The audit of trusts and NGOs in India is not simply a matter of routine compliance; it plays a critical role in maintaining the credibility and transparency of charitable and religious organisations. The Income-tax Act prescribes specific conditions under which an audit becomes mandatory and dictates the form and manner in which such audit reports must be submitted.
For the financial year 2022-23 and assessment year 2023-24, the audit reporting landscape for trusts has undergone significant transformation with the introduction of revised formats for Form 10B and Form 10BB. These changes reflect an effort to align audit reporting with the broader compliance framework, particularly the data requirements of ITR-7, and to standardise the information received by the Income Tax Department.
We examine the legal framework, applicability criteria, recent amendments, and structural overview of the updated forms, setting the stage for a detailed exploration of their contents in the subsequent parts.
Requirement of Audit under the Income-tax Act
Mandatory audit condition
Under section 12A(1)(b) of the Income-tax Act, a trust or institution is required to have its accounts audited if its total income, computed without giving effect to sections 11 and 12, exceeds the maximum amount not chargeable to income tax. The term accountant is defined in section 288(2), and such an individual must carry out the audit in the prescribed manner.
The audit report must be furnished by the specified date. This date is one month before the due date for furnishing the return of income under section 139(1). Failure to meet this timeline can have serious consequences for the exemption claims of the organisation.
Consequences of non-filing
Up to assessment year 2022-23, the failure to furnish the prescribed audit report meant that the benefits under sections 11 and 12 were withdrawn for that year. From assessment year 2023-24 onwards, the approach has shifted. Instead of outright denial of exemption, the income will be computed in accordance with sections 13(10) and 13(11), which may still lead to significant tax liabilities.
This change is intended to balance the need for compliance with the recognition that non-filing does not necessarily imply complete ineligibility for exemption, but the adjusted computation rules can still result in financial implications for the trust.
Forms for Filing Audit Report
New forms and rule changes
The reporting formats and procedural requirements for audits of charitable and religious entities are governed by Rules 16CC and 17B of the Income-tax Rules, 1962. With effect from 1 April 2023, these rules have been amended through the Income-tax (3rd Amendment) Rules, 2023. The amendments have introduced new formats for Form 10B and Form 10BB, accompanied by expanded annexures and the use of mandatory code numbers for various disclosures.
This overhaul addresses longstanding concerns with the old forms. The previous Form 10B, in place since 1973, and Form 10BB, in place since 2006, had become outdated. They did not reflect the numerous changes in the legal and regulatory environment, particularly those affecting the registration and approval of charitable institutions under section 12AB and section 10(23C).
The mismatch between the data collected in these forms and that required for ITR-7 filing created inefficiencies for both the organisations and the tax authorities. The new forms aim to create consistency, provide for more detailed reporting, and enable easier cross-verification of information across different filings.
Rationale for change
Over the years, amendments to the law have sought to bring uniformity between the regimes under section 12AB and section 10(23C). However, the audit forms had not kept pace with these changes. For example, requirements for reporting certain transactions, treatment of voluntary contributions, and classification of income were handled differently in the two regimes, leading to confusion and potential non-compliance.
The new forms are more comprehensive. They require detailed information linked to specific codes, which facilitates analysis by the Income Tax Department and helps ensure that the reporting aligns with the criteria for registration renewal and exemption claims. This move towards structured and standardised data collection reflects a broader trend towards digitisation and analytics-driven compliance.
Pre and post amendment position
Before the amendment, there were two distinct forms: Form 10B for entities registered under section 12AB and Form 10BB for entities approved under section 10(23C). Now, the forms are common to both regimes, but the applicability is determined by the size and nature of the organisation.
Form 10B is intended for larger or specified NGOs, while Form 10BB applies in other cases. The separation is no longer based on the legal provision under which the entity is registered or approved but on practical factors such as income thresholds and foreign contribution status.
Applicability of Forms
Criteria for Form 10B
Form 10B must be filed if any of the following conditions are met:
- The total income of the trust or institution, before applying exemptions under sections 11 and 12 or section 10(23C)(iv), (v), (vi), or (via), exceeds five crore rupees during the previous year.
- The trust or institution has received any foreign contribution during the previous year.
