ASPECTS COVERED DefinitionNGO vis – a- vis NPOFormationRegistration with different authorities Sources of Funds to NGOAccounting aspects Provisions of Income Tax Act, 1961

What is “NGO”What is “NGO”Defined as “Non Government Organisation”

Whose Control & Management does not vest into the Government but with a totally “independent” group of persons.

These are being formed for Charitable, Educational, Social or Religious purposes only

NGO vis-à-vis NPONPO denotes “Non Profit Organization” i.e. Their motto is not to earn profitsTheir objects may not cover benefits of public at large but are generally restricted to group of personsGenerally all “NGO” may also a kind of “NPO”, but all NPO are not necessarily NGO

Common example of NPO are Various Trade Organisation/Associations registered under Non Trading Companies Act

Different Forms of NGO

Different options available for formation A Trust Registered under Indian Trust ActA Society registered under State Societies ActA Society registered under Indian Societies ActA Company Registered u/s 25 of the Companies

Act, 1956 The Most Common form among above are either a trust or Society registered under the State Societies Act.

Formation of Trust/Societies Factors to be considered while selecting the form of NGO Number of persons interested to form the NGO Main objects of the NGO Amount to be settled by settler or no initial fund available Starting of activities ,whether immediately or can be started after registration

Proposed Management Pattern i.e. closely held or widely held Planning for generation of Fund From private sources, public / community Grants & contribution from Government, Funding Agencies (including FCRA) Reputation / Goodwill Annual formalities / compliances Penalties

Formation of TrustWhy to Form a Trust1.For discharge of Charitable and/or Religious

sentiments of the settler/author of the trust, in a way that ensures public benefit.

2.For Claiming exemption from income tax u/s 10/11 of the I.T. Act, 1961 as the case may be in respect of incomes applied to Charitable and/ or Religious purposes

3.For the welfare of members of the family and/or other relatives who are dependent on the settler of the trust.

Definition of Trust Section 3 of Indian Trust Act, 1882 defines trust as

under: A “trust’ is an obligation annexed to the ownership of

the property, and arising out of a confidence reposed by one person in other and enforceable in court of equity.

- A person who reposes or declares the confidence is ‘Author of the Trust:

- The person(s) who accepts the confidence is called “Trustee(s)”

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- The person for whose benefit the confidence is accepted is called the “beneficiary”

- The Subject matter of the trust is called “trust property” or “trust money”

- The instrument if any , by which the trust is declared is called the “instrument of the trust”

The word confidence reposed is key word for the formation of trust since the trustee is bound to held the property for the beneficiary and he cannot use the property for his own benefit.

Creation of Trust – Drafting of DeedInformation Required: Name of Settler Details of Movable/immovable property he wants to settle towards corpus of the Trust Name of at least three prospective trustees

(Settler can also be a trustee ) Name of the trust Address of the Registered Office of the Trust Main Objects of the Trust / other Objects Beneficiary details

Information Required: Names of at least Fifteen persons who wants to form the Society & agreed to becomes

subscriber to the Memorandum & Byelaws of the Society

Names of seven prospective office bearers

(incl. President, Secretary & Treasurer) of the Proposed Society

Proposed name of the Society ( Norms apply)

Address of the Registered Office Main Objects of the Society

Formation of Society – Under Rajasthan Societies Act

Important clauses to be taken care of : Appointment, term of office & removal of Trustees / Office Bearers & their powers & duties Appointment of an additional Trustee(s) / Office Bearer(s) Formation of various Committees etc The manner of making, altering & rescinding

regulations

Drafting of Trust Deed in case of Trust & Memorandum & Bye laws in case of a Society

Manner of dissolving of Trust / Society The determination upon the dissolution that

the property be utilised by the Government or others in particular manner

Removal or termination of any Office bearer or any member on some happening or conditions

Clause may be given to allow donation/ contribution to trust/society having similar objectives

Clause allowing authority to borrow money and / or mortgage the property

The Trust Deed is required to be executed on Non Judicial Stamp Paper of Rs.500/-

( in Rajasthan )

The Memorandum / Byelaws of a Society can be typed on plain paper or a booklet available for this purpose may also be utilised .

