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UNIT 1 LEGAL PROCEDURES

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Objectives /

After going through this unit, you should be able to understand:

a Trust and Society;
the legal provisions which govern the formation of Trust and society;
+e different ways in which NGO's can be registered; and
the tax reliefs for NGOs.
Structure
1.1 Introduction
1.2 ATrust
1.3 Memorandum of Association and Rules and Regulations of a Society
1.4
1.5
Tax Reliefs for NGOs
Documents Required Under Section 80G
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1.6 Type of Income Entitled for Exemption rn
1.7 Meaning of 'Charitable and Religious Purpose'
1.8 Summary
1.9 Self Assessment Questions
1.10 Further Readings

INTRODUCTION
The constitution of India, has guaranteed to all her citizens besides freedom of
speech, freedom to profess any religion, freedom to form associations ar
societies. A group of persons with common purpose and with intention to
further their vision and mission are allowed to form trusts and societies. These
are formed normally for the purpose of welfare of the people or for
M e r a n c e of arts and cultures. In modern times, the concept of 'trusts' have
gained greater significance mainly due to various tax exemptions attached to
these institutions, A trust is a separate tax entity and a charitable or religious
trust enjoys almost 100% exemption on its income, subject to certain
conditions.

1.2 ATRUST
Section 3 of the Indian Trusts Act, 1882 defines a 'trust' as :

'A trust is an obligation annexed to the ownership of property, and arising out
of a confidence reposed in and accepted by the owner, or declared'and
accepted by him, for the benefit of anot$er, or of another and the owner". ..
The person who reposes or declares thg confidence is called
'author of the trust;
The person who accepts the co dence is called the 'trustee';. ,I
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 The person for whose benefit the confidence is accepted is called the
'beneficiary';
The .subject matter of the trust is called 'trust property' or 'trust money';
The beneficial interest or 'interest' of the beneficiary is his right against
the trustee as owner of the trust property; and
The instrument if any, by which the trust is declared is called the
instrument of trust.
Essential Elements of a Trust
From the definitions of 'trust' noted above and subsequent discussion, the
following elements are essential to for a trust:

The author of the trust,

The trustee,
The beneficiary,
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The trust-property or the subject matter of the trust,

The objects of the trust.
Essential Elements of a Society
The formation and rules and regulations of a society is governed by
respective States Registration of Society's Acts,
A minimum of seven persons are required to form a Society.
Documents pertaining to the society namely, Memorandum of Association
and Rules and Regulations of the Society needs to be registered with the
Registrar of Society ofthe respective States.
What is a Trust Deed?
The instrument by which the trust is declared is called the 'instrument of trust'
or more properly as the 'trust deed'. Since a trust may be declared either by
will or alternatively by agreement, a trust-deed may be in the form of a
testamentary instrument i.e. will or non-testamentary instrument. Certain
trusts may be created even orally i.e. without executing an instrument in
writing. It is however, always advisable to have written trust-deed.

1.3 MEMORANDUM OF ASSOCIATION AND

RULES AND REGULATIONS OF'ASOCIETY
The Memorandum of Association is the main document, which gives the
vision and missiGn of the society. It should specify the name and address of
the society, the objects of the society and the names, addresses and the
occupation of the members of the committee.
In order to carry out the aims and objects of the society, a set of rules is
Registration of a Trust Legal Procedures

A trust can be registered on the following ways:

Registration under the Indian Registration Act;
Registration under Public Trusts Act;
Registration under Societies Registration Act.
Registration under the Company's Act;
Registration under the income-tax Act;
Registration under the Foreign contribution (Regulation Act).
Registration under the Indian Registration Act. It is the Trust Deed or the
will is registered. This deed or will need to be registered with the sub-
registrar of the registration department of the state government.
In certain states, the government has passed Public trust acts. In those
states the trust deed has to be registered under public trust acts.
A charitable societyltrust also can be registered under section 25 of
Companies Act. The application should be made in form 1-A and the
guidelines issued in this regard should be followed.
Charitable religious trusts and societies, claiming exemption under
sections 11 and 12 of the Income-tax Act are required to obtain
registration under the Act. The application for registration should be made
to the Commissioner, within a period of one year from the date of creation
of the trust/institution in Form, No. lOA along with the relevant
documents. -
In order to obtain registration under the Foreign Contribution Regulation
Act, the applicant trust or society has to submit Form FC-8 to the Home
Ministry at New Delhi.