- The trust or institution has applied any part of its income outside India during the previous year.
Criteria for Form 10BB
Form 10BB applies in all cases not covered by the criteria for Form 10B. This typically includes smaller organisations with incomes below the threshold and no foreign contribution or application of funds outside India.
This approach simplifies the selection process for the appropriate form but still requires careful assessment of income and transactions to avoid errors in compliance.
Key Practical Issues in Applicability
In practice, determining the correct form can raise a number of questions. For example, how should an organisation treat a NIL foreign contribution return if it is FCRA-registered but has not received any new foreign grants, interest, or other income of that nature during the year? If an organisation earns only bank interest on foreign contribution funds, does this count as having received foreign contribution for the purpose of form selection?
There are also cases where the FCRA registration of an NGO has been cancelled or its renewal denied, yet the organisation continues to receive bank interest on existing foreign contribution balances. These scenarios require careful interpretation of the law and guidelines to determine whether Form 10B is triggered.
Another area of uncertainty is the calculation of the five crore income threshold. Should this be based on income computed on a purely commercial basis or should it follow the computation rules under the Income-tax Act? Should voluntary contributions towards the corpus be included in this calculation? How should capital gains deemed to be utilised under section 11(1A) be treated? The answers to these questions can vary based on interpretation, but they directly affect the applicability of Form 10B.
Changes in Audit Report Content
Scope of financial statements
In the pre-amendment era, the audit report was concerned primarily with the balance sheet and the profit and loss account. The new formats expand this scope to include the balance sheet along with either an income and expenditure account or a profit and loss account. This aligns better with the presentation of accounts in many charitable institutions, which may not prepare a profit and loss account in the traditional commercial sense.
Auditor certifications
The amended formats require the auditor to certify the location where the books of account have been maintained, referencing the relevant row in the annexure to the audit report. This adds a level of specificity that enables the tax authorities to verify compliance with the maintenance of books and records requirements.
Furthermore, the auditor must certify that the annexures to the audit report present a true and correct view, and that the accounts give a true and fair view of the financial position and results of the organisation. Any observations or qualifications must be explicitly stated. This formalises and strengthens the role of the auditor in ensuring the accuracy and completeness of the reported information.
Overview of Form 10BB
Form 10BB, in its revised form, is structured with 32 clauses, nine sections, six schedules, and six notes. It is intended for entities that do not meet the criteria for filing Form 10B. Despite being shorter and less detailed than Form 10B, it still requires substantial disclosure and careful preparation.
The key reporting areas in Form 10BB include general information about the trust and its management, details of voluntary contributions (including their linkage with Form 10BD filings), income other than voluntary contributions, the application of income (both allowable and disallowable), source-wise application of funds, transactions with related parties under section 13(3), and reporting of specified violations under section 12AB(4).
Common issues in completing Form 10BB include determining whether income should be classified on a commercial or gross basis, deciding on the treatment of capital gains deemed to be applied under section 11(1A), understanding how to report application of income when it comes from prior year balances, and assessing whether donations to non-registered entities or individuals must be disallowed. Auditors must also determine the evidence needed to certify that there has been no benefit to specified persons.
Overview of Form 10B
Form 10B is the more detailed of the two audit report formats. It contains 49 clauses, 22 sections, 26 schedules, and 12 notes. Its design reflects the greater complexity and scale of the entities for which it is intended.
Key reporting areas include registration details coded as per the notes, the nature of the organisation’s objects (coded under section 2(15)), maintenance of books and documents in accordance with Rule 17AA, income not subject to application, compliance with sections 13(10) and 13(11), reporting of transactions with specified persons under section 13(3), and detailed business activity reporting for general public utility, business undertakings under section 11(4), and incidental business under section 11(4A).
The form also requires comprehensive reporting on voluntary contributions, their application, capital assets acquired under section 11(1A), and purpose-wise application of income. This level of detail demands careful record-keeping and an in-depth understanding of the relevant legal provisions.
Clause-by-Clause Analysis of Form 10BB
Clause 1 – General Information
This section seeks basic identification details such as the name, address, PAN, and registration number of the trust or institution. The details of registration under section 12AB or approval under section 10(23C) are also to be disclosed, along with the effective date and period of validity.