Formation of Societies Under Indian Societies Act1. Minimum 15 persons from 8 different

States required

2. Registration papers will have to be filed with the Registrar of Societies, Delhi.

3. Other requirements are generally same as per registration in Rajasthan Societies Act

Registration with Sub Registrar (Required in case of immovable property settled by the setter of the Trust, otherwise it is optional )

Two copies of Trust Deed , one original & one Xerox copy Xerox copy must have original signature Two Photo of each trustee/ Settlor Payment of requisite fee All Trustee & Settler are required to be present in person in the office of sub–registrar. Two Witnesses also required to be present in person

Registration with Registrar of Societies

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Mandatory in case of Society

Three Copies of Memorandum & Bye laws of Proposed

Society with original signature of all the subscribers i.e

at least Fifteen persons on Memorandum

Each page shall be signed by three office bearers

It shall be witnessed by two persons & shall be

notarised

Address / I.D. Proof of all Executives (self attested )

Recommendation of Parshad / MLA required

An affidavit (as prescribed) by office bears

Payment of requisite fee Rs.2,516/- (Challan by

Dept )

Application can be filed through President / Secretary

or any office bearer

Management Committee shall have the one person

from one family.

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Registration With DevesthanVibhagRegistration mandatory in case of Religious Trust /

Society possess immovable property ( temple ).Registration Mandatory to becomes Public Charitable

TrustIn Other case , it is optional Apply in Form No. 6 [ Rule 17(2) ] of Rajasthan Public

Trust ActSubmit two attested copies of Trust Deed in case of

trust & Memorandum & Byelaws in case of Society.

Copy of Registration Certificate required to be submitted in case of Society

A notice will be given by Dept. to be published in any one local news paper seeking objection within 60 days

After no objection within above mentioned time, registration generally granted after fixing a day for hearing .

NON GOVERNMENT ORGANISATION

Practical Aspects relating to Registration, Accounting & Provisions of Taxation CA. A.K. Goyal

Registration u/s 12A A & Grant of

approval 80G of the I.T. Act(A) Documents Required

a. Application to be made before the CIT having jurisdiction of address of Registered Office.

b. All documents to be filed in triplicate, fourth copy be retained for our record

c. Form No. 10A for application u/s 12AA

d. Form No. 10G for application u/s 80G

e. List of Trustees /List of Office bearers

f. Details of Main activity which has been undertaken or intended to be undertaken.

g. Copy of Trust Deed.

h. In Case of Society

a. Registered copy of Memorandum & Bye Laws.

b. Copy of Registration Certificate.

i. Accounts made up to the date of application

(B) Other Important PointsEarlier, a period of twelve month from the date of creation/formation was provided for filing of above application with a power to CIT to condone the delay, If any.But, now this power of condonation has been withdrawn & it is provided that Registration shall be granted from the F.Y. in which above application has been filed by the trust or society in all cases, where such applications have been filed on or after 01.06.2007.

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All benefits of section 11 shall be available only after getting registration u/s 12A of the I.T. Act, 1961, hence it is better to apply for above registration immediately after the creation of trust or registration of Society.After necessary enquiry, the CIT may grant registration u/s 12AA as well as approval u/s 80G of the I.T. Act, 1961Every order granting or refusing registration u/s 12AA shall have to be passed before the expiry of six months from the end of the month, in which application has been made. As per section 253 (1) ( c ), the order of refusal both under 12A / 80G are appealable before ITAT.

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Changes Made in the Provisions of section 80G

Earlier power was vested with the CIT to grant approval u/s 80G for a period not exceeding five years.

Vide Finance Bill 2009, amendment made w.e.f.01.10.2009 that once approval is accorded under this section, -it will be permanent ( no need to reapply ) -unless withdrawn by the department -after affording reasonable opportunity to the

Institution.

There are two types of cases :a. Where the approval already granted expires on or

after 01.10.2009 andb. Where such approval expires before 01.10.2009According to Memorandum to Budget & furtherclarification vide circular No. 7 dated 27.10.2010 it ismade clear that existing approvals expiring on orafter 1st October, 2009 shall be deemed to haveextended in perpetuity unless specifically withdrawn.In second case, an application has to be made before the concerned CIT for renewal of exemption.

Accounting Aspects – various issues Aspects covered Various sources of Funds / receiptsVarious project related, administrative & Capital

ExpenditureAccounting issuesAre Grants income ?Depreciation on Fixed Assets

Sources of Funds / Receipts to NGOa. Grants & Contribution from local authorities &

Governmentb. Grants & Contribution from various Funding

Agencies (Indian or Foreign), from another NGO.c. Donations including donation towards Corpus

Fund.d. Income from Fixed Assets, like rental income,

Vehicle hire income, Computer Charges.

