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.

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) (ii) (iii) (iv) (v) (vi) (vii)

The Societies Registration Act, 1860 ; The Indian Trusts Act, 1882 ; The Co-operative Societies Act, 1904 ; The Trade Union Act, 1926 ; Section 25 of the Indian Companies Act, 1956 ; Religious Endowments Act, 1863 ; The Charitable and Religious Trust Act, 1920 ;

(viii) Wakf Act, 1954 ; (ix) (x) (xi) Mussalman Wakf Act, 1923 ; Public Wakfs (Extension of Limitation) Act, 1959; 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 2

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. 3

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. // A from page 3//

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 Registrars 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, 4

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 5

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) (ii) (iii) (iv)

Charitable assistance Military orphan funds Societies established at the General Presidencies of India 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. 6

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 Bihar Delhi Agriculture ; Industry

Addition of object(s)

Promotion of social welfare; Activities conducive to the protection & improvement of the natural environment (including forests, lakes, rivers, & wild life)

Gujarat Haryana

Sports Interest or welfare of public; any other object notified as beneficial to public.

Maharashtra Pondicherry

Public or Religious 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 7

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 8

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 9

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) (ii) (iii) (iv)

The name and address of the Society; The names, addresses, and occupation of the those members subscribing to it; The objects of the Society; 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.] 10

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 11

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;

12

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) (ii) (iii) (iv) (v) (vi) (vii)

Particulars of documents creating the trust; Particulars other than documents about creation or origin of the trust; Objects of the trust; Sources of income of the trust; Particulars of encumbrances, if any, on trust property; Particulars of the scheme, if any, relating to the trust; Particulars of title deeds pertaining to trusts property and the names of trustees in possession thereof.

The following particulars are required for making an application for appointment of trustees :

(a) (b)

The name, occupation and address of the applicant; The name and description and registration number of the trust and its office address;

(c) (d) (e) (f) (g)

The name and addresses of the Trustees and managers; The objects of the trust; The nature of applicants interest in the trust; The cause of action and the nature of relief sought for in the application; and 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.

13

(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) (iii)

List of names, addresses, description and occupation of the promoters; 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) (vi)

Statement of assets and liabilities; 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; 14

(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) (v) (vi)

Assets and liabilities of the company; Estimate of expenses and source of income; 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 Principlesshall include 15

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 Registrars 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 16

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

Consumers 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 Millhands

Association formed in 1890, the Amalgamated Society of Railway Servants of India and 17

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. 18

19

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 20

Right to receive notices; Right to vote; Resolving disputes; Right to receive copies of by-laws, annual accounts, and annual reports.

Members Liabilities 2.

To be sued as stranger; Members guilty of offence punishable as stranger; Recovery of penalty accruing under Bye-laws; For misapplication of Funds.

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. 21

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 22

Every Society is required to hold its annual general meeting at a time as prescribed in its rules and regulations. A statement on the societys 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.

23

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 societys 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. 24

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

25

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. 26

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 27

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. III.

that the activities of the Society are subversive to the objects of the Society, or 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. V.

the registered Society has contravened any provisions of the Act or the rules, or 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.

28

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 registrars 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 registrars 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 29

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.

30

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. ii.

Subscription from members; Donations or voluntary contributions from members or others, other than corpus donation;

iii. iv. v. vi.

Income from the trust property of the Society; Return on investments; Sale of goods produced by beneficiaries; and 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.

31

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) (ii)

Scientific and research organizations 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) (v)

Organizations exclusively promoting sport like cricket, hockey, football, etc. 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 32

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

33

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 2

Repealed with effect from 1 April 1999. Repealed with effect from 1 April 1999.

34

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 35

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.

36

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 donors 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

37

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

38

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) (iii)

Deposit in any account with the Postal Savings Bank; Deposit in any account with the scheduled bank or a co-operative engaged in carrying on the business of banking;

(iv) (v)

Investment in units of the Unit Trust of India; 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) (xi) Investment in immovable property; and 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 39

(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 40

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 41

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.

42

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 43

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.

44

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

45

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 1990s, Offices of the Registrars of Society and Trust are archaic and antiquated. Information cannot 46

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 1980s, 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. 47

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. VANIs own efforts over the past ten years have made more noise then brought any significant 48

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 1990s have created greater space, flexibility and ease of operation for for-profit organisations, but very little! has changed for non-profit organisations.

