Income Tax Audit Form 10B, 10BB for Charitable and Religious Trusts: Purpose, Applicability, Recent Changes in Form & Filing Deadline.

Introduction

Form 10B is an important audit report prescribed under the Income Tax Act, 1961, primarily applicable to charitable and religious trusts or institutions that seek exemption under Section 11 and Section 12. Filing Form 10B is a statutory compliance requirement for such organizations whose total income exceeds the basic exemption limit before claiming exemption.

Section 11 of the Income Tax Act

Section 11 of the Income Tax Act provides income tax exemption to charitable and religious trusts and institutions registered under Section 12A or 12AB. This section allows such entities to claim exemption on income applied for charitable or religious purposes in India.

Key Features of Section 11:

1. Applicability:

• Applicable to trusts, NGOs, and institutions registered under Section 12A/12AB
• These entities must operate for charitable or religious purposes as defined under Section 2(15)

2. Types of Income Exempted:

• Income derived from:
  • Property held under trust
  • Voluntary contributions (donations)
  • Business income incidental to the main objective (subject to separate books)

3. Conditions for Exemption:

To claim exemption, the following conditions must be met:

Accumulation Beyond 15%:

If a trust wants to accumulate more than 15% of its income, it must:

• File Form 10 with the Income Tax Department
• Specify the purpose and period of accumulation (up to 5 years)

Exemptions May Be Denied If:

1. Income is applied for the benefit of specified persons (related parties) - Section 13
2. Business income is not incidental or separate books are not maintained
3. Trust is not registered or fails to comply with audit and filing requirements

 Example:

If a registered charitable trust earns ₹10 lakh in a year:

• It must spend at least ₹8.5 lakh (85%) on charitable purposes in India.
• The remaining ₹1.5 lakh (15%) can be accumulated.

If it wants to accumulate more (say ₹5 lakh), it must file Form 10 explaining the reason and plan of utilization within 5 years.

Audit Requirement:

If total income before claiming exemption exceeds the basic exemption limit (₹2.5 lakh), the trust must:

• Get accounts audited by a CA
• File Form 10B

Section 11 offers significant tax relief to NGOs and trusts that are genuinely working for the welfare of society. But to retain the benefits, they must comply with proper registration, spending norms, and documentation.

Section 12 of the Income Tax Act

Section 12 of the Income Tax Act, 1961 extends the scope of income tax exemption to voluntary contributions received by a trust or institution established for charitable or religious purposes, provided it is registered under Section 12A or 12AB.

It clarifies the treatment of voluntary donations (not being corpus donations), treating them as income eligible for exemption under Section 11, if used for the approved purposes.

Corpus Donations

Corpus donations (also known as corpus fund or capital donations) are voluntary contributions made with a specific direction by the donor that they form part of the corpus (capital base) of a charitable or religious trust or institution. These donations are not meant to be spent for routine activities or operational expenses. Instead, they are to be kept intact, often invested, and the income generated from them may be used for the charitable purposes of the trust.

Key Features of Corpus Donations:

1. Specific Direction Mandatory:
   To treat a donation as a corpus donation, the donor must specifically state in writing that the donation is intended for the corpus of the trust.
2. Not Treated as Income:
   Under Section 11(1)(d) of the Income Tax Act, corpus donations are fully exempt from income tax and not included in the total income of the trust.
3. Utilisation Restrictions:
   The trust cannot use the corpus amount directly for expenses unless specifically allowed. Only the interest/income earned from corpus investments may be used for charitable purposes.
4. Must Be Applied Cautiously:
   Misuse or diversion of corpus funds (without appropriate approvals) can lead to tax implications and loss of exemption.

Tax Treatment under Income Tax Act:

• Exemption: Section 11(1)(d) grants 100% exemption for corpus donations, provided:
  • The trust/institution is registered under Section 12AB.
  • The donation is with a specific written direction for corpus.
  • The amount is invested or deposited as per Section 11(5) of the Act.

Difference Between General and Corpus Donations:

Importance of Corpus Fund:

• Provides long-term financial stability.
• Builds a sustainable income base for future activities.
• Helps institutions plan capital expenditure and large projects.
• Enhances the credibility of a trust.

Purpose of Section 12:

• To ensure that all voluntary contributions received by a registered charitable or religious trust (except corpus donations) are treated as income.
• To make them eligible for exemption under Section 11, if properly applied towards charitable or religious purposes.

Types of Voluntary Contributions:

Corpus Donations are capital receipts; General Donations are revenue receipts.

Corpus donations (with specific direction that it shall form part of the corpus) are fully exempt under Section 11(1)(d) and not included in total income.

Eligible Sources of Income:

• Rent from property
• Interest on investments
• Donations (except corpus donations)
• Income from business (if incidental and books are maintained)

Key Conditions for Exemption:

To claim exemption on general donations (u/s 12), the following conditions must be satisfied:

1. The trust or institution must be registered under Section 12A or 12AB
2. Proper books of accounts must be maintained
3. The donations received (except corpus) are applied for charitable/religious purposes
4. The return of income should be filed in Form ITR-7 within due date
5. If income exceeds ₹2.5 lakh (before exemption), audit (Form 10B) is mandatory

Example:

An NGO registered under Section 12A receives:

• ₹10 lakh as general donation (no specific direction)
• ₹2 lakh as corpus donation (with written direction)

₹10 lakh is treated as income under Section 12
₹2 lakh corpus donation is not treated as income

If the NGO utilizes ₹8.5 lakh (85%) for charitable purposes in India, it qualifies for exemption under Section 11.

Difference between Section 11 & Section 12:

Section 12 works in conjunction with Section 11 to ensure tax exemption on donations received by charitable and religious trusts.
However, registration under Section 12A or 12AB is mandatory, and proper application of funds as per law is essential to retain the exemption.

