Socio Research & Reform Foundation

Dear Sir

‎There is amendment in the law that if the donation is paid to other registered trusts / ‎institution, only 85% of such donation shall be treated as application for charitable / religious ‎activities.‎

‎Can you please explain little more for understanding purpose, especially it’s real ‎meaning, impact and how it will be executed. How shortfall of 15% will be ‎reported/managed.   ‎

‎Thanks & Regards

S. Kumar

SC provides clarity on ‘Charitable Purpose’ under S.2(15) on clause relating to General Public Utility

Asst. CIT (E) v Ahemdabad Urban Development Authority 2022 (143 taxmann.com 78 (SC) ~ Order dt 3-11-2022)

SC has clarified law relating to General Public Utility (GPU) clause under the last limb of S.2(15). As per the SC judgement activities in question (i.e. considered as commercial) need to be undertaken for advancement of objects of the entity. Even if these are considered in the nature of trade, commerce or business, that does not bar the entity from tax exemption under S.11.

However in such a scenario, two aspects need to be considered

(1) are the activities commercial in nature ? For this SC has given following guidelines:

·       Consideration charged is on cost or nominal mark-up basis, if so than activities cannot be stated to be trade, commerce or business or services in the nature of trade, commerce or business.

·       To decide the above test, SC has illustrated through several examples:

Not considered as trade, commerce or business related activities

o   Gandhi Peace Foundation disseminating Mahatma Gandhi’s philosophy through museums, exhibitions, publications for nominal cost is not business.

o   An institute providing low-cost hostels to weaker segments of the society, where the fee  or charges recovered cover the costs, including administrative expenditure plus nominal mark-up.

o   An entity renting marriage halls for low amounts at fees meant to cover costs.

o   A blood-bank services recovering fees to cover costs

Considered as trade, commerce or business related activities, even if arising from GUP related objectives

o   Publishing an expensive coffee table book on Mahatma Gandhi

o   Renting marriage hall at significant amounts, even if  by providing extra services, far above the cost plus nominal mark-up.

(2)  If consideration charged is considered commercial, then one would need to satisfy the 20% threshold limit of total turnover.

It is further clarified that above law will apply to all institutions, falling under the limb of GPU activity, whether it is a statutory or non-statutory body.

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Socio Research & Reform Foundation (NPO)                       
512 A, Deepshikha, 8 Rajendra Place,
New Delhi – 110008.

• Donation by NPOs to another NPO to be allowed upto 85%
  Effective 1-4-2024 onwards, donations given by one NPO to another, only 85% will be allowed as application to the first NPO.
  
  Apparently Tax Dept fears that NPOs who are required to spend only 85% of its income are defeating the purpose of donations, by forming multiple trusts and accumulating 15% at each layer. Hence this rather regressive amendment, which will discourage institutions (particularly those who themselves are an NPO) to transfer to other NPOs.

• NPOs would need to finalise their accounts by 31 August 2023 – Form 10 & Form 9A to be submitted two months before the date of filing ITR
  All NPOs have to file Form 10 (for accumulation or setting apart of their income) alongwith their ITR. However now this has to be filed at least 60 days prior to the last date of filing the return.
  
  Similarly NPOs are required to file Form 9A declaring the amount of income to be applied. Presently this declaration is filed alongwith the ITR by NPOs. However now this also needs to be filed at least 60 days prior to last date of filing return.
  
  The above provisions have become applicable effective 1-4-2023. This means all entities would need to finalise their accounts by 31^st August 2023, 2 months preponement compared to previous years. This would put enormous pressure both on NPOs as well as their chartered accountants.

• Do not forget to apply for Full registration under S.12AB, after receiving Provisional Registration
  If you have rec’d provisional registration and have not applied for full registration under S.12AB, you could be running the risk of your assets being subjected to Tax as a non-charitable entity.

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Socio Research & Reform Foundation (NPO)                       
512 A, Deepshikha, 8 Rajendra Place,
New Delhi – 110008.

As we all know, FCRA rule 17 requires that every FCRA registered NPO must submit Financial Statements of Balance Sheet, Income & Expenditure and Receipt & Payment alongwith the Annual return (FC4). Generally most NPOs submit FCRA financial statements, however some have been submitting consolidated financial statements. Now FCRA authorities have started demanding FCRA financial statements only. While Rule 17 does not specifically state that an NPO should submit FCRA financial statements, however considering the practice by FCRA authorities you are all requested to ensure that FCRA financial statements are prepared and audited and submitted along with FC4.

It is further pointed out that sometimes NPOs do not even maintain separate books of accounts for FCRA receipts & utilisations. This is certainly a violation of Section 19 of the Act, which requires that a FCRA registered person must maintain accounts of any FC received & utilised during the year. This will also be required by your chartered accountant while issuing FC certificate to you, as the CA is required to certify that the NPO is complying both with Section 19 of the Act and Rule 17 of the FCRA Rules. It may be noted that violation for non-maintenance of accounts could attract a penalty of Rs 1 lakh or 5% of FC rec’d, whichever is higher.

