TRUST- A FORM OF NON-PROFIT ORGANISATION
A Trust is a form of Non- Profit
Organisation in India created for advancement of education, promotion of public health and comfort, relief of poverty, furtherance of religion, or any other
purpose regarded as charitable in law.
A public charitable trust is usually floated when there is a
property involved, especially in terms of land and building.
There are two types of Trusts- Public Trust and Private trusts.
Different states in India have different Trusts Acts in force,
which govern the trusts in the state; in the absence of a Trusts Act in any
particular state or territory the general principles of the Indian Trusts Act
1882 are applied.
CREATION /FORMATION OF TRUST
(A) Creation of a private trust: A Private Trust may be created inter vivos or
by will. If a trust in created by will it shall be subject to the provisions of
Indian Succession Act, 1925.
The following are the requisites for creation of a Trust:
(i) The existence of the author/settlor of
the Trust or someone at whose instance the Trust comes into existence and the
settlor to make an unequivocal declaration which is binding on him.
(ii) There must be a divesting of the
ownership by the author of the trust in favour of the trustee for the
beneficial enjoyment by the beneficiary.
(iii) A Trust property.
(iv) The objects of the
trust must be precise and clearly specified.
(v) The beneficiary who
may be particular person or persons.
Unless all the above requisites are fulfilled, a trust cannot be
said to have come into existence.
(B) Creation of a Public Trust:
Like the private trusts, public trusts may be created inter vivos or by will.
In the case of Hanmantram Ramnath (Bom) it was held that
“Although the Indian Trusts Act does not specifically apply to charitable
trusts, there are three certainties required to create a charitable trust. They
are:
(i) a declaration of trust which is binding
on settlor,
(ii) setting apart definite property and the
settlor depriving himself of the ownership thereof, and
(iii) a statement of the objects for which
the property is thereafter to be held, i.e. the beneficiaries.
It is essential that the transferor of the property viz the
settlor or the author of the trust must be competent to contract. Similarly,
the trustees should also be persons who are competent to contract. It is also
very essential that the trustees should signify their assent for acting as
trustees to make the trust a valid one.
When once a valid trust is created and the property is
transferred to the trust, it cannot be revoked, If the trust deed contains any
provision for revocation of the trust, provisions of sections 60 to 63 of the
Income-tax Act will come into play and the income of the trust will be taxed in
the hands of the settlor as his personal income.
Public Trusts for Charitable or Religious Purposes
The income derived from a property held under charitable or
religious trusts is exempt from tax u/s 11 subject to the fulfilment of certain
conditions. However, any profit or gain of a business carried on by such trust
shall not be exempt unless the business is incidental to the attainment of the
objectives of the trust/institution and separate books of account are maintained
by such trust/institutions in respect of such business.
Who can form a Charitable or Religious Trust : As per section 7 of the Indian Trusts Act, a trust can be formed
–
a. by every person competent to
contract, and
b. 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.
Requisites of a Trust
-The existence of the author/settler of the trust or someone at
whose instance the trust comes into existence.
-Clear intention of the author/settler 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.
TAXATION OF TRUST
Trusts have not been defined under the Income-tax Act, 1961. The
dictionary meaning of “trust”, in so far as it relates to the realm of law, is
“an arrangement” by which property is handed over to or vested in a person, to
use and dispose it off for the benefit of another person.”
Trusts can be broadly classified into two categories, viz.,—
(i) Public,
(ii) Private.
However, there may be trusts which are a blend of both and are
known as Public-cum-Private Trusts.
1A Public trust: A public trust is
one which benefits the public at large or some considerable portion of it. A
public trust can be of two types, viz., (a) Public
charitable trust, (b) public religious trust.
1B Private trust: In case of private
trust, the beneficiaries are individuals or families. Private trusts are further
broadly classified into:—
(i) Private specific trust, also referred to
as Private Discretionary Trust with beneficiaries and shares determinate in
respect of both.
(ii) Private Discretionary Trust where the
beneficiaries or their share or either is indeterminate.
Private Trusts are created and governed by Indian Trusts Act,
1882 whereas charitable trusts are beyond this Act and have not been defined by
law. According to section 3 of this Act, a trust is an obligation annexed to
the ownership of the 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. The person who reposes or declares the
confidence is called the author of the trust, the person who
accepts the confidence is called the trustee, the person for whom
the benefit is created is called the beneficiary.
The subject-matter of the trust is called trust property or trust
money, the beneficial interest or interest of
the beneficiary is his right against the trustee as owner of the
trust-property; and the instrument, if any, by which the trust is declared is
called the instruments of trust.
From the analysis of the above definitions, it may be observed
that three types of persons are involved in the creation of a trust—
(i) Author of the trust i.e. the
person who reposes or declares the confidence;
(ii) Trustees i.e., the persons
who accept the confidence;
(iii) Beneficiary i.e.,
the person(s) for whose benefit the confidence is accepted.
In case of private trusts, the beneficiary may be another person
or the author.
1C Public-cum-Private Trusts: There may be certain trusts whose part of the income may be
applied for public purposes and a part may go to a private person or persons.
Such trusts are known as Public cum Private Trusts. Such trusts, in respect of
the portion of the income going to private person or persons are assessable as
private trusts and in respect of that portion of the income which is applied
for public purposes, they shall be eligible for exemption under section 11
provided these trust are created before the commencement of Income-tax
Act, 1961 i.e. before 1-4-1962. Public-cum-private created on or after
1-4-1963 shall not be eligible for exemption u/s 11,.
TAX Exemption under sections 11 to 13
Subject to the provisions of sections 60 to 63, certain incomes
of a charitable/ religious trust or institution are not included in its total
income to the extent and subject to the conditions specified
in the Act. The word Trust as used in the context of sections
11 to 13 of the Income-tax Act, includes in addition to the trust “any other
legal obligation“.
Subject to the provisions of sections 60 to 63: Section 11 starts with the opening phrase “subject to the
provisions of sections 60 to 63. It means that if there is:
(a) a transfer of income without transfer of
an asset; or
(b) revocable transfer of assets,
the income from that asset, in that case, shall be taxable in
the hands of transferor and not the transferee.
Sections applicable for charitable or religious trust:
The following sections of the Income-tax Act deal with the
subject of exemption of income from property held for charitable or religious
purposes:
Section 11 :-
Exemption of Income from property held in trust or other legal obligation, for
religious or charitable purposes.
Section 12 :- Exemption
of Income derived by such a trust from voluntary contributions not being
contributions made with a specific direction that they shall form part of the
corpus of the trust or institution.
Section 12A :- Prescribes the
conditions for registration of a trust etc.
Section 12AA :- Prescribes the procedure for registration.
Section 13 :- Enumerates the
circumstances under which exemption available under sections 11 and 12 will be
denied.
The exemption outlined in section 11 are subject to the
fulfillment, not only of the various conditions set out in this section but
also those set out in sections 12, 12A, 12AA, 13 and 60 to 63
Conditions to be satisfied for claiming exemption under section
11:
For claiming exemption under section 11, the following
conditions must be satisfied:
(a) Trust must have been created for any
lawful purpose;
(b) Such trust/institution
must be for charitable or religious purposes. According to section 2(15), charitable
purpose includes relief of the poor, education, medical relief and the
advancement of any other object of general public utility.
CA Shivani Agarwal
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