ABOUT THE AUTHORS 1. Adv. (Dr.) Manoj Fogla Adv. (Dr.) Manoj Fogla has been serving charitable and voluntary organisations in diversified sectors including educational & religious institutions, civil society organisations, environmental agencies, international donor agencies, as well as several large corporate foundations. Dr. Fogla has been providing a full range of services related to advisory, contract reviews, organisational restructuring, compliance management and litigation support to Indian as well as international clients for their work in the charity domain. The highlights of his profile are as under:
Over 3 decades of practising experience on tax, legal and regulatory aspects of NPOs and Charitable Institutions. Law practitioner, a fellow member of the Institute of Chartered Accountants of India and holds a Master’s degree in Philosophy. PhD from Utkal University, Doctoral Research on Social Accountability Standards for NPOs. Author of several best-selling books for professionals, including the recent one titled ‘Trust and NGO’s Ready Reckoner’ by Taxmann. Drafted publications for the Institute of Chartered Accountants of India, New Delhi, such as FAQs on GST for NPOs & FAQs on FCRA for NPOs. Faculty and resource person at various national and international forums.
2. CA. Suresh Kumar Kejriwal Mr. Suresh Kumar Kejriwal is a Practising Chartered Accountant and founder partner of M/s. Agarwal Kejriwal & Co., Chartered Accountants, Kolkata. He mainly works in the NGO sector, and he has wide experience of more than 32 years. His professional working areas include India & Bangladesh.
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ABOUT THE AUTHORS
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He has been the co-opted member of the committee for Co-operatives and NPO Sectors of the Institute of Chartered Accountants of India for 2013-14. He is one of the Associate Authors of the book “Taxation of Trusts & NGOs” by Taxmann. He is one of the persons involved in preparing the draft of FAQs for NPOs on GST published by the Committee for Co-operatives and NPO Sectors, the Institute of Chartered Accountants of India, New Delhi. He has facilitated many workshops and seminars organized by various institutions and the Institute of Chartered Accountants of India as a resource person on topics concerning the NGO sector. 3. CA. Tarun Kumar Madaan Mr. Tarun Kumar Madaan is an experienced practising Chartered Accountant with over 7 years of specialisation in taxation. He specialises in providing tax consultancy services to start-ups and NGOs in India, helping them navigate complex tax laws. Mr. Madaan is an expert writer and renowned speaker who regularly contributes articles to various publications and speaks at events on Income-tax issues. He holds a Diploma in International Taxation from ICAI and possesses extensive knowledge of the nuances of tax laws. In addition, he is a close ally of Taxmann’s Research and Advisory department and has contributed to several research papers and advisories on Income-tax law. He is also a co-author of the highly acclaimed book ‘Trusts & NGOs Ready Reckoner’ and is a contributor to the widely regarded book ‘Master Guide to Income-tax Act’.
CONTENTS PAGE
About the Authors
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FAQs ON AUDIT OF TRUSTS & INSTITUTIONS IN FORM 10B/10BB FOR AY 2023-24 FAQs on Audit of Trusts & Institutions in Form 10B/10BB
for AY 2023-24 FAQs : Introduction & Applicability of Audit FAQs : Who can conduct the Audit? FAQs : Format of Audit Report FAQs : Due date & process to file Audit Report FAQs : Disclosure & reporting of common clauses in Annexure to Form 10B/10BB FAQs : Clauses for reporting only in Annexure to Form 10B
3 5 16 18 24 32 53
LAW AND PRACTICE RELATING TO AUDIT OF TRUSTS AND INSTITUTIONS AND ITR-7
1 REQUIREMENT OF AUDIT UNDER SECTION 12A AND SECTION 10(23C) 1.1 1.2 1.3
Requirement of audit of accounts Time limit to obtain and furnish the audit report Applicability of audit to section 10(23C) institutions I-7
69 70 70
CONTENTS
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1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11
Applicability of audit to non-approval category of section 10(23C) institutions Monetary limit for audit Objective of audit under the Income-tax Act Form of audit report (upto A.Y. 2022-23) Form of audit report (from A.Y. 2023-24) Who is required to file an audit report in Form 10B? Who is required to file an audit report in Form 10BB? Definition of foreign contribution
71 71 71 72 73 73 73 74
2 MAINTENANCE OF BOOKS OF ACCOUNT 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9
Inherent requirement to maintain books of account Insertion of explicit provision by the Finance Act, 2022 Condition of the requirement to maintain books of account Applicable if total income exceeds ` 2,50,000 Meaning of books of account List of books and documents to be maintained by trust or institution Manner of keeping books of account Place of keeping books of account Period for which books are to be maintained
76 78 79 79 79 80 87 88 88
3 RAMIFICATIONS OF NOT OBTAINING AUDIT REPORT AND NON-MAINTENANCE OF BOOKS OF ACCOUNT 3.1 3.2 3.3
Whether submission of the audit report is directory or mandatory? Case laws regarding the delayed filing of audit report [not relevant after enactment of section 13(10) and 13(11)] If the conditions for availing the benefit of exemption are substantially satisfied, it could not be denied exemption merely on the bar of limitation in the furnishing audit report in Form 10B
89 90 91
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CONTENTS
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3.4 3.5 3.6 3.7 3.8 3.9
Delay in obtaining/submission of audit report upto AY 2022-23 Delay in obtaining/submission of audit report w.e.f. AY 2023-24 Special provisions to compute income (w.e.f. AY 2023-24) Reporting in clause 39 of annexure to Form 10B Computation of income Condonation of delay in filing Form 10B/10BB
92 92 92 93 94 95
4 OVERVIEW OF FORM 10B AND FORM 10BB 4.1 4.2 4.3 4.4 4.5 4.6
Who must file an audit report in Form 10BB? Who is required to file Form 10B? Audit report and its parts Annexure to Form 10BB Annexure to Form 10B Notes to Form 10BB and Form 10B
