN)
INTRODUCTION
19.01 Under the Income-tax Act, every person making payment or crediting
income of specified types to another person is required to deduct a specific
proportion of amount payable/creditable at the time of making payment or
giving credit, whichever is earlier and deposit the sum so deducted [Refer further
to para 19.4]. Every such person shall have to apply to the Assessing Officer for
allotment of a Tax Deduction Account Number (TAN) under section 203A.
PROCEDURE FOR OBTAINING TAX
DEDUCTION ACCOUNT NUMBER (TAN)
19.02 All organisations which are required to deduct tax at source are required
application
for the
to obtain TAN from the Assessing Officer by making an i,
J'
allotment of TAN in Form 49B.
MANDATORY NATURE OF PROVISIONS
19,03 Under the income-tax law, it is mandatory to apply for and obtain TAN if
an organisation is liable to deduct tax at source on certain payments which are
discussed in the following paras and the organisation deducting tax is required
to quote the TAN in the following documents :
(i) all challans while depositing the tax so deducted.
(n) all certificates issued against the tax deducted.
(in) all returns furnished in respect of tax deducted at source.
(iv) all other documents pertaining to such transaction as may be prescribed.
106
TYPES OF PAYMENTS REQUIRING
TAX DEDUCTION AT SOURCE
19.04 Section 200 of the Act specifies a list of payments which requires
deduction of tax at source. From the viewpoint of voluntary organisations, the
following are the important payments, in respect of which tax must be deducted
at source:
Rate of
Nature of
Amount above
Deduction
Payment'
which TDS will
operate (in
Salary incomes must be more than
exemption limit after deductions.
Contract/Sub-contract**
30,000
1% other 2%
Interest
Rent (Land & Building)
1,80,000
Salary
Rent (P&M, Equipment,
Furniture & Fittings)
Average Rate
Individual/HUF
10%
1,80,000
2%
Fees for Professional
or Technical Service
30,000
Any remuneration or commissionAny Amount
paid to director of .company
(w.e.f. 1 July 2012)
76%
10%
** Tax shall be deducted at source where the amount credited/paid to a contractor/
sub-contractor exceeds 30,000 in a single payment or F 75,000 in the aggregate
during the financial year.
Note: If deductee's PAN is not available or invalid then 20% TDS will be deductible.
TCS (Tax collected at source) by seller on bullions or jewellery (if sale
consideration is paid in cash exceeding INR 2 Lakh) is 1% w.e.f. 1 July 2012.
DEPOSIT OF TAX
DEDUCTED AT SOURCE
19.05 The tax deducted at source is required to be deposited to the credit of
the Central Government within the stipulated time limit. Such deposit can be
made in various specified scheduled banks with the help of TAN challans.
107
Whenever a TDS is deposited, one should not forget to quote the TAN on
challan.
19.06 The time limit for depositing the amount of TDS is as under :
♦ For salaries as well as for other payments : within one week from the
end of the month in which deduction has been made.
However, in case of 'other payments' when amount is credited by a person to
the payee s account as on the date up to which the accounts of such peison aie
made : Within 2 months from the end of the month in which such date falls.
With effect from 1-6-2004, the income-tax department has introduced OLTAS
(online tax accounting system) wherein a single copy of Challan No. 281 is
required to be filed.
ISSUE OF CERTIFICATE
19.07 Under section 203, the organisation deducting TDS is required to issue a
certificate to the person from whose income, tax has been deducted. This
certificate will enable the person to claim credit for such tax deducted in his/
her return of income. Organisations can prepare the certificate in their own
stationery but in the prescribed form. The prescribed form is Form No. 16/ 16AA
for deduction of tax from salary. For all other cases, it is Form No. 16A. Form
12BA is a statement showing particulars of perquisites, other fringe benefits or
amenities and profits in lieu of salary with value thereof.
19.08 Where the tax has been deducted or deposited on or after 1-4-2008,
there is no requirement to furnish this certificate. However, the TDS certificate
shall be issued by the prescribed income-tax authority or the person authorised
by such authority within the prescribed time after the end of each financial
year beginning on or after 1-4-2008 to the person from whose income, tax has
been deducted at source or in respect of whose income, tax has been paid.
RETURNS TO BE FURNISHED
BY THE ORGANISATION
19.09 All organisations responsible for deduction of tax at source are required
to submit to the prescribed income-tax authority; a return(s) within a stipulated
L
108
period after the end of the quarter. The relevant return form and the month by
which it should be filpd are as under :
Form
Na
Last date for
Submission
Quarterly return for salaries and perquisites 24Q
15th July, 15th Oct.,
15th Jan. & 15th May
Types of Return
Quarterly return for others
26Q .
15th July, 15th Oct.,
• 15th Jan. & 15th May
INTEREST, PENALTIES AND PUNISHMENT
19.10 Failure to deduct income-tax at source on various payments as discussed
may attract interest, penalty and even severe punishment.
- If an organisation does not deduct tax or deducts tax but does not
deposit the same then interest at the rate of 1 per cent for every
month or part of a month on the amount of such tax from the date on
which such tax was deductible to the date on which such tax is
deducted and at the rate of 1.5 per cent for every month or part of a
month on the amount of such tax from the date on which such tax was
deducted to the date on which such tax is actually paid, under section
2O1(1A).
- Now from 1 July 2012 if TDS return is filed late then late fees of 200
per day will have to be deposited before filing TDS / TCS return,
however it is specified that late fees should not exceed TDS/TCS for
that quarter. In addition to this, if TDS and interest due thereon is not
deposited within one year from the due date then penalty ranging
from 10 thousand to 1 lakh may be imposed.
- The Income-tax Department may also levy penalties to the extent of
the amount of tax not deducted in cases of failure to deduct tax, under
section 271 C( 1).
- If deductee’s PAN is not available or invalid then 20% TDS will be
deductible.
- On furnishing wrong information (like wrong PAN & amount) in TDS
return then penalty ranging from 10 thousand to 1 lakh may be
imposed.
109
'hapter 20
TDS on Income of NPOs
WHEN NO TAX NEEDS TO BE DEDUCTED OR
TAX MAY BE DEDUCTED AT LOWER RATE
20.01 On payee's application in Form No. 13, if the Assessing Officer is .satisfied
that total income of payee justifies no deduction or deduction of tax at lower rate,
he may issue an appropriate certificate to that effect to the payer.
20.02 Declaration under section 197A: No deduction of tax is to be made in the
case of a payee (other than a company or firm), if he furnishes a declaration in
writing in duplicate in the prescribed form [Form No. 15G] and verified in the
prescribed manner, to the payer of such income to the .effect that tax on his
estimated income of the relevant previous year will be nil.
20.03 The payer of the income is required to deliver to the Commissioner of
Income-tax one copy of the aforesaid declaration on or before the 7th day of
month following the month in which the declaration is furnished to him [section
197AJ. Where payments are to be made to the same person more than once in a
year, the declaration in the relevant form may be furnished before the first
payment in a year becomes due. It may also be noted that in the declaration,
particulars of only such securities are to be furnished, the income from which is
payable by a person to whom declaration is furnished - Circular No. 351, dated
November26,1982.
20.04 Restriction on filing self-declarations w.e.f 1-6-2002: Under sub-section
(1B) of section 197A, inserted by the Finance Act, 2002 with effect from 1 -6-2002,
the provisions of section 197A shall not apply where the amount of income on
the following items, or the aggregate of such income, exceeds the maximum
amount which is not chargeable to tax:
(a) Interest on securities
110
(b) Dividends
(c) Interest other than interest on securities
(d) Payments in respect of deposits under National Savings Scheme
(e) Income in respect of units.
20.05 In other words, if the income of a trust under any of the above items, or
the aggregate income of the trust under all the above items, exceeds the
prescribed limit, such a trust cannot ab initio [lie any declaration in respect of the
above items, and even if it files a declaration, the payer cannot act on the same
and make the payment without deducting tax at source. The payer has to just
ignore the declaration and deduct tax at source.
20.06 Special provisions for certain entities : With effect from 1-4-2004, the
newly inserted rule 28AB provides for obtaining a certificate of no deduction of
tax at source in the case of certain entities, provided certain conditions are
satisfied.
20.07 Persons covered - The following persons are covered in this regard:
(a) Persons in receipt of income or deemed income derived from property
held under trust wholly for charitable purposes and who claim exemption
under section 11 or section 12
(Z?) Persons mentioned below who are required to file a return of income
under section 139(4C) & (4D):
(?) Scientific research association referred to in section 10(27);
(n) News agency referred to in section 10(225);
(Hi) Association or institution referred to in section 10(23A);
(zv) Institution referred to in section 10(235);
(v) Fund or trust referred to in section 10(23Q(iiiae);
(vi) Fund or trust referred to in section 10(23Q(zv);
(vii) Trust or institution referred to in section 10(23Q(v);
(viii) University or other educational institution refeired to in section
10(23Q(vz);
(ix) Hospital or other medical institution referred to in section
10(23C)(vid)-,
(x) Trade Union or association referred to in section \.0(24)(a)(b).
Ill
20.08 Form of Application : The persons mentioned above may make an
application in Form No. 13 to the Assessing Officer for the grant of a certificate
under section 197(1) authorising them to receive incomes of any type without
deduction of tax at source, if the conditions mentioned below are satisfied.
20.09 Conditions to be Satisfied : The persons must satisfy the following
conditions in order to make the application in Form No. 13:
(0 The persons must have furnished the returns of income for all the
assessment years for which such returns became due on or before the
date on which the application in Form No. 13 is made;
the entity if for the time being approved for the purpose of exemption
from income-tax;
(n'O the applicant must give a list of deductors from whom amounts are to
be received without deduction of tax at source every six months along
with the names, address and the amounts received.
20.10 Issue of Certificate : The Assessing Officer may issue a certificate
authorising payment of incomes without deduction of tax at source, if he is
satisfied that all the conditions are fulfilled and that the issue of any such
certificate will not be prejudicial to the interests of revenue. The certificate is
to be handed over to the applicant.
20.11 Validity of the Certificate: The certificate shall be valid for the financial
year specified therein unless it is cancelled by the Assessing Officer at any time
before the expiry of the period of validity of the earlier certificate.
20.12 Issue of fresh Certificate : If the assessee desires, he can make an
application for a fresh certificate, after the ex]:piry of the period of validity of
the earlier certificate.
20.13 Action by Applicant: The applicant may furnish copies of certificate to
the persons responsible for paying the income for the purpose of no deduction
of tax at source.
112
hapter 21
Brief Analysis of
FCRA 2010
INTRODUCTION
21.01 The Foreign Contribution (Regulation) Act 2010 and The Foreign
Contribution (Regulation) Rules 2011 have been enacted w.e.f. 01.05.2011. The
old FCR Act and Rule, 1976 have been repealed. The FC Rules were further
amended vide the Foreign Contribution (Regulation) Amendment Rules, 2012
[G.S.R. 2,92 (E) dated 12,h April, 2012], In this chapter, we are discussing the
major changes and the impact thereof.
THE SCOPE OF FCRA EXPANDED
21.02 The new FCRA, 2010 has a much broader applicability; it is applicable to
individuals, Hindu Undivided Family (HUF), Association and a section 25 company.
In the old Act, the term person was not defined and generally the Act referred
to the term 'Association'. However, now it is very clear that FCRA applies to the
above category of persons including individuals.
DOES FCRA APPLY TO COMMERCIAL
OR BUSINESS TRANSACTIONS
21.03 Movement of foreign funds in the normal course of commerce and
business is outside the purview of FCRA. Therefore, business organisations are
not covered by FCRA 2010 also. However, the provision of Foreign Exchange
Management Act, 1999, which is a financial legislation, would be applicable. The
new act exempts commercial transactions of NPOs, also.
113
WHAT IS FOREIGN CONTRIBUTION
21.04 Foreign Contribution includes all kind of transfers from foreign sources.
The new act retains the earlier definition which includes any kind of transfer,
delivery or donation of currency, article or securities. The notable change in the
new act is that Foreign Contribution does not include commercial receipts. In
other words, an NPO can receive consultancy or other commercial receipt from
foreign sources even without having FC registration. FC registered NPOs should
receive such receipt in their domestic account and the commercial receipts are
not required to be reported to the FCRA department. Further, it has been clarified
that any income from foreign funds or foreign assets will be( treated as foreign
contribution. However, for the purposes of this Act, any article received as gift
upto the value of ? 25,000/- is exempted vide the Foreign Contribution
(Regulation) Amendment Rules, 2012 [G.S.R. 292 (E) dated 12,h April, 2012].
PANCHAYAT HAS BEEN
DEFINED AS LEGISLATURE
21.05 'Panchayat' has been included under the definition of ‘Legislature 'under
section 2(1)(A:). The NPOs working closely with Panchayat will have to be careful
and ensure that their activities are not interpreted as of political nature. They
should not get into activities such as the political processes of election and
constitution of Panchayats.
FC FROM RELATIVES OR
SCHOLARSHIP, STIPEND ETC.
21.06 The term 'Relative’ has been defined for the first time giving it the same
meaning as under section 2(41) of the Companies Act, 1956.
21.07 No permission is required to be obtained for receipt of foreign
contribution from a relative under section 4 which is a relaxation. However,
rule 6 provides that any gift from relatives above ? 1,00,000/- in one year shall
be intimated to the FCRA department in Form FC-1.
21.08 Similarly, scholarship, stipend etc. received from foreign sources are
excluded under section 4. This again is a relaxation over the old Act.
114
ORGANISATIONS OF POLITICAL NATURE
21.09 Organisations of political nature cannot accept foreign contributions
which was possible under the old Act with prior permission. Elaborate Rules
have been framed for notifying any organisation as an organisation of political
nature.
21.10 Under Rule 3, the FCRA department may declare any organisation as an
organisation political nature, if :
-
It has political objectives in its memorandum.
-
It is a trade union.
It is a group of political nature.
-
It is like Student Union, Worker Union, Youth Union and Women wing
of Politcal party.
-
Any organisation if any material evidence found to be engaged in
political acivity.
Any organisation found to be engaged, habitually, in activity such as
'Bandh', 'Rasta Roko’ 'Rail Roko' and 'Jail Bharo'.
-
21.11 Under this provision, NPOs may be declared as organisations of political
nature and consequently may loose FC registation. However, any such order
can only be passed after placing it before both the houses of the parliament
under section 49 of the Act.
TRANSFER OF FUNDS TO FC
REGISTERED ORGANISATIONS
21.12 The Act prohibits transfer of funds to any other organisation unless the
recipient organisation also possesses FC registration. However, under Rule 24,
the donor organisation should ensure that the recipient organisation is also
having FC registration and has not been proceeded against under any provisions
of FCRA Act.
TRANSFER OF FUNDS TO
UNREGISTERED ORGANISATIONS
21.13 The old Act prohibited transfer of funds to any other organisation unless
115
the recipient organisation also possesses FC registration. However, the new Act
allows transfer of FC funds to even unregistered organisations with prior
approval.
21.14 Section 7 of FCRA 2010 provides that foreign contribution can also be
transferred to non FC organisation with prior approval. Rule 23(4) provides that
an organisation may apply in Form FC-10 for transfer of FC funds to uni egistei ed
organisations. Such transfer could be made to multiple recipients through one
prior approval. However, the total amount of transfer to unregistered
organisations shall not exceed 10% of the total foreign contribution received.
21.15 When the FCRA 2010 was enacted w.e.f. 1st May of 2011, there was a
requirement to get recommendation from the District Magistrate for transfer
of funds to unregistered organisation. Fortunately, the amended Foreign
Contribution (Regulation) Amendment Rules, 2012 [G.S.R. 292 (E) dated 12n
April, 2012], have withdrawn the requirement of getting recommendation from
the District Magistrate. In other words, an application for permission to transfer
funds to unregistered organisations can be directly made to the FCRA deparment.
ADMINISTRATIVE EXPENSES
21.16 Under the new FCRA, 2010 there is a new provision which prohibits
administrative expenses beyond 50%. The definition of administrative expenses
includes various expenses such as rent, vehicles etc. which can also be incuned
for programme purposes.
21.17 This amendment may cause hardship in interpreting the Rule 5 constituted
in this regard. The definition of Administrative Expenditure briefly is as under :
-
Remuneration and other expenditure to Board Members and Trustees
-
Remuneration and other expenditure to persons managing activity.
-
Expenses at the office of the NPO
-
Cost of accounting and administration
Expenses towards running and maintenance of vehicle
-
Cost of writing and filing reports
-
Legal and professional charges
-
Rent and repairs to premises
116
21.18 The Rule further provides that the following salaries shall not be
considered as administrative in nature :
-
Salaries of personnel engaged in training or for collection or analysis
of field data of an association primarily engaged in research or training
(1st proviso)
-
Expenses related to activities i.e. salaries to doctors of hospital, salaries
to teachers of school etc. (2nd proviso)
21.19 From the above definition of administrative expenses, the followings
issues need greater clarity :
-
All kinds of vehicle expenditure has been considered as administrative
in nature. However, the last proviso provides that expenses for
furtherance” of activity shall be excluded. Therefore, it should be
expected that all programme related vehicle expenses and other
expenditures are excluded from calculation of administrative expenses.
-
The Rule includes the salaries of persons engaged in management of
activity and at the same time the proviso as discussed above also applies.
Therefore, it is expected that all direct programme salaries shall be
excluded.
-
In case of network organisations, the programme is implemented
through partner organisations. In such cases, it is not clear how the
admn. expenditure of the mother NPO shall be determined. It is
expected that the grant given to the subsequent organisation will be
considered as a part of programme expenses of the mother NPO.
APPLICATION FOR REGISTRATION &,
PRIOR PERMISSION
21.20 Under section 11 of new Act, application for registration and prior
permission is required to be made. There are no major changes under this
provision ’and all the existing registered organisations will continue to remain
valid for the next 5 years from the enactment of this Act. Other relevant issues
in this regard are as under :
-
All new registration and prior permission applications have to be made
in Form FC-3 and FC-4 respectively. All applications should be made
electronically followed by hard copies within 30 days of the electronical
submission, otherwise the application will become void. A new
117
application can only be made after 6 months of the cessation of the
old application, both in the case of registration and prior permission.
