Other
Matters
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Accounts
and Audit of a Society |
A
society and its members raise funds through various sources
like donations and grants from domestic and international
sources. Such an association has to be registered under
the Societies Registration Act 1860 since it gives the
society a legal status and is also essential for:
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Opening
bank accounts |
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Obtaining
registration and approvals under Income Tax Act and Home
Ministry. |
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Lawful
vesting of properties of societies |
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Recognition
to the society at all forums and before all authorities |
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The
society is a legal entity and has in its possession funds
of its members and also the property belonging to the members
in its name which is used for achieving the objectives
for which the society has been formed. Like any other corporate
body, the funds of the society are managed by a group of
individuals who are accountable for these funds to other
members of the society. To have proper accountability,
it is important to have proper records of all the funds
received and the expenditure of the society. To achieve
this it is important for a society to maintain regular
books of accounts and to have them audited.
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Also
for a society which is registered under the Societies Registration
Act, 1860, the principal act does not have any specification
regarding the maintenance and audit of accounts. However,
in order to meet the statutory requirements of the Income
Tax Act and other related acts like FC( R) A, maintenance
of proper books of accounts and having an annual audit
done generally becomes mandatory and should therefore be
also followed by a registered society.
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Maintenance
of Accounts |
Every
registered office of a society should have proper books of
accounts regarding: |
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the
various funds received both from national and international
sources and the corresponding expenditure in accordance to
the objects and purposes of the organisation. |
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according
to the assets and liabilities of the society which give a
true and fair view of the state of affairs of the society. |
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All
other activities involving the society’s funds. |
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Generally
the following books of account to be maintained by the society
on Single Entry/Double Entry basis are: |
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Cash
Book/Bank Book giving the daily receipts |
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Voucher
files |
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Ledgers |
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Receipt
books |
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Even
though the principal act does not provide any specifications
regarding the maintenance and the audit of accounts, various
state governments have made suitable amendments in the
principal act regarding maintenance of books of accounts.
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Various
state provisions regarding maintenance of accounts under
various state acts are: |
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Section
5A of Assam Act states that the books of account should
be kept at the registered office which have to be entered
accurately according to the (a) All sums of money received
and the source thereof and all sums of money expended
by the society and the objects or purposes for which
such sums are expended.(b) The assets and liabilities
of the society. In case of default the President, Secretary
or any other person authorized on their behalf by a resolution
of the governing body of the Society shall be punishable
with a fine which may extend to twenty rupees for every
day after the detection of the default during which the
default continues.
Section
12 C of Gujarat Act & Section 12 D of Maharashtra
Act state that every Governing Body entrusted with the
management of the affairs of a society registered under
this act (not being a public trust within the meaning
of the Bombay Public Trust Act 1950) shall keep regular
accounts in such form as may be approved by the Registrar,
and shall contain such particulars as may be prescribed
by rules. These accounts shall be balanced each year
on the thirty-first day of March or such other day as
may be fixed by the Registrar.
Section
12 of Karnataka Act specifies that the governing body
should maintain proper books of accounts related to the
sums of money received and expended, all sales and purchases,
all assets and liabilities of the society. It also specifies
that the Balance Sheet should give a true and fair view
of the state of affairs of the society as at the end
of the year
Section
25 of Madhya Pradesh Act specifies that proper books
of account to be kept at the head office with regard
to the sums of money received and expended by the society
and the assets and liabilities of the society and to
give a true and fair view of the state of affairs of
the society
It
also specifies that the books of account shall be open
to inspection by the office bearer(s), members or registrar
during the office hours
Section
16 of Tamil Nadu Act & Rule 18-20 of Tamil Nadu Rules
specifies that proper books of account to be maintained.
The rules specify the various books of accounts to be
maintained by the society. It also specifies that the
books of accounts should be maintained promptly i.e.
as soon as the payment or receipt is made
Section
12 & 13 of Travancore Cochin Act - specifies that
the governing body should maintain proper books of account
related to the sums of money received and expended, all
assets and liabilities of the society. Also certain specifications
regarding the Annual Balance Sheet are also given.
Section
15 of West Bengal Act specifies that proper books of
account of the society to be kept at the head office
with regard to the sums of money received and expended
by the society and its assets and liabilities.
