In every country and every society there are people who wish to do something monetarily for the poor and needy people in various ways. For this purpose, instead of donation the amounts to the Government or semi Government organizations, they prefer to form Charitable Trusts or Organizations and do the charity through such trusts.
When anybody wish to form a charitable trust, it is necessary to know the meaning of charitable purpose. Charitable purpose has been defined u/s 2(15) of the Income Tax Act 1961 as well as under section 9 of Bombay Public Trust Act 1950. Unlike the word ‘ Charitable Purpose’, the word ‘Religious Purpose’ has not been define in any of the Acts. It would include the advancement, support or propagation of a religion of idols and performance of religious and its tenets. Thus trusts established for the worship of idols and performance of religious festivals would be exempt under section 11 of the Income Tax Act 1961, though they may be for the benefit of a particular religious, community or caste. It includes relief of poor, education, medical relief and the advancement of any other object of general public utility. Promotion of sports and games is considered to be a charitable purpose vide circular no 395 dated 24-09-1984. The words “not involving the carrying on of any activity for profit” have been omitted from the said definition of charitable purpose with effect from 1st April, 1984. The definition is an inclusive one and not an exclusive.
Therefore it is advisable not to form charitable trust for carrying on of any activity for profit. If it is formed accordingly, it will be liable to tax at maximum marginal rate.
Purpose behind Formation of Trust:
Charitable and Religious institutions and trusts are formed to create and maintain the following establishments in public interest.
Relief of the Poor.It is not necessary that the relief of the poor means providing something without recovering any cost or for less than its cost. The relief may be given to the poor or to an identifiable section. In the context of certain trust deeds, charity may mean only relief of poor. It is not necessary that the benefit be confined to poor only.
Education.
Education includes activity to open, establish, maintain, acquire, support and or grant monetary assistance to any schools, colleges, polytechnic institution, commercial colleges, research laboratories, vidhyapith, institutions imparting education and training to the students in these line of courses. It also include activity to establish and support professorship, fellowship, lectureship and prizes and medals in the name of the trust at any schools, colleges or other educational institutes.
Medical Relief.
On the same lines as the ‘relief of the poor’, medical relief also does not necessarily mean only the provision of free treatment or a treatment on concessional basis. Hospitals or other medical institutions may be considered as established for charitable purpose if in order to provide itself with revenue for its maintenance, it runs special rooms for the patients, who pay the full price, over and above donation.
Hospital would not lose its charitable character, if certain fees are charged to affording persons who choose to take benefit of the hospital.
Thus, it is not necessary that benefit of trust is available to poor only. There may be general ward, special room, Air-conditioned rooms for patients who pays the charges accordingly.
General Public Utility:
The Supreme Court in Ahmedabad Rana Caste Association Vs. CIT(1971) 82 ITR 704, has further enunciated the well settled principle that an object of general public utility includes an object beneficial to a section of the public and it is not necessary that the object should be for the benefit of whole of mankind or all persons of that country or state. It would be sufficient if the intention is to benefit a definite and identifiable section of the public having a common quality as distinguished from a specified individual.
Forms of Charitable and Religious Institutions.
Main forms of Charitable and Religious Institutions are constituted in any one of the following forms:
- Companies: An association may be registered under section 8 of the Companies Act, 2013 if it is about to be form as a limited company for promoting charity or any other useful object. In such cases The Central Government may by license register such association as a company with limited liability without the word ‘Limited’ or ‘Private Limited’.
- Societies: A society registered under section 20 of the Societies Registration Act 1860, is a legal entity apart from its members of the governing body, secretary or trustees.
- Public Charitable Trust: Public Trust is a trust for public religious or charitable purposes and includes a temple, mosque, church and a society for a religious or charitable purpose. Society may have religious or charitable objects but if it is not a trust then it will not be “Public Trust”.
Muslim Wakf: Trust under Mohammedan Law is called Wakf. Section 2 of the Muslim Wakf Validation Act defines Wakf as dedication by person professing Islam or the Musalman faith, or any purpose recognized by the Musalman Law as religious, pious of charitable.