Registration of a Society
With the Memorandum of Association and the Rules & Regulations framed,
the desirous persons should approach the Registrar of Societies, of the State
where they intend to function, purchase properties, Operate bank accounts,
etc. In some States along with the Society registration, a registration with
Charity Commissioner is also required e.g., Maharashtra and Gujarat. The
legal obligations to the Charity Commissioner are many and they need to be
follo\ved very strictly. The charity commissioner may impose penalties on the
Society on violations and has suo-motto powers.
Ethics Formation-of Trust and Society
The trustees and thd members of the society should be above board in their
actions on behalf of the society. They should get involved and take interest in
the welfare of the people for whom they have formed these institutions. It is
enough that they attend only annual meetings and remain as passive members.
They should maintain high ethical standards and not draw any benefits from
these intuitions which are not provided in the statutes. The trustees and
mkdbers should always be conscious of the Aims and Objects for which they
have come together to form these institutions.
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Administration of NGOs
1.4 TAX RELIEF'S FOR NGOs
Income tax was first introduced in India in 1860. In those days income related I
with charitable purposes were totally exempt from tax. Over the years the
Income Tax Act underwent radical changes, basically to ensure that such
exemptions are not misused by unscrupulous elements. Currently, extensive I
exemptions are still available to NGOs but a host of regulatory provisions
have been incorporated in the act, which are to be adhered to, in order to claim
exemptions.
Generally the Trusts and societies are formed for the benefit of the general
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public at large or for benefit of a particular section of people in the society. It
is a well known fact, many trusts and societies are involved in Poverty
alleviation programs, Medical assistance, Education, adult literacy and other
community development programs. Generally they work without any profit
motive and their main focus is to serve the community. Of late some on .
Governmental Organizations are involved in income generating projects to
sustain their development programs. Since these organizations are involved in
development programs, the Government of India has extended various tax
reliefs, in order to support them in their effort to bring in social and economic
transformation m o n g the poor in the country. In this unit we will look at
those tax concessions extended to them.
Tax Exemption for NGOs U/S 11 and 12 of Income Tax Act
Application for Registration
In order to claim exemption. an NGO should make an application to the
Commissioner of Income Tax for registration of the NGO. Such application is
to be made in Form 10A. The following documents are required to be
submitted:
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i) Form 10A
ii) The original instrument under which the NGO is established, or the Bye
Laws & Memorandum of Association evidencing the creation of the NGO
should be enclosed.
iii) Two copies of the Accounts of three previous years should be enclosed.
Where the NGO was not in existence in any of three prior years, copies of
the accounts of lesser number of years may be submitted.
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Time Limit for Making an Application
The application for registration should be made before expiry of one year from
\ the date of creation of the NGO. NGOs which make a delayed application are
allowed exemption' with effect from the 1st day of the financial year in which
1 application is made. However, the Commissioner of Income Tax has the
power to condone the delay in submitting the application.
. The Authority to Whom Application is to be Made
The application is to be submitted under Income Tax - Registration Procedure
to the Commissioner of Income Tax in whose area the NGO is located. I

However,'in respect of the four metropolitan cities of Kolkata, ~hen&i,Delhi

& Murnbai, the applications are to be made to the Director of-Income Tax
(Exemption).
I Trusts Eligible for Exemption UIS 11 & 12 Legsl Procedures