Section
12 C of Goa Daman & Diu Act specifies that every
Governing Body entrusted with the management of the affairs
of a Society shall keep regular accounts in such form
as may be approved by the inspector general and shall
contain such particulars as may be prescribed. The accounts
of the society shall be balanced each year on the 31st
Day of March or such date as may be fixed.
Audit
of Accounts
Audit
of the Accounts maintained by the organization ensures
a check on the accuracy and the authenticity of the income
and expenditure in an organization.
It
is beneficial and mandatory to get the accounts audited
annually by a duly qualified Chartered Accountant. The
Chartered Accountant should give the auditors report
regarding the financial affairs of the society. In case
of any irregularities the auditor should report the same
in his report and to the management.
The
audited financial statements have to be submitted annually
to both the Registrar of Societies, Income Tax authorities
and the Home Ministry if the FC( R ) A is applicable
for the society.
There
are various provisions under the specific State Societies
Registration Act(s) wherein provisions for Audit and
filing of annual returns are specified. In general these
Acts specify the check and audit of the accounts to be
done by a duly qualified Chartered accountant within
the meaning of the Chartered Accountants Act 1949 or
a person approved by the Registrar of Societies in this
behalf.
Section
5A & Section 4 B of Assam Act states that every society
shall have its accounts audited once every year by a
duly qualified auditor and have a balance sheet prepared
by him. The auditor shall also submit a report showing
the exact state of affairs of the Society. Three copies
of the balance sheet and the auditors report shall be
certified by the auditor. A copy each of the balance
sheet and auditors report certified by the auditor under
sub section (2) of Section 5 A should be forwarded to
registrar within thirty days after the holding of every
AGM
Section
12 C of Gujarat Act & Section 12 D of Maharashtra
Act states that the accounts shall be audited annually
in such manner as may be prescribed by rules and by a
person who is a Chartered Accountant within the meaning
of Chartered Accountants Act 1949 or by such person as
may be authorized in this behalf by the State Government.
It also states that it is the Auditor’s duty to
prepare balance sheet and report irregularity .The auditor
should prepare a report relating to auditing such account
(prepared according to Sec 12 C) and forward a copy of
the same to the inspector general.
Sec
4A of Pondicherry Act specifies that a copy of the balance
Sheet together with a statement of receipts and expenditure
duly certified by at least two members of the governing
body and audited by a person who has been granted a certificate
by the Government under the Chartered Accountants Act
1949 or by a special auditor approved by the Government
shall also be filed with the registrar of companies at
the same time as required under section 4.A filing fee
of Rs.3/- each shall be paid along with the list and
the balance sheet and copy of alteration to rules respectively
under section 4 and 4A.
Section
12D of Goa Daman & Diu Act states that the accounts
of a society shall be audited annually in such manner
as may be prescribed and by a person who is a Chartered
Accountant within the meaning of the Chartered Accountants
Act 1949 or by such persons as may be authorized in this
behalf by the Government. It also states the auditor
should prepare a report of the accounts audited and report
any irregularities therein. A copy of the same should
be forwarded to the registrar.
Section
15 of West Bengal Act specifies that the society should
have the accounts audited once a year by a duly qualified
auditor and have the balance Sheet prepared by him. The
auditor should also submit a report which shows the exact
state of the financial affairs of the society.
Section
16 of Tamil Nadu Act & Rule 18-22 of Tamil Nadu Rules
states that every society shall have its accounts, audited
once every year by a duly qualified auditor or by two
or more members(not being members of the committee) of
the registered society . The irregularities should be
reported to the registered society..
Regarding
the filing of copies of the balance sheet and statement
of accounts to the registrar of societies, however various
State Governments have made amendment in the principal
Act to provide for filing of Accounts. Even if not specified,
the society should annually file a copy of the Balance
Sheet, Statement of receipt and payments along with the
appropriate fees .The above should be certified by at
least one member of the governing body preferably within
one month of the AGM along with a list of the members
of the Governing Body.
Specific Income Tax Requirements regarding Books of Account and Audit
a Registered Society
In order to claim various exemptions and benefits available
under Section 11 & 12 of the Income Tax Act, it is mandatory
for a society to get itself registered under the Income tax
Act.
Section 12A specifies that:
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(a)
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Provisions
of Section 12 and Section 11 of Income tax Act shall not
apply to a trust, society or person unless an application
for its registration is made in the prescribed format.
