Other Matters
   
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:
Opening bank accounts
Obtaining registration and approvals under Income Tax Act and Home Ministry.
Lawful vesting of properties of societies
Recognition to the society at all forums and before all authorities
   
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.
   
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.
   
Maintenance of Accounts
Every registered office of a society should have proper books of accounts regarding:
the various funds received both from national and international sources and the corresponding expenditure in accordance to the objects and purposes of the organisation.
according to the assets and liabilities of the society which give a true and fair view of the state of affairs of the society.
All other activities involving the society’s funds.
   
Generally the following books of account to be maintained by the society on Single Entry/Double Entry basis are:
Cash Book/Bank Book giving the daily receipts
Voucher files
Ledgers
Receipt books
   
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.
   
Various state provisions regarding maintenance of accounts under various state acts are:
   

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:

(a)
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.
(b)
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 .
   
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:
Cash Basis of Accounting
Accrual Basis of accounting
Hybrid/Mixed basis of Accounting
   
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-

(a)
an account of any foreign contribution received by it, and
(b)
a record as to the manner in which such contribution has been utilized by it.”
   
Rule 8 of the Foreign Contribution Regulation (FCR) Rules 1976 states that:
(1)
A separate set of accounts and records shall be maintained, exclusively for foreign contribution received and utilized-
 
(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;
 
(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;
  (c) in Form FC-7, where the foreign contribution relates to foreign securities.
(2)

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.

   
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.
   
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.

   
A Society can be dissolved by:
its members,
the Registrar,
the Court or
by the Government
   
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:

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)
Decide whether the society should be dissolved ‘forthwith’ or at a later time agreed upon by them.
The steps for the disposal of the property and settlement of all the claims and liabilities of the society
   

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.

   
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:
The society has done unlawful activities
According to the memorandum of association governing the society:
• 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)
Society’s activities are against the Governmental or the state policy
Society has become insolvent
Society has contravened any law or the provisions of the Societies Registration Act 1860
   

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.

   
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:

If there is a contravention of the provisions of the Societies Act by the society.
If the number of members are below seven.
If the society has ceased to function for more than three years.
Society is unable to pay its debts or meet its liabilities.
If it is proper that the society should be dissolved.
   
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:
Removing the existing governing body and appointing a fresh governing body;
Framing a scheme for the better and efficient management of the society;
Dissolving the society.
   
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.
   
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.