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Form 10B/10BB Filing Complications: Regulatory Framework, Compliance Challenges, and Reform Appeals in India’s Non-Profit Sector
The Summery 0f representation made by the Income Tax Bar Association, Jalandhar, to the Hon’ble Finance Minister of India regarding the challenges and difficulties faced by professionals and non-profit organizations in filing of new form.
Introduction
India’s charitable and non-profit sector operates within a comprehensive legal framework designed to balance tax incentives with accountability measures. The Income Tax Act, 1961, extends significant tax exemptions to entities engaged in charitable, religious, and educational activities, recognizing their contribution to social welfare and national development. However, these benefits come with stringent compliance obligations, particularly concerning financial transparency and audit requirements. In February 2023, the Central Board of Direct Taxes (CBDT) introduced substantially revised audit report formats through Forms 10B and 10BB, triggering widespread concern among tax professionals and non-profit organizations regarding implementation timelines and practical feasibility [1].
The introduction of these new forms represented a fundamental shift in how charitable institutions must document and report their activities to tax authorities. Unlike the previous versions, which required relatively straightforward financial information, the 2023 iterations demand extensive disclosures covering operational details, foreign contributions, cross-border expenditures, and asset-liability positions. This regulatory overhaul occurred against the backdrop of the government’s broader efforts to enhance transparency in the charitable sector, particularly concerning foreign funding and application of funds. The timing of these changes, however, coincided with lingering operational disruptions from the COVID-19 pandemic, creating a perfect storm of compliance challenges for organizations already struggling with resource constraints.
Legal Framework Governing Charitable Institutions Under Income Tax Act
The Income Tax Act, 1961, establishes a distinct taxation regime for charitable and religious institutions through Sections 11 to 13, which form the cornerstone of tax exemptions available to qualifying entities. Section 11(1) provides that income derived from property held under trust wholly for charitable or religious purposes shall be exempt from taxation to the extent such income is applied for charitable or religious purposes in India. This exemption operates on the fundamental principle that funds utilized for public benefit should not be subject to income tax, thereby encouraging philanthropic activities and social welfare initiatives.
Section 12A of the Act mandates that trusts and institutions seeking tax exemption must obtain registration from the Principal Commissioner or Commissioner of Income Tax. This registration serves as a gateway mechanism, ensuring that only genuine charitable entities benefit from tax exemptions. The registration process requires applicants to demonstrate that their objectives are genuinely charitable and that their activities align with the definition of “charitable purpose” as outlined in Section 2(15) of the Act. Following amendments introduced through the Finance Act 2020, Section 12AB now governs the registration and approval procedures, introducing a more structured approach with provisional and regular registration categories.
Section 12A(1)(b) specifically requires registered entities to file their returns of income in the prescribed form, which for most charitable institutions is Form ITR-7. The provision explicitly states that the return must be accompanied by the audit report specified under Section 12A(1)(b), which materializes through Forms 10B and 10BB. Section 10(23C) extends similar exemptions to educational institutions and hospitals, subject to fulfillment of prescribed conditions. These institutions must also comply with audit and reporting requirements, though the specific forms may vary depending on the nature of the entity and the relevant sub-clause under which exemption is claimed.
The statutory framework also encompasses Section 11(2), which permits accumulation or setting apart of income for application in future years, subject to filing Form 10 and satisfying specified conditions. Section 13 outlines circumstances under which exemptions under Sections 11 and 12 shall not apply, particularly when income or property is used for the benefit of specific individuals or when business income exceeds the prescribed thresholds. The regulatory architecture thus creates a delicate balance between encouraging charitable work and preventing misuse of tax exemptions, with audit reports serving as critical compliance tools in this ecosystem.
Evolution and Structure of Forms 10B and 10BB
Prior to February 2023, Forms 10B and 10BB existed in relatively simpler formats that focused primarily on basic financial information and confirmation of charitable application. Form 10B applies to entities registered under Section 12A or approved under Section 10(23C), while Form 10BB is specific to institutions claiming exemption under Section 10(23C)(iv), (v), (vi), or (via), covering universities, educational institutions, hospitals, and medical institutions. The previous versions required chartered accountants to verify that the institution maintained proper books of account, that funds were applied for charitable purposes, and that the institution complied with conditions prescribed under relevant provisions.
The notification dated February 21, 2023, issued by the CBDT under Notification No. 11/2023, fundamentally restructured these forms by expanding their scope and introducing granular reporting requirements [2]. The new Form 10B requires disclosure of detailed information across multiple schedules covering various aspects of operations. Schedule I mandates reporting of investments made during the year, including investments in capital assets, shares, securities, and other financial instruments. Schedule II requires disclosure of loans and advances provided by the institution, including details of borrowers and terms of lending. Schedule III focuses on voluntary contributions received, distinguishing between domestic and foreign sources, with specific emphasis on contributions exceeding prescribed thresholds.
