law

I. LEGAL CONTEXT
India has evolved a series of legislations which address the field of voluntary non-profit
sector in different ways. In its legal framework since independence, India has followed a
common law borrowed from the British context. Many of the legislations applicable to
this sector of organisations are derived from their British heritage and some of them were
enacted during the period of British Colonial rule (Sen, 1997). The Constitution of India
explicitly recognises a number of rights to freedom. Article 19 gives right "to freedom to
form associations or unions". Various legal provisions prevalent in the country emanate
from the aforesaid Article of the Constitution. The laws relating to this sector, therefore,
are both complex and historically evolved (Mathew, 1994).
In India, there are enabling legal provisions which permit any group wanting to
commence a nonprofit, voluntary or charitable work to organize themselves into a legal
body by registering themselves under a specified Act (or a combination of Acts).
However, these provisions are not mandatory. There exist a vast group of voluntary
bodies which have not registered themselves under any of the available provisions.
Nonetheless, following incorporation as a legal body, the organisation acquires legal
status to sue and/or be sued as a separate and distinct “person” but with no physical
existence. Some of the advantages of incorporation are as follows :
a) Incorporation bestows legal rights to the members to hold property in a common
name. It also enables the nonprofit organization to open bank account(s) against its
registered identity.
b) It means the legal body can sue and be sued in its own name.
c) Any property held by the organisation can pass from one generation of managers to
another without having to pay any transfer fees or taxes and without any cumbersome
documentation.
d) Only incorporated organizations can get benefits of tax-exemptions, and other
benefits.
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e) Registration under the Foreign Contribution Regulation Act (FCRA), 1976 and
Income Tax Act, 1961, is more easily granted if the nonprofit organization is
incorporated.
f) It affords recognition to the nonprofit organization at all forums and before all
authorities.
India has a set of statutory laws governing various types of registered? nonprofit
organizations. Following are some of the main laws :
(i) The Societies Registration Act, 1860 ;
(ii) The Indian Trusts Act, 1882 ;
(iii) The Co-operative Societies Act, 1904 ;
(iv) The Trade Union Act, 1926 ;
(v) Section 25 of the Indian Companies Act, 1956 ;
(vi) Religious Endowments Act, 1863 ;
(vii) The Charitable and Religious Trust Act, 1920 ;
(viii) Wakf Act, 1954 ;
(ix) Mussalman Wakf Act, 1923 ;
(x) Public Wakfs (Extension of Limitation) Act, 1959;
(xi) Public Trusts Act of various states such as the Bombay Public Trusts Act,
Rajasthan Public Trusts Act, etc.
The Societies Registration Act, 1860; the Indian Trusts Act, 1882; and the Section 25 of
the Indian Companies Act, 1956 are the three enactments which seem to fulfill
requirements of nonprofit organizations created for the larger public good. The
Cooperative Societies Act of 1904 and the Indian Trade Union Act of 1926 are created
for the sole benefit of their members and certainly not for the larger public benefit, yet
they too are nonprofit entities in their spirit and operations. The question on bringing
institution registered under these two Acts within the ambit of the non-profit was debated
by the Advisory Committee on the NPS Study constituted by PRIA. The consensus which
emerged was that co-operative institutions were more often then not involved in
production and sales of goods and were distributing profits amongst their members. On
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the other hand, Trade Unions were generally not involved in production of goods for sale
purposes. Therefore, while co-operative institutions should generally be excluded from
the preview of the non-profit sector under warranted otherwise by the circumstances,
Trade Unions need generally be brought within the ambit of the sector. In other word, the
character of each organisation registered under the two Acts in question need to be
examined on case by case basis. The Acts on Wakf focus on the benefit of people
belonging to one community of a particular religion. Other Acts affecting the religious
endowments focus on the religious activities of organizations.
Nonprofit organizations in India may be registered/incorporated under any of the
following five forms (Kandasami, 1994) :
a) Societies Registration Act 1860
b) Public Charitable Trust Act(s) of various States
c) Section 25 of the Indian Companies Act, 1956
d) The Cooperative Societies Act 1904
e) The Trade Union Act, 1904
Brief description of each of the above forms is given below. Section II contains the details
of all the five acts.
a) Registration under the Societies Registration Act, 1860 :
The Societies Registration Act of 1860 is an all India Act but many states, while applying
the Act to themselves, have enacted their own Societies Registration Act. Hence, a
Society can be registered either under the Central Act or the respective State Acts. In
Maharashtra and Gujarat, the Bombay Public Trusts Act, 1950, obliges institutions that
have the nature of Public Trusts to get registered as such under the Act. According to the
Act, all charitable and religious institutions are to be registered as Public Trusts and will
come under the supervision of the Charity Commissioner. Additionally, in the state of
Maharashtra and Gujarat, all institutions registered under the Societies Registration Act,
1860 are also registered under the Bombay Public Trusts Act, 1950, which is obligatory.
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b) Registration as a Public Charitable Trust
For this, a Deed of Trust has to be framed incorporating necessary provisions for
management of affairs and objects of the organization. This Deed has to be registered
with the office of the Charity Commissioner and in the States where such office does not
exist, the Sub-Registrar of the Registration Department of the respective State
Government. Most of the States have used the Bombay Public Trusts Act, 1950 as a
model for enacting similar Acts. The Indian Trust Act, 1882, has limited application to
“private” / “family” entities registered as ‘trusts’ which is outside our purpose in the
present context.
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c) Registration under Section 25 of the Indian Companies Act, 1956
The Indian Companies Act, 1956 is an all India Act, and the States have no authority over
it. Section 25 of this Act provides for granting of license by the Central Government for
formation of ‘non-profit companies’ under the agies of a parent company.? Sub-section 4
of the Section 25 of the Act permits a partnership firm to become a member of such a
company and provides that firms may be member of any association or company
registered under these provisions but on dissolution of the firm the membership of
company or association shall lapse (Kochhar & Jain, 1987).
d) Registration under the Co-operative Societies Act, 1904
Common interests and/or economic interests within the cooperative principles are the
guiding themes behind establishment of cooperatives in the country. In the absence of
proper definition of cooperative principles, arbitrary authority has been vested in the
Registrar of co-operative Societies (a government functionary) to formulate Cooperative
Principles. The Rules lay down a period of time within which the Registrar’s decision to
register a co-operative Society or with-hold its registration shall be communicated to the
applicant. Separate Acts exist in the State of Andhra Pradesh, Assam, Bihar, Gujarat,
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Himachal Pradesh, Jammu & Kashmir, Karnataka, Kerala, Madhya Pradesh, Orissa,
Punjab and Tamil Nadu.
e) Registration under the Indian Trade Union Act, 1926
Under the Act, a ‘trade union’ means any combination, whether temporary or permanent,
formed primarily for the purpose of regulating the relations between workmen and
employer or between workmen and workmen and includes any federation of two or more
Trade Unions. This is a Central Act and its framework guides registration in different
provinces of the country.
II. LEGAL TREATMENT
In this section, detailed analysis of various laws pertaining to voluntary non-profit sector
is presented under different themes.
1. Eligibility
(a) Societies Registration Act, 1860 Number XXI of 1860
The preamble to the Societies Registration Act provides for an explanation of its
rationale. Besides the associations for commercial purposes, other associations for
literary, scientific and charitable purposes may be formed under the Act, in keeping with
the progress of civilization. Since such associations may possess properties, movable and
immovable, owned not by individual members of the association, but in common, there
may arise a dispute between the members themselves or between the members and
outsiders. To deal with such disputes, the association concerned must be recognized by
law as an entity enabling it to sue or be sued. The present Act has come into existence to
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lay down a procedure for registration of such associations or societies in order to give
them the legal status of a corporation or a legal person. Like many other Indian
enactments, this Act has its origin in English law. Apart from its four sections, it has been
framed after the model of the English Literary and Scientific Institutions Act, 1854” (
Malik, 1985).
The Societies Registration Act of 1860 is an all India Act but many States, while applying
the Act to themselves have enacted their own Societies Registration Act. Hence, a Society
can be registered either under the central Act or the respective State Act.
1. Purposes for which a Society can be formed
Section 20 of the principal (central) Act specifically mentions following purposes for
which a Society may be registered under the Act :
(i) Charitable assistance
(ii) Military orphan funds
(iii) Societies established at the General Presidencies of India
(iv) Societies established for promotion of :
• - Science
• - Literature
• - Fine Arts
• - Instruction or diffusion of useful knowledge
• - Diffusion of political education
• - Foundation or maintenance of libraries or reading rooms
• - Public museum and galleries of paintings
• - Works of art
• - Collection of natural history
• - Mechanical and philosophical inventions
• - Instruments
• - Designs.
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Various State governments by their amendments have sought to expand the provisions in
the principal Act by the areas of coverage for formation of societies. Some of the
examples are given below.
