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Registration of Non Profits as Trusts in India

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In the last article, we saw how non-governmental organisations (“NGOs”) can be registered as “Societies” in India. In this article, we shall focus on using a “Trust” to establish an NGO in India.

Prerequisites to form a Trust: In order to form a Trust:

(i)  a person (i.e., the settlor/ author) must donate his property for the benefit of others viz., beneficiaries;

(ii) settlor must also attach a legal obligation to the ownership of such property;

(iii) such attachment of legal obligation to the ownership of the property is based on settlor’s confidence placed in and accepted by the Trustee; and

(iv) Trustees must hold and manage such property to achieve the aims and objectives of the Trust and for the benefit of the beneficiaries.

A Trust is usually formed for a charitable purpose and hence, conveniently suits the requirements of an NGO that proposes to be involved in charitable purposes. The property of the Trust or the income generated therefrom can be utilized for the benefit of its intended beneficiaries.

Types of Trusts: Broadly, there are two types of Trusts, viz., public charitable trusts and private trusts. Income from public charitable trusts is applied to charitable purposes.

Income from private trusts is available to specified beneficiaries and not the public at large.

Legal Regime: There is no central law governing public charitable trusts, although most states have legislations governing public trusts. Different states in India have different legislations in force that govern the public charitable trusts in that state, such as the Bombay Public Trust Act, 1950. Further, private trusts are governed by the Indian Trusts Act, 1882.

Public charitable trusts, by their very definition, must be created for the benefit of the public. A private charitable trust does not enjoy the extent of the privileges and tax benefits that are available for public trusts. Since NGOs need to have broad based objectives to reach out to a large chunk of the society, it is recommended to register them as “public charitable trusts”. Henceforth, we shall focus on using “public charitable trusts” to set up an NGO in India.

NGOs as “Public Charitable Trust”

Public Benefit Status: To be eligible for tax-exemption under the Income Tax Act, 1961, a public trust must be organized for charitable purposes such as education, relief of the poor and the downtrodden, providing medical benefits and advancement of any other object of public utility.

Registration: A public charitable trust must register with the office of the Charity Commissioner/ Deputy Register having jurisdiction over the Trust in order to be eligible to apply for tax-exemption. At least 2 (two) Trustees are required to register a public charitable trust. A duly executed trust deed will have to be prepared and registered which governs the relationship among the Trust, the Settlor and the Trustees.

Principal Instrument: The principal instrument of any public charitable trust is the “Trust Deed”. The Trust Deed should be signed by both the settlor(s) and the Trustees, in the presence of 2 (two) witnesses. The Trust Deed should be executed on non-judicial stamp paper of a prescribed value which is dependent on the valuation of the Trust property. Some of the salient elements of a Trust Deeds are as follows:

(i)  aims and objects of the Trust;

(ii) mode of management;

(iii) minimum and maximum number of Trustees; and

(iv) appointment, removed, etc., of the Trustees.

Board of Management: Trustees form the board of management of a Trust. A Trust needs a minimum of two Trustees; there is no upper limit to the number of Trustees. The Trustees stand in a ‘fiduciary capacity’ to manage the affairs of the Trust for the benefit of the beneficiaries. Generally, Indian citizens serve as Trustees of the Trusts. However, there is no prohibition against legal persons or foreigners serving in the capacity of Trustees.

Responsibilities of the Trustees: Legal title of the property of a public charitable trust vests in the Trustees. Trustees of a public charitable trust may not, however, in any way use their position or the Trust property for their personal benefit. Trustees need to discharge their duties with due care and diligence. Trustees are bound to protect the interests of the beneficiaries all the time. Trustees shall not enter into contracts in which they may have a personal interest that conflicts with the interests of the beneficiaries. Trustees shall not delegate their authority with respect to duties or obligations requiring the exercise of discretion but may delegate the ministerial acts.

Dissolution: Public charitable trusts in India are generally irrevocable. If a Trust becomes inactive due to the inaction or negligence of its Trustees, the Charity Commissioner/Deputy Register may take steps to revive the Trust. Furthermore, if it becomes too difficult to carry out the objects of a Trust, the objects of the Trust may be suitable changed.

To sum up, the legal requirements of a Trust are much simpler than that of a Section 25 Company and similar to that of a Society. Further, members of the managing committee or governing council of a Society or Section 25 Company hold the property of a Society or Section 25 Company. Whereas, even though Trustees have legal title to the Trust’s property, they hold the property for the beneficiaries of the Trust alone and not for themselves. Thus, there is less scope of manipulation and misuse of the property of the Trusts.

In the case of a Section 25 Company or a Society, members always have the right to remove directors/principal officers and thus to influence policy. However, Trusts have the right to neither remove the settlor nor easily change the aims and objectives of the Trust.

Further, since Charity Commissioner/Deputy Register can revive an inactive Trust, settlors could feel fairly secure even if the Trust can no longer accomplish its initial public charitable purposes; the Trust’s purposes would be changed to another purpose similar to the initial purpose. Even in the worst scenario of winding up of a (revocable) Trust, the property of the Trust would be used for similar charitable purposes.

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