Whenever the total income of a charity trust or NGO exceeds the amount exempt from tax exempt, a certified chartered accountant has to audit the organisation’s books under Section 12A (1) (b) of the Income Tax Act of 1961. The income tax office has to receive the audit report combined with the trust or NGO’s income tax return.
The audit of trust or trust audit is to persuade the assessing officer that the privilege/exemption claim under Section 11 is legitimate. It’s even to make sure the trust meets specific standards developed by law or regulation. The accountant needs to generate an accurate and fair balance sheet and profit & loss. He shall evaluate if the institution complies with the Act by maintaining books of accounts, data and returns from members along with other documents. Let us understand these concepts and also answer if audit of trust is compulsory or voluntary in India.
Why is Audit of Trust or NGO Required?
Charitable trust audit or NGO audit pertains to specific criteria given in the Income Tax Act. According to Section 12A(1)(b) of the Income Tax Act, these are the criteria given below:
1. Audit Threshold:
An audit is mandated if the total income of the charitable organisation for the relevant year exceeds the maximum amount not subject to income tax.
2. Audit Exemption:
If the organisation’s total income, before considering the provisions of the Act, does not surpass this maximum exempt amount, an audit is not required.
3. Inclusion of Corpus Contributions:
For calculating the ceiling limit of the non-taxable amount under Section 12A(1)(b), contributions or grants directed towards the organisation’s corpus must be added.
4. Exclusion of Certain Income Exemptions:
Income exemptions under Section 10, such as dividends, should not combine to exceed the non-taxable maximum amount.
5. Unforeseen Situations:
In certain cases, even if the ‘total income’ crosses the maximum limit, due to specific incidents like unforeseen misapplications of investments under Section 11(2)(b), the audited reports can be submitted with corrected returns.
6. Deductions for Donations:
Donations collected by organisations exempt under sections 11, 12, Clause (23), Clause (23AA), or Clause (23C) of Section 10 qualify for deduction under Section 80G. This deduction needs approval by the Commissioner of Income tax or Director-general (exemptions) under Section 80G(5)(vi).
7. Accountant’s Role in Audit of Charitable Trust or NGO:
The primary duty of the accountant is to conduct the audit of a Charitable Trust as per Section 12A. However, no obligation exists for the accountant to validate compliance under other laws.
8. Additional Requirements:
Apart from the conditions in Section 12A(1)(b), there are other essential requirements. Section 12A(1)(a) deals with registration requirements, necessitating trust registration applications in Form No.10A, as per Rule 17A.
Meaning of Audit Report Under Form 10B and 10BB
When conducting an audit of trust or NGO, the auditor is required to review and consider specific documents that address essential particulars as given in the specified annexure forms, such as Form 10B and 10BB. These documents provide critical information relevant to the assessment of a trust’s financial activities and compliance with relevant regulations.
Form 10B Audit Report
Form 10B would be the audit report that charitable or religious trusts should submit to determine if they qualify for tax exemptions under Section 11 of the Income tax Act. For this report the auditor should consider the following information and documents for the charitable trust or NGO audit:
- Income & Expenditure Statements : Review the income statements and all accounts of expenditure to examine financial activities.
- Balance Sheet: Examine the trust’s balance sheet.
- Payment & Receipt Reports: Verify all payments and receipts by analysing all reports associated with payments.
- Minutes of Trust Governing Committee Meetings: Examine minutes of meetings of the trust’s governing committee for decisions and actions taken.
- Proof of Paid Income Tax: Verify documents indicating the payment of income tax.
- Income Tax Statements: Examine calculations and statements of income tax for each year.
- Business Reports and Profits/Loss Proof: Review business reports and assess proofs of profits and losses.
- Trust Deed/Byelaws/Memorandum of Articles: Examine multiple copies of legal documents defining the trust’s structure.
Form 10BB Audit Report
Form 10BB is relevant to approval of the trustee’s remuneration in case of charitable or religious trusts. The auditor needs to consider these specifics for this form when doing the audit of charitable trust or NGO:
- Particulars of Remuneration: Assess details of remuneration paid to the trustees.
- Charitable or Religious Purpose: Verify if the remuneration is consistent with the trust’s objectives for charitable or religious activities.
In both cases, the audit reports help ensure compliance with legal requirements and tax exemptions, contributing to transparent financial practices within the trust.
Verifications in the Audit of Charitable Trusts or NGO
In the audit of charitable trust or NGO, verification is a main process where auditors confirm the existence, ownership, valuation, and details of assets and liabilities reported in the financial statements. It ensures the accuracy and reliability of the financial position presented. Given below are the main verifications conducted during the audit of a charitable trust:
1. Verification of Income:
- Income under Sections 11 and 12: Verify the income earned by the trust and classify it into different categories:
- Income with Specific Direction: Voluntary contributions intended to become part of the trust’s corpus with a specific direction.
- Income without Specific Direction: Voluntary contributions not specifically directed to become part of the corpus.
- Profits from Incidental Business Activities: Gains and profits from business activities conducted to fulfil the trust’s objectives.
- Receipts and Capital Gains: Regular receipts and capital gains generated.
2. Expenditure Verification:
Confirm the amount utilised during the year by analysing figures from the income and expense account, balance sheet, receipts, and returns account.
3. Donations to Other Trusts:
Examine donations made to other trusts as per the provisions of section 11(3)(d) of the Income tax Act.
4. Services Provided:
Verify the services provided to the specified class of individuals or beneficiaries, as required by section 12(2).
5. Anonymous Donations:
Examine anonymous donations in accordance with the prescribed particulars set by the Government. Ensure proper documentation and management representation.
Final Thoughts
The audit of trust or NGOs under Section 12A(1)(b) mandates a certified chartered accountant’s involvement when income surpasses tax exempt levels. Audit scrutiny includes assessing option exercises, comparing nonreceipt claims with previous years, and verifying deemed income details for compliance. This process ensures accurate income computation, promoting financial transparency and regulatory adherence in charitable endeavours.
FAQs
1. Why is it important for charitable trusts or NGOs under Section 12A (1) (b)?
The audit under Section 12A (1) (b) is vital for regulatory compliance and financial transparency which validates the trust/NGOs case for tax exemption privileges under Section 11 of the Income tax Act.
2. How does Section 12A (1) (b) affect auditing of charitable trusts or NGOs?
Section 12A (1) (b) requires an audit whenever the total earnings of the charitable trust or NGO surpasses the amount not liable for income tax. The audit procedure needs to consist of verification of income, donations, expenditure, services offered and anonymous donations as per the guidelines provided.
3. Who is charged with auditing NGOs under Section 12A (1) (b)?
In case the organisation’s books are audited by a licensed chartered accountant, the audit has to be performed in case the entire money exceeds the tax exempt limit under Section 12A (1) (b) (ii) (iii) (iii) (iv).
4. What are the key requirements/guidelines for an audit under Section 12A (1) (b)?
The main requirements are reviewing income and expenditure statements, financial statements, payment and receipt reports, governing committee meeting minutes, income tax statements and legal documents including trust deeds/bylaws. The auditor also must verify income sources, expenditure utilisation, donations to various other trusts, services offered and anonymous donations.
5. What are consequences of noncompliance with Section 12A (1) (b) audit requirements for trusts/NGOs?
Non-compliance with audit requirements under Section 12A (1) (b) might lead to the trust/NGO relinquishing its tax exempt status or subject to income tax authorities’ penalties.
