Audit of Charitable trust or NGO under section 12A (b)

If you’re involved in running a charitable trust or NGO, keeping your finances in order is one of your most important tasks. Part of this responsibility includes making sure your organization gets audited regularly, especially if you’re seeking tax exemptions under Section 12A of the Income Tax Act.

But what exactly does an audit involve? Why is it necessary? Let’s break it down into simple terms to help you understand the process and keep your organization compliant.

What is Section 12A?

To begin with, Section 12A is a part of the Income Tax Act that allows charitable trusts and NGOs to apply for exemptions on their income. Once your organization is registered under this section, you are eligible to claim tax exemption on the income earned, as long as it’s used for charitable activities.

However, to maintain this exemption, the law requires that your trust or NGO undergoes regular audits, which is outlined under Section 12A(b).

What Does Section 12A(b) Require?

Section 12A(b) specifies that if your trust or NGO’s income exceeds the basic exemption limit (currently ₹2.5 lakhs), you must have your accounts audited by a certified chartered accountant. After the audit is completed, an audit report needs to be prepared in the format of Form 10B and submitted to the Income Tax Department.

If this requirement is not met, your organization could lose its tax-exempt status, and you may have to pay taxes on the income.

Why is an Audit Important?

Conducting an audit is not just a legal formality—it plays a crucial role in keeping your organization on track. Here’s why audits are essential:

1. Ensures Transparency: An audit gives a clear overview of how your organization is handling its finances, which can help maintain transparency with donors, the government, and the public.
2. Legal Compliance: Audits help ensure that your trust or NGO is following all legal and tax-related guidelines, so you don’t lose your tax exemption under Section 12A.
3. Promotes Accountability: By having your financial records reviewed, you show that your organization is managing its funds properly and sticking to its charitable goals.
4. Prevents Mismanagement: Regular audits can uncover financial errors or improper use of funds, ensuring that resources are used responsibly.

Key Steps for Auditing under Section 12A(b)

If your organization falls under the audit requirement, here’s what you need to know:

1. Appoint a Chartered Accountant (CA): Your accounts need to be audited by a certified CA. They will go through your organization’s financial documents to check for accuracy and compliance.
2. Maintain Proper Records: Keeping detailed records of all financial transactions—including income, expenses, donations, and investments—is critical. Organized bookkeeping makes the audit process smoother.
3. Submit Form 10B: Once the audit is complete, the CA will prepare an audit report in Form 10B. This form must be submitted to the Income Tax Department to ensure your tax-exempt status is maintained.
4. Meet the Deadline: The audit report must be filed before the deadline for submitting your income tax return, which is generally by September 30th of the assessment year.
5. Full Disclosure of Income: During the audit, all income sources, such as donations and grants, should be disclosed. You must also show how these funds were spent to confirm they were used for charitable purposes.
6. Consequences of Non-Compliance: Failure to conduct the audit or improper use of funds could result in penalties or the loss of your organization’s tax-exempt status.

Common Challenges in the Audit Process

Here are some of the common issues trusts and NGOs face during audits, and how to deal with them:

• Inconsistent Recordkeeping: Not maintaining accurate financial records can lead to delays or problems during the audit. It’s important to keep all documentation, such as receipts and invoices, properly organized.
• Improper Use of Funds: If funds are not used solely for charitable purposes, this can lead to penalties or loss of tax exemptions.
• Missing Filing Deadlines: Submitting your audit report or tax returns late can result in fines or disqualification from tax exemptions.

How to Prepare for an Audit under Section 12A(b)

To make the audit process as smooth as possible, here are some tips to help your trust or NGO prepare:

1. Organize Financial Records: Keep all your financial transactions documented clearly, including donations, expenses, and grants. This will make it easier when the audit takes place.
2. Start Early: Don’t wait until the last minute to prepare for the audit. Keeping your records updated throughout the year will help you avoid a stressful rush later on.
3. Work with a Qualified CA: Find a Chartered Accountant who has experience auditing charitable organizations. They can guide you through the process and ensure all steps are correctly followed.
4. Use Funds for Charitable Purposes Only: Ensure all the funds received by your organization are being used as intended. Keep records of all expenditures to prove compliance.
5. Stay on Top of Deadlines: Make sure you’re aware of all deadlines for submitting audit reports and tax returns to avoid penalties or complications.

Conclusion: Stay Compliant and Maintain Trust

Audits may seem like a burden, but they are an important part of keeping your trust or NGO on solid legal and financial ground. Following the audit requirements under Section 12A(b) not only helps you stay compliant but also builds confidence among donors and beneficiaries that your organization is being managed transparently and responsibly.

By staying organized and working with the right professionals, you can ensure your trust or NGO continues to benefit from tax exemptions and stays focused on its charitable mission.