The regulatory framework for charitable and religious trusts and other not-for-profit institutions in India has undergone a series of reforms over the last decade. These reforms have been aimed at strengthening transparency, monitoring compliance, and ensuring that organizations receiving income-tax exemptions continue to function in accordance with their stated objectives. One of the significant outcomes of these reforms is the introduction and evolution of Form 10AC, which plays a critical role in granting registration or approval to trusts and institutions.
With the passage of the Finance Act, 2022, the scope and application of Form 10AC have further evolved. The Central Board of Direct Taxes (CBDT) has subsequently issued clarifications to align the operational framework with the amendments. To appreciate the importance of these changes, it is essential to first understand the background, legislative journey, and rationale behind the introduction of Form 10AC.
Evolution of the Regulatory Framework for Charitable Trusts and Institutions
Historically, charitable and religious trusts in India were eligible for exemption under the Income-tax Act, subject to compliance with certain conditions. Sections such as 11, 12, and 10(23C) allowed institutions engaged in educational, medical, religious, or other charitable purposes to claim exemptions, provided they were duly registered and adhered to prescribed norms.
The registration process, however, was initially decentralized and lacked uniformity. The application of exemptions was scrutinized based on documents and representations, often leading to varied interpretations and inconsistent decisions across jurisdictions. Over time, the government recognized the need for a standardized and technology-driven process that would streamline approvals and bring greater accountability.
The Finance Act, 2020 marked a turning point in this journey. It introduced a new regime for the registration and approval of trusts, institutions, and funds. This included a mandatory requirement for all existing trusts and institutions, whether registered under section 12A, section 12AA, or approved under section 10(23C) or section 80G, to re-apply for registration or approval. The purpose was to create a comprehensive and updated database of such entities and to establish a clear framework for monitoring their activities.
Introduction of Form 10AC
Pursuant to the changes introduced by the Finance Act, 2020, the CBDT notified a set of rules that operationalized the new registration regime. Among these rules was the introduction of Form 10AC, which became the standard order issued by the income-tax authorities upon the approval of registration or provisional registration.
Form 10AC thus became the formal instrument through which trusts and institutions received confirmation of their registration status under section 12AB, their approval under section 10(23C), or their approval under section 80G. The form carried essential details, including the Unique Registration Number (URN), the effective date of registration, and the conditions subject to which the registration or approval was granted.
The introduction of this form marked a shift toward digitization and standardization. It was generated electronically and delivered through the income-tax portal, reducing manual intervention and enhancing efficiency. This ensured that entities across the country were treated consistently and uniformly.
Finance Act 2022 and the Concept of Specified Violation
While the new registration regime provided greater structure, it also brought with it a new set of challenges. Concerns were raised about the misuse of exemptions and the possibility of organizations deviating from their stated objectives after securing registration. To address these issues, the Finance Act, 2022 introduced amendments that empowered the Principal Commissioner or Commissioner of Income-tax to examine whether a registered or provisionally registered trust or institution had committed any specified violation.
Specified violation was defined broadly to include circumstances such as:
- Application of income for purposes other than those for which the entity was established.
- Use of income or property for the benefit of interested persons.
- Non-genuine activities or activities not in accordance with the conditions of registration.
- Non-compliance with requirements of other laws material to the functioning of the entity.
If, upon examination, the authority determined that a specified violation had occurred, an order could be passed for cancellation of registration or for refusal to cancel, depending on the findings. This provision created a framework for ongoing monitoring, ensuring that entities did not merely obtain registration but continued to adhere to the intended objectives.
The Role of Form 10AC After Finance Act 2022
The amendments introduced by the Finance Act, 2022 necessitated a revision of the conditions under which Form 10AC was being issued. Earlier, the form contained a set of standard conditions applicable at the time of registration or approval. However, with the new provisions relating to specified violations, the scope and language of these conditions had to be aligned with the legislative framework.