98 98 99 103 109 116
5 ANALYSIS OF THE APPLICABILITY OF TAX AUDIT UNDER SECTION 44AB 5.1 5.2 5.3 5.4
5.5
Do the charitable trusts need to file an audit report in Form 3CA/3CB-3CD? Controversy on the applicability of tax audit Analysis of the applicability of tax audit What are the implications of point 9 in the notes to Form 10B, which requires the uploading of the audit report in Form 3CA or 3CB? Conclusion
117 117 120 131
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SAMPLE OBSERVATIONS AND QUALIFICATIONS FOR INCLUSION IN THE MAIN AUDIT REPORT Reporting the details of persons specified in section 13(3)
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CONTENTS
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6.2 6.3 6.4 6.5
6.6 6.7 6.8
Reporting of benefit to specified persons Reporting of specified violation Requirement of reporting of maintenance of books of account Reporting of non-filing of the income tax return and non-furnishing of the audit report under section 13(10) and 13(11) Reporting the amount of application based on income and expenditure account For reporting specified violations as to whether the auditee has complied with other relevant laws Suggested remarks in technical guide on report of audit under section 12A/10(23C) of the Income-tax Act, 1961 issued by ICAI
135 136 137 137
138 138 140
7 INSTRUCTIONS FOR FILLING FORM 10BB ISSUED BY INCOME TAX DEPARTMENT 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9
Assessment Year from which renotified Form 10BB is applicable Applicability of existing Form 10BB Meaning of “auditee” Applicability of renotified Form 10BB Meaning of “foreign contribution” Process to file Form 10BB (A.Y. 2023-24 onwards) Modes of Verification of Form 10BB (A.Y. 2023-24 onwards) Common Instructions Field Specific Instructions
145 145 145 146 146 146 147 147 148
8 INSTRUCTIONS FOR FILLING FORM 10B ISSUED BY INCOME TAX DEPARTMENT 8.1
Assessment Year from which renotified Form 10B is applicable
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CONTENTS
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8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 8.10 8.11
Applicability of existing Form 10B Meaning of “auditee” Applicability of renotified Form 10B Meaning of “foreign contribution” Process to file renotified Form 10B Modes of Verification of Form 10B Process of Downloading Offline Utility for Renotified Form 10B Instructions for filling specific fields of Form 10B Common Instructions to fill schedules and .CSVs Miscellaneous things to be taken care in filing the offline utility
152 152 153 153 153 154 154 154 171 171
9 TUTORIAL ON E-FILING OF FORM 10B/10BB 9.1 9.2 9.3 9.4 9.5 9.6 9.7
Introduction Steps to submit Form 10B/10BB Tutorial on adding the CA to the e-filing portal (Assessee Login) Tutorial on assigning Form 10B/10BB to the CA (Assessee Login) Tutorial on acceptance of assignment by CA (CA Login) Tutorial on uploading/submission of Form 10B/10BB by CA (CA Login) Tutorial on acceptance of Form 10B/10BB by auditee (Assessee Login)
173 173 174 176 179 181 184
10 REQUIREMENT TO SUBMIT ITR UNDER SECTIONS 12A AND 10(23C) 10.1 10.2 10.3
Submission of ITR is one of the conditions to claim the benefit of exemption Requirement to submit ITR Time-limit to file ITR
186 187 187
CONTENTS
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10.4 10.5 10.6
Which ITR Form is to be used? E-filing of ITR Consequences of delay in furnishing of ITR, i.e., submission of return after the due date but before the time allowed under section 139(4) 10.7 Belated return of income 10.8 Revised return of income 10.9 Can the benefit of exemption be claimed by filing an updated return? 10.10 Should the updated return be subject to section 13(10) and 13(11)? 10.11 Whether assessment made due to non-furnishing of return shall be subject to section 13(10) & 13(11)?
188 190 191
192 193 194 195 197
11 PRACTICAL GUIDE TO FILE FORM ITR-7 11.1 11.2 11.3 11.4 11.5 11.6 11.7 11.8
Introduction Key changes introduced in Form ITR-7 applicable for AY 2023-24 Relevant schedules of Form ITR-7 Manner of filing ITR Verification of ITR Processing of ITR Defective ITR Common mistakes while filing of ITR-7
198 199 203 206 206 207 207 208
APPENDICES Appendix 1 : Circulars and Notifications Appendix 2 : Relevant Rules of Income-tax Rules, 1962 Appendix 3 : Relevant Forms of Income-tax Rules, 1962
213 226 235
FAQs : Disclosure & Reporting of Common Clauses in Annexure to Form 10B/10BB FAQ 54. What other important considerations should be kept in mind while filling the information in Form 10B and Form 10BB? When filing the Forms 10B and 10BB, it is essential to adhere to the following instructions: (a) Denomination of Currency: Ensure that all amounts entered in the utility are in Indian Rupees only. (b) Date Format: Utilize the standard date format, which is DD-MM-YYYY. For instance, dates should be input as 06-MAR1990. (c) Nil Value: When there is no value to report (i.e., a Nil value), auditors should enter “0” in the amount fields, as these fields are mandatory and must be filled. FAQ 55. What constitutes the meaning of “commencement of activities”? What is the significance of the auditor reporting the date of the commencement of activities? In our opinion, a charitable or religious institution should consider the date of commencement of activity from the day it starts applying its Income towards charitable purposes. Whether a business has been commenced or not is a question of fact. However, what activities constitute the commencement of business is a mixed question of law and fact, and it has to be decided on the facts of each case. Where the business consists of a continuous course of activities, for commencement of business, all the activities that make up the business need not be started simultaneously. As soon as an activity, which is the essential activity in the course of carrying on the business, is started, the business must be said to have commenced [CIT v. Sponge Iron India
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FAQs : DISCLOSURE & REPORTING OF COMMON CLAUSES
