Can an NRI become a Trustee in Public Charitable Trust in India?

Can an NRI become a Trustee in Public Charitable Trust in India?

Friends, I get this question from Non Resident Indians as well as from people residing in India. At times NRIs want to start a trust in India because they want to do some social work. At other times, a Trust started by Indians want to include an NRI in the board of trustees.

Let’s explore the issue and see what different clauses in the law say about it.

As we know, trust in India are governed by the Indian Trusts Act, 1882. Most of the states have adopted this act and other have adopted it with a few changes. This act has sections that stipulate as to how a trust should function and who can be trustee.

Indian Trust Act 1882 does not explicitly bars an NRI from becoming a trustee but there are few indirect consequences that may hamper the way.

Explanation 1 to Section 60 provides, inter alia, that a person domiciled abroad or an alien enemy, i.e. a person not domiciled/ resident in India or a person belonging to a state which is at war with India, are not proper persons to be trustees and they are not permitted to be trustees of Indian resident trusts.

Indian courts have held that a non resident cannot be a trustee of an Indian resident trust unless he is domiciled in India. The principle behind this is that the trustee at all times must be within the reach of Indian Courts in order to ensure the enforcement of the terms of the trust. However, if Indian trust does not have a resident trustee, then a court application would have to be made in order to invalidate the trust.

Further, Section 73 of the Indian Trusts Act, provides that where a person appointed as a trustee is absent for a continuous period of six months, leaves India for a continuous period of six months, or leaves India for the purpose of residing abroad, a new trustee may be appointed in his place by the person nominated in the deed

Under the Indian exchange control regime, it is not possible for a trust holding immovable property to have a non resident trustee.

Looking to the above facts NRI cannot become Trustee in a Public Charitable Trust in India.

During the course of survey u/s 133A of the Act, department noticed that a donation entry of Rs. 37,00,000/ According to the department such donation given to trust was bogus and sham. CIT(Exemption) initiated proceeding for cancellation of Registration.

The action of CIT (Exemption) is correct?

The above facts is based on the real case of CIT ( Exemption) v/s Jagnath Gupta Trust (Civil Appeal No 1381 of 2019. 411 ITR 235 (S.C.) dated 01.02.2019.

The facts  is based on the real case is as under:

CIT Vs. Jagnath Gupta Family Trust (2019) 411 ITR 235 S.C.

• Trust is registered u/s 12AA of the I.T.Act 1961 and also registered u/s 80G(5) of the Act.
• The object of the trust were Public and Charitable purposes, namely medical relief, education any other causes of public utility etc. The trust is running an Engineering College.
• Survey was conducted u/s 133A of the Act, in the premises of School of Human Genetics and Population Health, Kolkata by the investigation wing of on 27.01.2014.
• During the said survey the Income Tax Department Noticed a donation entry of Rs. 37,00,000/ in two tranches in the month of February and March, 2013.
• According to the Department such donation given to the trust was bogus and sham.
• In view of such allegation the CIT(Exemption) initiated the proceeding for cancellation of registration and issue a show cause notice to the trust on 04.12.2015.
• Trust replied to the same. The main plank of the defense was that the procedure adopted by the Department was contrary to the principal of Natural Justice.
• After receipt of the explanation to the show-cause notice, alleging that the activities of the trust were neither genuine nor as per the object of the trust, further alleging that the transaction in question was only a money laundering. Therefore, receipt of donation in lieu of cash was never the object of the trust and as such it was to be treated as in genuine and illegal activity.
• By recording the above findings the primary authority by order dated 15.03.2016, in exercise of power u/s 12AA(3) of the Act cancelled the registration of the trust.
• Aggrieved by the order of cancellation, trust filed an appeal before the ITAT, Kolkata.
• The appellate authority set aside the order dated 15.03.2016 and remanded the matter for fresh consideration.
• Aggrieved by the order of ITAT dated 10.04.2017, the trust filed an appeal before the High Court of Kolkata.
• By the impugned order, the high court allowed the appeal by order dated 18.09.2017 and quashed the order of cancellation of registration.
• The High Court held that while it was possible that a particular donation may be bogus or fictitious and, trust may be assessed to tax therefore and other steps could be taken but the single donation which was allegedly bogus, would establish that the activities of the trust were not genuine and not being carried out in accordance with the object of the trust.
• According to Supreme Court, such a reason assigned by the High Court was erroneous and ran contrary to the plain language of section 12AA(3) of the Act. In view of the serious allegations made against the Trust, it was a matter of consideration of the issue, after giving opportunity as pleaded by the trust, but the High Court had committed an error in entertaining the appeal against the remand order passed by the appellate authority and quashing the order of cancellation of registration.
• The Supreme Court therefore set aside order of High court, but however, clarified that it has not expressed any opinion on merits, and it was open to CIT(exemption) to considered all the issues on its own merit, uninfluenced by the observations made by appellate authority, the High Court or in this order by it.

As per the newly substituted sub section 4 and 5 of the section 12AB, power to cancellation of registration has been acquired by the department. On happening of the specified violation, commissioner on his own or on reference from the A.O. can cancel the registration after following the procedure.

Specified violations are:

Any income is applied, other than for the object of the trust.

1. Trust is running business, which is not included to the attainment of its objective or separate books of accounts are not maintained for the business which is incidental to the attainment of objectives.

2. Any part if the income is applied for private religious purpose which does not ensure for the benefit of public(only applicable for the trust registration or provisionally registered u/s.12AA/12AB).

3. The trust established for charitable purpose after commencement of this Act and has applied any part of its income for any particular community or caste.

Activity of the trust is not genuine or Activity is being carried out in contravention of all or any of the conditions with which it was registered.

The trust has not complied any of the requirement of any other law which has not been disputed or has attained finality.

In the instant case the trust case will fall in the category of “Activity of the trust is not genuine” and hence commissioner on his own can start the procedure of cancellation.