NGO and its Legal aspect

Non-Governmental Organization

What is NGO

Generally, NGO refer to a Non-Governmental Organization. NGO is nothing but an association of volunteers those group together and engage themselves in a wide range of activities viz. Environment, Health, Education, Women, Children, Social Justice, Human Right, cultural and so on. . . may be at local, regional, national, or International level.

NGOs are difficult to define, and term ‘NGO’ is not always used consistently. In some countries, the term NGO is applied to an organization that in another country would be called NPO (non-profit organization), and vice versa.

Apart from ‘NGO’, there are many alternatives such as voluntary organization (VO), civil society organization (CSO), grassroot organization (GO), social movement organization (SMO), private voluntary organization (PVO), Self-help organization (SHO), mother non-governmental organization (MNGO) etc.

Sources of Fund of NGOs

Generally, NGOs enjoy high degree of public trust, which make them useful to achieve goal. According to the size of organization, Non-governmental Organization prepare an annual budget and arrange fund from various sources such as :

1. Public donation and subscription
2. Grant form various government or agencies
3. Membership fee or contribution
4. Own income

Legal Status of NGOs in India

Registered Society – Society Registration Act, 1860 is a central act for registering not for profit organization. Almost all the states in India have adapted (with modification, if any) the central Act for creating State level authorities for registering various types of not profit entities. According to the act any seven persons who subscribe to the memorandum of Association (MOA) can registered a society. The memorandum should include name of society, its objectives, it names, address, and occupations of the members subscribing to it as well as the first governing body to be constituted on registration.

Trust – There are two types of Trust, one is Public Trust can be created and governed by Public Trust Act for public charitable purpose. Second is Private Trust, created and govern by The Indian Trusts Act of 1882 aims to managing trust property for private or religious purpose.

Non-Profit Companies – created and govern under Companies Act, 2013.

Indian Income Tax Act and NGOs

Trust formed for charitable or religious purposes which are not intended to do commercial activities are allowed various benefit under Income Tax Act, inter-alia, exemption under Section 11.

Section 2(15) of the Act defines “Charitable purposes” to include relief of the poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility.

Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless—

• such activity is undertaken in the course of actual​​ carrying out of such advancement of any other object of general public utility; and
• the aggregate receipts from such activity or activities during the previous year, do not exceed 20% of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year

TAX Exemption to NGOs in India

Income of a charitable or religious NGO is exempt from tax subject to certain conditions. Some of the exemption allowed to a NGO are as under :

• Section 11provides exemption for income derived from property held under trust wholly for charitable or religious purposes to the extent such income is applied for charitable or religious purpose in India. However, this exemption shall be subject to certain conditions.
• In view ofSection 12, income in the form of voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes shall also be exempt from tax (subject to certain conditions).
• Any voluntary contributions received by an electoral trust shall not be included in its total income (subject to certain conditions).
• Income of an educational institute is subject to exemption underSections 10(23C)(iiiab)/(iiiad)/(vi).
• Income of a hospital or other institution shall be eligible for exemption if it satisfies the conditions prescribed underSections 10(23C)(iiiab)/(iiiad)/(vi)

Details Discussion of Section 11 and 12 of Income tax Act, 1961-2017

Section 11 – Income form property held for charitable or religious purposes

As per Section 11(1) subject to the provision of section 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income –

1. income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property;
2. income derived from property held under trust in part only for such purposes, the trust having been created before the commencement of this Act, to the extent to which such income is applied to such purposes in India; and, where any such income is finally set apart for application to such purposes in India, to the extent to which the income so set apart is not in excess of fifteen per cent of the income from such property;
3. income derived from property held under trust—

• created on or after the 1st day of April, 1952, for a charitable purpose which tends to promote international welfare in which India is interested, to the extent to which such income is applied to such purposes outside India, and
• for charitable or religious purposes, created before the 1st day of April, 1952, to the extent to which such income is applied to such purposes outside India:

Provided that the Board, by general or special order, has directed in either case that it shall not be included in the total income of the person in receipt of such income;

1. income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution.

Section 12 – Income of trusts or institutions from contributions

Clause (1)        Any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) shall for the purposes of section 11 be deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provisions of that section and section 13 shall apply accordingly.

Clause (2)        The value of any services, being medical or educational services, made available by any charitable or religious trust running a hospital or medical institution or an educational institution, to any person referred to in clause (a) or clause (b) or clause (c) or clause (cc) or clause (d) of sub-section (3) of section 13, shall be deemed to be income of such trust or institution derived from property held under trust wholly for charitable or religious purposes during the previous year in which such services are so provided and shall be chargeable to income-tax notwithstanding the provisions of sub-section (1) of section 11.

Explanation – For the purposes of this sub-section, the expression “value” shall be the value of any benefit or facility granted or provided free of cost or at concessional rate to any person referred to in clause (a) or clause (b) or clause (c) or clause (cc) or clause (d) of sub-section (3) of section 13.

Clause (3)        Notwithstanding anything contained in section 11, any amount of donation received by the trust or institution in terms of clause (d) of sub-section (2) of section 80G in respect of which accounts of income and expenditure have not been rendered to the authority prescribed under clause (v) of sub-section (5C) of that section, in the manner specified in that clause, or which has been utilised for purposes other than providing relief to the victims of earthquake in Gujarat or which remains unutilised in terms of sub-section (5C) of section 80G and not transferred to the Prime Minister’s National Relief Fund on or before the 31st day of March, 2004 shall be deemed to be the income of the previous year and shall accordingly be charged to tax.

Section 13 – Forfeiture of exemption

Following incomes of charitable or religious NGOs do not qualify for exemption under section 11 and 12 –

1. Income for private religious purposes
2. Income for the benefit of any particular religious community or caste (exception – Scheduled Castes, Backward Classes, Schedule Tribes or Women and Children)
3. Income for the benefit of Interested persons
4. Funds not invested in section 11(5)
5. Educational and Medical facilities to specified persons
6. section 13(7) – Anonymous donation refer section 115BBC(1)

Anonymous Donation – Section 115BBC (1)

As per section 115BBC (3), Anonymous Donation means any voluntary contribution referred to in sub-clause (iia) of clause 24 of section 2, where a person receiving such contribution does not maintain a record of the identity indicating the name and address of the person making such contribution and such other particulars as may be prescribed.

As per section 115BBC (1),  Where the total income of an assessee, being a person in receipt of income on behalf of any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via) or any fund or institution referred to in sub-clause (iv) or any trust or institution referred to in sub-clause (v) of clause (23C) of section 10 or any trust or institution referred to in section 11, includes any income by way of any anonymous donation, the income-tax payable shall be the aggregate of—

1. the amount of income-tax calculated on the income by way of any anonymous donation, at the rate of thirty per cent; and
2. the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in
   clause (i)

Example :

ABC a fully charitable NGO, during the Financial Year 2016-17 received voluntary contribution Rs. 9,00,000/- (including Rs. 6,00,000/- as anonymous donation within the meaning of section 115BBC(3)). Application of fund fully for charitable purposes within India. Compute Tax liability for the assessment year 2017-18.

Particulars                                                                               Amount (Rs.)              Amount (Rs.)

Total Income of the ABC                                                                                            900000.00

Less : exemption u/s 11 on application of fund                                                          900000.00

Add : Anonymous donation taxable as per section 13(7)      600000.00                   500000.00

Less : Higher of followings                                                     100000.00

1. 5% of total donation i.e. Rs. 45000/-
2. 100000

Taxable Income                                                                                                          500000.00