[box]Formation of Charitable Trust[/box]
A public charitable or religious institution can be formed either as a Trust or as a Society or as a Company registered u/s 25 of the Companies Act.
It generally takes the form of a trust when it is formed primarily by one or more persons.
To form a Society at least seven persons are required. Institutions engaged in promotion of art, culture, commerce etc. are often registered as non-profit companies.
These forms are enumerated as under :
Charitable Trust settled by a settlor by a Trust Deed or under a Will.
Charitable or religious institution / association can be formed as a society.
Charitable institution can be formed by registering as a company u/s. 25 of the Companies Act, 1956, as non profit company (without addition to their name, the word “Limited” or “Private Limited”).
Who can form a Charitable or Religious Trust
As per section 7 of the Indian Trusts Act, a trust can be formed –
by every person competent to contract, and
by or on behalf of a minor, with the permission of a principal civil court of original jurisdiction.
but subject in each case to the law for the time being in force as to the circumstances and extent in and to which the Author of the Trust may dispose of the Trust property.
A person competent to contract is defined in section 11 of the Indian Contract Act as a person who is of the age of majority according to the law to which he is subject and who is of sound mind and is not disqualified from contracting by any law to which he is subject. Thus, generally speaking, any person competent to contract and competent to deal with property can form a trust.
Besides individuals, a body of individuals or an artificial person such as an association of persons, an institution, a limited company, a Hindu undivided family through it’s karta, can also form a trust.
It may, however, be noted that the Indian Trusts Act does not apply to public trusts which can be formed by any person under general law. Under the Hindu Law, any Hindu can create a Hindu endowment and under the Muslim law, any Muslim can create a public wakf. Public Trusts are essentially of charitable or religious nature, and can be constituted by any person.
Capacity to create a Trust
As a general rule, any person, who has power of disposition over a property, has capacity to create a trust of such property. According to section 7 of the Transfer of Property Act, 1882, a person who is competent to contract and entitled to transfer the property or authorized to dispose of transferable property not his own, either wholly or in part and either absolutely or conditionally, has ‘power of disposition of property’.
Thus, two basic things are required for being capable of forming a trust –
power of disposition over property; and
competence to contract.
Who can be a Trustee
Every person capable of holding property can become a trustee. However, where the trust involves the exercise of discretion, he can accept or act as a trustee only if he is competent to contract. No one is bound to accept trusteeship. Any number of persons may be appointed as trustees. However, no trust is defeated for want of a trustee. Where there is no trustee in existence, an official trustee may be appointed by the court and the trust can be administered. An executor of a Will may become a trustee by his dealing with the assets under the provisions of the Will. When an executor is functus officio to any of the assets and yet retains them, he becomes a trustee in respect of those assets.
Who can be a Beneficiary
In a private trust the beneficiaries are one or more ascertainable individuals. In a public trust the beneficiaries are a body of uncertain or fluctuating individuals and may consist of a class of the public or the whole public. Generally, a private trust is not a permanent one. But a public trust is of a permanent nature. If properties are dedicated to temples and mosques or gifts are made to religious or charitable institutions they create a trust.
Subject matter of Trust
Any property capable of being transferred can be a subject matter of a trust.
Section 8 of the Indian Trust Act, however, provides that mere beneficial interest under a subsisting trust cannot be made the subject matter of another trust.
In the case of J.K. Trust vs. CIT (1957) 32 ITR 535 (S.C.), the Supreme Court had held that the word ” property” under the Trusts Act is of the widest import and a business undertaking will undoubtedly be a property so that a running business can be made a subject matter of trust. This view has been followed in the case of in CIT vs. P. Krishna Warriar (1964) 53 ITR 176 (SC).
Business may be a taboo for charitable institution from the point of view of exemption for income tax purposes. From time to time, the law has undergone a change as to what business is permitted and under what circumstances. The present law permits only such business which is incidental to attainment of the objects of the trust or the institution, subject to the condition that separate account books are maintained for such business as prescribed under sub-section 4A of section 11 of I.T. Act.