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(b)
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Where
the total income of the organization as computed under
the Income tax Act without giving the effect of the provisions
of section 11 & 12 exceeds Rs.50000/-in any previous
year, the accounts of the trust or institution for that
year have to audited by a duly qualified Chartered Accountant
in the prescribed form duly signed and verified. The audit
report in Form 10B along with the Balance Sheet, Income
and Expenditure Account, Receipt and payment Account along
with the copy of the registration certificate should be
attached along with the Society’s annual return in
Form 3A .
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Section
145 of the Income tax Act provides that either cash or
mercantile system of Accounting should be followed. However
it has been held in various court cases that Section 14
i.e income of charitable organizations need not be computed
under various heads of income, therefore there is no clarity
whether a charitable organization also come under the purview
of Section 145 or not. Therefore in absence of any clarifications,
a charitable organization can maintain books of accounts
from the following three methods of accounting:
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Cash
Basis of Accounting |
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Accrual
Basis of accounting |
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Hybrid/Mixed
basis of Accounting |
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Specific
rules for Accounting and Audit of Foreign Contribution received
by a registered society under the FC(R) A
For
organizations which are receiving the grants or funds from
international agencies, it is also important to follow
the rules and the guidelines of the Foreign Contribution
Regulation Act. Under the FC(R) A, Section 13 states that:
“Recipients
of foreign contribution to maintain accounts, etc.
Every association, referred to in section 6, shall maintain, in such
form and in such manner as may be prescribed-
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(a)
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an
account of any foreign contribution received by it, and |
(b)
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a
record as to the manner in which such contribution has been
utilized by it.” |
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Rule
8 of the Foreign Contribution Regulation (FCR) Rules 1976
states that: |
(1)
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A
separate set of accounts and records shall be maintained,
exclusively for foreign contribution received and utilized- |
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(a)
in Form FC-6, where the foreign contribution relates only
to articles as referred to in item (1) of sub-clause (c)
of clause (1) of section 2;
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(b)
in the cash book and ledger account on double entry basis,
where the foreign contribution relates to currency received
and utilized, and a separate bank account shall be maintained
in respect of such contribution;
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(c)
in Form FC-7, where the foreign contribution relates to foreign
securities. |
(2)
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Every
account specified in sub-rule (1) shall be maintained on
yearly basis, commencing on the 1st day of April each year
and every such yearly account, duly certified by a chartered
accountant in Form FC-3 along with a balance sheet and
statement of receipt and payment shall be furnished in
duplicate, to the Secretary to the Government of India,
in the Ministry of Home Affairs, New Delhi, within four
months of the closure of the year.
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Dissolution
of a Registered Society |
Section
13(corresponding to Section 29 of the Literary and Scientific
Institutions Act 1854) of the Societies Registration Act
1860 gives the provisions for the dissolution of the society
and lays down the procedure for dissolving the society.
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According
to Section 13 : |
“ Provision
for dissolution of societies and adjustment of their affairs
: Any number not less than three-fifths of the members
of any society may determine that it shall be dissolved
and thereupon it shall be dissolved forthwith, or at the
time then agreed upon, and all necessary steps shall be
taken for the disposal and settlement of the property of
the society, its claims and liabilities, according to the
rules of the said society applicable thereto ,if any ,and
,if not, then as the governing body shall find expedient,
provided that, in the event of any dispute arising among
the said governing body or the members of the society,
the adjustment of its affairs shall be referred to the
principal court of original civil jurisdiction of the district
in which the chief building of the society is situated
and the Court shall make such order in the matter as it
shall deem requisites..’
A
society, which is generally formed for a specific purpose,
may live to dissolve as soon as the purpose for which
it was formed is fulfilled. Similarly a society may be
dissolved by its members, registrar of societies or the
court where the purpose of the formation of the society
is not being fulfilled or for any other reason leading
to the dissolution.
In cases like Shanti Swarup vs Radhaswami
Satsang Sabha, Dayal Bagh AIR 1969,where
the bye laws of the society state the terms
for dissolution
like ‘the society shall stand dissolved in case no Satsang Guru
reappeared within two years of the death of the last Satsang Guru’,
it was decided that such byelaws militates against the said provisions
of Section 13 of the Societies Registration Act 1860 and therefore be
deemed to be invalid and inoperative.
