Taxation of NGO part -1 covering provisions pertaining to registration, cancellation/rejection and available remedy.

Introduction: NGO are non-government organization working primarily for wellbeing of public at large by way of charitable activities and religious activities. Such organizations are either public charitable trust, society registered under The Societies Registration Act or may be section 8 company (earlier section 25 company). Income of such organization are exempt but subject to satisfaction of certain conditions like having registration under income tax, getting account audited, filing of ITR before due date, threshold minimum utilization  of non -corpus  receipts  during the year etc., in this article  we are discussing one most important  conditions for exemption is registration under income tax . Similarly such organization may have approval  under section 80G so that person donating to such organizations may claim deduction under income tax so  that tax saving to the donor as well, then how  NGO can get section 80G approval and more importantly the changes where application for registration by every NGO whether already registered under income tax or not under newly inserted section 12AB and similarly  approval under section 80G   whether already registered under income tax or not due to amendment in section 80G and similar provisions under amended section 35, all these will be discussed in next article. This article is limited to registration, rejection and remedy against rejection of application.

Income of a trust or institution:

1. Real income 2. Deemed income 3. exempt income 4. taxable income 5. voluntary contribution forming part of corpus popularly known as  corpus donation 6. voluntary contribution not forming part of corpus, popularly known as non corpus donation 7. grant whether FCRA or domestic  8. benefit or facility granted or provided free of cost or at concessional rate to person referred 13(3) treated as deemed income.

Comparison of various income of NGO

Deemed to be income from property held under trust –section 12:

1.  voluntary contributions (except corpus received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes deemed to be income derived from property held under trust.
2.  value of any services, being medical or educational services, made available by any charitable or religious trust running a hospital or medical institution or an educational institution to specified person u/s 13(3)shall be deemed to be income of such trust or institution derived from property held under trust and shall be chargeable to income-tax notwithstanding the provisions of sub-section (1) of section 11.
3.  Meaning of value of service =expression “value” shall be the value of any benefit or facility granted or provided free of cost or at concessional rate to any person referred under section 13(3)

 Section 12A-Conditions to be fulfilled for claiming exemption u/s 11:

Upto 31-03-2021: section 12A(1)

(aa) Application for registration in prescribed form ( form 10A) to Pr. CIT(E ) within 1 year from the date of the creation of the trust or the establishment of the institution and such trust or institution is registered under section 12AA

(ab) If after registration ,  trust/institution has adopted or undertaken modifications of the objects which do not conform to the conditions of registration,  application in the prescribed form( form 10A)  and manner, within a period of  30 days from the date of said adoption or modification to the PR. CIT(E ) and such trust or institution is registered under section 12AA.

(b) Audit on or before due date if total income of the trust or institution as computed under this Act without giving effect to the provisions of section 11 and section 12 exceeds the maximum amount which is not chargeable to income-tax in any previous year.

(ba) person in receipt of the income has furnished the return of income for the previous year in accordance with the provisions of sub-section (4A) of section 139, within the time allowed under that section

Note: if delay in filing of application for registration , provisions of sections 11 and 12 shall apply in relation to the income of such trust or institution from the assessment year immediately following the financial year in which such application is made.[ section 12A(2)]

Effect of registration on pending assessments:

Provided that where registration has been granted to the trust or institution under section 12AA/12AB, then, the provisions of sections 11 and 12 shall apply in respect of any income derived from property held under trust of any assessment year preceding the aforesaid assessment year, for which (1) assessment proceedings are pending before the Assessing Officer as on the date of such registration and (2) the objects and activities of such trust or institution remain the same for such preceding assessment year:

Provided further that no action under section 147 shall be taken by the Assessing Officer in case of such trust or institution for any assessment year preceding the aforesaid assessment year only for non-registration of such trust or institution for the said assessment year.

Provided also that provisions contained in the first and second proviso shall not apply in case of any trust or institution which was refused registration or the registration granted to it was cancelled at any time under section 12AA/12AB.