-
A new prior permission application can be made any time or
simultaneously if it pertains to a different project.
21.21 In the old FCRA, there was no time limit for processing an application
for registration. Under section 12 of the FCRA 2010, applications have to be
processed within 90 days. The FCRA department shall also provide reasons in
case of rejection of applications.
21.22 In case of prior permission, there is no provision which allows deemed
approval as was the case in the old act.
POWERS FOR REJECTING
AN APPLICATION
21.23 The FCRA 2010 has provided considerable powers to the authorities for
rejecting an application for prior permission or registration. Under Section 12,
various strict conditions have been provided which include that the applicant
should not have been prosecuted or convicted for indulging in‘activities aimed
at conversion or creating communal tension. It may be noted that the word
'prosecuted' has been used which implies that even if there is a Court proceeding
pending, then also FCRA registration could be denied.
SUSPENSION OF
REGISTRATION CERTIFICATE
21.24 Section 13 of the new Act allows the power to suspend the registration
pending cancellation of certificate, for a period upto 180 days. During suspension
the organisation cannot receive any foreign funds without prior approval. Such
organisation cannot even use the FC funds available with them. However, such
organisation can utilise the existing foreign funds to the extent of 25%, with
prior approval from FCRA department. Before suspending any registration, the
FCRA department shall record the reasons in writing. One very important issue
under this section is the absence of any provision for an opportunity of being
heard, before suspension which seems to be very harsh and unfair.
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CANCELLATION OF
REGISTRATION CERTIFICATE
21.25 Under section 14, the Central Government may cancel the registration
certificate for various reasons. However, no certificate shall be cancelled unless
reasonable opporturiity of being heard is provided. The reasons for cancelling
the certificate are : ’
(z) Providing false information
(ii) Violating the terms and conditions like filing of return, etc.
(Hi) Violating the Act or the Rules
(zv) Acting against public interest
(v) No reasonable activity for 2 years.
21.26 Once a registration certificate is cancelled, such person shall not be
eligible for registration or prior permission for the next 3 years from the date of
cancellation.
21.27 The term “reasonable activity” has not been defined. It may so happen
that an NPO may have activity from local sources. Therefore, it is understood
that reasonable activity whether from FC or local sources should be there for
retaining FC registration. The FCRA department will provide an opportunity of
being heard before making any cancellation.
FOREIGN COMPANY &
FOREIGN SOURCE
21.28 The old FCRA 1976 considered Indian companies, where more than 50%
of equity is held by foreigners, as foreign source. For example : companies like
ICICI Bank, Infosys etc. were foreign source and donations can not be accepted
from them without FCRA registration. Unfortunately, this provision has been
retained in the new FCRA 2010, though the stated intent of the Government was
to exclude such companies. This provision could be a drafting error as the FCRA
2010 has defined a foreign company under clause (g) of Section 2, which does
not include Indian Companies. This clause is apparently inserted to exclude
Indian companies having more than 50% of Foreign equity holding. However
section 2(j) which defines the term 'foreign source' includes an Indian company
under the category of foreign source if more than 50% of its equity is held by
foreigners.
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21.29 Therefore, under this provision, NPOs should be careful in receiving
funds from Indian companies, because if any Indian Company's equity is held
by foreigners in excess of 5096, then FC registered NPOs can only accept such
contributions.
BUSINESS / CONSULTANCY
INCOME OF AN NPO
21.30 As discussed earlier, the new Act excludes consultancy or commercial
receipts from the purview of foreign contribution. As per the new provisions,
any fee or cost against business, trade or commerce shall not be considered as
foreign contribution. In other words, such receipts can be treated as local income.
However the problem is that this provision is in contradiction with the amended
section 2(15) of the Income Tax Act which prohibits trade or business related
receipts beyond ^25 lakh. Therefore, NPOs should be careful in treating
consultancy income and other receipts as local income even though it is now
permissible under the FCRA Act.
PERSONS SPECIFICALLY DEBARRED
FROM RECEIVING FOREIGN CONTRIBUTION
21.31 Section 3 of FCRA 2010 specifies that the following persons cannot
receive foreign contribution:
(a) candidate for election.
(Z?) correspondent, columnist, cartoonist, editor, owner, printer or
publisher of a registered newspaper.
(c) Judge, Government servant or employee of any corporation.
(d) member of any legislature
(e) political party or office-bearer thereof.
(f) Organisation of a political nature.
Association or company engaged in broadcast of audio or visual news.
Correspondent, columnist etc. related with the company refered in
clause (g)
te)
w
21.32 It may be noted that the category of persons debarred from receiving
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foreign funds have been increased. The clause (f), (g) and (h) have been added by
the FCRA 2010. Under the enlarged list of debarred persons, NPOs engaged in
(i) Audio/Visual broadcast of public news or current afairs (ii) activity of political
nature. In the light of the new law, NPOs should be careful about the publications,
periodicals and the contents of their websites.
21.33 The above mentioned persons cannot receive foreign contribution subject
to certain exceptions specified in section 4 which are as under:
“(a) If they receive foreign funds by way of salary, wages or remuneration
for services rendered. Or if they receive payment in ordinary course of
business transaction in India by such foreign organisation or source.
(b) If the funds are received in the course ,of international trade or
commerce or in the ordinary course of business transacted outside
India.
(c) Payment is received as an agent of a foreign source of organisation in
relation to any transaction made by such foreign organisation with the
central or state government.
(d) If the payment is received by way of gift or presentation as a part of
any Indian delegation within the norms of acceptance described by
Central Government.
(e) From his / her relative.
(/) By remitance under normal course under FEMA 1999.
(g) By way of Scholarship, stipend etc."
RENEWAL OF REGISTRATION
EVERY 5 YEARS
21.34 The FCRA 2010 provides for renewal of registration of NPOs every' 5
years. However, the Act has provided relief to all the existing registered NPOs
for the first 5 years from the date of enactment. In other words, all existing
registered NPOs have to renew their registration at the end of the period of
5 years from the date of enactment of FCRA 2010. This implies that the renewal
of all the existing NPOs will become due on 1st May 2016.
21.35 Rule 12 provides the procedure for renewal of registration. NPOs have
to apply in Form FC-5 six months before the due date. Therefore, all the existing
NPOs have to file their FC-5 for renewal before 1st November 2015. The Rule
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further provides that NPOs implementing multi year projects shall be eligible to
apply for renewal twelve months before the date of expiry of the certificate of
registration.
21.36 In case an NPdO fails to apply for renewal within the due date, its
registration shall become invalid. However, the department may condone the
delay if satisfactory reasons for not submitting the renewal application are
provided. Such delay should not be for more than 4 months after the expiry of
the original certificate of registration.
POWER TO PROHIBIT SOURCES FROM
WHICH FC CAN BE ACCEPTED
21.37 The Act provides power to the Central Government under section 11 (3)(iv)
to notify such source(s) from which foreign contribution shall be accepted with
prior permission only. It implies that the Central Govt, may notify specific donois
or countries from which foreign funds could not be received or shall be received
with prior permission only.
MULTIPLE BANK ACCOUNT
21.38 Section 17 of FCRA 2010 provides that multiple bank accounts can be
opened for the purposes of utilisation provided only one bank account is
maintained for receiving foreign contribution. This amendment.provides a great
relief to all the NPOs who were struggling because of the disallowance of multiple
bank accounts under FCRA, 1976.
21.39 Under Rule 9 it is provided that the NPOs may open one or more bank
accounts for the purpose of utilisation. However, in all such cases an intimation
in plain paper should be sent to the FCRA department within 15 days of the
opening of such account.
DISPOSAL OF FIXED ASSETS ON DISSOLUTION
21.40 Section 22 of the FCRA 2010 provides that, in case of dissolution, the
722
Central Govt, shall have the power to determine the process of disposal of FC
assets. The Central Govt, may specify the manner and procedure in which such
asset shall be disposed off.
SPECULATIVE ACTIVITIES
21.41 Rule 4 specifies the circumstances under which an investment could be
treated as speculative in nature.
21.42 Rule 4(1 )(a) prohibits investment in shares & stocks even through mutual
fund. This provision is in conflict with section 11(5) of the Income Tax Act
which provides investment in certain stock linked mutual funds.
21.43 Rule 4(1 )(b) prohibits investment in high return schemes or in land if it is
not directly linked to the declared aims and objectives of organisation.
DISCLOSURE OF INFORMATION IF
RECEIPTS EXCEED ONE CRORE
21.44 Rule 12 provides that if the contributions received during the year exceed
one crore, then the organisation has to keep in the public domain all data of
receipts and utilisation during the year and also in the subsequent year. The
rule also states that the Central Government will also upload such summary
data through its website.
21.45 The manner of disclosure or meaning of 'public domain’ has not been
explained. It seems that all such organisations are required to have their own
website where such data should be uploaded.
CUSTODY OF FUNDS AND ASSETS IN
THE EVENT OF CANCELLATION
21.46 Rule 14 provides the procedure regarding the custody of foreign funds
and assets in the event of cancellation of registration.
21.47 In case of available bank balances, the respective banking authority will
become the custodian till the Central Government issues further directions.
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21.48 If funds have been transferred to another NPO after cancellation, then
the funds in the bank account of such NPO will also go to the custody of the
banking authority.
21.49 All other assets of the organisation whose certificate has been cancelled
or has become defunct shall go to the interim custody of the District Magistrate
or any other authority which the Central Government may direct. This provision
seems unfair, because the direction for repossession of asset should only be
issued when all appellate remedies are exhausted.
REPORTING BY BANKS
21.50 Rule 15 provides that the bank should report to the FCRA department
within 30 days under two circumstances :
(i) if any foreign contribution is received without registration or prior
permission,
(ii) if foreign contribution is received in excess of ' one crore during a
period of 30 days, this rule will apply to all FC funds received through
valid registration or prior permission.
FILING OF RETURN &
METHOD OF ACCOUNTING
21.51 Rule 16 provides that the annual return accompanied by Income and
Expenditure statement, Receipt and Payment Account and Balance Sheet shall
be submitted by 31st of December. The law regarding filing of returns remains,
more or less unchanged. However, the notable changes are as under :
- The return shall be filed in Form FC-6 and not FC-3
- For the first time, FC rules include submission of Income and
Expenditure Account
- A copy of bank statement certified by the bank has to be submitted
- A nil return is required to be filed if there is no activity
21.52 The FCRA 2010 and the Rules thereof do not specify any method of
accounting. Section 19 of the FCRA 2010 just provides that accounts with regard
to FC receipt and utilisation should be maintained. In the past, it was assumed
that FCRA required cash basis of reporting (if not accounting). However, with
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the new requirement of filing Income and Expenditure account raises the question
whether accrual basis of accounting is also permissible. On a plain reading of
section 19 of FCRA 2010, Rule 16 and Form FC-6, it seems that the requirement
is to report FC funds received and utilised during the year. In other words, the
receipt of funds shall be on cash basis only but there is no direction regarding
utilisation on payment basis only. FCRA 2010 does not seem to be prescribing
any fixed method of accounting. Any method of accounting may be followed by
the organisation but the receipt of FC funds should be reported on cash basis
only. Due to the inclusion of Income & Expenditure account, the utilisation will
be permissible on accrual basis also if the organisation consistently follows accrual
basis of accounting.
WHICH RETURN SHOULD BE
FILED FOR THE YEAR 2010-11
21.53 The new Rules provide that the annual return shall be filed in Form FC6. However since the act became effective from 1st May 2011, it is understood
that the FCRA return for the year 2010-11 should be filed in the old form FC-3.
In all subsequent years the annual return shall be filed in Form FC-6.
ADDITIONAL REQUIREMENT
OF FILING FORM FC-7
21.54 All NPOs are required to file Form FC-7 alongwith a certificate from
Chartered Accountant, if they receive contribution in kind. In the old Act, there
was no such requirement for filing a separate return for foreign contribution
received in kind. It may be noted that old Form FC-3 and the new Form FC-6,
both have a column for contribution received in kind. Therefore, it was not
necessary to have a requirement for filing an additional form for contribution
received in kind. However, as it stands, FC-7 has to filed in case of receipt of
contribution in kind.
PRESERVATION OF ACCOUNTING
RECORDS FOR 6 YEARS
21.55 The Rule 17(7) provides that accounting statements shall be preserved
for 6 years. This is a very welcome change. Earlier it was seen that the NPOs
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were asked to provide books and records for past 10-15 years which was
practically not possible. This rule will provide a lot of relief to the existing
NPOs.
COMPOUNDING OF OFFENCE
21.56 Section 41 read with Rule 21 provides that the Ministry of Home Affairs
may compound any offence punishable under the FCR Act. When an offence is
compounded, then such organisation is not prosecuted. This is also a positive
change which will help in avoiding needless legal cases.
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'hapter 22
Frequently Asked
Questions (FAQs) on FCRA*
Q. 1
What is foreign contribution?
Ans. As defined in Section 2(1 )(h) of FCRA, 2010, “foreign contribution’’ means
the donation, delivery or transfer made by any foreign source,—
(ii)
of any article, not being an article given to a person** as a gift for his
personal use, if the market value, in India, of such article, on the date
of such gift is not more than such sum*** as may be specified from
time to time by the Central Government by rules made by it in this
behalf;
of any currency, whether Indian or foreign;
(iii) of any security as defined in clause (h) of section 2 of the securities
Contracts(Regulation) Act, 1956 and includes any foreign security as
defined in clause (o) of Section 2 of the Foreign Exchange
Management Act, 1999.
Explanation 1—A donation, delivery or transfer or any article, currency
or foreign security referred to in this clause by any person who has received
it form any foreign source, either directly or through one or more persons,
shall also be deemed to be foreign contribution with the meaning of this
clause.
Explanation 2—The interest accrued on the foreign contribution deposited
in any bank referred to in sub-section (1) of Section 17 or any other income
derived from the foreign contribution or interest thereon shall also be
deemed to be foreign contribution within the meaning of this clause.
* Source: h tip://mho. nic. in/fcra.htm.
**In terms of FCRA, 2010 "person "includes (i) an individual; (ii) a Hindu undivided family; (Hi) an association; and (iv) a
company registered under sect ion 25 of the Companies Act, 1956.
’** The sum, as stated at (i) above, has. been specified as ' 25,000/- vide lhe Foreign Contribution (Regulation) Amendment
Rules, 2012 [G.S.R. 292 (E) dated 12m April, 2012].
127
Explanation 3—Any amount received, by an person from any foreign source
in India, by way of fee (including fees charged by an educational institution
in India from foreign student) or towards cost in lieu of goods or services
rendered by such person in the ordinary course of his business, trade or
commerce whether within India or outside India or any contribution
received from an agent or a foreign source towards such fee or cost shall
be excluded from the definition of foreign contribution within the meaning
of this clause.
Q.2 Whether earnings from foreign client(s) by a person in lieu of goods sold or
services rendered by it is treated as foreign contribution?
Ans. No. As clarified at Explanation 3 above, foreign contribution excludes
earnings from foreign client(s) by a person in lieu of goods sold oi sei vices
rendered by it as this is a transaction of commercial nature.
Q.3 Section 2(c)(i) of repealed FCRA, 1976 inter alia defined foreign contribution
as the donation, delivery or transfer made by any foreign source of any article, not
given to a person as a gift for personal use, if the market value, in India, of such
article exceeds one thousand rupees. What limit has been prescribed in FCRA,
2010 in respect of such articles?
Ans. The limit has been specified as ? 25000/- through insertion of the following
Rule 6A in FCRR, 2011 vide the Foreign Contribution (Regulation) Amendment
Rules, 2012 [G.S.R. 292 (E) dated 12,h April, 2012]:
‘6A. When articles gifted for personal use do not amount to foreign
contribution.—Any article gifted to a person for his personal use whose market
value in India on the date of such gift does not exceed rupees twenty-five
thousand shall not be a foreign contribution within the meaning of sub-clause
(i) of clause (h) of sub-section (1) of section (2).’'
Q.4
What is a foreign source?
Ans. Foreign source, as defined in Section 2(1) (j) of FCRA, 2010 includes:(1) the Government of any foreign country or territory and any agency
of such Government;
(ii) any international agency, not being the United Nations or any of its
specialized agencies, the World Bank, International Monetary Fund
or such other agency as the Central Government may, by notification,
specify in this behalf;
(iii) a foreign company;
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(iv) a corporation, not being a foreign company, incorporated in a foreign
country or territory;
(v)
a multi-national corporation referred to in sub-clause (iv) of clause
(g);
(vi) a company within the meaning of the Companies Act, 1956, and more
than one-half of the nominal value of its share capital is held, either
singly or in the aggregate, by one or more of the following, namely:(A) the Government of a foreign country or territory;
(B) the citizens of a foreign country or territory;
(C)
corporations incorporated in a foreign country or territory;
(D) trusts, societies or other associations of individuals (whether
incorporated or not), formed or registered in a foreign country
or territory;
, (E) Foreign company;
(vii) a trade union in any foreign country or territory, whether or not
registered in such foreign country or territory;
(viii) a foreign trust or a foreign foundation, by whatever name called, or
such trust or foundation mainly financed by a foreign country or
territory;
(ix) a society, club or other association or individuals formed or registered
outside India;
(x) a citizen of a foreign country;
List of agencies of the Unite'd Nations, World Bank and some other International
agencies/multilateral organisations, which are not treated as 'foreign source',
are available on the website http://mha.nic.in/fcra/intro/FCRAexemptedAgenciesUN pdf
Q.5
Who can receive foreign contribution?
