# Code of Taxation for NGOs (Part I)
# Code of Taxation (2023)
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### Types of entities that can register as charitable institutions in India
For charitable purpose, the following entities can be constituted:
- Trust
- Society
- Not for profit Company
While above entities have separate incorporation laws, the Income Tax law applies uniformly for all these entities.
### Definition of Charitable purpose in Income Tax
Section 2(15) "charitable purpose" includes:
✓ Relief of the poor,
✓ Education,
✓ Yoga,
✓ Medical relief,
✓ Preservation of environment (including watersheds, forests and wildlife) and
✓ Preservation of monuments or places or objects of artistic or historic interest, and
✓ The advancement of any other object of general public utility:
Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless:
1. Such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and
2. The aggregate receipts from such activity or activities during the previous year, do not exceed 20% of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;
[](https://library.pattic.org/uploads/images/gallery/2024-04/types-of-registration.png)
*Illustrated:*
1. *10(23C) approval*
2. *12A, 12AA now 12AB*
3. *10(46)-body notified by Central/State Govt S 35-approved institutions for scientific research etc.*
4. *80G Approval for tax deductions for donations*
### Section 10(23C) entities
Section
Non Approval
Section
Approval
10(23C)(iiiab)
Educational institution wholly/substantially financed by Govt
10(23C)iv
National Fund/Charitable institution of national importance
10(23C)(iiiac)
Medical institution wholly/substantially financed by Govt
10(23C)v
Religious institution or religious cum charitable institution notified by Govt
10(23C)(iiiad)
Educational institution gross receipts less than Rs.5 cr in a FY
10(23C)vi
Educational institution gross receipts more than Rs. 5 cr in a FY
10(23C)(iiiae)
Medical institution gross receipts less than Rs.5 cr in a FY
10(23C)via
Medical institution gross receipts more than Rs.5 cr in a FY
### Two recent Landmark SC judgements in October 2022
- 10 (23C)(vi) entities should be solely (exclusively) for educational purposes, can undertake business activity incidental to the main object but not otherwise. Can generate surplus in course of pursuing main objects
- For GPU entities, commercial activity only for advancement of GPU. Markup has to be reasonable for such commercial activity. The commercial activity should not be feeding charity
### New regime of registration for charitable organisations wef 1.4.2021
- Re-registration/approval of charitable entities u/s 10(23C), 12A,35 and 80G approval for a period of 5 years, thereafter renewal once every 5 years. Perpetual registration abolished.
- Department wants to have database and better control/monitoring on charitable institutions which has been fragmented and decentralised until now
#### Types of Approvals:
1. Re-registration/Revalidation of existing registered entities-5 years
2. Provisional registration for new entities-3 years
3. Regular registration for existing unregistered entities-5 years
4. Provisional to Normal registration for new entities- Total period 5 years
5. Modification of objects clause for 12A entities
6. If registered both under 10(23C) or 10(46) and 12A, then retain 10(23C) or 10(46) for 5 years
7. Renewal of registration after 5 years
### New Regime and Forms
**Coverage:**
1. Re registration/re approval under 10(23C)/12A/80G-existing registered
2. Registration/re approval under 10(23C)/12A/80G-existing un-registered
3. Provisional registration under 10(23C)/12A/80G-new entities
4. Statement of donation u/s 80G
5. Receipt/Certificate of donation u/s 80G
**Forms:**
1. 10A-Re-registration and provisional registration
2. 10AC-Approval of 10A by CIT
3. 10AB-Registration of existing unregistered entities, conversion of provisional to normal registration, Renewal, change in objects and one of the two registrations made inoperative.
4. 10AD- Approval of 10AB by CIT
5. 10BD-Statement of donations u/s 80G
6. 10BE-Receipt of donation u/s 80G
#### Action for existing registered entities
- Common Form 10A for 10(23C), 12AA, 80G, 35 entities-select code for respective sections e.g. 01 for 12A and 11 for 80G.
