A Note on Non-Profit Organizations in India
In India non profit / public charitable organizations can be registered as trusts, societies, or a private limited non profit company under section-25 companies.
Non-profit organizations in India:
(a) Exist independently of the state;
(b) are self-governed by a board of trustees or ?managing committee?/ governing council, comprising individuals who generally serve in a fiduciary capacity;
(c) produce benefits for others, generally outside the membership of the organization;
(d), are ?non-profit-making?, in as much as they are prohibited from distributing a monetary residual to their own members.
Regulatory Bodies: At the state level, these agencies include the Charity Commissioner (for trusts), the Registrar of Societies (referred to in some states by different titles, including the Registrar of Joint Stock Companies), and the Registrar of Companies (for section 25 companies). At the national or federal level, the regulatory bodies include the income tax department and Ministry of Home Affairs (only for not-for-profit organizations receiving foreign contributions).
Section 2(15) of the Income Tax Act which is applicable uniformly throughout the Republic of India ? defines charitable purpose? to include relief of the poor, education, medical relief and the advancement of any other object of general public utility?. A purpose that relates exclusively to religious teaching or worship is not considered as charitable. Thus, in ascertaining whether a purpose is public or private, one has to see if the class to be benefited, or from which the beneficiaries are to be selected, constitute a substantial body of the public. A public charitable purpose has to benefit a sufficiently large section of the public as distinguished from specified individuals. Organizations which lack the public element ? such as trusts for the benefit of workmen or employees of a company, however numerous ? have not been held to be charitable. As long as the beneficiaries of the organization comprise an uncertain and fluctuating body of the public answering a particular description, the fact that the beneficiaries may belong to a certain religious faith, or a sect of persons of a certain religious persuasion, would not affect the organization’s public character.
Whether a trust, society or section-25 company, the Income Tax Act gives all categories equal treatment, in terms of exempting their income and granting 80G certificates, whereby donors to non-profit organizations may claim a rebate against donations made. Foreign contributions to non-profits are governed by FC(R)A regulations and the Home Ministry. CAF would like to clarify that this material provides only broad guidelines and it is recommended that legal and or financial experts be consulted before taking any important legal or financial decision or arriving at any conclusion.
Formation and Registration of a Non -Profit organizations in India
I. Trusts: A public charitable trust is usually floated when there is property involved, especially in terms of land and building.
Legislation : Different states in India have different Trusts Acts in force, which govern the trusts in the state; in the absence of a Trusts Act in any particular state or territory the general principles of the Indian Trusts Act 1882 are applied.
Main Instrument : The main instrument of any public charitable trust is the trust deed, wherein the aims and objects and mode of management (of the trust) should be enshrined. In every trust deed, the minimum and maximum number of trustees has to be specified. The trust deed should clearly spell out the aims and objects of the trust, how the trust should be managed, how other trustees may be appointed or removed, etc. The trust deed should be signed by both the settlor/s and trustee/s in the presence of two witnesses. The trust deed should be executed on non-judicial stamp paper, the value of which would depend on the valuation of the trust property.
Trustees: A trust needs a minimum of two trustees; there is no upper limit to the number of trustees. The Board of Management comprises the trustees.
Application for Registration: The application for registration should be made to the official having jurisdiction over the region in which the trust is sought to be registered.? ?After providing details (in the form) regarding designation by which the public trust shall be known, names of trustees, mode of succession, etc., the applicant has to affix a court fee stamp? to the form and pay a very nominal registration fee. The application form should be signed by the applicant before the regional officer or superintendent of the regional office of the charity commissioner or a notary. The application form should be submitted, together with a copy of the trust deed. Two other documents which should be submitted at the time of making an application for registration are affidavit and consent letter.
II. Society: According to section 20 of the Societies Registration Act, 1860, the following societies can be registered under the Act: ?charitable societies, military orphan funds or societies established at the several presidencies of India, societies established for the promotion of science, literature, education or the fine arts, for instruction, the diffusion of useful knowledge, the diffusion of political education, the foundation or maintenance of libraries or reading rooms for general use among the members or open to the public, or public museums and galleries of paintings and other works of art, collection of natural history, mechanical and philosophical inventions, instruments or designs.?
