In this article, Rohit Upadhyayay who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses How to register a charitable trusts and get necessary income tax registrations for donor benefit?

Introduction

Charitable trusts are the institutions incorporated to advance help and support to the person who really belongs to the poor and deprived category. This form of institution is incorporated to provide maximum benefit to the society. Trust so formed is purely independent and a nonprofit entity as the main aim of formation of trust is to cause public benefit. A trust also provides a various group of individuals to collectively help the person who are unable to survive and to take care of all of their needs. These institutions are formally incorporated as any other company or association and have its own individual legal identity as a legal person. The firm can also make its own individual decision by means of its trustee. The trusts so formed may be formed with a premeditated thought or it may be after its formation may solemnize the intention of formation of such an institution. The trusts so formed may be engaged in one or more than one business by means community service or to provide affordable services to the person availing those services. These trusts can be make to serve old age citizen, orphans, physically disabled children, specially able children, and even for animals.  Charitable trusts are also forms to promote efforts to bridge gap between the privileged and the needy.

Classification of trusts

The following are the major classifications of trust in India.

1. Private trust
2. Public trust

Private trust

Private trusts are the trusts which are formulated to benefit or to contribute towards any specific class or category of people and keeps their prospective interests on the key for such formations.  So a private trust could be recognized as a trust which has a specific cause of formulation and it has certain class which is made as the beneficiary. Example if an industrialist or an employer with an intention of service or to support the health, or other bonafide conditions of the family of the 100 laborers and his employees forms a trust that trust would be a private trust. The Indian trusts Act, 1882 governs all the private trusts in India. The act of 1882 is applicable all over India expect the state of Andaman and Nicobar islands and the state of Jammu and Kashmir.

The following mentioned have similar motive as that to a private trust but they are excludedWaqf

Waqf

Waqf boards are the boards which command the rights and maintains the property inherited by the virtue of donation by the Islamic community. The parliament has authorized this body by means of statutory authority and passing a statute in its favor.

Property of a Hindu Undivided Family’s

property of Hindu undivided family can also be settled as a trustee.

Public or private religious as charitable endowments

The endowment department of state is the authority which has been constituted with a view to manage all the religious donations received by the temple and other religious activities.

Creation of a private trust

few conditions to be taken care of before setting up of a private trust,

• Any person can form a private trust
• A private trust should have a legal purpose which is not forbidden by law and procedure to be adopted shall also be legal.
• The person so forming the trust should have attained majority, should be of sound mind must not suffer from any mental disability which renders him not suitable for holding any place or position.
• The person setting up any private trust should not be declared to be bankrupt or disqualifies by any other law or legal means.
• The person who is minor can also establish or create a trust but this condition would require prior approval from civil court of competent jurisdiction.

Trustee/beneficiary of a private trust

Trustees are the official living guardian of the trust and the officially hold the property. The trustee I regarded as the person who is officially authorized to hold the property on behalf of the trust and te position of the trustee is similar to that of a director of a company.   Except the director gets paid and the trustee doesn’t get paid. The trustee performs an ex-gartia duty for all the members of the trusts and beneficiaries

Qualifications of a trustee

• A person competent to hold property can become a trustee of a trust.
• The person holding the post of a trustee must have administrative skills to manage the affairs of the property vested with the trust and the trustee should also have reasonable prudence to strive to make his best efforts to take care of the interest of the beneficiaries and the trust itself.
• Any individual, association or company can also be appointed as trustee.

Public trust

Private trusts are formulated without any specific intention and the beneficiary class of society is also not clear. Such trusts are not very effective in administration and they have no such big participation into the development of the status of society neither they have any such mandatory obligation for such community service. The major purposes of incorporation of such public trusts are to manage religious affairs and such institution manages their personal dominations and other financial gifts as for religious donations.

• Waqf board.
• Endowment department for Hindu religious affairs.

Laws and regulations regarding the establishment of trusts in India

• The trusts incorporated in India are established by the virtue of Indian Trust Act 1882. The section 3 of the act defines trust as follows:
• “Trust” is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner.
• Section 4 of the act of 1881 provides that the trust should be formed for a lawful cause. A trust may never be formed for satisfaction of any unlawful action or activity, The trust so formed must also not defeat the provisions of law either in expressed or in any implied manner, the trust should not be formed to fulfill fraudulent intentions of a person, the trust shall not be constituted to cause any injury to any person individual or any company, the trust should not also involve any of those affairs which are against any public policy or declared by court to be immoral.
• Section 5 of the act of 1882, provides that no trust in reference to immovable property can be incorporate and effected unless the person proposing that transfer declares the same on a non-testamentary instrument which is duly signed and registered by the author of the deed or the creator of that trust. In case of a moveable property no trust in favor of such moveable property is valid until the property is transferred to the trustee.