Ans. A 'person', as defined in Section 2(l)(m) with the exclusion of those
mentioned in Section 3 of FCRA, 2010, having a definite cultural, economic,
educational, religious or social programme can receive foreign contribution
after it obtains the prior permission of the Central Government, or gets itself
registered with the Central Government. Illustrative but not exhaustive lists of
activities which are permissible and may be carried out by associations of
different nature are available on the website —Ptttp://mha.nic.in/fcra/intro/
permitted_programs.htm.
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Q.6
Who cannot receive foreign contribution?
Ans. As defined in Section 3(1) of FCRA, 2010, foreign contribution cannot be
accepted by any:
(a) a candidate for election;
(b) correspondent, columnist, cartoonist, editor, owner, printer or
publisher of a registered newspaper;
(c) Judge, government servant or employee of any Corporation or any
other body controlled on owned by the Government;
(d) member of any legislature;
(e)
(f)
(g)
Ci)
political party or office bearer thereof;
organization of a political nature as may be specified under sub
section (1) of Section 5 by the Central Government.
association or company engaged in the production or broadcast of
audio news or audio visual news or current affairs programmes
through any electronic mode, or any other electronic form as defined
in clause (r) of sub-section (i) of Section 2 of the Information
Technology Act, 2000 or any other mode of mass communication;
correspondent or columnist, cartoonist, editor, owner of the
association or company referred to in clause (g).
E^planation-ln clause (c) and section 6, the expression "corporation” means
a corporation owned or controlled by the Government and includes a
Government company as defined in section 617 of the Companies Act,
1956.
(i)
individuals or associations who have been prohibited from receiving
foreign contribution.
Q.7 Are there any banned organisations from whom foreign contribution should
not be accepted?
Ans. Yes. FCRA is meant to ensure that foreign contribution is received from
legitimate sources and utilised for legitimate purposes by any person. A list of
banned organisations is available in MHA's website http://mha.nic.in/
uniquepage.asp?Id_Pk=292. In particular, the list of foreign entities/individuals
can be seen in http://www.un.org/sc/committees/1267/AQList.htm
Q.8 Whether donation given by Non-Resident Indians (NRIs) is treated as
‘foreign contribution’?
i
130
Ans. Contributions made by a citizen of India living in another country (i.e.,
Non-Resident Indian), from his personal savings, through the normal banking
channels, is not treated as foreign contribution. However, while accepting any
donations from such NRI, it is advisable to obtain his passport details to ascertain
that he/she is an Indian passport holder.
Q.9 Whether donation given by an individual of Indian origin and having foreign
nationality is treated as ‘foreign contribution’?
Ans. Yes. Donation from an Indian who has acquired foreign citizenship is
treated as foreign contribution. This will also apply to PIO card holders and to
Overseas Citizens of India. However, this will not apply to 'Non-resident Indians',
who still hold Indian citizenship.
Q.10 Whether foreign remittances received from a relative are to be treated as
foreign contribution as per FCRA, 2010?
Ans. The position in this regard as given in Section 4(e) of FCRA, 2010 and Rule
6 of FCRR, 2011 are as under:
Subject to the provisions of section 10 of the FCRA, 2010, nothing contained in
section 3 of the Act shall apply to the acceptance, by any person specified in
that section, of any foreign contribution where such contribution is accepted
by him from his relative. However, in terms of Rule 6 of FCRR, 2011, any person
receiving foreign contribution in excess of one lakh rupees or equivalent thereto
in a financial year from any of his relatives shall inform the Central Government
in Form FC-1 within thirty days from the date of receipt of such contribution.
This form is available on the website http://mha.nic.in/fcra/fornis/fc-l.pdf
Q. 11 Whether individuals not covered under section 3 or a HUF can accept foreign
contribution freely for the purposes listed in section 4 of FCRA, 2010?
Ans. Yes. Since, subject to the provisions of section 10, even the persons
specified under section 3, i.e., persons not permitted to accept foreign
contribution, are allowed to receive foreign contribution for the purposes listed
in section 4, it is obvious that Individuals in general and a HUF are permitted to
accept foreign contribution without permission for the purposes listed in section
4. However, it should be borne in mind that the monetary limit for acceptance
of foreign contribution in the form of any article given as gift to a person for his
personal use has been specified as 25,000/ vide FCR Amendment Rules, 2012.
Q. 12 Can the fee paid by the foreign delegates/participants attending/participating
in a conference/seminar etc. be termed as foreign contribution and thus require
permission from FCRA?
131
Ans. "Delegate/participation Fees" paid in foreign currency by foreign
delegates/participants for participation in a conference/seminar and which is
utilized for the purpose of meeting the expenditure of hosting the conference/
seminar is not treated as foreign contribution and as such no permission under
FCRA is required.
Q. 13 Whether a Company incorporated in India under the Companies Act, 1956
having its operations in 2 or more countries is to be treated as a MNC/foreign
source under FCRA, 2010?
Ans. No. However, as defined under section 2(j)(vi), a company within the
meaning of the Companies Act, 1956 having more than one-half of the nominal
value of its share capital held, either singly or in the aggregate, by one or more
of the following will be treated as a "foreign source”:
(A) the Government of a foreign country or territory;
(B) the citizens of a foreign country or territory;
(C) corporations incorporated in a foreign country or territory;
(D) trusts, societies or other associations of individuals (whether
incorporated or not), formed or registered in a foreign country or
territory;
Q.l4 Can foreign contribution be received in rupees?
Ans. Yes. Any amount received from ‘foreign source' in rupees or foreign
currency is construed as 'foreign contribution' under law. Such transactions
even in rupees term are considered foreign contribution.
Q.l5 Will interest or any other income earned from foreign contribution be
considered foreign contribution?
Ans. Yes.
Q.l6 Whether interest or any other income earned out of foreign contributions
be shown as fresh foreign contribution receipt during that year or not?
Ans. Yes. The interest or any other income earned out of such deposit should
be shown as second / subsequent foreign contribution receipt in the annual
return during the year in which it is earned.
Q17 Can NPOs use the foreign contributions for investment in Mutual Funds
and other speculative investments?
132
Ans. No. Speculative activities have been defined in Rule 4 of FCRR - 2011 as
under:(1)
(a)
any activity or investment that has an element of risk of
appreciation or depreciation of the original investment, linked
to marked forces, including investment in mutual funds or in
shares;
(b)
participation in any scheme that promises high returns like
investment in chits or land or similar assets not directly linked
to the declared aims and objectives of the organization or
association.
(2)
A debt-based secure investment shall not be treated as speculative
investment.
(3)
Every association shall maintain a separate register of investments.
(4)
Every register of investments maintained under sub-rule (3) shall be
submitted for audit.
In view of the above, secure investments and fixed deposits in any bank or
Government approved financial institution which ensures a fixed return will
not be treated as speculative investment.
Q.18 Can capital assets purchased with the help of foreign contributions be
acquired in the name of the office bearers of the association?
Ans. No. Every asset purchased with foreign contribution should be acquired
and possessed in the name of the association since an association has a separate
legal entity distinct from its members.
Q. 19 Can an association invest the foreign contribution received by it in profitable
ventures and proceeds can be utilized for welfare activities?
Ans. No. The association should utilize such funds for the welfare purpose or
activities for which it is received. The utilization should be in line with the
objectives of the association. However, foreign contributions can be utilized for
self-sustaining activities, not meant for commercial purposes.
Q.20 Can foreign contribution be received in and utilised from multiple Bank
Accounts?
Ans. No fund other than foreign contribution can be deposited in the exclusive
single FC account of a Bank, as mentioned in the order for registration or prior
permission granted by MHA, to be separately maintained by the associations.
133
However, one or more accounts in one or more banks may be opened for utilising
the foreign contribution after it has been received provided that no funds other
than that foreign contribution shall be received or deposited in such account or
accounts and in all such cases, intimation on plain paper shall have to be furnished
to MHA within 15 days of the opening of the account.
Q.21 Whether inter-account funds transfer shall be allowed within the multiple
accounts that an Association is now permitted to open for the purpose of utilizing
the foreign contributions and the level of diligence required on the part of the
Banks in this regard?
Ans. Transfer of funds is allowed from the designated FC account of an
Association to the multiple account or accounts opened for its utilization.
However, no funds other than the amount received in the designated FC account
shall be received or deposited in such multiple account or accounts. Inter-account
transfer of funds between the multiple accounts is not permissible. As such, the
banks should apply full diligence to keep track of the transfers.
Q.22 Can foreign contribution be mixed with local receipts?
Ans. No. Foreign contribution cannot be deposited or utilised from the bank
account being used for domestic funds.
Q.23 Whether expenses like ‘interest paid to bank’, ‘bank charges’, ‘hospitality’
etc. can be included in‘‘administrative expenses’?
Ans. No. The definition of as 'administrative expenses', as given in Rule 5 of
FCRR, 2011 is explicit in this regard.
Q.24 Is there any restriction on transfer of funds to other organisations?
Ans. Yes. Section 7 of FCRA, 2010 states:"No person who (a) is registered and granted a certificate or has obtained prior
permission under this Act; and
(b)
receives any foreign contribution,
‘
shall transfer such foreign contribution to any other person unless such
other person is also registered and had been granted the certificate or obtained
the prior permission under this Act:
Provided that such person may transfer, with the prior approval of the
Central Government, a part of such.foreign contribution to any other person
i
134
who has not been granted a certificate or obtained permission under this Act in
accordance with the rules made by the Central Government."
Rule 24 of FCRR, 2011, as amended vide the Foreign Contribution
(Regulation) Amendment Rules, 2012 [G.S.R. 292 (E) dated 12th April, 2012]
prescribes the procedure for transferring foreign contribution as under:
"24. Procedure for transferring foreign contribution to any unregistered
person. —
(1) A person who has been granted a certificate of registration or prior
permission under section 11 and intends to transfer part of the foreign
contribution received by him to a person who has not been granted
a certificate of registration or prjor permission under the Act, may
transfer such foreign contribution to an extent not exceeding ten
per cent of the total value thereof and for this purpose, make an
application to the Central Government in Form FC-10. http://
mha.n ic. in/fcra/forms/fc-10. pdf
(2)
Every application made under sub-rule (1) shall be accompanied by a
declaration to the effect that(a) the amount proposed to be transferred during the financial year
is less than ten per cent of the total value of the foreign
contribution received by him during the financial year;
the transferor shall not transfer any amount of foreign
contribution until the Central Government approves such
transfer.
A person who has been granted a certificate of registration or prior
permission under section 11 shall not be required to seek the prior
approval of the Central Government for transferring the foreign
contribution received by him to another person who has been granted
a certificate of registration or prior permission under the Act provided
that the recipient has not been proceeded against under any of the
provisions of the Act.
(b)
(3)
(4)
Both the transferor and the recipient shall be responsible for ensuring
proper utilisation of the foreign contribution so transferred and such
transfer of foreign contribution shall be reflected in the returns in
Form FC-6 to be submitted by both the transferor and the recipient.”.
http://mhanic. in/fera/forms/fc-6.pdf
Q.25 How would an organisation that is registered or has obtained prior
permission under FCRA and intends to transfer a part of the foreign contribution
135
received by it to another organisation would know whether the recipient
organisation has been proceeded against under FCRA?
Ans. Where any organisation is proceeded against under FCRA, it is done with
due intimation to the organisation concerned. Therefore, the donor organisation
is advised to insist on a written undertaking from the intending recipient
organisation.
Q.26 What are the eligibility criteria for grant of registration?
Ans.
For grant of registration under FCRA, 2010, the association should:
(i)
(ii)
be registered under the Societies Registration Act, 1860 or the Indian
Trusts Act, 1882 or section 25 of the Companies Act, 1956 etc;
normally be in existence for at least three years and has undertaken
reasonable activity in its chosen field for the benefit of the society
for which the foreign contribution is proposed to be utilised. For
this purpose, the association should have spent at least 10,00,000/over the last three years on its activities, excluding administrative
expenditure. Statements of Income & Expenditure, duly audited by
Chartered Accountant, for last three years are to be submitted to
substantiate that it meets the financial parameter.
Q.27 What are the eligibility criteria for grant of prior permission?
in formative stage is not eligible ’for registration. Such
Ans. An organisation
__o
’ —
‘ 2010. prjor
organisation may apply for grant of prior permission under
FCRA,
permission is granted for receipt
x of a specific amount from a specific donor for
carrying out specific activities/projects. For this purpose, the association should:
(i)
be registered under the Societies Registration Act, 1860 or the
Indian Trusts Act, 1882 or section 25 of the Companies Act, 1956 etc;
(ii)
submit a specific commitment letter from the donor indicating the
amount of foreign contribution and the purpose for which it is
proposed to be given; and
(iii) submit copy of a reasonable project for the benefit of the society for
which the foreign contribution is proposed to be utilised.
Q.28 Whether the amount of foreign contribution for which prior permission
has been granted can be received by an association in installments?
Ans. There is no bar on receiving such foreign contribution in installments.
136
However, the aggregate amount should not exceed the specified amount for
which prior permission has been granted. The association shall have to submit
the mandatory return in FC-6 form for receipt and utilisation of the foreign
contribution on a yearly basis, till the amount of foreign contribution is fully
utilised. Even if no transaction takes place during a year, a NIL return should
be submitted.
Q.29 Whether an association should open an exclusive FC A/c before submission
of an application for registration or prior permission?
Ans. Yes. Since the FC A/c through which foreign contribution is proposed to
be received and utilised is to be mentioned in the application seeking registration
or prior permission, as the case may be, the association should open such an
exclusive FC A/c with a Bank. This A/c number would be mentioned in the
letter granting registration or prior permission to the association.
Q.30 Whether Banks should allow an association which is applying for
registration or prior permission under FCRA, 2010 to open an exclusive FC A/c
with INR?
Ans. Yes. However, 'the Banks should not allow any foreign inward remittance
in that A/c till such time the association is granted registration or prior
permission, as the case may be.
Q.31 Whether Banks should credit any foreign contribution received by an
association to its account even If the association does not have registration/prior
permission from MHA and subsequent reporting can be made by Banks to MHA?
Ans. Rule 16 (1) of FCRR, 2011 states that every bank shall send a report to the
Central Government within 30 days of receipt of foreign contribution by any
person who is required to obtain a certificate of registration or prior permission
under the Act, but who was not granted such certificate or prior permission on
the date of receipt of such remittance. Further, Rule 16(3) prescribes that the
banks shall send a report to the Central Government within 30 days from the
date of such last transaction in respect of receipt of any foreign contribution in
excess of Crore or equivalent thereto in a single transaction or in transactions
within a duration of 30 days, by any person whether registered or not under the
Act.
In view of the above, it follows that bank may credit any foreign
contribution received by an Association without registration or prior permission.
However, while the banks can prevent such a situation in cases where a cheque
is presented by the recipient of foreign contribution for deposit in its savings/
137
current account, it may not always be possible when the foreign remittance is
through wire transfer. Therefore, in all such cases, besides sending a report to
MHA as per Rule, the bank should not allow any withdrawal or transfer or
utilisation of the FC amount till such time the Association produces documentary
evidence from MHA permitting it to do so.
Q.32 Should the Banks report transactions pertaining to foreign contributions
which are returned back to the remitter by the beneficiary Association for want of
registration/prior permission from MHA?
Ans. It is not necessary for the bank to report such foreign contribution that is
returned to the donor without crediting in the account of the recipient.
Q.33 Whether reporting by Banks is also applicable for transfer of funds between
FCRA accounts of two or more associations?
Ans. Yes. Reporting by Banks is also applicable to transfer of funds from one
FCRA registered Association to another.
Q.34 Whether the reference period prescribed in Rule 16(3) of FCRR, 2011 for
reporting by Banks in respect of transactions during 30-days period should mean
calendar month?
Ans. For the purpose of reporting to MHA, 30 days period may be construed as
a calendar month.
Q.35 What are the conditions to be met for the grant of registration and prior
permission?
Ans. In terms of Sec.12 (4) of FCRA, 2010, the following shall be the conditions
for the grant of registration and prior permission:
(a) The 'person' making an application for registration or grant of prior
permission(i) is not fictitious or benami;
(ii)
has not been prosecuted or convicted for indulging in activities
aimed at conversion through inducement or force, either directly
or indirectly, from one religious faith to another;
(iii) has not been prosecuted or convicted for creating communal
tension or disharmony in any specified district or any other part
of the country;
138
(iv) has not been found guilty of diversion or mis-utilisation of its
funds;
(v) is not engaged or likely to engage in propagation of sedition or
advocate violent methods to achieve its ends;
(vi) is not likely to use the foreign contribution for personal gains
or divert it for undesirable purposes;
(vii) has not contravened any of the provisions of this Act;
(viii) has not been prohibited from accepting foreign contribution;
(ix) the person being an individual, such individual has neither been
convicted under any law for the time being in force nor any
prosecution for any offence is pending against him.
(b)
(ix) the person being other than an individual, any of its directors or
office bearers has neither been convicted under any law for the
time being in force nor any prosecution for any offence is pending
against him.
the acceptance of foreign contribution by the association/ person is
not likely to affect prejudicially -•
(i) the sovereignty and integrity of India; or
(ii)
the security, strategic, scientific or economic interest of the State;
or
(iii) the public interest; or
(iv) freedom or fairness of election to any Legislature; or
(v) friendly relation with any foreign State; or
(vi) harmony between religious, racial, social, linguistic, regional
groups, castes or communities.
(c)
the acceptance of foreign contribution-
(i)
shall not lead to incitement of an offence;
(ii)
shall not endanger the life or physical safety of any person.
Q.36 Can a private limited company or a partnership firm get registration or
prior permission under FCRA, 2010?
Ans. As per the definition of the "person" in the FC(R)Act, 2010 which includes
an "association” which in turn is defined as an association of individuals, whether
incorporated or not, having an office in India and includes a society, whether
registered under the Societies Registration Act, 1860, or not, and any other
139
organisation, by whatever name called, a private limited company too may seek
prior permission/registration for receiving foreign funds in case they wish to
do some charitable work at some point of time.1
Q.37 Whether an individual or a Hindu Undivided Family (HUF) can be given
registration or prior permission to accept foreign contribution in terms of section
11 of FCRA, 2010?
