What is an overview of non-profit companies under the Companies Act, 2013?

Introduction 

The concept of Non-Profit companies was first introduced in the Companies Act, 1913, which allowed companies with charitable objects to register without the words “Limited” or “Private Limited.” There was a restriction that these companies could only use their profits for the purposes for which the company was incorporated, and profits could not be used for distributing dividends. In the year 1956 Bhabha Committee recommended these types of companies under Section 25 of the Companies Act, 1956.

The non-profit companies are governed by Section 8 of the Companies Act, 2013, and also commonly referred as Section 8 Company, the Act elaborates on the objects of the companies that is sports, education, research, social welfare and protection of environment, etc.

In India there are mainly two types of companies, first society[1] registered under Section 20 of the Societies Registration Act, 1860 and second Trusts registered under Indian Trusts Act, 1882. Under the Schedule VII of the Indian Constitution both the Central and State Governments are competent to legislate and regulate the trusts and charitable institutions. However, Section 8 companies are regulated by the Companies Act, 2013.

According to Rule 8(7) of the Companies (Incorporations) Rules, 2014[2], the name of non-profit companies shall include the words such as foundation, forum, association, federation, confederation, etc. However, a foreign company registered outside India for non-profit activities that has opened a branch office in India cannot fall in the definition of a foreign company because its business activities are missing; such companies can, however, promote and register themselves under the provisions of this Act as a distinct entity in India. 

Meaning of Non-Profit Companies

The term non-profit company refers to any person or association of persons intending to register as a company with objectives related to the promotion of arts, commerce, science, sports, education, research, social welfare, environmental protection, and other charitable purposes. After incorporation, such companies use their profits solely to promote these objectives and are known as non-profit companies.

Procedure for Incorporation of Non-Profit Companies 

According to Section 8 of the Companies Act, 2013, the formation of a company with charitable objectives prohibits the payment of any type of dividend to its members, requiring its profits to be used solely for the promotion of its objectives. For incorporation under this section, an application in Form INC-12 must be filed with the Registrar of Companies along with the following documents:

• The drafts of Memorandum of Association (MoA) and Article of Association (AoA) of the applicant company in Form INC-13, with the identification details of the subscribers of the company.
• The declaration on stamp paper with duly notarized must be attached in the Form INC-14 by an Advocate, Chartered Accountant, Cost Accountant and Company Secretary stating that the MoA and AoA have been made in accordance with the provisions of Section 8 and rules made under this Act are also complied with.
• A proposal of the future annual income and expenditure of the company for upcoming three financial years and the details of source of income and the objects of expenditure.

Conversions to Non-Profit Companies 

Any existing company registered under the Companies Act, 2013, or any previous Act (other than a non-profit company) can be converted into a non-profit company under Section 8(5) of the Companies Act, 2013, and Rule 20 of the Companies (Incorporation) Rules, 2014.[3] To initiate this process, it is necessary to pass a special resolution in a general meeting for altering the object clause and amending the Memorandum and Articles of Association to align with the requirements of a non-profit company. Additionally, the conversion requires the approval of the Registrar of Companies. Furthermore, the company must publish a notice in Form INC-26 within one week of filing the application with the Registrar. This notice must appear in at least one newspaper in the vernacular language and one in English, and a copy of the notice must also be displayed on the company’s website.

Strength of Board of Directors 

According to Section 149(3) of this Act, at least three directors are required for public company and at least two for a private company but there are no prescriptions regarding minimum and maximum number of directors in a non-profit company. However, second proviso of Section 149(1) requires a women director in each class of company and Section 149(3) requires at least one resident director for each class of company. Thus, if Section 8 Company is incorporated under this Act, it should comply with the requirement of appointing women director within six months of the incorporation of the company.

Corporate Social Responsibility (CSR) 

A non-profit company spending on its own activities will not qualify as CSR spend. However, non-profit companies need to spend on CSR other than normal activities. According to Section 135 of this Act, every company including Section 8 Company fulfilling the criteria under this provision needs to contribute towards CSR.

Reliefs and Benefits Provided Under the Income Tax Act, 1961 

According to Section 12A of the Income Tax Act, 1961, provisions of Section 11 and Section 12 which relate to the exemption of income, will not be applicable to a non-profit company unless an application for its registration is made to the Commissioner of Income Tax within a period of one year from the date of incorporation. While submitting the application for registration, it is important to provide the certificate of incorporation of the non-profit company, and all its objects must be charitable or religious in nature. Section 80G provides tax deductions to donors. However, according to Section 2(15) of the Income Tax Act, 1961, relief is provided only for charitable purposes and not for activities of general public utility if the aggregate value of receipts from such activities exceeds twenty-five lakhs rupees in the previous year.

Consequence for Contravention 

If a non-profit company contravenes the provisions of the Companies Act, 2013, the Central Government may revoke its license, order amalgamation with a company having similar objectives, or initiate winding-up proceedings. According to Section 8(11) of the Companies Act, 2013, penalties can be imposed on the company, with a fine not less than 10 lakhs rupees and up to rupees 1 crore. Additionally, the officer in default may be liable for imprisonment for a term of up to three years and may also face action under Section 447 of the Companies Act, 2013.

Winding up of Non-Profit Companies 

If a non-profit company ceases to fulfil its charitable objectives or is unable to continue its operations, it must follow the procedure for voluntary winding up as per Sections 304 to 323 of the Companies Act, 2013. Any assets remaining after satisfying debts will be transferred to another non-profit company with similar objectives. The NCLT may also order the sale of assets, and the proceeds may be credited to the Rehabilitation and Insolvency Fund established under Section 269 of the Companies Act, 2013. After the winding-up proceedings, as per Section 248 of the Act, the Registrar of Companies may suo moto strike off the name of the non-profit company.

Conclusion 

A non-profit company incorporated under Section 8 of the Companies Act, 2013 or previous Act, aims to promote social welfare, environment protection, education and charitable objectives. These companies utilize their profits for their objects and not to distribute dividends to their members. The non-profit companies are eligible for tax exemptions and other benefits under the Income Tax Act, 1961, and also contribute to Corporate Social Responsibility (CSR) initiatives. However, they must comply with the rules and regulations under the Companies Act; failure to do so may result in penalties or even the revocation of their license. In the event of dissolution, any remaining assets must be transferred to another entity with similar objectives. Thus, Section 8 companies enjoy significant exemptions and benefits under the Companies Act and other related laws.

[1]  The Societies Registration Act, 1860 (Act 21 of 1860), s.20.

[2]  ICSI Company Law & Practices 360.

[3] The Companies Act, 2013 (Act 18 of 2013), ss. 5, 8.

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