Formation of Companies with Charitable Objectives: Section 8 Company

Introduction:

Section 8 company is a company which is established under Section 8 of the Indian Companies Act,2013(Section 25 of the Indian Companies Act,1956) with the main objective of-

Promoting commerce, art, science, sports, education, research, social welfare, religion, charity, protection of the environment, or any such other object[1]
Wherein all the profits, if at all any, or any other income is used only for the promotion of the objects of the company[2].
No dividend is paid to its members[3].

Section 8 companies are set up by a person or an association of persons and are registered under the Companies Act, 2013.

Section 8 Company is incorporated for non-profit purposes and social welfare. It is very similar to any Trust or a Society, but the distinguishing factor is that a Section 8 Company is registered with the “Ministry of Corporate Affairs (MCA) and is governed by the rules and regulations of the Central Government of India. On the other hand, all the Trusts and Societies are registered under the State Government and governed by their rules and regulations.

Procedure for Registration of NGO’S

The procedure for registration of a Section 8 company is different from that of the registration of a private or public company. Registration of an NGO includes two major steps which are:

To get the license under section 8(1) of the Companies Act, 2013.
To get the certificate of incorporation.

Before the formation of the company, the promoters have to decide the following points:

The proposed name to be applied for
Objectives that the Company will be carrying out during its operation.
Address of the proposed registered office.
The authorized capital of the proposed Company.
The number of promoters and directors.
The number of shares that each director will subscribe to.

Name Approval

While deciding a proper name for the company, the following rules are to be kept in mind:

The company’s name should be according to the main objectives of the company as specified in the memorandum of association.
The name to be proposed should not fall under the category of undesirable names specified in Rule 8 of Companies (Incorporation)Rules, 2014.
The name of the NGO should include the words like Foundation, Forum, Association, Federation, Chambers, Confederation, Council, or any other similar names. [Rule 8(7) of the Companies (Incorporation) Rules, 2014].
The company is not required to add the word Limited or Private Limited to its name. [Provision to Section 4(1)(a) and Section 8(1)].

Name Approval Procedure

All the companies must get their names registered with the Registrar of Companies. It is also important to prevent overlapping of names of any two organizations and to prevent any copyright issues.

To get the name approval, the INC-1 application is to be filed to the Central Registration Centre. The applicant has to give 6 names for approval while filling the form.

The centre may then approve of the name, which it thinks would be appropriate. After receiving the approval, the name remains valid for up to 60 days.

After deciding upon the name and structure of the company, the following steps have to be taken and then the Certificate of Incorporation will be issued to the Company, after which, it can begin its operations:

It has to be made sure that all the proposed directors should have a valid DIN. If not, then the director not having DIN, has to obtain it.
The E-Forms to be submitted to the Registrar have to be digitally signed by any one of the directors.
The next step is to prepare the Memorandum of Association and Articles of Association for the company.
It has to be made sure that the company fulfils the criteria to get registered as a company (private/public) under section 8

Subscribers to the Memorandum

The Memorandum should have at least 2 subscribers if the company is intended to be a Private Company[Section 3(1)(a)].
In the case of a Public Company, the memorandum should have at least 3 subscribers [Section 3 (1)(b)].

Directors

If the company is to be registered as a Public company, then there is a minimum requirement of 3 directors.
There is a maximum limit of 15 directors in cases of both private as well as public companies. But, if the company wishes to have more than 15 directors, it can increase the number by passing a Special Resolution in the General Meeting [Section 149(1)(a) (b)].
The Company ought to have at least one such director who has stayed in India for a total period of not less than one hundred and eighty-two days in the previous calendar year[Section 149(3)].

