Formation of NPO By CA Ved MittalVed & Associates

205 , Jagdamba Tower13, commercial complex

Delhi-110092Contact : 011-22456788,42686788

9811011665cavedmittal@gmai.com

Trust Society Section 8 Company ( Section 8 of New

Company Act 2013 ) Special Licenses ( State Trading corporation)

.

Formation of A NPO

Section 2(15) of income tax Act 1961 defines the expression “charitable purpose” in an inclusive manner to include◦ Relief of the poor◦ Education◦ Medical relief◦ Preservation of Environment(Including Watershed,

forests and wildlife)◦ Preservation of monuments or places◦ Preservation of artistic or historic interest◦ Any other object of general public utility

Meaning of “charitable purpose”

The Following Laws or constitutional Articles of Republics of India are relevant to the NPO◦ Article 19(1) ( c ) and 30 of the constitution of India◦ Concurrent List ( List III ) Entry 10 “ Trusts and

Trustee” and Entry 28 “ Charities and charitable institutions”

◦ Income tax Act 1961◦ Public Trust Act of Various States and Indian Trust Act

1882.◦ Society Registration Act 1860.◦ Section 8 of Indian companies Act 2013◦ Foreign Contribution Regulation Act 2010

Relavent Acts

There is NO ANY CENTRAL ACT’S in relation to the charitable trust’s which cover the whole meanings.

Charitable and Religious Trust Act 1920 is the one of the central act which governs many provisions related to Public Trust’s.

First Law of the trust in India came into force known as Indian Trust Act 1882 but it was basically for Private Trust’s.

In the state of Maharastra,Rajesthan,Gujrat, Madhya Pradesh etc have their own State Act’s.

Section 92 of Code of Civil Procedure 1908 also express the meaning of Public charity.

Trust in the Eye’s of Law

The Registration for a Trust , whether in relation to a movable property or an immovable property is optional but always desirable.

A Registered Trust Deed has certain advantages which are listed below◦ A registered Trust Deed is an official document

which carries support and force of Law◦ It effectuates transmutation of Possession◦ A Conveyance of Trust proper to trustee under a

Registered Deed is generally not open to Challenge.

Registration of Trust

These trust are registered under the Sub-Registrar as per the area of the registered office of the trust.

Requirements:-(i) Settler:- Who creates the trust.(ii) Trustee:- Who look after the trust. Minimum 2(iii) Objectives.(iv) Initial Corpus Fund / Trust Property.(v) Beneficiaries:- Public at Large with any

discrimination as Cast, colour & Religion.

Registation of Trust

The Following mentioned Papers need to be submitted at the Office of Sub- Registrar

Two copy of the Trust deed with duly signed and photo of settler and trustees

Address proof of the registered office with NOC Address proof of Settler and Trustees A Pay order of Rs. 1100/= Stamp Duty @ 3% of initial Trust Property value (In Delhi ) Two witness All other procedure as same as you purchased the

property and transfer

Registration of The Trust

Key points to be remembered:-◦ Name of the Trust.◦ Name of the Settler.◦ Name of the Trustees.◦ Initial Corpus Fund.◦ Main Objective of the Trust.◦ Ancillary Objective.◦ General Body.◦ Executive Committee.◦ Quorum.◦ Operating Bank Account.◦ Dissolution.

Key Points of Trust Deed

Societies Registration Act 1860 is a Central Act.

Various State made their on act on the basis of Societies Registration Act 1860. We can say this act is the Foundation of all Societies Registration Act’s.

Minimum 7 Member in State Level and minimum 9 member with 8 different state’s at National Level ( in Delhi ).

Various Applicable Law’s of Society

Searching the Name of Proposed Society ( Via Link http://www.delhi.gov.in/wps/wcm/connect/doit_industry/Department+of+Industries/our+Services1/Society+Name+Search ).

Two copy of the Bye-Laws with duly signed by all initial Members. Address proof of the registered office with NOC Address proof of all initial Members A Receipt of Rs 50/= Affidavits by the Presidents/ Secretary. All the papers has to be notarized. Submit all the Papers with the office of Sub- Registrar of the

District in Delhi. After duly verification of all the document a certificate of the

registration of Society has been issued with True Certify copy of Bye-Law’s of the Society.

