Tax Audit Applicability for Company: Section 8 Guide

TL;DR Summary

Tax audit for Section 8 companies under the Income Tax Act 1961 is triggered when total income exceeds the basic exemption limit before claiming exemptions, requiring ITR-7 filing with Form 10BB — covering fund utilization verification, 85% application rule compliance, Section 12A/12AB and 80G adherence, TDS compliance, and related party transaction scrutiny. Key risks include missing the 85% income application threshold, incomplete donation documentation, non-charitable income, lapsed registrations, and delayed ITR-7 filing — all of which can result in loss of tax-exempt status, penalties, and ROC action.

A tax audit for a Section 8 company in India is required when total income exceeds the basic exemption limit before claiming exemptions under the Income Tax Act 1961, and must be filed alongside ITR-7 with Form 10BB certifying fund utilization compliance. Unlike a statutory audit — which is mandatory for all Section 8 companies regardless of income and focuses on overall financial reporting — a tax audit is conditional and specifically examines taxable income, exemptions under Section 12A/12AB and 80G, the 85% income application rule, TDS compliance, FCRA adherence, and related party transactions. Non-compliance risks include loss of tax-exempt status, penalties, disallowance of exemptions, and potential cancellation of 12A or 80G registration — making timely, accurate tax audit completion a critical annual priority for every Section 8 company.

The nature of Section 8 Companies, focused on promoting charitable objectives, require adherence to regulatory standards. Tax audit services for Section 8 Company play a vital role in ensuring financial integrity and transparency.

These services help verify that the organization’s financial practices align with legal requirements which builds trust and accountability. Delve deeper with us in understanding the requirements of these tax audits, their scope and the advantages of having accountable firms like PKC Management Consulting by your side.

What are Section 8 (Non-profit) Companies?

Section 8 organizations are non-profit companies created pursuant to the Indian Companies Act of 2013. Unlike normal businesses, they provide services supporting educational, charitable, social, scientific, environmental, or similar types of activities.

What sets Section 8 Companies apart is the concept of treating income/profit. All income/profit earned must be retained by the company to assist the company in accomplishing its purpose. In other words, the directors/members cannot distribute or withdraw the profits as dividends or salaries. This model makes a Section 8 Company very attractive as an affiliated entity for NGOs, Foundations, and Social Enterprises.

In addition, Section 8 Companies typically benefit from being subject to fewer compliance obligations as compared to other types of companies and registered with the Internal Revenue Service (IRS), so long as they are registered under Sections 12A and 80G.

Tax Audits and Section 8 Companies

Compliance with Tax Exemptions

Most Section 8 Companies rely heavily on tax exemptions to operate. Conducting a tax audit helps ensure that a Section 8 Company is complying with the requirements necessary to maintain its tax-exempt status under applicable laws or regulations of India, including the Income Tax Act of 1961. Any deviation may jeopardize an organization’s tax-exempt status.

Proper Use of Funds

Because Section 8 Companies exist to provide charitable services to the community, any funds received are to be used primarily to support the charitable activities and cannot be used for the purposes of profit, dividends, or other purposes not approved by the Companies Act 2013. Therefore, compliance with applicable laws is necessary to ensure proper use of funds.

Key Tax Provisions Applicable to Section 8 Companies

Registration Under Section 12A / 12AB

To claim income tax exemption, a Section 8 Company must register under Section 12A of Income Tax Act India (now revalidated under 12AB). Without this, the entire income of the company may become taxable. This registration basically recognizes the entity as a charitable institution in the eyes of the tax department.

Benefits Under Section 80G

If the company wants to attract donations, getting approval under Section 80G of Income Tax Act India is important. It allows donors to claim deductions on their contributions, which makes your organization more appealing for funding.

Application of Income Rule (85% Requirement)

One of the key conditions is that at least 85% of the income earned during the year must be applied toward the charitable or specified objectives. If this condition isn’t met, the remaining income could become taxable unless it is properly accumulated as per rules.

Taxability on Non-Charitable Activities

If a Section 8 Company earns income from activities that are not aligned with its main objectives, that portion of income may be taxed. The tax authorities keep a close watch to ensure that the “charitable purpose” is not just on paper.