CBDT recognized that many forms issued between April 2021 and June 2022 carried the older set of conditions, which were not fully consistent with the new provisions. To avoid confusion and ensure uniformity, CBDT issued a circular clarifying that the conditions contained in Form 10AC during this period should be read as if they had been substituted with the revised conditions, effective from April 1, 2022.
This clarification ensured continuity and eliminated the possibility of disputes or technical challenges arising from differences in wording. Entities were expected to comply with the updated conditions, regardless of the version of Form 10AC they had originally received.
Addressing Technical Glitches and Provisional Registrations
Another important aspect of CBDT’s clarification was the treatment of certain forms that had been incorrectly issued due to technical issues. In several instances during the financial year 2021-22, Form 10AC was generated with the heading “Order for provisional registration” or “Order for provisional approval,” even though the intent was to issue a final registration or approval order.
This discrepancy created uncertainty for the affected institutions, as provisional registration is typically granted for a shorter period and carries different compliance implications compared to final registration. Recognizing this, CBDT clarified that all such forms would be deemed to be valid orders for registration or approval, notwithstanding the heading.
By addressing this issue, CBDT prevented unnecessary hardship to trusts and institutions that might otherwise have faced compliance challenges or doubts regarding the validity of their status.
Legislative Intent Behind the Reforms
The series of changes leading to the current framework around Form 10AC reflect a broader policy intent. The government has consistently emphasized the importance of accountability and transparency in the functioning of charitable and not-for-profit organizations. While such entities play a vital role in delivering social welfare and development programs, the significant tax benefits available to them necessitate a rigorous compliance environment.
The move toward mandatory re-registration, standardized forms, and continuous monitoring of specified violations demonstrates a clear effort to balance the autonomy of these organizations with the need to safeguard revenue and prevent misuse of exemptions.
The Finance Act 2022, by empowering tax authorities to examine compliance on an ongoing basis, ensures that registration is not merely a one-time event but a continuing obligation. The clarifications issued by CBDT on Form 10AC further ensure that the legislative intent is implemented in a consistent and equitable manner.
Impact on Trusts and Institutions
For trusts and institutions, these reforms represent both an opportunity and a responsibility. On one hand, the digitized and standardized process has made it easier to obtain and track registration or approval. On the other hand, the revised conditions and the emphasis on avoiding specified violations impose a higher standard of governance and compliance.
Trusts must ensure that their activities align strictly with their stated objectives, that no benefits flow to related parties, and that they comply with all relevant laws governing their operations. Failure to do so may expose them to the risk of cancellation of registration, which could have significant financial and reputational consequences.
The journey of Form 10AC is deeply intertwined with broader legislative reforms aimed at strengthening the oversight of charitable and not-for-profit organizations. Understanding this background is crucial before delving into the details of CBDT’s clarifications and their practical implications.
Detailed Analysis of CBDT Clarification on Form 10AC
The Central Board of Direct Taxes has issued a circular to provide clarity on the evolving framework of registration and approval for trusts and institutions through Form 10AC. This clarification was necessary after the amendments brought by the Finance Act 2022, which introduced the concept of specified violation and empowered tax authorities to cancel registration in case such violations were found. With these changes, the conditions attached to the registration process needed to be realigned to ensure consistency between legislative intent and administrative practice.
The following analysis breaks down the CBDT clarifications in detail, examining their impact on various provisions under the Income-tax Act, their relevance to different categories of institutions, and their implications for provisional and final registrations.
Revising Conditions for Grant of Registration
The first major clarification issued by CBDT relates to the conditions that govern the grant of registration and approval under the key provisions of the Income-tax Act. These provisions include section 12AB, which deals with charitable and religious trusts, section 10(23C), which covers educational and medical institutions, and section 80G, which governs donations made to approved institutions.
Importance of Conditions in Registration Orders
When trusts or institutions are granted registration through Form 10AC, the approval is always subject to certain conditions. These conditions are intended to ensure that the organization operates within the boundaries of its stated objectives and in compliance with the law. For example, one of the typical conditions is that the entity must apply its income solely for charitable or religious purposes, and another is that no part of the income or property should directly benefit specified individuals such as trustees or members.
