Can a Section 8 Company Invest in Profit-making Company
We all know that Section 8 Companies are the Non-Profit Companies whose objective is to promote fields of arts, commerce, science, research, education, sports, charity, social welfare, religion, environment protection, or other similar objectives. Such Companies spend their profits on furtherance of these above-mentioned charitable objectives and do not share the profits with its members. Such Companies are registered under the provisions of the Companies Act, 2013.
As on date, there are large number of such Non-Profit organisations which have profitable balance sheets and wants to invest in shares of other “For Proft” companies. Now the question arises whether Section 8 Companies can invest in profit making companies or not?
There is no specific restriction under the Companies Act, 2013 that prohibits a Section 8 Company to invest in shares of ‘for profit’ companies, however, Section 8 of the Act does emphasis that such Company should have the intent to apply its profits or other income in promoting its charitable objects i.e. towards art, commerce, science, sports, education, charity etc. Similarly, societies and trusts are expected to engage in charitable activities stated in their main objects and application of their income is governed by their charter documents.
In case the ‘not for profit’ tax exempt institutions do apply their income in acquisition of shares of ‘for profit’ companies, they will need to assess its implications not only under the terms of their charter documents (such as trust deed, memorandum of association, bye-laws) but also assess the implications of this investment under the Income Tax Act, 1961 (“IT Act”) to continue to claim exemption from income tax.
The taxation of such Non-Profit Companies is governed by Chapter III of the Income Tax Act which contains sections 11, 12, 12A, 12AA and 13.
Section 12A/12AA contains the provisions concerning the Registration and the Registration Procedure under the Income Tax Act. Section 11 and 12 contains the provisions concerning the conditions to be fulfilled by the Non-Profit Companies in order to claim exemption from income tax. Section 13 stipulates the provisions concerning the Non-Profit Companies which are not eligible for exemption u/s 11 & 12.
A Non-Profit Company or institution will have to apply at least 85 % of the income to charitable purposes. If the income spent on charitable or religious purposes, during the previous year, falls short of 85 % of the income derived during the year, such shortfall will be liable to tax. Further, section 11(5) of the IT Act requires the accumulated funds to be invested or deposited in certain stipulated manner/mode including investment in government savings certificates, deposit in any account with the Post Office Savings Bank, investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963, investment or deposit in any public sector company, investment in immovable property etc.
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