Requisites of a Trust
The existence of the author/settlor of the trust or someone at whose instance the trust comes into existence.
- Clear intention of the author/settlor to create a trust.
- Purpose of the Trust.
- The Trust property
- Beneficiaries of the Trust.
- There must be divesting of the ownership by the author / settlor of the trust in favour of the beneficiary or the trustee.
- Unless all these requisites are fulfilled a trust cannot be said to have come into existence.
Essentials of a valid Charitable or Religious Trust
There are four essential elements of a valid charitable or religious trust –
- Charitable or Religious Object : The object or purpose of the trust must be a valid religious or charitable purpose according to law ;
- Capacity to create Trust : The founder or settlor should be capable of creating a trust and dedicating his property to that trust;
- Certainty of Object and Dedication thereto : The settlor should indicate precisely the object of the trust and the property in respect of which it is made. The property should be dedicated to the trust and the owner must divest himself of the ownership of that property.
- Concurrence with the law : The trust or its objects must not be opposed to the provisions of any law for the time being in force.
Instrument of trust – i.e., trust deed
The instrument by which the trust is declared is called instrument of Trust, and is generally known as Trust Deed.
It is well settled that no formal document is necessary to create a Trust as held in Radha Soami Satsung vs. CIT- (1992) 193 ITR 321 (SC). But for many practical purposes a written instrument becomes necessary under following cases –
- When the trust is created by a will irrespective of whether the trust is public or private or it relates to movable or immovable property. This is because as per Indian Succession Act, a will has to be in writing
- When the trust is created in relation to an immovable property of the value of Rs.100 and upwards, in case of a private trust. In case of public trusts, a written trust deed is not mandatory, even in respect of immovable property, but is optional.
- Where the trust/association is being formed as a society or company, the instrument of trust; i.e., the memorandum of association, and Rules and Regulations has to be in writing.
- A written trust-deed is always desirable, even if not required statutorily, due to following benefits :
- A written trust deed is a prima facie evidence of existence of a trust ;
- It facilitates devolution of trust property to the trust;
- It clearly specifies the trust-objectives which enables one to ascertain whether the trust is charitable or otherwise;
- It is essential for registration of conveyance of immovable property in name of the Trust;
- It is essential for obtaining registration under the Income-tax Act and claiming exemption from tax;
- It helps to control, regulate and manage the working and operations of the trust;
- It lays down the procedure for appointment and removal of the trustee(s), his/their powers, rights and duties; and
- It prescribes the course of action to be followed under any eventuality including dissolution of the trust.
Types of Instrument of Trust
- Trust deed, where a trust is declared intervivos; i.e., by settling property under Trust.
- A will, where a trust is declared under a will;
- A memorandum of association along with rules and regulations, when the association/institution is being formed as a society under the Societies Registration Act, 1860.
- A memorandum and articles of association where the association /institution is desired to be formed as a Company.
A person drafting the deed of a public charitable trust has to bear in mind several enactments, particularly the Indian Trusts Act, any local enactment relating to trusts, like the Bombay Public Trusts Act for the State of Maharashtra and the Income tax Act. Such a person has also to keep in mind the relevant judicial pronouncements dealing with the scope of “charitable purpose” and accordingly decide whether a particular purpose is charitable or not. An instrument of Trust
or association/institution created or established should contain inter alia the following clauses:
Nothing contained in this deed shall be deemed to authorise the trustees to do any act which may in any way be construed as statutory modifications thereof and all activities of the trust shall be carried out with a view to benefit the public at large, without any profit motive and in accordance with the provisions of the Income-tax Act, 1961 or any statutory modification thereof.
The trust is hereby expressly declared to be a public charitable trust and all the provisions of this deed are to be construed accordingly.
The Trust Deed, generally contains the following clauses :
- Trust name by which Trust shall be known
- Place were its office shall be situated
- Author or settlor of the trust
- Names of the Trustees
- The property settled, for Trust – In case of immovable property, it should contain full description of the property sufficient to identify it
- An express intention to direct the trust property from the trustees
- The objects of the Trust
- Minimum and maximum number of Trustees
- The procedure for appointment, removal, replacement of trustees
- Trustees rights, duties and powers
- Administration of trust
- Provision for maintenance of accounts, auditing etc.