The Finance Act 2022 changed the framework of compliance by introducing the ability to cancel registration in cases of specified violation. This made it necessary to revise the standard conditions attached to the orders issued in Form 10AC, so that they reflect the powers of the tax authorities and the obligations of the entities.
CBDT’s Clarification on Revised Conditions
CBDT clarified that the conditions in Form 10AC issued between April 1, 2021 and June 3, 2022 will be treated as if they had been substituted with the revised conditions, effective from April 1, 2022. This means that even if an organization received its registration order earlier under the old set of conditions, those conditions are deemed to have been automatically replaced with the new conditions.
This clarification is significant because it creates uniformity across all organizations, regardless of when their forms were issued. It ensures that all entities are bound by the same set of rules aligned with the Finance Act 2022, thereby removing ambiguity about compliance obligations.
Practical Impact of Revised Conditions
The practical effect of this clarification is that trusts and institutions cannot rely on the wording of older orders to claim exemption from the updated compliance framework. Whether the order was issued in early 2021 or in mid-2022, the governing conditions are the same. As a result, organizations must carefully review their operations to ensure they do not fall into the category of specified violations that could lead to cancellation of registration.
Provisional Registration and Approval
The second major clarification deals with the issue of provisional registration and provisional approval. These categories were introduced as part of the re-registration regime to ensure that even newly formed entities could obtain a temporary registration while building their track record. Provisional registration is typically granted for a period of three years and is meant for entities that do not yet have sufficient activities or history to qualify for full registration.
Technical Issues in Form 10AC
During the financial year 2021-22, some entities applying for registration or approval faced a technical glitch. Instead of receiving an order titled “Order for registration” or “Order for approval,” they were issued Form 10AC with the title “Order for provisional registration” or “Order for provisional approval.” This was an error generated by the system and not the actual intent of the authority.
Such errors created confusion among institutions. Provisional approval carries different compliance requirements and is valid only for a limited period. For entities that had already been operating for several years and were otherwise entitled to full registration, being mistakenly issued a provisional order created unnecessary doubts about their status.
CBDT’s Clarification on Provisional Orders
To address this issue, CBDT clarified that all such forms shall be deemed to be valid orders for registration or approval, irrespective of the title used in the heading. In other words, if the content and intent of the order was to grant full registration or approval, the heading error will not affect its validity.
This clarification provides relief to many organizations, as they no longer need to worry about their registration status being provisional when it was actually meant to be permanent. It also avoids the need for such entities to reapply or undergo fresh scrutiny simply because of a technical error.
Significance of this Clarification
The clarification demonstrates CBDT’s recognition of practical challenges faced by organizations. By removing technical hurdles and ensuring that genuine approvals are not invalidated due to system-generated errors, CBDT has upheld the principles of fairness and certainty in the registration process.
Interplay Between Sections 12AB, 10(23C), and 80G
Understanding the CBDT clarification requires a closer look at the three key provisions where registration and approval play a central role.
Section 12AB
Section 12AB requires trusts and institutions engaged in charitable or religious purposes to register in order to avail of exemption under sections 11 and 12. Registration is the gateway for such entities to operate with income-tax benefits. After the Finance Act 2020, all existing entities had to migrate to section 12AB, and new entities could apply either for provisional or final registration depending on their stage of operations.
Section 10(23C)
This provision applies to institutions such as universities, educational institutions, hospitals, and other medical institutions. Approval under this section ensures that their income is exempt, provided it is applied solely to their stated purposes. The conditions under this section are strict, especially regarding the application of income and restrictions on diversion for private benefit.
Section 80G
Section 80G approval is sought by institutions that rely on donations from the public. Donations to such approved institutions are eligible for deduction in the hands of the donor. This makes 80G approval critical for organizations seeking to attract funding from individuals and corporations.
Unified Conditions and Compliance
With CBDT’s clarification, the revised conditions apply equally across all three provisions. Whether an entity is registered under section 12AB, approved under section 10(23C), or approved under section 80G, the conditions align with the provisions relating to specified violation. This creates consistency in compliance and ensures that all categories of institutions are subject to a uniform framework.
