Donation to Section 8 company

Hi Shrikant,

Good questions! Here’s a clear explanation on donations received by a Section 8 company (a company formed for promoting charitable objects under the Companies Act), especially those received under CSR activities:

Query 1: Is the amount received as Corpus donation taxable in the hands of CSR company?

• Corpus donation means the amount donated to the capital/corpus fund of the company, typically meant to be kept intact and used for long-term purposes.

• For a Section 8 company (usually registered as a charitable entity), donations to the corpus fund are not treated as income but as capital receipts.

• Such corpus donations are generally not taxable, provided the company fulfills conditions under Section 11 and 12 of the Income Tax Act (such as registering under Section 12A/12AA/80G and using the funds for charitable purposes).

• If the company is registered as a charitable institution/trust and maintains proper books, corpus donations do not attract income tax.

• However, if corpus donations are utilized or diverted for non-charitable purposes, or if the company is not registered for tax exemption, tax implications may arise.

Query 2: Is it a right practice to treat donations received as capital receipt instead of income in the P&L account of CSR company?

• Yes, it is a right and accepted accounting practice to treat corpus donations as capital receipts, not as income in the Profit & Loss Account.

• Instead, corpus donations are credited directly to the Corpus Fund (Capital Reserve or Capital Fund) on the balance sheet.

• This treatment reflects the nature of the receipt—long-term funds to be used for charitable purposes, not regular income or revenue.

• Only revenue donations (non-corpus donations) meant for running day-to-day activities or specific programs are shown as income in P&L.

• This distinction is also important for compliance with accounting standards applicable to nonprofit/charitable organizations.

Summary:

If the CSR company is registered under Section 12AA and has proper utilization certificates, the corpus donations are not taxable, and this accounting treatment is proper.