Trust means an entity created to hold assets for the benefit of certain persons or entities, with a Trustee managing  the trust (and oftenholding title on behalf of the trust). Most trusts are founded by the persons (called trustors, settlors and/or donors) whoexecute a written Declaration of Trust which establishes the trust and spells out the terms and conditions upon which it will be conducted. The Declaration also names the original trustee or trustees, successor trustees, or means to choose futuretrustees. The assets of the trust are usually given to the trust by the creators, although assets may be added by others. A public charitable or religious institution can be formed either as a Trust or as a Society or as a Company registered u/s 8 of the Companies Act 2013. Trusts have not been defined under the Income-tax Act, 1961. The dictionary meaning of "trust", 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, (i) Public,(ii) Private.

However, there may be trusts which are a blend of both and are known as Public-cum-Private Trusts. According to section 3 of Indian Trusts Act, 1882, 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.

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.

Requisites of a Trust

1. The existence of the author/settlor of the trust or someone at whose instance the trust comes into existence.
2. Clear intention of the author/settlor to create a trust.
3. Purpose of the Trust.
4. The Trust property.
5. Beneficiaries of the Trust.
6. 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.

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.

Registration of Charitable Trust

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.

1. Application for registration in Form No.10A in duplicate.
2. List of Name and Address of the Trustees.
3. Copy of Registration Certificate with Charity Commissioner or copy of application to him.
4. Certified True Copy of the Trust Deed.
5. PAN No. or Copy of application of the Trust.
6. 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 –

1.  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
2. 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.

1. 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.
2. 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 –

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.

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 willbe denied.

Which income will be exempt under section 11

Subject to the provisions of sections 60 to 63, the following incomes of a religious or charitable trust or institution are not included in its total income, provided the conditions mentioned under para 3a above are satisfied:-

(a) Income from property held under trust wholly for charitable or religious purposes [Section 11(1)(a)]:-

Income derived from property held under trust, wholly for charitable and religious purposes, shall be exempt—

(i) to the extent such income is applied in India for such purposes; and

(ii) where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of 15% of the income from such property;.

(b) Income from property held under trust which is applied in part only for charitable or religious purposes [Section 11(1)(b)]:-

Income derived from property held under trust in part only for such purpose, shall be exempt:-

(i) to the extent such income is applied in India for such purposes, provided, the trust in question is created before the commencement of Income-tax Act, 1961 i.e. before 1-4-1962; and

(ii) where any such income is finally set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of 15% of the income from such property.

(c) Income from property held under trust which is applied for charitable purposes outside India [Section 11(1)(c)]:-

(i) Income derived from property held under trust, created on or after 1-4-1952 for charitable purpose which tends to promote international welfare in which India is interested, shall be exempt to the extent to which such income is applied to such purpose outside India. Religious trusts are not covered here.

(ii) Income derived from property held under a trust for charitable or religious purposes, created before 1-4-1952, shall be exempt to the extent to which such income is applied to such purposes outside India.

In the above two cases, it is necessary that the Board, by general or special order, has directed in either case that it shall not be included in the total income of the person in receipt of such income.

(d) Voluntary contributions forming part of corpus [Section 11(1)(d)]:-

Income in the form of voluntary contributions made with a specific direction, that they shall form part of the corpus of the trust or institution, shall be fully exempt. The condition that at least 85% of the income should be applied during the previous year in which it is earned is not applicable in this case. It is not sufficient that the property is indirectly responsible for the income; it is necessary that the income must directly and substantially arise from the property held under trust. The property must be the effective source from which the income arises.

(1) Although corpus donations are fully exempt but these are to be considered for the limit of maximum amount which is not chargeable to income tax i.e. Rs. 1,00,000 prescribed for audit of accounts of the trust. Further, such donations are also required to be invested only in the mode specified in section 11(5).

(2) Voluntary Contributions not forming part of corpus shall be deemed income [Section 12]: Voluntary Contributions received by a trust/ institution created wholly for charitable or religious purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) shall be deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provision of section 11 (including the application of atleast 85% of income) and the provision of section 13 shall apply accordingly. Thus as per Explanation 1 to section 11 in computing the 15%of income which may be accumulated or set apart, such voluntary contributions, shall be deemed to be part of the income. It may be noted that if such voluntary contributions are received by a trust created partly for charitable or religious purposes, the exemption shall not be available.

(3) Section 11 provides for exclusion of income of a trust subject to the provision of sections 60 to 63. Therefore, before excluding any portion of the trust income from charge on the ground that it belongs to a charitable or religious trust, it is necessary first of all, to find that the income in question is includible in the total income of the trust. For, if any income though received by the trust, is includible in the total income not of the trust, but of another person, then no question of the exclusion or exemption arises in respect of that income on the ground of its belonging to a trust for charitable or religious purposes. For instance, where property is settled in trust but the settlement is by way of a revocable transfer, then, the income arising out of such property is chargeable in the hands of the settlor under section 61. The group of section 60 to 63 deals with the subject. When income is so assessed in hands of the settlor by virtue of the operation of the said sections, it will bear full tax without any exemption in the hands of the settlor.

(4) "Property held under trust" includes a business undertaking so held and income of such business has necessarily to be applied for charitable or religious purpose as directed in the trust deed. [See para 7]

(5) University and other educational institutions as well as hospitals or other medical institutions can claim exemption under section 10(23C) instead of section 11. [See 14].

Comparision among Charitable Trust, Society and Non profit Company

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