State Addition of object(s)
Bihar Agriculture ; Industry
Delhi Promotion of social welfare; Activities conducive to the protection &
improvement of the natural environment (including forests, lakes, rivers,
& wild life)
Gujarat Sports
Haryana Interest or welfare of public; any other object notified as beneficial to
public.
Maharashtra Public or Religious
Pondicherry Dissemination of social & economic education; Interest of welfare of
public or a section of public; Interest of non-trading association; any
other objects beneficial to public
Besides, a few states have enacted independent laws and have covered additional objects
for which a society may be formed. For example,Jammu & Kashmir : Charitable
societies, promotion of science
Madhya Pradesh Societies Registration Act of 1973 provides for social welfare;
promotion of religious or charitable purposes including establishment of funds for welfare
of military orphans, welfare of political sufferers and welfare of the like; and promotion
of gymnastics, As qualifying areas in which the associations can function.
2. Position of registered society : A society registered under this Act is a
corporation and has separate existence apart from its members and can sue and be sued in
its corporate capacity. Like a corporation, a registered society can be a trustee of a
charity.
3. Application of the Act : The Act is applicable not only to societies of public or
charitable nature but it is also applicable to private societies established for the purposes
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defined in the Act. The various provisions in the Act itself make it clear that the Act
applies to all societies formed prior to the commencement of the Act in order to give them
the legal status of a corporation for carrying out the purposes for which they were formed
or were to be formed.
4. Local extent : The Act does not lay down any rule of its application to different
geographical areas of the country. Post-Independence, the Act was extended to all the
merged states under the Union of India by the Merged States (Laws) Act, 1949 (Act No.
LIX of 1949). It was also extended to the States under the Union of India by their
respective Amending Acts (See Annexure I) with certain modifications. However, rules
of the Central Act's application have been framed by only two States viz. Maharashtra
and Uttar Pradesh.
5. Inapplicability to certain States : The Act is not applicable in States (or parts
thereof), which have independent legislations framed by their legislatures. They are :
i. Andhra Pradesh (Telangana Area) Public Societies Registration Act, 1 of 1350F
ii. Jammu & Kashmir Societies Registration Act, 1998 (Samvat)
iii. Madhya Pradesh Societies Registrikaran Adhiniyam, 1973; amended by M.P. Society
Registrikaran (Sansodhan) Adhiniyam, 1976
iv. Mysore Societies Registration Act, 1960
v. Rajasthan Societies Registration Act, 1958; amended as Rajasthan Societies
Registration Act, 1967
vi. Tamil Nadu Societies Registration Act, 1975
vii. West Bengal Societies Registration Act, 1961; as amended by West Bengal Societies
Registration Act, 1964.
6. Scope and purpose : The Act, as its preamble shows, has been enacted to make
provisions for improving the legal conditions of societies established for promotion of
literature, science, or fine arts, or for diffusion of useful knowledge, or of political
education, or for charitable purposes. It embodies the rules for registration of these
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societies. Its preamble has been amended by the Act XXII of 1927 and the words ‘the
diffusion of political education’ have been inserted therein in order to bring within its
ambit the increasing number of societies established for the purpose.
In India, the expression ‘charitable purposes’ was defined for the first time in the
Charitable Endowments Act, 1890 (Act No. VI of 1890). Section 2 of that Act defined
‘charitable purposes’ as including “relief of the poor, education, medical relief and
advancement of any other object of general public utility but not including a purpose
which relates exclusively to religious teaching or worship”. However, it may be noted
that the legal conception of charitable purposes has developed according to the popular
notions in India. It is no doubt true that a precise and complete definition of ‘charity’ in
the legal sense is difficult to frame. It has, however, been held that the most
comprehensive and carefully drawn definition is that “it is a gift to be applied consistently
with existing laws for the benefit of an indefinite number of persons by bringing their
hearts under the influence of education or religion, by relieving their bodies from disease,
suffering or constraint, by assisting them to establish themselves for life or by reacting or
maintaining public buildings or works or otherwise lessening the burdens of
Government” (Rama Swami vs. Aiyaswami, AIR 1960 Mad 467).
A Society formed for charitable purposes is registerable under the Societies Registration
Act, 1860. The essential factor to determine whether it is a charity or not would be
whether there is any private gain by setting up the institution or Society. A Society
formed for the purpose of merely benefiting its own members, though it may be to the
public advantage that its members should be benefited by being educated or having their
aesthetic tastes improved, would not be one for charitable purpose (C.I.T vs. Yorkshire
Agricultural Society, 13 TC 58). However, if the benefit offered to the members is merely
incidental to the promotion of the charitable purpose, the charitable purpose is not
vitiated.
7. Registration Procedures :
A memorandum of association is the charter of a Society. It is a document depicting and
describing the objects of its existence and its operation. It defines the permitted range of
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enterprise. Any seven or more persons associated for any such purpose as is described in
Section 20 of this Act may, by subscribing their names to a memorandum of association,
and filing the same with the Registrar of Joint Stock∗ Companies form themselves into a
society under this Act.
8. Format of Memorandum of Association :
The Memorandum of Association as per the principal Act and Acts passed by various
state governments should contain :
(i) The name and address of the Society;
(ii) The names, addresses, and occupation of the those members subscribing to it;
(iii) The objects of the Society;
(iv) The names, addresses, and occupation of the Governors, Council, Directors,
Committee or other governing body to whom the rules of the Society,
management of its affairs is entrusted;
(v) The names, addresses, and occupation of the seven or more persons subscribing
their names to a memorandum of association. Such persons signatures should be
duly witnessed and attested.
In addition to the memorandum of association, it is mandatory for a Society to file a set of
governing rules and regulations with the Registrar of Societies. Apart from the details as
spelled out in the memorandum, the rules and regulations must contain the following :
a) The manner, criteria, and procedures for enrolling and removing various categories of
members;
b) The rights, obligations, and length of membership for the members;
c) The criteria, manner, and procedures of forming the Governing Body;
d) The manner in which meetings are conducted;
e) The notice period for such meetings;
f) The designation, manner of election, and removal of officers;
∗ [Substitute this term with Inspector General of Registration in Andhra Pradesh;
Registrar of Societies in Assam, Bihar, Uttar Pradesh.]
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g) The powers and rights of members;
h) The procedures for conducting the annual general body meeting and special meetings;
i) Accounts and audit procedures;
j) The manner in which the objectives and rules and regulations of the society can be
changed;
k) Other provisions as required by state acts.
B) TRUSTS
The major laws governing Trusts are “The Indian Trust Act, 1882” and “The Bombay
Public Trusts Act, 1950”
1. The modern Trust grew out of the medieval custom of putting land and other
forms of property together to community? use. For the due constitution of a Trust, it is
necessary that there should be : (i) a property to be made the subject of confidence, (ii) a
person in whom the confidence is reposed, i.e., the trustee, and (iii) a person to be
benefited by the confidence, i.e., cestui que trust.
Trusts may be divided into public and private. The former is constituted for the benefit
either of the public at large or of some considerable portion of it answering a particular
description. Unlike private trusts, they are of a permanent and indefinite character and not
confined to any certain limits prescribed in a settlement. (Sarin, 1992)
The Indian Trust Act, 1882, applies to private trusts and not to public trusts. The Bombay
Public Trusts Act, 1950, is being taken as the model Act for the discussion purpose here.
2. Local Extent: The Indian Trust Act, 1882 extends to the whole of India (except
Jammu and Kashmir and Andaman Islands), but the Central Government may, from time
to time, by notification in the Official Gazette, extend it to (the Andaman & Nicobar
Islands) or to any part thereof. The Act does not affect the Wakf Laws, or the mutual
relations of the members of an undivided family as determined by any customary or
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personal law, or applies to public or private religious or charitable endowments, or to
trusts to distribute prizes taken in war among the captors.
3. State Amending Acts: Several states enacted Trusts Acts, some of them more
independently. The Bombay Public Trusts, 1950, and Rajasthan Public Trusts Act, 1959,
are examples of independent Acts for covering ‘public trusts’ within their respective state
jurisdictions. As we are concerned about entities, which exist for the benefit of the larger
public, we will focus on the public trusts only. This means that we will be discussing the
Bombay Public Trusts Act, 1950 in particular and the Indian Trusts Act, 1882 in general,
where basic principles of ‘Trusts’ and ‘Trustees’ matter.
4. Scope: The law recognizes no purpose to be charitable unless it is of a public
character. The distinction between a public purpose and one which is not public is often
subtle but the general principle is that if the intention of the donor is merely to benefit
specific individuals, the gift is not charitable even though the motive of the gift may be to
relieve poverty or advancing education, etc.
Definition and legal interpretation of the phrase ‘charitable purpose’ remains same
whether the organization is registered as a Society or as a Trust.
5. Registration of a Public Trust
The application for registration shall be made to the Deputy or Assistant Charity
Commissioner of the region or sub-region within the limits of which - (1) the trustee has
an office for the administration of the trust, or (2) the trust property or substantial portion
of the trust property is situated, as the case may be.
