In this article, Kshitij Datta Rishi who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses What laws apply to a public charitable trust in India? Process compliance, best practices, and applicable laws.
Before we understand the laws applicable to the public trusts in India, we need to understand the difference between the various non-profit organizations societies, Section 25 companies &, trusts in India.
Types of non-profit organizations
- During the 19th century close to the 1857 event, various groups and organizations were established in the country on contemporary issues of arts, politics, science & literature. Later to give legal standing to such organizations, the Societies Registration Act was enacted in India in 1860. This act allows the formation of any literary, charitable and scientific Society for any such purpose as described in Section 20 of the Act. Under the Act, any group of seven persons who agree to follow a Memorandum of Association (MOA) can register a Society.
- Such Memorandum should include the name of the society, the purpose and the details of the members. Also, this should be accompanied by a set of Rules and Regulations.
- Post India’s Independence, based on the adaptation orders 1948/50, the Act continued to remain on the statute but came under the legislature of State governments and various amendments have happened to the same in different states
Section 8 companies (under the Companies Act, 2013) or the old 25 Companies (under the Companies Act, 1956)
The section 8 of the Companies Act, 2013, allows a mechanism through which a Company can be registered with a limited liability if such company is formed for promoting arts, science, commerce, protection of environment or any other useful object provided it intends to apply the income and profits in promoting the underlying objects. Also, that the members cannot be paid any dividends from the profits.
The objective of this structure is to provide a corporate outlook to such companies while exempting them from heavy legal/regulatory requirements.
To register such a Section 8 company, the process is similar to registering or other companies in exception of an additional license requirement specific to this Section 8 company
Trust, Endowments, and Waqfs
- As per Section 3 of The Indian Trusts Act, 1882, ‘A “trust” is an obligation annexed to the ownership of the property, and arising out of confidence reposed in and accepted by the owner, or declared and accepted by him, for the behalf of another, or of another and the owner.’
- The party/person who designates the confidence is called ‘author of trust’ (testator), the person who accepts such confidence is called ‘trustee’ and the person for whose benefit the mentioned confidence is accepted is ‘beneficiary’.
- Essentially, these types of organizations are legally created as modes of property settlement/arrangement dedicated for definite charitable and religious purposes. The basis of their formation is the presence of a property or an asset which has been donated by the will maker for a specific purpose, religious or social. Charitable and religious institutions are special kinds of Trusts which have clear non-secular intent. Waqf is another variant of Trust where the donor is a Muslim.
- Their incorporation, organizational structure, and distribution of functions and powers are governed by the provisions of the specific law under which they are registered.
Broadly, these organizations can be registered legally in the following five ways:
- Registering before the Inspector General of Registration/ Charity Commissioner under the respective State Public Trusts Act e.g. the Rajasthan Public Trusts Act, the Gujarat Public Trusts Act, the Bombay Public Trusts Act,1950etc.;
- By seeking interference of civil courts to lay down schemes for governing a Trust under Sections 92 and 93 of the Civil Procedure Code;
- Registration of the trust deed (of a Public Charitable Trust) under the Registration Act, 1908;
- Notifying an organization in the list of Charitable Trusts and Religious Endowments which are supervised by the Endowments Commissioner of the State or by a Managing Committee formed under the Charitable Endowments Act, 1890 or under other State laws on Hindu Religious and Charitable Endowments; and
- Creating a Waqf under the provisions of the Waqf Act, 1995.
Trusts can be differentiated into Public and Private. Persons, groups, companies etc. on the receiving end of trusts are called beneficiaries. The types of beneficiaries distinguish public trust from a private trust.
- Private trust beneficiaries are generally closed groups, individuals, companies but beneficiaries of public trust are always not defined, that is public at large. This Public trust is an organization that is formed with the primary motive of charity to public.
- A trust can be created by written deed, will or it can even be created by word of mouth. However, in case of immovable property as the subject, the trust can be created only by non-testamentary instrument signed by author of trust and is registered, or by will of author. Therefore, ‘Will’ is not necessarily required to be registered, even though it may pertain to immovable property.