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Socio Research & Reform Foundation (NPO)                       
512 A, Deepshikha, 8 Rajendra Place,
New Delhi – 110008.

As per latest FAQ issued by FCRA Dept., a company incorporated in India will not be treated as ‘foreign source’, even if it has operations in more than two countries. To see latest FAQs please visit https://fcraonline.nic.in/home/PDF_Doc/fc_faq_04102022.pdf

It may be noted that under S. 2 (1) (j) (iii) of FCRA 2010 Act, a foreign company is treated as Foreign Source. S.2(1)(g) defines Foreign Company. One of its sub-clause, (g)(iv), further defines multi-national corporation (MNC).

The definition of MNC is a company incorporated outside India, and includes, and has a subsidiary or a branch or place of business in two or more countries or operates in two or more countries. Thus the first condition of the definition requires that the company be incorporated outside India. Question arises then why FCRA Dept has clarified that a company incorporated in India, will not be treated as a MNC.

Well there are some views which consider that a company even if incorporated in India, but if it is a subsidiary of a foreign company should be treated as Foreign Source. The Dept has now made it clear that any company which is incorporated in India, even if it operates in more than two countries should not be treated as MNC for the definition of Foreign Source.

The clarification still does not cover if a subsidiary of a foreign company would be treated as foreign source. Although we would like to point out that the original amendment in Finance Act 2016 had made it quite clear that it never considered subsidiaries to be still covered as Foreign Source. Further Ministry of Home Affairs placed a written clarification stating that the purpose of the amendment (Click here for press release) was to ensure that the definition of ‘foreign source’ remains consistent with the FDI Policy of the Government of India; and provisions of the Companies Act, 2013 and the Companies (Corporate Social Responsibility Policy) Rules, 2014. Therefore we hope with this clarification, now we all can state that if funds have been rec’d from an Indian company than it will not be treated as foreign source.

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Socio Research & Reform Foundation (NPO)                       
512 A, Deepshikha, 8 Rajendra Place,
New Delhi – 110008.

CBDT has extended the last date for filing of audit report of Charitable Organization (NPO)  for the AY: 2022-23 to 7^th October 2022. Earlier it was to be filed by 30^th September. (click here for CBDT Notification)

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Socio Research & Reform Foundation (NPO)                       
512 A, Deepshikha, 8 Rajendra Place,
New Delhi – 110008.

It is a happy news for all in the NPO Community that MHA has extended FCRA registration validity by six months to 31^st March 2023.

This is applicable to all those who applied before the due date i.e. before expiring of 5 year original validity period. (click here for FCRA notification)

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Socio Research & Reform Foundation (NPO)                       
512 A, Deepshikha, 8 Rajendra Place,
New Delhi – 110008.

Whether Interest earned on endowment fund from FCRA account can be transferred to other account i.e .INR account(non fcra account) for utilizing the same as written in the contract/agreement. However, in the FCRA return we can show the income earned from endowment fund (investments)during the year and expenditure as income transferred to INR account (90% of interest- for the purpose mentioned in the contract) and 10% balance as reinvested. Otherwise we are never able to spend the income earned from an FCRA account.
Can you share your views

Ramakrishnan Natarajan

Many organizations who have received adverse order from FCRA and who wish to challenge the same, have little choice except filing a writ petition in the High Court. Going to High Court is both expensive and lengthy, and may not be the first choice of an entity.

FCRA has provision of Section 32, which allows any person registered under the Act to file for revision of any order issued by the FCRA Dept within one year of the Order having been communicated to that person. However most do not know how to file a revision application, as no detailed procedure had been prescribed by the FCRA Dept. Rule 20 stated that application can be filed on a plain paper. However considering FCRA Dept has stopped taking physical documents, many were at a loss on how to proceed in the matter. Now vide an Order dt. 12 August 2022, the Dept has stated that w.e.f. 1^st September 2022 an application under Section 32 for revision of a order issued by FCRA Dept shall be made in electronic form through FCRA website.

To further explain the matter it has come out with FAQ on the issue, it specifically forbids to send Revision application through post, but to be posted online at FCRA website.

Once you go to FCRA website select from main options, ‘Services Under FCRA’ and the sub-heading ‘Revision Application against Section 32, FCRA 2010’.  Link at the FCRA website is https://fcraonline.nic.in/FCR.aspx?Resp_Id=44

For FCRA Order and FAQs please click here

Looking forward to contribution of Dialogue members on the same.
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Socio Research & Reform Foundation (NPO)                       
512 A, Deepshikha, 8 Rajendra Place,
New Delhi – 110008.