Certain
specific terms like ‘Forthwith’ and ‘Principal
Court of Original Civil Jurisdiction’ mentioned
in Section 13 can be explained as:
‘Forthwith’ according
to the dictionary means, ‘immediately, at once,
without delay or interval’. In Bidya Deb Burma
Vs District Magistrate Tripura, Agartala AIR 1969, the
court interpreted from the case of Keshav Nilakanth Joglekar
Vs Commissioner of Police Greater Bombay, (the Constitution
Bench of Supreme Court) that “When a Statute requires
that something shall be done ‘forthwith’ or ‘immediately’ or
even ‘instantly’, it should probably be understood
as allowing a reasonable time for doing it”.
Therefore ‘Forthwith’ does
not mean a precise time but should be within a reasonable
time without avoidable and unreasonable delay.
‘Principal
Court of Original Civil Jurisdiction’ under Section
13 of the Act means the Principal Court of Civil Jurisdiction
of the District where the Registered Office of the society
is situated. In case of any dispute relating to adjustment
of affairs of a society in case of dissolution, the matter
has to be referred to the Principal Court of Civil Jurisdiction
of the District where the Registered Office of the society
is situated.
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A
Society can be dissolved by: |
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its
members, |
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the
Registrar, |
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the
Court or |
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by
the Government |
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Dissolution
by Members: |
To
dissolve a society Section 13 says that ‘Provided
that no society shall be dissolved unless three- fifths
of the members shall have expressed a wish for such dissolution
by their votes delivered in person, or by proxy, at a general
meeting convened for the purpose.’ Therefore the
Dissolution of a society can take place at the time as
agreed upon by the members of the society.
In
a society, if Government is a member or contributes in
the society funds or is otherwise interested in the society
Section 13 further says the following regarding the consent
from the Government
‘Provided
that whenever any Government is a member of or a contributor
to, otherwise interested in, any society registered under
this Act, such society shall not be dissolved without
the consent of the Government of the State of registration.’
Section
13A & 13 B have been inserted by the UP Societies
registration Act where Section 13A deals with the ‘Power
of registrar to apply for dissolution’ and Section
13 B deals with the ‘Dissolution of Society by
Court’ and also the cancellation of registration
of a society.
For the dissolution of a society the members should decide the time when
the society may stand dissolved. To dissolve a society the members should
pass a special resolution at a special general meeting and follow the
following procedure for the dissolution:
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The
resolution for the dissolution should be passed with 3/5th
majority.(3/4th under Karnataka Act, Travancore Cochin
Act and 2/3rd under Rajasthan Act)
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Decide
whether the society should be dissolved ‘forthwith’ or
at a later time agreed upon by them. |
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The
steps for the disposal of the property and settlement of
all the claims and liabilities of the society |
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Adequate
steps for the disposal and settlement of the Society property
and adjustment of claims, liabilities of the society according
to the rules of the society.
Section
24 of West Bengal Act and section 41 of the Tamil Nadu
Act gives the specific provisions for dissolution by
resolution which states that a society may be dissolved
by resolution by 3/4 members of the society in the special
general meeting wherein the governing body shall take
adequate steps for disposal and settlement of the property.
Thereafter
a report has to be sent to the Registrar if any surplus
is left over. The registrar will then issue a notice
in the official gazette to seek no objection from any
claimant, creditor, and members within three months of
the notice. In case no objection is raised during the
3 month period, the registrar shall record the order
of dissolution in the register maintained in his office.
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Dissolution
by Registrar of Societies: |
Under
various circumstances, the registrar of societies (as per
the respective state acts) can dissolve a society. These
circumstances may be:
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The
society has done unlawful activities |
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According
to the memorandum of association governing the society: |
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• Society’s
object clause has not been fulfilled
• Office of the society has ceased to be in state of registration
• Members of the society are below the required number of seven
• Society has ceased to function for a particular period of time
• Society has been declared insolvent(not able to pay its liabilities) |
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Society’s
activities are against the Governmental or the state policy |
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Society
has become insolvent |
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Society
has contravened any law or the provisions of the Societies
Registration Act 1860 |
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To
dissolve the society, the registrar inquires into the activities
of the society and calls for show cause for no dissolution
from the society. Thereafter the registrar may move the
court for making an order for dissolution in case the registrar
is not satisfied with the show cause of the society.