Auditors must ensure that these details match the registration certificate and the entries in the Income Tax Department’s database. Mismatches can lead to unnecessary queries and delays in processing exemption claims.
Clause 2 – Nature of Activities and Objects
The revised form uses a code-based system to categorise the nature of the organisation’s objects. The classification aligns with section 2(15) of the Income-tax Act, which defines charitable purposes to include relief of the poor, education, yoga, medical relief, preservation of environment, preservation of monuments, and advancement of any other object of general public utility.
Accurate coding is crucial because the applicability of certain provisions, including restrictions on business activities, depends on the nature of the objects. For example, entities engaged in advancement of general public utility face limits on receipts from commercial activities under the provision to section 2(15).
Clause 3 – Maintenance of Books of Account
The auditor must report whether the books of account and other documents prescribed under Rule 17AA have been maintained. This includes records of voluntary contributions, income, application of income, and investments.
Additionally, the clause requires the location of the books to be stated, which could be the registered office, another administrative office, or the place where day-to-day operations are managed.
Failure to maintain books at the declared location or as per Rule 17AA may lead to a violation reportable under section 12AB(4).
Clause 4 – Voluntary Contributions
This section is designed to reconcile the voluntary contributions disclosed in the income and expenditure account with those reported in Form 10BD. Separate reporting is required for corpus donations, specific purpose donations, and other voluntary contributions.
The auditor must verify the linkage between donors reported in Form 10BD and the amounts shown here. Any mismatch may attract penalties under section 271K and may also affect the credibility of the exemption claim.
Clause 5 – Income Other than Voluntary Contributions
Here, the auditor reports income from house property, capital gains, business activities, and other sources. The form expects disclosure at gross levels rather than net after expenses, which means adjustments must be made to reconcile with the financial statements.
Particular attention should be paid to business income, as its tax treatment depends on whether it falls under section 11(4) (business held under trust) or section 11(4A) (incidental business activity).
Clause 6 – Corpus Investments and Deposits
This clause requires reporting of investments or deposits made out of corpus funds in modes specified under section 11(5). Any deviation from the specified modes can be treated as an application for non-charitable purposes and taxed accordingly.
The auditor must verify the source of funds for such investments and confirm compliance with both the mode and the utilisation requirements.
Clause 7 – Application of Income in India
The form requires detailed reporting of income applied for charitable or religious purposes in India during the year. This includes amounts spent on revenue expenditure, capital expenditure, and specified purposes such as scholarships or medical relief.
The source of application must also be identified—whether it came from current year’s income, accumulated funds, or borrowings.
Clause 8 – Application of Income Outside India
If any amount is applied outside India, the auditor must confirm whether prior approval of the Board has been obtained under section 11(1)(c). The reporting must specify the country, purpose, and amount.
Application outside India without approval may lead to the amount being taxed as income not applied for charitable purposes.
Clause 9 – Accumulation of Income
This section deals with the accumulation of income under section 11(2). The auditor must report the amount accumulated, the specific purpose for which it is accumulated, and whether Form 10 has been filed within the prescribed time.
The form also seeks details of utilisation of past accumulations, along with any unutilised amounts that may be deemed as income under section 11(3).
Clause 10 – Disallowable Application of Income
Certain applications are explicitly disallowed under the Income-tax Act. These include:
- Donations to other charitable organisations not registered under section 12AB or approved under section 10(23C).
- Benefits provided to specified persons under section 13(3).
- Investments in prohibited modes.
The auditor must identify such disallowable applications and report them separately, as they directly affect the computation of taxable income.
Clause 11 – Transactions with Specified Persons
Under section 13(3), specified persons include founders, trustees, substantial contributors, and their relatives. Any transaction with such persons must be reported, whether it is in the nature of payment, provision of services, or any other benefit.
Even if the transaction is at arm’s length, the auditor must report it for transparency. The Income Tax Department can then decide whether the benefit is permissible or taxable.
Clause 12 – Business Undertakings Held Under Trust
If the trust holds a business undertaking, the auditor must report the nature of the business, the income derived, and whether separate books are maintained as required under section 11(4).
Any income not applied for charitable purposes from such undertakings may be taxable.
