Charitable Trust / NGO audit

A practitioner’s guide to the audit of public charitable and religious trusts, Section 8 companies, and NGOs registered under Sections 12A, 12AB, or 10(23C).

1 · The trust audit landscape

India has lakhs of registered public charitable and religious trusts, Section 8 companies, and societies under the Societies Registration Act 1860. Their income-tax exemption flows from Sections 11, 12 and 10(23C). Audit of these entities is a specialised practice — the focus shifts from profit-maximisation testing to application-of-income testing, related-party (Sec 13(3)) exposure, and compliance with the specific exemption regime under which the entity is registered.

The Finance Act 2020 substantially restructured trust registration. Existing trusts had to migrate from Sec 12A to Sec 12AB; new registrations now route through Sec 12AB with 5-year renewal cycles. Audit reports moved from the old Form 10B to a refreshed Form 10B / 10BB regime under the 2022 amendment.

2 · Form 10B vs Form 10BB — which one applies?

The distinction matters: applying the wrong form invalidates the audit report. The current position (post-Notification 7/2023):

• Form 10B — for trusts / institutions registered under Sec 12A / 12AB with annual receipts exceeding ₹5 crore, OR with foreign contribution receipts, OR applying income outside India
• Form 10BB — for trusts / institutions referred to in Sec 10(23C) sub-clauses (iv), (v), (vi), (via), OR with annual receipts up to ₹5 crore, OR no foreign contribution / overseas application
• Both forms must be filed electronically on the Income-tax portal at least one month before the ITR due date

3 · The 85% income application rule — and audit verification

Section 11(1) requires a trust to apply at least 85% of its income from property held under trust towards charitable / religious purposes in India during the previous year. The remaining 15% may be accumulated without restrictions; amounts beyond 15% can be accumulated for up to 5 years only by filing Form 10 and investing in modes specified in Sec 11(5).

The auditor’s verification:

• Compute "income" properly — includes voluntary contributions (other than corpus), capital gains, etc.
• Trace application — direct expenditure, capital expenditure on objects, payments to other charitable trusts
• Verify Sec 11(5) investments for any amount accumulated under Sec 11(2)
• Check Form 10 has been filed for any accumulation beyond 15%
• Examine reasons for any shortfall in 85% application

4 · Section 13(3) — specified persons

Section 13 disallows exemption if income / property of the trust is applied for the benefit of "specified persons" — the author, founder, contributor of more than ₹50,000, their relatives, any concern in which they have substantial interest. Detection of Sec 13(3) violations is one of the auditor’s primary audit objectives.

• Loans / advances to specified persons (interest rate, security)
• Property of the trust made available for use of specified persons
• Salary / allowances / payments to specified persons
• Services rendered to specified persons (with or without consideration)
• Share, security or property purchased from / sold to specified persons
• Investments in concerns where specified persons hold substantial interest (Sec 13(2)(h))

5 · Foreign contributions and FCRA

Trusts receiving foreign contributions must be registered under the Foreign Contribution (Regulation) Act 2010. The auditor verifies:

• FCRA registration current and not suspended / cancelled
• Foreign contributions received through the designated FCRA bank account at SBI Main Branch, New Delhi
• Utilisation per the FCRA framework — 50% on administrative cap (now stricter post-2020 amendment)
• FC-4 annual return filed with the Ministry of Home Affairs
• Disclosure under Part IV of Form 10B

6 · Common pitfalls

Disciplinary patterns observed in trust audits:

• Wrong form filed — Form 10B vs Form 10BB confusion
• Computation of "income" omits voluntary contributions (corpus vs non-corpus)
• Sec 13(3) tests not documented — no specified-persons list, no transaction-by-transaction check
• Application of income computation includes inadmissible items (e.g. depreciation where capital cost was already claimed as application)
• Foreign contributions routed through non-FCRA account — taints the entire FC
• UDIN not obtained on the audit report

CORAA handles the audit. You handle the judgement.