The trust is private one if the following conditions are fulfilled :
a) the beneficiaries are ascertained individuals;
b) the grant has been made in favour of an individual and not in favour of a deity;
c) the temple is situated within the campus of the resident;
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d) the revenue records or entries in the survey records suggest the land coming in
possession of an individual person and not in the name of a deity.
6. Registration Procedure :
The application for registration of a public trust shall contain the following particulars:
(i) Particulars of documents creating the trust;
(ii) Particulars other than documents about creation or origin of the trust;
(iii) Objects of the trust;
(iv) Sources of income of the trust;
(v) Particulars of encumbrances, if any, on trust property;
(vi) Particulars of the scheme, if any, relating to the trust;
(vii) Particulars of title deeds pertaining to trust’s property and the names of trustees in
possession thereof.
The following particulars are required for making an application for appointment of
trustees :
(a) The name, occupation and address of the applicant;
(b) The name and description and registration number of the trust and its office
address;
(c) The name and addresses of the Trustees and managers;
(d) The objects of the trust;
(e) The nature of applicant’s interest in the trust;
(f) The cause of action and the nature of relief sought for in the application; and
(g) The list of documents relied on.
The following particulars of the persons proposed for trusteeship shall also be given : (i)
Age, (ii) Education, (iii) Occupation, (iv) Approximate annual income, (v) Whether
trustee of any other trust, and (vi) inter-relations with the present trustees or proposed
trustees, if any.
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(C) Nonprofit Institution under Section 25 of the Indian Company Act, 1956
The registration procedures for companies are elaborate and require the submission of a
printed Memorandum of Association and Articles of Association to the Registrar of
Companies. Such companies can have directors who are also trustees. Directors or
trustees manage the company and can be reimbursed for their management activities, but
cannot accept remuneration or share a profit.
1. Application for license under Section 25 of the Companies Act, 1956
(a) New Associations : Such association should apply to Regional Director, Company
Law Board of the region by a covering letter along with following documents -
(i) Draft Memorandum & Articles of Association of the proposed company in
triplicate;
(ii) List of names, addresses, description and occupation of the promoters;
(iii) List of companies, association and other institutions in which promoters of
applicant company are directors or hold responsible positions, with description of
positions held;
(iv) Copies of accounts, balance sheet and reports on working of association for last
two financial years;
(v) Statement of assets and liabilities;
(vi) A note on works already done by the association and works proposed to be done
after registration u/s 25;
(vii) Grounds in brief, for making application u/s 25; and other documents as required
under the Act and/or as demanded by the Company Law Board.
(b) Companies already registered : Such companies should apply to Regional Director
by a covering letter along with -
(i) Memorandum & Articles of Association;
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(ii) List of names and addresses, description and occupation of Directors, managers or
secretary;
(iii) Profit & loss account, balance sheet, annual report of Board Directors and audit
report of the company for each of last two years;
(iv) Assets and liabilities of the company;
(v) Estimate of expenses and source of income;
(vi) A note on works already done by the association and works proposed to be done
after registration u/s 25;
(vii) Grounds in brief, for making application u/s 25; and other documents as required
under the Act and/or as demanded by the Company Law Board.
The Regional Director grants the license after the scrutiny of the applications and
considering the recommendation of the Registrar made on the application.
2. Privileges and Exemptions
Associations registered u/s 25 of the Companies Act, 1956, enjoy all the privileges of a
limited company. In addition these companies have been exempted from compliance with
certain provisions of the Companies Act 1956, by special or general order of the Central
Government.
(D) Cooperative Societies
1. Registration of Cooperative Societies
Most of the states have enacted their own Cooperative Acts. Yet, there are significant
commonalties among these Acts. The Uttar Pradesh Cooperative Act defines cooperative
principles as follows -
‘Cooperative Principles’shall include
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a) advancement of economic interest of the members in accordance with public morals,
decency and the relevant directive principles of State policy enunciated in the
Constitution of India;
b) regulation and restriction of profit motives;
c) promotion of thrift, mutual aid and self-help;
d) voluntary membership, and
e) democratic constitution of the society.
Common interests and/or economic interests within the cooperative principles are the
guiding themes behind establishment of cooperatives in the country. In the absence of
proper definition of cooperative principles, arbitrary authority has been vested in the
Registrar to formulate Cooperative Principles.
2. Application : For registration, every application should be made on a prescribed
form, duly signed by the applicant along with certain prescribed document. The Rules lay
down a period of time within which the Registrar’s decision to register or not shall be
communicated to the applicant. These are broadly the provisions of the Rules relating to
registration in Andhra Pradesh, Assam, Bihar, Gujarat, Himachal Pradesh, Jammu &
Kashmir, Karnataka, Kerala, Madhya Pradesh, Orissa, Punjab and Tamil Nadu.
The specified matters that include the application for registration of a cooperative society
are -
the name and address of the cooperative society (hence onwards referred to as society);
the area of operation; the objects of the society, the purpose for which its funds are
applicable; the payment, if any, to be made or the interest to be acquired as a condition
for exercising the right of membership; the nature and extent of the liability of the
members for the debts contracted by the society; the circumstances under which
withdrawal from the membership shall be permitted; the procedure to be followed in the
cases of withdrawal, ineligibility or death of members; the privileges, rights and liabilities
of a nominal or associate member; the nature and amount of the share capital, if any, of
the society and where there is a share capital the maximum number of shares which a
single member can hold; the extent and conditions under which the society may receive
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and deposit and raise loans; the entrance and other fees and fines, if any, to be collected
from members; the procedure to be followed in granting loans and extensions and
renewals may be granted to members; the terms on which a society may grant loans to the
employees of the society or to another society; the maximum dividend payable on paid up
share capital to members; the constitution and powers of a representative general body
and the restrictions and conditions subject to which the representative general body may
exercise its powers; the authorization of an officer or officers to sign documents and to
institute and defend suits and other legal proceedings on behalf of the society; the
preparation and submission of the annual statements required by the Registrar and their
publication; and other matters as spelled out in the rules and regulations of the society as
well as required under the state Act.
3. The Madhya Pradesh Cooperative Societies Act, 1960 classifies all cooperative
societies under one or more of the following heads, namely -
• Consumer’s Society
• Farming Society
• Federal Society
• Central Society
• Housing Society
• Marketing Society
• Multipurpose Society
• Producers’ Society
• Processing Society
• Resource Society, and
• General Society.
(E) Trade Union under the Indian Trade Union Act, 1926
1. Origin : The earliest known Trade Unions in India were the Bombay Millhand’s
Association formed in 1890, the Amalgamated Society of Railway Servants of India and
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Burma formed in 1897, Printers’ Union formed in Calcutta in 1905, the Bombay Postal
Union formed in 1907 and the Kamgar Hitwardhak Sabha of Bombay formed in 1910. In
1921, the all India Trade Union pressurized the Central Legislative Assembly to introduce
legislation for the registration and protection of the trade unions. Finally, in 1926, the
Indian Trade Unions Act was enacted and enforced in the country.
Every registered Trade Union is a body corporate and has perpetual succession and a
common seal with power to acquire and hold movable or immovable property and to
contract as well as by the said name shall sue or be sued.
Certain Acts, viz., the Societies Registration Act of 1860, the Cooperative Societies Act
of 1912 and the Companies Act of 1956 are not applicable to any registered Trade Union.
2. Applicability : The Indian Trade unions Act 1926 extends to the whole of India,
excluding Part B states, viz., Jammu and Kashmir.
3. Registration : Any seven or more members of a Trade Union may, by subscribing
their name to the rules of the Trade Union and by otherwise complying with the
provisions of this Act with respect to registration, apply for registration of the Trade
Union under this Act.
4. Application : Every application for registration of a Trade Union shall be made to
the Registrar, and shall be accompanied by a copy of the rules of the Trade Union and a
statement of the following particulars, namely,
a) the names, occupations and addresses of the members making the application;
b) the name of the Trade Union and the address of its head office; and
c) the titles, names, ages, addresses and occupations of the office-bearers of the Trade
Union.
5. Separate Fund : A registered Trade Union may constitute a separate fund, from
contributions separately levied for or made to that fund, from which payments may be
made, for the promotion of the civic and political interests of its members.
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III. INTERNAL GOVERNANCE
Different aspects of internal governance are provided for in different legislations. Since
Society is the most common form of legal incorporation, it has been made the focus of
detailed analysis below.
1. Working and Management of Society
Member of a Society
The principal Act defines a member of a Society as a person who has :
♦ been admitted to the society according to its rules and regulations, and
♦ has paid subscription provided in the rules, and
♦ has signed the roll or list of members of the society, and
♦ has not resigned or been removed in accordance with the rules and regulations of the
society.
Status of a Member
A Society and its members are separate entities. If a wrong is done to the Society, it alone
can assert and vindicate its rights, and its individual members cannot do so. If a wrong is
done to the Society a suit can be brought to redress it, only by persons representing the
Society and not by individual members in their individual capacity.