 Section 12A-Conditions to be fulfilled for claiming exemption u/s 11:

From 01-04-2021:  newly inserted clause in section 12A(1) (ac)-where new time limit for filing application:

• (i) Already registered u/s 12A/12AA application in the prescribed form and manner to the Principal Commissioner or Commissioner within 3 months from the date on which this clause has come into force; upto 30th June 2021.application in form 10A.
• (ii) where the trust or institution is already registered under  section 12AB and the period of the said registration is due to expire, application at least 6 months prior to expiry of the said period;
• (iii) where the trust or institution has been provisionally registered under section 12AB, at least 6 months prior to expiry of period of the provisional registration or within 6 months of commencement of its activities, whichever is earlier;
• (iv) where registration of the trust or institution has become inoperative due to the first proviso to section 11(7), at least 6 months prior to the commencement of the assessment year from which the said registration is sought to be made operative;
• (v) where the trust or institution has adopted or undertaken modifications of the objects which do not conform to the conditions of registration, within a period of 30 days from the date of the said adoption or modification;
• (vi) in any other case, at least one month prior to the commencement of the previous year relevant to the assessment year from which the said registration is sought,

(b) Audit on or before due date if total income of the trust or institution as computed under this Act without giving effect to the provisions of section 11 and section 12 exceeds the maximum amount which is not chargeable to income-tax in any previous year.

(ba) person in receipt of the income has furnished the return of income for the previous year in accordance with the provisions of sub-section (4A) of section 139, within the time allowed under that section

Note: if delay in filing of application for registration , provisions of sections 11 and 12 shall apply in relation to the income of such trust or institution from the assessment year immediately following the financial year in which such application is made.[ section 12A(2)]

Why registration with income tax is required?

If no registration, the contribution or donation received shall be taxable in the hand of trust or institution, because exclusion to only those NGO who are registered under income tax.

As per section 56(2)(x)   where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017,—

(a)   any sum of money, without consideration, the aggregate value of which exceeds ₹50,000/-,      the whole of the aggregate value of such sum;

(b)   any immovable property,—

(A)  without consideration, the stamp duty value of which exceeds ₹50,000/-, the stamp duty value of such property;

(B) for a consideration, the stamp duty value of such property as exceeds such consideration, if the amount of such excess is more than the higher of the following amounts, namely:—

(i)   the amount of ₹ 50,000/-; and

(ii)  the amount equal to 5% of the consideration.

(c)   any property, other than immovable property,—

(A)   without consideration, the aggregate fair market value of which exceeds ₹50,000, the whole of the aggregate fair market value of such property;

(B)   for a consideration which is less than the aggregate fair market value of the property by an amount exceeding ₹50,000/-, the aggregate fair market value of such property as exceeds such consideration :

Provided that this clause shall not apply to any sum of money or any property received—

(I)   from any relative; or

(II)   on the occasion of the marriage of the individual; or

(III)   under a will or by way of inheritance; or

(IV)   in contemplation of death of the payer or donor, as the case may be; or

(V)   from any local authority as defined in the Explanation to clause (20) of  section 10; or

(VI)  from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of  section 10; or

(VII) from or by any trust or institution registered under [section 12A or section 12AA/12AB]]; or

(VIII)   by 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 clause (23C) of  section 10; or

(IX)   by way of transaction not regarded as transfer under clause (i) or clause (iv) or clause (v) or] clause (vi) or clause (via) or clause (viaa) or clause (vib) or clause (vic) or clause (vica) or clause (vicb) or clause (vid) or clause (vii) of  section 47; or

(X)   from an individual by a trust created or established solely for the benefit of relative of the individual;

(XI)   from such class of persons and subject to such conditions, as may be prescribed .

Explanation.—For the purposes of this clause, the expressions “assessable”, “fair market value”, “jewellery”, “property”, “relative” and “stamp duty value” shall have the same meanings as respectively assigned to them in the Explanation to clause (vii).]

New procedure for registration- section 12AB- Action to be taken on receiving application for registration:

 In case of an application made under sub-clause (vi) of clause (ac) of sub-section (1) of section 12A during PY 2021-22, the provisional registration shall be effective from the AY 2022-23 Rule 17A(7).

 Procedure for registration – rule 17A – substituted w .e .f 01-04-2021

Documents accompanied the registration form 10A/AB- R-17A(2)

1. Instrument creating or establishing the applicant like registered trust deed, certificate of incorporation. MOA,AOA, Bye laws. etc
2. where the applicant is created, or established, otherwise than under an instrument, self-certified copy of the document evidencing the creation or establishment of the applicant;
3. self-certified copy of registration with Registrar of Companies or Registrar of Firms and Societies or Registrar of Public Trusts, as the case may be;
4. self-certified copy of registration under FCRA ,if the applicant is registered under such Act;
5. self-certified copy of existing order granting registration under section 12A or section 12AA or section 12AB, as the case may be;
6. self-certified copy of order of rejection of application for grant of registration under section 12A or section 12AA or section 12AB, as the case may be, if any;
7. where the applicant has been in existence during any year or years prior to the financial year in which the application for registration is made, self-certified copies of the annual accounts of the applicant relating to such prior year or years (not being more than three years immediately preceding the year in which the said application is made) for which such accounts have been made up;
8. where a business undertaking is held by the applicant as per the provisions of section 11(4) and the applicant has been in existence during any year or years prior to the financial year in which the application for registration is made, self-certified copies of the annual accounts of such business undertaking relating to such prior year or years (not being more than three years immediately preceding the year in which the said application is made) for which such accounts have been made up and self-certified copy of the report of audit as per the provisions of section 44AB for such period;
9. where the income of the applicant includes profits and gains of business as per the provisions of section 11(4A) and the applicant has been in existence during any year or years prior to the financial year in which the application for registration is made, self-certified copies of the annual accounts of such business relating to such prior year or years (not being more than three years immediately preceding the year in which the said application is made) for which such accounts have been made up and self-certified copy of the report of audit as per the provisions of section 44AB for such period;
10. self-certified copy of the documents evidencing adoption or modification of the objects;
11. Note on the activities of the applicant.