Ans. The definition of the 'person' in the Foreign Contribution (Regulation)
Act, 2010 includes any individual and 'Hindu Undivided Family' among others.
As such an Individual or an HUF is also eligible to apply for prior permission to
accept foreign contribution.
Q.38 Whether infusion of foreign share capital in a company registered under
section 25 of the Companies Act, 1956 attracts the provisions of FCRA, 2010?
Ans. Yes, infusion of foreign share capital in a company registered under section
25 of the Companies Act, 1956 is treated as foreign contribution.
Q.39 Is recommendation of District Collector or Deputy Commissioner or District
Magistrate mandatory for submission of an application for registration or prior
permission?
Ans. No. Submission of verification certificate from the District Collector or
Deputy Commissioner or District Magistrate is not mandatory. However, in
certain cases, if the amount of foreign contribution for which prior permission
is being sought is less than ^50 lakh, submission of such a certificate assists in
speedy clearance of the application.
Q.40 If an application for registration or prior permission is submitted online by
an association, does it need to submit that application in physical form also ?
Ans. Yes. When an application is filed online, a printout of the same is to be
taken after submission and thereafter, it should be submitted, duly signed by
the Chief Functionary of the Association, along with the requisite documents to
the Ministry of Home Affairs. The prescribed forms for submission of application
for grant of Registration and Prior Permission are FC-3 and FC-4 respectively.
The forms are available at MHA website http://mha.nic.in/fcra/forms/fc-3.pdf
and http://mha.nic.in/fcra/forms/fc-4.pdf respectively.
Q.41 What are the documents to be enclosed with the application?
Ans. (a)
Following documents should be enclosed with the application for
140
grant of Registration:
(>) Hard copy of the online application, duly signed by the Chief
Functionary of the association;
(ii)
Certified copy of registration certificate or Trust deed etc., as
the case may be;
(iii) Activity Report indicating details of activities during the last
three years;
(iv) Copies of audited statement of accounts for the past three years
(Assets and Liabilities, Receipt and Payment, Income and
Expenditure);
(v)
If functioning as editor, owner, printer or publisher of a
publication registered under the Press and Registration of Books
Act,' 1867, a certificate from the Registrar of Newspapers for
India that the publication is not a newspaper in Perms of section
1(1) of the said Act.
(vi) Fee of ? 2000/- by means of demand draft or banker's cheque in
favour of the "Pay and Accounts Officer, Ministry of Home
Affairs", payable at New Delhi.
(b)
Following documents should be enclosed with the application for
grant of Prior Permission:
>
(i)
(ii)
Hard copy of the online application, duly signed by the Chief
Functionary of the association;
Certified copy of registration certificate or Trust deed etc., as
the case may be;
(iii) Commitment letter from foreign donor specifying the amount
of foreign contribution and the purpose for which it is proposed
to be given;
(iv) Copy of the project report for which foreign contribution is
solicited/being offered and is proposed to be utilised;
(v)
If functioning as editor, owner, printer or publisher of a
publication registered under the Press and Registration of Books
Act, 1867, a certificate from the Registrar of Newspapers for
India that the publication is not a newspaper in terms of section
1(1) of the said Act.
(vi) Fee of 1000/- by means of demand draft or banker’s cheque in
favour of the "Pay and Accounts Officer, Ministry of Home
Affairs", payable at New Delhi.
141
Note: The hard copy of the on-line application along with all the documents
mentioned above must reach the Ministry of Home Affairs, Foreigners
Division (FCRA Wing), NDCC-II Building, Jai Singh Road, New Delhi-110
001 within thirty days of the submission of the on-line application, failing
which the request of the person for grant of registration or prior
permission, as the case may be, shall be deemed to have ceased.
Q.42 How to find the status of pending application for registration/prior
permission. ?
Ans. Status of pending applications for grant of registration or prior permission
may be checked on-line from the Ministry of Home Affairs web-site-http://
mha.nic.in/fcraweb/fc_online.htm. One needs to fill in the numbers on
acknowledgement letter or any correspondence from MHA (Foreigners Division)
in the blank format which pops up on the screen after selection of status enquiry
icon (registration/prior permission, as the case may be)
Q.43 Whether foreigners can be appointed as Executive Committee members of
an association seeking registration or prior permission?
Ans. Organisations having foreign nationals, other than of Indian origin, as
members of their executive committees or governing bodies are generalbLUQi
permitted to receive foreign contribution. Foreigners may, however, be allowed
to be associated with such associations in an ex-officio capacity, representing
multilateral bodies, foreign contribution from whom is exempted from the
purview of the Foreign Contribution (Regulation) Act, 2010, or in a purely
honorary capacity depending upon the persons stature in his/her field of activity.
Subject to relaxation given on a case to case basis, foreign nationals fulfilling
the following conditions may be appointed as Executive Committee members,
after obtaining prior approval of the Central Government:
the foreigner is married to an Indian citizen;
(ii) the foreigner has been living and working in India for at least five
years;
(iii) the foreigner has made available his/her specialized knowledge,
especially in the medical and health related fields on a voluntary
basis in India, in the past;
(iv) the foreigner is part of the Board of Trustees/Executive Committee
in terms of the provisions in an inter-governmental agreement;
(v) the foreigner is part of the Board of Trustee/Executive Committee,
in an ex-officio capacity representing a multilateral body which is
exempted from, the definition of foreign source.
The need for such an appointment should, however, be adequately justified.
(i)
142
Q.44 Whether Government servants, Judges and employees of a Government
owned/controlled company/body can be on the executive committees/boards of
an association?
Ans. Yes. The legal entity of a 'person' under FCRA, 2010 is distinct from am
individual person. Therefore, individuals who cannot receive foreign contribution
may happen to be on the executive committees/boards of such an association.
Q.45 Whether organisations under Central/State Governments are required to
obtain registration or prior permission under FCRA, 2010 for accepting foreign
contribution?
Ans. In terms of Gazette Notification S.O. 1492(E) dated 01.07.2011, http://
mha.nic.in/pdfs/ExempStatBodi-010711.pdf all statutory bodies constituted or
established by or under a Central Act or State Act requiring to have their accounts
compulsorily audited by the Comptroller & Auditor General of India are
exempted from all the provisions of FCRA, 2010.
Q.46 What is the procedure for seeking change in the name/address of an
association registered under FCRA?
Ans. For seeking change in the name/address of the association, one should
use the prescribed form available on MHA's website http://mha.nic.in/-fcra/
forms/chng_name_addr.pdf and submit the same along with the requisite
documents specified therein.
Q.47 What is the procedure for change of designated FC Bank Account?
Ans. For change of the bank account, an application in prescribed form
mentioning the details of the old bank account and the proposed new bank
account along with justification for change of designated bank, name/ address
of the society, copy of registration under FCRA, copy of fresh resolution of the
executive committee (in English or Hindi) for change of designated back account,
certificate from the proposed bank (copy of Bank Pass Book is not acceptable)
that the account is being opened exclusively for FCRA, may be submitted to
MHA. This form is available on website http://mha.nic.in/fcra/forms/
chng_bank_acnt.pdf
Q.48 Whfether intimation regarding the change of Members of the Executive
Committee/Governing Council of the association is to be given to the Government?
Ans. Yes. If at any point of time, such change causes replacement of 50% or
more of such Members of the Executive Committee/Governing Council of the
143
association, intimation is to be given to MHA within thirty days of such change
in accordance with the undertaking & declaration given by the association in its
application for registration or prior permission, as the case may be. Further, as
per the uhdertaking & declaration, the association should not accept any foreign
contribution except with'.prior permission till the permission to replace the
office bearer(s) has been granted by MHA.
Q.49 What is the procedure for filing Annual Returns?
Ans. An association permitted to accept foreign contribution is required under
law to maintain separate set of accounts and records exclusively for the foreign
contribution received and submit an annual return, duly certified by a Chartered
Accountant, giving details of the receipt and purpose-wise utilisation of the
foreign contribution. The return is to be filed for every financial year (1st April
to 3 Is' March) within a period of nine months from the closure of the year i.e. by
31st December each year. Submission of a 'Nil' return, even if there is no receipt/
utilization of foreign contribution during the year, is mandatory. The return is
to be submitted, in prescribed Form FC-6, duly accompanied with the balance
sheet and statement of receipt and payment, which is certified by a Chartered
Accountant. The form is available on MHA's web-site - http://mha.nic.rn/fcra/
forms/fc-6.pdf For further details, please refer to Sections 17, 18 and 19 of
FCRA, 2010 and Rule 17ofFCRR, 2011.
Note: It may be noted that the annual return for the financial year 2010-2011
was to be filed by the 31st December, 2011 in Form FC-3, i.e., as pei
FCRA, 1976.
Q.50 For how many years an association which has been granted prior permission
to receive foreign contribution should file the mandatory annual return?
Ans. 'Prior permission' is granted to an association to receive a specific amount
of foreign contribution from a specific donor for a specific purpose. After
receipt of approval from the Government, the association should submit the
mandatory return in FC-6 form for receipt and utilisation of the foreign
contribution on a yearly basis, till the amount of foreign contribution is fully
utilised. Even if no transaction takes place during a year, a NIL return should
be submitted.
Q.51 What are the offences and penalties under FCRA, 2010?
Ans. Section 11 of the FCRA, 2010 prescribes that no person, save as otherwise
provided in the Act, shall accept foreign contribution unless such person obtains
a certificate of registration or prior permission of the Central Government.
144
Therefore, acceptance of foreign contribution without obtaining registration or
prior permission from the Central Government constitutes an offence under the
Act and is punishable.
The provisions of FCRA,’2O1O regarding offences and penalties are
Section 33: Making of false statement, declaration or delivering false accounts:
Any person, subject to this Act, who knowingly, —
(a)
gives false intimation under sub-section (c) of section .9 or section 18;
or
(b) seeks prior permission or registration by means of fraud, false
representation or concealment of material fact, shall, on conviction
by a court, be liable to imprisonment for a term which may extend to
three years or with fine or with both.
Section 34: Penalty for article or currency or security obtained in contravention
of Section 10:
If any person, on whom any prohibitory order has been served under section
10, pays, delivers, transfers or otherwise deals with, in any manner whatsoever,
any article or currency or security, whether Indian or foreign, in contravention
of such prohibitory order, he shall be punished with imprisonment for a term
which may extend to three years, or with fine, or with both; and notwithstanding
anything contained in the Code of Criminal Procedure, 1973, the court trying
such conttaventi.oxi may also impose on the person convicted an additional fine
equivalent to the market value of the article or the amount of the currency or
security in respect of which the prohibitory order has been contravened by him
or such part thereof as the court may deem fit.
Section 35: Punishment for contravention of any provision of the Act:
Whoever accepts, or assists any person, political party or organisation in
accepting, any foreign contribution or any currency or security from a foreign
source, in contravention of any provision of this Act or any rule or order made
thereunder, shall be punished with imprisonment for a term which may extend
to five years, or with fine, or with both.
Section 36: Powers to impose additional fine where article or currency or security
is not available for confiscation:
Notwithstanding anything contained in the Code of Criminal Procedure, 1973,
145
the court trying a person, who, in relation to any article or currency or security,
whether Indian or foreign, does or omits to do any act which act or omission
would render such article or currency or security liable to confiscation under
this Act, may, in the event of the conviction of such person for the act or omission
aforesaid, impose on such person a fine not exceeding five times the value of
the article or currency or security or one thousand rupees, whichever_is.mo.re,
if such article or currency or security is not available for confiscation, and the
fine so imposed shall be in addition to any other fine which may be imposed on
such person under this Act.
Section 37: Penalty for offences where no separate punishment has been provided:
Whoever fails to comply with any provision of this Act for which no separate
penalty has been provided in this Act shall be punished with imprisonment for
a term which may extend to one year, or with fine or with both.
Section 38: Prohibition of acceptance of foreign contribution:
Notwithstanding anything contained, in this Act, whoever, having been convicted
of any offence under section 35 or section 37, in so far as such offence relates to
the acceptance or utilisation of foreign contribution, is again convicted of such
offence shall not accept any foreign contribution for a period-Qf three, years.
from the date of the subsequent conviction.
Section 39: Offences by companies:
(1)
Where an offence under this Act or any rule or order made thereunder
has been committed by a company, every person who, at the time the offence
was committed, was in charge of, and was responsible to, the company for the
conduct of the business of the company, as well as the company, shall be deemed
to be guilty of the offence and shall be liable to be proceeded against and
punished accordingly;
Provided that nothing contained in this sub-section shall render such
person liable to any punishment if he proves that the offence was committed
without his knowledge or that he had exercised all due diligence to prevent the
commission of such offence.
(2)
Notwithstanding anything contained in sub-section (1), where an offence
under this Act or any rule or order made thereunder has been committed by a
company and it is proved that the offence has been committed with the consent
or connivance of, or is attributable to any neglect on the part of, any director,
manager, secretary or other officer of the company, such director, manager,
secretary or other officer shall also be deemed to be guilty of that offence and
146
shall be liable to be proceeded against and punished accordingly.
Explanation - for the purposes of this section,
(a) "company" means any body corporate and includes a firm, society,
trade union or other association of individuals; and
(b) 'director" in relation to a firm, society, trade union or other association
of individuals, means a partner in the firm or a members of the
governing body of such society, trade union or other association of
individuals.
Section 40: Bar on prosecution of offences under the Act:
No court shall take cognizance of any offence under this Act, except with the
previous sanction of the Central Government or any officer authorised by that
Government in this behalf.
Section 41: Compounding of certain offences:
(1)
Notwithstandirfg anything contained in the Code of Criminal Procedure,
1973, any offence punishable under this Act (whether committed by an individual
or association or any officer or employee thereof), not being an offence
punishable with imprisonment only, may, before the institution of any
prosecution, be compounded by such officers or authorities and for such sums
as the Central Government may, by notification in the official gazette, specify in
this behalf.
(2)
Nothing in sub-section (1) shall apply to an'.offence committed by an
individual or association or its officer or other employee within a period of
three years from the date on which a similar offence committed by it or him
was compounded under this section.
Explanation-For the purposes of this section; any second or subsequent offence
committed after the expiry of a period of three years from the date on which
the offence was previously compounded, shall be deemed to be a first offence.
(3)
Every officer or authority referred to in sub-section (1) shall exercise the
powers to compound an offence, subject to the direction, control and supervisions
of the Central Government.
(4)
Every application for the compounding of an offence shall be made to the
officer or authority referred to in sub-section (1) in such form and manner
along with such fee as may be prescribed.
147
(5)
Where any offence is compounded before the institution of any
prosecution, no prosecution shall be instituted in relation to such offence, against
the offender in relation to whom the offence is so compounded.
(6)
Every officer or authority referred to in sub-section (1), while dealing
with a proposal for the compounding of an offence for a default in compliance
with any provision of this Act which requires by an individual or association or
its officer or other employee to obtain permission to file or register with or
deliver or sent to, the Central Government or any prescribed authority any
return account or other document, may, direct by order, if he or it thinks fit to
do so, any individual or association or its officer or other employee to file or
register with, such return, account or other document within such time as may
be specified in the order.
Q.52 Which are the offences that can be compounded and what would be the
penalties therefor?
Ans: In terms of Gazette Notification S.O. 1976 (E) dated 26.08.2011, http://
mhcLnic.in/fcra/forms/ComOffNoti-26081 l.pdf the categories of offences that
can be compounded under section 41 of FCRA, 2010 and the quantum of penalty
for compounding, as indicated against each of the offences, are provided in
Annexure 20.
Q.53 How to apply for compounding of an offence under FCRA, 2010?
Ans: An application for the compounding of an offence under section 41 is to
be made to the Secretary, Ministry of Home Affairs, New Delhi on a plain paper
along with a fee of T1000/- (One Thousand only) in the form of a demand draft
or a banker’s cheque in favour of the "Pay and Accounts Officer, Ministry of
Home Affairs", payable at New Delhi.
Q.54 What happens after an offence is compounded?
Ans: After payment of the penalty imposed and compounding of the offence,
the person may be granted registration or prior permission, as the case may be,
subject to its fulfilling all parameters.
Q.55 What if the person is unwilling or unable to pay the penalty imposed?
Ans: In the event of failure to pay the penalty, for whatever reason, necessary
action for prosecution of the person shall be initiated.
148
Q.56 Which are the investigating agencies for investigating and prosecuting a
person for violation of FCRA?
Ans. In terms of Gazette Notification S.O. 2446 (E) dated 27.10.2011, The Central
Bureau of Investigation or the investigating agencies (Crime Branch) of the State
Governments, cause of action which arises in their respective States, are the
designated agencies for investigating and prosecuting a person for violation of
FCRA.
Q.57 Can the Government cancel the certificate of registration granted to a person
under FCRA?
Ans. Yes. The conditions for cancellation of certificate, as prescribed under
section 14 of FCRA, 2010 are
14(7) The Central Government may, if it is satisfied after making such inquiry as
it may deem fit, by an order, cancel the certificate if —
(a)
the holder of the certificate has made a statement in, or in relation
to, the application for the grant of registration or renewal thereof,
which is incorrect or false; or
(£?)
the holder of the certificate has violated any of the terms and
conditions of the certificate or renewal thereof; or
(c)
in the opinion of the Central Government, it is necessary in the public
interest to cancel the certificate; or
(<7)
the holder of the certificate has violated any of the provisions of this
Act or rules or order made thereunder.
(e)
if the holder of the certificate has not been engaged in any reasonable
activity in its chosen field for the benefit of the society for two
consecutive years or has become defunct.
14 (2) No order of cancellation of certificate under this section shall be made
unless the person concerned has been given a reasonable opportunity of being
heard.
14 (3) Any person whose certificate has been cancelled under this section shall
not be eligible for registration or grant of prior permission for a period of three
years from the date of cancellation of such certificate.
Q.58 Can the Government suspend the certificate of registration granted to a
person under FCRA?
