Law Insider India

Legal News, Current Trends and Legal Insight | Supreme Court of India and High Courts

Regulation of Trusts and NGOs in India: An Overview

13 min read
TRUST and NGO Law Insider

By : Arryan Mohanty

Published on: March 16, 2022 at 10:04 IST

Introduction

A Trust is a legal relationship in which a Person or legal organisation is entrusted with the legal title to property and is obligated to hold and utilise it for the benefit of another.

The Party who entrusts the property is known as the ‘Settlor’, the Party to whom the property is entrusted is known as the ‘Trustee’, the party to whom the property is entrusted is known as the ‘Beneficiary’, and the entrusted property itself is known as the ‘Corpus’ or ‘Trust property’ in Anglo-American common law.

A Trust is defined as a legal structure in which a Person or Organisation watches after money and property for someone else until that person is old enough to govern it, according to the English dictionary definition.

Individuals can ensure that their children, grandkids, or other designated beneficiaries receive the entire inheritance they desire by employing the smart and legal usage of Trusts.

As fiduciary for the beneficiary or beneficiaries who are the Equitable Owner(s) of the Trust Property, the trustee is the legal owner of the property in trust.

As a result, trustees have a fiduciary responsibility to operate the trust in the best interests of the equitable owners. They must keep track of the trust’s income and expenses on a regular basis.

Trustees may be rewarded and have their expenses covered. A trustee who violates his or her fiduciary duty can be removed from office by a court of competent jurisdiction.

Some violations of fiduciary responsibility can be charged and tried in a Court of Law as Criminal offences. A trustee might be a Natural Person, a Corporation, or a Government Agency.

Trust Regulation in Other Countries

In the United States, a trust may be taxed both federally and State-by-State. A settlor establishes a trust by transferring title to some or all of his or her property to a trustee, who subsequently holds title in trust for the benefit of the beneficiaries.

The Trust is controlled by the terms that it was established under. In most jurisdictions, a contractual trust agreement or deed is required.

It is possible for a single person to play the role of many of these parties, or for multiple people to share a single role. For example, in a living trust it is common for the grantor to be both a trustee and a lifetime beneficiary while naming other contingent beneficiaries.

Trusts have existed since Roman times and have become one of the most important innovations in property law.

Trust law has evolved through court rulings differently in different states, so statements in this article are generalisations; understanding the jurisdiction-specific case law involved is tricky.

Some U.S. states are adapting the Uniform Trust Code to codify and harmonise their trust laws, but state-specific variations still remain.

When an owner places property in trust, he or she transfers a portion of his or her rights to the trustee, separating legal ownership and control from equitable ownership and advantages.

If the settlor is absent, incapacitated, or deceased, this can be done for tax reasons or to keep control of the property and its benefits.

Wills can include testamentary trusts that specify how money and property will be handled for children or other beneficiaries.

Trust Regulation in India

There are particular regulations in India for the formation of Societies, Charitable Institutions, Waqfs, and Endowments.

The Indian Trusts Statute of 1882 was the first act in India to establish a legal framework for trust establishment and regulation.

The Act specifies what a trust is and who can legally be its trustees, as well as providing a definition for them.

The Indian Trusts Amendment Bill of 2015 revised the Act, removing several restrictions on the trust’s ability to invest its monetary assets in specific investments. At the same time, it gave the government complete control over the trusts’ investments.

The person who professes the confidence is known as the author of the trust, according to section 3 of the Indian Trust Act 1882.

The individual who accepts the trust is known as a trustee. The Trust’s subject matter is referred to as Trust property or Trust monetary.

An instrument of trust is a Written Document that is used to establish Trust. Beneficiary refers to the individual who receives the benefit of the Trust.

Thus, a Trust is a Person’s acceptance of a commitment to use or maintain Property or Finances for the benefit of the person for whom the trust is established. Section 6 of the Act lays out the elements of a legitimate trust.

The act outlines how the author can establish a Trust, Appoint trustees, and Entrust his Monetary Assets to the Trust. It could be stated or assumed that it includes the author’s intent to create the Trust, the Trust’s purpose, and the monetary asset assigned for the Trustee’s benefit.

It Grants the trustee authority or transfer of the trust property, which includes the author’s objective.

The trustee can deduct his expenses and compensation from the trust’s benefits.

The author must indicate by words or conduct with the reasonable purpose to create a trust: certainty of author’s intention, certainty of object, certainty of beneficiary, and certainty of trust property, according to trust law.

For example, if a person transfers his property and assets to another person to pay his creditor, no valid trust will arise because the beneficiary of the trust is not specified with certainty.

Similarly, if the transferee distributed the property among members of the same family as he believes are most deserving, no valid trust will arise because there should be no certainty about beneficiaries.

This is not a trust, but rather a transfer subject to the terms of an Indian trust statute.

Also read:  Pandora Papers – Exposing Hidden Wealth

Provisions of Indian Trusts Act, 1882

The Trust law stipulates that the subject matter must be property and capable of being transferred to the beneficiary, according to section 8 of the ITA 1882.