! , "~all*w& charitable or religious trusts are entitled to exemption d s 11 and

, 12, on fulfilment of certain conditions:
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Trusts created wholly for charitable or religious purposes and applying (or
i accumulating) their income to such purposes, in India the expression
"wholly for religious purposes" has been held to mean a religious purpose
i within the meaning of personal law applicable to the assessee.
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(ii) Trusts created before 1.4.1962 in part only for charitable or religious
purposes and applying (or-accumulating) their income to such purposes, in

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India; where trust is partly religious and partly charitable, so long as no
part of the income or corpus can be utilized for a purpose, which is not
either charitable or religious, exemption u/s 11 would be available.
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(ili) 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;
(iv) 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 to such -
purpose outside India, and
(v) Charitable trusts created for the benefit of scheduled castes, tribes,
backward classes or women and children.
Trusts no1 Eligible for Exemption
Following trusts are not eligible for exemption under Section 11 and 12:
(a) A trust for private religious purpose, which ensures no public benefit;
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(b) A charitable trust created or established on or after 1.4.1962 for the

benefit of any particular religious community or case (other than
scheduled castesltribes, backward classes or women and children).
(c) A trust or institution for charitable or religious purposes, if any part of its
income or property is used or applied, or ensures, directly or indirectly for
the benefit of a person specified u/s 13(3) for example the founder of the
trust.
(d) Any charitable or religious trust or institution, which has not invested or
deposited its funds in the modes or forms specified u/s 1 l(5).
Income Tax-Privileges to the Donors
1) Under section 806
Registration Under Section 80G
(a) If an NGO gets itself registered under section 80G then the person or
the organization making a donation to the NGO will get a deduction
of 50% from his/its taxable income. The NGO has to apply in Form
No. 10G as per Annexure - 29 to the Commissioner of Income Tax for
such registration. Normally this approval is granted for 2-3 years.

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Administration of NGOs *
1.5 DOCUMENTS REQUIRED UNDER SECTION

Documents to be filled with Form 10G

The application form should be sent in triplicate to the C o d e s i o n e r of
Income Tax alongwith the following documents :
i) Copy of income tax registration certificate.

ii) Detail of activities since its inception or last three years whichever is less I
iii) Copies of audited accounts of the institutionMG0 since its inception or
last 3 years whichever is less.
Conditions to be fullfilled Under Section 80G
For approval under section 8 0 0 the following conditions are to be fulfilled :
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(i) The NGO should not have any income which are not exempted, such I
business income. If, the NGO has business income then it should
maintain separate books of accounts and should not divert donations
received for the purpose of such business.

(ii) The by laws or objectives of the NGOs should not contain any provision
for spending the income or assets of the NGO for purposes other thm
charitable.

(iii) The NGO is not working for the benefit of particular religious
community or caste.
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(iv) The NGO maintains regular accounts of its receipts and expenditures.

(v) The NGO is properly registered under the Societies Registration Act
1860 or under any law corresponding to that act or is registered under
section 25 of the Companies Act 1956.
Extent of Benefit
There is ceiling limit up-to which the benefit is allowable to the donor. If the
amount of deduction to a charitable organization or trust is more than 10% of
the Gross Total Income computed under the Act (as reduced by income on
which income-tax is not payable under any provision of this Act and by any
amount in respect of which the assessee is entitled to a deduction under any
other provision of this Chapter), then the amount in excess of 10% of Gross
Total Income shall not qualify for deduction under section 80G.

In other words, while computing the. total income of an assessee and for
arriving at the deductible amount under section 80G, first the aggregate of the
sums donated has to be found out. Then 50 per cent of such donations has to
be found out and it should be limited to 10 per cent of the gross total income.
If such amount is more than 10 per cent of the gross total income, the excess
will have to be ignored.
 lllostration of Benefits Under Section 80G Legal Roeedures
The persons or organization who donate under section 80G gets a deduction of
50% fiom their taxable income. Here at times a confusion creeps in, that the
tax advantage under section 8 0 0 is SO%, b1.t actually it is not so. 50% of the
donation made is allowed to be deducted from the taxable income and
consequently tax is calculated:,
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The ultimate benefit will depend on the tax rates applicable to the assessee.
Let US take an illustration. Mr. X an individual and M s . Y Pvt. Ltd., a
Company both give donation of Rs. 1,00,000/- to a NGO called ACTS. The
total income for the year 2003-2004 of both Mr. X and Ms. Y Pvt. Ltd. is Rs.
2,00,000/-. Now assuming that the rates are 30% for the individuals and 40%
for the Companies without any minimum exemption limit. The tax benefit
would be as shown in the Table;