Admission as Members
No one can claim admission to a Society as a matter of right on payment of prescribed
subscription. The discretion of the governing body is final concerning grant or refusal of
admission to a person.
Rights of Members
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• Right to receive notices;
• Right to vote;
• Resolving disputes;
• Right to receive copies of by-laws, annual accounts, and annual reports.
Members’ Liabilities
• To be sued as stranger;
• Members guilty of offence punishable as stranger;
• Recovery of penalty accruing under Bye-laws;
• For misapplication of Funds.
2. GOVERNING BODY
The governing body of the Society is the ‘brain’ of the society. The principal Act defines
the governing body to be the Governors, Councils, Directors, Committee, Trustees or
other body to whom the management of its affairs is entrusted according to the rules and
regulations of the Society. The definition gives different names to the body by which it
can be known. The main criterion for identifying the governing body is whether the rules
and regulations of the Society have entrusted the management of the affairs of the society
to such body. The entrustment of the management should be complete. The governing
body of the Society is a fluctuating body. Constitution of the governing body is not
affected by the change in its membership. There will always be a governing body to
manage the affairs of the Society whether or not the same has been properly constituted in
terms of the rules and regulations. The criterion in all cases is who is managing the affairs
of the Society.! The property of the Society vests in the governing body and not in the
members of the Society (Kochhar and Jain, 1987).
The members of the Society are separate from the governing body and may not always be
the same. Governing body has been similarly defined in the state Acts of Jammu and
Kashmir, Karnataka, Madhya Pradesh, Rajasthan, Tamil Nadu & West Bengal.
22
There should be at least seven members in any governing body. In Tamil Nadu there
should be at least three members of the governing body.
The members of the governing body are either elected or nominated as the rules and
regulations provide. The term of the governing body members is generally provided in
the rules of the society. In Tamil Nadu the term of office of a member of governing body
can not exceed more than three years through a recent amendment. The members of the
governing body may retire or be expelled if provided in the rules of the Society.
Provisions for supersession of a governing body have been specifically laid down in
Section 33 of the Madhya Pradesh Act.
The members of the governing body are the trustees of the properties of the society. The
property may be movable and immovable both. In the civil or criminal proceedings the
property of the society is described as the property of the governing body of such society.
Many provisions in the principal Act provide the manner in which the society is required
to act and for all purposes it is the governing body, which will act on behalf of the
society. Some of the statutory duties of the governing body are being elaborated here :
(a) Filing of List
The society has to file with the Registrar or such authorities as prescribed in the Act, a list
of the names, addresses, and occupation of the Governors, Council, Directors, Committee
or other Governing Body at that time entrusted with the management of the affairs of the
Society.
(b) Holding of Annual General Meeting
23
Every Society is required to hold its annual general meeting at a time as prescribed in its
rules and regulations. A statement on the society’s activities, statement on income and
expenditure and other information as prescribed in the rules and regulations has to be
presented to the governing body in this annual general meeting. Further, a society may
hold extraordinary general meeting if some special business has to be transacted which
needs immediate attention of the governing body.
(c) Changes in the managing body and the rules of the Society
Subject to mandatory condition of informing the appropriate authority, the Registrar, the
governing body of a Society may bring in changes in the managing body and the rules of
the Society. The Registrar has to be informed whenever a Society wishes to change its
situation! of the registered office.
(d) Registration of Amendments
An amendment of memorandum or bye-laws has to be registered with the Registrar.
(e) Supply of copies to members
A registered Society should supply to its members on application made to the Society
along with fee prescribed in the rules, a copy of -
- its bye-laws,
- the receipt and expenditure account, and
- the balance sheet
3. Powers and Duties of the Registrar of Societies
The Registrar of Societies, a state government appointed official, enforces the provisions
of the principal Act or the corresponding Acts enacted by other States.
24
The Registrar is the authority who supervises the activities of the Societies within his
jurisdiction. Though the principal Act does not define the term “Registrar”, various State
Acts have defined it and its powers and duties. Some of the important powers and duties
of the Registrar are summed up here :
Certification and Inspection of Documents
A Society is registered only when the Registrar is satisfied with all the documents and
other obligations are fulfilled by a society. The Registrar upon verification and
satisfaction issues a certificate stating the legal status of the Society as having been
registered with the Office of the Registrar.
Power to Call for Information
The Registrar is empowered to call from the Society in certain States, information,
explanation or returns relating to person(s) employed by the society, service conditions,
emoluments to the staff, concessions and/or other benefits being given to the staff
(employees); to furnish information which is considered incomplete information;
accounts of income and expenditure, assets and liabilities, and any document required to
be filed by the Society.
Enquiry and Settlement of Disputes
The Registrar may hold an enquiry suo moto or on request of the members of the
governing body of the society into the constitution, working and financial conditions of
the Society. The Registrar in the process of enquiry may look into the society’s books,
accounts, documents, securities, cash and its other properties. The Registrar may ask the
governing body to convene a general meeting of the society for resolving disputes or on
any matter deemed fit for such step by the official. In case the governing body fails to
convene a general meeting, the Registrar has the power to call such a meeting. The
provisions relating to enquiry and settlement of disputes apply to following States only
and appear in: Section 25 of Karnataka Act; Section 32 of Madhya Pradesh Act; and,
Section 35 of Tamil Nadu Act.
25
Cancellation of Registration
The Registrar may cancel the registration of any Society where he is satisfied:
(i) that office of the Society has ceased to be in the State of the registration or change
of office has occurred from the State of registration to any other State, or
(ii) that the activities of the Society are subversive to the objects of the Society, or
(iii) the Society is carrying on any unlawful activities or has allowed any unlawful
activity to be carried on within any premises under the control of the Society, or
(iv) the registered Society has contravened any provisions of the Act or the rules, or
(v) the registered Society is insolvent or must necessarily become so, or
(vi) the business of such Society is conducted fraudulently or not in accordance with
bylaws or the objects specified in the memorandum filed with the Registrar.
The provisions relating to ordering cancellation of society apply to following States only
and appear in: Section 23 of Bihar (amendment) Act, Section 27 of Karnataka Act,
Section 22 of Pondicherry (amendment) Act, Sections 37 & 38 of Tamil Nadu Act,
Section 34 (2) of Madhya Pradesh Act, and, Section 26 of West Bengal Act.
Amendment of Memorandum of Association
The Registrar can order the Society in writing to make amendments in their memorandum
of association or regulations or bylaws of the Society if considers such amendments are
necessary or are desirable in the interest of the Society.
Power to Seize Record
26
The Registrar, if convinced, may seize and take possession of records, books of accounts,
funds, and property of a Society following evidences of fraud, misappropriation of funds,
or any other act contravening any civil and/or criminal law of the land. In case of dispute
between the outgoing members and newly elected/nominated members of the governing
body, the Registrar may intervene by taking possession of the aforesaid items of a Society
and then legally hand over to right and lawful members of the governing body following
resolution of the dispute.
Power to Order Audit
The Registrar may audit or cause to be audited! the accounts of the Society if such audit
is necessary in his opinion.
Appointing Liquidator
The Registrar can appoint a liquidator to wind up the society when the registration of the
Society has been canceled.
4. ACCOUNTS and AUDITS
The principal Act does not provide for maintenance of accounts or their audit in any
manner. State governments have made amendments in the Act which are applicable to the
societies registered in the particular state. Various States have also made provisions for
accounts and audit in various independent Acts enacted.
Maintaining of Accounts
Every society should keep at its registered office proper books of accounts containing
accurate entries in respect of:
a) All sums of money received and the sources thereof and all sums of money expended
by the Society and the objects or purposes for which sums are expended.
27
b) All sales and purchases of goods by the Society.
c) The assets and liabilities of the societies giving true and fair view of the state of
affairs of the Society.
It is suggested to maintain following books of accounts :
i. cash book showing daily receipts and expenditure and the balance at the end of each
day.
ii. receipt book containing forms in duplicate, one of each set, to be issued with details
of money received by the Society and other to serve as counterfoil.
iii. vouchers file containing all vouchers for contingent and other expenditure incurred by
the Society, numbered serially and file chronologically.
iv. ledger showing consolidated and separate accounts of all items of receipts and
expenditure, member-wise as well as item wise.
v. monthly register of receipts and disbursement.
Specific provisions relating to maintaining of accounts appear in Section 5 (a) of Assam
(amendment) Act, Section 12 (D) of Gujarat (amendment) Act, Section 12 of Karnataka
Act, Section 25 of Madhya Pradesh Act, Section 12 (D) of Maharashtra (amendment)
Act, Section 16 of Tamil Nadu Act, Sections 12 & 13 of Travancore Cochin Act, and,
Section 15 of West Bengal Act.
Auditing of Accounts
Every Society should get its account audited once a year by duly qualified auditor and
have a balance sheet prepared by him. The auditor should submit a report showing the
exact state of financial affairs of the Society.