Ltd. (1993) 67 Taxman 437 (AP)1]. With regard to charitable trusts, the same ratio may be construed as the initiation of activities related to the objectives for which the trust has been registered. Clause 13 of Form 10B and clause 10 of Form 10BB specifically seek information about the commencement of activities by trusts or institutions that have been granted provisional registration or approval. The auditor should see the commencement of activity declared by the organisation at the time of filing Form 10AB because a provisionally registered organisation was required to file for regular registration within 6 months of the commencement of the activity. However, many organisations have treated the date of issue of the Provisional Registration Certificate even though they had already commenced activity prior to that. The auditor may provide a suitable clarificatory audit note in this regard in the main audit report. FAQ 56. What are the auditor’s obligations regarding reporting the details of the location of books of account and other documents? Clause 14 of Form 10B and clause 11 of Form 10BB require information on whether the auditee has maintained the books of account and other documents in the form and manner prescribed under Rule 17AA2. These clauses also require to report whether books of account are maintained at registered office and if the answer is negative, the auditor must provide the address of the respective location, the date when the management decided to maintain records at that location, and the date when the Assessing Officer was informed of this address. Rule 17AA requires that the books of account and other documents shall be kept and maintained by the trust or institution at its registered office. Such books of account and other documents may be kept at such other place in India as the management may decide if the following conditions are satisfied: (a) A resolution is passed for such purposes; (b) An intimation is given to the jurisdictional Assessing Officer in writing within 7 days; 1. For the purpose of Section 28(i) of the Income-tax Act, 1961. 2. Rule 17AA inserted vide Notification No. 94/2022 dated 10-08-2022 provides the list of books and other documents to be maintained by entities approved or registered under Section 10(23C) or Section 12A.
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(c) In such intimation, the full address of that other place is mentioned; and (d) The intimation is duly signed and verified by the person who is authorised to verify the return of income under section 140. The auditor should obtain a list of books of account and addresses and locations of the books of account duly certified by management and verify the books of account given in the list. If these books are maintained at a location other than the registered office, it is imperative to get a copy of the resolution passed by management and a copy of the intimation submitted to the Assessing Officer about this location. FAQ 57. What shall be the auditor’s obligation if, during an audit, it was observed that the books of account and other documents are maintained at a place other than the registered office but the required resolution is not passed or passed but not intimated to the Assessing Officer within the prescribed timeline? In such instances, we understand that the auditors should make relevant disclosures in the observations/qualifications section of the audit report. FAQ 58. What shall be the auditor’s obligation if the details of the place of maintenance of books of account are intimated to the Assessing Officer but not within the prescribed timeline of 7 days? In such situations, we understand that the auditors should include suitable disclosures in the observations/qualifications section of the audit report. FAQ 59. The registered office address of the auditee is pre-filled information while filing Form 10BB in online mode and if the pre-filled information is different than the current address of the organisation, then what shall be the auditor’s responsibility? The address should be the same as has been communicated by the assessee to the Income-tax Department as on the date of signing of the audit report. The auditor should verify the relevant details of the assessee from the available income tax records or from the profile of the assessee on the Income Tax portal. In case of difference, the same should be given as an observation in the audit report.
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FAQs : DISCLOSURE & REPORTING OF COMMON CLAUSES
FAQ 60. Clause 6 requires details of other addresses; what should be mentioned under this clause? As per note 3 to Form 10B and 10BB, the auditor has to provide the address which has been decided by the management by way of a resolution and which has been intimated to the jurisdictional Assessing Officer in writing within seven days of such resolution as per the proviso to sub-rule (3) of rule 17AA. FAQ 61. What is the nature of books of account or other documents as provided in Rule 17AA? Clause 14 of Form 10B and clause 11 of Form 10BB require the disclosure of whether the auditee has kept and maintained the books of account and other documents in the form and manner as stipulated in Rule 17AA. Rule 17AA prescribes the books and other documents to be kept and maintained by entities approved under section 10(23C) or registered under section 12AB. Here is a list of the books and documents to be maintained by the trust or institution: (a) Books of account; [Rule 17AA(1)(a), (b) & (c)] Cash Book. Ledger. Journal. Copies of bills, whether machine numbered or otherwise
serially numbered, wherever such bills are issued by the assessee, and copies or counterfoils of machine numbered or otherwise serially numbered receipts issued by the assessee. Original bills wherever issued to the assessee and receipts
in respect of payments made by the assessee. Any other book that may be required to be maintained in
order to give a true and fair view of the state of the affairs of the person and explain the transactions effected. Books of account, as referred to above, for a business
undertaking referred to in section 11(4) of the Act. Books of account, as referred to above, for business carried
on by the assessee other than the business undertaking referred to section 11(4) of the Act.