The trust, when applied for registration, will have following contents in the application form as a valid requisite

• Name of the trust.
• Address of the trust
• Objects of the trust(charitable or Religious)
• One settler of the trust
• Two trustees of the trust
• Property of the trust-movable or immovable property (normally a small amount of cash/cheque is given to be the initial property of the trust, in order to save on the stamp duty).

After the above-mentioned conditions, the next following necessary steps are taken.

• Prepare a Trust Deed on stamp paper of the requisite value
• The trust deed so formed shall be registered with the locally empowered registrar who will register the trust under Indian Trust act, 1882.
• The trust deed would have due stamps required to incorporate such institution (ratable as per the norms of registration)
• The photo identity of the person setting up the trust along with his passport size photograph on the same deed.
• Passport size photograph of the two trustees who are being handed over this trust.
• Signature of the person setting up the trust.
• Signature of two witnesses on the trust deed.
• After compliance of all the relevant formalities the trust deed is submitted to registrar and after the approval of Registrar the trust comes to existence.

There are few other statutory provisions for the establishment of trusts.

Companies Act, 2013.

The companies’ acts 2013 have specific provisions for incorporation of nonprofit organization to support such causes of social interests. Prior to the act of 2013, the same provisions existed with the Companies Act of 1956. Under section 25 of the act incorporation of nonprofit organization

The nonprofit organization is the institution who are incorporated to serve the main objective of promotion of education, social, welfare, cultural and religious which are formally sourced by the individual or association for such profits.

• While incorporation of a trust under Companies Act 2013 there must be following compliances,

1. Digital signatures of the Director.
2. Director identification number (S.153)
3. Name availability of the proposed company
4. Preparation of Memorandum of association (MOA )and article of association(AOA).
5. Grant of license under section 8 of The Companies Act to work for charitable objective.

Indian Constitution

The constitution of India also empowers such effort of incorporation by setting and promoting of such formations. The Article 19 (1) (C) provides for the formation of such organizations. this has been a special incorporation by the means of a fundamental right.

The constitution of India also empowers other minority and other weaker and backward community to establish and manage their own institution to establish promote and profess their beliefs and to strive to promote their personal practice.

Society’s Act, 1860

The society’s act of 1860 also provides for registration of nonprofit organization and charitable trust as under. Any group of seven or more individuals can personally associate for any literary, scientific and charitable purpose or for any other purpose which may be defined in section of the societies act 1860may formally by subscribing their names to a memorandum of association and filing to the registrar of joint stock companies to formulate such society.

According to section 20, the concise list of the societies which can be registered under this act has been defined and the following may be registered under the societies act of 1860.

• Military orphan funds
• Societies established at several presidencies part of India.
• Established or promotion of science, literature and fine arts
• Foundation and maintenance of libraries.
• Museum, galleries, painting and other form of work.

The following are the relevant provision regarding income:

As the trust formed under any of the above mentioned programs are strictly for nonprofit initiatives as charitable trust enjoys income tax exemption and public trusts as the Hindu Religious Institutions and Charitable Endowments Act, 1997 and the Muslim Wakf council formed under Muslim Wakf Act, 1954. Enjoys additional benefit on account of being a public trust and get exemption from taxes based laws and regulation.

The details of the specific exemption are as follows

Section 11. Tax exemptions.

In compliance and consistency with the provision laid in section 60(transfer of income without transfer of asset) and 63(transfer and revocable transfers) of the income tax act the income earned by any religious trust would be exempted from taxation liability as per the extent specified in the schedule for this act.  To obtain such exemption from taxation the procured income must fulfill certain conditions.

Nature of income and the extent to which tax exemption is allowed – Section 11(1)(A)

When the property is completely and wholly for charitable purpose to the extent of income is applied to such charitable or religious purpose in India. Whereas such income is accrued or set apart for such application, to the extent of 15% of the income from such property.

• When any trust earns any income for some charitable purpose which aims for the promotion of welfare which helps in realizing Indian goals theses are exempted to such charitable or religious purpose outside India.

Section 12 of income tax provides for voluntary contribution

• Income earned by the trust by the means of contribution received by the trust from the donors
• A contribution voluntarily made by a charitable trust with and intention to engage into charitable or religious purpose can either receive or donate towards the charitable trust.

