At the very outset we have to remember the five essential elements of a Trust, namely the Founder, Trustee(s), Beneficiaries, Trust Property and Trust Deed with the Objects of the Trust clearly spelt out. Here we are talking about the Public Charitable Trusts. Once a Trust is formed, the Founder may or may not be there, but the other four elements are vital for the on-going functioning of the Trust. They can be summarized as:
- a) No profit motive: Central to the concept of a Public Charitable Trust is the fact that the Trust, with its entire property and income, exists for the benefit of the public, irrespective of caste, creed, religion, etc., and hence the Trustees have no profit motive at all. This means that at no point of time can the Trustees or their relatives or friends have a share of the profit or income of the Trust, nor can they even avail any of its services free of cost.
- b) Use of the Property and all Income only for the objects of the Trust: Here, the Trustees have an obligation to use the entire property and income of the Trust only on the objects of the Trust spelt out in the Trust deed, for the benefit of the beneficiaries for whom the Trust has been set up.
- c) Activities in line with the objects: The purpose of the Trust is already spelt out in the form of objects of the Trust in the Trust Deed. This would mean that the Trust can have only those activities which are in line with its objects. Now, according to the recent Finance Bill of 2017, if a Trust modifies its objectives or purpose, it has to get a fresh registration for exemption from income tax.
How is a Trust run? Every Trust will have a group of Trustees, three or five or more, according to the provisions of the Trust Deed. The management and control of the Trust and all its assets is vested in these Trustees, who shall run the Trust according to the rules and procedure spelt out in the Trust Deed. There may be a Managing Trustee, for practical purposes, to run the Trust, on behalf of the Body of Trustees. It is expected that the Body of Trustees meets at least twice a year (can be more according to the need) and takes collective decisions in the matters of policy, activities and assets of the Trust, but keeping in mind the demands of 12A for tax exemption: Charitable Trusts are eligible for tax exemption under sections 11, 12, 12A, 12AA and 13 of the Income Tax Act. Charitable purpose includes relief of the poor, education, medical relief, preservation of environment and preservation of monuments or places or objects of artistic or historic interest and the advancement of any other object of general public utility.
After getting the Trust registered, the Trustees shall apply for and get a PAN (Permanent Account Number), which is needed for the income tax purpose. Now with the Trust Deed and the PAN in hand, the Trust can open a bank account in the name of the Trust, after passing a resolution regarding the same and its mode of operation. Simultaneously, the Trustees can apply for 12A, which entitles the Trust for exemption from income tax. This is the most important document from the income tax point of view. By granting income tax exemption through its 12A certificate, the government officially recognizes the Trust as a Public Charitable Trust. The Trust, while filing its income tax returns, can claim income tax exemption, provided it follows the conditions necessary for the same, like following the clauses of the Trust Deed and complying with the sections 11, 12, 12A, 12AA and 13 provisions of the income tax. With 12A in hand, the Trust may apply for 80G, which will give some income tax benefit to those to give donations to the Trust. In the meanwhile, the Trust may also have to apply for and get its TAN (Tax Account Number) and GST No, if it is applicable.
While running the Trust, it is important for the Trustees to note the following:
- A Public Charitable Trust with 12A certificate may not give any donation to another Trust without 12A certificate.
- A Public Charitable Trust may not give donation to another Trust, even with 12A certificate, if the latter’s objects are different from those of the donor Trust.
- A Public Charitable Trust may not take up any activity, however noble it may be, if it is not part of its objects in the Trust Deed.
It is also important for the Trust to maintain its membership and minutes register, with the agenda, proceedings, decisions and resolutions of the meetings recorded in it and the competent authority endorsing the same with his signature. Needless to say, the Trust has to maintain all its original documents like the Trust Deed, PAN card, 12A certificate, 80G certificate, land and property related documents, etc., in safe custody.
As the Trust functions, it is necessary to maintain its accounts with all supporting documents, get the accounts audited at the end of the financial year and file its income tax returns within the prescribed time frame.
Finally, a word of caution A Trust may get into great difficulties if any of its legal documents is lost, if the Trust is not run according to the provisions of the Trust Deed and even lose its 12A status if the legal compliances are not met.
In the next issue, we shall see the differences among a Trust, Society and Non-profit Company.
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