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e. Income from any business with the intention to use the profit to attain main object of the institution.

f. Bank Interest on S.B. A/c as well as FDR’s. - Interest received - Interest Accrued - TDS deducted by bank ( Submission of form 15G by Trust / Societies )

g. Community contribution in the form of labour, material, service etc.

h. Income from sale of Fixed Asset.i. Income from Agricultural and irrigation

activities.j. Annual Membership fee.k. By Providing various services like Fooding

arrangement to different Projectsl. Bank loans to self help groupsm. Savings of the Self help group that is utilized in

project

Various project related, administrative & Capital Expenditure

1. Expenditure incurred as per projects2. Various Expenses charged from the projects3. Capital Expenditure Out of Project Fund Out of H O Fund4. Administrative Expenses5. TDS, ESI, PF Payment6. Bank accounts / charges

Various Accounting issues a. Preparation of Receipt & Payment account is must.

b. Accounting on cash basis is highly recommended.

( DTC also provides cash method of accounting )

c. All calculation for receipt & application of income under the I.T. Act should have to be computed from receipt & payment account only.

d. Grants , Contribution and/or Donation.

e. Donation in kind.

f. Unutilised amount of grants in various projects

Are Grants Income ?Some views are that grants are received for

specific purposes & represent a liability, hence they should not taken in I & E A/c & should be shown under the head liability in Balance Sheet – not a correct view

To show the reality of the activity of the NGO, all grants should have been shown as income against which all expenses ( including capital Expenditure ) should be shown. Provision be made for unspent balance & be carried to Balance Sheet.

Grant received for capacity building- treatment

g. Local Contribution in form of material, Labour, Services etc. h. Purchase & Sale of Fixed Assets

i in some projects as per scheme of Project.ii By head office out of current or accumulated Surplus.

iii Fixed Asset acquired by donation _ As per ICAI nominal value should be accounted, but a fair market value be considered

i. Charging of various expenses by H.O. (including in various projects)i. Administrative Expenses.ii. Fooding & Mess Expenses.iii. Vehicle Charges.

iv. Computer Charges.v. Telephone & other Expenses.

j. Bank Interest on S.B. A/c & FDR’s.k. Donation towards Corpus Fund. l. Utilisation of Funds of one project in other project. 1. From Local Project to another Local Project 2. From FCRA Project to another FCRA Project 3. From FCRA to Local Projects or vice versa ?It is advisable to maintain fixed assets register

irrespective of the source of receipt / purchases of fixed assets.

Consolidation of Accounts

Separate Receipt & Payment account prepared as per requirements of Funding Agencies

Consolidated Receipt & Payment Account, I & E Account & Balance Sheet must be prepared

- To know the overall activity of the NGO - Income Tax return can be prepared only from consolidated accounts - Attachment to ITR -7 will be only of

consolidated statements

Donation to other NGO having similar objects

- No restriction on such donation by one NGO to Other NGO subject to powers given in bye laws of NGO

- w.e.f. 01.04.2003 One NGO can give donation to other NGO out of current income only i.e. it can not be given out of accumulated amount. ( Explanation to section 11(2) added by Finance Bill 2002

Depreciation on Fixed Assets – a critical Analysis

Depreciation on Fixed Assets-whether required to be provided and the manner of its accounting is still a controversial issue

Opinion of differences between professionals, NGO’s, Funding Agencies , Various High Court & Supreme Court .

Depreciation – Judicial opinion Depreciation on Fixed Assets can also be claimed as

application of income to charity, if the capital expenditure (on which depreciation is claimed) has not been claimed as income applied to charitable or religious purposes.

Karnataka High Court in CIT v/s Society of Sister of St. Anne 146 ITR 28) had allowed depreciation in addition to capital expenditure to be claimed as income applied to charitable/religious purposes.

Supreme Court in Escorts Ltd. vs. Union of India in 199 ITR 43 has ruled that a double deduction in respect of the same outgoing (i.e. depreciation and capital expenditure) cannot be allowed.

This was subsequently followed by the Income Tax Appellate Tribunal [IAC vs. Mahila Sidh Nirman Yojna (ITR No. 1880 and 2020 DEL/1989 dated 6.7.1994)].

What is depreciation

When we purchase any fixed asset, it lasts for many years, say for 5-10 years, or 100 years In case of building as per useful life of that asset.

Some assets diminishes as per passage of time, like vehicle, furniture etc.

Some assets become unusable due to changes in the technology like computer & other technical machinery

When we charge depreciation, we write off a proportionate amount each year so as to reduce the book value of such assets.

