The Utilization Certificate: Why Every Non-Governmental Organization Needs To Take It

The Utilization Certificate:

Why Every Startup Founder and CA Must Take It Seriously

By CA Dhiraj Ostwal | Advisory Article | Pune, Maharashtra | June 2025

A Utilization Certificate is one of those compliance documents that startup founders tend to treat as a boxticking exercise something the investor or grant agency asked for, so someone needs to produce it. In practice, what we often find is that the UC is signed under pressure, without adequate documentation, by a CA who has not seen the underlying fund flow, or by the founder without any CA involvement at all. That is where the trouble starts.

This article explains what a Utilization Certificate actually involves from a compliance standpoint, why it matters beyond the immediate funding context, how it connects to DPIIT recognition and Section 80IAC tax benefits, and what founders and their advisors need to get right before one is issued.

 

A Utilization Certificate is a formal document typically certified by a Chartered Accountant that confirms that a specific sum of money received for a defined purpose has actually been used for that purpose. It is issued after the money has been spent, and it draws a direct line between the funds received and the expenses incurred.

In the startup ecosystem, UCs are required in a range of situations:

• Government grants under schemes such as Startup India Seed Fund Scheme (SISFS), Technology Development Board (TDB), or DST NIDHI programmes
• Funding from incubators or accelerators who need to confirm to their principal funding bodies that grant money was used correctly
• Private investors or angel networks who include UC clauses in investment agreements to monitor milestonelinked fund deployment
• SIDBI's Fund of Funds tranches, where downstream startups receiving capital may be required to furnish utilization reports
• State government schemes that provide matching grants or reimbursement of expenses upon UC submission

 

The certificate is not a standard format document. Its content is driven by the terms of the grant or funding agreement. Some UCs are simple onepage certifications of total spend. Others require a categorywise breakdown, supporting expense lists, bank reconciliation, and auditor declarations. Before issuing one, both the CA and the startup need to understand exactly what the funding body expects.

 

The assumption that a UC is just paperwork is dangerous. Here is why it carries real weight:

It Is a Certified Statement of Fact

When a CA certifies a Utilization Certificate, it is not a general opinion. It is a specific representation that the funds have been used as stated. If the books do not support that representation if expenses are not properly documented, if the bank account from which the money was spent does not match the inflows, if invoices are missing then the CA is certifying something they cannot verify. That is professional misconduct, and it exposes both the CA and the startup founder to legal consequences.

Under Section 197 of the Companies Act 2013 and various ICAI guidelines, a CA signing a certificate without adequate documentary basis can face disciplinary proceedings. More practically, if a grant agency later audits the startup and finds discrepancies between the UC and actual fund use, the startup risks disqualification from future schemes and recovery proceedings.

 

It Creates an Audit Trail That Travels Forward

The documentation gathered for a UC does not disappear once the certificate is submitted. It becomes part of the startup's financial record. When the company applies for Section 80IAC tax holiday recognition, or undergoes a tax audit under Section 44AB, or faces scrutiny from the Income Tax Department, the fund utilization record will be examined. Inconsistencies between what was represented in the UC and what appears in the audited accounts create a credibility problem that is difficult to resolve after the fact.

 

What a CA Should Verify Before Signing a UC

Before a CA issues or certifies a Utilization Certificate, a minimum set of checks is required. These are not optional, regardless of the size of the grant or the urgency of the submission deadline.