Specified Violations and Their Implications
One of the most significant aspects of the Finance Act 2022 was the introduction of specified violations. These violations form the basis on which registration or approval can be cancelled.
Nature of Specified Violations
Specified violations include circumstances such as:
- Income not being applied for the purposes for which the entity was established.
- Benefits being provided to related parties or specified persons.
- Activities not being genuine or not being carried out in accordance with the objectives.
- Non-compliance with requirements of other material laws.
Monitoring Compliance
The introduction of specified violations means that trusts and institutions are under continuous scrutiny even after registration. The Principal Commissioner or Commissioner has the power to call for documents, examine records, and determine whether a violation has occurred. This marks a shift from the earlier regime, where cancellation was relatively rare and usually required significant non-compliance.
Role of Form 10AC
Form 10AC now incorporates conditions that directly link registration to compliance with the provisions on specified violations. By issuing orders that contain these conditions, CBDT has ensured that organizations are clearly informed of the consequences of non-compliance at the time of registration itself.
Uniformity Across Registrations
One of the key objectives of the CBDT circular is to ensure uniformity across the registration framework. By deeming all orders issued between April 2021 and June 2022 to carry the revised conditions, CBDT has avoided a situation where different entities were bound by different sets of obligations depending on when their forms were issued.
This uniformity also reduces litigation. Without the clarification, organizations could have argued that they were bound only by the conditions present in their specific order, even if those conditions were outdated. The circular eliminates such arguments and ensures that all entities are treated alike.
Broader Policy Perspective
The clarifications issued by CBDT must also be understood in the broader context of policy. The government’s approach toward charitable and not-for-profit institutions has been to encourage genuine organizations while curbing misuse. By combining ease of registration through digital processes with strict monitoring of compliance through specified violation provisions, the policy strikes a balance between facilitation and regulation.
The focus on alignment, uniformity, and correction of technical errors shows that the intent is not to create unnecessary hardship but to ensure that the benefits of exemptions and approvals are enjoyed only by deserving institutions.
Practical Implications of CBDT Clarifications on Form 10AC
The issuance of clarifications by the Central Board of Direct Taxes regarding Form 10AC marks a significant shift in the regulatory landscape for trusts, institutions, and organizations seeking registration or approval under the Income-tax Act. These clarifications were made necessary by the amendments introduced in the Finance Act 2022, which empowered tax authorities to verify compliance, detect specified violations, and cancel registrations where necessary.
We examine the practical implications of these changes. It looks at how trusts and institutions must adapt their operational practices, compliance strategies, and governance structures to ensure they remain eligible for exemptions and approvals.
Compliance as an Ongoing Requirement
One of the most important implications of the CBDT clarification is the reinforcement of compliance as an ongoing obligation. Registration or approval is no longer a one-time formality. Instead, it must be maintained through continuous adherence to the conditions outlined in Form 10AC.
Monitoring Use of Income
Trusts and institutions must demonstrate that their income is applied exclusively for their stated objectives. Whether the purpose is charitable, religious, educational, or medical, income must be directed toward those activities. Failure to do so can amount to a specified violation.
For example, if a charitable trust diverts its funds for private investments unrelated to its objectives, it risks cancellation of its registration. Similarly, if an educational institution applies income toward commercial ventures not aligned with its mission, the registration can be questioned.
Avoiding Personal Benefit
Another practical compliance requirement is the prohibition on using organizational income or property for the personal benefit of trustees, members, or other specified individuals. Even indirect benefits, such as preferential contracts or salary payments beyond reasonable limits, can be treated as violations. Institutions must therefore maintain transparency in their financial dealings and ensure that compensation and contracts are justified.
Genuine Activities
The requirement that activities must be genuine places responsibility on organizations to ensure that their operations align with their declared purposes. Entities that merely exist on paper but do not carry out substantive charitable or educational activities risk losing their approvals. This also requires organizations to maintain proper documentation of their programs, beneficiaries, and outcomes to demonstrate genuine work.
