Philanthropy has been the part of culture in India, so non-profit organization is part of India fabric. The various forms of such organizations to do philanthropy includes-a trust, societies, Section 8 companies under the new Companies Act, 2013 (“Section 8 Companies”). The various laws that govern these organizations are-Indian Trust Act, 1882 (Public Trust has been excluded from its ambit, which are governed by different Acts mentioned below), regulates the Private Trust and trustees whereas Societies Registration Act 1860 regulates a society and the Companies Act, 2013 regulates the Section 8 Companies. However, the procedural laws alone do not regulate any activity alone but by multiple laws. The article highlights various civil law in India relating to such philanthropic organizations.
1. Laws relating to formation of a Trust
(i) Understanding the Concept of Trust
A trust is a legal entity in which a person or an entity known as Trustee holds a legal title to a certain property known as Trust Corpus or Property. It is created for the purpose of benefit of an individual or an organization and is governed by Trust Agreement and local laws. The entity that creates a trust is called as Settlor. A trust is required to obtain the permanent account number. The document to be executed for formation of trust is known as Trust Deed, which is executed on a non-judicial stamp paper. Minimum two trustees required but there is no upper limit of number of members in trustee. Board of Trustee manages the affairs of trust.
(ii) Public Trust
Trusts are of primarily of two types: Public Trust and Private Trust. The Public Trust is called Religious and Charitable Trust. There is no central law governing Public Trust usually States have Public Trust Acts. Some of the laws governing the Public Trust are as follows:
- The Charitable and Religious Trust Act, 1920
- The Religious Endowments Act, 1890
- Societies Registration Act, 1860
- Bombay Public Trust Act, 1950
- Madras Hindu Religious and Charitable Endowments Act
- Orissa Hindu Religious Endowments Act, 1939
- Bihar Hindu Religious Trust Act, 1951
Whereas the Private Trust as mentioned above are governed by the Indian Trust Act, 1882. Further, the Public Trust is created for class of people unknown generally. Charity Commissioner has jurisdiction over the Trust. Charitable Trust, as against private trust may continue indefinitely. A formal deed is not required for its formation even if immovable property is dedicated. Public Trust requires registration under the Indian Registration Act, 1908 whereas in certain states there are specific legislations for the purpose of registration as mentioned above. At least two trustees are required to register a Public Trust. In general, Indian citizens serve as trustees, although there is no prohibition against non-natural legal persons or foreigners serving in this capacity. A Public Trust can even obtain foreign contribution by registering under section 6 (1) of the Foreign Contribution Regulation Act and as per regulations of the Home Ministry. In Ganesha Devi Rama Devi Charity Trust vs. CIT it was held that if the body of persons, which is not a public body, controls the trust or fund the organization is still a public trust if it serves public. Any property capable of being transfer can be subject matter of trust.
(iii) Private Trust
A Private Trust with movable property need not be registered but a trust with immovable property needs to be registered under the Indian Registration Act, 1908. Person competent to contract alone or on behalf of minor by a minor or by a person on his behalf by permission from the court of original civil jurisdiction can form a private trust.
(iv) Tax laws related to the Trust
Charitable Trusts and Section 8 Companies are eligible for tax exemption under Sections 11, 12, 12A, 12AA and 13 of the Income Tax Act, 1961. Charitable purpose includes relief of the poor, education, medical relief, preservation of environment and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility. There is no prohibition on a charitable trust from carrying on business. However, the income from a business conducted by a charitable trust shall also qualify for tax exemption provided certain criteria’s are fulfilled. In addition, any income of a charitable trust shall not qualify for tax exemption unless the business is incidental to the attainment of the objects of the trust and separate books of account are maintained in respect of such business. For instance, if a charitable trust is established for medical relief, then the manufacturing of medicines, the running of a hospital shall be considered to be a business incidental to the objective of the charitable trust.
Trusts and institutions formed for promotion of scientific research, education, sports, certain professions, khadi and village industries, etc., or as hospitals and notified charitable or religious institutions, are entitled for total exemption from tax under Section 10 of the Income Tax Act. Section 11 lays down that any income, profit or gain derived from property held under trust or other legal obligation wholly for religious and charitable purposes, shall not be included in the total income of the trust or institution in so far as such income is applied or accumulated for application to such purposes.
The following charitable or religious trusts are entitled to exemption under section 11 and section 12 of the Income Tax Act, 1961, on fulfillment of following conditions:
- Trusts created wholly for charitable or religious purposes and applying their income to such purposes in India.
