SECTION 12AA

This query is : Resolved

nikhil (Querist)
Follow

29 October 2010 If a section 25 Company apply for the exemption under section 12AA and is granted the same is the company 100% exempted from tax.

And if the company is 100% Exempted then is the company needs to pat the Advance Tax and claim it refund or it does not have to pay the same.

Also help on the condition to claim exemption and condition to maintain after the the registration u/s 12AA.

CA KISHORE VANAMA

CA KISHORE VANAMA (Expert)
Follow

29 October 2010 In order to claim exemption u/Sec 12AA, that company should use minimum 85% funds for their objects or investments specefied under sec 12, there is no need to pay advance tax for your trust.

nikhil

nikhil (Querist)
Follow

29 October 2010 thanks alot. wherein I am pointing out the section 25 Company. Suppose RBI opens a division with as a Section 25 for the smoth regulation and seeks exemption from Tax it in granted is the company suppose to pay the advance tax?

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
Follow

23 July 2025 When a Section 25 Company (now known as a Section 8 Company under the Companies Act, 2013) applies for exemption under Section 12AA of the Income Tax Act, 1961, certain conditions and nuances apply to its tax obligations and exemptions. Here's a breakdown of your queries:

1. Is a Section 8 Company 100% exempt from tax under Section 12AA?
Section 8 Companies (formerly Section 25 Companies) are non-profit organizations created for promoting commerce, art, science, charity, or any other useful object, and their profits are not meant to be distributed to shareholders.

If the company is registered under Section 12AA of the Income Tax Act, it can avail exemption from income tax on its income to the extent that it's applied for its charitable objects. However, this exemption is not automatic and is subject to the following conditions:

85% Utilization Condition: At least 85% of the income generated must be utilized for the objects specified under Section 12 of the Act (i.e., the charitable or non-profit purposes as defined by the company’s objectives).

Non-Distribution of Profits: The income must not be distributed to its members, and must be reinvested in furthering the company's objects.

If these conditions are met, then the Section 8 Company could be eligible for full exemption from income tax under Section 12AA. However, this is subject to fulfilling the conditions of income application and non-distribution of profits.

2. Does a Section 8 Company need to pay Advance Tax after obtaining 12AA exemption?
Section 8 Companies (or any entity) that is exempt under Section 12AA are not required to pay advance tax, provided the income is applied for charitable purposes and there is no taxable income.

If the income is fully exempted under Section 12AA and the conditions for exemption (such as 85% utilization) are met, then the company does not need to pay advance tax. This is because the income is not subject to income tax as it is utilized for charitable purposes.

Refund of Advance Tax: If the Section 8 Company has paid advance tax and later claims exemption under Section 12AA, the company could potentially claim a refund of any advance tax paid, as the income would be exempt under the conditions of Section 12AA.

3. Conditions for Claiming and Maintaining Exemption under Section 12AA:
Claiming Exemption:

The company must be established for a charitable purpose (promoting commerce, art, science, charity, etc.).

The application for registration under Section 12AA should be filed with the Income Tax Department, and the registration must be approved by the authorities.

The company must ensure that its funds are utilized for the specified charitable purposes, and at least 85% of the income must be spent on the charity (Section 12).

Maintaining Exemption:

Annual Filing of Returns: Even though the company is exempt under Section 12AA, it still needs to file its annual income tax returns (ITR) and disclose all income and expenditure details.

Income Utilization: The company must demonstrate that at least 85% of its income is applied towards charitable activities or investments specified in the company’s objectives.

Non-Distribution of Profits: The company must ensure that it does not distribute any profits to members or shareholders, which is a fundamental condition for maintaining its exemption.

Annual Audit: As per the Income Tax Act, the company must maintain proper accounts, and these accounts are subject to audit. The audit will verify if the funds are being utilized in accordance with the company’s charitable purpose.

Notification of Changes: Any change in objectives or activities must be intimated to the Income Tax Department to ensure that the company remains eligible for exemption.

Continuing Compliance with Laws: The company must continue to comply with all regulatory requirements under the Companies Act (Section 8 requirements) and ensure that it adheres to the conditions of Section 12AA.

4. RBI’s Section 8 Company and Advance Tax Obligation:
If the Reserve Bank of India (RBI) opens a Section 8 Company for smooth regulation or for any other charitable or non-profit purpose, the conditions for claiming exemption under Section 12AA would be the same.

If the company qualifies for exemption, and its income is fully utilized for charitable purposes, it would not have to pay advance tax. The key is that the company must ensure that its activities align with the charitable or non-profit objectives and 85% of its income is applied in accordance with the law.

Summary:
Exemption under Section 12AA does not make a Section 8 Company 100% exempt from all obligations, but it can be exempt from income tax to the extent its income is used for charitable purposes.

The company does not need to pay advance tax if it fulfills the conditions for tax exemption.

After obtaining Section 12AA exemption, the company must ensure that:

It spends at least 85% of its income on its charitable objects.

It maintains proper records and files annual returns.

It does not distribute profits to its members.

Refund of Advance Tax can be claimed if the company later qualifies for exemption under Section 12AA

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now