Introduction:
The Central Board of Direct Taxes (CBDT) recently issued notification No. 07/2023, dated 21.02.2023, introducing significant changes to the format of audit reports for trust entities. This notification also amends rule 16CC, which governs the audit report format prescribed under the tenth proviso to s.10(23C), and rule 17B, which applies to audit reports for charitable or religious trusts.
Over time, there have been multiple amendments to the Income Tax Act, 1961, regarding provisions applicable to Charitable and Religious Trusts approved under s.10(23C), registered under s.12AB, and approved under s.80G. Additionally, there have been significant judicial rulings and legal decisions. These developments necessitated amendments to the audit report format for charitable and religious trusts, previously known as Form 10B and 10BB.
Previously, Form 10B applied to trusts or institutions registered under s.12A, while Form 10BB applied to trusts or institutions approved under s.10BB. However, the focus has shifted from the type of registration to the total income of the trust. Therefore, the appropriate form of the audit report should be selected based on the amended provisions of rule 16CC and Rule 147B.
Applicability Form 10B:
Total income, without giving effect to the provisions of sub-clause (iv), (v), (vi) and (via) exceed Rs. 5 crores.
Total income, without giving effect to the provisions of s.11 and s.12 exceeds Rs.5 crore.
The trust or institution has received any foreign contribution during the previous year.
rust or institution has applied any part of its income outside India during the previous year.
Form 10BB:
In any other cases not covered above, Form 10BB is applicable.
Both Form 10B and Form 10BB now require the auditor to distinguish between payments or applications made through electronic modes and non-electronic modes. The previous description of electronic modes did not include account payee cheques drawn on a bank, account payee bank drafts, or the use of electronic clearing systems through a bank account. However, a recent circular clarifies that, for the purposes of Form 10B and Form 10BB, the electronic modes should be considered in addition to account payee cheques drawn on a bank, account payee bank drafts, or the use of electronic clearing systems through a bank account.
Changes made in Form 10B:
The revised Form 10B and Form 10BB require reporting of the following details:
Details of authors, founders, settlors, trustees, members of society, members of the governing council, directors, shareholders (including non-individual persons) holding 5% or more shareholdings, and office bearers of the auditee at any time during the year. This includes their names, relation, Unique Identification Number, address, etc.
Details of the commencement of activity, including the application for registration/approval if the trust has commenced the activity.
Details of the books of accounts maintained by the trust, such as the nature of the books of accounts, whether they are maintained in a computer system, whether they are maintained at the registered office, and if maintained at any other place, details of that place. It also requires intimation to the Assessing Officer (AO) about the decision and whether the books of accounts have been audited.
Details of filing Form 10BD, including the amount of donation reported and not reported in Form 10BD. It also mentions donations that are not required to be reported.
Details of voluntary contributions received during the year, which should be matched with the amount reported and not reported in Form 10BD.
Details of foreign contributions out of voluntary contributions.
Voluntary contributions forming part of the corpus.
Details of anonymous donations taxable at 30% under s.115BBC.
Details of income applied outside India.
Details of income other than voluntary contributions reported.
Details of the application of income.
Amounts not actually paid during the year, amounts actually paid during the year but not claimed as an application of income in the earlier previous year, amounts invested or deposited back to the corpus which were applied during the previous year but not claimed as an application during that previous year, and repayment of loan or borrowing during the previous year which was earlier applied and not claimed as an application of income during that previous year.
Amounts to be disallowed from the application, including amounts disallowed under s.40A(ia), 40A(3)/(3A), donations to other trusts towards corpus, donations to other trusts not having the same objects, donations to any unregistered trust, application outside India, application beyond trust objects, any other disallowance, amounts deemed to have been applied, and accumulated amounts.
Application out of income of the earlier previous year or out of the corpus and borrowed funds.
Taxable income under s.115BBI.
Application of income out of income deemed to be applied in any preceding year, income of the earlier previous year out of 15% accumulated or set apart, and application out of corpus and borrowed funds.
Details of transactions with specified persons referred to in s.13(3) and 13(2).
Details of specified persons as referred to in s.13(3).
Details of income/property referred to in s.13(2).
Details of specified violations.
Details of depreciation on assets, the acquisition of which is claimed as an application of income.
Details of TDS deducted or TCS collected by the trust.
Under current laws and regulations, the income of a charitable and religious trust is exempt from tax, subject to certain specific circumstances. However, due to concerns over the misuse of these benefits, the income tax department has significantly tightened provisions to ensure that only genuine and verified trusts and activities enjoy the exemption.
The Union Budget 2023-24 has introduced additional changes in the tax treatment of charitable trusts. The revisions to Form 10B and Form 10BB aim to improve consistency, transparency, compliance, cost-efficiency, and operational effectiveness. Additionally, it has been proposed to consider only 85% of eligible donations made by a trust or institution to another trust or institution as an application.
Conclusion:
In conclusion, charitable and religious trusts play a crucial role in philanthropy and rely on donations for their operations. The revised audit report format enhances transparency, compliance, and operational efficiency for these trusts and institutions. With the new format, it is easier for assesses and the Income Tax department to verify compliance with applicable provisions. The changes in the audit report format contribute to improved reporting, reduced costs, and better overall governance of trusts and institutions.
Authored by Tanisha Kakeri, Intern at Metalegal Advocates. The views are personal and do not constitute legal opinion.