Question

Assertion (A): Non-profit organisations (NPOs) in India are exempt from paying taxes and utilize their funds for developmental activities rather than distributing profits to shareholders.
Reason (R): Non-profit organisations are primarily established to earn profits and distribute them among their members.
Select the correct answer from the codes given below:

• A. Both (A) and (R) are true, and (R) is the correct explanation of (A)
• B. Both (A) and (R) are true, but (R) is not the correct explanation of (A)
• C. (A) is true, but (R) is false
• D. (A) and (R) are false

Answer 1

Answer:

C. (A) is true, but (R) is false

Non-Profit Organisations (NPOs) in India

• Non-profit organisations, often referred to as Not-for-Profit Organisations (NPOs), are entities primarily established to pursue social, charitable, educational, religious, or other public welfare objectives, rather than to generate and distribute profits.
• Their core mission revolves around serving a cause or community, with any surplus income being reinvested into the organisation's activities.

Tax Exemption for NPOs (Assertion A is True)

• In India, NPOs are generally exempt from paying income tax on their surplus income, provided they adhere to specific regulations and provisions outlined in the Income Tax Act, 1961.
• This tax exemption is a crucial incentive for NPOs, enabling them to maximize their resources for charitable and developmental activities, instead of diverting them to tax payments.
• Key sections of the Income Tax Act, 1961, that grant tax exemptions to NPOs include:
  • Section 11 and 12: Deals with income derived from property held under trust or other legal obligations solely for charitable or religious purposes.
  • Section 10(23C): Exempts income of certain educational institutions, hospitals, and other specified institutions.
• For these exemptions, NPOs must typically obtain 12A registration (under Section 12A of the Income Tax Act) and often 80G registration, which allows donors to claim tax deductions on their contributions.
• The funds accumulated by NPOs are legally bound to be utilized exclusively for their stated charitable or developmental objectives. They are prohibited by law from distributing profits or surpluses to their members, trustees, or shareholders.

Primary Objective of NPOs (Reason R is False)

• The fundamental and defining characteristic of a non-profit organisation is its inherent opposition to profit-making for distribution. NPOs are not established to earn profits for their members or shareholders.
• Any financial surplus generated by an NPO is always retained and reinvested into the organisation itself to further its social, charitable, or public service mission.
• If an organisation's primary aim is to generate and distribute profits among its members or owners, it falls under the category of a 'for-profit' or commercial entity, not an NPO.
• This distinction is critical for legal recognition, regulatory compliance, and eligibility for various grants and concessions.

Legal Frameworks for NPOs in India

• NPOs in India can be registered under different legal structures, each governed by specific acts:
  • Trusts: Formed under the Indian Trusts Act, 1882, or state-specific Public Trusts Acts (e.g., Bombay Public Trusts Act, 1950).
  • Societies: Registered under the Societies Registration Act, 1860, or corresponding state acts. These are usually membership-based organisations.
  • Section 8 Companies: Incorporated under Section 8 of the Companies Act, 2013 (previously Section 25 of the Companies Act, 1956). These are companies formed with charitable objects, with a strict prohibition on the payment of dividends to their members.
• The Foreign Contribution (Regulation) Act, 2010 (FCRA) is another crucial piece of legislation that governs the acceptance and utilisation of foreign donations by NPOs in India. Organisations receiving foreign funds must be registered under FCRA.