What to Verify	Why It Matters
Invoices or receipts for every expense category	Provides documentary evidence for each line item
Agreement or sanction letter defining permissible use	Defines what counts as valid utilization
Whether any funds were transferred to related parties	Related party fund flows need additional scrutiny
Bank statement for the grant receipt and all disbursements	Confirms money actually flowed as stated
Board resolution or founder approval for fund allocation	Shows internal authorisation trail
Reconciliation of total received vs total spent vs balance	Identifies any unspent or misclassified amount

 

The Documentation Baseline

For a UC to be issued with confidence, the startup must be able to produce, at minimum:

• Bank statements showing the inflow and all outflows during the utilization period
• A ledger or cost centre report showing expenses mapped to the funded activity
• Original invoices or purchase orders for all significant expense items
• Salary records if grant funds were used for team salaries (a common and permissible use under most schemes, with conditions)
• Software subscription confirmations, cloud service invoices, or SaaS billing records where relevant
• Any subcontracts or agency agreements if services were procured externally

 

If these records do not exist, or exist in a disorganized form, the CA cannot certify the UC responsibly. The right course in that situation is to first reconstruct or complete the records, not to issue the certificate and hope no one checks.

 

What DPIIT Recognition Actually Gives You

Recognition by the Department for Promotion of Industry and Internal Trade under the Startup India initiative is widely misunderstood. Many founders believe that once the certificate is obtained, compliance obligations reduce. The reality is the opposite recognition unlocks benefits, but maintaining those benefits requires ongoing compliance discipline.

The benefits available to DPIITrecognized startups include:

• Eligibility to apply for Section 80IAC income tax holiday
• Selfcertification under certain labour laws (for the first five years)
• Fasttrack patent application and 80% rebate on patent fees
• Exemption from angel tax under Section 56(2)(viib) if shares are issued to Category I AIF investors or certain other specified persons
• Eligibility for the Startup India Seed Fund Scheme (SISFS)

 

Critical point: DPIIT recognition does not automatically grant tax exemption. Section 80IAC requires a separate application to the InterMinisterial Board (IMB). Founders regularly confuse these two processes, assuming that the DPIIT certificate in hand means their profits are taxfree. It does not.

 

Compliance Expectations After DPIIT Registration

Postregistration, startups are expected to keep their DPIIT profile updated with correct business information. More importantly, the quality of financial records directly affects how well the startup can actually use its DPIITlinked benefits. If a startup receives a government grant under a DPIITlinked scheme and cannot produce a proper UC, it may lose access to followon tranches and also jeopardize its standing for future government programmes.

 

The Benefit and Its Conditions

Section 80IAC of the Income Tax Act provides a 100% deduction on profits and gains derived from an eligible business by an eligible startup for any three consecutive assessment years out of the first ten years from the year of incorporation. For a startup incorporated in FY 202021, for example, the tenyear window runs through FY 203031.

To claim the deduction, the startup must satisfy all of the following:

• Incorporated as a private limited company or LLP (not a partnership firm or sole proprietorship)
• Incorporated on or after 1 April 2016 and before 1 April 2025 (for the current eligibility window)
• DPIITrecognized at the time of the claim
• Approved by the InterMinisterial Board of Certification (IMB) this is the separate application mentioned above
• Turnover must not exceed rs100 crore in the year for which the deduction is claimed
• The startup must not have been formed by splitting or reconstruction of an existing business

 

Why Startups Lose the Benefit or Fail to Claim It

Section 80IAC is a substantial benefit, but we regularly encounter startups that have either missed it entirely or claimed it incorrectly. The common failure modes are:

• Not applying to the IMB at all, under the mistaken belief that DPIIT recognition is sufficient
• Missing the application window IMB approval must be in place before filing the ITR for the relevant year
• Claiming the deduction for the wrong assessment year the deduction is available for three consecutive years from the first year in which income is earned, not from any year the founders choose
• Incorrect ITR filing the deduction must be claimed in the ITR by filling Schedule 80IAC; errors or omissions here cannot always be rectified through a revised return
• Poor books that make it impossible to compute profit attributable to the eligible business

 

How UC and Financial Discipline Support 80IAC Credibility

The connection between fund utilization discipline and Section 80IAC eligibility is indirect but real. A startup that maintains proper books, tracks grant funding correctly, issues UCs based on documented expense records, and files its returns accurately sends a consistent signal across all its filings. When an IMB application is reviewed, or when the income tax assessment for the deduction year comes up, that consistency is protective.