Governance and Internal Controls
The revised conditions under Form 10AC make strong governance and internal controls essential for every registered trust or institution.
Role of Trustees and Governing Boards
Trustees or governing board members are accountable for ensuring compliance with the revised conditions. They must not only oversee the application of income but also monitor compliance with other laws, such as those relating to foreign contributions, labor, or environmental regulations.
Boards must also adopt policies that prevent conflicts of interest. For example, if a trustee has a business interest in a vendor supplying goods or services to the trust, the transaction should be disclosed and approved in a transparent manner, and it must reflect fair market value.
Financial Audits and Reporting
Regular audits are more critical than ever. Independent audits help verify that income is applied correctly, that there is no undue benefit to insiders, and that records are complete. Institutions must also ensure that their financial statements are filed on time and accurately reflect their operations.
Compliance with reporting requirements under the Income-tax Act, including filing of returns and maintenance of specified records, is part of the broader framework of responsibilities. Failure to comply with these requirements can be treated as evidence of a specified violation.
Documentation of Activities
Institutions must maintain detailed records of their activities. For example, an educational institution should keep track of the number of students enrolled, the facilities provided, and the financial assistance extended. A medical institution should document the services rendered to patients, including free or subsidized treatment. Charitable organizations must record the beneficiaries of their programs and the resources allocated to them.
Such documentation serves as evidence of genuine activities and is critical in case of any examination by the tax authorities.
Implications for New Organizations
The clarifications also have implications for newly formed organizations seeking provisional registration.
Provisional to Final Registration
A new organization without an established track record can initially obtain provisional registration. During this period, it must begin its operations and build evidence of genuine activity. At the end of the provisional period, it must apply for final registration, at which point tax authorities will examine whether its activities align with its objectives and whether it has complied with the conditions.
Importance of Early Compliance
New organizations must adopt compliance practices from the very beginning. Even though they may not yet be fully operational, they should avoid activities that could later be considered violations. For instance, they should not allow conflicts of interest in initial contracts or use their funds for unrelated activities, as these could jeopardize their eligibility for final registration.
System-Generated Errors
The CBDT clarification that provisional registration orders mistakenly issued as full registration orders, and vice versa, will be deemed valid is particularly beneficial for new organizations. This prevents them from facing unnecessary hurdles due to technical glitches. However, they must still comply with all applicable conditions during the provisional period.
Donor Confidence and Fundraising
Another practical implication of the CBDT clarification relates to donor confidence. For institutions approved under section 80G, the ability to attract donations depends on their compliance status.
Validity of 80G Approval
Donors rely on the fact that contributions to approved institutions qualify for deduction under section 80G. If an institution’s approval is cancelled due to specified violations, donors may lose the tax benefit. This makes it imperative for institutions to maintain compliance not only for their own benefit but also to protect the interests of their supporters.
Transparency in Fund Utilization
Donors increasingly expect transparency in how funds are utilized. The clarified conditions under Form 10AC reinforce this expectation by making proper utilization of income a legal requirement. Institutions that can demonstrate compliance are more likely to inspire confidence and attract continued support.
Risk of Cancellation and Its Consequences
One of the strongest implications of the revised conditions is the risk of cancellation in case of specified violations.
Impact of Cancellation
If a trust or institution loses its registration, its income becomes fully taxable. This can have devastating financial consequences, as exemptions under sections 11, 12, 10(23C), or 80G would no longer apply.
For example, an educational institution with substantial annual income that loses its approval under section 10(23C) would be taxed at normal rates, leaving little surplus for its objectives. Similarly, a charitable trust that loses registration under section 12AB would find its income fully exposed to taxation, significantly reducing its ability to serve its beneficiaries.
Reapplying After Cancellation
Reapplying for registration after cancellation is not simple. The institution must demonstrate that it has corrected the violations and is once again eligible. This process can be time-consuming and uncertain, especially if the violations involve misuse of funds or lack of genuine activities.