Schedule IV of the revised Form 10B demands comprehensive reporting of income and expenditure, broken down by activity type and geographic location. This schedule requires institutions to segregate income derived from charitable activities, business operations, and other sources, providing unprecedented visibility into revenue streams. Schedule V addresses application of income outside India, a particularly sensitive area given regulatory concerns about cross-border fund flows. Institutions must now provide detailed justification for any expenditure incurred outside Indian territory, including the charitable purpose served, beneficiaries identified, and monitoring mechanisms employed.
Form 10BB, applicable to educational and medical institutions, underwent parallel expansion with similar disclosure requirements tailored to their specific operations. The form now requires detailed reporting of fees charged, scholarships provided, infrastructure facilities maintained, and beneficiary demographics. Educational institutions must disclose admission criteria, student strength across various categories, and compliance with regulatory requirements of bodies like the University Grants Commission or All India Council for Technical Education. Medical institutions face additional reporting obligations concerning patient treatment statistics, categorization by economic background, and details of free or subsidized medical services provided.
Both forms now mandate digital signatures from both the chartered accountant conducting the audit and authorized representatives of the institution. This requirement aims to enhance authenticity and accountability but has introduced technical complexities, particularly for smaller organizations lacking digital infrastructure. The forms also incorporate several cross-verification fields designed to match data with other returns filed by the institution, creating an integrated compliance ecosystem that leaves little room for discrepancies or omissions.
The September 2023 Representation and Industry Concerns
On September 17, 2023, the Income Tax Bar Association, Jalandhar, submitted a detailed representation to the Finance Minister of India, articulating widespread distress within the tax professional community and among non-profit organizations regarding implementation of the new forms [3]. The representation, endorsed by numerous professional bodies across India, highlighted that the February 2023 notification provided inadequate lead time for stakeholders to comprehend the extensive new requirements and establish systems for compliance. Given that the assessment year 2023-24 pertains to financial year 2022-23, many organizations found themselves in the position of reconstructing historical data in formats that did not exist when the relevant financial year was underway.
The association emphasized that the complexity of new disclosures demanded fundamental restructuring of accounting systems and data collection processes. Many charitable institutions, particularly those operating in rural areas or with limited resources, maintained basic accounting records sufficient for previous compliance requirements but wholly inadequate for the granular reporting now mandated. The requirement to segregate income and expenditure across multiple dimensions, track beneficiary details at unprecedented levels, and document cross-border transactions with extensive supporting evidence represented a quantum leap in compliance burden. The representation noted that even well-resourced organizations with professional accounting staff struggled to compile required information, while smaller trusts faced near-impossible challenges.
Technical difficulties compounded substantive challenges, as the representation documented numerous instances of software incompatibility and portal malfunctions. The income tax e-filing portal, which had been designed for the previous form versions, underwent modifications to accommodate new forms, but these updates introduced bugs and errors that prevented successful uploads. Chartered accountants reported spending hours attempting to file forms, only to encounter validation errors that lacked clear explanations or required corrections that seemed arbitrary. The digital signature requirement, while conceptually sound, created barriers for organizations in regions with limited digital infrastructure or for elderly trustees unfamiliar with digital certification processes.
The representation further argued that the September 30, 2023 deadline for filing Form ITR-7, which necessitates prior completion of Forms 10B/10BB, created an impossible timeline. Chartered accountants typically conduct audits during the months following the close of the financial year, with most work concentrated in the August-September period to meet the September 30 deadline. The introduction of substantially expanded forms in February 2023, with applicability to the assessment year commencing April 1, 2023, left professionals with effectively six months to understand new requirements, gather additional data, and complete audits under the new framework. This timeframe became further compressed considering that many organizations only engaged auditors in the July-August period, leaving mere weeks for compliance with forms they had never previously encountered.
Comparative Analysis with Previous Compliance Requirements
The pre-2023 audit report regime, while comprehensive, operated within manageable parameters that balanced regulatory oversight with practical compliance feasibility. Under the old Form 10B, chartered accountants primarily verified maintenance of proper books of account as required under Section 12A(1)(b) and Section 12A(1)(a)(ii), confirmed application of at least 85 percent of income for charitable purposes, and ensured compliance with accumulation provisions under Section 11(2). The form required disclosure of total income, application of income, and accumulated funds, but without the extensive schedular breakdowns now mandated. Verification of investments and loans occurred at a summary level, focusing on ensuring that corpus funds remained intact and that prohibited investments were avoided.
