Trusts/societies and Companies Act-section 25

Dear Friends,

Given the resource crunch, NGOs/CSOs have to think of earning for serving. So as not to get entangled in Tax web, some of them are planning to go for separate body under (not- for-profit) Companies Act-25. They can’t afford to have a separate CEO for the Company which is supposed to spare surplus money earned for running the Charitable NGO. Do the rules permit one CEO heading both the Charitable NGO and the not-for-profit Company. Few of the Governing body members of the NGO could be on the Board of the Company for safety.
If a common CEO is permitted, what precautions should be taken? Can terms like “Trade” be used by such a Company?
Please advise.


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One Response to Trusts/societies and Companies Act-section 25

  1. Expert Panel says:

    Dear SRRF Members,
    Greetings of the day,

    Both a Trust and a Section 25 company are two different legal entities and no law bars any of these entities to have common CEO. However one has to look into Section 13(3) of Income Tax Act to ascertain what precaution one has to take while dealing with CEO of such entities. CEO becomes an interested party as per Section 13(3). This may result in transactions between the society/trust and S. 25 company being looked into by the department more thoroughly.
    However an important issue is whether a Trust can float a Section 25 company. It is our opinion that a Trust can own /promote a Section 25 company or for that matter even a profit making company. However it would not be able to treat any funds invested towards share capital, in such an enterprise, as funds towards 85% expenditure. However considering that minimum this investment would be around Rs 1 lakh only, an agency could try it out.

    Regarding the query whether company can use term Trade , it is not clear whether you mean use of Trade as ‘objective’ or in ‘name’.

    We thank Deepak Bansal, Chartered Accountant, and B V Soma Sastry for providing their inputs in resolving the above query.

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