Dissolution of a Society
28
The procedure for dissolving a Society is laid down in Section 13 of the principal Act
1860. The members of the Society have to determine by a 3/5th majority that it shall be
dissolved and they have two options to decide, either it may be dissolved forthwith, or, a
time may be agreed upon when the Society shall stand dissolved.
In the event of dispute arising among the members of the governing body, it may refer the
dispute for adjustment of the affairs of the Society, to the Principal Court of Civil
Jurisdiction of the District in which the chief building of the Society is situated.
Dissolution of the Society by the Registrar
The principal Act does not provide for dissolution of Societies by the Registrar. Various
States have made provisions in the principal Act for dissolution of the Societies by the
Registrar under certain circumstances such as :
I. that office of the Society has ceased to be in the State of the registration or change
of office has occurred from the State of registration to any other State, or
II. that the activities of the Society are subversive to the objects of the Society, or
III. the Society is carrying on any unlawful activities or has allowed any unlawful
activity to be carried on within any premises under the control of the Society, or
IV. the registered Society has contravened any provisions of the Act or the rules, or
V. the registered Society is insolvent.
Consequence of Dissolution
Dissolution of the societies results in cessation of their activities. The principal Act
provides that if any property remains surplus after the satisfaction of all the debts and
liabilities of the society, it cannot be paid to or distributed among the members of the
society or any one of them. The members by 3/5th majority may determine for giving the
surplus properties to some other society. Any dispute regarding disposal of surplus
property may be referred to the Principal Court of Civil Jurisdiction of the District.
29
Implications
Among the various legal provisions mentioned above, the most commonly used
provisions for organisations in this sector are Society and Trust. The incorporation of
these organisations does not automatically grant them a tax exempt status. As can be seen
from the above, co-operatives and trade unions are incorporated separately and have
distinct identity. The description of the purpose for Trust, in particular public Trust, as
well as Societies is pretty broad and inclusive. At the time of legal incorporation,
statement of intent of that purpose is adequate. However, in determining non-profit
status, as will be analysed in later section, more stringent criteria are applied.
In case of Society, a minimum of seven persons can constitute an organisation and apply
for its legal incorporation. In case of a Trust, a minimum of two persons is enough for
this purpose. There is no limit of minimum endowment prescribed in the law. In terms
of registration procedure, there are several infirmities that have come about. They are
largely due to the bureaucratic, rigid and out-dated system of administration followed by
various registration authorities. For example, the Delhi Society registrar’s office cannot
adequately answer the question if a Society by the same name has been incorporated
before, because their record keeping is manual, out-dated and archaic. In such
situations, corruption, inefficiency and harassment have become an order of the day. As
a result, there is an increasing tendency to prefer a Trust for legal incorporation for a nonprofit
organisation, since this requires only preparation and registration of the deed, and
does not require permission from the registrar’s office.
In a sense, the general administrative culture and efficiency affect the speed of legal
incorporation of these organisation in different parts of the country. Other laws of
incorporation of organisations of non-profit variety also provide for some mechanisms of
establishing the rights and obligations of members as well as the procedure for the
internal governance. The Trust as a form of incorporation is very flexible and the trust
deed is expected to describe the manner of internal governance. In most cases, these
ideas are similar to the one's relevant for the internal governance of the Society. Cooperative
Acts of different states specify in detail various dimensions of internal
30
governance which have to be adhered to. Likewise, the Companies Act provides for
requirements of governors, directors and members. The Trade Union Act has model bylaws
which are followed. In the context of the Indian scenario, above mentioned aspects
of internal governance are generally more widely applicable. As can be seen from above,
several state governments have incorporated much more restrictive provisions than the
original Society Registration Act 1860 had intended. In respect of public trust, their
exists greater flexibility in developing internally relevant norms and procedures for
governance.
31
IV. TAX EXEMPTIONS
Indian Income Tax Act, 1961 provides various exemptions from taxation on income of
the nonprofit organizations. Various sections of the Income Tax Act, 1961 providing such
exemptions are being dealt with here. It is important to note here that the Act classifies
such registered societies as “association of persons” and thus, the procedures and rates of
taxation are same as applicable in the case of individual assesses.
1. Income of a Society (society/trust/Section 25 company) : The income of a society
may include :
i. Subscription from members;
ii. Donations or voluntary contributions from members or others, other than corpus
donation;
iii. Income from the trust property of the Society;
iv. Return on investments;
v. Sale of goods produced by beneficiaries; and
vi. Any other source (from within the country or from outside the country sources).
2. Section 139 (4A) of the Income Tax Act 1961, provides that any person in receipt
of income from property held under trust or any other legal obligation wholly for
charitable or religious purposes or in part only for such purposes or, in case of income
being voluntary contributions referred to in Section 2 (24) shall, if the total income in
respect of which he is assessable as a representative assessee, exceeds the maximum
amount which is not chargeable to income tax, furnish a return of such income of the
previous year in the prescribed form and verified in the prescribed manner. The total
income for this purpose has to be computed under the Income Tax Act without giving
effect to the provisions of Sections 11 and 12. The return has to be submitted in Form 3A
by the 31st October of the assessment Year. It is to be noted that, where charitable/
religious trusts/institutions do not file a return of income, they become liable to payment
of tax under specific provisions of the Act. Audit Report is also required to be filed in
Form No. 10B.
32
3. Section 10 through 13 of the Income Tax Act of 1961 define organizations
eligible for tax-exempt status generally as “religious and charitable” organizations.
These religious and charitable organizations fall into two groups: (1) organizations that
are totally exempt from taxation due to their nonprofit status, and (2) organizations that
can acquire income tax exemptions if they satisfy certain requirements. The first group
includes:
(i) Scientific and research organizations
(ii) Universities, colleges or other educational institutions pursuing exclusively
educational purposes
(iii) Hospitals or medical institutes that are not profit making and exist solely for
the provision of medical care to suffering persons
(iv) Organizations exclusively promoting sport like cricket, hockey, football, etc.
(v) Organizations existing solely for the protection or encouragement of khadi
and village industries registered with the Khadi and Village Industries
Commission (KVIC).
These organizations are fully exempt from income tax as long as they continuously
pursue their objectives and apply all of their income to these objects.
4. Application of Income by Charitable / Religious Trusts
The Income Tax Act 1961 provides exemptions to registered societies (whether under the
Societies Registration Act, or under the Public Trusts Act or Section 25 of the Indian
Companies Act) which are created and operate for ‘charitable and/or religious purposes’.
From the view of the Income Tax Act (as amended by the Finance Act of 1983), Section
2 (15), charitable purposes includes ‘relief of the poor, education, medical relief and
advancement of any other object of public utility’.
(i) Relief of the Poor: The relief, in order to be charitable, may not be given in the
form of free doles or alms to the poor. It may be in the form of payment of wages for the
specific work given to them mainly with a view to relieving their poverty. While passing
a judgement, Justice Herman (in Baddly vs. CIT) defined relief as : “Relief seems to
33
connote need of some sort either the need for a home or for the means to provide for some
necessity or quasi-necessity and not merely amusement, however healthy it is”.
(ii) Education: Education includes advancement of technical education. Property
held by a body corporate or incorporated for the promotion of education, literature,
science or the fine arts is technically held as a charitable trust.
(iii) Medical Relief: Medical relief presumes aid for the sick. It means treatment of
persons suffering from illness and requiring medical attention or rehabilitation. Medical
relief must be public in character and for the general public or a section of it. It should be
for philanthropic purpose and not for purposes of profit.
(iv) Any Other Object of General Public Utility: The expression “object of general
public utility” in Section 2 (15) would prima facie include all objects which promote the
welfare of the general public. It cannot be said that a purpose would cease to be charitable
even if public welfare were intended to be served. If the primary purpose were
advancement of objects of general public utility, it would remain charitable even if an
incidental entry results into the political domain for achieving that purpose of
contemplated.!
5. Others who may get tax exemptions under certain provisions of the Income Tax
Act 1961 are being enumerated here in reference to specific clauses/sections of the Act.
Section 10: Various organizations are exempted from taxation under this section which
prescribes specified charitable institutions whose income is exempt completely and they
are also not required to comply with certain procedural formalities like registration with
Commissioner of Income Tax (CIT), spending of income, investment in certain specified
modes of investment etc.
Section 10 (21): Scientific Research Associations: In the case of Scientific Research
Associations, their income is totally exempt in respect of the assessment years for which
approval under Section 35 (1) (ii) is accorded. This section defines a Scientific Research
34
association, ‘which would have, as its object, undertaking of scientific research, i.e.,
scientific research should be its sole or principal object.
Section 10 (22): Educational Institutions: According to sub-section 22 of Section 10,
income of university or any other educational institutions which exist solely for education
purposes and not for the purposes of the profit, would be exempt from tax.1
Section 10 (22 A): Income of Medical Institutions: This sub-section exempts any
income of a hospital or other institution established for the reception and treatment of
persons suffering from illness or mental defectiveness or for the reception and treatment
of persons during convalescence or persons requiring medical attention or rehabilitation,
existing solely for philanthropic purposes and not for purposes of profit.2
Section 10 (23): Sports Associations: This section exempts income of an association or
institution established in India which has its object, control, regulation, supervision or
encouragement of games and sports in India.
