Key Insights and Implications of the Rule 17AA

CA. Amresh Vashisht

The Finance Act, 2022 and Rule 17AA that was inserted with effect from the assessment year
2022-23 specifies the requirements for maintaining books of accounts and other documents
for trusts and institutions. Charitable institutions are now obligated to maintain specific books
of accounts and other essential documents. These sections dictate that if a trust or institution
has not maintained books of account, the income chargeable to tax will be computed after
allowing a deduction for only those expenditures specified in these sections. The notified
Rule 17AA, which came into effect on 10th August 2022 outlines the form and manner in
which books of account should be maintained, the place where such books should be kept,
and the duration for which books of account and other documents should be preserved.Rule
17AA contains four subsections, addressing various aspects such as

A. Books of Accounts and Other Documents required to be maintained.

Section 2(12A) of the Income Tax Act defines "books of account" as including various types
of books and records, whether kept in written form, electronic form, digital form, print-outs
of electronically stored data, or other forms of electromagnetic data storage devices. The
amendment to Section 12A(1)(b) specifies that if the total income of a trust or institution,
calculated without considering the exemptions under Section 10(23C) or sections 11 and 12
of the Income Tax Act, exceeds the maximum amount not chargeable to tax, that trust or
institution is obligated to keep and maintain books of account and other documents.

Section 12A(1)(b):

"(b) where the total income of the trust or institution as computed under this Act without
giving effect to the provisions of sections 11 and 12 exceeds the maximum amount, which is
not chargeable to income-tax in any previous year,—

(i) the books of account and other documents have been kept and maintained in such form
and manner and at such place, as may be prescribed; and

(ii) the accounts of the trust or institution for that year have been audited by an accountant
defined in the Explanation below sub-section (2) of section 288 before the specified date
referred to in section 44AB and the person in receipt of the income furnishes by that date the
report of such audit in the prescribed form duly signed and verified by such accountant and
setting forth such particulars, as may be prescribed."

Under Rule 17AA(1), organizations subject to the conditions mentioned in Section 10(23C)
or Section 12A of the Income Tax Act are required to maintain specific books of account,
which include:

o Cash book
o Ledger
o Journal
o Copies of bills and receipts
o Original bills issued to individuals and receipts for payments made
 o Any other book required to provide an accurate view of the organization's
affairs and transactions.

Separate Books for Section 11(4) and 11(4)(a) Income: Organizations with income subject to
Section 11(4) and 11(4)(a) must maintain separate books of account for such income, as per
the provisions of the Income Tax Act.

Additional Condition for Exemption:

It's important to note that the requirement to maintain books of account is an additional
condition imposed on charitable institutions. In addition to maintaining books of account,
these institutions must also meet other conditions, such as obtaining registration, auditing the
books of account, and filing the income tax return. Failure to comply with any of these
conditions can result in the loss of the benefit of exemption under Section 11 and 12.

Applicability Based on Total Income:

This provision concerning the maintenance of prescribed books of account and other
documents applies only when the total income of the charitable institution, as computed
under the Income Tax Act, without taking into account the provisions of sections 11 and 12,
exceeds the maximum amount that is not chargeable to income tax in the previous year.

These changes are aimed at enhancing transparency and accountability in the financial
operations of charitable institutions, ensuring that they meet specific conditions to continue
enjoying tax exemptions under Section 11 and 12.

Mode in Which Documents May be Kept:

According to the rule, the books of account and other relevant documents can be maintained
in any of the following forms:

 Written form
 Electronic form
 Digital form
 Printouts of data stored digitally

To ensure transparency & compliance:

In addition to the books of accounts, there are specific requirements for maintaining records
of ten specific items, including details about projects and institutions, income, application of
income, loans and borrowings, properties held, and more.