- Clause enabling, spending and utilization of the Trust funds or corpus.
- Bank Account operations
- Borrowing money on security for the purpose of the Trust
- Investment of the Trust funds and dealing with Trust properties
- Alienation of immovable property of the Trust
- Amalgamation clause
- Dissolution of Trust
- Irrevocable nature of the trust.
Registration of Charitable Trust
Registration of Public Trust (Sec. 18 of Bombay Public Trust Act)
- It shall be the duty of the trustee of a public trust to which this Act has been applied to make an application for the registration of the public trust.
- Such application shall be made to the Deputy or Assistant Charity Commissioner of the region or sub-region within the limits of which the trust has an office for the administration of the trust or the trust property or substantial portion of the trust property is situated, as the case may be.
- Such application shall be in writing, shall be in such form and accompanied by such fee as may be prescribed.
- The application shall be made within 3 months of creation of the Public Trust.
- The application shall inter alia contain the full detail as prescribed in the form of Schedule II – (under Rule-6).
- Every application made under sub-section (1) shall be signed and verified in the prescribed manner by the trustee or his agent specially authorized by him in this behalf. It shall be accompanied by a copy of an instrument of trust, if such instrument has been executed and is in existence.
- Where on receipt of such application, it is noticed that the application is incomplete in respect of any particulars, or does not disclose full particulars of the public trust, the Deputy or Assistant Charity Commissioner may return the application to the trustee, and direct the trustee to complete the application in all respects or disclose therein the full particulars of the trust, and resubmit it within the period specified in such direction; and it shall be the duty of the trustee to comply with the direction.
- It shall also be the duty of the trustee of the public trust to send memorandum in the prescribed form containing the particulars, including the name and description of the public trust, relating to the immovable property of such public trust, to the Sub-Registrar of the sub-district appointed under the Indian Registration Act, 1908, in which such immoveable property is situated for the purpose of filing in Book No.I under section 89 of that Act.
- Such memorandum shall be sent within three months from the date of creation of the public trust and shall be signed and verified in the prescribed manner by the trustee or his agent specially authorized by him in this behalf.
When the Registering Officer is satisfied that the provisions of the Act as applicable to the document presented for registration have been complied with, he shall endorse thereon a certificate containing the word “registered”, together with the number and page of the book in which the document has been copied. Such certificate shall be signed, sealed and dated by the Registering Officer, and shall then be the conclusive evidence that the Trust has been duly registered. A registered trust deed shall become operative (retrospectively) from the date of its execution.
Procedure for registration
The following documents are required to be filed for registration of a Charitable Trust.
- Covering Letter
- Application Form in Form –Schedule II under rule 6 duly notarised
- Court fee stamp of Rs. 2/- to be affixed on application form
- Certified copy of the Trust Deed
- Consent letter of Trustees. (Blank Form enclosed)
- The office of the Charity Commissioner maintains a register containing all details of the Trust; viz., Reg.No., name and address of the Trust, names of all the Trustees (Past & Present), mode of succession of Trusteeship objects of the Trust, particulars of documents creating a Trust, description of movable and immovable properties, particulars of encumbrances on trust property etc. This register is known as P.T.Register. A certified copy of the P.T. Registrar in Schedule-I (vide Rule 5) can be obtained by applying in simple application with Rs.10/- Court fee stamp by paying prescribed fees for the same. It is advisable for all the trusts to have a certified copy of P.T. Register entry.
Registration under the Societies Registration Act
Society as a form of charitable institution will be suitable, where a large number of contributors making regular contributions would require some kind of indirect controls by the office bearers. The best examples are professional organizations.
The Charity Commissioner is also an authority to register such organizations as a society. When a trust is constituted as a society, it is required to be registered under the Societies Registration Act, 1860.
