Understanding the Compliance Requirements for Charitable Trusts: Key Insights for Filing Forms 10B and 10BB

In India, charitable trusts and societies must adhere to stringent regulatory and tax compliance frameworks under the Income Tax Act. One critical aspect of compliance for such organizations is the correct filing of audit reports, particularly Form 10B or Form 10BB, which are used to declare income and claim exemptions. However, navigating these forms can be tricky, especially when a trust is not registered under the relevant sections or fails to report donations correctly.

In this article, we’ll dive into three key areas:

1. Whether trusts not registered under Section 12A/12AB can file Form 10BB.
2. The consequences of incorrectly filing these forms by the trust and the auditor.
3. How to report donations and income from activities in these forms if compliance hasn’t been fully met.

Can a Trust Not Registered Under Section 12A/12AB File Form 10BB?

The short answer is no.

Form 10BB is meant for trusts and societies that are registered under Section 12A/12AB and seek to claim exemptions under Sections 10(23C)(iv), (v), (vi), or (via) of the Income Tax Act. These sections pertain to income from charitable or educational activities, and without this registration, the trust is not eligible to file Form 10BB.

For a trust or society that is not registered, filing this form would be irrelevant and potentially risky, as it may not be able to justify the claims for tax exemption that would otherwise apply to a registered entity.

What Happens if an Ineligible Trust Files Form 10BB?

Both the trust and the auditor face significant risks and consequences if Form 10BB is filed by a trust that is not eligible:

1. For the Trust:
2. For the Auditor:

In short, both parties must exercise caution when it comes to filing forms that they are not legally eligible to file. Proper compliance is key to avoiding penalties and professional consequences.

How to Report Donations and Income from Activities in Form 10B/10BB

Let’s explore how donations and income from charitable activities should be reported in Form 10B/10BB—especially when some forms for reporting donations haven’t been filed.

1. Reporting Donations When the Relevant Form Hasn't Been Filed

Trusts receiving donations are often required to file forms like Form 10BE for donations eligible for deductions under Section 80G. Failure to file these forms can complicate the audit process:

• Donations Not Reported for 80G Deduction: These donations will not qualify for deductions under Section 80G for the donors. However, they still need to be reported in Form 10B/10BB under "Voluntary Contributions."
• Audit Report Disclosure: The auditor must include a note highlighting that the relevant donation forms were not filed and mention this as a compliance issue in the audit report.

In Form 10B, donations will be reported in Part A (Income and Expenditure Account), while Form 10BB will also reflect these under the appropriate heads for income. The non-compliance with Section 80G filing should be disclosed through comments or notes in both forms and the audit report.

2. Reporting Income from Charitable and Commercial Activities

All income generated from activities aligned with the trust's objectives must be reported transparently. Here's how to classify and report this income:

• Income from Charitable Activities: This includes revenue from educational, religious, or medical services, which should be classified under “Income from Objectives” in Form 10B/10BB. The corresponding expenses related to these activities should also be disclosed.
• Income from Business or Commercial Activities: If the trust has any income from commercial activities, it should be reported under "Income from Business." For this income to remain exempt, the business must be incidental to the trust's objectives, and separate books of accounts must be maintained as required under Section 11(4A).

In both cases, the auditor must ensure that the trust is not overstating exemptions and that all required details are provided in the audit report and the relevant form.

Conclusion: The Importance of Accurate Reporting in Form 10B/10BB

Filing Form 10B and Form 10BB correctly is essential for charitable trusts seeking to claim exemptions under the Income Tax Act. Failure to register under Section 12A/12AB, failing to report donations, or incorrectly reporting income can lead to severe penalties for both the trust and the auditor.

Whether you are a trustee or an auditor, it is crucial to ensure that all compliance requirements are met, including timely filing of relevant donation forms and proper classification of income. Accurate reporting not only helps avoid financial liabilities but also upholds the credibility and transparency of the trust’s operations.

To sum up, transparency, compliance, and thorough audit practices are key to maintaining tax-exempt status and safeguarding both the trust and the professionals responsible for their audit.

If you are managing or auditing a trust, always ensure that your filing practices are aligned with the latest regulations under the Income Tax Act to avoid unnecessary penalties.