The detailed requirements for maintaining other documents, in addition to books of accounts,
as specified in Rule 17AA(1)(d) under the Income Tax Act, are comprehensive and crucial
for organizations, trusts, and institutions subject to these provisions. These documents are
necessary to ensure transparency and compliance with tax regulations.

a. Record of Projects and Institutions: Contains details of the name, address, and
objectives of all the projects and institutions run by the organization.
 b. Record of Income: Contains details of income for the previous year, including:
Voluntary contributions with donor details (name, address, PAN, and Aadhaar
number if available), income from property held under trust and Income of the
organization other than the contributions mentioned above.
c. Record of Application of Income: Details the application of income in India,
including recipients and purposes, application of income outside India, deemed
application of income, as per the provisions of the Act, income accumulated or set
apart, with details on the purpose and Money invested or deposited in various
forms and modes.
d. Record of Application from Previous Years: Application of income
accumulated or set apart from previous years, application of deemed income
referred to in the Act, application from income accumulated in previous years and
money invested or deposited in specified forms and modes.
e. Record of Voluntary Contributions with Corpus Direction: Contains details of
voluntary contributions received, with specific directions to form part of the
corpus includes details of contributors, application of such contributions, and
investment details and money invested or deposited in forms and modes specified
in the Act.
f. Record of Contributions for Renovation or Repair of Places: Contains details
of contributions received for the renovation or repair of specific places, such as
Temples, Mosques, Gurudwaras, Churches, etc and Includes donor information,
application of contributions, and investment details.
g. Record of Loans and Borrowings: Contains information about loans and
borrowings, including the amount, date, and repayment details includes lender
information, such as name, address, PAN, and Aadhar (if available) and Details
applications from loans and borrowings and repayments of such loans.
h. Record of Properties Held: Includes details of immovable properties, including
their nature, address, cost of acquisition, and registration documents, records
property transfers and net considerations and Movable properties are also
documented.
i. Record of Specified Persons: Contains details of specified persons, as referred to
in sub-section (3) of Section 13 of the Act , Includes their name, address, PAN,
and Aadhaar (if available) and Documents transactions with these specified
persons, detailing dates, amounts, nature of transactions, and evidence that such
transactions are not for the benefit of specified persons.
j. Any Other Relevant Documents: This category allows for the inclusion of any
other documents that contain relevant information.

Compliance with these requirements is essential for organizations to meet their tax
obligations and demonstrate transparency in their financial operations. It ensures that they are
following the regulations set forth by the Income Tax Act regarding the maintenance of
records and documentation. Further, the newly introduced Form 10 B & 10 BB sought the
abovementioned requirements.

B. Form of keeping Books of Accounts and Other Documents

(Rule 17AA(2)):

Books of account and other documents can be maintained in various forms, including written,
electronic, digital, or as print-outs of data stored in electronic or digital form. This flexibility
allows organizations to keep their records in a more digital or electronic format, simplifying
record-keeping processes. However, it's important to ensure the admissibility of supporting
documents in electronic or digital form, and physical copies should be retained where
necessary.

C. Place of Maintaining Books of Account & Other Documents (Rule

17AA (3)):

The books of account and other documents specified in Rule 17AA(1) can be maintained in
various forms, including written form, electronic form, digital form, print-outs of data stored
electronically, or any other form of electromagnetic data storage device. According to Rule
17AA(3), these books of account and documents must be kept and maintained at the
organization's "registered office." Books of account and other documents must be kept at the
organization's registered office. However, with approval through a board resolution, they can
be kept at other places in India. If books are kept at a place other than the registered office,
the organization must notify the jurisdictional Assessing Officer in writing within seven days,
providing the full address of the other place. This notification should be signed and verified
by the authorized person.

If the accounts are maintained at locations other than the registered office or at various
project locations, the organization must inform the Assessing Officer in writing for each and
every project undertaken.. The written intimation should provide the full address of the other
places where the books are maintained. This written intimation should be duly signed and
verified by the person authorized to sign the return, and it should be supported by a resolution
of the board.

D. Period for Which Books of Account & Other Documents Should Be

Kept (Rule 17AA(4)):

Books of account and other documents specified in Rule 17AA(1) should be kept and
maintained for a period of ten years from the end of the relevant assessment year.If an
assessment for a particular year is reopened under section 147 of the Income Tax Act within
the specified period, the books of account and documents maintained at the time of reopening
must continue to be kept until the assessment is finalized.

These provisions emphasize the need for organizations to maintain records for an extended
period to ensure compliance with tax regulations. The books of account and other documents
specified in Rule 17AA (1) must be maintained for a specific period.