 Signature of application form – rule 17A (3)&(4)

As per Rule 17A (4) Form Nos. 10A or 10AB, as the case may be, shall be verified by the person who is authorised to verify the return of income under section 140, as applicable to the applicant.

Rule 17A (3) Form Nos. 10A or 10AB, as the case may be, shall be furnished electronically, —

(i)   under digital signature, if the return of income is required to be furnished under digital signature; 

(ii)   through electronic verification code(EVC) in a case not covered under clause (i).

 Cancellation of registration and ground for cancellation

1. GENERAL GROUND FOR CANCELATION OF REGISTRATION[S- 12AB(4)

Where registration of a trust or an institution has been granted under clause (a) or clause (b) of sub-section (1) and subsequently, the Principal Commissioner or Commissioner is satisfied that the

(1) activities of such trust or institution are not genuine or

(2) activities are not being carried out in accordance with the objects of the trust or institution,

 he shall pass an order in writing cancelling the registration of such trust or institution after affording a reasonable opportunity of being heard.

 Show cause Notice for cancellation of registration:

• Object of the NGO to be charitable or religious.
• Genuineness of the activities to be So documentary proof of the activities must be kept. Now focus will shift from examination of expenses to  genuineness of the activities.

2. SPECIFIC GROUND FOR CANCELATION OF REGISTRATION[S-12AB(5)]

 Where registration of a trust or an institution has been granted under clause (a) or clause (b) of sub-section (1) and subsequently, it is noticed that—

(a)   the activities of the trust or the institution are being carried out in a manner that the provisions of sections 11 and 12 do not apply to exclude either whole or any part of the income of such trust or institution due to operation of sub-section (1) of section 13; or 

(b)   the trust or institution has not complied with the requirement of any other law, as referred to in item (B) of sub-clause (i) of clause (b) of sub-section (1), and the order, direction or decree, by whatever name called, holding that such non-compliance has occurred, has either not been disputed or has attained finality,

then, the Principal Commissioner or the Commissioner may, by an order in writing, after affording a reasonable opportunity of being heard, cancel the registration of such trust or institution.

 Show cause Notice for cancellation of registration:

• No benefit or amenity to specified person – amount recoverable from the specified person same as from other person.
• Appeal is pending or such order is not appealable and hardship leading to non- compliances.

 Note: refer rule 17A (6) for other ground of cancellation of registration.

3. Other ground for cancellation of registration-[Rule 17A(6)]

1. Application form not duly filled fully/part
2. providing false or incorrect information in form of application
3. providing false or incorrect documents with application
4. Application form not properly verified

 Principle of Natural justice  must be followed before rejection of application:

• The Principal Commissioner or the Commissioner may, by an order in writing, after affording a reasonable opportunity of being heard, cancel the registration of such trust or institution.
• The discretion to be exercised judiciously and not arbitrarily
• The reply must be considered before taking decision of cancellation
• Reasonable time to submit reply and opportunity of personal hearing is part of principle of natural justice.

 Status of pending application as on 01-04-2021–section 12AB(2)

• All applications, pending before the Principal Commissioner or Commissioner on which no order has been passed under clause (b) of sub-section (1) of section 12AA before the date on which this section has come into force, shall be deemed to be applications made under sub-clause (vi) of clause (ac) of sub-section (1) of section 12A on that date.
• Application made under old system upto 31-03-2021 and remain pending for disposal shall be considered as application of new system applicable from 01-04-2021. so no need to file application again for registration.

 If registration application or application for approval under section 80G rejected- appeal to ITAT- section 253

 Conclusion: it is vital for nil tax otherwise huge tax liabilities to NGO so try to obtain registration as soon as possible and comply the provisions of tax law so that exemptions remain valid and no tax liability on the NGO.