149
Ans. The conditions for suspension of certificate, as prescribed under section
13 of FCRA, 2010 are
13(1) Where the Central Government, for reasons to be recorded in writing, is
satisfied that pending consideration of the question of cancelling the certificate
on any of the grounds mentioned in sub-section (1) of Section 14, it is necessary
so to do, it may, by order in writing, suspend the certificate for such period not
exceeding one hundred and eighty days as may be specified in the order.
13(2) Every person whose certificate has been suspended shall
(a)
not receive any foreign contribution during the period of suspension
of certificate:
Provided that the Central Government, on an application made by
such person, if it considers appropriate, allow receipt of any foreign
contribution by such person on such terms and conditions as it may
specify;
utilise, in the prescribed manner, the foreign contribution in his
(b)
custody with the prior approval of the Central Government.
In terms of Rule 14 of the Foreign Contribution (Regulation) rules, 2011,
the unspent amount that can be utilised in case of suspension of a certificate of
registration may be as under: (a) In case the certificate of registration is suspended under sub-section
(1) of section 13 of the Act, up to twenty-five per cent of the unutilised
amount may be spent, with the prior approval of the Central
Government, for the declared aims and objects for which the foreign
contribution was received.
(b)
The remaining seventy-five per cent of the unutilised foreign
contribution shall be utilised only after revocation of suspension of
the certificate of registration.
Q.59 Can an organization, whose violation under FCRA, 1976 has been condoned,
apply for registration/prior permission?
Ans. After the violation committed by an association has been condoned, the
association can apply for pHor permission (PP) only by submitting an application
in form FC-4 http://mhcLriic.in/fcra/forms/-fc-4.pdf. Once the PP has been granted
and foreign contribution received for specific purpose has been fully/partially
utilized and organisation has submitted annual FC-6 http://mha.nic.in/fcra/
forms/fc-6.pdf returns and accounts in prescribed format pertaining to the PP,
150
it becomes eligible for consideration of registration under FCRA. Registration
would be granted under FCRA, if other parameters are fulfilled by the association.
Q.60 What is the status of the applications submitted under the repealed FCRA,
1976 but have not been disposed of?
Ans. In terms of Rule 9(5) of FCRR, 2011, every application made for registration
or prior permission under FCRA, 1976 but not disposed of before the date of
commencement of these rules, i.e., 01.05.2011, shall be deemed to be an application
for registration or prior permission, as the case may be,'under FCRR, 2011 subject
to the condition that the applicant furnishes the prescribed fees for such
registration or prior permission, as the case may be.
Q.61 Whether the registration certificate or prior permission granted under the
repealed FCRA, 1976 shall remain valid when FCRA, 2010 has come into force?
Ans. Yes. An association granted prior permission or registration under the
repealed FCRA, 1976 shall be deemed to have been registered or granted prior
permission, as the case may be, under FCRA, 2010. Registration granted under
FCRA, 1976 shall remain valid for a period of 5 years from the 1st May, 2011, i.e.,
up to the 30th April, 2016.
Q.62 Whether prior permission granted under FCRA, 1976 would also remain
valid for next 5 years from the 1st May, 2011, i.e., the date when FCRA, 2010
came into force?
Ans. Prior permission granted under FCRA, 1976 as also under FCRA 2010
remains valid till receipt and full utilisation of the amount of FC for which the
permission was/is granted.
Q.63 Whether the certificate of registration is to be renewed and what is the
procedure for such renewal?
Ans. Section 16 of FCRA, 2010 and Rule 12 of FCRR, 2011 may please be seen in
this regard.
Q.64 When should an Association which has been granted registration under
FCRA, 1976 should apply for renewal of registration?
Ans. In terms of Rule 12 (2) of FCRR, 2011, an Association registered under
FCRA should apply, in Form FC-5 for renewal of its registration six months
before the date of expiry of the certificate of registration. Since registration
151
granted to Associations under the repealed FCRA, 1976 shall be valid up to 30th
April, 2016, such Associations should apply for renewal of their registration on
or before 1st November, 2015.
An Association granted registration under FCRA, 2010, i.e., after Is’ May, 2011,
shall have to apply for renewal of registration six months before the date of
expiry of the validity of its certificate of registration.
Associations implementing an ongoing multi-year project should apply for
renewal twelve months before the date of expiry of the certificate of registration.
Q.65 What is foreign hospitality?
Ans. Foreign Hospitality means any offer, not being a purely casual one, made
in cash or kind by a foreign source for providing a person with the costs of
travel to any foreign country or territory or with freeboard, lodging, transport
or medical treatment.
Q.66 Who cannot accept foreign hospitality without prior approval of the Ministry
of Home Affairs?
Ans. Section 6 of FCRA, 2010 prescribes that “No member of a Legislature or
office bearer of a political party or Judge or Government servant or employee
of any corporation or any other body owned or controlled by the Government
shall, while visiting any country or territory outside India, accept, except with
the prior permission of the Central Government any foreign hospitality.
Provided that it shall not be necessary to obtain any such permission for
an emergent medical aide needed on account of sudden illness contracted during
a visit outside India, but, where such foreign hospitality has been received, the
person receiving such hospitality shall give, within one month from the date of
receipt of such hospitality an intimation to the Central Government as to the
receipt of such hospitality, and the source from which, and the manner in which,
such hospitality was received by him.”
Q.67 Whether approval of the Ministry of Home Affairs is required in cases where
the proposed foreign visit is being undertaken by a person in his/her personal
capacity and the entire expenditure thereon is being met by the person concerned?
Ans. No. Any person belonging to any of the categories specified in Section 6
of FCRA, 2010 would require such approval only if the person concerned is
seeking foreign hospitality from a foreign source.
r ,'. &,o - too
152
Q.68 How one can seek permission of the Government for receiving foreign
hospitality?
Ans. Application form (Form FC-2) for this purpose is available on MHA's web
site- http://mha.mc.in/fcra/-forms/fc-2.pdf. In terms of Rule 7 of FCRR, 2011:
(i)
Every application for acceptance of foreign hospitality shall be
accompanied by an invitation letter from the host or the host country,
as the case may be, and administrative clearance of the Ministry or
department concerned in case of visits sponsored-by a Ministry or
department of the Government.
(ii) The application for grant of permission to accept foreign hospitality
must reach the appropriate authority ordinarily two weeks before
the proposed date of onward journey.
(iii) In case of emergent medical aid needed on account of sudden illness
during a visit abroad, the acceptance of foreign hospitality shall be
required to be intimated to the Central Government within sixty days
of such receipt giving full details including the source, approximate
value in Indian Rupees, and the purpose for which and the manner
in which it was utilized.
Provided that no such intimation-is required if the value of such hospitality in
emergent medical aid is up to one lakh rupees or equivalent thereto.
153
'hapter 23
Legal Due Diligence for Donors
INTRODUCTION
23.01 In this chapter we discuss certain issues which need to be kept in mind
at the Donor Agencies level. The donors who are funding partners in India should
ensure the following legal compliances.
DECLARATION OF AN ORGANISATION
TO BE OF A ‘POLITICAL NATURE’
23.02 Rule 3 of FCRR, 2011 of provides the guidelines for declaring an
organisation to be of political nature. It may be noted that in the old act even
organisations of political nature were eligible to receive foreign funds with prior
permission. The new act completely prohibits orginisations of political nature
from receiving foreign contribution. Further the Government has framed
stringent rules under which it can declare any NPO to be of political nature. For
example, if an NPO engages in actions like 'bandh', 'hartal', 'rasta roko', 'jail
bharo', it will be considered as an organisation of political nature.
Possible caution/actions by Donors:
23.03 Donor Agencies must ask for a complete profile of the Organisation that
may include specific declaration from the Organisation that it doesn’t have any
activity which can be considered to be of Political Nature under FCRA 2010.
23.04 Memorandum of Association/Trust Deed of the Organisation should be
verified so as to ensure that the object clause doesn't include any activity which
can be interpreted as an activity of political nature.
23.05 While approving the project, it should be ensured that no activity in the
154
project proposal as well as approved budget comes into the ambit of definition of
Political Nature' under Rule 3 of FCR Rules 2011. Special care should be taken in
supporting partners engaged in activism and advocacy.
ADMINISTRATIVE EXPENDITURE
23.06 Section 8 of the FCRA 2010 provides that the administrative expenditure
shall not exceed 5096 of the total utilisation of funds out of FCRA receipts. Further,
it states that any expenditure of administrative nature in excess of 5096 shall be
defrayed with prior approval of the central government.
23.07 The definition of Administrative Expenditure briefly is as under:
-
Remuneration and other expenditure to Board Members and Trustees.
-
Remuneration and other expenditure to persons managing activity.
-
Expenses at the office of the NPO.
-
Cost of accounting and administration.
-
Expenses towards running and maintenance of vehicle.
Cost of writing and filing reports.
Legal and professional charges.
Rent and repairs to premises.
23.08 The rule further provides that any type of expenditure expended directly
on programme activities shall not be considered as administrative in nature.
Possible caution/actions by Donors:
23.09 The program/projedt budget should be structured properly in order to
absorb the salary and other administrative components which can be directly
attributed to the program.
23.10 Donor Agencies may ask for the overall budget of the organization and
analyse the administrative cost component in the budget in line with the Rule 5 of
FCRR2011.
VALIDITY OF THE
REGISTRATION CERTIFICATE
23.11 Section 11 of FCRA 2010 has restricted the validity of FCR.A registration
155
to a period of 5 years from the date of its issue. All organisations registered on
the date when of FCRA 2010 came into force will have to go for renewal after
next 5 years. As per Section 16 of the proposed Act, all NPOs should apply for
renewal of the certificate within 6 months prior to the expiry of the five year
period. In case of ongoing multi-year projects, NPOs shall be eligible to apply
for renewal twelve months before the date of expiry of the certificate of
registration.
23.12 The organization failing to apply in time would have to face cancellation
of registration and the funds and assets would go into the custody of competent
authority.
Possible caution/actions by Donors:
23.13 The Donor Agencies should ascertain the status of registration of the
Organisation that they are funding or planning to fund and period for which it is
valid. The registration of NPOs which was valid on 1st May 2011 would continue
to remain valid upto 30th April 2016.
23.14 In case the project is going beyond the expiry of registration, Donor Agencies
should keep track of application for renewal
23.15 It is advisable to synchronise the project period to end within Original date
of expiry of registration and start another project only'if the registration has been
renewed for the next block of five years.
CHANGE IN MEMBERS OF EXECUTIVE
COMMITTEE/GOVERNING COUNCIL
23.16 FCR Rules through its Forms require prior permission for change of
more than 5096 of members of Executive Committee of an NPO.
23.18 Form FC-3 pursuant to FCR rule 9(1 )(a) of 1976 and Form FC-4 pursuant
to FCR rule 9(2)(a) of 2010 includes ‘Declaration and undertaking' by the Chief
Functionary of the applicant organization which in point (ii) specifies obtaining
of prior permission for the changes causing replacement of 5096 or more members
of the Executive committee/Governing Council.
23.19 There is no corresponding provision in FCR Act 1976 or 2010 which
provides for the above and so forms in rules takes the effect of superseding the
156
Act. The rules are made under the power conferred by the Act itself and cannot
have any provision which stretches beyond the Act.
Possible caution /actions by Donors:
23.20 Donor Agencies should take a declaration that there is no substantial change
in the overall composition of the board after FCRA registration.
23.21 In case of change of more than 50% members, Donor Agencies should
ensure that necessary prior approval has been obtained from Ministry of Home
Affairs.
CONSULTANCY INCOME OF AN NPO
23.22 FCRA 2010 excludes 'the professional/consultancy fees paid to NPOs
from Foreign Source' from the definition of Foreign Contribution.
23.23 Explanation 3 to Section 2(1 )(h) of FCRA 2010 states that any amount
received, by any person from any foreign source in India by way of fee or cost
against business, trade or commerce shall not be considered as foreign
contribution. In other words, such receipts shall be kept outside the FCRA
account.
23.24 However, the provision is in contradiction with the amended section
2(15) of the Income Tax Act, 1961 which prohibits trade or business related
receipts beyond ? 25 lakh. Therefore, NPOs should be careful in treating
consultancy income and other receipts as local income even though it is now
permissible under the FCRA 2010.
Possible caution/actions by Donors:
23.25 Payment of Consultancy Fees to NPOs by foreign Donor Agencies would
not fall into the ambit of FCRA. If there is any element of help or support in such
agreement then it will be treated as foreign contribution. For example - An
unsecured loan for development programme will not be treated as commercial
transaction. But a secured loan may be treated as commercial transaction.
23.26 Donors should avoid awarding grant type of contracts as commercial
contracts to some partners and. grant contracts to some other partners.
157
REQUIREMENT TO PUT
INFORMATION IN PUBLIC DOMAIN
23.27 Rule 13 provides for requirement of keeping the information regarding
receipt and utilization in public Domain.
23.28 The Rule provides that if the contribution received during the year exceed
10 million, then the organisation has to keep in the public domain all data of
receipts and utilisation during the year and also in the subsequent year. The
rule also states -that the Central Government will also upload such summary
data through its website.
23.29 The manner of disclosure or meaning of 'public domain' has not been
explained. It is understood that all such organisations are required to upload
data on website.
Possible caution/actions by Donors:
23.30 Donor Agencies may ask for website in the organizational profHe and verify
that the information, as required by the rule, is kept in the website and is accessible
to all
23.31 Donor Agencies may ask the NPOs they are funding or planning to fund
but do not have a website, to create a website and put its accounts on it if the
amount of funds would be more than 10 million in a year.
INTER-ORGANISATIONAL
TRANSFER OF FC FUND
23.32 Rule 24 provides that an organisation shall not transfer FC fund to
another organisation unless such other organisation is also registered or has
been given prior permission under FCRA.
23.33 FCRA registered organizations intending to transfer funds to other
organisations having registration or prior permission under FCRA, do not need
prior approval of the Central Government subject to the condition that the
recipient organisation has not been proceeded against under any provision of
the Act.
23.34 Prior Approval to be obtained from Central Government for transfer of
158
FC fund from one NPO to another who has not been granted a certificate of
registration or prior permission.
23.35 The organization may apply for permission to the Central Government
for transfer of FC funds, not exceeding 10% of the total value of the foreign
contribution received in that financial year.
Possible caution /actions by Donors:
23.36 The Foreign Donor Agencies should ensure that Nodal/Principal Partner
transferring foreign contribution to network organizations has obtained prior
permission from the Central Government, if such network partners are not
registered under FCRA.
23.37 The budget for each Network Partner should be properly defined in advance
so that prior approval for the transfer of specified amount can be obtained by the
Nodal Partner.
23.38 Annual declaration from the network organization must be obtained that
they have not been proceeded against and in case it happens, they will inform the
nodal/partner organization. This clause can be included in their grant contract
also.
23.39 In case network partners include those not registered under FCRA, care
should be taken while framing the budget, so that the amount to be transferred
doesn’t exceed 10% of total expected foreign funds to be received by the Nodal
Partner in that financial'year.
POWER TO NOTIFY SOURCES FROM
WHICH FC CAN BE ACCEPTED
23.40 The Act provides power to the Central Government under section 11(3)
(iv) to notify such source(s) from which foreign contribution shall be accepted
with prior permission only. It implies that the Central Govt, may notify specific
donors or countries from which foreign funds could not be received or shall be
received with prior permission only.
Possible caution/actions by Donors:
23.41 The donor agency should make a detailed study as to the objectives of the
organisation to be funded so that they don’t land in to the list of restricted donors
or donors who require prior permission from Central Government before funding.
159
BANK ACCOUNT RELATED ISSUES
23.42 FCRA 2010 and FCRR 2011 specify that foreign contribution should be
received in the designated bank account only. However aftei i eceiving the funds
in the designated bank account, the organisation may transfer funds to various
bank accounts earmarked to specific donors or projects for utilisation of the
same. This is a welcome change of FCRA 2010, since earlier multiple bank accounts
were not permissible.
Possible caution/actions by Donors:
23.43 The donor agency should ensure that the funds are transferred only in the
approved and designated bank account and subsequently the donor may ask the
partner to open dedicated bank account for specific projects,
PROHIBITION OF
SPECULATIVE INVESTMENT
23.44 The new law does not permit investment of surplus funds in risky or
speculative assets. Rule 4(1 )(a) prohibits investment in shares & stocks even
through mutual fund.
23.45 Rule 4( 1 )(b) prohibits investment in high return schemes or in land if it is
not directly linked to the declared aims and objectives of organisation. Basically
the idea is to prevent investment of short term funds into risk bearing instruments
or assets.
Possible caution/actions by Donors:
23.46 The donor should ensure that the balance of project fund available with
the partner is invested in secured instruments. The donor should also ask for the
details of investment against the available projept balance at the end of each period
SUSPENSION OF
REGISTRATION CERTIFICATE
23.47 Section 13 of the new Act allows the power to suspend the registration
pending cancellation of certificate, for a period upto 180 days. During suspension
160
the organisation cannot receive any foreign fund without prior approval.
However, such organisation can utilise the existing foreign funds to the extent
of 25%, with prior approval from FCRA wing of the Ministry of Home Affairs.
Before suspending any organisation, the FCRA wing shall record the reasons in
writing. One very important issue under this section is the absence of any
provision for an opportunity of being heard before suspension, which seems to
be very harsh and unfair. An organisation’s certificate may be suspended while
cancellation proceedings are on. It may be noted that during suspension period
the bank accounts are attached which will include the project funds also.
Possible caution/actions by Donors:
23.48 The donor should seek a declaration from the partner that its certificate of
registration has not been suspended. Special care is necessary in case of 'networks ’
because if the lead holder's certificate is suspended, then the activity of the entire
network will come to a halt.
PERSONS SPECIFICALLY DEBARRED FROM
RECEIVING FOREIGN CONTRIBUTION
23.49 Section 3 of FCRA 2010 specifies that the following persons cannot
receive foreign contribution:
(a) candidate for election.