Specifically
certain State Acts have certain specific provisions regarding
dissolution by the registrar like:
Section
25 of West Bengal Act gives the provisions for dissolution
by Registrar wherein if the registrar is of the opinion
and has reasonable grounds to believe that a society
is not managing its affairs properly or is not functioning,
he shall send to the society at its registered office,
a notice by registered post calling upon it to show cause
within such time as may be specified in the notice why
the society shall not be dissolved.
If
no cause is shown or if the cause shown be considered
by the registrar as unsatisfactory, the registrar may
move the court under Section 25 for making an order for
the dissolution of the society.
Similarly
under Section 27 of Karnataka Societies Act the registrar
may dissolve a society if the registrar is satisfied
that a society is carrying on any unlawful activities
and the dissolution is done in accordance to provisions
of Section 22 of the Act.
Section
37 of the Tamil Nadu Act states that the registration
of a society can be cancelled by the Registrar of the
society when he is satisfied that the society has contravened
any of the provisions of the act or is insolvent or the
business of the society is being carried out fraudulently
and not in accordance to the bye laws or objects as per
the memorandum. Section 38 of the Act deals with the
cancellation of registration where the society is carrying
on unlawful activities.
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Dissolution
by Court: |
In
the principal Societies Registration Act, 1860 there are
no specific mention for the dissolution of a society by
the order of the court. However there are a few states
who have inserted certain sections related to dissolution
of society by court.
Section
25 of West Bengal Act gives the provisions for dissolution
by Court where the court may on an application of the
registrar or on the application of not less than one
tenth of the members, make an order for the dissolution
of a society in the following cases:
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If
there is a contravention of the provisions of the Societies
Act by the society. |
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If
the number of members are below seven. |
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If
the society has ceased to function for more than three years. |
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Society
is unable to pay its debts or meet its liabilities. |
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If
it is proper that the society should be dissolved. |
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Section
25 of Travancore Cochin Act gives the provisions for Application
to court for dissolution, framing a scheme etc. Wherein
it says that an application can be made by the state government
or one tenth of the members of the society to the district
court in which the society is registered with a fees of
Rs.100 as security for costs. Thereafter the court may
after enquiry may pass the following orders:
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Removing
the existing governing body and appointing a fresh governing
body; |
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Framing
a scheme for the better and efficient management of the society; |
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Dissolving
the society. |
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Section
13 B of the UP (Amendment) Act says that a court may dissolve
a society on application made by the District magistrate
that the activities of society are opposed to the public
policy.
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Dissolution
by Government |
The
Central or the State Government may also dissolve a society
if it finds adequate reasons for doing so.
Members
not to receive profits- On Dissolution of a society,
the activities of the society cease to exist. Thereafter
the property and settlement of all the claims and liabilities
of the society have to be done.
However,
it is specifically stated under Section 14 of the Societies
Registration Act (corresponding to the Section 30 of
the Literary and Scientific Institutions Act 1854 (English)
) that members are not to receive profit .In case of
surplus remaining after satisfaction of all the debts
and liabilities Section 14 states that ‘If upon
the dissolution of any society registered under this
Act there shall remain, after the satisfaction of all
its debts and liabilities, any property whatsoever, the
same shall not be paid to or distributed among the members
of the said society or any of them, but shall be given
to some other society, to be determined by the votes
of not less than three-fifths of the members present
personally or by proxy at the time of the dissolution,
or, in default thereof, by such court as aforesaid.
Provided,
however, that this clause shall not apply to any society
which shall have been funded or established by the contributions
of shareholders in the nature of a joint stock company. ’
The
decision making votes of the members under Section 14
may vary accordingly as per the respective state acts.
Section
14 shows that the properties of the society whether movable
or immoveable belongs to the society registered under
the Act. Therefore the provisions under Section 14 of
the Societies Registration Act are mandatory. Any surplus
with the society after the debts and liabilities are
paid of should be transferred to any society with kindred
object even if the rules and regulations of the society
contains provisions for division of property of the society
upon dissolution among its members.(Re Bristol Athenaeum(1889)).
The
Bihar and Uttar Pradesh Societies Registration Act have
inserted Section 14A which says that it shall be lawful
for the members of the society to determine by a majority
present personally or by proxy at the time of dissolution
of such society that any property remaining after the
debts and liabilities are paid off, shall be given to
Government for utilization of any purpose referred under
Section 1 of the Act.
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