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(b) Record of all the projects and institutions run by the person containing details of their name, address and objectives; [Rule 17AA(1)(d)(i)] (c) Record of income of the person during the previous year; [Rule 17AA(1)(d)(ii)] (d) Record of application of income, etc., out of income during the previous year; [Rule 17AA(1)(d)(iii)] (e) Record of application of income out of the income of any previous year preceding the current previous year; [Rule 17AA(1) (d)(iv)] (f) Record of voluntary contribution made with a specific direction that they shall form part of the corpus; [Rule 17AA(1)(d)(v)] (g) Record of contribution received for the purpose of renovation or repair of temple, mosque, gurdwara, church or other place notified under clause (b) of sub-section (2) of section 80G which is being treated as corpus; [Rule 17AA(1)(d)(vi)] (h) Record of loan and borrowings; [Rule 17AA(1)(d)(vii)] (i) Record of properties; [Rule 17AA(1)(d)(viii)] (j) Record of specified persons; [Rule 17AA(1)(d)(ix)] (k) Any other documents containing any other relevant information; [Rule 17AA(1)(d)(x)] FAQ 62. How should the auditor satisfy himself that the books of account have been maintained at the address mentioned in Form 10B? To ensure that the books of account have been maintained at the address specified in Form 10B, the auditor should perform the necessary audit procedures. This involves obtaining a certified list of books of account and their respective addresses and locations, as provided by the management. If any discrepancies arise, or if it is discovered that the books of account are not maintained at the address mentioned in Form 10B, the auditor must appropriately report this fact in his report. It is important to note that rule 17AA provides that the books of account and other documents may be kept in the following forms: (a) Written; (b) Electronic form;
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FAQs : DISCLOSURE & REPORTING OF COMMON CLAUSES
(c) Digital form; (d) Print-outs of data stored in electronic or digital form; or (e) Any other form of electromagnetic data storage device. Considering the flexibility provided by this Rule, if the books of account are maintained in electronic or digital form, the auditor should obtain from the assessee the details of the address of the place where the server is located or the principal place or registered office by whatever name called and mention the same accordingly. If the books of account are stored on the cloud or online, a unique IP address of the same may be reported. The auditor should also specify which books of account have been maintained in the computer system and which records have been maintained in hard copy form. FAQ 63. What are the implications if a trust fails to maintain books of account and other documents? The maintenance of books of account and documents is a mandatory condition of registration under section 12A(1)(b) and the Tenth proviso to section 10(23C) which provides that if the total income of the trust or institution, without giving effect to an exemption under sections 11/12 or section 10(23C), exceeds the maximum amount which is not chargeable to tax, such trust or institution shall keep and maintain books of account1 and other documents in such form and manner and at such place, as may be prescribed. If the trust or institution has not maintained the books of account, in such case, the income shall be computed under special provisions of section 13(10) and 13(11) or the twenty-second proviso to section 10(23C). In such case, the income chargeable to tax shall be computed after allowing a deduction for expenditure incurred for the objects of the institution as specified in these sections. Furthermore, the auditor’s role extends to reporting in clause 39 of Form 10B, whether the provisions of section 13(10) or the twenty-second proviso to section 10(23C) are applicable. If affirmative, a detailed computation of the income subject to taxation under section 13(10) is required to be reported.
1. The mandatory requirement to maintain books of account has been introduced by the Finance Act, 2022 with effect from the assessment year 2023-24.
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FAQ 64. Is it mandatory for the auditor to report regarding the maintenance of specified documents under Rule 17AA? How should the auditor report when the books of account are kept in order but the specified documents are not being maintained? Yes, the auditor is required to report on the maintenance of specified documents in accordance with rule 17AA, even if the books of account are being maintained. If, during the audit process, it is found that the specified documents, as required by rule 17AA, are not being maintained despite the books of account being in order, the auditor should report such information in clause 14 of Form 10B. However, if the specified documents are substantially maintained that is most of the specified documents are available then the auditor may consider the requirement has been complied with and simultaneously give audit observation in the main report. It is important to note that while clause 14 of Form 10B requires the list of both books of account and specified documents, clause 11 of Form 10BB seeks confirmation whether the books of account and other documents have been maintained in accordance with the form, manner, and place prescribed under rule 17AA by the auditee. Therefore, in cases where this specific issue arises, it can be disclosed as an appropriate observation or qualification in the main audit report in Form 10B/Form 10BB. FAQ 65. Clause 31 of Form 10B and clause 23 of Form 10BB require the details of the application of income out of income with the amount to be disallowed from the application under various sections. However, no similar disallowance is provided for in clause 37 of Form 10B and clause 27 of Form 10BB while giving details of the application of income from sources other than income. Whether it is an omission on the part of Form 10B or it is for any other reason. In our opinion, the application claimed against sources other than Income, i.e., against corpus or loan is also subject to the same disallowances. There seems to be an error in both Form 10B and 10BB. It is recommended that the auditor under the notes to the audit report should separately report the disallowances against application claimed against sources other than Income, i.e., against corpus or loan. For example, cash payment above ` 10,000 or non-deduction of TDS etc.
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FAQs : DISCLOSURE & REPORTING OF COMMON CLAUSES
FAQ 66. How do we report the utilisation of funds for specific purposes when none of the purposes covered in the definition of Charitable Purpose under section 2(15) is defined in the Income-tax Act? The auditor should see the categorisation of expenses under various limbs as per the past ITR 7 returns, and the same consistency should be followed unless there is an error in such reporting. Further, the auditor may also have a look at Forms 10A and 10AB filed at the time of registration where it is necessary to disclose the specific limb of charitable purposes. Generally, most of the expenses are reported under the dominant limb of activity. It may also be noted that sometimes expenses such as salary, travel etc., pertaining to the programme are treated as administrative expenses which also results in incorrect reporting. An entity with a charitable object is eligible for exemption from tax under sections 11 and 12 of the Income-tax Act. The definition of a charitable purpose under the Income-tax Act is provided in section 2(15), which is inclusive rather than exhaustive. The definition outlines seven distinct categories of charitable purposes. As per the definition in section 2(15), the charitable purpose includes the following: (a) Relief of Poor. (b) Education. (c) Yoga. (d) Medical Relief. (e) Preservation of environment (including watersheds, forests and wildlife). (f) Preservation of monuments or places or objects of artistic or historic interest. (g) Advancement of any other object of general public utility. However, the Income-tax Act does not provide specific definitions for these purposes. For instance, it does not define what constitutes ‘relief of the poor’ or ‘education.’ In such cases, both the taxpayer and the auditor should refer to judicial precedence to define and interpret these terms.