(b) correspondent, columnist, cartoonist, editor, owner, printer or
publisher of a registered newspaper.
(c) Judge, Government servant or employee of any corporation.
(d) member of any legislature
(e) political party or office-bearer thereof.
(/) Organisation of a political nature.
(g) Association or company engaged in broadcast of audio or visual news.
(h) Correspondent, columnist etc. related with the company refered in
clause(g)
23.50 In this context it is important to note that be clause(g) above prohibits
an organisation engaged in broadcast of audio or visual news.
Possible caution/actions by Donors:
23.51
The donor should seek a declaration that the partner is not engaged in
161
any broadcasting activity or dissemination of public news or current affairs. It
may be noted that such activity is not permissible at all, whether from foreign or
local funds.
GENERAL LEGAL COMPLIANCES
23.52 Donors should seek a declaration that the partner is complying with the
legal requirements such as:
-
Filing of Annual returns under Income Tax Act and FCRA.
■
Deducting tax at source in payments such as salary, consultancies, fees,
rent, payment to contractor etc.
-
Project funds are not used for the benefit of any board member or
interested individual.
Notional expenditure are not charged to project. Notional expenditure
may include internal transfers or estimated expenses against services or
assets used.
162
Annexure - 1
NOTICE & AGENDA FOR A MEETING
Notice is hereby given that a meeting of the Governing body members of
"
" will be held on
,
20
. at
a.m./p.m. in the registered office at
.......................................... to transact the following items/issues :
1.
To read and confirm the minutes of the last meeting of the Governing
body members held on
, 20
2.
To discuss the matter arising from the previous minutes of the last
meeting of the Governing body members held on
20
3.
To discuss the matter arising from the previous minutes (if any) of the
last meeting of the Governing body members held on
. 20
4.
To consider the appointment of Mr./Mrs./Ms
as a member of the organisation ;
5.
To consider opening a new bank account with
bank at
................................... ;
6.
To consider investment of surplus organisation funds ;
7.
To review the various project activities ;
8.
To consider the project proposal to be sent to the funding agency;
9.
To discuss and review the remuneration and consultancy contracts with
the functionaries and board of directors.
10
Listing out the action points.
11
Date of next meeting and deadlines of documentation.
12.
Any other matter with the permission of the chair ;
13.
Closure or adjournment of meeting.
Secretary
’
163
Annexure - 2
A MODEL OF PROXY FORM
hereby,
I, the undersigned, being a member of the
appoint Mr/Ms ..................................... ........................ or
as my proxy to vote for me and on my behalf at the annual
general meeting of the organisation to be held on
19........ and
at any adjournment thereof. He/she would be entitled :
1.
To receive and adopt the governing body's report and audited accounts.
2.
To elect each retiring managing committee member as named in the notice.
3.
To re-appoint the
..................................auditors.
Date
Signature
Name ...
Address
(In block letters)
164
Annexure - 3
A MODEL FORMAT OF
MINUTES & RESOLUTIONS
A meeting of the board of members of " ...
Organisation" was held on
. 20
Registered Office at
at
a.m./p.m. in the
Members present :
i)
ii)
iii)
iv)
v)
Present by invitation :
i)
ii)
iii)
1)
Mr./Mrs/Ms.
2)
Leave of absence :
was voted to the chair.
and Mr./Mrs./
Letters from Mr./Mrs./Ms.
Ms...........................................
regretting their inability to attend
the meeting was placed on the table and leave of absence was granted.
3)
Record of late arrival/early departure :
4)
Confirmation of the minutes of the previous meeting :
The minutes of the meeting held on
were read and confirmed.
20
5)
Matters arising out of the minutes of the previous meeting :
6)
Items deferred or adjourned in the previous meeting :
165
7)
Opening A New Bank Account:
The governing body member, Mr./Mrs./Ms
proposed that for administrative convenience, a new savings account be
opened with
bank at
The
proposal was seconded by Mr./Mrs./Ms
and pas'sed unanimously.
Accordingly, the following resolution was passed :
"RESOLVED that a new savings account be opened in the name of
"
.................. Member" with
*................. bank,
branch.
FURTHER RESOLVED that Mr./Mrs./Ms
..................... Mr/Mrs./Ms
and
Mr./Mrs./Ms
Le the authorised
signatories and the account may be operated by any two of the authorised
signatories jointly”.
8)
Investment of funds:
lying in the
Mr./Mrs./Ms. proposed that the surplus of ?
bank be invested in
saving account with
Bonds which offer a return of 10% p.a. and is an
approved investment as per Section 11(5) of the Income Tax Act, 1961.
was
seconded
by
Mr./Mrs./Ms.
The
proposal
and the following resolution was
passed unanimously:
"RESOLVED that sum of ?
be invested in the name of
"
Organisation" in
Bonds for a
period of three year @ 10% p.a.
FURTHER RESOLVED that Mr./Mrs./Ms
Mrs./Ms
and Mr./Mrs./Ms.
be the authorised signatories".
Mr./
Also RESOLVED that in the event of either the death, resignation or non
availability of any one or all the aforesaid applicants, the aforesaid bonds,
166
may be redeemed at any time, by any two or more board members of the
organisation and all the proceeds, together with the accrued interest, be
credited to the account of the organisation.
9)
Review of Operation :
A detailed report of the activities of the organisation during the month of
20 . as submitted by the General Secretary was tabled,
discussed and noted.
The Governing Body Members expressed their satisfaction over the
activities of the organisation and also noted the increase in the number of
beneficiaries and the local mobilisation of resources in kind at various
communities.
10)
Consideration of Final Accounts :
The final accounts for the year ending
20... .... wefe tabled before
the governing body alongwith the notes thereon, were considered and
approved.
11)
Listing out the action points :
12)
Date of next meeting and deadlines of documentation :
The date of the next governing body meeting was considered decided
that the same would be held on ...r
20
13)
Closure or adjournment of meeting:
The meeting terminated with a vote of thanks to the chair
Chairman
167
Annexure - 4
CIRCULAR NO. 21 OF 2011
ISSUED BY MCA, DT.02.07.2011
Circular N0.21/2011
No 17/95/2011/CL.V
Government of India
Ministry of Corporate Affairs
5,h floor, 'A' Wing, Shastri Bhawan,
Dr. Rajendra Prasad Road, New Delhi
Dated: 02.05.2011
All the Regional Directors,
All the Registrar of Companies
Subject : Green Initiative in the Corporate Governance - Approval of Ministry
of Corporate Affairs for appointment of agency for providing electronic
platform for electronic voting under the Companies Act, 1956.
Sir,
The Ministry of Corporate Affairs has taken a “Green Initiative in the Corporate
Governance" by allowing paperless compliances by the Companies after
considering sections 2, 4, 5 and 81 of the Information Technology Act, 2000 for
legal validity of compliances under Companies Act, 1956 through electronic
mode.
Section 192A of the Companies Act, 1956 read with Companies (Passing of the
Resolution by Postal Ballot) Rules, 2001 already recognizes voting by electronic
mode for postal ballot. Some of the listed company have already started using
electronic platform of certain agencies for providing and supervising the
electronic platform for electronic voting.
In order to have secured electronic platform for capturing accurate electronic
voting processes, it is hereby clarified that the agency appointed for providing
and supervising electronic platform for electronic voting shall be an agency
duly approved by the Ministry of Corporate Affairs.
It is further clarified that for the above purpose, National Securities Depository
Limited (NSDL) and Central Depository Services (India) Ltd (CDSL) are being
approved by the Ministry of Corporate Affairs subject to the condition that
168
they obtain a certificate from Standardization Testing and Quality Certification
(STQC) Directorate, Department of Information Technology, Ministry of
Communications & IT, Govt, of India, Electronics Niketan, 6 CGO Complex,
New Delhi - 110 003, INDIA. Once they obtain the same and inform the Ministry,
they will be authorized to undertake these activities.
Yours faithfully,
(Kamna Sharma)
Assistant Director
Copy to: All concerned
169
Annexure - 5
CIRCULAR NO. 27 OF 2011
ISSUED BY MCA, DT.20.05.2011
General Circular No. 27/2011
No 17/95/2011-CL.V
Government of India
Ministry of Corporate Affairs
'
5,h floor, 'A' Wing, Shastri Bhawan,
Dr. Rajendra Prasad Road, New Delhi
Dated: 20.05.2011
All the Regional Directors,
All the Registrar of Companies
Subject: Green initiative in the Corporate Governance — Participation by
shareholders in general meetings under the Companies Act, 1956 through
electronic mode.
Sir.
The Ministry of Corporate Affairs has taken a "Green initiative in the Corporate
Governance" by allowing paperless compliances by the Companies after
considering sections 2, 4, 5, 13 and 81 of the Information Technology Act, 2000
for legal validity of compliances under Companies Act, 1956 through electronic
mode.
2.
The Ministry has been receiving representations from various Industry
bodies to recognize participation by shareholders in meetings under the
Companies Act, 1956 through electronic mode.
3.
Section 13 of the Information Technology Act, 2000, inter-alia provides
time and place of dispatch of notices in electronic mode, which may be
applicable for the purpose of notice period provided in the Companies Act,
1956 or in the Article of Association of the company.
4.
In the light of the above prdvisions and circumstances, it is hereby
clarified that a shareholder of the company may participate in a general meeting
under the provisions of Companies Act, 1956 through electronic mode.
For this purpose, the company shall also comply with the following requirements
and procedures, in addition to the normal procedures required under the
Companies Act, 1956 for holding general meeting:—
170
(a)
(b)
(c)
Electronic mode means video conference facility i.e. audio-visual
electronic communication facility employed which enables all
persons participating in that meeting to communicate concurrently
with each other without an intermediary, and to participate
effectively in the meeting.
The notice of the meeting must inform shareholders regarding
availability of participation through video conference, and provide
necessary information to enable shareholders to access the available
facility of video conferencing.
The Chairman of the meeting and Secretary shall assume the
followi'ng responsibilities:
(i)
to safeguard the integrity of the meeting via video
conferencing.
(ii)
to ensure proper video conference equipment/facilities.
(iii) to prepare the minutes of the meeting.
(iv) to ensure that no one other than, the concerned shareholder
or proxy to the shareholder is attending the meeting through
electronic mode.
(v)
5.
If a statement of a participant in the meeting via video
conferencing is interrupted or garbled, the Chairman of the
meeting or Secretary shall request for a repeat or reiteration,
and if need be, the Chairman or Secretary shall repeat what
he heard the participant was saying for confirmation or
correction.
(a)
Section 166 of the Companies Act, 1956 inter-alia provides that a
company is required to have its Annual General Meeting either at
the registered office of the company or at place within the city,
town or the village in which registered office of the company is
situated.
(b)
Section 174 of the Companies Act. 1956 inter-alia provides that at
least five members in case of public company and two members in
case of other company have to be personally present and shall be
the quorum for the general meeting.
(c)
In a general meeting, where shareholders are allowed to participate
through electronic mode, the quorum as required under section
174 of the Companies Act, 1956 as well as chairman of the meeting
shall have to be physically present at the place of the meeting.
171
6.
To provide larger participation and for curbing the cost borne by the
shareholders to attend general meetings, listed companies may provide video
conferencing connectivity during such meetings at least five places in India. It
is recommended that these places would be situated all over India in such a
way that it covers top five States/UTs based on maximum number of members
or at least 1000 members, whichever is more, residing as per the address
registered with the depositories.
7.
In order to have secured electronic platform for capturing accurate
electronic voting processes, the necessary clarification has already been issued
vide Circular no. 21/2011 dated 02.05.2011.
Yours faithfully,
(Monika Gupta)
Assistant Director
Copy to: All concerned.
172
Annexure - 6
CIRCULAR NO. 28 OF 2011
ISSUED BY MCA, DT.20.05.2011
General Circular No. 28/2011
No 17/95/2011-CL.V
Government of India
Ministry of Corporate Affairs
5th floor, 'A' Wing, Shastri Bhawan,
Dr. Rajendra Prasad Road. New Delhi
Dated: 20.05.2011
All the Regional Directors,
All the Registrar of Companies
Subject: Green Initiative in the Corporate Governance — Participation by
directors in meetings of Board/Committee of directors under the Companies
Act, 1956 through electronic mode.
Sir,
The Ministry of Corporate Affairs has taken a "Green Initiative in the Corporate
Governance” by allowing paperless compliances ,by the Companies after
considering sections 2, 4, 5, 13 and 81 of the Information Technology Act, 2000
for legal validity of compliances under Companies Act, 1956 through electronic
mode.
The Ministry has been receiving representations from various Industry
2.
bodies to recognize participation by director? in meetings of Board/Committee
of directors under the Companies Act, 1956 through electronic mode.
3.
Section 13 of the Information Technology Act, 2000, inter-alia provides
time and place of dispatch of notices in electronic mode, which may be applicable
for the purpose of notice period provided in the Companies Act, 1956 or in the
Article of Association of the company.
In the light of the above provisions and circumstances, it is hereby clarified
4.
that directors of a company may participate in a meeting of Board/Committee
of directors under the provisions of Companies Act, 1956 through electronic
mode.
173
For this purpose, the cdmpany shall also comply with the following requirements
and procedures, in addition to the normal procedures required under the
Companies Act, 1956 for holding meetings of Board/Committee of directors:(a)
(b)
(c)
Electronic mode means video conference facility i.e. audio-visual
electronic communication facility employed which enables all
persons participating In that meeting to communicate concurrently
with each other without an intermediary, and to participate
effectively in the meeting.
Every Director of the company must attend the meeting of Board/
Committee of directors personally at least one meeting a financial
year of the company.
The Chairman of the meeting and Secretary shall assume the
following responsibilities:
(i)
to safeguard the integrity of the meeting via video conferencing.
(ii) to ensure proper video conference equipment/facilities.
(iii) to prepare the minutes of the meeting.
(iv) to ensure that no one other than the concerned director or
other authorized participants are attending the meeting through
electronic mode.
(v)
5
If a statement of a participant in the meeting via video
conferencing is interrupted or garbled, the Chairman or
Secretary shall request for a repeat or reiteration, and if need
be, the Chairman or Secretary shall repeat what he heard the
participant was saying for confirmation or correction.
(a)
The notice of the meeting must inform directors regarding
availability of participation through video conference, and provide
necessary information to enable directors to access the available
facility of videoconferencing.
(b)
The notice of the meeting shall also seek confirmation from the
director as to whether he will attend the meeting physically or
through electronic mode and shall also contain the contact
number(s)/e-mail addresses of the Secretary/ designated officer to
whom the director shall confirm in this regard.
(c)
In the qbsence of any confirmation from the Director, it will be
presumed that he will physically attend the Board meeting.
174
At the start of the scheduled meeting through electronic mode, a roll
6.
call shall be made by the Chairman/Secretary. Every director and authorized
participant shall state, for the record, the following:-
i.
Full Name
ii.
Location
iii.
that he can completely and clearly see and communicate with
each of other participants.
iv
and will ensure that no one other than the concerned director or
authorized participant is attending the meeting through electronic
mode.
Thereafter, the Chairman/Secretary shall confirm the participation of the
directors in the meeting who are not physically present. After the roll call, the
Chairman or Secretary may certify the existence of a quorum.
It is clarified that a director participating in a meeting through use of video
conference shall be counted for the purpose of quorum. A roll call should also
be made at the conclusion of the meeting or at re-commencement of the meeting
after every break to ensure presence of quorum throughout the meeting.
7.
The place where the Chairman or Secretary is sitting during the Board
meeting shall be taken as place of meeting in terms of section 288 of the Act,
and all recordings will be made at this place. The other statutory registers which
are required to be placed in the Board meeting as per the provisions of the Act,
shall be placed before the Chairman for compliance of the Act. The statutory
registers required to be signed by the other directors shall be deemed to have
been signed by directors participating through electronic mode if they have
given their consent to this effect in that meeting.
8.
If a motion is objected to and there is a need to vote, the Chairman/
Secretary should call the roll and note the vote of each director who should
identify himself.
9
(a)
In the end of the meeting, Chairman of the meeting shall announce
the summary of the decisions taken in that meeting in respect of
each agenda item and names of the directors who have consented
or dissented to those decisions. Video recording of that part of the
meeting shall be preserved by the company for one year from the
conclusion of that meeting.
(b)
In the minutes, chairman shall also confirm the mode of attendance
175
of every director of the company during last three meetings whether
personally or through electronic mode.
(c) Draft minutes of the meeting shall be circulated in soft copy not
later than 7 days of the meeting for comments/confirmation to the
directors who attended the meeting to dispel all doubts on matters
taken up during the meeting. Thereafter, the minutes shall be entered
in the minute books as prescribed under section 193 of the Act. The
minutes shall also disclose the particulars of the Directors who
attended the meeting through electronic mode.
Yours faithfully,
(Monika Gupta)
Assistant Director
Copy to: All concerned.
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Annexure - 12
TEXT OF FORM NO. 10A
FORM NO. 10A
[See rule 17A]
Application for registration of charitable or religious trust or institution
under clause (aa) of sub-section (1) of section 12A of the
Income-tax Act, 1961
To
The Commissioner of Income-tax,
Sir,
I
on behalf of
hereby apply
for the
[name of the trust or institution]
registration of the said trust/institution uncier section 12Aof the Income-tax Act, 1961. The
following particulars are furnished herewith:
1. Name of the’trust/institution in full [in block letters] t
2. Address
.
3. Name(s)andaddress(es)ofauthor(s)/founder(s)
4. Date of creation of the trust or establishment of the
institution
5. Name(s)andaddress(es)oftrustee(s)/manager(s)I also enclose the following documents:
J. (a) ‘Original/Certified copy of the instrument under which the trust/institution was
created / established, together with a copy thereof.
(Z?) ’Original/Certified copy of document evidencing the creation of the trust or the
establishment of the institution, together with a copy thereof. [The originals, if enclosed,
will be returned].