After the Memorandum and Rules and Regulations of the Society have been drafted, signed and witnessed in the prescribed manner, the members should obtain the registration of the society. For the purpose of registration as society, following documents are required to be filed :
- Letter requesting for registration stating in the body of the letter various documents annexed to it. The letter is to be signed by all the subscribers to the Memorandum or by a person duly authorised by all of them to sign on their behalf.
- Memorandum of Association, in duplicate, neatly typed and pages serially numbered.
- Rules and Regulations in duplicate.
- Where there is a reference to any particular existing places of worship like temple, mosque, church, etc., sufficient documentary proof establishing legal competence and control of applicant society over such places should be filed.
- An affidavit of the President or Secretary of the society, on a non-judicial stamp paper of prescribed value, stating the relationship between the subscribers, duly attested by an Oath Commissioner, Notary Public or First Class Magistrate.
- Documentary proof of address such as House Tax receipt, rent receipt in respect of premises shown as Registered Office of the society or no objection certificate from the landlord of the premises.
- If the Registrar is satisfied with the documents filed, he then requires the applicant society to deposit the registration fee. Normally, registration fee is Rs. 50, payable in cash or by demand draft. After the registration formalities have been completed and the Registrar is satisfied that the provisions of the Act have been complied with, he issues a certificate of Registration. Certified copies of the Rules and Regulations and Memorandum can be obtained by making simple application.
An entity registered under the Societies Act also gets registration under the local Public Trusts Act; i.e., Bombay Public Trusts Act by making an application simultaneously as mentioned above in case of trust deed. This is so because the definition of a Public Trust in Bombay Public Trusts Act includes a ” Society ” which is registered under the Societies Registration Act.
Registration under Companies Act
A charitable institution/association can be registered as a non-profit company and obtain a licence u/s 25 of the Companies Act. For obtaining a licence, the association has to first apply for availability of name to the Registrar of Companies of the State in which it wants to get itself registered. The application should be made in Form 1-A and the guidelines issued in this regard should be followed. As soon as the letter of approval of name is received from the Registrar, proceed for incorporation, as follows :
- The institution/associations should apply to Regional Director, Registrar of Companies of the region by a letter along with following documents.
- Three typewritten copies of draft Memorandum and Articles of Association of the proposed company. No stamp duty is payable.
- List of names, addresses, description and occupation of the promoters in triplicate.
- List of companies, associations and other institutions in which promoters are directors or hold responsible positions, with description of positions held.
- List of members of the proposed board of Directors.
- Declaration in the prescribed form by an Advocate, Attorney, Pleader, Chartered Accountant or a whole time practising Company Secretary, on a non-judicial stamp paper of appropriate value.
- Copies of accounts, balance sheet and reports on working of association for last two financial years ( for one year only if the association has functioned for less than two years), in triplicate.
- Statement of assets and liabilities.
- Sources of income and estimate of annual income and expenditure.
- A note on work already done and proposed to be done by the association.
- Grounds in brief for making application u/s. 25.
- Declaration signed by each of the applicant.
- Certified copy of notice published in newspaper .
- A draft or paid treasury challan for requisite fees for registration.
- A copy of the application with all enclosures and accompanying papers should be sent to the Registrar of Companies of the State where the association proposes to situate its Registered Office.
- After the draft Memorandum and Articles have been approved by the Regional Director, the association should apply to the Registrar of Companies, for its registration as a company, in Form No.1 along with printed copies of Memorandum and Articles and other documents necessary for registration along with a registration fee of Rs. 500/-. The Registrar then issues a certificate of incorporation.
Registration under Income-tax Act
Charitable or religious trusts, societies and companies claiming exemption under sections 11 and 12 of the Income-tax Act are required to obtain registration under the Act. Private/family trusts are neither allowed such exemption nor required to seek registration under the Income-tax Act. The detailed procedure is as under:
- Registration of Trust under Income-tax Act procedure for registration u/s. 12AA of I.T. Act.
- Application for registration in Form No.10A in duplicate.
- List of Name and Address of the Trustees
- Copy of Registration Certificate with Charity Commissioner or copy of application to him.
- Certified True Copy of the Trust Deed.
- PAN No. or Copy of application of the Trust.