FAQs ON AUDIT OF TRUSTS & INSTITUTIONS FOR AY 2023-24
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FAQ 67. How should capital expenses be classified while reporting the purpose-wise application? It is important to recognise that for charitable or religious trusts, the scope of ‘income’ includes capital income and the scope of ‘application’ includes applications of capital nature. Therefore, the term ‘application’ has a broad enough scope to encompass capital expenditures. The acquisition of a capital asset, when directed toward furthering the trust’s objectives, qualifies as an application of income. Consequently, expenditures incurred for acquiring capital assets can be claimed as deductions under section 11(1)(a). For instance, when reporting purpose-specific expenditures, expenses related to capital nature such as buildings and infrastructure should be categorised as capital expenses, and further, they should be treated as utilised for advancement of the dominant limb of charitable purpose such as ‘education’, ‘relief to poor’ etc. FAQ 68. Clause 31(iv) of Form 10B requires and clause 23(iii) of Form 10BB “Amount actually paid during the previous year which accrued during any earlier previous year but not claimed as application of income in earlier previous year”. However, in case where the provision amount in an earlier year is fully paid in cash then what shall be the implication of reporting in this clause? The provisions of section 40(a)(ia), section 40A(3) and section 40A(3A) shall also apply to application/payment made against provisions made in the earlier year but not claimed as the application of income. FAQ 69. What information is required to be reported for persons specified in section 13(3)? Clause 41 of Form 10B and clause 28 of Form 10BB mandate that the auditor must provide information regarding the individuals mentioned in section 13(3). These clauses require reporting their Name, PAN, Aadhaar Number, and address. The specified persons to be reported in these clauses include the following: (a) Author of the trust or the founder of the institution; (b) Any person who has made a substantial contribution to the trust or institution (contribution exceeding ` 50,000 up to the end of the relevant previous year);
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FAQs : DISCLOSURE & REPORTING OF COMMON CLAUSES
(c) Where such author, founder or person is a HUF, a member of the family; (d) Any trustee of the trust or manager of the institution; (e) Any relative of any such author, founder, person, member, trustee or manager as aforesaid; (f) Any concern in which any of the persons referred above have a substantial interest. FAQ 70. How should the auditor collect the details of persons specified in Section 13(3)? The CBDT’s Circular No. 143, dated 20-8-1974, states that an auditor can accept a list of persons covered under section 13(3) and consider it correct while certifying Form No. 10B along with its annexure. Hence, the auditor should collect a certified list of persons covered by section 13(3) from the chief functionary, the managing trustees of the organisation, or the trust. Furthermore, Rule 17AA mandates that the trust or institution maintain records containing the Name, Address, Permanent Account Number, and, if available, the Aadhaar number of such specified persons. Therefore, the auditor should procure the specified persons list outlined in section 13(3) from the organisation and the documentation maintained under rule 17AA. FAQ 71. Whether the details of relatives of the trustees are also required to be reported? Any individual related to the author, founder, substantial contributor, member, trustee, or manager falls under the category of specified persons according to section 13(3). Consequently, the auditor must report the relatives’ details, including their name, PAN, Aadhaar Number, and address. The auditor may report the information based on the list of specified persons provided by the management. The relative in relation to an individual means: (a) Spouse of the individual; (b) Brother or sister (and their spouses) of the individual; (c) Brother or sister (and their spouses) of the spouse of the individual;
FAQs ON AUDIT OF TRUSTS & INSTITUTIONS FOR AY 2023-24
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(d) Any lineal ascendant or descendant (and their spouses) of the individual; (e) Any lineal ascendant or descendant (and their spouses) of the spouse of the individual; (f) Any lineal descendant of a brother or sister of either the individual or of the spouse of the individual. FAQ 72. Who shall be considered as substantial contributors under section 13(3)? Any person whose total contribution up to the end of the relevant previous year exceeds ` 50,000 is a substantial contributor. Therefore, if a person has made a cumulative donation of ` 50,000 or more since the trust’s inception, they are deemed a substantial contributor. Once a person becomes a substantial contributor and an interested person within the meaning of section 13(3), he shall remain so in future1. The auditor is obligated to report their details, including their name, PAN, Aadhaar Number, and address. Furthermore, the auditor must also specify the amount of their contribution to the auditee. It may be noted that the auditor may not have access to details of donors of all the past years therefore he may rely on the list provided by the management with suitable audit observation in the main report. However, the auditor should ensure that the relevant donor list of the year under audit is duly reflected. The CBDT has issued a clarification on reporting of Substantial Contributors in Form 10B/10BB vide Circular No. 17/2023, dated 0910-2023. It has been clarified that only those substantial contri-butors whose contributions during the relevant previous year exceed ` 50,000 need to be reported in Form 10B/10BB. Therefore, for reporting in Form 10B/10BB, there is no need to verify whether the contribution by any person has crossed ` 50,000 since the inception of the trust. Now, only those substantial contributors whose contribution during the relevant reporting period surpasses Rs. 50,000 are required to be reported. FAQ 73. Does the auditor need to report information about the relatives of substantial contributors? Any person who has made a substantial contribution to a trust or institution is an interested person. According to section 13(3)(d), even 1. Shree Ram Vaikuntha Trust v. ITO (1986) 15 ITD 1 (Delhi).