2. Two copies of the accounts of the ‘trust/institution for the latest ’one/two/three years.
I undertake to communicate forthwith any alteration in the terms of the trust, or in the rules
governing the institution, made at any time hereafter.
Date
Signature
Designation
Address
’Strike out whichever is not applicable.
182
Annexure - 13
TEXT OF FORM NO. 56
FORM NO. 56
[See rule 2C]
Application for grant of exemption or continuance thereof
under section 10(23C)(iv) and (v) for the year
1. Name and address of the registered office of the trust/institution
2. Legal status, whether trust or registered society/others. Please enclose a copy of
certificate of registration
3. Objects of the trust
4. Names and addresses of the trustees/office bearers
5. Geographic area over which the activities of the trust are performed. Enclose details
of work done in different places with addresses of branch offices and names and
addresses of office bearers in these places.
6. Enclose copies of memorandum of association, articles of association, trust deed,
rules/regulations of the trust or institution and those of other institutions like schools,
hospitals, etc., managed by the trust/institution
7. Enclose copies of audited accounts and balance sheets for the last three years along
with a note on the examination of accounts and on the activities as reflected in the
accounts and in the annual reports with special reference to the appropriation of
income towards objects of the trust
8. Has the trust received any donations from a foreign country to which the provisions
of Foreign Contribution (Regulation) Act, 1976, applies? Give details.
9. Give assessment particulars:—
(i) Ward/Circle of jurisdiction and the last income returned and assessed with
permanent account number/GIR number
(it) Is the income exempt under section 11
(nt) Is any recovery of tax, etc., outstanding against the trust?
(tv) Whether any penalties have been initiated/levied?
10. Total income of the trust including (voluntary contributions) for the previous year
relevant to the assessment year for or from which the exemption is sought
11. Amount of income referred to above that has been or deemed to have been utilised
wholly and exclusively for the objects of the trust income deemed to have been utilised
shall have the meaning assigned to it in sub-sections (1) and (1 A) of section 11
12. Amount accumulated for the purposes mentioned in column (3) above.
183
13. (i) Details of modes in which the funds of the trust are invested or deposited showing
the nature, value and income from the investment
(ii) Details of funds not invested in the modes specified in section 11(5):
SL
No.
J
Name and address In the case of a
of the concern company, number
and class of
shares held
2
3
Nominal value of
the investment
Income from the
investment
4
5
14. (z) Is the trust carrying on any business (give details)?
(u) Is the business incidental to the attainment of its objects?
15. Details of nature, quantity and value of contributions (other than cash) and the manner
in which such contributions have been utilised
16. Details of shares, security or other property purchased by or on behalf of the trust from
any interested person as specified in sub-section (2) of section 13
17. Whether any part of the income or any property of the association was used or applied in
a manner which results directly or indirectly in conferring any benefit, amenity or
perquisite (whether converted into money or not), on any interested person as specified
in sub-section (3) of sectjon 13? If so, details thereof.
18. Amount deemed to be irlcome of the trust if sub-section (3) of section 11, is made applicable.
19. The income that would have been assessable if the trust had not enjoyed the benefit of
section 10(23Q(iv)or (v)
Certified that the above information is true to the best of my knowledge and belief.
Place,.
Date..
Signature
Designation
FullAddress
Notes :
184
In this form, the term "trust" also includes a fund or institution or any other legal obligation.
2. The application form should be sent to the Chief Commissioner or Director General whom the Central
Board of Direct Taxes may authorise to act as prescribed authority for the purposes of sub-clause (iv)
or sub-clause (v) of clause (230) of section 10, through the Commissioner of Income-tax or Director of
Income-tax (Exemptions) having jurisdiction over the trust or institution. Four copies of the application
form along with the enclosures should be sent.
3. Copies of the following documents should be annexed:—
(0 Deed of trust/memorandum and Articles of Association.
(h) A list of trustees enclosing settlor/members of the Governing Council.
(«i) A photocopy of the latest certificate under section 80G issued by the Commissioner of Incometax.
(.iv) True copies of the assessment orders passed for the last three years.
(v) Photocopy of communication from the Commissioner of Income-tax with reference to the
application of the trust/institution for a registration under section 12A.
4, The applicant shall furnish any other documents or information as required by the Chief Commissioner
01* Director General or any authority authorised by the Chief Commissioner or Director General.
185
Annexure - 14
TEXT OF FORM NO. 10B
FORMNO. 10B
[See rule 17B]
Audit report under section 12A(b) of the Income-tax Act, 1961, in the case of
charitable or religious trusts or institutions
T/We have examined the balance sheet of.
as at
[name of the trust or institution]
and the profit and loss account for the year ended on that date which are in agreement with the
books of account maintained by the said trust or institution.
T/We have obtained all the information and explanations which to the best of ‘my/ our knowledge
and belief were necessary for the purposes of the audit. In ‘my / our opinion^proper books of account
have been kept by the head office and the branches of the above- named ‘trust/institution visited
by ‘me/ us so far as appears from ‘my/our examination of the books, and proper returns adequate
for the purposes of audit have been received from branches not visited by ‘me/us, subject to the
comments given below:
In ’my/our opinion and to the best of ‘my/ our information, and according to information given
to ‘me/us, the said accounts give a true and fair view—
(i) in the case of the balance sheet, of the state of affairs of the abovenamed ‘trust/
institution as at
and
(ii) in the case of the profit and loss account, of the profit or loss of its accounting year ending
on
The prescribed particulars are annexed hereto.
Place.
Date.
Signed
Accountant]
Notes:
1. ‘Strike out whichever is not applicable.
2. fThis report has to be given by—
(0 a chartered accountant within the meaning of the Chartered Accountants Act, 1949 (38 of 1949);
or
(ii) any person who, in relation to any State, is, by virtue of the provision^ of sub-section (2) of section
226 of the Companies Act, 1956 (1 of 1956), entitled to be appointed to act as an auditor of
the company registered in that State.
3. Where any of the matters stated in this report is answered in the negative, or with a qualification, the
report shall state the reasons for the same.
ANNEXURE
Statement of particulars
I. APPLICATION OF INCOME FOR CHARITABLE OR RELIGIOUS PURPOSES
1. Amount of income of the previous year applied to charitable
or religious purposes in India during that year
186
2. Whether the trust/institution* has exercised the option under
clause (2) of the Explanation to section 11 (1) ? If so, the details of
the amount of income deemed tohavebeen applied tocharitable
or religious purposes in India during the previous
year
accumulated orsetapan*
3. Amount of income
for application
finally set apart
to charitable or religious purposes, to the extent it does not exceed
25 per cent of the income derived from property held
under trust
wholly’
for such purposes.
in part only
4. Amount of income eligible for exemption under section
11(1 )(c) (Give details)
5. Amount of income, in addition to the amount referred to in item
3 above, accumulated or set apart for specified purposes
under section 11(2)
6. Whether the amount of income mentioned in item 5 above has
been invested or deposited in the manner laid down in section
11 (2)(b) ? If so, the details thereof
7. Whether any part of the income in respect of which an option was
exercised underclause(2)of the Explanation to section 1 l(l)inany
earlier year is deemed to be income of the
previous year under section 11 (1B) ? If so, the details thereof
8. Whether, during the previous year, any pail of income accumulated
or set apart for specified purposes under section
11(2) in any earlier year—
(a) has been applied for puiposes other than charitable or religious
purposes or has ceased to be accumulated or set
apart for application thereto, or
(£») has ceased to remain invested in any security referred to in
section ll(2)(b)(i) or deposited in any account referred
to in section 1 l(2)(Z>)(n) or section 1 l(2)(b)(ni), or
(c) has not been utilised for purposes for whichit was accumulated
or set apart d uring the period for which it was to be accumulated
or set apart, or in the year immediately
following the expiry thereof? If so, the details thereof
II. APPLICATION OR USE OF INCOME OR PROPERTY
FOR THE BENEFIT OF PERSONS REFERRED
TO IN SECTION 13(3)
1. Whether any part of the income or property of the ’trust/institution
was lent, or continues to be lent, in the previous year to any person
referred to in section 13(3) (hereinafter referred to in this Ann exure
as such person)? If so, give details of the amount,
rate of interest charged and the nature of security, if any
2. Whether any land, building or other property of the ‘trust/
institution was made, or continued to be made, available for the use
187
of any such person during the previous year? If so, give details of
the property and the amount of rent or compensation
charged, if any
3. Whether any payment was made to any such person during the
previous year by way of salary, allowance or otherwise?
If so, give details
4. Whether the services of the ‘trust/institution were made available
to any such person during the previous year? If so, give details
thereof together with remuneration or compensation
received, if any
5. Whether any share, security or other property was purchased by
or on behalf of the ‘trust/institution during the previous year from
any such person? If so, give details thereof together
with the consideration paid
6. Whether any share, security or other property was sold by or on
behalf of the ‘trust/institution during the previous year to any such
person? If so, give details thereof together with the
consideration received
7. Whether any income or property of the 3‘trust/institution was
diverted during the previous year in favour of any such person? If
so, give details thereof together with the amount of income or
value of property so diverted
8. Whether the income or property of the ‘trust/institution was used
or applied during the previous year for the benefit of any
such person in any other manner? If so, give details
‘Strike out whichever is not applicable.
III INVESTMENTS HELD AT ANY TIME DURING THE PREVIOUS YEAR(S) IN
CONCERNS IN WHICH PERSONS REFERRED TO IN SECTION 13(3)
HAVE A SUBSTANTIAL INTEREST
SZ. No.
Name and
address of
the concern
1
2
Nominal value
Where the
of the
concern is a
investment
company,
number & class
of shares held
3
4
income from Whether the amount
the invest in col. 4 exceeded 5 per
cent of the capital of
ment
rhe concern during the
previous year—say,
Yes/No
5
6
TOTAL
Place.
Date...
SignedAccountant
188
Annexure-15
TEXT OF FORM NO. 10BB
FORMNO. 10BB
[See rule 16CC]
Audit report under section 10(23C) of the Income-tax Act, 1961, in the case of any
fund or trust or institution or any university or other educational institution
or any hospital or other medical institution referred to in
sub-clause (iv) or sub-clause (v) or sub-clause (vi)
or sub-clause (via) of section 10(23C)
(i) *1/We have examined the Balance Sheet as at
and the Income and Expenditure or Profit
and Loss Account for the year ended on that date attached herewith of
(name of fund
or trust or institution or any university or other ed ucational institution or any hospital or other
medical institution).
(ii) ‘I/We certify that the Balance Sheet and the Income and Expenditure Account or Profit
and Loss Account are in agreement with the books of account maintained by the head office
at
and
branches.
(in) Subject to comments below—
(a) ‘1/We have obtained all the information and explanations which to the best of ’my/
our knowledge and belief were necessary for the purpose of the audit.
(Z?) In ‘my/our opinion, proper books of account have been kept by the head office and
branches of the above-named fund, or trust, or institution or any university or other
educational institution or any hospital or other medical institution so far as appears
from ‘my/our examination of the books of account.
(c) In ‘my/our opinion and to the best of ‘my/our information and according to the
information given to me/ us, the said accounts read with notes thereon, if any, given
a true and fair view—
(/) In the case of the Balance Sheet, of the state of affairs of the above-named fund,
or trust, or institution or any university or other educational institution or any
hospital or other medical institution as at
and
(2) In the case of Income and Expenditure Account or Profit and Loss Account,
surplus or deficit or profit or loss for the year ended on that date.
The prescribed particulars are annexed herewith:
Place:
Date:
Notes :
1. ‘Strike out whichever is not applicable.
Signed
Name
Membership No.
Address
189
2. This report has to be given by—
(i) a chartered accountant within the meaning of the Chartered Accountants Act, 1949 (38 of
1949); or
(ii) any person who, in relation to any State, is, by virtue of the provisions of sub-section (2) of
section 226 of the Companies Act, 1956 (1 of 1956), entitled to be appointed to act as an auditor
of the company registered in that State.
3. Where any of the matters stated in this report is answered in the negative, or with a qualification,
the report shall state the reasons for the same.
ANNEXURE
Statement of particulars
PART A
GENERAL
1. Name of the fund or trust or institution or any university or other
educational institution or any hospital or other medical institution
2. Address
3. Permanent Account Number
4. Assessment year
5. Sub-clause of section 10(230 under which the fund or trust or
institution or any university or other educational institution or any
hospital or other medical institution is seeking exemption
6. Number and date of notification/approval of the fund or trust or
institution or any university or other educational institution or any
hospital or other medical institution
PARTS
APPLICATION OF INCOME FOR CHARITABLE OR RELIGIOUS OR
EDUCATIONAL OR PHILANTHROPIC PURPOSES
7. Nature of charitable/religious/educational/philanthropic activity
[as referred to in sub-clause (iv), (v), (vi) or {via} of section 10(23C)]
8. Total income of the previous year of the fund or trust or institution
or any university or other educational institution or any hospital
or other medical institution
9. Amount of income of the previous year applied during the year
wholly and exclusively to the objects for which it is established
10. Amount of income of the previous year accumulated for application,
wholly and exclusively, to the objects-for which it is established, to
the extent it does not exceed 15% of income of that year
11. Amount of income, exceeding 15% of income of the year, accumulated
in accordance with clause (a) of the third proviso to section 10(23Q
12.
(a) Whether, during the previous year, any part of the income, not
exceeding 15% of income accumulated in any earlier year, was
190
applied for purposes other than to the objects for which it is
established or has ceased to be accumulated for application
thereto?
(b) If the answerto («) above is 'yes', then give details of income so
applied or ceased to be so accumulated
13.
14.
(a) Whether, during the previous year, any part of the income
of any earlier year exceeding 15% of the income, that was
accumulated in accordance with clause (a) of the third proviso
to section 10(23Q in that year, was applied for purposes other
than to the objects for which it is established or has ceased to
be accumulated for application thereto?
(Z?) If the answer to (a) above is 'yes’, then give details of income so
applied or ceased to be so accumulated
(a) Whether, during the previous year, any part of the income of any
earlier year exceeding 15% of the income, that was accumulated
in accordance with clause (a) of the third proviso to section 10(23C)
in that year, was not utilised for purposes forwhich it was accum
ulated during the period for which it was.to be accumulated?
(Zj) If the answer to (fl) above is 'yes’, then give details thereof,
together with amount of income not so utilised
PART C
OTHER INFORMATION
15.
{a) Whether any funds, other than the assets or voluntary contri
butions referred to in clause (/?) of the third proviso to section
10(23Q, were invested or deposited for any period during the
previous year, otherwise than in the forms and modes specified
in sub-section (5) of section 11
.
(Z?) If the answer to (a) above is 'yes', then give details as under:
SI. No.
Nature of investment
or deposit
Amount invested
or deposited
Period of investment
or deposit
____________________
16. In relation to any income being profits and gains of business,—
(a) Whether the business was incidental to the attainment of the
objectives of the fund or trust or institution or university or
other educational institution or hospital or other medical
institution?
(Z?) Whether separate books of account were maintained in respect
of such business?
(c) If the answer to (a) and/or (/?) above is 'no', then state the
amount of such income
191
17.
(a) Whether during the previous year, any part of the accumulated
18.
income was paid or credited to any trust or institution registered
under section 12AA or to any fund or trust or institution or any
university or other educational institution or any hospital or
other medical institution referred to in sub-clause (zv) or sub
clause (v) or sub-clause (vi) or sub-clause (vza) of clause (23C)
of section 10?
(b) If the answer to (fl) above is ‘yes', then give details thereof.
together with the amount of income so paid or credited
(a) Whether any voluntary confribution, other than voluntary
contribution in cash or voluntary contribution of the nature
referred to in clause (Z?) of the third proviso to section 10(23Q,
was held during the previous year, otherwise than in any of the
forms or modes specified in sub-section (5) of section 11, after
the expiry of one year from the end of the previous year in
which such voluntary contribution was received?
(ty If the answer to (fl) above is 'yes’, then give details thereof,
including the amount of such voluntary contribution
19.
(a) Whether any anonymous donation referred to in section
115BBC was received during the year? (See notes 2 & 3)
(b) If the answer to (fl) above is 'yes', then state the amount of
such anonymous donation
Place.
Date..
Signed
Auditor
Notes :
J. Strike out whichever is not applicable.
2. This item is not applicable to any anonymous donation received by—
(a) any trust or institution created or established wholly for religious purposes;
(b) any trust or institution created or established wholly for religious and charitable purposes other
than any anonymous donation made with a specific direction that such donation is for any
university or other educational institution or any hospital or other medical institution run by
such trust or institution.
3. This item is applicable for assessment year 2007-08 and subsequent assessment years.
192
Annexure-16
TEXT OF FORM NO. 10
FORM NO. 10
[See rule 17]
NOTICE TO THE ASSESSING OFFICER/PRESCRIBED AUTHORITY
UNDER SECTION 11(2) OF THE INCOME-TAX ACT, 1961
To
The Assessing Officer/Prescribed Authority,
on behalf of
[name of the trust/institution/association]
hereby bring to your notice that it has been decided by a resolution passed by the
trustees/governing body, by whatever name called, on
(copy
enclosed) that, out of the income of the trust/institution/association for the
previous year(s), relevant to the assessment year 20
- 20
and subsequent
previous year(s), an amount of ?
per cent of the income of
the trust/institution’/association such sum as is available at the end of the
previous year(s) should be accumulated or set apart till the previous year(s)
ending
in order to enable the trustees/governing body by whatever
name called, to accumulate sufficient funds for carrying out the following
purposes of the trust/association/institution
I,
(1)
(2)
2. Before the expiry of six months commencing from’ the end of the each previous
year, the amount so accumulated or set apart has been/will be invested or
deposited in any one or more of the forms or modes specified in sub-section (5)
of section 11.
3. Copies of the annual accounts of the trust/institution/association along with
details of investment (including deposits) and utilisation, if any, of the money so
accumulated or set apart will be furnished to you before the expiry of six months
commencing from the end of each relevant previous year.
