Maintenance Of Accounts
Could foreign contribution be mixed with local receipts?
Answer: No. Accounts and records relating to receipt and utilisation of FC are to be maintained exclusively and separately from local/domestic donations/receipts. Foreign contribution cannot be deposited or utilised from the bank account being used for local/domestic funds. Associations should distinguish between domestic and foreign contribution and only foreign contribution should be received/deposited in the FCRA Account(s), as prescribed by MHA, and reflected in the FC books of account. Possibility of mingling of domestic donation with foreign contribution is there because even funds from overseas in foreign currency may be domestic donation. It is reiterated that donation received in foreign currency from an Indian citizen living abroad is not treated as FC whereas, donation received in INR from a foreigner in India is a foreign contribution. Please note that the Form FC-4 for submission of Annual Return also requires the Association concerned to indicate whether during the period under report any domestic contribution has been credited in any FCRA Account.
What should be the method of accounting as per FCRA, 2010?
Answer: In terms of Section 19 of FCRA, 2010, “Every person who has been granted a certificate or given prior approval under this Act shall maintain, in such form and manner as may be prescribed, ‒
(a) an account of any foreign contribution received by him; and
(b) a record as to the manner in which such contribution has been utilised by him.”
Further, Rule 11 of FCRR, 2011 prescribes that, “Every person who has been granted registration or prior permission under section 12 shall maintain a separate set of accounts and records, exclusively, for the foreign contribution received and utilised.“
It follows from the above that FCRA 2010 and FCRR, 2011 do not prescribe any specific method of accounting. The requirement is only of maintenance of exclusive and separate accounts and records, i.e., separate cash books, ledger, bills, vouchers etc., in proper manner for the foreign contribution received and utilised. Therefore, any standard and acceptable method of accounting can be used for maintaining books of account for FCRA purposes and, local/domestic contribution should never be mixed up with foreign contribution. The Charter (Annexure-IV) for Associations who have been granted PP/registration inter alia states that, “The cash book and ledger account is to be maintained on double entry basis, where the FC relates to currency received and utilised.” It may please be noted that violation of section 19 of the Act is an offence. Please refer to the reply to Q.228 for the quantum of penalty for compounding such violation.
It may also be noted that as per Rule 17 of FCRR, 2011, the mandatory annual return in the prescribed form FC‒4 should be accompanied by scanned copies of income and expenditure statement, receipt and payment account, and balance sheet for every financial year. The requirement prescribed in form FC‒4 implies that receipt and utilisation of FC should be reported on cash basis and for its accompanying income & expenditure statement etc., any standard and acceptable method of accounting may be followed.
For how long the financial statements are to be kept by an Association?
Answer: As per Rule 17(7) of FCRR, 2011, the accounting statements, viz., income and expenditure statement, receipt and payment account, and balance sheet, annual returns and copy of statement of account from the bank regarding the FCRA Account accompanying the annual returns, should be preserved by the Association for a period of 6 years.
Please note that if, for some reason, MHA decides to conduct inspection of the books of account and records of an Association, it may ask for the details of receipt and utilisation of FC since registration with yearly breakup. Therefore, it is advisable that the Associations should try to preserve such records since inception along with the corresponding vouchers, bills etc. If it is difficult to preserve such voluminous records, the documents since inception may be scanned and kept in digitised form and the records for the last 6 years may be kept in physical as well as digitised form. In this context, reply to Q. 244 may please be seen.
Is it necessary for Associations to maintain a register of investments?
Answer: Yes. In terms of Rule 4(3) and 4(4) of FCRR, 2011, all Associations who have been granted registration or prior permission under FCRA, 2010 should maintain separate register of investments and every register of investments must be submitted for audit.
Is it necessary for Associations to maintain separate accounts for its administrative expenses?
Answer: Neither FCRA, 2010 nor FCRR, 2011 specifically prescribe maintenance of separate accounts in respect of administrative expenses. Since an Association is required to indicate in its annual return the total administrative expenses vis-à-vis the FC received in a financial year, the books of account for FC should be maintained in such manner that the Association is in a position to clearly segregate the items of expenditure that constitute ‘administrative expenses’ as per Rule 5 of FCRR, 2011 and incurred out of the FC received in a financial year. Please refer to the reply to Q. 131 in this regard.
Whether interest or any other income earned out of FC is to be shown as FC receipt during that year or not?
Answer:Yes. In terms of Explanation 2 under Section 2(h) of FCRA, 2010, interest accrued on the FC deposited in any bank or any other income derived from the FC or interest thereon is also treated as foreign contribution. Item 2(i) of the Form FC-4 for submission of mandatory the Annual Return is for indicating ‘Foreign Contribution received in cash/kind (value)’ and item 2(i)(b) of the Form is for indicating ‘Interest’ and ‘Other receipts from projects/activities’ during the year under report. It has also been clarified therein that ‘interest accrued on foreign contribution, and any other income derived from foreign contribution, e.g., sale proceeds from assets created from foreign contribution, or interest thereon during the year, income from projects/activities’ should be taken into account for indicating the amounts against item 2(i)(b)(i) and 2(i)(b)(ii) respectively. Please refer to the answer to Q. 140 also.