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FAQs : DISCLOSURE & REPORTING OF COMMON CLAUSES
the relatives of substantial contributors are considered interested persons. Therefore, it is also necessary to report the details of the relatives of substantial contributors. The CBDT has issued a clarification on reporting of Substantial Contributors in Form 10B/10BB vide Circular No. 17/2023, dated 09-10-2023. It has been clarified that the details of relatives of such contributors and concerns in which these contributors hold substantial interests should also be reported, if available. FAQ 74. ITR 7 and Form 10B/10BB have distinct requirements when it comes to reporting substantial contributors to a trust or institution, as per section 13(3) of the Income-tax Act. In ITR-7, there is a specific request in PART A - GEN for disclosing the “Name(s) of the person(s) who has/have made substantial contributions to the trust/institution in terms of section 13(3)(b) during the previous year.” Here, the focus is on reporting individuals who have made substantial contributions during the particular previous year. On the other hand, Form 10B/10BB places a broader obligation on the auditor. The auditor is mandated to provide a list of all substantial contributors in accordance with section 13(3), without the restriction of reporting contributions made only during the previous year. As per the Income-tax Act, a substantial contributor is defined as any person whose total contribution, up to the end of the relevant previous year, exceeds ` 50,000. In Form 10B, the auditor is required to furnish comprehensive details of these substantial contributors, including their name, PAN, Aadhaar Number, and address, along with specifying the exact amount of their contributions to the auditee. This reporting encompasses cumulative contributions made since the inception of the trust or institution. However, this anomaly between ITR-7 and Form 10B/10BB has been removed through the clarificatory Circular No. 17/2023, dated 09-10-2023, issued by the CBDT. The CBDT has clarified that only those substantial contributors whose contributions during the relevant previous year exceed Rs. 50,000 need to be reported in Form 10B/10BB. The details of relatives of such contributors and concerns in which these contributors hold substantial interests should also be reported, if available.
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FAQ 75. What audit evidence should be retained when the benefit to a specified person is certified as ‘Nil’? The auditor should verify the transactions involving specified persons to ascertain whether any benefit has been conferred upon them. This evaluation may involve obtaining management representation in addition to exercising professional judgment. It is crucial to understand that reporting the list of specified persons and reporting benefits to specified persons are separate clauses. Therefore, even if no benefits are conferred upon specified persons, the reporting of the list remains mandatory. Further, a question arises regarding when to report benefits to specified persons as “YES” and when to report them as “NO” in Clause 42 of Form 10B or Clause 29 of Form 10BB. The benefits should be indicated as “YES” when there is a clear and evident element of benefit to specified persons. In all other cases, it should be reported as “NO.” Also, if the benefit is reported as “YES”, the amount of benefit shall get taxed under section 115BBI and shall be reported in Clause 33 of Form 10B or Clause 25 of Form 10BB, as the case may be. FAQ 76. Clause 21 of the Annexure to Form 10BB pertains to the disclosure of income other than voluntary contributions that are generated from property held under the trust mentioned in Section 11. What should be included in this clause? Clause 21 specifically asks the information regarding income other than voluntary contributions that originate from property held under a trust covered by section 11. It may be noted that all income other than voluntary contributions should be reported under this clause. The auditor may also refer to ‘Schedule AI’ of last year’s ITR-7. FAQ 77. What are the ‘Specified Violations’ the auditor must report in Form 10B and Form 10BB? Clause 43 of Form 10B and Clause 30 of Form 10BB impose a responsibility on auditors to report specific violations as outlined in Explanation 2 to the fifteenth proviso to section 10(23C) or the Explanation to section 12AB(4). The following are the specified violations that auditors are obligated to report:
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FAQs : DISCLOSURE & REPORTING OF COMMON CLAUSES
(a) The income of the auditee has been applied other than for the objects of the trust or institution; (b) Whether the auditee has income from profits and gains of business which is not incidental to the attainment of its objectives; (c) Whether separate books of account are not maintained by the auditee in respect of the business which is incidental to the attainment of its objectives; (d) Whether the auditee has applied any part of its income from the property held under a trust for private religious purposes, which does not enure for the benefit of the public; (e) Whether the auditee has applied any part of its income for the benefit of any particular religious community or caste; (f) Whether any activity carried out by the auditee is not genuine or is not being carried out in accordance with all or any of the conditions subject to which it was registered; (g) Whether the auditee has not complied with the requirement of any other law, for the time being in force, 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. FAQ 78. The auditor’s responsibility for reporting specified violations extends to verifying whether the auditee has complied with other relevant laws. To what extent the auditor can be held responsible or liable for not detecting and reporting compliance with “any other law”? Violations of laws mentioned in (a) to (f) are those violations which auditor can come across in the normal course of audit. Violation of any other law mentioned in (g) above relates to any other law. Violation of any other law cannot be detected in ordinary course of audit. Moreover, auditor is not a legal expert and cannot say whether such a violation has taken place. That is why clause (f) of Explanation to section 12AB(4) as well as clause 30/43 of Annexure to Form No. 10BB/ 10B respectively limit the auditor’s responsibility to report on such violations based on whether order, direction or decree, by whatever name called, holding that such non-compliance has occurred has been made and the same has either not been disputed or has attained
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finality. Where such order, direction or decree has been made but disputed, the auditor may furnish suitable note referring to clause 30/43 Annexure to Form No. 10BB /10B respectively in the fourth para of Form 10BB/Form 10B respectively. In order to detect violations of “any other law”, auditor will have to rely on management representations and procedures outlined in Standard of Auditing, SA 501, as regards Litigations and Claims. Paras 9 and 10 of SA 501 require that the auditor shall design and perform audit procedures in order to identify litigation and claims involving the entity which may give rise to a risk of material misstatement, including: (a) Inquiry of management and, where applicable, others within the entity, including in-house legal counsel; (b) Reviewing minutes of meetings of those charged with governance and correspondence between the entity and its external legal counsel; (c) Reviewing legal expense accounts; and (d) Seek direct communication with assessee-trust’s legal counsel. The auditor should remember that the scope and ambit of the enquiry under the Act in this matter is limited. For example, a charitable institution is running a school. It requires registration for the same under the State Law, and if it is not obtained, the institution can be wound up under the said law. Accordingly, it may not be able to achieve its objective of education. In such circumstances, the auditor shall consider it a fit case of specified violation. Therefore, if the auditor is of the opinion that approval/permission is required from competent authorities, then he should specify the relevant laws, the reasons why such other laws are material and the authorities from which permissions/approval are required. In view of the foregoing, the auditor should limit his liability/responsibility in respect of detection of specified laws covered by clause (f) of section 12AB(4) by adding suitable remarks in the 4th Paragraph/5th Paragraph of main audit report in Form 10B/Form 10BB. The remarks can be along the following lines: “Based on audit procedures required to be followed by Standards of Auditing SA 250 and SA 501 and based on management representations obtained, we have not come across any order, direction or decree, by
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whatever name called, holding that such non-compliance has occurred which has not been disputed or attained finality.”