4. It is requested that in view of our complying with the conditions laid down in
section 11(2) of the Income-tax Act, 1961, the benefit of that section may be given
in the assessments of the trust/exempting the income in respect of the trust/
institution/association in respect of the incomes accumulated or set apart as
mentioned above.
Date
Signature
193
Designation
Address
Notes:
1. This notice should be signed by a trustee/principal officer.
2. Delete the inappropriate words.
194
Annexure - 17
MODES OF INVESTMENT OF ACCUMULATED INCOME
UNDER SECTION 11(5) AND RULE 17C AND SECTION 10(23D)
SECTION 11(5)
(5) The forms and modes of investing or depositing the money referred to in
clause (b) of sub-section (2) shall be the following, namely
(z) investment in savings certificates as defined in clause (c) of section 2 of the
Government Sayings Certificates Act, 1959 (46 of 1959), and any other
securities or certificates issued by the Central Government under the Small
Savings Schemes of that Government;
(zz) deposit in any account with the Post Office Savings Bank;
(Hi) deposit in any account with a scheduled bank or a co-operative society
engaged in carrying on the business of banking (including a co-operative
land mortgage bank or a co-operative land development bank).
Explanation.—In this clause, "scheduled bank” means the State Bank of
India constituted under the State Bank of Indip Act, 1955 (23 of 1955), a
subsidiary bank as defined in the State Bank of Ihdia (Subsidiary Banks) Act,
1959 (38 of 1959), a corresponding new bank constituted under section 3 of
the Banking Companies (Acquisition and Transfer of Undertakings) Act,
1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition
and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank
being a bank included in the Second Schedule to the Reserve Bank of India
Act, 1934 (2 of 1934);
(zv) investment in units of the Unit Trust of India established under the Unit
Trust of India Act, 1963 (52 of 1963);
(v) investment in any security for money created and issued by the Central
Government or a State Government;
(vz) investment in debentures issued by, or on behalf of, any company or
corporation both the principal whereof and the interest whereon are fully
and unconditionally guaranteed by the Central Government or by a State
Government;
(vu) investment or deposit in any public sector company:
Provided that where an investment or deposit in any public sector company
has been made and such public sector company ceases to be a public sector
company,—
(A) such investment made in the shares of such company shall be deemed
to be an investment made under this clause for a period of three years
from the date on which such public sector company ceases to be a
public sector company;
(B) such other investment or deposit shall be deemed to be an investment
•or deposit made under this clause for the period up to the date on
195
which such investment or deposit becomes repayable by such company;
(vut) deposits with or investment in any bonds issued by a financial corporation
which is engaged in providing long-term finance for industrial development
in India and which is eligible for deduction under clause (vm) of sub-section
(1) of section 36;
(ix) deposits with or investment in any bonds issued by a public company
formed and registered in India with the main object of carrying on the
business of providing long-term finance for construction or purchase of
houses in India for residential purposes and which is eligible for deduction
under clause (vziz) of sub-section (1) of section 36;
(ixa) deposits with or investment in any bonds issued by a public company
formed and registered in India with the main object of carrying on the
business of providing long-term finance for urban infrastructure in India.
Explanation.—For the purposes of this clause,—
(a) "long-term finance” means any loan or advance where the terms under
which moneys are loaned or advanced provide for repayment along
with interest thereof during a period of not less than five years;
(^) “public company” shall have the meaning assigned to it in section 3 of
the Companies Act, 1956 (1 of 1956);
■ (c) "urban infrastructure" means a project for providing potable water
supply, sanitation and sewerage, drainage, solid waste management,
roads, bridges and flyovers or urban transport;
(x) investment in immovable property.
Explanation.—"Immovable property" does not include any machinery or
plant (other than machinery or plant installed in a building for the
convenient occupation of the building) even though attached to, or
permanently fastened to, anything attached to the earth;
deposits with the Industrial Development Bank of India established under
the Industrial Development Bank of India Act, 1964 (18 of 1964);
(x/z) any other form, or mode of investment or deposit as may be prescribed.
RULE 17C
Forms or modes of investment or deposits by a charitable or religious trust or
institution.
17C. The forms and modes of investment or deposits under clause (xh) of sub
section (5) of section 11 shall be the following, namely
(z) investment in the units issued under any scheme of the mutual fund referred
to in clause (23D) of section 10 of the Income-tax Act, 1961;
196
(n) any transfer of deposits to the Public Account of India;
(Hi) deposits made with an authority constituted in India by or under any law
enacted either for the purpose of dealing with and satisfying the need for
housing accommodation or for the purpose of planning, development or
improvement of cities, towns and villages, or for both;
(n') investment by way of acquiring equity shares of a depository as defined in
clause (e) of sub-section (1) of section 2 of the Depositories Act, 1996 (22 of
1996);
(v) investment made by a recognised stock exchange referred to in clause (/)
of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956)
(hereafter referred to as investor) in the equity share capital of a company
(hereafter referred to as investee)—
which is engaged in dealing with securities or mainly associated with
the securities market;
(5) whose main object is to acquire the membership of another recognised
stock exchange for the sole purpose of facilitating the members of the
investor to trade on the said stock exchange through the investee in
accordance with the directions or guidelines issued under the Securities
and Exchange Board of India Act, 1992 (15 of 1992) by the Securities and
Exchange Board of India established uncjer section 3 of that Act; and
(0 in which at least fifty-one per cent of equity shares are held by the
investor and the balance equity shares are held by members of such
investor;
(vz) investment by way of acquiring equity shares of an incubatee by an
incubator.
:•
Explanation.—For the purposes of this clause,—
(a) "incubatee" shall mean such incubatee as may be notified by the
Government of India in the Ministry of Science and Technology;
(b) "incubator" shall mean such Technology Business Incubator or Science
and Technology Entrepreneurship Park as may be notified by the
Government of India in the Ministry of Science and Technology;
(vn) investment by way of acquiring shares of National Skill Development
Corporation.
INVESTMENTS UNDER SECTION 10(23D)
(23D) subject to the provisions of Chapter XII-E, any income of—
(?) a Mutual Fund registered under the Securities and Exchange Board of India
Act, 1992 (15 of 1992) or regulations made thereunder;
(it) such other Mutual Fund set up by a public sector bank or a public financial
197
institution or authorised by the Reserve Bank of India and subject to such
conditions as the Central Government may, by notification in the Official
Gazette, specify in this behalf.
Explanation.—For the purposes of this clause,—
(a) the expression "public sector bank" means the State Bank of India constituted
under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as
defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959),
a corresponding new Bank constituted under section 3 of the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970),
or under section 3 of the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1980 (40 of 1980) and a bank included in the category
"other public sector banks" by the Reserve Bank of India;
(b) the expression "public financial institution" shall have the meaning assigned
to it in section 4A of the Companies Act, 1956 (1 of 1956);
(c) the expression "Securities and Exchange Board of India" shall have the
meaning assigned to it in clause (a) of sub-section (1) of section 2 of the
Securities and Exchange Board of India Act, 1992 (15 of 1992);
198
Annexure - 18
EXTRACT OF CBDT CIRCULAR NO. 8, DATED 27-8-2002
21. Restriction on the application of accumulated income of the charitable or
religious trusts.
21.1 Through the Finance Act, 2002, an Explanation has been inserted below sub
section (2) of section 11 so as to provide that any amount paid or credited out of
income from property held under trust referred to in clause (a) or clause (/?) of
sub-section (1), read with the Explanation to that sub-section, which is not
applied, but is accumulated or set apart, to any trust or institution registered
under section 12AA or to any fund or institution or trust or any university or other
educational institution or any hospital or other medical institution referred to in
sub-clause (zv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23Q
of section 10, either during the period of accumulation or thereafter, shall not be
treated as application of income for charitable or religious purposes. Thus,
payment to other trusts and institutions out of income from property held under
trust in the year of receipt will continue to be treated as application of income.
However, any such payment out of the accumulated income shall not be treated
as application of income and will be taxed accordingly.
21.2 Through the Finance Act, 2002, a new clause (d) has also been inserted in sub
section (3) of section 11 so as to provide that if any income referred to in sub
section (2) of the said section, is paid or credited to any trust or institution
registered under section 12AA or to any fund or institution or trust or any
university or other educational institution or any hospital or other medical
institution referred to in sub-clause (/v) or (v) or (vi) or (via) of clause (23C) of
section 10, such payment or credit shall be deemed to be the income of the person
making such payment or credit, of the previous year in which such payment or
credit is made.
21.3 A proviso in sub-section (3A) has also been inserted so as to provide that the
Assessing Officer shall not allow application of accumulated income by way of
payment or credit made for the purposes referred to in clause (d) of sub-section
(3) of section 11. This takes away the discretion of the Assessing Officer provided
in sub-section (3A) to allow the trusts to apply the accumulated income for
payment or credit to other charitable or religious trusts and institutions.
21.4 These amendments will take effect from 1st April, 2003 and will, accordingly,
apply in relation to the assessment year 2003-04 and subsequent years. [Section
7]
22. Condition of publication of accounts by religious and charitable trusts in a
local newspaper has been dispensed with.
22.1 Under the existing provision contained in clause (c) of section 12A, the
exemption under sections 11 and 12 is not available to a trust or institution,
having total income exceeding one crore rupees (before giving effect to the
199
provisions of sections 11 and 12), unless such trust or institution publishes its
accounts in a local newspaper, before the due date of furnishing the return of
income and also furnishes a copy of such newspaper along with the return of
income.
22.2 Under the existing provisions contained in the ninth proviso to clause (23Q
of section 10, income of trust or fund or institution or any university or other
educational institution or any hospital or other medical institution referred to in
sub-clauses (zv), (v), (vz) and (via) of the said clause, whose gross receipts exceed
one crore rupees, is not exempt, unless the said trust or fund or institution or
university or other educational institution or hospital or other institution,
publishes its accounts in a local newspaper and furnishes a copy of such
newspaper, along with the form of application for exemption oi continuance
thereof.
22.3 Since the trusts or institutions registered under section 12AA are already
filing their returns, and the entities exempt under sub-clauses (zv), (v), (vi) and (via)
are now also required to file their return of income, the requirement of
publishing accounts in a local newspaper and furnishing a copy of such
newspaper along with the return of income or along with the form of application
for exemption or continuance thereof, as the case may be, has been dispensed
with by omitting clause (c) of section 12A and ninth proviso to clause (23C) of
section 10 through the Finance Act, 2002.
22.4 These amendments take effect retrospectively from 1st April, 2002 and
apply in relation to the assessment year 2002-03 and subsequent years. [Sections
4(5) & 9]
200
Annexure-19
CIRCULAR ON PERPETUAL NATURE
OF 10(23C) & 80G RENEWALS
GOVERNMENT OF INDIA
MINISTRY OF FINANCE, DEPARTMENT OF REVENUE
CENTRAL BOARD OF DIRECT TAXES
Circular No. 7/2010
Dated: October 27, 2010
Subject:- Period of validity of approvals amended vide Taxation Laws (Amendment)
Act, 2006 under Section 10(23C) (iv), (v), (vi) or (via) and Section 80G (5) of the
IT Act-clarification reg.
The Board has received various references from the field formations as well as
members of public about the period of validity of approvals granted by the
Chief Commissioners of Income Tax or Directors General of Income Tax under
sub-clauses (iv), (v), (vi) and (via) of Section 10(23C) and by the Commissioners of
Income Tax or Directors of Income Tax under Section 80G (5) of the Income
Tax Act, 1961.
2. It has also been noticed by the Board that different field authorities are
interpreting the provisions relating to the period of validity of the above
approvals in a different manner. The following instructions are accordingly issued
for the removal of doubts about the period of validity of various approvals
referred to above.
3. Sub-Clause (iv) and (v) of Section 10(23C) were amended by Taxation Laws
(Amendment) Act, 2006 by insertion of the following proviso to that clause:-
“Provided also that any (notification issued by the Central Government under
sub-clause (iv) or sub-clause (v), before the date on which the Taxation Laws
(Amendment) Bill, 2006 receives the assent of the President", shall at any one
time, have effect for such assessment year or years, not exceeding three
assessment years) (including an assessment year or years commencing before
the date on which such notification is issued) as may be specified in the
notification.)”
The intention behind the insertion of the above proviso was laid out in the
relevant portion of the explanatory notes to the Taxation Laws Amendment
Act, 2006 which reads as under:
"A need has been felt to dispense with the requirement of periodic renewal of
notifications. The requirement of periodic renewal of notifications has been
resulting in delays in their renewal.
5.2 In order to overcome delays, the eighth proviso to section 10(23C) has been
amended so as to provide that the above mentioned limit of effectivity for three
201
assessment years shall be applicable in respect of notifications issued by the
Central Government under sub-clause (iv) or sub-clause (v) before the date on
which Taxation Laws (Amendment) Bill, 2006 receives the assent of the President.
5.3 The Taxation Laws (Amendment) Bill, 2006 received the assent of the President
on 13.07.2006. Therefore, on account of the above amendment any notification
issued by the Central Government under the said sub-clause (iv) or sub-clause
(v), on or after 13.07.2006 will be valid until withdrawn and there will be no
requirement on the part of the assessee to seek renewal of the same after three
years.
The intention of legislature that the approvals under Section 10 (23C) (iv) & (v)
after the cut off date mentioned atyove would be a one time approval which
would be valid until withdrawn, is thus sufficiently clear.
4. Approvals under Sub-Clause (vi) and (via) of Section 10 (23C) are governed by
the procedure contained in Rule 2CA. Rule 2CA was amended w.e.f. 1.12.2006,
inter alia by substitution of the existing sub-rule 3 by a new provision which is
reproduced below:"(3) The approval of the Central Board of Direct Taxes or Chief Commissioner
or Director General, as the case may be, granted before the 1st day of December,
2006 shall at any one time have effect for a period of exceeding three assessment
years."
Read in isolation, without any further guidance as was given by way of
explanatory notes to Finance Act, 2006 in respect of amendment of sub-clause
(iv) & (v) of Section 10(23C), the above amendment leaves some scope for doubt
about the period of validity of the approval under Section 10 (23C)(vi) and (via)
on or after 1.12.2006. For the removal of doubts if any in this regard, it is clarified
that as in the case of approvals under sub-clause (iv) & (v) of Section 10(23C),
any approval issued on or after 1.12.2006 under sub-clause (vi) or (via) of that
sub-section would also be a one time approval which would be valid till it is
withdrawn.
5. As regards approvals granted upto 1.10.2009 under Section 80G by the
Commissioners of Income Tax/ Directors of Income Tax, proviso to Section
80G (5)(vi) clarified that any approval shall have effect for such assessment year
or years not exceeding five assessment years as may be specified in the approval.
The above proviso was deleted by the Finance (No. 2) Act 2009. The intent behind
the deletion of above proviso as explained in the explanatory memorandum to
Finance (No.2) Bill, 2009 was as under:
"Further as per clause (vi) of sub-section (5) of section 80G of the Income-tax
Act, 1961, the institutions or funds to which the donations are made have to be
approved by the Commissioner of Income-tax in accordance with the rules
prescribed in rule 11AA of the Income-tax Rule, 1962. The proviso to this clause
provides that any approval granted under this clause shall have effect for such
202
assessment year or years, not exceeding five assessment years, as may be specified
in the approval.
Due to this limitation imposed on the validity of such approvals, the approved
institutions or funds have to bear the hardship of getting their approvals renewed
from time to time. This is unduly burdensome for the bona fide institutions or
funds and also leads to wastage of time and resources of the tax administration
in renewing such approvals in a routine manner.
Therefore, it is proposed to omit the proviso to clause (vi) of sub-section (5) of
section 80G to provide that the approval once granted shall continue to be valid
in perpetuity. Further, the Commissioner will also have the power of withdraw
the approval if the Commissioner is satisfied that the activities of such institution
or fund are not genuine or are not being carried out in accordance with the
objects of the institution or fund. This amendment will take effect from 1st day
of October, 2009. Accordingly, existing approvals expiring on or after 1st October,
2009 shall be deemed to have been extended in perpetuity unless specifically
withdrawn/
It appears that some doubts still prevail about the period of validity of approval
under Section 80G subsequent to 1.10.2009, especially in view of the fact that no
corresponding change has been made in Rule 11A(4). To remove any doubts in
this regard, it is reiterated that any approval under Section 80G (5) on or after
1.10.2009 would be a one time approval which would be valid till it is withdrawn.
F.NO.197/21/2010.ITA-I
(Raman Chopra)
Director (ITA-I)
I
203
Annexure-20
QUANTUM OF PENALTY ON
COMPOUNDED OFFENCES
Nature of offence
Acceptance of cheque or draft towards
foreign contribution by a 'person'
without registration or prior permission
of the Central Government even in cases
where the cheque or draft has not been
deposited in a Bank by the 'person'.
Quantum of penalty
? 10,000/- or 2 per cent
of the foreign contribution
involved, whichever is
higher.
(ii)
Acceptance of cheque or draft by a
'person' towards foreign contribution
without registration or prior permission
of the Central Government &l depositing
the same in a Bank notwithstanding
non-utilisation of the amount of the
foreign contribution.
r. 25,000/- or 3 per cent
of the foreign contribution
involved, whichever is
higher.
(iii)
Acceptance of foreign contribution by
a 'person' without registration or prior
permission of the Central Government
and utilisation of the same notwith
standing any inquiry which revealed
that the contribution received was not
diverted towards any purpose other
than the objectives or purpose for
which the same was received, utilisation
of the contribution was as per the
objectives of receipt of the same and
records of receipt and utilisation have
been kept properly.
? 1,00,000/- or 5 per cent
of the foreign contribution
involved, whichever is
higher.
(iv)
Acceptance of foreign contribution in
kind by a 'person' without registration
or prior permission of the Central
Government notwithstanding that
nothing adverse was reported
after inquiry.
10,000/- or 2 per cent
of the foreign contribution
involved, whichever is
higher.
(i)
- Media
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