Section 10 (23 A): Income of Professional Associations: Income of a professional
association is partly exempt under this section. Whereas, income chargeable under the
heads, interest on securities, income from house property and income by way of interest
from investment and any income received for rendering specific services, is liable to
income tax.
Section 10 (23 B): Institutions for the Development of Khadi Village Industries:
Under this section of the Income Tax Act 1961, income derived by institutions existing
solely for the development of khadi or village industries and not for the purpose of profit,
under direct supervision and control of the Khadi & Village Industries Commission
(KVIC) is exempt from income tax.
1 Repealed with effect from 1 April 1999.
2 Repealed with effect from 1 April 1999.
35
6. Tax Exemption to Religious Institutions: The Income Tax Act 1961 is also
applicable in the same manner to religious institutions as to developmental organizations
as it includes in the charitable ambit religious purposes also.
(a) Religious Purposes
The expressions ‘religious purposes’ and ‘charitable purposes’ carry similar meanings for
the taxation purposes when both terms are used to signify their objects for public or for a
section of the public. Any society/trust while carrying out its objects for religious or
charitable purposes (for the public or a portion of the public) is entitled for tax
exemptions provided it satisfies other requirements mentioned under the Income Tax Act
1961.
(b) Religious and Charitable Endowments
A religious endowment is one, which has for its object the establishment, maintenance, or
worship of an idol or deity, or any object or purpose subservient to religion. A religious
endowment may be public or private. A public religious endowment is dedication of
property for the use or benefit of the public. A private religious endowment is the
dedication of the property for the worship of a family God in which public are not
interested. A charitable endowment is one, which has for its objects the benefit of the
public or of mankind. What is to be noted is that there might be a private trust for
religious purposes, but there can be no private charitable trust.
© Public Temples
A public temple is one where a considerable portion of the public or a section thereof has
a beneficial interest. In respect of public temple, the law is well settled that the !true
beneficiaries of religious endowments are not the idols but the worshippers and that the
purpose of the endowment is the maintenance of that worship for the benefit of the
worshippers.
(d) Wakf
36
Wakf means the permanent dedication of any property by a person professing the
Mussalman (Islamic) faith for any purpose recognized by the Mussalman law as
religious, pious or charitable. Thus, the dedication must be permanent and the subject of
the wakf may be any property. A valid wakf may, therefore, be made not only of
immovable property, but also of movables, such as shares in joint stock companies,
Government promissory notes, and even money.
7. Business Activities of Nonprofit Organization
If a business is held under trust or other legal obligation to apply it income for promotion
of an object of general public utility or it is carried on for the purpose of earning profit to
be utilized exclusively for carrying out such charitable purpose, the non profit
organization can still retain its tax exemption.! Section 11 (4) of the Income Tax Act
deals in the trust property for nonprofit organizations. The first part merely explains that
for the purposes of this section property held under trust ‘includes a business
undertaking’. The second part provides that where the property held under trust is a
“business undertaking”, the Assessing Officer (of the Income Tax Department) shall have
power to determine the income of such undertaking in accordance with the provisions of
the Act and where the income so determined is in excess of the income as shown in the
accounts of the undertakings, such excess shall be deemed to be applied to purposes other
than the charitable or religious purposes.
As a result of the substitution of Section 10 (4A) by the Finance Act, 1991, the provisions
of sections 11 (1) or 11 (2) or 11 (3) or 11 (3A) shall not apply, for and from assessment
year 1992-93, in relation to any income of a trust or an institution, being profit and gains
of business, unless -
(i) The business is incidental to the attainment of the objectives of the trust or
institution, and
(ii) Such trust or institution in respect of such business maintains separate books of
accounts.
37
8. Tax treatment to Voluntary Contributions
Voluntary contributions received by a trust created wholly for charitable or religious
purposes (not being contributions with a specific direction that shall form part of the
corpus of the trust) shall be deemed to be income of the trust subject to exemption u/s 11.
Income in the form of voluntary contribution made with a specific direction that they
shall form part of the corpus of the trust will be excluded from the total income of the
trust u/s 11 (1) (d). Voluntary contributions will be included in the total income of the
trust only if it loses exemptions u/s 11.!! This is consequential to inclusion of voluntary
contributions in the definition of income u/s 2 (24). In order to establish that the
contributions were received with the specific direction that they shall form part of the
corpus of the trust, it is advisable to obtain confirming letters to that effect from the
donors. It may be noted that income by way of voluntary contributions received by
private religious trusts will not be exempt from tax.
Section 80 (G): Donors, whether individuals, associations, companies, etc., are entitled to
a deduction (in computing their total income) if they make a donation to an organization
enjoying exemption u/s 80G of the Income Tax Act. Registration for the purpose of
section 80G, a nonprofit organization that is duly registered with the Income Tax
Department has to apply in Form 10G to the Income Tax authorities. The amount donated
should not, however, exceed 10 % of the donor’s gross total income after subtracting
allowable deductions, other than the deduction u/s 80G for the purpose of tax rebate. 50%
of such contributions is deductible from income of the Donor u/s 80G of the Income Tax
Act 1961.
Section 35 AC : Contribution(s) made to a project or scheme notified as an eligible
project or scheme for the purpose of Section 35 AC of the Income Tax Act entitles the
donor (individual, institution or company) to a 100% deduction of the amount of the
contribution. Unlike the certificate granted u/s 80G (whereby donations made to a
qualifying organization entitles the donor to a 50% deduction), the certificate u/s 35 AC is
not given to any organization as a whole, but only to an eligible and approved project or
to an eligible and approved scheme of an organization. Broadly, any project or scheme for
38
the uplift of the rural poor or urban slum dwellers would be eligible for approval u/s 35
AC.
Section 35 CCA : This sub-section provides deduction of sums paid by an assessee to
any association or institution to be used for carrying out any program of rural
development and/or an association or institution which has its object the training of
persons for implementation of a rural development program.
Section 35 CCB: Sums paid by a taxpayer carrying on a business or profession to any
association or institution which has its object the undertaking of programs of conservation
of natural resources to be used for such programs is allowed as a deduction in the
computation of taxable profits.
9. Other Tax Deductions
The nonprofit organizations have to contend with other dimensions of Income Tax.
a) Deductions of Tax from Salaries U/S 192: Nonprofit organizations are required to
deduct tax at source at amount payable as salaries/other benefits to various
employees, after calculating the tax payable by respective employee for that particular
financial assessment year. Tax so deducted has to be deposited within 7 days of
deduction. Certificates of deduction have to be issued to various employees by 30
April and annual return in Form No. 24 is to be filed every year by 31 May.
b) Deduction of Tax at Source from Contractors and Sub-Contractors U/S 194(C):
Nonprofit organizations are required to deduct tax at source if the total payments
under the contract during the year exceeds Rs. 20,000 (approx. US $ 500) in one year.
10. Modes of Investment by Nonprofit Organizations
Charitable/religious trusts and institutions have to exercise great caution on the
investments of their funds in approved securities and other modes of investment specified
39
under Section 11 (5) of the Income Tax Act 1961. The Finance Acts of 1983 and 1984
have laid down the approved modes of investment of trust funds as under:
(i) Investment in savings certificates and any other securities or certificates issued by
the Central Government under Small Savings Scheme;
(ii) Deposit in any account with the Postal Savings Bank;
(iii) Deposit in any account with the scheduled bank or a co-operative engaged in
carrying on the business of banking;
(iv) Investment in units of the Unit Trust of India;
(v) Investment in any security for money created and issued by the Central
Government or a State Government;
(vi) Investment in debentures issued by any company or corporation whereon the
principal and interest are fully and unconditionally guaranteed by the Central
Government or by a State Government;
(vii) Investment or deposit in any Government Company;
(viii) Deposit with or investment in any bonds issued by a financial corporation which
is engaged in providing long-term finances for industrial development of India;
(ix) Deposit with or investment in any bonds issued by a public company formed and
registered in India with the main object of carrying on the business of providing
long-term finances for construction or purchase of house in India for residential
purposes;
(x) Investment in immovable property; and
(xi) Investment with the Industrial Development Bank of India.
While certain mutual funds have been allowed recently as approved securities, these
restrictions place enormous burden on the flexibility of investment options by a nonprofit
organization in India.
11. Tax Treatment of Foreign Contribution(s)
Any association having a definite cultural, economic, educational, religious or social
program may accept foreign contributions provided they are registered with the Central
Government in accordance with the rules made under the Foreign Contribution
40
(Regulation) Act 1976, and agrees to receive such foreign contributions only through
such one of the branches of a bank as it may specify in its application. Intimation to the
Central Government as to the amount of each foreign contribution received by it, the
source from which and the manner in which such foreign contribution was received and
the purpose for which and manner in which such foreign contribution was utilized by it
must also be given.