Application for Incorporation

The process for the incorporation of the firm is carried out online through eForm SPICe+ which deals with a single application for reservation of the company’s name, incorporation of a new company, application for allotment of DIN, and application for PAN and TAN. This form is then accompanied by supporting documents which include all the details of Directors & subscribers, MOA and AOA, etc.
Finally, when the e-Form is found to be complete by the registrar, then the company would be considered to be registered and a CIN would be issued to the Company.
The DINs (Director Identification Number) also get issued to the proposed Directors who do not have one. Maximum 3 Directors can make use of this integrated form for applying for the allotment of DIN while incorporating a company.
The PAN and TAN(Tax Deduction Account Number) would be issued to the Company. Incorporation application is filed through e form SPICe+ and by attaching the following documents with it :
Memorandum of Association
Article of Association
Appointment of all the directors of the company as mentioned in Form DIR – 12.
Address Proof of the subscribers.
Identity Proof of the subscribers( A copy of PAN Card).
Declaration by each subscriber of the Memorandum.
In case the registered office premise is taken on rent or lease, then the rent agreement or the Lease and License Agreement have to be provided.
Specimen Signature as mentioned in Form INC 10.
NOC, in case there is a change in the name of promoters after the approval of the name.
Resolution of the board authorizing the subscription to MOA.

Certificate of Incorporation

When the Registrar of Companies will be satisfied that all the requirements mentioned in the Companies Act, 2013 have been fulfilled, then the Certificate of Incorporation will be issued which will carry a Company Identification Number (CIN) that would be unique to the particular company.

This completes the Formation Process of the Section 8 Companies. After obtaining the Certificate of Incorporation, the Company can commence its operations with immediate effect. Section 8 Companies are set up with the objective of public welfare; thus they enjoy certain exemptions from the regulations of the Companies Act, 2013 so that they do not get stuck in the setting up procedures only, but can focus on their main operations.

80G Certificate

80G certificate is a crucial Tax savings certificate that was introduced in 1967-1968. It is a certificate that allows tax exemption(fully or partially) if any donations to any Section 8 company have been made.

Who can avail Tax savings under 80G?

Donations made only to the registered trusts, societies and organizations would be considered for tax exemption under 80G.
Any individual who donates is entitled to get exemption under 80G. The condition is that the aggregate amount of donations must not exceed 10% of the Total Gross Income. The excess amount will not be any tax exemption.
If an NRI donates to a registered institution/ trust, then also tax exemption can be claimed.
If a donation is made from the salary of the employees and the receipt has the name of the employer, then the employees can also claim the deduction.

Who Cannot Avail Tax Savings Under 80G?

Following are the categories under which tax exemption under 80G cannot be availed:

A donation made to any foreign trust.
Donations made to one or more political parties.

Rules for 80G Registration

As a general rule, all societies, trusts, and non-profit organizations are entitled to this registration. But there are some rules which the organization must comply with if it wants to get registered under 80G. These are:

Proper Separation of Charity and Business

The organization should maintain separate accounts for charity and business if it carries out any. It should not mix any monetary transaction which is not a part of the donations, with the donations. If it mixes the transactions, the request for 80G registration will be cancelled.

The Organization Must Not Carry Any Religion-Based Activity

If the organization carries out any particular religion or caste-based activity, it cannot apply for 80G certification.

No Misemployment of Donations

The organization should strictly comply with the accounting rules. It must not make use of the donations for any purpose or cause other than the main activities of the organization.

Proper Maintenance of Accounts

The organization ought to maintain proper accounts and keep a record of all its transactions as proof as all the documents are analyzed before providing the certification.

Registration of the Organization

An organization must be registered under Section 8 of the Indian Companies Act,2013 or under the Societies Registration Act, 1860 to be certified under 80G. If it is not registered, then it cannot claim 80G registration.

80G Registration Process

The applicant has to submit the Application(Form 10G) for 80G registration and all the necessary documents to the Income Tax Department. After the receipt of the application and all the documents, the Income Tax department will go through it carefully.
If the officers are not satisfied with the application, they can demand more documents to be submitted within a specified time limit.
If they are satisfied with the information provided, the Commissioner will grant an 80G Certificate to the organization.

12A Registration

12 A registration facility is provided by the Income Tax department to all the Section 8 companies to get an exemption from paying Income Tax by registering themselves only once. The 12A registration is provided to all the Section 8 companies through which these companies are not required to pay Income Tax on their surplus Income.