Legislation : Societies are registered under the Societies Registration Act, 1860, which is a federal act. In certain states, which have a charity commissioner, the society must not only be registered under the Societies Registration Act, but also, additionally, under the Bombay Public Trusts Act.??
Main Instrument: The main instrument of any society is the memorandum of association and rules and regulations, wherein the aims and objects and mode of management (of the society) should be enshrined.
Trustees :?A Society needs a minimum of seven managing committee members; there is no upper limit to the number managing committee members. The Board of Management is in the form of a governing body or council or a managing or executive committee
Application for Registration: Registration can be done either at the state level (i.e., in the office of the Registrar of Societies) or at the district level (in the office of the District Magistrate or the local office of the Registrar of Societies).??The procedure varies from state to state. However generally the application should be submitted together with:
- (a) memorandum of association and rules and regulations;
- (b) consent letters of all the members of the managing committee;
- (c) authority letter duly signed by all the members of the managing committee;
- (d) an affidavit sworn by the president or secretary of the society
- (e) a declaration by the members of the managing committee that the funds of the society will be used only for the purpose of furthering the aims and objects of the society. ??All the aforesaid documents, which are required for the application for registration, should be submitted in duplicate, together with the required registration fee. Unlike the trust deed, the memorandum of association and rules and regulations need not be executed on stamp paper.
III. Section-25 Company?: According to section 25(1)(a) and (b) of the Indian Companies Act, 1956, a section-25 company can be established ?for promoting commerce, art, science, religion, charity or any other useful object?, provided the profits, if any, or other income is applied for promoting only the objects of the company and no dividend is paid to its members.
- Legislation :?Section-25 companies are registered under section-25 of the Indian Companies Act. 1956.
- Main Instrument :?For a section-25 company, the main instrument is a Memorandum and articles of association (no stamp paper required)
- Trustees :?A section-25 Company needs a minimum of three trustees; there is no upper limit to the number of trustees. The Board of Management is in the form of a Board of directors or managing committee. ??
Application for Registration 😕
1. An application has to be made for availability of name to the registrar of companies, which must be made in the prescribed form no. 1A,
2.Once the availability of name is confirmed, an application should be made in writing to the regional director of the company law board. The application should be accompanied by the following documents: ?Three printed or typewritten copies of the memorandum and articles of association of the proposed company, duly signed by all the promoters with full name, address and occupation. A declaration by an advocate or a chartered accountant that the memorandum and articles of association have been drawn up in conformity with the provisions of the Act and that all the requirements of the Act and the rules made there under have been duly complied with, in respect of registration or matters incidental or supplementary thereto. Three copies of a list of the names, addresses and occupations of the promoters (and where a firm is a promoter, of each partner in the firm), as well as of the members of the proposed board of directors, together with the names of companies, associations and other institutions in which such promoters, partners and members of the proposed board of directors are directors or hold responsible positions, if any, with description of the positions so held. ??A statement showing in detail the assets (with the estimated values thereof) and the liabilities of the association, as on the date of the application or within seven days of that date. ?An estimate of the future annual income and expenditure of the proposed company, specifying the sources of the income and the objects of the expenditure. ??A statement giving a brief description of the work, if any, already done by the association and of the work proposed to be done by it after registration, in pursuance of section-25. ??A statement specifying briefly the grounds on which the application is made. ??A declaration by each of the persons making the application that he/she is of sound mind, not an undischarged insolvent, not convicted by a court for any offence and does not stand disqualified under section 203 of the Companies Act 1956, for appointment as a director.
3. The applicants must also furnish to the registrar of companies (of the state in which the registered office of the proposed company is to be, or is situate) a copy of the application and each of the other documents that had been filed before the regional director of the company law board.
4. The applicants should also, within a week from the date of making the application to the regional director of the company law board, publish a notice in the prescribed manner at least once in a newspaper in a principal language of the district in which the registered office of the proposed company is to be situated or is situated and circulating in that district, and at least once in an English newspaper circulating in that district.