Foreign Source includes:
a. The Government of any foreign country or territory and any agency of such
Government;
b. Any International agency, not being the United Nations or any of its specified
agencies, the World Bank, the International Monetary Fund or such other agency as
the Central Government may, by notification in the Official Gazette, specify in this
behalf;
c. A foreign company including multi-national companies;
d. A Corporation, not being a foreign company, incorporated in a foreign country or
territory;
e. A multi-national corporation within the meaning of this Act;
f. A Trade Union in any foreign country or territory whether or not registered in such
foreign country or territory;
g. A Company where more than half of the nominal value of its share capital is held,
either singly or in the aggregate by specified persons in the Act;
h. A foreign trust or a foreign foundation which is either in the nature of trust or is
mainly financed by a foreign country or territory;
i. A Society, club or association of individuals formed or registered outside India; and,
j. A citizen of a foreign country.
Foreign source does not include any foreign institution, which has been permitted by the
Central Government by notification in the Official Gazette, to carry on its activities in
India.
12. Status of International Organizations operating in India
41
International organizations planning to promote philanthropy generally seek permission
from the Reserve Bank of India. In majority of cases foreign foundations wanting to have
a legal presence in India seek permission to open a liaison office or post a representative
in India. Such permissions are granted by the Mumbai based central office of the Reserve
Bank of India (RBI).
The foreign foundations operating from India have also to register themselves with
Department of Economic Affairs, Ministry of Finance, Government of India, in case they
are giving direct grants in India.
13. Forfeiture of tax exemption
The following income of charitable/religious trusts and institutions do not qualify for
exemption under Section 11 :
• Income from property held under trust for private religious purposes which does not
serve the public (or a section of it).
• Income of a charitable trust/institution established on or after April 1, 1962 created for
the benefit of any particular religious community or caste.
• Income of religious/charitable trust/institution created or established after March 31,
1962 which inures,! directly or indirectly, under the rules governing the trust for the
benefit of any person specified in Section 13 (3), i.e., author, founder or substantial
contributor of the trust, any relative of such author, founder, substantial contributor or
any concern in which person has a substantial interest.
• The exemption under Section 11 (1) (a) is available only if at least 75% of the income
is applied for charitable/religious purposes in India during the year and the remaining
amount is invested in forms/modes specified under Section 11 (5). Thus both the
requirements will have to be fulfilled before the trust can claim and avail of the
exemption under Section 11 (1) (a).
• Any charitable/religious trust or institution will forfeit exemption from tax if any
funds are invested or deposited after February 28, 1983 otherwise than in anyone or
42
more of the modes specified above. Trusts and institutions which continue to hold any
shares in a company other than a government company or statutory corporation from
the said date will also forfeit exemption from income tax.
14. Filing of Returns
Every year, the Income Tax Return must be sent to the concerned Income Tax department
by the organization. Under various rules, the organization must follow specified dates for
filing its returns, viz.,
Last date for filing the return is October 31 for the previous year ending March 31.
Return for tax deducted at source :
a) Salaries - May 31 of each year
b) Contracts - June 30 of each year
c) Professional Services - June 30 of each year
d) Rent - June 30 of each year
Organizations, which are registered under either the Trusts Act, the Societies Act or the
Companies Act, need not seek any special permission to raise funds except as provided in
FCRA in case of foreign contributions. It is also important for such organizations to be
registered with the Income Tax authorities in order to claim exemptions as well as to
fulfill various financial obligations spelled out in the Acts and the rules.
43
V. OTHER LAWS
The legal environment in India mandates that all legal entities follow some other laws as
applicable from time to time. Some of these are highlighted here.
1. The Minimum Wages Act 1948 : The Minimum Wages Act 1948 provides the
government prescribed minimum wages be paid to different categories of labour
employed. The Act applies to all nonprofit organizations, trusts, companies, etc.
2. Shops and Establishments Act 1954 : The Shops and Establishment Act is an
Act to amend and consolidate the law relating to the regulation of hours of work, payment
of wages, leave, holidays, terms of service and other conditions of work of persons
employed in shops, commercial establishments, establishments for public entertainment
or amusement and other establishments and to provide certain matters connected
therewith.
Every business establishment whether it be sole-proprietorship, partnership, cooperative
society, private company or public company is required to be registered under the Shops
and Establishments Act, 1954. All shopkeepers and occupiers of establishments carrying
on any business or profession or rendering any service including administrative and
clerical offices are required to be registered under this Act. While the Delhi Shops and
Establishment Act covers all registered Societies and Trusts, the situation is ambiguous in
many other states.
3. The Employees Provident Funds & Miscellaneous Provisions Act 1952 : This
Act provides for the institution of Provident Funds, Family Pension Funds and Deposits
linked Insurance Fund for employees. The Applicability of the Act to different types of
nonprofit organizations is debated, though it includes establishments covered under the
Shops and Establishment Act 1954.
4. The Payment of Gratuity Act 1972 : This Act provide for the payment of
gratuity to employees engaged in factories, mines, oil fields, plantations, ports, railway
companies, shops or other establishments and for matters connected therewith or
44
incidental thereto. This Act is applicable to every shop or establishment in which 10 or
more persons are employed on any day of the preceding twelve months.
5. The Central Sales Tax Act 1956 : The nonprofit organizations, which are
engaged in sale or purchase of goods, are covered under the Central Sales Act 1956. It is
an Act to formulate principles for determining when a sale or purchase of goods takes
place in the course of inter-state trade or commerce outside a state or in the course of
import into or export from India, and to provide for the levy, collection and distribution of
taxes of sales of goods.
45
VI. Implications
The foregoing analysis raises several issues as per the legal and tax treatment.
1. Clearly, the reporting requirements for tax exempt status are far more stringent than
those for legal incorporation. Trusts, except under the jurisdiction of charity
commissioner in Maharashtra and Gujarat, do not have any particular reporting
requirements to any public authority. Society in some states is obligated to provide an
annual return as elaborated earlier. The law does not explicitly require special
fiduciary responsibilities from the directors or trustees in addition to what has been
prescribed. The office-bearers of a Society or a Trust are expected to perform their
functions with much greater care, loyalty and obedience as per the requirements of
common law.
2. With respect to the business activity, as has been clarified above, the income tax
provisions discourage major profit making activities by non-profit organisations.
Only when an activity is seen as "incidental" to the main objects of the organisation
that its profits are tax exempt, provided it is exclusively applied to the same objects.
This provision, therefore, discourages profit making ventures.
3. Other funding restrictions are applicable primarily from the Foreign Contributions
Regulation Act. The Act is administered by Ministry of Home Affairs, department of
internal security. It came about at a time when political emergency was in force in
1976. The provisions of this Act debar political parties, trade unions and their
affiliated mass organisations, elected representatives in state and national legislatures,
judges of various courts, etc. from receiving any foreign contribution. It also
restricts receipt of foreign contributions by 'an organisation of political nature'. Thus
politically active campaign and lobbying activity could be restricted under this Act.
Only in the case of Bombay Public Trust Act 1950, political education is kept outside
the ambit of charitable purposes. As has been elaborated earlier, section 20 of the
Society Registration Act 1860 allows a Society to have its object as diffusion of
political education. Thus organisations which mobilise internal resources and do not
use any international contributions as covered under FCRA 1976 do not face any
restrictions on political activity. Likewise, individuals holding political offices or
46
government offices or other public offices can be part of the governing boards of legal
non-profit organisations in the country.
4. Clearly, Income Tax Act is extremely stringent in laying down conditions and
limitations on the functioning of non-profit organisations. It is this Act and its rules
which also prescribe the manner in which financial operations will be handled and the
quality of financial accounting and statutory audits. The FCRA 1976 also places strict
standards of financial accounting and audit for organisations that receive foreign
contribution (PRIA, 1999). Thus, a host of legal provisions derived from a wide
spectrum of laws are applicable to non-profit voluntary organisations in the country
today (Kandasami, 1994).
VII. TRENDS
During the past two decades, there has been growing debate on the relevance and
adequacy of the legal framework in the Indian context. The debate has centered around
several issues.
1. First issue focuses on the relevance of the legal framework itself. Both Society
Registration Act and Indian Trust Act were historically developed during the British
Colonial rule in the middle of 19th century. They grew out of an extended practice in
Britain. The nature of voluntary non-profit activities have dramatically changed over
the past 150 years. There is a much wider spectrum of actors and associations than
were prevalent in the 19th century. As a result, these two legal statutes are no longer
adequate to provide incorporation to such a wide spectrum of associations of
voluntary non-profit sector (PRIA, 1987; Dadrawala, 1991).