TDS (Tax Deducted at Source) Compliance

Just like any other entity, Section 8 Companies must comply with TDS provisions under the Income Tax Act 1961 India. This includes deducting tax on salaries, professional fees, contractor payments, etc., and filing regular TDS returns.

Filing of Income Tax Return (ITR-7)

Section 8 Companies are required to file their income tax returns using ITR-7, even if their income is fully exempt. Filing on time is crucial to avoid penalties and maintain compliance status.

Audit Requirements Under Income Tax Law

If the total income exceeds the basic exemption limit (before claiming exemptions), the accounts must be audited as per provisions of Income Tax Act 1961 India. This audit ensures that the funds are properly utilized and reported.

Restrictions on Use of Funds

Funds should not be used for the benefit of specific individuals, founders, or related parties. Any such usage can lead to cancellation of tax exemptions and even penalties.

Accumulation of Income

If the company is unable to spend 85% of its income, it can accumulate funds for specific purposes by following prescribed procedures. However, proper documentation and timely filings are essential to avoid tax issues.

Section 8 Company Eligibility & Requirements for Tax Audit

Section 8 companies in India are required to get their annual accounts audited by a qualified Chartered Accountant. Here’s what you need to know about these audits:

Tax Audit Requirements

As in the case of regular businesses, there’s no specific turnover limit for mandating a tax audit under Section 44AB of the Income Tax Act for Section 8 companies.
The company’s tax audit report must be filed along with its annual income tax return.
Tax audits can cover- Income Tax Audit and Transfer Pricing Audit (if international transactions are involved).
The company must comply with TDS, GST, and other tax-related obligations if applicable.
Failure to comply with audit requirements can result in penalties and fines imposed by the Registrar of Companies (ROC).

Audit Report Requirements

The audit report for a Section 8 company must follow the following :

Auditor is appointed for a maximum of 5 financial years
Audit report must be filed with the Income Tax Department along with the annual income tax return
Form 10BB is to be submitted with the audit report. It contains details of funds received and activities carried out by the Section 8 Company.
Accounting Standards and Schedule III of Companies Act need to be followed while preparing financial statements
Secretarial audit is required if the company meets the criteria under Section 204 of Companies Act

Scope of Tax Audit Services for Section 8 Company

Tax audit services for Section 8 company cover a broader spectrum than a regular business due to its unique nature and objectives. Here’s a quick breakdown of the scope:

Verification of Financial Statements

Accuracy and completeness of income, expenditure, and balance sheet figures.
Verification of accounting policies and methods used.
Ensuring compliance with accounting standards applicable to non-profit organizations.

Compliance with the Income Tax Act

Verification of exemption under Section 12A and 80G (if applicable).
Examination of income from various sources including donations, grants, investments, etc. to ensure correct tax treatment.
Verification of deductions and exemptions claimed.
Assessment of transfer pricing implications if applicable in the case of Section 8 companies.
Ensuring compliance with provisions related to TDS/TCS.

Compliance with Section 8 Objectives

Verification that the company’s activities are in line with its stated objectives.
Examination of expenditure to ensure it is directly related to the company’s objectives.
Assessment of the utilization of funds for the intended purposes.
Verification of income-generating activities (if any) and their alignment with the main objectives.

Related Party Transactions

Scrutiny of transactions with related parties to ensure arm’s length pricing.
Verification of proper disclosure of related party transactions.

Non-Compliance with TDS Provisions

Failing to deduct or deposit TDS on time is a common mistake. It might seem like a small compliance issue, but during an audit, it can lead to penalties and disallowances.

Delay in Filing Returns and Reports

Late filing of ITR-7 or audit reports can have bigger consequences than expected. Apart from penalties, it can also impact the organization’s eligibility to claim exemptions.

Poor Tracking of Donor-Specific Funds

Sometimes donations are received for a specific purpose, but the usage is not tracked separately. This creates confusion during audits and may lead to questions about fund utilization.

Documentation and Records

Verification of the adequacy and accuracy of accounting records and supporting documents.
Checking the maintenance of registers and books of accounts as per statutory requirements.

Compliance with Other Laws

Verification of compliance with other relevant laws such as Foreign Contribution Regulation Act (FCRA), if applicable.