Vehicles etc. can be written off in 10 years, computer may be in 4 years

Who pays for Depreciation

Funding Agencies / Donors pays for purchases of new Fixed Assets

Neither Funding Agency nor NGO pays for depreciation. It is only an accounting entry to reflect the Written down

value of the assets.

Depreciation Accounting Two ways of accounting Through the Income & Expenditure Account Capital Fund not created Dr. - Depreciation A/c Cr. - Fixed Assets A/c Directly to capital Fund ( Value of assets transferred to capital Fund ) Dr. - Capital Fund A/c Cr. - Fixed Assets A/c

Provisions of Income Tax Act

Taxation aspect of Trust/Societies a. Provision of section 11 to 13 apply in case registered

u/s 12AA of the I.T. Act, 1961.

b. 85% of receipt of the year is to be utilized during that year itself.

c. Donation/contribution towards Corpus Fund not considered as receipts ( Sec.11(1)(d) )

d. In case 85% of the receipt not utilized:i. Option u/s 11(1) Explanation 2 may be exercised by

filing a letter before A.O. before the due date u/s 139(1) of the I.T. Act.

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ii. Option u/s 11(2) may be exercised by passing a resolution for setting apart a specified sum for specific objective for the period not more than five years. A notice in form 10 is required to be filled before the A.O. before the due date u/s 139(1) of the I.T. Act. Amount to be invested in the modes specified in Sec 11(5) of the I.T. Act

e. Addition to fixed assets will be treated as application of income, whereas proceeds of sale of Fixed Assets will be considered as receipt of that year. ( if assets relates to FCRA Projects, then sale will also be accounted in FCRA A/c )

f. Accounts are required to be audited, if gross receipt (income ) in any year is in excess of the maximum amount which is not chargeable to I.T.

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g. Report in form 10B is to be filled with return.

h. Care is to be taken while filling annexure to form 10B.i. In column no. 1 only amount incurred out

of income of previous year is to be filled. If any expenditure has been incurred out of the funds b/f from last year, it should be deducted out of total expenditure.

ii. Amount kept as option either u/s 11(1) or 11(2) is to be separately shown other than 15% accumulated amount as permitted.

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iii. Details of any kind of payment, whether salary, honorarium, rent, vehicle charges paid to trustees/office bearers are to be given. It may be noted that as per provisions of section 13, reasonable payment can be made to trustees towards salary, Honorarium, rent & other charges which should not be more that what reasonably payable in market

i. Return to be filed in paper mode ITR – 7 with all attachments

j. Provisions of TDS applies on these institutions also. ( Salary, contract, rent , professional fee )

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k. Due date of filing return is 31st July if gross receipt(income) is below the maximum amount which is not chargeable to I.T. ( Section 139 (4A).

l. Penalty provisions also applies on such entity. m. Provision of anonymous donation ( Sec 115BBC)

n Definition of Charitable activity – section 2

0 Provisions of section 44AB applies, if Trust/ Society carries business activity having turnover of Rs.60 lacs & above from F.Y. 2010-11 ( Separate Books )

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Anonymous Donations( Sec.115BBC)W.e.f. 01.04.2007, amendment made to tax

unaccounted money .Saliant features are: a. Tax on anonymous donations @30% b. Religious trusts are exempt from such tax c. Applicable to Trust/Societies created for Religious

& Charitable activities where such donations are not with a specific directions i.e for University, Hospital or medical Institution run by such Institution

d. 5% of such donations or Rs.1,00,000/- whichever is higher is exempt

Amended definition of Charitable Activities

Amendment made w.e.f. 01.04.2008New Hardship to NGOCharitable purposes includes:

a. Relief to poor

b. Educational relief c. Medical Relief

d. Preservation of Environment e. Preservation of monuments or places or objects

of

historical interests and

f. Advancement of any other object of general public

Utility

If any general public utility involves activity in the nature of trade, commerce , Business where fee is charged than this will not be treated as charitable activity.

No consideration whether this amount is utilised for Charitable activity.

This Provision will not apply if such receipts in a year are Rs.ten lacs or less.

Provisions of TDSApplicable Provisions to NGO’sSection 192 - TDS from salaryTotal salary income is to be calculated & deduction

be given for HRA, Conveyance, LIP, PPF etc & tax to be calculated as per slabs provided in the law.

