1. Legal Framework

A. RBI Master Direction - KYC Direction, 2016 (Amended upto Jan 2024 & 2025)

• Definition of NPO: Any entity constituted for religious or charitable purposes referred to in clause (15) of Section 2 of Income Tax Act, 1961 that is registered as a trust, society or Section 8 company.
• Mandatory DARPAN: REs must register details of NPO clients on NGO DARPAN portal of NITI Aayog. DARPAN Unique ID is mandatory to open and maintain a bank account.
• Beneficial Owner: After 2023 amendment, any natural person holding >10% ownership / entitlement to capital or profits is Beneficial Owner, down from 25%. Bank must identify trustees, authors, and persons exercising ultimate control.
• Periodic Updation: Risk-based. High-risk NPO accounts: every 2 years, Medium: 5 years, Low: 10 years. After 2023, REs must give 3 advance notices and allow at least 3 months before partial freeze (credits only) and another 6 months before full freeze.

B. PMLA, 2002 & PML (Maintenance of Records) Rules, 2005
NPOs were brought under PMLA by Gazette Notification dated 12th Nov 2009. Amended Rule 2023 states:

• All receipts by NPOs of value > Rs.10 lakhs or equivalent foreign currency to be treated as reportable under PMLA.
• Details of beneficial owners and senior managing officials to be filed in Central KYC Records Registry (CKYCR).
• Banks are Reporting Entities and must maintain transaction records for 5 years for reconstruction.

C. FCRA, 2010 & Income Tax Act

• Foreign donations can be received only in FCRA account at SBI, New Delhi Main Branch after MHA registration. Operating any other donation account for foreign funds is violation.
• Section 115BBC - Anonymous donations (without name/address of donor) taxed @30% if exceeding 5% of total donations or Rs.1 lakh, whichever is higher.

2. What is Donation Account KYC Review in Practice?

A bank's KYC review for a donation account is not just ID proof. It is a 6-step audit:

1. Entity Verification: Trust Deed / MoA / Certificate of Incorporation, PAN of NPO, DARPAN ID validation on ngodarpan.gov.in, FCRA Certificate if applicable, 80G, 12A/12AA.
2. BO & Control Verification: KYC of all trustees, settlors, authorized signatories, CEO. Declaration of BO >10%.
3. Source and Purpose Check: Donor KYC register with name, address, PAN, mode of payment. Cash donations > Rs. 2000 not allowed for 80G. No third-party credits.
4. Transaction Monitoring: Alert for round-tripping, sudden spike after dormancy, foreign inward without FCRA, cash deposits below Rs.10 lakh to evade CTR.
5. Utilization Check: 85% application of income rule, FCRA utilization returns FC-4, audit reports.
6. Re-KYC: Fresh board resolution, audited financials, Form 10BD for donations.

3. Case Laws You Must Know

1. Hansraj Samarak Society vs. ADIT (Exemptions) - 2012 ITAT Delhi [69 DTR 123]
Donations of Rs.9,53,600/- were treated as anonymous by AO. Tribunal held they cannot be treated as anonymous if donation register contains complete name and address of donor and donors are verifiable. Principle: If KYC is maintained, benefit of exemption cannot be denied.

2. DIT(E) vs Bharat Kalyan Pratishthan & Trust receiving donations (ABCAUS 2577 (2018) HC)
Delhi HC held Trust receiving donations under bona fide is under no obligation to verify source of source of donor, but must maintain donor KYC as per banking standards. Failure to maintain KYC leads to addition u/s 68, but verification beyond reasonable KYC is not required.

3. Vijay Madanlal Choudhary vs Union of India, (2023) 12 SCC 1 - Supreme Court on PMLA
Landmark for NPOs. SC held "proceeds of crime" requires demonstrable linkage to a scheduled offence. Mere fund-raising without proven scheduled offence source is not proceeds of crime. However Court upheld ED's power to investigate NPOs if diversion is proved. This is used to defend NGOs where ED invoked PMLA solely on donation irregularity.

4. Karnataka HC - Possession of FCRA registration does not create right to receive foreign donation [Justice K.S. Hemalekha, 2023]
Court held that even with permanent FCRA registration, credit of foreign donation requires separate MHA clearance and SBI designated account KYC. Bank can withhold credit if KYC review shows non-compliance.

5. CIT vs Dawoodi Bohara Jamat (2014) 11 SCC 354 - Supreme Court
While not direct KYC case, it defined religious charitable purpose. Used by banks to classify NPO risk: if object is not within Section 2(15), account must be treated as high-risk commercial, not donation.

6. Sahara India NGO Diversion Case (2012) & Recent ED vs NGO Cases
Where donation account used for diversion of corporate funds, authorities invoked PMLA. Court emphasized accountability of NGO officials and mandatory KYC of large donors.

4. Why KYC Review Fails - Common Notices under Section 68 & PMLA

• No DARPAN linkage -> Account freeze by bank
• Anonymous donations > limit -> Taxed @30% + exemption u/s 11 withdrawn
• Foreign credit in non-FCRA savings account -> FCRA violation, penalty upto 5x amount
• BO not identified -> Reporting under PMLA Rule 9, STR filed to FIU-IND

Best Practice Checklist for Your Donation Account:

Keep Donor Register in Form 10BD format (Name, Address, PAN, Aadhaar masked, Mode, DARPAN ID if NPO donor), PAN of NPO linked to CKYCR, Annual self-declaration of Trustees, No cash >2k, Separate books for domestic and FCRA, Re-KYC 30 days before due date.