Accounting For Society/ Trust

ACCOUNTING OF SOCIETY AND TRUST
In India nonprofit / public charitable organizations can be registered as trusts, societies, or a private limited nonprofit company, under section-25 companies. Non-profit organizations in India

(a) Exist independently of the state;
(b) Are self-governed by a board of trustees or ‘managing committee’/ governing council, comprising individuals who generally serve in a fiduciary capacity;
(c) Produce benefits for others, generally outside the membership of the organisation; and
(d) Are ‘non-profit-making’, in as much as they are prohibited from distributing a monetary residual to their own members.
Accounting of non-governmental organizations play a vital role in bringing the underprivileged and least-advantaged to the common stream of the society. With the passage of time, there has been a big increase in their physical as well as financial activities. Their presence has also increased from the national to the international level and the source of funds has also diversified from private donations to international funding agencies. Due to this manifold increase, there is a need for consensus on certain varied accounting as well as legal issues so that a more meaningful financial reporting and disclosure can be made. This would not only make the financial statements of these organizations comparable, but would also provide the user of these statements a bird’s eye view of the activities of such organizations. The succeeding paragraphs deal with some such intricacies, which need consensus.
Accounting of NGOs
Different kinds of Legal Status of an NGO
An NGO can be formed under various legal forms:
1. Trust (Formed under a Trust deed and registered with Income Tax Authority.)
2. Society registered under Societies Registration Act.
3. Limited company incorporated under section 25 of The Companies Act.
Income Tax Benefits for the NGOs Income received by any religious or charitable trust, any other fund or institution established for religious or social purpose is not taxable provided the income is applied for the objects of the organization. However, to get exemption under income tax, it is essential
for NGOs to register themselves with income tax authorities.
Accounting for Grants received by NGOs
NGOs receive grants from government as well as other national and international agencies.
Grants recognized as Income
Most of the NGOs recognize a grant as income in the year in which it is received. The amount expensed out of this amount is shown as expenditure in the Income and Expenditure Account. While the total amount of grant received is shown as income in the Income and Expenditure account, In the absence of any legal authoritative pronouncement and varied interpretation of certain terms under the related laws by the judiciary, it has become a difficult task to follow a uniform line of action in preparation and presentation of the financial statement of an NGO. The practices followed by an NGO on certain issues
are varied and diverse thereby making the financial statements incomparable and difficult for users to understand. The intricacies range from the accounting treatment of certain items of income/expenditure, to the issues under legal laws in force at present. The author is a member of the Institute. in a strict sense grants are not income as they are given not to accumulate but to spend for a particular project or the core activities of the organization.
Grants Recognized as Liability
This is another method of recognition of grants. In correct sense, the grants are money of the donor agencies, which are given to an organization to be spent in a particular manner.This is not the income of the organization, which is freely available for any use. That is why many NGOs recognize grants as liabilities in their balance sheet. The expenditure is deducted directly from the balance of the grant and does not form part of the Income and Expenditure account.
Grants recognized as income only to the extent of the expenditure incurred
Under this method, grants are recognized as income but only to the extent of expenditure incurred out of it. The unspent or overspent balance is shown as liability or assets in the Balance Sheet and in the Income and Expenditure account the unspent balance is deducted from the grant received. This matches the amount of the grant (income) and the expenditure exactly. However, the unspent balance can be deducted from the total grant in the Income and Expenditure account but if there is overspent balance it cannot be added
to the income. The concept of prudence should always be born in mind whenever accounting for such issues is done.
Applicability of Accounting Standards Regarding NGOs
Accounting Standard Board (ASB) has given an opinion in September 1995. The relevant text of the opinion is reproduced below: “The Institute will issue Accounting Standards for use in the presentation of the general purpose financial statements issued to the public by such commercial, industrial or business enterprises as may be specified by the Institute from time to time and subject to the attest function of its members” The reference to commercial, industrial or business enterprises in the aforesaid paragraph is in the context
of the nature of activities carried on by an enterprise rather than with reference to its objects. It is quite possible that an enterprise has charitable objects but it carries on, either wholly or in part, activities of a commercial industrial or business nature in furtherance of its objects. The Board believes that Accounting Standards apply in respect of commercial, industrial or business activities of any enterprise, irrespective of whether it is profit oriented
or is established for charitable or religious purpose. As, will not, however, apply to those activities, which are not of a commercial, industrial or business nature. (E.g. an activity of collecting donations and giving them to flood affected people).
It is clear from the above that the Accounting Standards are applicable to NGOs whose some, or more, of the activities are commercial or business in nature. However, it is very difficult to determine what the exact meaning of commercial is or business activities with reference to NGOs. NGOs are not meant for earning profit out of their activities. Even if profit is derived from some of the activities the profit is ploughed back or returned to the beneficiaries.
DEPRECIATION: Tax authorities are reluctant to allow depreciation as deduction from the income of NGOs on the grounds that when capital expenditure is itself allowed as ‘application’ of income for the purposes of section 11 then allowing depreciation will amount to a double deduction.
INCOME: What constitutes income for the Income tax purposes has been a matter of controversy since the inception of the definition of ‘income’ under the Income Tax Act. Section 2(24)(ii)(a) of the Income Tax Act, 1961 defines ‘income’. It provides that ‘income’ includes voluntary contributions received by charitable or religious trusts or such institutions, scientific research associations or sports associations. Voluntary contribution received by funds or trusts or institutions is exempted under section 10(23C)(iv) and 10(23C)(v) also constitutes income of such fund or trust or institution. Thus, income of
NGOs may be in the form of donations, voluntary contributions from members, subscription fees, capital gains, profit and gains from business carried on by the organization, income from property held under trust and corpus donations. Corpus donations do constitute income for the purposes of section 2(24)(iia) but this section has to be read with section 12 which provides that contributions made with specific directions that they shall form part of corpus of the trust are not included in income of the trust or institution.