- The primary instrument of forming a trust is the Trust Deed, which is made on non-judicial stamp papers of prescribed fee and is signed by the trustee(s) for submission to the concerned Registrar. For this, since the trust is based on the principle of asset transfer, the registrar or sub-registrar having authorized to register properties has the authority to register this Trust Deed. For this reason, Trust Deed of the proposed Trust may be registered with the registrar of properties or Tahsildar, followed by the endowment of the same at the district level in the collectorate. In case of metropolitan regions/cities, this process is carried out with separate offices of registrar of properties and endowments.
The Trust Deed should contain various details including the names of authors, the names of trustees; settlers of the trust; the names if any, of the beneficiaries or whether it is the public at large; name and address of the trust; objects of the trust; specifics on the appointment, removal or replacement of a trustees, their powers, rights & duties and powers; the method and mode of determination of the trust among others.
Comparison between Society Trust and Section 8 Company
|Society||Public Trust||Section 8 Company|
|Act/ Legislation||Societies Registration Act of1860||Public Trusts Acts like the Bombay Public Trusts Act of 1950||Companies Act of 1956|
|Jurisdiction||State where registered||State where registered||State where registered|
|Authority||Registrar of societies||Charity Commissioner||Registrar of Companies|
|Registration||As Society (and also as Trust in Maharashtra and Gujrat)||As Trust||Memorandum and Articles of Association|
|Number of Persons needed to register||Minimum seven; no upper limit||Minimum two Trustees;||Minimum2 shareholders/ Minimum 2 directors|
|Board of Management||Governing Council or Body/ Executive or managing Committee||Trustees||Board of Directors/ Managing Committee|
|Mode of succession on Board of Management||Usually election by members of the General Body||Usually by appointment||Usually election by members of the General Body|
Now that we have understood the basic types of non-profit organizations, it is important to also understand what is meant by charitable organizations.
- Charitable organizations are organizations established for charitable purposes. These are non-profit organizations; however, it must be realized that not all non-profit organizations are charitable organizations. Some of the charitable organizations may be established by companies primarily as a part of their tax planning strategies.
- The main responsibility of any charitable organization is to work towards benefit of the public by focusing on causes that help the public at large. Along with this, all the operations performed by these organizations should be legal and their policy should be in line with the general public policy.
- Public charitable trust must be created for the larger benefit of the public. Similarly, Societies may be registered for charitable purposes. Section 8 companies as described previously are formed for the limited purposes of “promoting commerce, art, science, religion, charity or any other useful object.
- In legal terms, the concept of “charitable purpose” may differ a bit from the dictionary definitions of the term.
- As per Section 2(15) of the Income Tax Act, 1961, the term Charitable purposes include “relief of the poor, education, medical relief, and the advancement of any other object of general public utility.” In addition to this, Finance (No.2) Act, 2009 added the “preservation of environment (including watersheds, forests, and wildlife) and preservation of monuments or places or objects of artistic or historic interest” under the purview of the term charitable purposes.
- Apart from this, Finance Act, 2008 restricted the definition of “charitable purpose,” by mentioning that if the “advancement of any other object of general public utility” involves undertaking any business activity, trade or commerce, or providing any related service for a condition or a fee, it will not be considered a “charitable purpose.”
- The Finance Act 2010, retrospectively effective from April 1, 2009, provided some relief by setting up a threshold and exempting the aggregate amount of receipts from such activities up to one million rupees. An organization, established for and running programs for education, relief of poverty and medical support were not affected by the amendments of 2009 or 2010.
Under the state laws, as per the Section 9(1) of the Bombay Public Trusts Act, 1950, charitable purpose includes:
- relief of poverty or distress
- medical relief
- provision of facilities for recreation or other leisure time occupations, if the said facilities are provided in the interest of public benefit and social welfare.