The previous Form 10BB for educational and medical institutions similarly focused on core compliance aspects such as verification that fees charged did not exceed prescribed limits, that the institution existed solely for educational or medical purposes without profit motive, and that infrastructure and facilities met minimum standards. Reporting requirements centered on demonstrating that the institution primarily served charitable objectives rather than commercial interests, without demanding the exhaustive operational data now required. The forms could typically be completed within the standard audit engagement timeframe, with most information readily available from existing accounting records maintained for general compliance purposes.
The 2023 revisions transformed these forms from certification documents into comprehensive operational reports that function almost as annual information returns. The shift from summary disclosures to detailed schedular reporting exponentially increased data compilation requirements. Where previous forms might require a single figure for total investments, new schedules demand itemized listings of every investment transaction, including dates, amounts, counterparties, and current valuations. Similarly, the earlier requirement to confirm application of income for charitable purposes has evolved into detailed reporting of every expenditure item, categorized by nature, purpose, beneficiary type, and geographic location.
This transformation reflects a broader regulatory philosophy emphasizing transparency and accountability in the charitable sector, driven partly by concerns about fund diversion and partly by international pressure to demonstrate robust anti-money laundering and counter-terrorism financing controls. However, the implementation approach failed to adequately consider the capacity constraints of the sector, particularly among smaller organizations that constitute the vast majority of registered charitable entities. While large, professionally managed foundations with dedicated compliance teams might absorb these new requirements with relative ease, the thousands of community-based trusts, religious institutions, and local educational societies operating with volunteer management and minimal professional support face disproportionate challenges.
Regulatory Jurisprudence and Judicial Precedents
Indian courts have consistently emphasized that while charitable institutions deserve supportive tax treatment, they must demonstrate genuine charitable character and maintain transparency in operations. In Commissioner of Income Tax v. Bankipur Club Ltd., the Supreme Court established that exemption under Section 11 is not automatic but must be earned through compliance with statutory conditions and maintenance of proper records [4]. The court noted that tax exemptions represent a form of state subsidy and, like all subsidies, must be accompanied by accountability mechanisms ensuring that public resources (in this case, foregone tax revenue) serve intended purposes.
The principle of strict construction of exemption provisions has been reiterated across numerous judgments, establishing that entities claiming exemption bear the burden of proving entitlement. In Addl. CIT v. Surat Art Silk Cloth Manufacturers Association, the Supreme Court held that charitable institutions must maintain clear demarcation between charitable and commercial activities, with proper accounting systems enabling verification of income application [5]. This judgment underscores the importance of audit reports as evidentiary documents supporting exemption claims, lending weight to regulatory requirements for detailed disclosures.
However, courts have also recognized that procedural compliance requirements must remain reasonable and should not become tools for harassment or denial of legitimate exemptions. In Institute of Chartered Accountants of India v. Director General of Income Tax, the Delhi High Court observed that compliance obligations should be proportionate to the regulatory objective and should consider practical difficulties faced by assesses [6]. The court emphasized that tax administration must balance revenue protection with facilitation of genuine taxpayers, particularly in sectors serving public interest.
The Supreme Court in Kamla Town Trust v. CIT addressed situations where charitable institutions face difficulties in meeting technical compliance requirements due to circumstances beyond their control. The court held that genuine charitable organizations should not be penalized for procedural lapses if they demonstrate bona fide intent and substantial compliance with core requirements [7]. This principle suggests that rigid enforcement of new form requirements without considering implementation challenges might not withstand judicial scrutiny, particularly where organizations demonstrate good faith efforts to comply.
Regarding accumulation of income and related reporting, the case of CIT v. Institute of Banking Personnel Selection clarified that Section 11(2) permits accumulation for specified purposes subject to proper documentation and annual reporting through Form 10 [8]. The court emphasized that the accumulation provision serves legitimate charitable planning needs, allowing organizations to build corpus for future projects, but requires transparent disclosure to prevent misuse. This jurisprudence supports the principle behind detailed reporting requirements while also suggesting that procedural compliance should facilitate rather than frustrate legitimate charitable planning.
Implementation Challenges and Sectoral Impact
The practical implications of revised Forms 10B/10BB extend far beyond mere paperwork burdens, potentially affecting the operational viability of numerous charitable entities. Small rural trusts running community schools or healthcare centers often operate with annual budgets under ten lakh rupees, managed by local volunteers without professional accounting backgrounds. These organizations, while registered and compliant under previous requirements, lack the capacity to generate detailed schedular reports now demanded. The requirement to engage chartered accountants for extended periods to compile new information significantly increases audit fees, potentially consuming a substantial portion of available funds.