FAQ 79. How should auditors handle situations where quantifying the monetary aspects of specified violations is practically challenging in clause 43 of Form 10B, especially in cases of non-compliance with other laws? Clause 43 of Form 10B necessitates auditors to disclose specified violations as delineated in Explanation 2 to the fifteenth proviso to section 10(23C) or the Explanation to section 12AB(4). Moreover, it mandates the quantification of the financial implications stemming from these violations. However, it is important to acknowledge that quantifying the monetary aspects of such violations may be practically unfeasible in some instances. For instance, consider the scenario where the auditee has failed to adhere to the requirements of another prevailing law. The auditor may find it challenging to provide a precise monetary assessment since receipts may not be directly applied in such cases. Instead, non-compliance might manifest as the failure to obtain registration under the pertinent law. In such circumstances, it is advisable for the auditor to report this fact as an observation in the audit report. If feasible, the auditor may also include details regarding the punitive consequences prescribed under that specific law for non-compliance. FAQ 80. What audit evidence should be retained when specified violations are certified as ‘No’? The auditor should check whether the auditee has received any notice or order from the Principal Commissioner or Commissioner regarding the occurrence of specified violations under section 12AB(4). This includes reviewing any submissions or appeals made by the auditee in response to such notices or orders. The auditor should also request a management representation letter from the management regarding the non-occurrence of any specified violation. The findings should then be included in the observations or qualifications section of the report. FAQ 81. When dealing with a restricted grant, which amount should be reported in Form 10B or Form 10BB while declaring income?
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Project grants are classified as specific or restricted contributions since their use is constrained by the conditions outlined in the project or grant agreement. The grant is not freely available to the recipient organisation for charitable purposes. The organisation is bound by the contractual obligations associated with the project or grant agreement. A restricted grant or legal obligation is not a part of the Income of the organisation. However, all project grant may not be treated as legal obligation based on the conditions of the grant agreement. Further, under the current ITR-7 there is no mechanism to report legal obligations which do not form a part of the Income. Schedule VC of Form ITR-7 requires reporting of CSR grants and other specific grants as Voluntary Contributions. Hence, they may be reported as Voluntary Contributions in Form 10BB and Form 10B. If it is not reported as a Voluntary Contribution, the fact may be disclosed as an observation in the main report about the treatment of restricted grants in Form 10B or Form 10BB. FAQ 82. Applications of income are now allowed on a payment basis. Can we consider the advances made to vendors, suppliers, or for acquiring fixed assets as applications in the current year? If an NGO gives an advance to a vendor under contract, then it essentially makes a part payment against goods or services to be delivered. All such advance which are the nature of a part payment should be treated as applications. However, any advance which is cash equivalent, i.e., recoverable at the discretion of the organisation, then such amount may not be treated as application. It is imperative for auditors to review the documentation. It is also essential to differentiate between partial payments and advances. Advances are funds held by someone else on behalf of the organisation, much like cash in hand. FAQ 83. Should donations made to entities not registered or approved be excluded when calculating the application amount? Clause 23 of Form 10BB and clause 31 of Form 10B explicitly require the auditor to report any amounts that should be disallowed if donations are made to entities other than funds, institutions, trusts, universities, educational institutions, hospitals, or medical institutions as specified in sub-clause (iv), (v), (vi) or (via) of section 10(23C), or trusts or institutions referred to in section 11 or 12. In other words
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inter charity grant should be excluded if it is not given to aforesaid registered or approved organisations. The Income-tax Act does not prohibit donations to institutions not registered under section 12AB or approved under section 10(23C). In a significant legal precedent, the High Court, in the case of CIT (Exemptions) v. Maria Social Service Society [2018] 99 taxmann.com 381 (Kar.), determined that the transfer of foreign contributions to an organisation lacking section 12AA registration or FCRA compliance did not constitute an ultra vires or illegal activity. Furthermore, the court ruled that the cancellation of section 12AA registration was not justified. Similarly, the Hyderabad ITAT, in the case of Asstt. DIT v. Dharmavana Arboretum [ITA No. 1512/HYD/2011], affirmed that inter-charity donations to non-12AA societies were permissible, provided the funds were utilised for legitimate charitable purposes. In this case, the society disbursed grants from FCRA funds to nine different societies lacking section 12AA registration. However, even if the organisation adopts a different stance on this matter such grants cannot be treated as valid application for the purposes of reporting in clause 23 of Form 10BB and clause 31 of Form 10B. In such cases, the suitable disclosure shall be made as an observation in main audit report in Form 10B/10BB. FAQ 84. Does the term “donation to any person” encompass financial assistance or donations provided to individuals for personal consumption? Any reasonable amount to an indigent or deserving beneficiary should indeed be regarded as an application of income if it is directly contributed toward the stated objectives of the NGO. For example, Charitable institutions provided cash contributions of ` 3,000 to each family in a village during the pandemic to purchase essential items, especially to low-income households that were unable to secure regular income due to their status as wage earners, among other factors. In essence, this is not a conventional donation. The term “donation” is used when an individual receives funds in the capacity of a trustee to be utilised for a specific purpose. Therefore, if the amount is reasonable and the recipient is indeed deserving, it can be treated as an application of funds. FAQ 85. What are the consequences when donations are made to organisations with different objectives or funds are applied for