2. The second issue relates to the inadequate system of accountability. This has two
components. First component! relates to public accountability through the regulatory
process. The regulatory machinery in respect of Society and Trust is fairly weak and
out-dated, administration is inefficient, rigid and corrupt. Unlike the Company Law
Board which has been dramatically upgraded and computerised in the 1990’s, Offices
of the Registrars of Society and Trust are archaic and antiquated. Information cannot
47
be easily accessed nor follow be carried out. As a result, there is no mechanism to
check whether regular returns have been filed in time, whether Society and Trust are
fulfilling the obligations required of them by law and proclaimed by them through
their own objects.
The second dimension! of accountability is public accountability of voluntary
associations on their own. This has to do with dissemination of information about
their methods and styles of functioning, their resources and their decision-making
practices. Standards for application of practical behaviour is not very common.
While there was an attempt to impose a code of conduct by government of India in
mid 1980’s, bulk of the voluntary sector has been in favour of self regulation. As a
result, Voluntary Action Network India (VANI) has developed and its membership
has approved, a set of practical standards for the members of VANI (VANI, 1998).
3. A third set! of issues relate to the laws related to exemption from tax. Firstly, the
Indian Income Tax Act discriminates against informal, smaller, less well organised
voluntary associations; it favours national, more formally organised, elite oriented
institutions. As has been explained in this paper, an institution of higher education, a
boarding school, a hospital, Gymkhana club are 'suo-motto' tax exempt. But small
literacy classes, primary health care centres and youth clubs in the neighbourhood
have to file annual returns to attain a tax exempt status. The law also gives enormous
discretionary powers to assessing officers. Given the rigidity, inefficiency and
corruption in the system, these powers are being increasingly abused to harass and
intimidate select organisations in the country.
Another dimension /Secondly! of inadequacy in this act has to do with restrictions
imposed on the ability of non-profit organisations to be self-sustaining. A strict
guideline to invest in government and para government securities restricts the kind of
returns on investment that such organisations can get. Restrictions placed on
business activity and generation of income through market mechanisms also inhibits
the self reliance of such organisations in the long run.
48
4. Another dimension on which tax laws are wanting is in promotion of philanthropic
giving in the country. Existing climate, legal provisions and procedures discourage
contributions of the voluntary nature. This restricts the pool of resources available to
voluntary non-profit organisations in the country. If anything, tax laws seem to
favour government sponsored, government controlled and government certified
associations. This undermines the autonomy and independence of associations, which
is guaranteed by the Indian Constitution.
5. Finally, there are a number of other restrictions which the legal framework today
creates for effective functioning of organisations of this sector. The FCRA 1976 is
perhaps the most irritating, out-moded and intimidating legislation in place in India.
Brought in at the time of political emergency for purposes other than those related to
voluntary action, the implementation of the Act is housed in the Department of
Internal Security, Ministry of Home Affairs, Government of India. In order to receive
foreign contribution, each association must get itself registered with the Ministry.
The process of registration is time-consuming, harassing, humiliating and corrupt.
The process of reporting on receipt also results in harassment and continuous, but
selective, intimidation (VANI, 1997). Organisations which challenge policies,
positions and perspectives of rating elites find themselves intimidated, coerced and
harassed by the authorities set up to monitor the implementation of this Act.
In the context of liberalised economy, in the context of amendments made to FERA, in
the context of unrestricted foreign flow of capital into the economy, continuation of
FCRA is politically motivated, sectarian and purposively intimidating (VANI, 2000).
Efforts made by associations of voluntary organisations to bring the attention of policy
makers and political leaders to these issues have so far yielded perversely. VANI’s own
efforts over the past ten years have made more noise then brought any significant
49
progress (VANI, 1994). Likewise, implementation of other legislation like Provident
Fund Act make it impossible for small, purposive voluntary associations to be able to do
reasonable 'business'. In the Indian context, labour laws created for government and
public sector or large scale private sector corporations are being extended and 'dumped'
on all other kinds of organisations, irrespective of their size and financial viability. In
some sense, the experience of those managing such organisations today suggests that the
legal framework is much more restricting for non-profit sector organisations than for forprofit
organisations. The liberalisation of economy and reforms in 1990’s have created
greater space, flexibility and ease of operation for for-profit organisations, but very little!
has changed for non-profit organisations.
50
Annex I
Societies Registration Laws in India as on 31.12.1998
Sr. No. State 1860 Act (with State
Amendment)
State Act
1. Andhra Pradesh 1860 Act (Coastal and
Rayalseema areas)
Act No. 1 of 1350 Fasli
(1940 AD) - Telangana
Area
2. Arunachal Pradesh 1860 Act -
3. Assam 1860 Act -
4. Bihar 1860 Act -
5. Goa 1860 Act -
6. Gujarat 1860 Act -
7. Haryana 1860 Act -
8. Himachal Pradesh 1860 Act -
9. Jammu & Kashmir - Act No. 6, 1998
10. Karnataka - Act No. 17, 1960*
11. Kerala 1860 Act Act No. 12, 1955*
12. Madhya Pradesh - Act No. 44, 1973*
13. Maharashtra 1860 Act∗ -
14. Manipur 1860 Act -
15. Meghalaya - Act No. 12, 1983*
16. Mizoram 1860 Act -
17. Nagaland 1860 Act -
18. Orissa 1860 Act -
19. Punjab 1860 Act -
20. Rajasthan - Act No. 28, 1958
21. Sikkim 1860 Act -
22. Tamil Nadu - Act No. 27, 1975*
23. Tripura 1860 Act -
24. Uttar Pradesh 1860 Act* -
25. West Bengal - Act No. 26, 1961*
UNION TERRITORIES
1. Andaman Nicobar 1860 Act -
2. Chandigarh 1860 Act -
3. Dadra & Nagar
Haveli
1860 Act -
4. Daman & Diu 1860 Act -
5. Delhi 1860 Act -
6. Lakshadweep 1860 Act -
7. Pondicherry 1860 Act -
Note: The Societies Registration Act (Central Act No. 21 of 1860), with amendments made by
respective State legislatures, is applicable in 16 States and all 7 Union Territories. There are locally
enacted societies registration laws in other 7 States. In the remaining two States, the Central Law
and the State law are applicable for the different parts of those two States.
∗ Rules for the application of the Act have been frame by respective State Legislatures.
51
ANNEXURE IV
State Act
Andhra Pradesh Societies Registration (A.P.) Amendment Act 1954; as reenacted
by A.P. Re-enacting Act, 1956
Assam Societies Registration (First Amendment) Act, 1948
Societies Registration (Second Amendment) Act, 1948
Societies Registration (Third Amendment) Act, 1952
Societies Registration (Fourth Amendment) Act, 1957
Societies Registration (Fifth Amendment) Act, 1958
Assam Act of 1967
Bihar Societies Registration (First Amendment) Act, 1948
Societies Registration (Bihar Amendment) Act, 1951
Societies Registration (Second Amendment) Act, 1956
Societies Registration (Bihar Amendment) Act, 1960
Societies Registration (Bihar Amendment) Act, 1963
Gujarat Societies Registration (Gujarat Amendment) Act, 1965
Societies Registration (Gujarat Amendment) Act, 1978
Himachal Pradesh Modifications in Punjab Act No. XXXI of 1957
H.P. Act VIII of 1965
Kerala Societies Registration (Madras Amendment) Act, 1954
Madhya Pradesh Central Provinces and Berar Vidya Mandir Act, 1940
Maharashtra Societies Registration (First Amendment) Act, 1912
Societies Registration (Second Amendment) Act, 1948
Societies Registration (Third Amendment) Act, 1956
Societies Registration (Extension & Amendment) Act, 1958
Societies Registration (Maharashtra Amendment) Act, 1968
Manipur Modification in Assam Act No. 7 of 1957
Modification in Assam Act No.11 of 1958
Nagaland Societies Registration Nagaland First Amendment Act, 1948
Orissa Societies Registration (Amendment) Act, 1958
Societies Registration (Orissa Amendment) Act, 1969
52
Societies Registration (Orissa Amendment) Act, 1979
Pondicherry Pondicherry Act 9 of 1969
Punjab Societies Registration (First Amendment) Act, 1948
Societies Registration (Second Amendment) Act, 1949
Societies Registration (Third Amendment) Act, 1957
Societies Registration (Punjab Amendment) Act, 1961
Punjab Separation of Judicial and executive functions Act, 1964
Tripura Modification in Assam Act No.7 of 1957
Modification in Assam Act No. 11 of 1958
Union Territory of
Delhi
Modification in Punjab Act No. 31 of 1957
Uttar Pradesh Societies Registration (U. P. Amendment) Act, 1958
Societies Registration (U. P. Amendment) Act, 1975
Societies Registration (U. P. Amendment) Act, 1978
Societies Registration (U. P. Amendment) Act, 1979
Societies Registration (U. P. Amendment) Act, 1984
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Dadrawala, Noshir Paper on 'Legal Overview of the Nonprofit Organizations in India,
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Government of India: Act No. LIX of 1949 - Merged States Act
Government of India: Act No. VI of 1890 - Charitable Endowments Act 1890
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IRMA Cooperative Initiative Panel: State of Cooperation in India, IRMA,
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54