5. The regional director may, after considering the objections, if any, received within 30 days from the date of publication of the notice in the newspapers, and after consulting any authority, department or ministry, as he may, in his discretion, decide, determine whether the license should or should not be granted.
6. The regional director may also direct the company to insert in its memorandum, or in its articles, or in both, such conditions of the license as may be specified by him in this behalf. ??
Comparison among Trust, Society and Non profit Company
|Statute/Legislation||Relevant State Trust Act or Bombay Public Trusts Act, 1950||Societies Registration Act, 1860 OR the relevant State Societies Registration Act||Indian Companies Act, 1956|
|Jurisdiction||Deputy Registrar /Charity commissioner||Registrar of (Firms and) societies||Registrar of companies|
|Registration||As trust||As Society||As a company u/s 25 of the Indian Companies Act.|
|Registration Document||Trust deed||Memorandum of association; and Rules and Regulations||Memorandum and articles of association and regulations|
|Stamp Duty||Trust deed to be executed on non-judicial stamp paper, vary from state to state||No stamp paper required for memorandum of association and rules and regulations.||No stamp paper required for memorandum and articles of association.|
|Members Required||Minimum ? two trustees. No upper limit.||Minimum ? seven managing committee members. No upper limit.||Minimum three trustees. No upper limit.|
|Board of Management||Trustees / Board of Trustees||Governing body or council/managing or executive committee||Board of directors/ Managing committee|
|Mode of Succession on Board of Management||Appointment or Election||Appointment or Election by members of the general body||Election by members of the general body|
Societies and Trusts
Societies are similar in character to trusts, although there are a few essential differences.? While only two individuals are required to form a trust, a minimum of seven individuals is required to form a society.? The applicants must register the society with the relevant state Registrar of Societies in order to be eligible for tax-exempt status.? A registration application includes the society?s memorandum of association and rules and regulations.? In general, Indian citizens serve as members of the managing committee or governing council of societies, although there is no prohibition in the Societies Registration Act against non-natural legal persons or foreigners serving in this capacity.
The governance of societies also differs from that of trusts; societies are usually managed by a governing council or managing committee, whereas trusts are governed by their trustees.? Individuals or institutions or both may be members of a society.? The general body of members delegates the management of day-to-day affairs to the managing committee, which is usually elected by the membership.? Members of the general body of the society have voting rights and?can demand the submission of accounts and the annual report of the society for inspection.? Members of the managing committee may hold office for such period of time as may be specified under the bylaws of the society.
Societies, unlike trusts, must annually file a list of the names, addresses and occupations of their managing committee members with the Registrar of Societies.? Furthermore, in a society all property is held in the name of the society, whereas all of the property of a trust legally vests in the trustees.
Unlike trusts, societies may be dissolved.? Dissolution must be approved by at least three-fifths of the society?s members. Upon dissolution, and after settlement of all debts and liabilities, the funds and property of the society may not be distributed among the members of the society.? Rather, the remaining funds and property must be given or transferred to some other society, preferably one with similar objects as the dissolved entity.
Legal title of the property of a public charitable trust vests in the trustees.? Trustees of a public charitable trust may not, however, in any way use trust property or their position for their own interest or private advantage.? Trustees may not enter into agreements in which they may have a personal interest that conflicts or may possibly conflict with the interests of the beneficiaries of the trust (whose interests the trustees are bound to protect).? Trustees may not delegate any of their duties, functions or powers to a co-trustee or any other person, except that trustees may delegate ministerial acts.? In essence, trustees may not delegate authority with respect to duties requiring the exercise of discretion.
Trustees of religious or charitable trusts are charged with discharging their duties with the degree of care that an ordinarily prudent person would exercise with respect to his personal property. Public charitable trusts are highly regulated.? For instance, in many states, purchases or sales of immovable property by a trust or taking a loan must be approved in advance by the Charity Commissioner.
Indian public charitable trusts are generally irrevocable.? If a trust becomes inactive due to the negligence of its trustees, the Charity Commissioner may take steps to revive the trust.? Furthermore, if it becomes too difficult to carry out the objects of a trust, the doctrine of cy pres, meaning ?as near as possible,? may be applied to change the objects of the trust.