How to Register Society

Key point to be remembered◦Name of the Society.◦Work Scope within state or Whole of India.◦Main Objective.◦Ancillary Objective.◦General Body.◦Executive Committee.◦Quorum.◦Operating Bank Account.◦ Dissolution Clause.

Bye- Laws of the Society

Minimum 2 members in a private and 7 members in public company.

2 director in Private Company & 3 Director in Public Company.

Company may or may not have Share Capital. Main objective of the company should be

promote commerce, art, science, Religion, charity or other useful objectives.

Apply its profit for promoting its objects and prohibit payments of dividends to its member’s.

Requirement of Section 8 Company

Registration Procedure:-(i) Availability of name :- in form no INC-1

applies with the ROC as normal name application for companies.

(ii) Application for License :- After approved name we file application for License in form no INC-12 with the following documents.

1. Draft Memorandum of Association as per form INC-13.

2. Draft Article of Association

COMPANY U/S 8

ii. Application for License ( continued ):-

3. Declaration in form No INC-14 ( Professional Declaration ).

4. Declaration in form No INC-15 ( Directors Declaration ).

5. Estimated income & Expenditure for next 3 years6. Approval/ concurrence/ NOC of the concerned

Authorities7. Copy of Resolution Passed in General Meeting and

Board Meeting.8. Assets & Liabilities Statements with their values as

per applicable Rule.9. List of Proposed Promoters.10. List of Proposed Directors.11. List of key managerial personnel.

(iii) After Receiving License we file following form Form

HeadingCompanies Act 1956

Companies Act 2013

Application for incorporation of the company ( other than OPC )

Form – 1 Form – INC-7

Notice of Situation or change of situation of Registered office

Form- 18 Form-INC-22

Particulars of appointment of Directors

Form-32 Form- DIR-12

Registration Procedure ( contin…..)

Differential factors Trust Society

Company ( Sec 8 )

     Basic Document

  Trust Deed - which contains objects of the

trust (bye-law)

Memorandum of AssociationArticles of

Association with rules & regulations.

Memorandum of Association Articles of

Association

     Formation   Very Easy  Easy   Little Hard

   Jurisdiction

Deputy Registrar / Charity Commissioner

Registrar of Societies - 

For Maharashtra Charity

CommissionerRegistrar of Companies

Legislation / Statute

Relavent state Trust Act - Bompany Public Trust

Act 1950

Societies Registration Act

1860Indian Companies

Act 2013

       ObjectsSocial benefits &

CharitableSocial Benefits &

Charitable   Nonprofit Activities

Authority For Registration Sub- Registrar of Societies

Registrar of Society/ Office SDM

Headquarter. Registrar of Company

Controlling Monopoly Democratic Professional

Comparison

Differential factors Trust Society

Company ( Sec 8 )

Re-ammendment

or         

Modification of Objects

Can be done by Trustees but

Procedure u/s 92 of code of civil procedure

be required

by Members in governing body meeting with

Special ResolutionComplicated 

Legal Procedures

Required Members

     Minimum = 2     Maximum = No

limit

      Minimum = 7     Maximum = No

limit

Minimum = 2 /3 Maximum = No

limit

Registration

  As Trust with the

Registrar.

As Society with Society Registrar - Both as a society

and a trust in some states like

Maharastra.

As per Companies Act 

under Section 8

Stamp Duty

As per the Stamp duty Act of relevant State

of Trust property Value will be executed in non judicial stamp

paper with the registrar

No stamp paper required for

Memorandum of association, and

rules and regulations.

No Stamp paper required for

Memorandum of association and

articles of association.

Name Very easy to chooseVery easy to

choose

Prior approval required from Registrar of Companies.

.

Differential factors

Trust Society Company ( Sec

8 )

Management Board Trustees Governing Body

Board of Directors &  Management

committee

Voting RightsEqual rights to all

TrusteeEqual Rights to all

MembersDepand on share

HoldingSuccession in Management By Appointment By Election By Appointment

MeetingsBoard of Trustee

Meeting

Annual Meeting As per Law. Governing Body meeting as per the rules of

Society.Shareholder / Directors

MeetingMembership

Transfer By Nomination By NominationTransfer as per Companies Act.

Member Admission PossibleGoverning Body

Control

General Body or Board Control

through issue of Capital.

Dissolution or Take over by State Possible Possible

As Per Companies Act 2013

Compliance Low Medium HighFilling the Suit by

outsider In the name of TrusteeIn the name of

Governing Body In the name of Company

Annual documents to Be filed No Such Requirement

Annual Audited Accounts and List of

Governing BodyAnnual Return and audited Accounts

.