Obtaining 12A Registration

According to Rule 17, A of the Income Tax Act, 1961, the applicant has to fill Form 10 A with the Commissioner of the Income Tax Department. The assessee has to submit an online application to get the registration of 12A done. The application is received by the Principal commissioner who then checks and reviews it. He can also demand any additional documents required to prove to the Income Tax Department the authenticity of the activities undertaken.

When the application is received by the Principal Commissioner, the following 2 things can happen:

The Commissioner Maybe Satisfied

If the commissioner is satisfied with the application, then he will pass a written order to the assessee stating that he can get registration under the Section. When the order is received by the assessee, he can get the registration.

The Commissioner Maybe Unsatisfied

If the commissioner is unsatisfied with the application, he has all the right to reject it but the assessee has to be provided with the written reason for the rejection.

Benefits of 12A Registration

The income which is used for any charitable purposes will be treated as an application of income. This means that while calculating the Income of the organization, expenditures done for charitable purposes will be allowed.
The income received will be tax-free.
The person will enjoy the benefit of accumulating or setting aside income. But the income set aside should not be more than 15% of the total amount used for charitable or non-commercial uses.
Accumulation of Income which is treated as the income application will be excluded from the total income of the assessee.
Companies registered under 12A are eligible to get funds from domestic as well as international sources. These agencies can give grants to organizations( NGO’s) registered under the section.
Since it is a one-time process, there is no need to get the registration renewed. The registration remains valid till the time it is not cancelled.

FCRA (Foreign Contribution Regulation Act) Registration

All the section 8 companies, trusts, and societies who get any donations from a foreign source are required to get registration under section 6(1) of the Foreign Contribution Regulation Act,2010. This registration under the Act is known as FCRA registration.

Types of Registration under FCRA 201

Normal Registration

The applicant has to be registered under –

The Societies Registration Act,1860
The Indian Trusts Act, 1882
Section 8 of the Indian Companies Act,2013

Requirements for Applying for Registration

While making the FCRA registration, the company must be in existence for at least 3 years.
It should not have received any foreign aid before the registration without the Government’s accent.
The organizations that have spent Rs 10,00,000 on their main aims and objectives excluding the administrative expenses are entitled to get registered.
The Statement Income and Expenditure of last 3 years, duly audited by a Chartered Accountant should also be presented to prove that it fulfils the financial requirements

Prior Permission Registration

Prior Permission is generally required by newly formed companies that are likely to receive any foreign contributions. Prior permission is required to accept a specified amount from a particular donor for carrying out its(firm’s) objectives.

The Objectives of FCRA 2010

FCRA 2010 was introduced with the aim of-

Regulating the receiving and utilization of foreign funds by some organizations.
Prohibition of funds received from foreign institutions which are used for the furtherance of activities against the nation’s interests.

Conclusion

Section 8 companies are the companies that have been set up for carrying out different public welfare activities and helping society in one way or the other. The Indian Companies Act,2013 lays down a proper procedure for setting up such companies and provide them with the autonomy required for its smooth functioning.

To allure people to make donations and charities in favour of these companies, registrations under 80G and 12A have been allowed by the Income Tax Department as well. 80G is a certification that allows tax exemption if any donations have been made to Section 8 companies. Whereas, 12A is also a one-time certification given to Section 8 companies which allows them to get exemption from paying Income Tax.

Various provisions have also been made to even ensure that such organizations do not face any shortage of funds and can receive donations and charities from domestic as well as foreign organizations. Foreign Contributions Regulation Act is one such provision that allows Section 8 companies to accept foreign donations also. There are broadly 2 categories of registrations provided under the act, namely

1.Normal Registration (for already existing companies)

2.Prior Permission Registration (for newly incorporated Companies)

All these certifications are important for Section 8 companies to ensure the proper flow of funds and not facing any shortage of funds. These provisions are also beneficial for the donors as they can claim Income tax exemption by making donations to such organizations and contributing their bit towards the betterment of society.

References:

[1] Indian Companies Act Section 8(1)(a)

[2] Indian Companies Act Section 8(1)(b)

[3] Indian Companies Act Section 8 (1)(c)

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Published by Niyati Gupta on 13/08/202113/08/2021