I Mr. X MS.Y
Pvt. Ltd.
(i) Total Incane for the year 200312004 2,00,000.00 2,00,000.00
(ii) Tax payable before Donation
-- . , 60,000.00 80,000.00
(iii) Donation made to charitable organizations 1,00,000.00 1,00,000.00

(iv) Qualifyingamount for deduction 50,000.00 50,000.00

(50% of donation made)

(v) Amount of deduction u/s 80G 20,000.00 20,000.00

(Gross QualifLingAmount subject
to a maximum limit 10% of the Gross
Total Income)

(vi) Taxable Income after deduction 1,80,000.00 1,80,000.00

(vii) Tax payable after Donation 54,000.00 72,000.00
(viii) Tax Benefit U/s 80G (ii)-(v) 6,000.00 8,000.00
Note :The tax rates and mode of computation is not actual.
llnder section 35 AC
(a) As we already know that an NGO can avail income tax exemption by
getting itself registered and complying with certain other formalities, but
such registration doesn't provide any benefit to the persons making
donations. The Income Tax Act has certain provisions which offer tax
benefits to the "donors". All NGOs should avail the advantage of these
provisions to attract potential donors. Section 35AC is one of such
sections.
Registration Under Section 35 AC
(b) The Central Government approves certain NGOs and notifies them as
eligible for project or schemes for the purposes of section 35AC. If an
. NGO succeeds in getting such an approval for its projects then it stands a
very good chance of mobilizing funds from the corporate and the business
sector. Business houses making contribution to such approved projects are
allowed the benefits of deducting such contribution as expenditure.
Administration of NGOs National Committee
The Central Government has constituted a National Committee to identifjl
projects and schemes to be notified under section 35AC, such committee
normally consists of eminent persons. All NGOs are entitled to apply to the
National Committee to get its projects or schemes approved.

Where the Application is to be Made?

The application for approval by the National Committee should be made te
the Secretary, National Committee for Promotion of Social and Economic
Welfare, Dept. of Revenue, Govt. of India,North Block, New Delhi - 110001.

The Application and itsEnclosure

(i) The application is to be made in 2 Sets, written either in Hindi or
English. I

(ii) Details such as name, address and status of applicant, the district] ward
circle where assessedPAN number.

(iii) Audited Balance Sheet, Profit & Loss Account or Income & Expenditure
Account for the latest year and two preceding years.

iv) How is it constituted i.e., whether as a trust, society, etc. supported by

relevant documents like trust deed, rules & regulation, memorandum of
association etc. and registration certificate, if any.

(v) Name and Addresses of the persons managing the affairs of the
association or institution, including those who left the organization but
were managing the affairs of the association or institution during the 3
years preceding the date of application.

(vi) If the association or institution is notified under section 10(23)@) or is

approved for the purposes of s'ection 8 0 9 the particulars of such
approval granted.

(vii) Brief particulars of the activities of the association or institution during 3

years preceding the date of application or since inception if the
association or institution is less than 3 years old.