The Status of NPO will be AOP (Trust) They all will be get registered in income tax

site www.incometaxindiaeffiling.com as there respective institution status.

But in case of Section 8 company the status of institution will be Company.

Status of NPO

There are various query weather institution will be able to avail the benefit of Basic Exemption Limit.

Answer will be that we can avail the benefit of Basic Exemption limit. Ie 200000 RS currently.

Basic Exemption Limit

Income Tax Return form The ITR – 7 has to be filled under the

following circumstances.◦ 139 ( 4A ) :- Return of income of charitable trust

and institution.:- the income derived from the property held under trust or other legal obligation wholly for or charitable purposes and income by way of voluntary contribution Due Date if we claim benefit of section 11 and 12

then it will be 30th September otherwise 31st July.

The Accounts need to be audited by a Chartered Accountant and audit report to be furnished in Section 12 ( A ) ( b ) of income tax act. As Section 12 ( A ) ( b ) which says that “ where the total income of the trust or institution as computed under this act without giving effect to ( the provisions of section 11 and 12 exceed the maximum amount which is not chargeable to income tax in any previous year), the accounts of the trust or institution for that year have been audited by an accountant as defined in the Explanation below sub-section ( 2) of section 288 and the person in receipt of the income furnishes along with the return of income for the relevant assessment year the report of such audit in the prescribed for duly signed and verified by such accountant and setting forth such particulars as may be prescribed”.

 

Accounts audit

◦ 139 ( 4 B ):- Return of income of political Party.◦ 139 ( 4 C ):- Return of income of certain

association and institution.ie institution claiming benefits under various section 10 clauses as news agencies research association etc

◦ 139 ( 4 D ):- certain institution claiming benefits under section 35 ( 1 ).

Income Tax Return form ( Cont )

Income derived from property under trust subject to sections 60 to 63

wholly for charitable or religious purposes is exempt to the extent such income is applied on the objects of the trust in India, during the previous year.

The trust must apply at least 85% of such income on the objects in such cases balance 15% will deemed to be accumulated for the purpose of charity and exempt.

For example if our income applied is say 90% then only 10% will be accumulated not 15%.

Income of the Trust

If the amount applied by the trust is less than 85%, the shortfall in application is not taxable in the following cases —◦ Income is accumulated up to 5 years and the purpose of

accumulation is specified to the AO in Form No. 10 . ◦ The income accumulated must be applied for the

specified purpose within the period of accumulation as per application in Form 10. Till the accumulated amount is applied, it must be invested as specified in Section 11(5).

◦ [2nd proviso to Section 11(3A)] In the case of dissolution of the trust, the AO may allow the application of income in the year in which it is dissolved by way of transfer of the accumulation to other trust registered u/s. 12 AA or institution referred to in Section 10(23C).

◦ If there is violation of any of the conditions relating to accumulation of income, such income will be deemed to be income of the previous year in which the conditions are violated or the previous year immediately following the expiry of the period of accumulation.

Section 11 ( 2 )

Income Not Received during the previous year◦ Where due to reason that whole or any part of the

income has not been received during the year, the amount can be applied in the year of receipt or in the following year. However, intimation in writing must be sent to AO before the expiry of time allowed u/s. 139(1) for furnishing the return.

◦ In case the amount is not applied, it will be deemed to be the income of previous year immediately following year of receipt.

Explanation 2 to Section 11(1)

The income from the properties held under trust have to be arrived at in the normal commercial manner without classification under the various heads set out in section 14 of the income tax act 1961.

The expression income has to be understood in the popular or general sense and not in the sense in which the income is arrived.

Income in commercial sense

the income should be applied at least 85% of the total receipt in that financial year.◦ Capital expenditure on purchase of fixed assets as per the sc CIT

vs Moolchand sharvati devi hospital trust that capital expenditure on building and infrastructure were basic necessary and therefore should be treated as expenditure under section 11(1).

◦ Payment of wealth tax and income tax also an application of fund as per CIT vs Ganga charity trust fund.

◦ Repayment of the any debt or has been considered as application as per CIT vs. Maharana of Mewar Charitable Foundation and circular no 100.

◦ Advance for property with adequate documentation will be treated as application of fund as per DIT vs Maharaja agresen Technical Society.

