Tax provisions likely to impact accounting systems for Non-profits

Accounting Software with Audit Trail:

All companies are now required to maintain accounting system, which has audit trail. The Govt has amended Companies (Audit & Auditors) Rules 2014. In the proviso for Rule 3(1) it has stated that effective 1^st April 2022 every company which uses accounting software for maintaining its books of account, shall use only such accounting software which has a feature of recording audit trail of each and every transaction, creating an edit log of each change made in books of account along with the date when such changes were made and ensuring that the audit trail cannot be disabled.

A genuine question arises, is this rule applicable to companies only? While on the face of it, the amendment seems to be applicable to companies only, however it is quite likely that Tax Officers may insist on such software even for other forms of entities, including NPOs. This is particularly relevant considering now S.12A(1)(b) has been amended and sub-clause (i) requires that books of account and other documents are kept and maintained in such form and manner and at such place, as may be prescribed.

It would not be surprising, if NPOs are also asked to maintain books of accounts in similar format as required of companies.

Cash Basis of expenditure to be used for tax assessment of NPOs

It is now clear that an expenditure will be considered as application for an NPO only in the year which it is actually paid. This is because Explanation has been added to S.11(7) of the Act, which states

For the purposes of this section, any sum payable by any Trust or Institution shall be considered as application of income in the previous year in which such sum is actually paid by it (irrespective of the previous year in which the liability to pay such sum was incurred by the trust or institution according to the method of accounting regularly employed by it).

However if it has already been claimed in a previous year as application, than it will not be allowed again as application, when payment is made.

This amendment has been made effective from AY 2022-23, i.e. Financial Year 2021-22.

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