Section 194C – Payment of Contract ( 1% ) TDS @ 1% is to be deducted if individual bill is of

Rs.30,000/- or more or if total contract amount in a year is more than Rs.75,000/-

TDS @2% if the payee is other than Individual & HUF

Section 194 J – Payment of fee for professional or

Technical servicesTax @ 10% is to be deducted if payment in a

year exceed Rs.30,000/- Section 194I - Payment of Rent 2% on Plant & Machinery10% on Land & Building ( if exceed

Rs.1,80,000/- in a year )

Other inportant points Quoting of PAN No. Mandatory, if not TDS @

20% to be deducted, Bill must contain PAN No. Tax to be deposited within 7 days from the end

of month in which TDS deducted.

Separate Challan for each section

Care to be taken while filling section & A.Y.

Returned to be filed quarterly

Email address is to be given while filing return

Applicable Penalty Provisions

- Penalty for non maintenance of books of account

- Penalty for non filing of return ( even cancellation of registration u/s 12AA & 80G )

- Penalty for not deducting TDS of late filing of return

- Penalty for accepting or paying loan amount of

Rs.20,000 or more in cash

Direct Tax Code – harsh for NGOThe Union Cabinet has approved the

proposed Direct Tax Code and place in Lok Sabha on 30.10.2010

Though many provisions are expected to be modified after report of Standing Committee

As per Finance Minister likely to be applicable from 01.04.2012

Presently, there are some harsh clauses in the Direct Tax Code (DTC) about NPOs. If the proposed DTC is enacted, then the NPO sector will

be very adversely impacted

key highlights of the proposed DTC(i) No re-registration required (ii) 10% of gross receipts or 15% of income,

whichever is higher, will not be taxed provided it is spent in next 3 years.

In other words, 85% of income or 90% of gross receipts will be taxed if not spent during the year.

(iii) If any income is received in the last month of the financial year, then it will not be treated as surplus and will not be taxed.

(iv) Religious organisations are also included.(v) The term “Charitable Purpose” has been

retained, earlier it was coined as “permissible welfare activity”.

(vi) basic exemption limit has been provided, surplus in excess of limit shall be taxed.

(vii) NPOs have to follow Cash Basis of accounting. However section 25 companies can follow mercantile basis

of accounting.(viii)The government can notify some NPO as

exempt entity ( Schedule VII )(ix) All receipts except loan and corpus donation

shall be considered as part of income.

(x) Any surplus from receipt and cash expenditure during the year will be taxable @15%

(xi) NPOs can not transfer any amount to their corpus without paying taxes. Currently 15% of income can be accumulated indefinitely.

(xii) If the NPO is unable to spend the income during the year, then it can only accumulate 15% of income to be spent in the next 3 years.

(xiii)The funds or assets shall not be used for the benefit of interested persons, whether directly or indirectly.

(xiv) Anonymous donation will be exempted to the extent of 5% or 1lakh rupees whichever is higher. The remaining amount will be taxed @30%.

Keeping of Old Records

Maintenance of Huge records of earlier year diificult

As per provisions contained in I T Act, 1961 records are to maintained for six years after the end of related assessment year , For Example

Accounting year ended on 31.03.2003Relevant A.Y. will end on 31.03.2004Accounts to be maintained upto 31.03.2010

It is suggested that After the end of limitation period, receipt

book, vouchers , bank pay in slips, cheque counter foil books bill books ( if any ) may be destroyed.

Following records ( may be year wise )should be kept intact:

- Cash Book, Ledgers including sub ledgers- Bank Statements, necessary

correspondence- Bills relating to purchase of fixed assets,

water, electricity, Telephone & such utility bills

Provisions of FCRA (Foreign Contribution Regulation Act, 1976)A. What is FCRA & its purposesB. What are foreign sourcesC. Process for receiving foreign grants i. Prior Permission ii FCRA RegistrationD. Documents required E. Rejection of applicationF. Cancellation of registration

Accounting issues relating to Foreign Grants

d. Separate Cash book & ledger for FCRA, separate sub ledger may be maintained for different projects.

e. Separate Bank A/c –Designed, Indian money can be used to open such a/c.

f. Local Contribution in kind/cash not to be mixed.

g. Transfer of FCRA fund to other NGO (having FCRA regn. Or not)

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h. Accounting of Purchase & sales of fixed assets.

i. Interest earned on Deposit with Bank. j. Contribution received & utilization in

kind- maintenance of stock in FC-6k. Accounting should be based on cash

receipt & payment basis.l. First recipient or second recipient.m. Depreciation matter.

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Changes proposed by Foreign Contribution ( Regulation ) Bill, 2006•Registration expires every five year

•Must be renewed within six months before the expiry of certificates

•Allowability of multi bank A/c for use of FCRA Funds ( Fund can be received in only one designated A/c )

•Now referred to Department related Parliamentary Standing Committee on Home Affairs