◦ Donation by one charitable trust to another trust from current income will be treated as application of fund.

Meaning of application of fund

A. Section 13(1)(a) — Trust for private religious purposes.

B. Section 13(1)(b) — Trust established for the benefit of any particular religious

community or caste. C. Section 13(1)(c) — Income of the trust is

applied directly or indirectly for the benefit of persons referred to in sub-section (3). D. Section 13(1)(d) — Funds are invested

otherwise than in any form or modes specified in 11(5).

Section 13(Exemption U/S 11 Not To Apply In Certain Cases)

Interest free loan or loan without security Use of properties without charging adequate rent. Excessive payment for services. Services of trust without adequate remuneration. Purchase of property for trust for excessive

consideration. Sale of trust property for inadequate

consideration. Diversion of income or property exceeding Rs

1000. Investment in substantial interest concerns.

Following will be considered as Benefit to a person section 13(3)

According to section 11(1)(d) any voluntary contribution received by a trust created wholly for charitable or religious purpose with a specific direction that they shall form part of the corpus of the trust, shall not be included in the total income u/s 11.

A charitable organization lose exemption by virtue of violation u/s 13 (1) then corpus income will also be included in the total income.

To claim a donation as a corpus donation, a written document with a specific direction from the donor

should be obtain. The recipient organization has no

right to treat a donation as a corpus donation.

Corpus Donation

Donation by one charitable organization to another charitable organization from its current income is treated as a valid application of funds

A corpus donation is not required to be spent in a same year it can be accumulated and form no. 10 is not required to be submitted in the Income Tax department.

Corpus Donation to an inter charity organization to be given during the year as a part of corpus donation received by the Trust.

As per circular no 108 dated 20.03.1973 by CBDT it cover u/s 12(1) which indicated that such corpus donation is not the part of income u/s 2(24).

The corpus donation to be kept in 11(5)

Corpus Donation ( contin…)

following are the persons which are covered under this section.◦ The author of the trust or the founder of the institution.◦ Any person who has made a substantial contribution to the

trust or institution that is to say any person whose total contribution at the end of the relevant previous year exceeds fifty thousand rupees.

◦ Where such author founder or person is a Hindu undivided family a member of the family.

◦ Any trustee of the trust or manager ( by whatever name called ) of the institution.

◦ 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 all above clauses has a substantial interest.

Persons referred to in section 13(3)

To ensure that only organization engaged in bona fide charitable or religious activities are allowed to claim exemption from tax, the law has prescribed a number of legal and procedural requirements. Taxpayers would be well-advised to go through the relevant provisions, particularly sections 11,12,12A, 1 115BBC and 139(4A) of income tax act and rules 17, 17A, 17B and 17C of income tax rules. section 11 are summarized as below:-

The trust must be public charitable or public religious trust and not a private trust.

Income claimed to be exempt must be derived from property held under trust.

If the trust or institution has taxable income for the year before clamming exemption under section 11 and 12, its accounts must be audited by a chartered accountant and audit report in the prescribed form must be filed with the return of income.

The trust must be registered by commissioner/director of income tax under section 12AA.

Condition for claim section 11

Activities of the trust must be carried out in india. 85% or more of the income for the year must be applied to

( i.e put to use) for charitable or religious purposes and the balance ( i.e 15 % or less ) ,must be accumulated or set apart for future application to charitable or religious purposes. OR

If 85% of the income not applied to charitable or religious purposes during the year the same must be accumulated or set apart for future application for definite and specified purposes. For this purpose the Assessee must a give a notice in writing to assessing officer within the due date of filing of return of income be invest the money so accumulated or set apart only in specified modes. The maximum perod for which such income can be accumulated or set apart is 5 years.

If income of the trust or institution includes any income from business such business must be incidental to objectives of the trust and separate accounts must be maintained for such business.

If the trust or institution had taxable income during the year without giving effect to section 11 and 12 it must be file a return of income.

Capital gains if any during the year ( whether short or long term) must be reinvested in a new capital asset in order to be deemed to have been applied to charitable purposes.

Application of earlier year registration granted.

No depreciation on Fixed Asset where we claim as application of Fund.

Cancelation of registration in certain more cases.◦ Income does not endure for the benefit of general

public.◦ For benefit of particular Region or Caste.◦ Income Applied for specified person.◦ Fund not Invested as per Section 11(5)

Recent changes in the Budget