CONSEQUENCES OF FAILURE TO MAINTAIN

Failure to maintain prescribed books of account and other documents as required under the
rules can lead to various consequences and penalties. Here are some of the potential
consequences:

Denial of Tax Exemption: If an entity, such as a charitable organization, fails to maintain

the prescribed books of account and other documents as required, it may be denied tax
exemption under sections 11 and 12 of the Income Tax Act. These sections pertain to
exemptions available to charitable and religious institutions.
Best Judgment Assessment: If an assessee fails to produce the required or prescribed books
of account during the assessment proceedings, the assessing officer can make a 'Best
Judgment' tax assessment under section 144 of the Act. This means that the officer will
estimate the income and tax liability based on available information and may not give the
benefit of doubt to the taxpayer.

Cancellation of Registration: Section 12AB of the Income Tax Act allows for the
registration of public charities. Failure to maintain prescribed books of accounts separately in
respect of the business carried on by the public charity (if it is incidental to its objectives) can
result in the cancellation of the registration granted under this section.

Penalty under Section 271AAD: Section 271AAD provides for a penalty if there are
omissions or incorrect entries in the books of account. The penalty is equivalent to the
amount representing such omissions or incorrect entries. It's a significant penalty and is
imposed in cases where an assessee does not maintain proper records or manipulates them.

Imprisonment under Section 276D: Section 276D allows for imprisonment of up to one
year and a fine for failure to produce or causing the non-production of books of accounts and
documents in response to a notice issued under section 142(1) of the Income Tax Act.

It's essential for individuals and organizations to comply with the record-keeping and
documentation requirements of the Income Tax Act to avoid these penalties and legal
consequences. Proper record-keeping not only ensures compliance with the law but also helps
in the accurate computation of income and taxation.

ADAPTATION TO RULE 17AA

Adapting to Rule 17AA is crucial for charitable institutions to ensure compliance with the
new requirements and maintain transparency in their financial operations. Here's a more
detailed breakdown of the steps to ensure a smooth transition:

Review Existing Accounting System: Start by conducting a comprehensive review of your

current accounting systems and procedures. Assess whether your existing system can capture
all the required information stipulated in Rule 17AA. Identify any gaps or areas that need
modification to align with the new rule.

Modify Accounting Software: Consider modifying or upgrading your accounting software

to accommodate the specific details mandated by Rule 17AA.Ensure that your accounting
software can efficiently record and track information related to projects, voluntary
contributions, income from property, and other relevant data.

Train Staff: Provide training to your accounting and finance staff to ensure they fully
understand and are capable of implementing the new requirements of Rule 17AA. Educate
your staff on the specific bookkeeping procedures and document maintenance guidelines
introduced by the rule. Training will help your team adapt to the changes and carry out their
responsibilities effectively.

Engage Professional Assistance: Consider seeking the assistance of professionals who are
well-versed in the intricacies of Rule 17AA.These experts can guide your organization
through the process of compliance, offer recommendations for system modifications, and
ensure accurate adherence to the regulation. Professional assistance can be particularly
valuable in navigating any complexities or uncertainties associated with the rule.

Document and Implement Changes: Document all changes and modifications made to your
accounting and financial systems to ensure transparency and compliance. Implement the
necessary changes in your organization's accounting processes, including data collection,
reporting, and documentation procedures.

Regular Compliance Monitoring: Establish a system for regular monitoring and internal
audits to ensure ongoing compliance with Rule 17AA. Review and update your procedures as
needed to address any evolving requirements or changes in the regulatory landscape.

Foster Trust and Transparency: Emphasize the importance of complying with Rule 17AA
to strengthen financial control and foster trust with stakeholders, including donors,
government authorities, and the public. Clearly communicate your organization's
commitment to transparency and compliance in your financial operations.

Adapting to Rule 17AA may require initial effort and investment, but it is essential for
maintaining the tax-exempt status and credibility of charitable institutions. By following
these steps and making the necessary adjustments, NGOs can navigate the new regulatory
framework effectively and demonstrate their commitment to transparency and accountability.