- Submission date-30.9.2023 vide CBDT circular 6 of May 2023
- CIT order within 3 months after month of application in 10AC Form. Registration valid for 5 years
- No inquiry. 10A-not completely filled, CIT may cancel after giving opportunity of being heard
- Renewal in Form 10AB after 5 years within 6 months of expiry and after due inquiry process
- If registered entity missed due date and applied for provisional registration, it can surrender and apply for regular registration in 10A upto 30.9.23
#### Action for existing un-registered entities
Existing unregistered entities:
- Apply only in Form 10AB upto 30.9.23 provided no exemption claimed earlier.
Others:
- All pending applications rejected due to missing the due date would be considered valid.
- Entities to be treated unregistered for section 115TD post 30.9.23
#### Action for Provisional Registration
- Effective from the previous year relevant to assessment year from which the said registration is sought. Applicable only when charitable activity not commended as confirmed in 10A and 10AB
- Form 10A
- CIT approval within 1 month from the end of month in which application was made. No inquiry
- Validity 3 years, convert to normal registration within 6 months of commencement of charitable activities or 6 months before expiry of provisional registration whichever is earlier.
- For normal registration, Form 10AB. Due process of inquiry
### Section 80G
#### Statement of donation
- 80G provisions: Cash donation upto Rs.2k permitted, not in kind and only through banking channels. No anonymous donation permitted u/s 80G
- Form 10BD-points to remember:
1. Donation type:
- Corpus
- Specific
- Others
2. UIN of donor-PAN, Aadhar
3. If PAN / Aadhaar is not available then either the passport No. /Elector’s photo identity / Driving License/ Ration Card/Taxpayer identification Number where the person resides outside India.
4. Mode of receipt-cash, kind, electronic and cheque, others
5. File by 31st May for each FY
6. Penalty for delayed filing
#### Receipt/certificate of donation
1. Form 10BE
2. Immediate issue after filing 10BD
3. Linked to UIN of donor
4. Penalty for delay
5. Generation and download of donation receipt from web portal after filing 10BD
6. Issue the system generated 10BE only to donors for claiming 80G benefit.
#### Code of Taxation for Charitable Institutions
Chapter III-Incomes which do not form part of total income
1\.
Section 11
Income from property held under trust for charitable or religious purposes.
2\.
Section 12
Income of trusts or institutions from voluntary contributions for charitable and relgious purposes.
Section 12A – Conditions for applicability of sections 11 and 12
Section 12AA – Procedure for Registration-repealed
Section 12AB – Procedure for Registration under new regime
3\.
Section 13
Section 11 not to apply in certain cases.
### Section 11
#### Income from property held for charitable or religious purposes
The following income shall not be included in the total income of the previous year of the person in receipt of the income:
- Income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen percent of the income from such property;
- Income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution.
#### Deemed Application-1 year
As per clause (2) of Explanation to section 11(1):
If, in the previous year, the income applied to charitable or religious purposes in India falls short of eighty-five per cent of the income derived during that year from property held under trust, or, as the case may be, held under trust in part, by any amount—
- for the reason that the whole or any part of the income has not been received during that year, or
- for any other reason,
Then at the option of the person in receipt of the income (such option to be exercised before the expiry of the time allowed under sub-section (1) of section 139 for furnishing the return of income in form -9A), be **deemed to be income applied** to such purposes during the previous year in which the income was derived.
**Note**: If the amount accumulated as per clause (2) of Explanation to section 11(1) is not utilised in the next year then the amount accumulated will be taxable income.
#### Accumulation-5 years
As per section 11(2):
If, in the previous year, the income applied to charitable or religious purposes in India falls short of eighty-five per cent of the income derived during that year from property held under trust, but is accumulated or set apart, either in whole or in part, for application to such purposes in India, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income, provided the following conditions are complied with, namely:
1. Such person furnishes a statement in the prescribed form (Form 10) and in the prescribed manner (Online) to the Assessing Officer, stating the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed five years;
2. The money so accumulated or set apart is invested or deposited in the forms or modes specified in sub-section (5) and utilised for the purpose for which accumulated
3. Not transferred to an entity covered under Section 12A of the Act
4. The statement referred to in clause (a) is furnished on or before the due date specified under sub- section (1) of section 139 for furnishing the return of income for the previous year.