- the advancement of any other object of general public utility, but does not include a purpose which relates exclusively to religious teaching or worship.”
As can be realized above, the definition of charitable purpose is broad enough to cover activities other than working towards providing direct relief from poverty or calamities.
Laws applicable to Public Charitable Trusts in India
Before we go into specifics of Public charitable trusts, a few important points must be considered regarding the charity sector:
There is no individual legislation or a law, which comprehensively governs the charitable organization sector and similarly there no single regulator in this sector in India
- Based on the choice of persons forming the charity and the purpose, a charitable organization can be formed in various ways and may be subject to different acts of legislation
- Separate legal provisions exist at state and national levels
- Nonprofit organizations are also not permitted to be involved in any ‘political activity’. Under the Bombay Public Trusts Act, even ‘political education’ remains outside the scope of ‘charitable purpose’.
- India, to maintain being a secular state, does not allow distinction of color, caste and creed in formation of any charitable organization. However, it is still possible to create a valid trust for the benefit of a specific section of the community. But then this kind of trust would not be allowed any income tax exemption
- As discussed in the point above, religious trusts established for the benefit of a specific religious communities are also not allowed to benefit from income tax exemptions
Laws governing the formation/registration of such Public Charitable Trusts in India
The first law in India Trusts came into force in 1882 and was known as the Indian Trusts Act, 1882. This ACT was basically for management of Private Trusts.
- As opposed to the central law from private trusts, a charitable institution formed as a Public Trust in individual states is, governed by the Public Trust Act applicable in the relevant State. As an example, the public charitable trusts formed/ registered in the state of Maharashtra are governed by the Bombay Public Trusts Act, 1950.
- Similar act is operational in state of Gujarat. For such trusts, Rajasthan, has a Trusts Act of 1959 and Madhya Pradesh had an Act of 1951. In certain southern states , there are endowments Acts (eg. Andhra Pradesh), while a many of the northern and north-eastern states in India have no trust Act at all.
- Even New Delhi-has no trust Act. In such cases, if no Public Trust Act exists in that state, then the public trusts in these states are governed by the Indian Trusts Act 1882.
Based on the ruling from the case of Hanumantram Ramnath (Bom), it can be concluded that even though the Indian Trusts Act, 1882 does not specifically apply to public charitable trusts, there are three bare minimum requirements to create a charitable trust. These are:
- A declaration of trust – binding on settlor,
- Setting apart of a definite property and the settlor depriving himself/herself of the ownership, and
- The beneficiarie(s)- for which the property is thereafter to be held,
It is important that the transferor of the property by the settlor or that the author of the trust must be competent to sign a contract. Along with this, the trustees should also be persons who are competent to sign a contract. It is also very critical that the trustees identified should signify their acceptance for acting as trustees to make the trust a legally valid one.
Specific acts for different states governing the Public charitable trusts or similar endowments have been mentioned in the list towards the end of the article.
Applicability of Income Tax Act 1961 to Public charitable trusts
Public charitable trusts are exempted from income tax. These exemptions provided to the public charitable trusts are specified in the Section 11, Section 12, and Section 13 of The Income Tax Act.
- Section 11 of the Act provides details of the modes of exemption from income tax to such public charitable trusts
- Section 12 mentions about exemptions for the contribution of income of the trust
- Income of trusts from these contributions
- Voluntary contribution received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes
- Section 13 of Income Tax Act gives the details related to forfeiture of exemption of income tax by public charitable trust
All trusts are obligated to file annual reports. These returns of income should be filed with the relevant authorities having jurisdiction of the state where the trusts are registered. Income of the authors of trusts can be taxed as personal income under Sections 60 – 63 of the Income Tax Act, 1961 in cases where the trust deed has a provision for revocation of trust.
