In this blogpost, Priyasa Patnaik, advocate and a student of Diploma in Entrepreneurship Administration and Business Laws by NUJS, writes about what is trust, what is a society and the difference between them.

Introduction

A business structure is important to decide to derive maximum benefit. Among the structuring options preferred by businessmen these days, trust and society constitute to be a few of the options. Both structures have similar purposes. However, their nature of the constitution, formation, taxations and dissolution are different.

What is a trust

Trust is an arrangement where two parties agree that one party will transfer his/her property to the other party who will hold the property for the benefit of another[1]. A trust is formed and registered under the provisions of the Indian Trusts Act, 1882 (ITA)

What is a society

Society is set of individuals who have come together for a common purpose. A society is incorporated under the provisions of Indian Societies Registration Act, 1860 (ISRA).

Difference between society and trust

Trusts are formed for any kind of lawful purposes under section 4 of the ITA.[2] There two types of trusts are depending upon the nature of segment of the public which is going to be benefited from the activities of the trust, i.e. private trust and public trust. The ITA governs the private trusts whereas public trusts are governed by The Charitable and Religious Trusts Act, 1920 and other respective state legislations on trusts[3]. Yet, trusts go on to be differentiated as revocable trust and irrevocable trust. A revocable trust can be revoked or modified by the grant or/settlor, however, the same cannot be revoked in event of the grantor’s/settlor’s death while an irrevocable trust cannot be revoked by the grantor since in this kind of arrangement the grantor has renounced his/her ownership of the trust property. For a trust to be determined as a revocable trust or irrevocable trust depends on an express or implied provision pertaining to revocation of the same in the trust deed. Society also has similar purposes like a trust but is not limited to charitable purposes[4] and is only governed by the ISRA. Further, winding up of society is possible when three-fifth of the members of the society decide to do so[5].

Minimum two individuals can form a trust by entering into and executing a trust deed expressly enumerating its objectives, property forming its subject matter, beneficiary and terms and conditions in detail. However, according to section 1 of the ISRA minimum requirement of members for society is seven. A family member can become a member of the trust whereas in a society a family member cannot become a member of society. However, in both trust and society residents of the foreign country can become trustees or members of the society subject to he/she not being a family member of the existing member of the society.

The members of the society form a managing committee which controls the affairs of the society whereas, in a trust, the settlor controls every single aspect of the trust[6]. The management of a trust is flexible compared to a society which involves a number of formalities ranging from its managing committee’s decision to approval from the Registrar of Societies.  Thus, trust is an effective means of succession arrangement where probate will not be required, thereby creating a framework wherein  the family property is protected and maintained efficiently while at the same time preserving the interests of family members[7].

In the case of incorporation of a society under the ISRA, the proposed society is required to prepare Memorandum of Association (MoA) and bye- laws of its own and file them with the Registrar of Societies along with other necessary documents. The MoA and bye- laws are the main documents of a society which specifically contain its objectives and terms and conditions for the cooperation of the society and conduct of business. The procedure for incorporation of society comprises of many steps unlike registration of a trust. Similarly, in the event of any change required to be done in the structure of the trust or the society, it is easier in the case of trust than society. This is so because in the case of a trust change has to be carried out only in the trust deed whereas in the case of society, changes has to be carried out by way of amendment to the MoA and accordingly in it bye- laws. Further, the title of the property in a trust is entrusted with the trustee/s whereas the title of the property in society is not with the members of the society but in the name of the society.

As far as taxation is concerned, a public trust is more tax efficient than society. A public trust, i.e. a charitable or religious trust under Section 11 to Section 13 of the Income Tax Act, 1961 (IT Act), is entitled to several tax exemptions and benefits. The income of the charitable or religious trusts and the donations made to these trusts are tax exempted subject to compliance with the conditions as provided by the IT Act. Otherwise, a private trust and a society registered for non- charitable or religious purposes are liable to pay income tax as any other organization in India.

Conclusion

Therefore, in view of the aforesaid points showing a comparison between a trust and society, it is hereby concluded that a trust as a business structure is advantageous over a society since it is hassle- free, accommodating and tax exempted (though in certain scenarios) without involvement of numerous procedures and formalities.

[1] H.C. Johari, Mukherjee’s on Indian Trusts Act, 1882, The Charitable & Religious Trusts Act, 1920 – Model Trust Deeds, Kamal Law House (2006), p. 4

[2] Section 4 of the ITA –  “Lawful purpose –A trust may be created for any lawful purpose- “The purpose of a trust is lawful unless it is (a) forbidden by law, or (b) is of such a nature that, if permitted, it would defeat the provisions of any law, or (c) is fraudulent, or (d) involves or implies injury to the person or property of another, or (e) the Court regards it as immoral or opposed to public policy. Every trust of which the purpose is unlawful is void. And where a trust is created for two purposes, of which one is lawful and the other unlawful, and the two purposes cannot be separated, the whole trust is void. Explanation.–In this section the expression “law” includes, where the trust-property is immoveable and situate in a foreign country, the law of such country”.

[3]The Religious Endowments Act, 1863, the Charitable Endowments Act, 1890, and the Bombay Public Trust Act, 1950 are the relevant legislations for the recognition and enforceability of public trusts.

[4] Section 20 of ISRA – “ To what societies Act applies -The following societies may be registered under this Act:- Charitable societies, the military orphan funds or societies established at the several presidencies of India, societies established for the promotion of science, literature, or the fine arts, for instruction, the diffusion of useful knowledge, 2 *[the diffusion of political education] the foundation or maintenance of libraries or reading-rooms for general use among the members or open to the public, or public museums and galleries of paintings and other work of art, collections of natural history, mechanical and philosophical inventions, instruments, or designs”.

[5] Section 13 of ISRA – “Provision for dissolution of societies and adjustment of their affairs Any number not less than three-fifths of the members of any society may determine that it shall be dissolved, and thereupon it shall be dissolved forthwith, or at the time then agreed upon, and all necessary steps shall be taken for the disposal and settlement of the property of the society, its claims and liabilities according to the rules of the said society applicable thereto, if any, and if not, then as the governing body shall find expedient, provided that, in the event of any dispute arising among the said governing body or the members of the society, the adjustment of its affairs shall be referred to the principal court of original civil jurisdiction of the district in which the chief building of the society is situate; and the court shall make such order in the matter as it shall deem requisite.”

[6] S. K. Sarvaria, Commentary on the Indian Trusts Act: Including Model Trust Deeds & Forms, Universal Law Publishers(2007), p. 357

[7] http://articles.economictimes.indiatimes.com/2011-07-18/news/29787429_1_private-trusts-estate-planning-indian-trusts-act, accessed on 26^th January 2016.