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Annex I Societies Registration Laws in India as on 31.12.1998 Sr. No. 1. State Andhra Pradesh 1860 Act (with State State Act Amendment) 1860 Act (Coastal and Act No. 1 of 1350 Fasli Rayalseema areas) (1940 AD) - Telangana Area 1860 Act 1860 Act 1860 Act 1860 Act 1860 Act 1860 Act 1860 Act Act No. 6, 1998 Act No. 17, 1960* 1860 Act Act No. 12, 1955* Act No. 44, 1973* Act No. 12, 1983* Act No. 28, 1958 Act No. 27, 1975* Act No. 26, 1961* -

2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 1. 2. 3. 4. 5. 6. 7.

Arunachal Pradesh Assam Bihar Goa Gujarat Haryana Himachal Pradesh Jammu & Kashmir Karnataka Kerala

Madhya Pradesh Maharashtra 1860 Act Manipur 1860 Act Meghalaya Mizoram 1860 Act Nagaland 1860 Act Orissa 1860 Act Punjab 1860 Act Rajasthan Sikkim 1860 Act Tamil Nadu Tripura 1860 Act Uttar Pradesh 1860 Act* West Bengal UNION TERRITORIES Andaman Nicobar 1860 Act Chandigarh 1860 Act Dadra & Nagar 1860 Act Haveli Daman & Diu 1860 Act Delhi 1860 Act Lakshadweep 1860 Act 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.

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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 Madhya Pradesh Maharashtra

Societies Registration (Madras Amendment) Act, 1954 Central Provinces and Berar Vidya Mandir Act, 1940 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 Orissa

Societies Registration Nagaland First Amendment Act, 1948 Societies Registration (Amendment) Act, 1958 Societies Registration (Orissa Amendment) Act, 1969 51

Societies Registration (Orissa Amendment) Act, 1979 Pondicherry Punjab Pondicherry Act 9 of 1969 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 Modification in Punjab Act No. 31 of 1957 Delhi 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

REFERENCES

AIR Charnalia, Anil

Rama Swami vs. Aiyaswami, Madras, 467. Paper on 'Tax Treatment to the Nonprofit Organizations in India, presented to PRIA as part of the CNPS Project, 1998-99.

Dadrawala, Noshir

Handbook on Administration of Trusts, Centre for Advancement of Philanthropy, Mumbai, 1991.

Dadrawala, Noshir

Management

of

Philanthropic

Organisations,

Centre

for

Advancement of Philanthropy, Mumbai, 1996. Dadrawala, Noshir Paper on 'Legal Overview of the Nonprofit Organizations in India, presented to PRIA as part of the CNPS Project, 1998-99. Government of India: Act No. LIX of 1949 - Merged States Act Government of India: Act No. VI of 1890 - Charitable Endowments Act 1890 52

IRMA

Cooperative Initiative Panel: State of Cooperation in India, IRMA, Anand, Gujarat, 1996.

Kochhar and Jain

Formation and Management of a Society, Nabhi Publications, New Delhi, 1987

Kandasami, M.

Management of Finances in Nonprofit Organisations, Caritas India, New Delhi, 1994.

Malik, Vijay

Societies Registration Act 1860, Eastern Book Co., Lucknow, 1985.

Mathew, P.D.

Law on the Registration of Societies, Indian Social Institute, New Delhi, 1994.

PRIA

Forms of Organisations : Square Pegs in Round Holes, New Delhi, 1987

PRIA PRIA

Management of Voluntary Organisations, New Delhi, 1989 Manual on Finance Management and account's Keeping, New Delhi, 1990

Sarin, H.L.

In edited volume by S.K.Aiyar, H.L.Sarin and R.K.Mehra: Principles and Digest of Trust Laws, Jain Book Agency, Allahabad, 1992.

Sen, Sidhartha

India in 'The International Guide to Nonprofit Laws' edited by Lester M.Salamon, Johns Hopkins, John Wiley & Sons, New York, 1997.

VANI

Report of the Task Force to review and simplify Acts, Rules, Procedures affecting Voluntary Organisations, VANI, New Delhi, 1994.

VANI

Laws, Rules & Regulations for the Voluntary Sector : Report of the South Asian Conference, 6-10 March, 1996; VANI, New Delhi, 1996.

VANI

A Critique of the Foreign Contribution (Regulation) Act 1976, paper prepared for the National Meeting on Creating Conaucrve Legal Environment for the Voluntary Sector, March 16-17, 2000, New Delhi, 2000.

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