Clause 13 – Incidental Business Activities
For business activities incidental to the attainment of the objectives, the auditor must confirm compliance with section 11(4A), including maintenance of separate books of account.
Failure to meet these conditions can result in the entire business income being taxed.
Clause 14 – Capital Gains and Section 11(1A)
Capital gains are exempt if the net consideration is utilised for acquiring another capital asset for charitable purposes. The auditor must verify such utilisation and report the dates of sale and acquisition to ensure compliance with section 11(1A).
Clause 15 – Borrowings and Repayment
This clause reports borrowings taken for charitable purposes and their repayment. If borrowings are used for non-charitable purposes, the related expenditure may be disallowed.
Clause 16 – Investments in Concern Where Specified Person Has Interest
Section 13(2)(h) prohibits investment in a concern where a specified person has substantial interest. The auditor must report such investments, including the percentage of shareholding or voting rights held by specified persons.
Clause 17 – Anonymous Donations
Anonymous donations are taxable under section 115BBC, subject to certain exemptions. The auditor must report the amount and whether it exceeds the permissible limits.
Clause 18 – Violations Reportable Under Section 12AB(4)
Any non-compliance that could lead to cancellation of registration, such as non-genuine activities or application of income for non-charitable purposes, must be reported here.
Clause 19 – Foreign Contributions
If the organisation receives foreign contributions, the auditor must verify compliance with the Foreign Contribution (Regulation) Act (FCRA), including registration status, permissible purposes, and utilisation.
Clause 20 – Disclosures Relating to TDS Compliance
The form seeks confirmation that tax has been deducted at source where required and that the amounts have been deposited within the prescribed time. Non-compliance may lead to disallowance under section 40(a)(ia).
Clause 21 – Details of Assets and Liabilities
The auditor must provide a summary of assets and liabilities at the year-end, reconciling them with the financial statements. This helps verify the deployment of funds for charitable purposes.
Clause 22 – Certification
The final clause contains the auditor’s certification that the information provided in the annexures and schedules is true and correct and that the accounts give a true and fair view of the financial position and results of the organisation. Any qualifications or observations must be explicitly stated.
Key Schedules in Form 10BB
Schedule VC – Voluntary Contributions
Details of each category of voluntary contributions, linked to donor reporting in Form 10BD.
Schedule AI – Income Applied
Breakdown of income applied during the year, distinguishing between current year income and past accumulations.
Schedule DA – Disallowable Application
List of applications disallowed under the Act, including payments to specified persons and non-registered entities.
Schedule FA – Foreign Application
Details of funds applied outside India, with necessary approvals.
Schedule TDS – Tax Deduction at Source
Verification of TDS compliance.
Schedule AL – Assets and Liabilities
Reconciliation of assets and liabilities with application of funds.
Practical Challenges in Completing Form 10BB
- Reconciling financial statements with gross income reporting requirements.
- Linking donor data in Form 10BD with income disclosures.
- Correct classification of objects under section 2(15).
- Distinguishing between revenue and capital expenditure for application reporting.
- Identifying related party transactions that are not obvious.
- Calculating and reporting anonymous donations correctly.
- Handling foreign contribution interest income and determining its classification.
Applicability of Form 10B
Form 10B applies to:
- Trusts or institutions registered under section 12AB with total income exceeding the basic exemption limit before claiming exemptions under sections 11 and 12.
- Entities approved under section 10(23C) whose income exceeds the threshold before exemptions.
- Any other trust or institution specifically notified to file Form 10B.
The form is to be e-filed along with the ITR-7 and must be digitally signed by a chartered accountant in practice.
Structure of Form 10B
Form 10B contains:
- Part A: General information.
- Part B: Clause-by-clause audit reporting (49 clauses).
- Part C: Schedules to be filled as per relevant clauses.
- Part D: Certification by the auditor.
Each clause focuses on a specific compliance requirement, and incorrect or incomplete reporting can lead to notices or even cancellation of registration.
Clause-by-Clause Overview
Clause 1 to 5 – General and Registration Details
These clauses require the auditor to confirm the trust’s name, PAN, address, registration number, date of registration under section 12AB or section 10(23C), and validity period.
The auditor must cross-check these with the certificate of registration and ensure that the registration status is active as per the Income Tax Department’s records.