Section 13. Provides major guidelines when the special exemptions under the section 11 and section 12 would be forfeited and would not have the privilege of exemption.

• If the contribution and the income so received is not utilized for charitable performance.
• Misuse of the contribution of the earnings of the trust.
• Noncompliance of the AOA and MOA of the deed of the trust.
• If the trust is misusing the contribution of the trust for the personal benefits of the trustee, director, donors, relatives of the person having influence in the management of the trust.

The impact of donation upon the donor {under section 80G of the income tax act 1961}

1. The donor presented for the purpose of the charitable trust must be a legal person and any legal person can enjoy this right of donation to charitable trust. The person who is a rightful tax payer can become a donor for the purpose of this charitable trust.
2. The donations advanced towards any foreign trusts would not have any privilege under this law only donations made within India will have the enjoyment of such benefits not otherwise.
3. The donations made to charitable trusts are only eligible for any sort of tax benefit otherwise no person individual or company could claim any sort of donation made to any political parties as they are not formed with an intention to commit public service.
4. The donation to enjoy the benefit of tax exemption the donation must be made in a prescribed manner and to a prescribed institution for prescribed fund. It is done with a view to maintaining the transparency and scrutiny on the trust so receiving and the donor so making such donations.
5. In order to curtail the adverse usage of the charitable trusts the sum of donation if exceed more than 10% of the total gross income the additional donation made by the person will not have any special privilege for the income percentage donated in excess of the 10 % of the income.

Necessary compliance to obtain maximum benefit of the donations made under section 80G of the income tax act 1961: In order to obtain maximum benefit of the donation for taxation purpose the donor must follow following instructions.

1. The most important document is the receipt of the donation and the donation made under section 80 G must have a stamped receipt of the trust. Which bear the pan number and the address of the receiver trust receiving the donation with the name of the donor to the trust which has the clear amount of donation described and the mode of the donation upon the receipt itself.
2. The donation when made in the particular head that is entitled to 100% exemption the donor must emphasis on the receiver to provide him with form 58. So that he may further claim his 100% exemption regarding his donation. Without form no. 58 the donor cannot enjoy the complete 100% deduction benefit although his receipt mentions 100%exemption.
3. The donor must also check for the registration number upon the receipt issued by the trust as all trust receipt must have registration number issued by the income tax department under 80G.
4. The donor must ensure that the trust to which he is making any donation possesses a valid certificate of 80G otherwise his donation would not have the exemptions of 80G of the income tax act.
5. The donor should produce the photocopy of the 80G certificate of the trust.
6. Donation made in cash or by means of cheque are only entitled to tax benefits not otherwise as donations made by means of a donation of blanket, other utility based articles do not fall under the ambit of Section 80 G of the income tax act.
7. Donation made in any natural disaster or any natural emergency situations the maximum amount of the exemption which could be enjoyed from tax liability would be 10,000 Rs when mode by any medium other than cash (i.e cheque or electronic transfers.)
8. The employees can claim deduction under the same section 80 G after providing a certificate obtained by their employer that such an amount is already deducted from their salary.
9. There is no capping limitation upon the amount of donation a person can make. However, as per statutes there are various heads in which the limit of obtaining the deduction is restricted to 10%.
10. The donations made to specific organization are entitled to specific deduction and tax exemptions.

• 100 % deductions without any qualifying limits (no capping on the amount and full deduction): – Prime minister`s national relief fund.
• 50% deduction without any qualifying limit (no capping on the amount and half deduction) Indira Gandhi memorial trust.
• 100 % deduction to a qualifying limit (full deduction but capping on the for specific amount): – An approved institution for health planning.
• 50 % deduction to a qualifying limit (half deduction but capping on the for specific amount): – approved institution for charitable purpose other than promoting family planning.

The following are the institutions with 100% deduction without any qualification limit.

1. National defense fund.
2. The national blood transfusion council or a state blood transfusion council.
3. National illness assistance fund.
4. Prime minister`s national relief fund.

The following are the institutions with 50% deduction without any qualification limit.

1. Prime minister drought relief fund.
2. National children`s fund.
3. Rajiv Gandhi foundation.
4. Jawahar lal Nehru foundation.

The following are the institutions with 100% deduction subjected to 10% of the gross total income

1. The donations made to the local or government authority for the promotion of family planning.
2. Sum paid by a company to Indian Olympic association.