- PAN of the trustees.
Procedure for registration (Sec 12AA)
The Commissioner, on receipt of an application for registration of a trust or institution made under clause (a) of section 12A, shall –
- call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of activities of the trust or institution and may also make such inquiries as he may deem necessary in this behalf; and
- after satisfying himself about the objects of the trust or institution and the genuineness of its activities he –
- shall pass an order in writing registering the trust or institution;
- shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution,
- and a copy of such order shall be sent to the applicant.
Provided that no order under sub-clause (ii) shall be passed unless the applicant has been given a reasonable opportunity of being heard.
Registration under Foreign Contribution (Regulation) Act, 1976 (FCRA)
Any Charitable Trust, Society, Company, desirous of receiving any foreign contribution from a foreign source, is required to obtain registration under section 6(1) of FCRA Any such association which is not registered or which has been denied registration, can receive foreign contribution only after obtaining prior permission from home ministry of the Central Government under section 6(1A) of the Act.
In order to obtain registration under the Foreign Contribution (Regulation) Act, (FCRA), the applicant association should preferably be incorporated as a legal entity, that is, as a Charitable Trust, Society, or a Company (u/s. 25) and should have been working for a period of at least three years. The association must not have received any foreign contribution earlier without prior permission of the Government.
Application for obtaining permission to accept foreign contribution or hospitality
Every individual, association, organization or other person, who is required by or under this Act to obtain the prior permission of the Central Government to accept any foreign contribution, or foreign hospitality, shall before the acceptance of any such contribution or hospitality, make an application for such permission to the Central Government in such form and in such manner as may prescribed.
If an application referred to in sub-section (1) is not disposed of within ninety days from the date of receipt of such application, the permission prayed for in such application shall, on the expiry of the said period of ninety days, be deemed to have been granted by the Central Government :
PROVIDED that, where in relation to an application, the Central Government has informed the applicant the special difficulties by reason of which his application cannot be disposed of within the said period of ninety days, such application shall not, until the expiry of a further period of thirty days, be deemed to have been granted by the Central Government.
An application for obtaining prior permission of the Central Government to –
a) receive foreign contribution under sub-section (1) of section 5, or clause (a) of sub-section (2) of that section, shall be made in Form FC-1;
aa)receive foreign contribution under proviso to sub-section (1) of section 6, or under sub-section (1A) of that section or clause (b) of section 10, shall be made in Form FC-1A.
b)accept foreign hospitality under section 9 or clause (d) of section 10, shall be made in Form FC-2.
Application for registration
An application for registration of an association referred to in sub-section (1) of section 6 for acceptance of foreign contribution shall be made in Form FC-8.
Transfer of Movable Property to Trust
A trust in relation to movable property, can be formed also by mere transfer of ownership of the property to the trustee, with a direction that the property be held under trust for the benefit of the beneficiaries. The ownership of a movable property can be transferred by physical act of handing over the possession of the property. The transfer of any symbol of ownership will be deemed sufficient, such as the key of the godown where the property is stored, or the deposit certificate of a Bank wherein the securities are lodged.
Where the author himself is the trustee, transfer of possession is neither necessary nor possible; and a mere declaration of the author that he holds the property under trust would be sufficient to constitute a trust.
Transfer of Immovable Property to Trust
An immovable property can be transfered to the Trust, either by way of settling the property through a Will or Deed or by way of donating the same to the existing Trust. In all the cases the instrument should be in writing and it should contain complete description of the property so as to clearly identify the property. The title of property should be clear to be transferable to the Trust. It should be free from mortgage and litigation. The instrument by which the immovable property is desired to be introduced to Trust is required to be registered, then only the property can be conveyed in favour of the Trust.
An intimation in the form of change report is required to be sent to the Charity Commissioner so as to record an entry in the P.T.Register. The entry in this record is conclusive evidence that the particular immovable property belongs to the Trust. This record contains description and location of the property and the area of the property. This entry in the P.T. Register is necessary for the reason that if in future the said property is desired to be alienated (sold) by the Trust, such an entry is a prerequisite.