Basis	Statutory Audit	Tax Audit
Governing Law	overall financial reporting, books of accounts, and compliance with company law	Conducted under the Income Tax Act 1961 India
Applicability	Mandatory for all Section 8 Companies, irrespective of income	Applicable only if certain income conditions are met
Purpose	To verify that financial statements show a true and fair view	To ensure proper compliance with income tax provisions
Focus Area	Overall financial reporting, books of accounts, and compliance with company law	Taxable income, exemptions, deductions, and tax compliance
Audit Requirement	Compulsory every financial year	Conditional, based on income thresholds and exemptions
Audit Report	Submitted as part of ROC (Registrar of Companies) filings	Filed along with income tax return (ITR-7)
Key Objective	Accuracy and transparency in financial statements	Correct calculation of income and proper tax treatment
Threshold Limit	No minimum limit – applicable to all Section 8 Companies	Depends on income before claiming exemptions
Overlap	Uses financial data prepared by the company	May use the same financial data but for tax analysis
Consequences of Non-Compliance	Penalties under company law and possible legal action	Penalties, loss of tax exemption, and additional tax liability

Why Section 8 Companies Choose PKC India for Tax Audit Services?

PKC Management Consulting positions itself as a specialized service provider for Section 8 companies across audit, tax, and advisory functions. Explore our full Audit and Assurance Services to understand the complete range of audit capabilities we bring to non-profit and charitable organizations operating under India’s complex regulatory framework.

Quality Assurance

PKC’s team comprises qualified and experienced professionals who can ensure high-quality tax audit services for Section 8 companies. Our experts implement robust quality control procedures that help maintain consistency and accuracy.

Deep Understanding of Section 8 Companies

Having helped businesses across different sectors and segments, we have gathered a strong grasp of the specific tax laws, rules, and regulations applicable to Section 8 companies. This puts us in a position to conduct tax audits of Section 8 companies in different sectors.

Expertise in Non-Profit Accounting

Understanding the nuances of non-profit accounting is crucial for accurate financial reporting and tax compliance. At PKC Management Consulting we have CAs and other experts who specialize in just that and more.

Proven Track Record of Tax Savings

We boast a strong history of delivering substantial tax savings for our Section 8 company clients. These savings range from a few lakhs to several crores. This track record is a testament to our expertise in navigating the complex tax regulations applicable to Section 8 companies.

Technology and Efficiency

Our experts leverage technology to streamline the audit process, improve efficiency, and enhance data analysis. We make use of data analytics to help identify trends, anomalies, and potential areas of concern.

Specialized Services

We offer a customized audit process designed specifically for Section 8 companies. Beyond audit, we also provide tax planning, compliance, and advisory services to help Section 8 companies optimize their tax position.

Contact PKC India today to discuss your Section 8 company’s tax audit requirements and find out how we can support your compliance and governance.

Frequently Asked Questions

Q1. What are the common areas checked during a tax audit of a Section 8 Company?

Common areas tax audit services for Section 8 companies focus on income recognition, expenditure claims, donations and grants, related party transactions, and compliance with Section 8 objectives.

Q2. Can the tax audit report be challenged?

Yes, if you disagree with the findings of the tax audit report, you can appeal to the income tax authorities.

Q3. What are the benefits of a tax audit for a Section 8 company?

A tax audit ensures compliance with tax laws, helps identify tax-saving opportunities, enhances credibility, and provides a detailed financial overview for the stakeholders.

Q4. What documents will be demanded during a tax required for a tax audit ?

Required documents include financial statements, income and expenditure accounts, balance sheet, bank statements, sales and purchase records, and other relevant supporting documents.

Q5. How long does a tax audit of a Section company usually take?

The duration of a tax audit of section 8 companies depends on the company’s size and complexity. It usually takes between 2 to 4 weeks to complete the audit.

Q6. What is Form 10BB, and why is it important for Section 8 companies?

Form 10BB is an audit report filed by certain Section 8 Companies under the Income Tax Act 1961 India, certified by a Chartered Accountant to verify compliance with tax provisions.
It is important because it supports tax exemption claims (like under Section 12A of Income Tax Act India) and ensures transparency in how funds are used.