Property transferred to the trustee may be movable or immovable, according to Section 5. If the author of the trust and the trustee both sign the instrument, as well as the author of the trust’s will, it may be legitimate in the event of immovable property.

The Provisions of Indian trust law cannot be exploited for the purpose of perpetrating fraud. A trust must be established for a valid purpose, according to Section 4.

The trust becomes void if the objective of the legislation of trust is unlawful. However, if the trust property is located in another Nation, that Country’s law will apply.

In India, trust law stipulates that the objective must be legal. Unless it is prohibited by law, fraudulent in nature, it is of such a character that, if allowed, would defeat the requirement.

It is considered immoral or against public policy by the court. Consider the case of a false creditor’s trust. Every person competent to contract, according to section 7 of India’s trust law, can create a trust.

However, if the trust is being established on behalf of a Minor, authorisation from the Civil Court should be sought first

Also read: Jurisdiction of Civil Courts

Every person capable of possessing property may be a beneficiary under section 9 of the ITA 1882. If the proposed beneficiary wishes to renounce his interest in the trust, he may do so by writing a disclaimer to the trustee and giving notice.

Definition of a Trustee under the Indian Law

Every individual who is competent to contract is capable of holding property as trustee, according to section 10 of the Indian Trusts Act of 1882.

No one, however, is obligated to accept a trust. When a trustee is appointed, he has the choice of accepting or rejecting the trust.

He must express his acceptance through words, written, spoken, or deeds. The assigned trustee may also disclaim it, but only within a reasonable time frame.

The Property will not be transferred to the trustee because of his disclaimer.

However, if there are more than one proposed trustee and one of them declines, the property will vest in the other trustee, who will then become the sole trustee.

From the date of the trust’s inception, a suggested trustee who accepts becomes the trustee.

When a person leaves property in trust for another in his will and the proposed trustees can show his will, it amounts to their acceptance of the trust.

Property becomes the subject of two types of ownership under English law. The trustee is the legal owner, while the beneficiary is the beneficial owner.

The trustee has custody of the property in Hindu law, according to the provision. Under Indian trust law, the beneficiary has various rights under the trust.

Beneficial ownership, also known as equitable ownership, is not recognised in Indian Trust law.

Kinds of Trusts

There are various types of trust, which are as follows:

Express Trust 

If a person is nominated to be the trustee of a trust that was made verbally, in writing, or in expressed terms, it is an express trust. If the property can be moved, it must first be registered and then physically handed to the trustee.

Implied Trust 

An Act of the Parties can also create an inferred trust. It appears from the Party’s actions. The behaviour of one party creates suspicion and reveals the parties’ intentions.

Public Trust

Under Indian Trust law, a Public trust is one that is established for the benefit of the general public. In general, the term ‘Public’ does not refer to the entire population.

The trust may be established for a segment of the public, and it will be legal as long as every member of a given class is allowed to benefit from it.

Medical, Health, Social Care, Education, and Training are examples of wide Public Purposes.

Private Trust

A Private trust is set up for a certain person so that no one else can benefit from it. A trust like this is enforceable only if the intended beneficiary takes private action.

Secret Trust

The term ‘Secret Trust’ refers to a trust in which neither the existence nor the terms of the trust are made public.

It is a half-secret if the existence of a trust is revealed but the terms of the trust are not. This is a misapplication of the notion of trust.

Requirements for starting a Public Trust under the Indian Trust Law

The charity trust must meet three requirements, according to the general rule originating from judicial authorities. The following are the details:

  1. The Trust must be for the Benefit of the Public.
  2. The Trust must be solely for Philanthropic Purposes.
  3. The Trust must have a Benevolent Purpose.

Liabilities of a Trustee under Indian Law

Trustees’ liabilities are defined in Sections 23 to 30 of the Trust law. The following are some of them:

Breach of Trust liability

Unless the beneficiary has fraudulently encouraged the trustee to conduct the breach, the trustee is obligated to compensate the beneficiary or the trust property whose loss has been sustained. When a trustee commits a breach, he is not obligated to pay in the following circumstances:

  1. When he has received actual interest
  2. When he may be reasonably thought to have received interest
  3. Where the trustee should have been compensated with interest

No Defence to liability.

When a Breach of trust occurs in two forms, one of which produces loss and the other of which causes profit, the trustee cannot argue that his obligation for the loss should be lessened by setting off the gain against it.

In other words, if the breach of trust causes loss, the trustee must suffer it. It will benefit the trust property if it generates profits.

Co-trustee’s Responsibilities

A trustee is generally immune from liability for any breach of trust committed by one of his co-trustees. Section 26, on the other hand, specifies when the trustee is accountable for the actions of his co-trustees.

He has delivered his co-trust trustee’s property without attending to its correct application. When a trustee learns of or suspects a Breach of Trust by a co-trustee, the trustee fails to take appropriate steps to protect the beneficiary’s interests.

Rights and Powers of a Trustee under the Indian trust law

Right to Title

A trustee has the right to keep the trust instrument and all title documents pertaining to the trust property in his possession.

Settling Accounts

When a trustee’s obligations are completed, he is entitled to have the accounts of his trust property administration investigated and settled.