Educational institutions claiming exemption under Section 10(23C) face particular challenges given the extensive operational data now required in Form 10BB. Institutions must report student demographics across multiple categories, including economic background, geographic origin, and scholarship recipients. Many institutions, particularly older establishments, maintained admission and fee records but not necessarily in formats enabling easy extraction of aggregated statistical data. Compiling this information retroactively for financial year 2022-23 required extensive manual effort, often involving examination of individual student files. Medical institutions encountered similar challenges regarding patient data, complicated further by confidentiality concerns and data protection requirements under the Digital Personal Data Protection Act, 2023.
Religious trusts and institutions faced unique complications given the nature of their activities and fund flows. Many religious institutions receive numerous small donations from devotees, often collected in cash during religious ceremonies or festivals. While these institutions maintained donation records at an aggregate level sufficient for previous reporting requirements, the new forms demand detailed reporting of individual contributions exceeding specified thresholds, including donor identification details. This requirement posed challenges both in terms of historical data availability and potential conflicts with donor privacy expectations. Additionally, many religious trusts undertake activities spanning religious, charitable, and sometimes commercial categories, requiring complex allocation of income and expenditure across different purposes.
The digital signature requirement, while aimed at enhancing authenticity, created access barriers across the sector. Obtaining digital signature certificates requires technical knowledge, reliable internet connectivity, and ongoing maintenance including renewal procedures. Many trustees and authorized signatories of charitable institutions, particularly in semi-urban and rural areas, lacked familiarity with digital certification processes. The requirement for both auditor and auditee to possess and correctly apply digital signatures introduced additional points of potential failure in the filing process. Technical errors in digital signature application often resulted in rejection of filed forms without clear guidance on corrective measures.
The Appeal for Deferment and Regulatory Response
The Income Tax Bar Association’s representation requested specific relief measures to address implementation challenges. The primary appeal sought deferment of new form applicability by one year, proposing that for assessment year 2023-24, the old forms should continue to be accepted. This would provide organizations with a full financial year of advance notice, enabling them to establish appropriate systems and processes for compliance with expanded requirements from assessment year 2024-25 onwards. The representation argued that such deferment would not compromise regulatory objectives, as the previous forms still ensured basic compliance verification, while affording stakeholders adequate preparation time for the more comprehensive reporting regime.
Recognizing that complete deferment might not be acceptable to tax authorities, the representation alternatively sought extension of filing deadlines. Specifically, the association requested that the due date for filing Forms 10B, 10BB, 9A, 10, and ITR-7 for assessment year 2023-24 be extended from September 30, 2023 to December 31, 2023. This three-month extension would provide relief without fundamentally altering the reporting framework, allowing organizations additional time to compile required data and enabling chartered accountants to complete audits without the extreme time pressure that characterized the September deadline. The representation emphasized that such extensions had been granted in previous years during the COVID-19 pandemic and in other circumstances where systemic compliance challenges emerged.
The representation also urged the CBDT to issue comprehensive guidance on completing new forms, including clarifications on ambiguous requirements and practical examples illustrating expected disclosures. Many provisions in the revised forms lacked clear definitions or examples, leaving auditors and organizations uncertain about precise compliance expectations. For instance, the requirement to report “application of income outside India” generated questions about what level of detail was required, how to document charitable objectives served, and what supporting evidence should be maintained. Official guidance addressing such questions would significantly reduce compliance uncertainty and minimize disputes arising from inadvertent non-compliance.
While the CBDT did not publicly respond to the specific representation from the Jalandhar association, broader industry feedback prompted some administrative responses. The income tax department issued technical advisories addressing common filing errors and portal difficulties, though these focused primarily on technical aspects rather than substantive compliance issues. Some regional offices reportedly adopted lenient approaches toward first-time filing defects, allowing subsequent corrections rather than immediately initiating penalty proceedings. However, no systematic extension of deadlines or deferment of applicability was officially announced, leaving organizations to navigate compliance under the original timeline.
Broader Policy Implications and Sector Development
The controversy surrounding Forms 10B/10BB reflects broader tensions in India’s approach to regulating the charitable sector. On one hand, legitimate concerns about financial transparency, fund diversion, and potential misuse of tax exemptions justify robust compliance mechanisms. India’s charitable sector, while predominantly comprising genuine organizations serving public welfare, has experienced instances of abuse where entities claimed charitable status while conducting commercial activities or serving private interests. Enhanced reporting requirements can help distinguish genuine charitable organizations from entities misusing exemption provisions.