[](https://library.pattic.org/uploads/images/gallery/2024-04/cleanshot-2024-04-24-at-12-02-42-at-2x.png)
*Illustrated: Less than 85% ➡️ Form 10 to AO ➡️ Specified modes for deposit ➡️ ITR to be filed u/S 139(1)*
### Section 11(4)
#### Business income of charitable institution
- (4) For the purposes of this section "property held under trust" includes a business undertaking so held, and where a claim is made that the income of any such undertaking shall not be included in the total income of the persons in receipt thereof, the Assessing Officer shall have power to determine the income of such undertaking in accordance with the provisions of this Act relating to assessment; and where any income so determined is in excess of the income as shown in the accounts of the undertaking, such excess shall be deemed to be applied to purposes other than charitable or religious purposes.
- (4A) Sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of the trust or institution, and separate books of account are maintained by such trust or institution in respect of such business.
### Section 11(5)
#### Modes of investment
The forms and modes of investing or depositing the money referred to in clause (b) of sub- section (2) shall be the following, namely:
1. Investment in savings certificates as defined in clause (c) of section 2 of the Government Savings 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;
2. Deposit in any account with the Post Office Savings Bank
3. 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)
4. Investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963)
5. Investment in any security for money created and issued by the Central Government or a State Government
6. 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
7. Investment or deposit in any public sector company:
8. 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 (viii) of sub- section (1) of section 36
9. 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 (viii) of sub-section (1) of section 36;
10. 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
11. Investment in immovable property.
#### Further additions to 11(5)
Additional as per Rule 17C (March 2018)
- Investment in units of any scheme of a mutual fund
- Deposit with authority for low cost housing
- Stock certificate of Sovereign Gold Bonds
- Debt instruments of infrastructure finance company
- Acquiring shares of NSDC, Depository.
Example of Computation
**Case 1**
Income derived from property held under trust wholly for charitable purposes
1000
Less: Expenditure (Income applied to charitable purposes in India)
-850
Less: Accumulation under section 11(1)(a) No Specific Form
-150
Taxable Income
NIL
**Case 2**
Income derived from property held under trust wholly for charitable purposes
1000
Less: Expenditure (Income applied to charitable purposes in India)
-600
Less: Accumulation under section 11(1)(a) No Specific Form
-150
Less: Accumulation under section (11) (2): Form 10, Specific Purpose
-250
Taxable Income
NIL
**Case 3**
Income derived from property held under trust wholly for charitable purposes (Rs 200 was received in March)
1000
Less: Expenditure (Income applied to charitable purposes in India)
-650
Less: Accumulation under section 11(1)(a) No Specific Form (15% of 1000)
-150
Less: Accumulation as per clause (2) of Explanation to section 11(1), Form 9
-200
Taxable Income
NIL
### Disallowance of Cash/bearer Payments
Section 40(A)(3) provides that “Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft or use of electronic clearing system through a bank account \[or through such other electronic mode as may be prescribed\], exceeds Ten Thousand Rupees, no deduction shall be allowed in respect of such expenditure”.
**Note:**
1. The expenditure as disallowed above, will be taxed @ 31.2% at the time of filing the Income Tax Return.
2. The cash payments made by staffs and reimbursed by organisation shall also be treated as cash payment.
3. Disclose non-compliances in ITR, if same noticed by Assessing Office during Income Tax Assessment, additional penalty and interests may also be levied.
4. Exceptions in Rule 60D.
#### Disallowance for Non Deduction of Tax at Source
Section 40(a)(ia) provides that 'Where the assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B then the amount equal to 30% of expenditure shall not be allowed at the time of computation of Income’
**Note:**
1. The expenditure as disallowed above, will be taxed @ 31.2% at the time of filing the Income Tax Return.
2. Disclose non-compliances in ITR, if same noticed by the Assessing Office during Income Tax Assessment, additional penalty and interests may also be levied.
Example of Computation
**Case 4**
Income derived from property held under trust wholly for charitable purposes
1000
Less: Expenditure (Income applied to charitable purposes in India)
-650
Less: Accumulation under section 11(1)(a) No Specific Form (15% of 1000)
-150
Less: Accumulation under section (11) (2): Form 10, Specific Purpose
-200
Add: Expenditure disallowed under section 40 and 40A (30% Expenditure)