Trustees’ General Authority

A trustee has the authority to do anything that is reasonable and proper in order to realise, protect, or benefit from the trust property, as well as to safeguard a beneficiary who is unable to contract.

This is referred to as trustee’s overall authority.

Convenance Power 

Certain formalities may be required to complete the sale (formality of conveyance).

Trustees have the authority of conveyance under Section 39. Also, the trustee shall have the power to deliver to the person as may be necessary after the conclusion of the sale.

Authority to deal with Trust Property, under Trust law

When numerous trustees are given authority to deal with trust property and one or more of them disclaims or dies, the remaining trustee may exercise the authority.

This will not apply in cases where the trust instrument is specific in the sense that the trust only executes a certain number of trustees.

The Ability to Sell

When a trustee has the ability to sell trust property, he can do so either with or without the charges attached.

He has the option of selling the entire property at once or in instalments, either at a public auction or privately, at one time or at different periods.

The trustee, on the other hand, can engage in such activity if it is specified in the trust deed.

Laws applicable to Public Charitable Trusts in India

The Public charitable trust is administered by the State’s Public Trust act as well as the 1882 Indian Trusts Act.

Because charity is on the Constitution’s Concurrent List, both the federal government and the States have the authority to legislate over public charitable trusts.

A Public charity trust organisation can be established by forming a trust and executing a trust deed, or by forming a society and registering with the Registrar of Societies.

In addition, under Section 8 of the Companies Act of 2013, a Private Non-Profit corporation can be founded. A Section 8 corporation is similar to a Section 25 corporation under the old Companies Act of 1956.

Aside from the foregoing, Religious trusts are governed by a number of laws & statutes, including the Hindu Religious Institutions and Charitable Endowments Act of 1997 and the Muslim Wakf Act of 1954.

However, not all religious charitable trusts are free from paying income taxes. Moreover, charitable organisations, trusts, and institutes are subject to a variety of state legislation.

The Bombay Public Trust Act, 1950 governs public charity trusts in Maharashtra, while The Rajasthan Public Trust Act governs public charitable trusts in Rajasthan.

The Indian Trust Act of 1882 governs public trust in states where there is no public trust act. The Indian Trust Act comes into play in Delhi because the State/UT does not have a public trust act.

Public Charitable Trust and Income Tax Act

Income tax exemption is granted to public charitable trusts. Tax exemptions for public charitable trusts are discussed under Sections 11, 12, and 13 of the Income Tax Act.

The advantages granted to contributors of public charity trusts are addressed in Section 80G. The public charitable trusts are free from income tax under Section 11 of the Income Tax Act. Section 12 refers to the trust’s revenue contribution.

Trust income is derived through contributions. A gift received by a trust formed solely for philanthropic or religious purposes, or by an institution founded solely for such purposes.

The forfeiture of an Income Tax exemption by a public charitable trust is dealt with in Section 13 of the Income Tax Act.

Annual reports are required for all trusts. Annual income tax returns should be filed with the authorities in the state where the business is registered.

If the trust deed contains a provision for revocation of trust, the income of the author of the trust can be taxed as personal income under Section 60 through Section 63 of the Income Tax Act, 1961.

If an individual donates to such Public charity trusts, he or she is eligible for a deduction under Section 80(g).

The Public charity trust must receive a legal certificate in order to provide this benefit to its benefactors.

The Income tax office must receive an application with form 10G and the trust deed in order to obtain this certificate.

The profits raised by the trust’s property must be used solely for charitable purposes in order to qualify for this certificate. The donor receives specific tax benefits under the income tax.

To get accreditation, public charity trusts must meet the following requirements: The trust should be a public charity trust rather than a private trust.

The Public charitable trust should be registered with the appropriate authorities including the Internal Revenue Service.

The trust’s income or contributions should not be eligible for exemption under the Income Tax Act’s Section 11, Section 12, Section 12A, and Section 12AA.

If that’s the case, it should keep separate books of accounts and not use donations for personal gain. The bylaws and objectives should be solely charitable in nature.

Conclusion

The Indian Trust Act, 1882, and various related state Acts where the public charity trust may be registered control public charitable trusts in India.

Because Public charity trusts are governed under Schedule 7 of the Indian Constitution, entry number 10 in the Concurrent list, both the Centre and the states have legislation in place.

Also read: What is the difference between Union List, State List and Concurrent List?

The Registration Act of 1908, the Indian Stamp Act of 1899, the Hindu Religious and Charitable Endowments Act of 1951, the Muslim Wakf Act of 1923, the Income Tax Act of 1961, the Companies Act (for non-profit companies) of 2013, the Foreign Contribution Regulation Act, and other relevant state acts such as the Bombay Public Trust Act of 1950 are all applicable to public charitable trusts.

Also read: Which are the Constitutional Bodies in India?

Edited By: Advocate Komal Sharma, Publishing Editor at Law Insider.

References

Laws Applicable To A Public Charitable Trust In India

How is a trust managed under Indian law

Indian Trusts Act – Objectives, Registration & Taxation

NGO Laws in India and its Legal Compliance