Could the expenditure on any project or for creation/purchase of an asset may be met both from domestic funds and FC?
Answer: Yes. However, proper accounts should be maintained to show as to how the expenditure was apportioned between local funds and FC. If the cost of an asset is met partially from domestic sources/funds and partially from FC, the expenditure from domestic funds should be shown in the domestic books of account and the expenditure met from FC should be separately shown in the FC books of account. There could be a consolidated statement showing the total cost of the asset so created.
How to account for the sale proceeds of an asset created out of FC?
Answer: Any asset created/purchased out of foreign contribution is FC asset and should be reflected in the FC books of account only. If an asset created/purchased out of FC is sold, then its sale proceeds should be shown as FC receipt and deposited in any ‘FCRA Account’. Please note that the Form FC-4 for submission of Annual Return also requires the Association concerned to declare whether during the period under report any fixed asset acquired out of foreign contribution has been sold out and whether the sale proceed of the above fixed asset has been diverted/has not been deposited in ‘FCRA Account’. Further, wherever the answer is ‘yes’, brief details must be provided.
What happens if an asset created partially from foreign contribution and partially from local fund is sold?
Answer: It may so happen that the cost of an asset was met partially from domestic sources/funds and partially from FC. For instance, a school building might have been constructed with FC on a piece of land purchased from domestic funds. If such an asset is sold, the sale proceeds should be apportioned, to the extent possible, with reference to the share of FC and local funds spent for creation of that asset. Thereafter, that portion of the total sale proceeds which reflect FC asset sale proceeds should be taken as FC receipt in the FC books of account. The remaining portion of the total sale proceeds should go as local receipt to the local books of account. The sale proceeds from the FC asset should be deposited in any ‘FCRA Account’ and declaration, as mentioned in reply to the previous question, must be given while filing the Annual Return.
How to account for an asset (e.g., land, building, vehicles, computer, office equipment etc.) created/purchased with FC after the asset has lost its total value due to depreciation, or is to be disposed of?
Answer: When any asset is created/ purchased, the asset is shown in the assets register of the organisation and the same principle is to be followed in the case of FC assets as well. When any FC asset is created/purchased, the foreign contribution received by an organisation gets utilised to the extent of its cost incurred and should accordingly be reflected in the annual return for the year in which the asset is created/purchased. Thereafter, irrespective of its accounting value, the asset is shown in the assets register of the organisation. Even after depreciation of its total value, the title of the asset would remain with the organisation at a nil value. Any income generated from the FC asset is to be treated as FC and reflected in the annual return irrespective of its book value. However, if the asset does not have any income generating capacity or it becomes surplus asset or it is to be replaced, and is to be disposed of after it has lost its value or has become surplus or otherwise, then the asset should be written off from the assets register and if any amount is received/recovered from the disposal of the asset, then that amount should be reflected in the annual return as FC receipt of that year, and realized proceeds deposited in any FCRA Account. The declaration, as mentioned in reply to the Q.162 must be given while filing the Annual Return.
What would be the best way for dealing with foreign contribution received as securities?
Answer: Associations who have received securities as foreign contribution should be careful about the applicability of other statutes in India. A foreign security will not be treated as permissible asset/investment under the Income Tax Act 1961. Further, since the very nature of these tradable instruments are subject to market forces having the possibility of appreciation or depreciation, keeping such FC in the form of investments may be treated as ‘speculative activity’ under FCRA, 2010. Therefore, it would be advisable to liquidate the foreign securities immediately after receipt and convert them into FC funds or assets. Please refer to Q. 48 regarding the definition of ‘foreign security’.
How to account for the sale proceeds received from liquidation or sale of foreign contribution received as securities or articles?
Answer: The money received from such sale should be treated as foreign contribution. It should be shown as receipt in the FC books of account and deposited in any FCRA Account and should be reflected in the annual return as FC receipt of that year.
Whether the surplus of FC income/receipt over expenditure of may be transferred to the general fund in the domestic books of account?
Answer:No. A general fund is an unrestricted fund at the discretion of an Association and it should not be construed as a domestic fund. All funds created from FC should be reflected in FC books of account only. An organisation may have two general funds ‒ one created from FC and the other from domestic funds. The same is true for the corpus and other funds also. All foreign contribution balances or assets, whether maintained/kept as general fund, corpus fund or any other fund should be part of the FC books of accounts only and should not be mixed up with any fund created out of local receipts/donations.