What is ‘Charitable Purpose’ under Income Tax Act?
Definition of Charitable Purpose as per section 2(15) is as under:
“ charitable purpose” includes, relief of the poor, education (yoga),medical relief, [preservation of environment ( including water sheds, forest and wild life) and preservation of monuments or places or objects of artistic or historic interest,] and the advancement of any other objects of general public utility:
[Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce, or business, or any activity of rendering service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless-
i. such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and
ii. the aggregate receipts from such activity or activities during the previous year, do not exceed twenty percent of the total receipts, of the trust or institution undertaking such activity or activities, of the previous year;]
Formation of the Trust:
- What is Trust?
A trust is created in a convenient form whereby a limited number of persons may hold property on behalf of other persons, who may be a large or fluctuating body or who may include a person not yet born.
Once the property has been vested with the trust, the trustees own the property, but they are compelled by law to exercise their ownership for the benefit of the beneficiaries and for them only.
- Types of the Trusts
01. Charitable or Public Trust
02. Private Trust
A public or charitable trust is one which benefits the public at large, or some considerable portion of it. But in the case of private trusts, the beneficiaries are ascertained individuals or families.
Requisites for creation of a Trust
a. There is a founder/ settler /author of trust;
b. There should be person/ persons called trustee / trustees;
c. There is property of the trust which the settler gives;
d. There is a person capable to enforce that obligation;
e. There are beneficiaries who will enjoy benefits out of that property;
f. An intension of the author or founder to create a trust;
g. The purpose i.e. objects of the trust;
h. Transfer the property to the trustees.
- Conditions for creation of Trust
a. The settler has to give up ownership and all beneficial interest in the property.
b. The property should be clearly described.
c. The objects for creation of trust should be clearly indicated.
d. Formal deed or any other writing is not required and an intention to create a trust may be shown through oral words. However it is advisable to have a written trust deed for all practical purposes.
e. The settler must be a competent to contract.
f. The trust property must be properly transferable to the beneficiary.
- Who may create Trust?
Any person who has power of ‘Disposition of Property’ means a person who is competent to contract and entitled to transferable property or authorized to dispose of transferable property not his own, is competent to transfer such property, either wholly or in part, either absolutely or conditionally, has capacity to create a trust over such property
Any Hindu under the Hindu Law can create a Hindu endowment and under Muslim Law, any Muslim can create a public Wakf.
In addition a body of Individuals, institution, a limited company, a Hindu Undivided Family through its Karta can also create a trust. A Karta of joint Hindu Family in relation to the family property, for the benefit of the family or if it is necessary to fulfill the religious or charitable responsibility of the family.
- Who may be trustees?
A Government, a corporation or a limited company, an individual can be trustee. Beneficiary may also be a trustee and author or settler of a trust may appointed himself as the sole trustee or as one of the trustees.
- Trust Deed.
The instrument by which the trust is declared is called the “ Trust Deed” . With effect from 1st April, 1973, for claiming exemption u/s 11 the condition is that there should be an instrument or written document for creating or establishing a trust. Though a trust may be created orally in certain cases a written trust deed is always desirable.
a) Advantages of a Trust Deed.
The main advantages of trust deed are classified as under:
1. A written Trust Deed is a prima facie evidence to existence of Trust;
2. It facilitates transfer of the trust property to the trust;
3. A written trust deed is important for registration of transfer of immovable property in the name of trust;
4. A written trust deed is also very important for boating registration and claiming exemption under the Income Tax Act;
5. To direct, control and for the management of working and operations a written trust deed is essential;
6. Powers, rights, duties of the trustees and also appointment and removal is indicated in the trust deed.
b) Contents of a Trust Deed.
A trust may be created in any language, enough to show the intention and no technical words are necessary. A written trust deed includes the name of settler, trustees and name of beneficiaries , the name by which trust shall be identified, place where its principal office shall be situated, also an intention to divest the trust property upon the trustee, most importantly, the object of the trust, rights, duties, appointment, removal of the trustees and mode & method of determination of the trust. Dissolution clause shall be there.
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