In this blogpost, Harsha Asnani, student, NIRMA University, Ahmedabad writes about the essentials of a charitable trust, who can form a religious or charitable trust, who can be a trustee or beneficiary in a trust, requirements for establishing a trust, what is a trust deed and essential clauses of a trust deed.

Essentials to form a charitable trust

A charitable trust can be formed in a number of ways. Any public or religious institution can be formed as a trust or society or such company which is registered under section 25 of the Companies Act. In cases where such charitable institute is formed by one or more persons, it takes the form of a trust. Trusts can be settled by a person under a trust deed or will. Such person is referred to as the settler. When such a number increases to seven, the institution can also be referred to as a society. Such charitable institutions can also be incorporated as companies. When such companies get engaged in the business of promotion of culture or commerce etc., they get registered as non –profit companies.

Who can form a religious or charitable trust

Section 7 of the Indian Trusts Act, defines all such persons who are competent to create a trust.  Such persons include the following:

1. Any person who is competent to enter into a contract i.e. according to the law to which he is a subject a person should have attained the age of majority, the person should be of sound mind and such person shall not be barred or disqualified from entering into the contract by the law being in force at that time.
2. Any person on behalf of the minor with the permission of a civil court with an original jurisdiction;

Provided that the person who may create a trust is subject to the law being in force at that time and to the extent to which the author of the trust may dispose of the trust property. Not only a person but even other entities such as group or body of individuals, artificial persons such as companies, association of persons, karta representing a Hindu undivided family are competent to form a trust.

It must be noted that the trusts created under the Indian Trusts Act do not include those trusts which are created under any general law. For example, a Hindu Endowment created under the Hindu law or a wakf created under the Muslim Law do not come under the ambit of Indian Trusts Act. A trust covered under Indian Trusts Act need to be necessarily of charitable or religious in nature.

Who can be a trustee or beneficiary in a trust

In order to become a trustee, the first essential requirement is of being competent to hold a property. In cases where the trust holds an element of discretion, a person can act as a trustee only when he is competent to contract. For a trust, more than one person can be appointed as the trustee. Once a person is offered to become a trustee, it is not necessary that he or she necessarily accepts or is bound to accept the trusteeship. However, the trust cannot come to an end in case of no trusteeship. In absence of a trustee, the court may appoint a trustee for administration purposes.

On the other hand, in the case of a private trust, beneficiaries are predetermined or ascertained individuals. However, in the case of a public trust, the number of beneficiaries cannot be ascertained. They may be fluctuating.

What can be the subject matter of a trust

Through various Supreme Court judgements, it can now be ascertained that a trust is capable of holding any type of property. Section 8 of the Indian Trusts Act, 1882 deals with the subject matter of a trust. It states that the subject matter of a trust must be the property transferable to the beneficiary. However, it must not be merely beneficial interest under a subsisting trust.

In the case of J.K. Trust vs. CIT[1] and CIT vs. P. Krishna Warriar,[2] it was held that the term property as used in Section 8 is of widest nature so as to include a business undertaking in its ambit so that a running business can be made a subject matter of trust.

Requirements for establishing a trust

Unless the following elements or points are not fulfilled, a trust cannot be said to have come into existence:[3]

1. The existence or the author or settlor of the trust or someone at whose instance the trust can come into existence.
2. Clear intention of establishing a trust
3. Purpose of the trust
4. Trust Property
5. Persons who shall be the beneficiaries of the trust
6. Divested ownership by the author or settler in favor of the beneficiary of the trust.

Essentials that are needs to be fulfilled for creating valid Charitable or religious trust

Following are the elements which are required to be fulfilled to form a valid charitable or religious trust:

1. Object which is religious and charitable in nature
2. The authors must have the capacity to create trust
3. The settler before creating the trust must precisely indicate the objective with which the trust and property have been given
4. The purpose with which the trust has been created should not be against the provisions of law in force at that time.

Trust Deed – The Instrument of Trust

Trust Deed refers to that instrument through which the trust gets declared. In the case of Padha Soami Satsung v. CIT[4] it was held that for creating a trust no formal document is required. In order to avoid practical difficulties, a trust deed is created. Such instances include:

1. As the Indian Succession Act, the trust which is created by will, irrespective of whether it is private or public, or relates to movable or immovable property needs to have trust deed in writing.
2. In the case of private trusts when the subject matter is an immovable property, whose value exceeds Rs. 100.
3. In the case of public trusts, it is optional.
4. In cases where the trust is created by a society or a company, then the instrument of trust such as rules and regulations or the MOA needs to be in writing.

What are the benefits that registration of a trust deed gives?

Following are the benefits that a written trust deed bears:

1. It acts as the prima facie evidence of the trust’s existence,
2. It leads to clear specification of the objective with which the trust is created.
3. A trust deed is essential for registration so that tax exemption can be claimed under the Income-tax Act.
4. It helps in controlling, regulating and managing the working and operations of the trust.
5. It lays down various procedures that shall regulate the internal working of the trust along with appointment and removal of trustees, rights and duties of various stakeholders etc.
6. It lays down the procedures that need to be followed in case the trust gets dissolved.

Clauses of the trust deed

Following are the clauses that a trust deed should contain:

1. Preamble
2. Name of the trust by why it shall be known
3. Place of office
4. Author or settle of the trust
5. Name of the trustees
6. Beneficiaries
7. Description of the Property
8. Objectives for establishing the trust
9. Express declaration by the trustees
10. Procedure for administration of the trust
11. The procedure through which funds shall be borrowed, raised, disposed etc.
12. Procedure stating the dissolution of the trust
13. Bank account operations

What are the various laws under which a trust can be registered

Following are the laws under which a charitable trust can be registered

1. Societies Registration Act;
2. Section 25 of the Companies Act
3. Section 11, 12 and 12 AA of the Income Tax Act
4. Foreign Contribution (Regulation) Act, 1976

[1] (1957) 32 ITR 535 (S.C.)

[2] (1964) 53 ITR 176 (SC).

[3] http://www.karmayog.com/formation.htm

[4] (1992) 193 ITR 321 (SC)