Clause 6 – Nature of Activities
The form requires coding of the primary and secondary activities based on section 2(15) definitions. The choice of activity affects the application of commercial receipt limits for entities engaged in advancement of general public utility.
Clause 7 – Maintenance of Books and Records
This clause confirms whether books prescribed under Rule 17AA are maintained, including cash books, ledgers, vouchers, donor records, and investment registers. The location of books must also be disclosed.
Clause 8 – Details of Voluntary Contributions
Separate reporting is required for:
- Corpus donations.
- Specific purpose donations.
- Other voluntary contributions.
Amounts must reconcile with Form 10BD. The auditor should ensure that corpus donations are supported by donor instructions in writing.
Clause 9 – Income from Other Sources
The clause seeks disclosure of:
- Rental income from property.
- Business income.
- Capital gains.
- Interest and dividend income.
The reporting is at gross level, so adjustments may be necessary to match with financial statements.
Clause 10 – Corpus Funds and Investments
The auditor must confirm whether corpus funds are invested in modes specified under section 11(5). Any deviation should be reported, as it may lead to taxable treatment.
Clause 11 – Application of Income in India
This is one of the most detailed clauses and requires:
- Amount applied for charitable purposes in India.
- Distinction between revenue and capital expenditure.
- Source of funds (current year income, accumulation, borrowings).
Accurate bifurcation is critical for exemption eligibility.
Clause 12 – Application Outside India
If funds are spent outside India, details of purpose, country, amount, and approval under section 11(1)(c) must be provided. Application without approval is taxable.
Clause 13 – Accumulation of Income
The clause requires:
- Amount accumulated under section 11(2).
- Purpose of accumulation.
- Filing of Form 10 within time.
- Utilisation of past accumulations.
Any unutilised amount may be deemed income under section 11(3).
Clause 14 – Disallowable Application
This includes expenditure or payments that are not allowed for exemption computation, such as:
- Donations to non-registered entities.
- Benefits to specified persons.
- Investment in prohibited modes.
Clause 15 – Related Party Transactions
Transactions with specified persons under section 13(3) must be reported, even if they are at market value.
Clause 16 – Business Undertakings Held Under Trust
The auditor must report details of such undertakings, income generated, and maintenance of separate books as required under section 11(4).
Clause 17 – Incidental Business Activities
For incidental business, compliance with section 11(4A) and maintenance of separate books must be confirmed.
Clause 18 – Capital Gains Treatment
Details are required if capital gains are claimed as exempt under section 11(1A) by reinvesting in another capital asset. Dates and amounts must be reported.
Clause 19 – Borrowings
Borrowings for charitable purposes and their repayment are to be disclosed. Misuse for non-charitable purposes can affect exemption.
Clause 20 – Investments in Concerns of Specified Persons
Section 13(2)(h) violations must be reported if investments are in concerns where specified persons have substantial interest.
Clause 21 – Anonymous Donations
Report amounts taxable under section 115BBC along with category of institution (wholly religious, wholly charitable, or mixed).
Clause 22 – Violations Leading to Cancellation
Non-genuine activities or misuse of income that may trigger section 12AB(4) action should be highlighted.
Clause 23 – Foreign Contribution Compliance
Report receipt and utilisation of foreign contributions, ensuring compliance with FCRA provisions.
Clause 24 – TDS Compliance
Confirm that TDS has been deducted and deposited where applicable.
Clause 25 – Receipts from Commercial Activities
Particularly relevant for entities under advancement of general public utility, this clause ensures that commercial receipts do not breach the 20% limit.
Clause 26 – Inter-Charity Donations
Details of donations to other trusts, whether corpus or non-corpus, must be provided with registration status of recipient trust.
Clause 27 – Corpus Utilisation
If corpus funds are utilised for purposes other than allowed under section 11(5), details must be given.
Clause 28 – Reversal of Application
Report any reversal of earlier application due to refunds, cancellations, or reclassification.
Clause 29 – Refunds of Grants
If grants received earlier are refunded during the year, details must be disclosed.
Clause 30 – Schedule AL: Assets and Liabilities
A complete reconciliation of assets and liabilities is required, detailing how funds are deployed.