Conversely, a startup with messy accounts, undocumented grants, and a poorly issued UC presents audit risk across all fronts simultaneously. The income tax officer reviewing the 80IAC deduction claim is not looking at it in isolation.

 

Scenario 1: Grant Received, Partially Deployed

A Punebased edtech startup received rs25 lakh under a state government grant in November 2023. By March 2024 (yearend), they had spent rs18 lakh on salaries, software development, and server infrastructure. The remaining rs7 lakh sat in the bank account. A UC was issued in May 2024 for the full rs25 lakh.

The problem: the UC should have certified only the rs18 lakh actually deployed. The balance was not utilized during the relevant period. The grantor’s scheme required utilization within 12 months, and the balance should have been flagged for either an extension request or return. When the startup’s books were later audited, the mismatch between the UC and the ledger created queries that took months to resolve.

 

Scenario 2: Salaries Paid from Grant Without Proper Payroll Records

A SaaS startup used rs10 lakh from an incubator grant to pay cofounder salaries over six months. The grant agreement permitted salary costs, but required that the individuals receiving salary were employees of the startup, not contractors or consultants. The startup had no employment agreements in place, no offer letters, and no payslip records. The UC was issued certifying salary expenditure. When the incubator requested supporting documents, none existed.

This is a documentation failure, not a fund misuse failure. But from a compliance standpoint, the two look identical at the point of review. Startups must maintain complete payroll records employment contracts, payslips, TDS deduction records under Section 192 before certifying salary costs in a UC.

 

Scenario 3: Expenses Booked Without Invoices

Perhaps the most common situation we encounter: a startup spends money legitimately on marketing, freelancer services, or cloud tools, but does not collect invoices from vendors. By the time the UC is needed, the expenses are in the bank statement but cannot be linked to a documentary record. Unvouchered expenses cannot be certified in a UC. Full stop.

 

Based on recurring issues across our startup clients, here is what founders should put in place from the point of receiving any grant or institutional funding:

• Open a separate bank account or subaccount exclusively for grant or investor funds commingling with operating cash creates reconciliation nightmares
• Set up a cost centre or project code in your accounting software mapped to the grant from Day 1
• Collect invoices immediately; do not rely on chasing vendors weeks later when the UC deadline arrives
• If salaries are being paid from grant funds, ensure employment contracts are signed before the grant inflow and payslips are generated monthly
• Do not issue or sign a UC without giving your CA at least two to three weeks of lead time and access to full records
• Distinguish clearly between DPIIT recognition and Section 80IAC approval apply to IMB separately and well before the relevant ITR filing date
• File your ITR on time in the years you intend to claim 80IAC; the deduction cannot be carried back
• Do not treat a UC deadline as the point at which compliance work starts by then, it is already late

 

 

A Utilization Certificate is a small document with serious implications. For startup founders, it is a compliance obligation that intersects with grant agreements, investor covenants, income tax filings, and audit exposure. Treating it casually is a risk that compounds over time.

The same discipline that produces a clean UC proper books, documented expenses, segregated fund tracking, timely CA involvement is the discipline that supports a successful Section 80IAC claim, clean statutory audits, and credible investor reporting. None of these exist in isolation. They are all expressions of the same underlying financial hygiene.

If you are a DPIITrecognized startup or one that is in the process of recognition, the right time to put this infrastructure in place is before the first grant or institutional funding arrives. If it has already arrived and the records are not where they should be, the next best time is now, not at the next compliance deadline.

 

2nd Floor, Shree Krishna, 7, Shirole Lane, Shivajinagar, Pune – 411004 | +9170200 45454 | dhiraj.ostwal@gmail.com

Disclaimer: This article is for general information only and does not constitute legal or financial advice for any specific situation. Please consult a qualified Chartered Accountant for guidance relevant to your circumstances.