(viii)~uchother information as the association or institution may like to place

before the National Committee.
Additional Information
(i) Title of project or scheme;
(ii) Date of commencement;
(iii) Duration and the likely date of completion;
(iv) Estimated cost of the project ;
(v) Category or class of persons who are likely to be benefited fiorri fils
project or scheme;
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 (vi) Affirmationthat no benefit from the project or scheme other than Legal Procedures
remuneration or honorarium, will accrue to persons managing the affairs
of the NGO ;
(viii) Such other particulars .as the applicant may place before the National
I Committee.
Certificate to be Isswd to t e o r ,

All approved NGOs are required to issue a certificate to the donor for all
contributions and receipts under section 35AC. Thcertificate is to be
issued in Form 58A.
This certificate will enable the donor to claim exemption from its taxable
income. Further, the NGOs should also send an Annual Report to the
National Committee indicating the progress ofthe work relating to the
project/scheme and the following information in respect of each
contributor :
(i) Name of the contributors and their addresses.
I \ (ii) PAN.
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' (iii) Amount of contributions. .
(iv) The project/scheme for which the contribution is made.
(v) Total amount of contribution received during the year.
(vi) Total cost of the project approved by the National Committee.
(g) Such Annual Report should reach the National Committee by 30th
June, following the financial year in which the amount is received.

1.6 TYPE OF INCOME ENTITLED FOR

EXEMPTION
The following incomes of a charitable or religious trust are exempt ufs 11 or
12:
lncome in the form of voluntary contributions towards the corpus of the
trust,
lncome derived from property held under trust is exempt to the extent it is .
applied to charitable or religious trust. Voluntary conlribution other than
those towards corpus of the trust is also exempt to the extent it is applied
to Charitable or religious purpose. The amount accumulated w set apart
for charitable purposes is also exempt subject to certain conditions.
Income being profits and gains of an eligible business, that is, business
which is incidental to the attainment of the objects of the trust. Separate
books of account has to be maintained for this purpose.
Income being the capital gains arising on transfer of capital asset, where
the sale consideration is utilized in acquisition of another capital asset.
- Generally the lxemption is i00% subject to certain conditions. Only 25%
accumulated income of the previous years allowed with a maximum
period of five years.
Administration of NGOs
1.7 MEANING OF 'CHARITABLE AND
RELIGIOUS PURPOSkT'
The 'Charitable purpose' includes relief of tt,e poqg ~ d ~ a t i omedical
n, relief
and any other object of general public utility. Apurpose must in erder to be 1
charitable, be directed to the benefit of the cormnunity or a section of the
community, as distinguished from an individual or a group of individuals.

The expression 'religious purpose' has not been d~finedunder the Act.
'Religious purposes' are necessarily associated with religion. Reiigious
purp&e includes the advancement, support or propagation of raligiop and its
tenets. The income of a religious trust or institution is entitled to exemption
even though it may be for the benefit of a particular religious community or
caste. The exemption u/s 11 is however confined to public religious trusts
only; any income from the property held under the trust for private religious
purposes which does not ensure for the benefit of the public is not exempt,

1.8 SUMMARY
This unit tries to acquaint you with the legal procedures related to NGOs in
brief. In this unit, different concepts of a trust and a society are discussed. This
is done with an aim to familiarize you with the registration procedures of a
trust and a society. The unit also deals with the tax relief measures of NGBs.

1.9 SELF-ASSESSMENT QUESTIONS

Q 1 . Define a trust and explain its essential elements.
Q2. Differentiate between a trust and a society giving examples.
Q3. Discuss some tax relief measures for NGOs.

1.10 FURTHER READINGS

Mehta.N.V., 2004. Income tax Ready Reckoner, Kuber Publishing

Indian Institute of Development Studies Research & Paining, 1996, Chemsi,

Manoharan. T.N, 2007. "Student b Hand Book on Income Tax Low ",snow
white Publishers, New Delhi.
Garg D.C. etal, 2007. "Income Tax Ready Reckoner " Low and Management
House Publishers, New Delhi.
Indian Trust Act by C.R.Rao.
"Trusts in "Halsburys Laws of England".
Nabhi Kurnar Jain, 2001. Formation & Management o f a Trust, Taj Press,
New Delhi.
Societies Registration Act of 1860.
Renuka Prasad H.S ., 2003. Guidelines for Registration of Society, Nyaaya
Sahitya Prakashana, Bangalore.