Clause 31 – Schedule VC: Voluntary Contributions
Breakdown by category, cross-referenced to donor details in Form 10BD.
Clause 32 – Schedule AI: Income Applied
A detailed application statement separating revenue and capital uses.
Clause 33 – Schedule DA: Disallowable Application
List of all disallowable expenditures.
Clause 34 – Schedule FA: Foreign Application
Complete details of funds applied outside India.
Clause 35 – Schedule TDS
Verification of TDS deduction and deposit.
Clause 36 – Schedule IA: Income Accumulated
Information on current and past accumulations.
Clause 37 – Schedule BP: Business Undertakings
Reporting of business held under trust and incidental business activities.
Clause 38 – Schedule CG: Capital Gains
Details of gains and utilisation for exemption claims.
Clause 39 – Schedule VC-AN: Anonymous Donations
Breakdown and taxability.
Clause 40 – Schedule EC: Expenditure Classification
Revenue vs capital expenditure classification for reporting and compliance.
Clause 41 – Schedule RP: Related Parties
Transactions with related parties in monetary and non-monetary form.
Clause 42 – Schedule SP: Specified Persons
Details of specified persons under section 13(3).
Clause 43 – Schedule INV: Investments
List of investments with mode of holding under section 11(5).
Clause 44 – Schedule FC: Foreign Contribution
Year-wise foreign contribution receipts and utilisation.
Clause 45 – Schedule IA-UT: Unutilised Trust Income
Details of income not applied and reasons.
Clause 46 – Schedule COM: Commercial Receipts
Reporting of commercial receipts for entities under section 2(15) restrictions.
Clause 47 – Schedule INT: Interest Income
Breakdown of interest income from various sources.
Clause 48 – Schedule RE: Refunds and Reversals
All refunds or reversals of prior applications.
Clause 49 – Certification
Auditor’s certification confirming true and fair reporting, along with any qualifications or observations.
Practical Considerations for Auditors
- Cross-verifying Form 10BD donor data with Form 10B voluntary contributions.
- Ensuring accurate classification of capital and revenue expenditure.
- Reconciling commercial receipts with limits under section 2(15).
- Checking FCRA compliance before certifying foreign utilisation.
- Maintaining clear audit trails for corpus fund movements.
- Identifying related party transactions that may not be evident from the ledger alone.
- Verifying that accumulations under section 11(2) are supported by timely Form 10 filings.
- Reviewing investment portfolios to ensure section 11(5) compliance.
- Confirming that capital gains exemption under section 11(1A) is backed by reinvestment evidence.
- Ensuring that borrowings and their repayments are for charitable purposes only.
Conclusion
Auditing trusts and NGOs under the Income-tax Act for FY 2022-23 / AY 2023-24 has become significantly more structured, transparent, and compliance-driven. The revised formats of Form 10B and Form 10BB are not mere reporting tools; they are comprehensive compliance checklists that bridge the gap between statutory requirements, operational transparency, and public trust.
The detailed clause-by-clause reporting, integration with donor disclosures in Form 10BD, cross-verification with FCRA regulations, and strict adherence to section 11(5) investment norms all point towards a unified compliance ecosystem. For trusts and NGOs, this means the focus must shift from year-end audit formality to ongoing documentation, accurate classification of transactions, and proactive internal reviews.
For auditors, the responsibility extends beyond financial verification, they must ensure legal compliance, detect governance gaps, and provide value-added guidance that helps organisations retain their registration and exemptions. Errors in reporting, delayed filings, or overlooking seemingly minor clauses can lead to significant repercussions, including taxation of income, penalties, or even cancellation of registration under section 12AB or section 10(23C). In this evolving compliance landscape, the key to smooth audits lies in maintaining robust books and records throughout the year, ensuring donor records and statutory filings are consistent and accurate, periodically reviewing commercial activity thresholds and accumulation utilisation, and aligning governance practices with statutory requirements.
Ultimately, an efficient audit process not only ensures compliance with the law but also reinforces an organisation’s credibility in the eyes of regulators, donors, and beneficiaries alike. By treating the audit as a year-round accountability exercise rather than a post-year-end formality, trusts and NGOs can strengthen both their operational integrity and their public image, thereby ensuring sustainable service to their charitable objectives.