Purpose of Form 10B

The main purpose of Form 10B is to report:

• Detailed financial information of the trust/institution.
• Application of income towards charitable or religious purposes.
• Compliance with provisions under Sections 11, 12, 13 of the Income Tax Act.
• Verification and audit by a Chartered Accountant (CA).

This ensures transparency and accountability in the operations of charitable trusts claiming exemption.

Section 13 of the Income Tax Act

Section 13 withdraws exemptions under Sections 11 and 12 if the income or property of the trust is misused or applied for the benefit of certain related parties or purposes not permitted under law.

When Will Exemptions Under Section 11 & 12 Be Denied

1 If the Trust is for the Benefit of a Particular Religious Community or Caste

As per Section 13(1)(b):

• A trust or institution created after 01-04-1962, formed for the benefit of any particular religious community or caste, will not be eligible for exemption.

Example: A trust formed only to benefit members of one religion or caste will be disqualified.

2 If Income or Property is Used for Private Benefit (Section 13(1)(c))

If the income or assets of the trust are:

• Used or applied for the benefit of the founder, trustee, manager, relatives, or anyone closely connected
• Provided as loans, salaries, benefits, or use of property without adequate compensation

Such misuse will attract withdrawal of exemption.

3 Investment in Violation of Section 11(5) (Section 13(1)(d))

Trusts must invest funds only in permissible investment modes under Section 11(5). If they invest in prohibited assets, the exemption will be lost.

4 Benefit to Specified Persons (Section 13(2))

Exemption under Section 11 or 12 will not apply if the trust:

• Lends money to specified persons
• Lets them use property without charging adequate rent
• Pays excessive salary, commission, etc.
• Makes investments in entities where specified persons have substantial interest

Specified persons include:

• Founder
• Trustees
• Relatives of above
• Concern in which these persons have substantial interest

Summary Table: Section 13 Violations

Important Note:

Even if Section 13 is triggered, only the portion of income misused will be taxed, not necessarily the entire income (unless the violation is major, like under 13(1)(b)).

In Simple Words:

Section 13 is like a safety lock that ensures only genuinely charitable/religious institutions benefit from tax exemptions. If they misuse funds or act unfairly, they lose the benefit.

Who Needs to File Form 10B

Form 10B is mandatory for trusts/institutions that:

1. Are registered under Section 12A / 12AB of the Income Tax Act, AND
2. Have total income (before exemption) exceeding the maximum amount not chargeable to tax (currently ₹2,50,000 for individuals/NGOs), AND
3. Claim exemption under Sections 11 and 12, AND
4. Are not covered under Form 10BB (which applies to specific funds, universities, or hospitals).

Key Contents of Form 10B

Form 10B includes:

• Part A: Basic details of the trust
• Part B: Audit observations and detailed reporting on:
  • Income application
  • Accumulation of income
  • Investments made
  • Benefits to specified persons (under Section 13)
• Signature and verification by the auditor (Chartered Accountant)

Due Date for Filing Form 10B

For Assessment Year 2024-25 onwards, the due date for filing Form 10B is:

At least one month prior to the due date for filing ITR under Section 139(1).

So, if the trust/institution’s ITR is due by 31st October, then Form 10B should be filed by 30th September of the relevant assessment year.

Consequences of Non-Filing or Delay

• Exemption under Sections 11 and 12 may be denied if Form 10B is not filed within the prescribed time.
• The total income of the trust/institution will become fully taxable.
• Interest and penalty may also be levied.

However, in genuine hardship cases, condonation of delay may be granted by the Commissioner of Income Tax (Exemptions).

Summary Table

Recent Changes in Form 10B - As per Income-tax (Twenty-ninth Amendment) Rules, 2023

Notification No. 7/2023 and subsequent updates from the CBDT (Central Board of Direct Taxes) have brought key changes in the audit report structure for trusts, especially for those availing exemptions under Sections 11 and 12.

1. Two Audit Forms Introduced - Form 10B & Form 10BB

Earlier: Only Form 10B was applicable to all trusts and institutions claiming exemption under Sections 11 and 12.

Now: From AY 2023-24 onwards, Form 10B or Form 10BB is applicable depending on the total income or donation receipts.

Applicability Criteria:

2. Enhanced Reporting in Form 10B (New Format)

The revised Form 10B now includes:

• Details of registration under Section 12A / 12AB
• Verification of application of income, accumulation under Section 11(2)
• Schedule-wise breakup of:
  • Corpus donations
  • Voluntary contributions
  • Donations received with specific direction
  • Income applied and set aside
  • Investments made under Section 11(5)
• Compliance with provisions of Sections 13(1)(c), 13(1)(d) (benefit to related parties or prohibited investments)
• Deemed income disclosures
• TDS compliance and reconciliation of 26AS with books

3. Revised Due Date for Filing Form 10B

• Due Date: One month prior to the due date for ITR filing (Form ITR-7).
• For AY 2025-26, Form 10B should be filed by 31st August 2025 (assuming 30th September ITR-7 filing due date for audit cases).

4. Additional Verification Requirements

• The auditor must now certify compliance with multiple provisions such as accumulation, investment norms, restrictions under Section 13, and application of income.
• This adds greater responsibility on the auditor and trust management to ensure clean records and detailed documentation.

Important Notes:

• Non-filing or delayed filing of Form 10B can lead to loss of exemption under Sections 11 and 12.
• PAN, registration details, books of accounts, and donation tracking must be accurate and reconciled.

Summary of Key Changes in Form 10B (New Format)

✍️ Final Words

Form 10B is not just a routine form-it’s the gateway to exemption for charitable and religious institutions under the Income Tax Act. Trusts must maintain proper books of accounts and ensure timely audit and filing to retain their exempt status and avoid penalties.