Preventive Measures
Given the severity of the consequences, organizations must adopt preventive measures. These include regular internal reviews, compliance audits, and consultation with experts to ensure that all conditions under Form 10AC are being met.
Broader Implications for the Nonprofit Sector
The clarifications on Form 10AC have broader implications for the nonprofit and charitable sector as a whole.
Enhanced Accountability
The revised framework increases accountability across the sector. Organizations are no longer able to operate without scrutiny. Every institution that seeks tax benefits must demonstrate genuine work and strict compliance with the law.
Level Playing Field
By ensuring that all entities, regardless of when they obtained registration, are bound by the same set of conditions, CBDT has created a level playing field. This prevents some organizations from enjoying lenient conditions simply because they were registered earlier under an outdated framework.
Professionalization of Management
The increasing compliance burden is likely to encourage the professionalization of nonprofit management. Organizations may need to hire dedicated compliance officers, accountants, and legal advisors to ensure adherence to conditions. This, in turn, could improve governance standards across the sector.
Discouragement of Non-Genuine Entities
The strict conditions and risk of cancellation serve as a deterrent to non-genuine entities that previously sought registration only to misuse tax exemptions. By aligning conditions with the provisions on specified violations, the framework makes it harder for such entities to operate.
Interconnected Nature of the Provisions
The clarifications also highlight the interconnected nature of sections 12AB, 10(23C), and 80G.
Combined Compliance Requirements
Institutions that hold multiple approvals must comply with the conditions applicable to each. For example, an educational trust may be registered under section 12AB, approved under section 10(23C), and approved under section 80G. Failure to comply with the conditions of any one approval could put all approvals at risk.
Administrative Efficiency
The unified conditions introduced by CBDT simplify administration. Instead of dealing with multiple sets of conditions, institutions can focus on a common compliance framework that applies across provisions. This reduces confusion and improves efficiency in governance.
Conclusion
The clarifications issued by the Central Board of Direct Taxes on Form 10AC have fundamentally reshaped the framework within which trusts, institutions, and charitable organizations must operate. Through the amendments introduced by the Finance Act 2022 and the subsequent circulars, compliance has been transformed from a one-time condition of registration into an ongoing responsibility requiring continuous vigilance.
The reinforced role of the Principal Commissioner and Commissioner of Income-tax ensures that approvals and registrations are no longer passive endorsements but actively monitored privileges. Institutions must now demonstrate that their income is genuinely applied for their stated objectives, that their activities are authentic and transparent, and that no undue benefits accrue to trustees or insiders. This shift aligns exemptions with accountability, ensuring that tax benefits serve public purposes rather than private gain.
For newly formed organizations, the provisional-to-final registration process underscores the importance of adopting compliance practices from the very beginning. For long-standing entities, the substitution of earlier conditions with the revised ones eliminates inconsistencies and brings all institutions under a uniform regime. In both cases, the message is clear: tax exemptions and approvals are contingent upon adherence to law, governance standards, and transparency.
The implications extend far beyond compliance. Donor confidence, fundraising capacity, and institutional credibility now rest heavily on how effectively an organization aligns with the clarified conditions. Institutions that meet these expectations will not only safeguard their registrations but also strengthen their public trust, attract sustainable support, and expand their social impact. Conversely, those that fail to comply face the dual risk of losing exemptions and damaging their reputation.
At the sectoral level, these clarifications foster greater accountability, professionalization, and fairness. By applying uniform standards and deterring non-genuine entities, the framework enhances credibility and levels the playing field for all organizations. While the compliance burden may appear stringent, it also provides an opportunity for institutions to build robust governance structures, reinforce their missions, and ensure long-term sustainability.
In essence, the CBDT’s clarifications on Form 10AC mark a decisive step toward balancing regulatory oversight with the legitimate needs of genuine charitable, educational, medical, and religious organizations. By embedding compliance, transparency, and accountability into the very conditions of registration, the framework ensures that the benefits of tax exemptions continue to support institutions that are truly committed to public welfare.