On the other hand, overly burdensome compliance regimes risk stifling charitable activity, particularly among smaller organizations with limited resources. Unlike commercial enterprises that can absorb compliance costs as business expenses offset against profits, charitable institutions must divert funds from beneficiary services to meet regulatory requirements. Excessive compliance burdens may discourage formation of new charitable entities or drive existing organizations toward voluntary dissolution, ultimately reducing social welfare provision. The optimal regulatory framework must therefore balance oversight needs with sector sustainability.
International comparisons reveal varying approaches to charitable sector regulation. The United Kingdom’s Charity Commission requires detailed annual returns from registered charities but provides extensive guidance, digital tools, and scaled requirements based on organizational size. Smaller charities face lighter reporting burdens, while larger entities undergo more intensive scrutiny. The United States employs Form 990, a comprehensive information return for tax-exempt organizations, but this form has evolved gradually over decades with extensive stakeholder consultation and phased implementation of new requirements. Australia’s Australian Charities and Not-for-profits Commission similarly implements graduated reporting based on organizational size and revenue.
India’s approach, introducing substantially expanded requirements with limited advance notice and without scaled compliance based on organizational capacity, represents a more abrupt regulatory shift. While the expanded requirements may align with international best practices in terms of transparency objectives, the implementation methodology has generated the friction evidenced by the Jalandhar representation and similar appeals from professional bodies nationwide. Future regulatory reforms might benefit from phased implementation approaches, allowing pilot testing with selected organizations before universal rollout, and from scaled requirements that recognize the vast diversity in size and sophistication across India’s charitable sector.
Conclusion and Future Outlook
The introduction of revised Forms 10B and 10BB in February 2023 marked a significant evolution in India’s regulatory framework for charitable institutions, reflecting government priorities around transparency, accountability, and prevention of tax abuse. The expanded disclosure requirements, when fully implemented, will provide tax authorities with unprecedented visibility into charitable sector operations, potentially enabling more effective targeting of enforcement resources toward entities exhibiting red flags while allowing compliant organizations to operate with greater confidence. The digital signature requirements and data validation mechanisms embedded in the new forms support broader digitization initiatives within tax administration.
However, the implementation challenges experienced during the first year of applicability highlight the importance of stakeholder consultation, adequate transition periods, and scaled compliance frameworks in regulatory design. The appeals from professional associations, while ultimately unsuccessful in securing deferrals or extensions, drew attention to legitimate difficulties faced by organizations genuinely committed to compliance but struggling with capacity constraints. These experiences offer valuable lessons for future regulatory reforms, whether in the charitable sector or other domains requiring complex reporting from diverse stakeholder groups.
Looking forward, the charitable sector’s adaptation to new reporting requirements will likely follow a maturation curve. Initial years will see organizations establishing enhanced accounting systems, investing in digital infrastructure, and building institutional capacity for detailed compliance. Professional service providers, including chartered accountants and specialized compliance consultants, will develop standardized processes and tools for efficient completion of new forms. The CBDT may issue clarifications and guidance addressing ambiguities identified through initial filing experiences, gradually reducing compliance uncertainty. Over time, the expanded reporting regime may become normalized, with younger organizations designing their operations from inception with these requirements in mind.
The broader question remains whether the regulatory pendulum has swung appropriately or whether future recalibration may be necessary. Continued monitoring of sectoral health indicators, including formation rates of new charitable entities, operational sustainability of existing organizations, and administrative efficiency in processing enhanced information, will inform this assessment. The ultimate measure of success for any regulatory framework lies not merely in compliance rates but in whether the regime effectively serves its dual objectives of preventing abuse while facilitating genuine charitable work that enriches society and serves vulnerable populations. As India’s charitable sector continues evolving under this enhanced regulatory framework, maintaining this balance will require ongoing dialogue between regulators, professionals, and charitable organizations themselves.
References
[1] Central Board of Direct Taxes, Notification No. 11/2023, dated February 21, 2023. Available at: https://www.incometax.gov.in/iec/foportal/
[2] Income Tax Department, Forms and Downloads – Form 10B and Form 10BB.
[3] TaxGuru, “Issues in Filing Form 10B/10BB for AY 2023-24 – Representation to FM,” September 2023.
[4] Commissioner of Income Tax v. Bankipur Club Ltd., (1997) 5 SCC 394.
[5] Addl. CIT v. Surat Art Silk Cloth Manufacturers Association, (1980) 2 SCC 31.
[7] Kamla Town Trust v. CIT, (1996) 2 SCC 324.
[8] CIT v. Institute of Banking Personnel Selection, (2003) 261 ITR 210 (Bom).