- Trusts created before 1.4.1962 in part only for charitable or religious purposes and applying their income to such purposes in India.
- Trusts created before 1.4.1952 for charitable or religious purposes, authorized by a general or special order of the Board, and applying their income to such purposes outside India.
- Trusts created on or after 1.4.1952, for the charitable purpose of promoting international welfare in which India is interested, authorized by a General or special order of the Board, and applying their income for such purpose outside India.
- Charitable trusts created for the benefit of scheduled castes, tribes, backward classes or women and children.
(iii) Issues in Management of Trust Property or Trustee Appointments
Any trustee without instituting a suit, apply be petition to principal civil court of original jurisdiction for its opinion, advice or direction on any question respecting the management of trust property unless the subject matter of hearing is not possible in summary process. Other than this even for appointment of trustee in case of disqualification or vacancy the court can be approached not by way of petition but otherwise.
2. An NGO as a Section 8 Company under the New Companies Act
A NGOs can be registered as limited company under section 8 of the Company (earlier Section 25 of the Old Companies Act, 1956) for carrying out charitable and promotional activities. It cannot pay any dividends to its members. Section 8 Companies are registered as Private Limited Company. The Section 8 Companies are those, which cannot earn profit but has to spend their earning for achieving the object of their formation. In the case of foreign subscriber to the Company documents i.e. MOA and AOA then there is a for the documents to be consularised before the Indian Embassy in the respective Country. In case the Section 8 Company is a wholly owned subsidiary, a copy of the Board resolution of Holding Company approving the investment in the proposed Indian Company and authorizing a person to sign the incorporation papers on behalf of the company, duly attested by the officer of the Indian Embassy in the foreign country where the registered office is situate is also required to be attached with the papers. A form INC-12 has to be filed with the ROC for the application of license. After receiving license approval from the Central Government, Form INC-7 (Application for Incorporation of a Company) and DIR-12 (For appointment of Directors) has to be filed in order to obtain Certificate of incorporation. Such an NGO is managed through Board of Directors. No stamp papers required for execution of memorandum of association and minimum three members are required for formation of such an NGO.
If a section 8 company gets itself registered under section 80G of the Income Tax Act, 1961 then the person or the organization making a donation to the NGO will get a deduction of 50% from his/its taxable income. The Company has to apply in Form 10G to the Commissioner of Income Tax for such registration. Normally this approval is granted for 2-3 years but can be granted earlier depending upon the situations.
3. Registering a Society
Philanthropy by way of society is most popular but for registering a society, it is essential that at least seven people are required and a Chief Promoter is elected first of the society. The process of formation of a society commences with reservation of name with the registering authority. A bank account is required to be opened in the name of prospective society. The entrance fee and share money has to be deposited with the bank account. The application for registration of society should be accompanied with adoption of rules and regulations and elections of governing body members. Jurisdiction for registration is done on the basis of municipal ward.
Upon registration, Registrar will notify the same in official gazette and the same would be issued certificates of registration.
The disputes relating to the societies can be heard under the Societies Registration Act as well as the Consumer Courts. Section 3 of the Consumer Protection Act, 1986 clearly states that the:
“Act not in derogation of any other law- the provision of this Act shall be in addition to
and not in derogation of the provision of any other law for time being in force.”
Therefore, consumer foras have jurisdiction to try such complaints in view of the above and the decision of the apex court in Secretary, Thirumurgan Cooperative Agriculture Society vs. M. Laila wherein it was held that the Cooperative Societies Act does not oust the jurisdiction of the Consumer Court to decide dispute between members and Cooperative Society.
Further, the Society Registration Act clearly states that if the judgment lies against the person named by the Society then enforcement of such judgment would not lie against the property of such person but against the property of the society. Additionally, in a recent judgment H.R.Singh vs. Vandana Sanjay Pandya it was held that the office bearers couldn’t be held responsible on behalf of their Cooperative Store.
Many organization are doing business as Foundations however, there is nothing like foundation as an entity under the Indian law. There are some NGOs or societies who prefer to call themselves as Foundations.
In 2014 buzz in the news which created much uproar was to create law to grant revenue officials, the power to revoke the registration and tax exemptions of any nongovernment organizations or charitable institutions that run afoul of the country’s complex tax rules on one hand whereas on other hand, there are several organizations like Bachpan Bachao Andolan are doing us all proud. With the growing popularity of these philanthropic organization and their increased role in building a welfare state there is need to address rising concerns of the compliances required by them so that such sanitized NGO’s get whole hearted support of the system.