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purposes that extend beyond the organisation’s stated objectives and beyond the scope of section 2(15)? Any such donations to organisations having different objectives will not be treated as valid applications. The mandatory 85% utilisation can be done by the trust or institution itself or by donating to trusts with similar objectives. Inter-charity donation is treated at par with direct application for section 11(1)(a). Hence, inter charity grant cannot be made to organisations with different objects even if such objects are otherwise permissible under section 2(15) for both the organisations. The objects should be common as per their memorandum of association or other constitutional documents. It may be noted that spending income towards objects other than the stated objects is a specified violation under section 12AB(4). FAQ 86. NGO has generated income solely from accrued interest on a fixed deposit, amounting to ` 11 lakhs, and it has spent ` 10 lakhs from the opening bank balance. How should it determine the amount of income applied? The organisation should treat the accrued of ` 11 lakhs as Income and the expenditure of ` 10 lakhs as application irrespective of the source of fund. The organisation may file Form 9A if funds are not available. The organisation may also follow the policy of recognising income on cash basis, which generally is not recommended in such cases because of the mismatch and reconciliation issues with TDS and Form 26AS. Section 12(1) used the term ‘received’ instead of ‘derived.’ Consequently, voluntary contributions should always be treated as income on a receipt basis when preparing income computations under the Income-tax Act. The Finance Act, 2022 inserted an Explanation after section 11(7). This Explanation explicitly provides that any sum payable by any trust shall be considered an application of income in the previous year in which such sum is actually paid. Thus, the application of income shall be allowed only on a payment basis. This is irrespective of the previous year in which the liability to pay such sum was incurred by such trust according to the method of accounting regularly employed.
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Explanation 1 to section 11(1) gives an option to be exercised when income has not been received. Therefore, NGOs should predominantly use a cash basis of accounting. However, income which is subject to TDS can be accounted for on an accrual basis. For instance, if an NGO has accrued interest but no cash available and has spent from other funds, it is important to note that cash flow matching is not required. So, if an NGO has declared an income of ` 11 lakhs and spent ` 10 lakhs, it has already applied more than 85% of the income and hence is not obligated to file Form 9A. FAQ 87. Can a donation be regarded as anonymous for Clause 23(vi) of Form 10B or Clause 18 of Form 10BB where the name and address of the donee are available but not PAN/Aadhaar? If the name and address of the donee are available then it should not be treated as an anonymous donation even if PAN/Aadhaar is not available. Section 115BBC(3) requires that a donation will not be treated as an “anonymous donation” only if a record of donors is maintained indicating: (a) The identity indicating the name and address of the donor; and (b) Such other particulars as may be prescribed (No particulars have been prescribed by CBDT so far under section 115BBC(3)). Where assessee-trust provided details of donors along with names and addresses and furthermore confirmation letters from donors were also provided to Assessing Officer in respect of donation received, mere absence of PAN in confirmation letters of donors would not give rise to suspicion that they were anonymous donations; maintenance of name and address details of contributors would be a sufficient document to establish identity of donors as prescribed under section 115BBC [Asstt. CIT v. Siddhartha Academy of General & Technical Education [2022] 141 taxmann.com 287 (Visakhapatnam - Trib.)] Assessee-society was formed with object of running an educational institution. It received corpus donations for construction of building. During course of search, donor’s receipts were found which contained names, addresses and PAN of donors along with details of mode of donations. Assessing Officer issued notice under section 133(6) to donors. It was found that said donations had been duly accounted for in regular books of account of assessee which had not been rejected by Assessing Officer. Further, amounts of donations was very
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small in case of donors who had failed to confirm and they had made payments mostly by cheques or drafts. On facts, all donations were to be accepted as genuine and, therefore, impugned addition made by Assessing Officer could not be sustained. [Dy. CIT v. Indo Global Education Foundation [2015] 62 taxmann.com 159 (Chd. - Trib.)]
TRUST & NGOS – YOUR QUERIES ON AUDIT REPORTS (FORM NOs. 10B & 10BB) & INCOME-TAX RETURN (ITR-7) AUTHOR
:
MANOJ FOGLA , SURESH KUMAR KEJRIWAL , TARUN KUMAR MADAAN
PUBLISHER
:
TAXMANN
DATE OF PUBLICATION
:
OCTOBER 2023
EDITION
:
2023 Edition
ISBN NO
:
9789357784597
BINDING TYPE
:
PAPERBACK
Rs. 695
DESCRIPTION This book is a comprehensive and up-to-date guide for understanding the intricate process of furnishing an audit report in Form 10B & Form 10BB and Income-tax Return Filing in ITR 7 This book will be helpful for trusts, NGOs, audit professionals and consultants. The Present Publication is the Latest 2023 Edition, amended by the Finance Act 2023 and updated till 10th October 2023. This book is authored by Dr Manoj Fogla, CA Suresh Kumar Kejriwal, and CA Tarun Kumar Madaan, with the following noteworthy features: • [Compendium of 100+ FAQs] pertaining to the audit of trusts and institutions in Form 10B & Form 10BB for AY 2023-24 • [Coverage of Changes Introduced in Form 10B & Form 10BB] providing in-depth insights into the applicability and reporting requirements • [Thorough Analysis] of the following: o Requirement of Audit o Maintenance of Books of Accounts o Filing of ITR 7 o Changes on ITR-7 applicable for AY 2023-24 • [Practical Guidance] o Using sample draft observations & qualifications for auditors to report in specific circumstances o Guide & tutorials for e-filing of audit report in Form 10B & Form 10BB
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