Issues Under Foreign Contribution Regulation Act, 1976
The FCRA 1976 was originally focused on political parties and the involvement of foreign funds in Indian elections. It was much later that the focus shifted towards the NGOs. Currently, it is the basic law that governs the foreign funding and its utilization.
Foreign Source
Section 2(e) of the FCRA, 1976 defines the term ‘foreign source’. This is an inclusive definition but not an exhaustive one. There have always been divergent views regarding contributions from certain kind of individuals and agencies. Sometimes, NGOs recover some nominal amount from the individual beneficiaries who are provided certain services, items etc., at a subsidized rate. The reporting of receipt of such money mainly depends upon the funding of the related expenditure on such items, services etc. If the related payment to purchase such items or hire such services is from foreign funds, then such recoveries should be reported as foreign contribution money only and must be reported in FC-3. If the related expenditure has been made out of both Indian
and foreign funds then the recoveries should also be bifurcated into Indian and foreign on the basis of related incurrence of expenditure.
Accounting of Non- Profit Organisations
Registering a Non Profit in India can be done in a total of five ways:
i. Trust
ii. Society
iii. Section-8 Company
iv. Special Licensing
v. Section-25 Company (old companies Act)
Section 2(15) of the Income Tax Act– Which is applicable uniformly throughout the Republic of India – defines ‘charitable purpose’ to include ‘relief of the poor, education, medical relief and the advancement of any other object of general public utility’. A purpose that relates exclusively to religious teaching or worship is not considered as charitable.Thus, in ascertaining whether a purpose is public or private, one has to see if the class to be benefited, or from which the beneficiaries are to be selected, constitute a substantial body of the public. A public charitable purpose has to benefit a sufficiently large section of the public as distinguished from specified individuals. Organizations which lack the public element – such as trusts for the benefit of workmen or employees of a company, however numerous – have not been held to be charitable. Whether a trust, society or section-25 company, the Income Tax Act gives all categories equal treatment, in terms of exempting
their income and granting 80G certificates, whereby donors to non-profit organizations may claim a rebate against donations made. Foreign contributions to non-profits are governed by FC(R)A regulations and the Home Ministry. CAF would like to clarify that this material provides only broad guidelines and it is recommended that legal and or financial experts be consulted before taking any important legal or financial decision or
arriving at any conclusion.Section 25 of the Companies Act, 1956- Section 25 Companies are not for profit companies incorporated and governed by the Companies Act, 1956. According to section 25(1)(a) and (b) of the Indian Companies Act, 1956, a Section 25 Company can be established for ‘promoting commerce, art, science, religion, charity or any other useful object’, provided the profits, if any, or other income is applied for promoting only the objects of the company and no dividend is paid to its members. Thus, for incorporating a
Section 25 Company, the following three conditions must be satisfied: The Company must be formed for promoting commerce, art, science, religion, charity or other useful objects, The Company should apply its profits, if any, or other income in promoting its objects, and the Company is prohibited to make payment of any dividend to its members. For a Section 25 Company, its Memorandum and Articles of Association are the main and guiding instruments. No stamping of memorandum or articles is required for a Section 25 company.
Public Benefit Status
To be eligible for tax-exemption under the Income Tax Act, 1961, a not-for-profit entity must be organized for religious or charitable purposes. Charitable purposes include “relief of the poor, education, medical relief and the advancement of any other object of general public utility.”
Public charitable trusts, by definition, must be created for the benefit of the public. Societies likewise may be registered for charitable purposes. Section 8 companies are formed for the limited purposes of “promoting commerce, art, science, religion, charity or any other useful object.”
Tax Exemptions
1. General Scheme
The Income Tax Act, 1961, which is a national all-India Act, governs tax exemption of not-for-profit entities. Organizations may qualify for tax-exempt status if the following conditions are met:
The organization must be organized for religious or charitable purposes;·
The organization must spend 85% of its income in any financial year (April 1st to· March 31st) on the objects of the organization. The organization has until 12 months following the end of the financial year to comply with this requirement. Surplus income may be accumulated for specific projects for a period ranging from 1 to 5 years; The funds of the organization must be deposited as specified in section 11(5) of the·Income Tax Act;  No part of the income or property of the organization may be used or applied directly·
or indirectly for the benefit of the founder, trustee, relative of the founder or trustee or a person who has contributed in excess of Rs. 50,000 to the organization in a financial year; The organization must timely file its annual income return; and·The income must be applied or accumulated in India. However, trust income may be applied outside India to promote international causes in which India has an interest, without being subject to income tax.
2. Corpus Donations
Corpus donations or donations to endowment are capital contributions and should not be included to compute the total income of the organization.
3. Business Income
Under amendments to Section 11(4A) of the Income Tax Act 1961, a not-for-profit organization is not taxed on income from a business that it operates that is incidental to the attainment of the objects of the not-for-profit organization, provided the entity maintains separate books and accounts with respect to the business. Furthermore, certain activities resulting in profit, such as renting out auditoriums, are not treated as income from a business.
4. Disqualification from Exemption
The following groups are ineligible for tax exemption: all private religious trusts; and charitable trusts or organizations created after April 1, 1962, and established for the benefit of any particular religious community or caste. But note that a trust or organization established for the benefit of “Scheduled Castes, backward classes, Scheduled Tribes or women and children” is an exception; such a trust or organization is not disqualified, and
its income is exempt from taxation.