Section 80G provides details of the privileges available to the donors of public charitable trusts. Under this section, an individual donor is granted specific deduction if donations are made to such kind of public charitable trusts. To be able to provide this benefit to its donors, a public charitable trust is required to obtain a valid certificate. For obtaining this certificate, a trust is required to give application with form 10G along with the trust deed to the income tax office. The primary prerequisite to obtaining this certificate to provide benefit to the donors is that the income gained from the property of the trust should only be used in charitable purposes (as described earlier). The specific conditions to be fulfilled by the public charitable trusts to obtain this certification are:
- The trust should be a public charitable trust, the benefit is not for private trusts
- The trust should be registered under the relevant laws of the state and also, with the income tax department
- Any income or contribution of the trust should not be not applicable for exemption under Section 11, Section 12, Section12A and Section12AA of the Income Tax Act. If this is the case, the trust should not use donations for private business and should maintain separate books of accounts
- The bylaws and objectives of the trust should be for charitable purposes only
- The trust should be having regular maintenance of accounts and regular audit of the same
- There should be no irregularity in filing of income tax returns
Applicability of the Foreign Contribution (Regulation) Act, 2010 to Public charitable trusts
Public charitable trusts that receive foreign contribution or donation from foreign sources are required to obtain registration under Section 6(1) of Foreign Contribution Regulation Act, 2010. Such a registration under the ACT is called an FCRA registration.
To be eligible for applying for the FCRA Registration a trust should match certain criteria,
- A public charitable trust seeking foreign contributions for definite cultural, economic, social, religious or educational programs may obtain FCRA registration or receive foreign contribution through “prior permission” route
- The trust must have also been in existence for a minimum of three years at the time of making the FCRA application and should not have received any foreign contribution before applying for the same without the Government’s approval
- Additionally, the trust seeking registration should have spent at least Rs.10,00,000/- over the last three years on its aims and objectives, excluding any administrative expenditure. To prove the same, Statements of Income & Expenditure, duly audited by Chartered Accountant, for last three years must be submitted
After the application is done, various additional criteria are checked before the FCRA registration is provided. However, even after the registrations, the trusts should be careful in accepting the grants from foreign entities as these could be risky in terms of their source of funds or the purpose of these funds may go against the public/ nations wellbeing.
Other Applicable Laws for Trusts
- Religious Endowments Act, 1863
- Charitable Endowments Act 1890
- Hindu Religious and Charitable Endowments Act 1951
- Charitable and Religious Trusts Act, 1920
- Official Trustees Act, 1913
- Registration Act, 1908
- Civil Procedure Code, 1908
- Indian Stamp Act, 1899
- Mussalman Wakf Validating Act,1913
- Mussalman Wakf Act, 1923
- Mussalman Wakf Validating Act, 1930
- Wakf Act, 1995
Some relevant State Acts
- Bombay Public Trusts Act, 1950 and Bombay Public Trusts Rules, 1951
- Andhra Pradesh Charitable and Hindu Religious Institutions and Endowments Act, 1987
- Bihar Hindu Religious Trusts Act, 1950
- Karnataka Hindu Religious Institutions and Charitable Endowments Act, 1997 and Karnataka Hindu Religious Institutions and Charitable Endowments Rules, 2002
- Orissa Hindu Religious Endowments Act, 1951
- Kerala Travancore-Cochin Hindu Religious Institutions Act, 1950
- Rajasthan Public Trust Act, 1959
- Tamil Nadu Hindu Religious and Charitable Endowments Act, 1959
- The Madras Hindu Religious And Charitable Endowments Act, 1951
- Uttar Pradesh Charitable Endowments (Extension of Powers) Act, 1950 and Charitable Endowments (U.P. Amendment) Act, 1952
- United Provinces Charitable Endowments Rules, 1943
- Religious Endowments (Uttar Pradesh Amendment) Act, 1951
- Societies, Trusts/ Charitable Institutions, Waqfs and Endowments: Social Capital – A Shared Destiny
- Handbook on Laws Governing formation and Administration of Charitable Organizations in India – CA Rajkumar S. Adukia
- FCRA Registration for Trusts and NGOs – India Filings