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Trust and Registration of Trust under Income tax Act

A trust is nothing but a transfer of property by the owner to another person for the benefit of a third person or person. The Indian Trust Act 1882 governs private trusts across India and public trusts are governed by state specific trusts of every state.

Usually when we say about trust, it usually mean real estate, but that is wrong. It can be cash, share or any other assets and it will be created by an instrument called instrument of trust or trust deed.

There are three parties to a trust

  1. Author also called as settler is the person or persons who creates trust

  2. Trustee is the person or persons with whom the trust is created

  3. Beneficiary is the person or persons for whom the trust is created

Every person including artificial legal person who can enter into contract can create trust. And if a trust is needed to be created by on or behalf of a minor, then the approval of Principal Civil Court having original jurisdiction is needed.

Section 4 of the Trust Act  says that a trust can be created for all lawful purposes unless it 

  1. Is forbidden by law

  2. Defeats the provision of law

  3. Is fraudulent

  4. Involves injury to another person or his property

  5. Immoral or against public policy.

​​​​​​​The trust are for the benefit of beneficiaries, but there are many tax benefits available to a trust if it is registered also under Income Tax Act 1961. So registering under Indian Trust Act or under state specific trust act give legal status to Private and public trust respectively, if they want to enjoy tax benefits, they need to register under section 12AB of the Income Tax Act, to claim various exemption under section 11 of the income tax act.

The trust needs to register apply for registration in form No 10A along with prescribed information and documents.

The documents which are required to be furnished along with application Form No. 10A are as follows:

(a) where the trust is created, or the institution is established, under an instrument, self-certified copy of the instrument creating the trust or establishing the institution;

(b) where the trust is created, or the institution is established, otherwise than under an instrument, self-certified copy of the document evidencing the creation of the trust, or establishment of the institution;

(c) self-certified copy of registration with Registrar of Companies or Registrar of Firms and Societies or Registrar of Public Trusts, as the case may be;

(d) self-certified copy of the documents evidencing adoption or modification of the objects, if any;

(e) where the trust or institution has been in existence during any year or years prior to the financial year in which the application for registration is made, self certified copies of the annual accounts of the trust or institution relating to such prior year or years (not being more than three years immediately preceding the year in which the said application is made) for which such accounts have been made up; note on the activities of the trust or institution;

(f) self-certified copy of existing order granting registration under section 12A or section 12AB, as the case may be; and

(g) self-certified copy of order of rejection of application for grant of registration under section 12A or section 12AB, as the case may be, if any.

Administrative Procedure for fresh registration. section 12AB

Following section 12AB shall be inserted after section 12A by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020, w.e.f. 1-4-2021 :

12AB. (1) The Principal Commissioner or Commissioner, on receipt of an application made under clause (ac) of sub-section (1) of section 12A, shall,—

(a) where the application is made under sub-clause (i) of the said clause, pass an order in writing registering the trust or institution for a period of five years;

(b) where the application is made under sub-clause (ii) or sub-clause (iii) or sub-clause (iv) or sub-clause (v) of the said clause,— (i)  call for such documents or information from the trust or institution or make such inquiries as he thinks necessary in order to satisfy himself about—

(A) the genuineness of activities of the trust or institution; and

(B) the compliance of such requirements of any other law for the time being in force by the trust or institution as are material for the purpose of achieving its objects;

(ii) after satisfying himself about the objects of the trust or institution and the genuineness of its activities under item (A) and compliance of the requirements under item (B), of sub-clause (i),—

(A) pass an order in writing registering the trust or institution for a period of five years; or

(B) if he is not so satisfied, pass an order in writing rejecting such application and also cancelling its registration after affording a reasonable opportunity of being heard;

(c) where the application is made under sub-clause (vi) of the said clause, pass an order in writing provisionally registering the trust or institution for a period of three years from the assessment year from which the registration is sought, and send a copy of such order to the trust or institution.

(2) All applications, pending before the Principal Commissioner or Commissioner on which no order has been passed under clause (b) of sub-section (1) of section 12AA before the date on which this section has come into force, shall be deemed to be applications made under sub-clause (vi) of clause (ac) of sub-section (1) of section 12A on that date.

(3) The order under clause (a), sub-clause (ii) of clause (b) and clause (c), of sub-section (1) shall be passed, in such form and manner as may be prescribed, before expiry of the period of three months, six months and one month, respectively, calculated from the end of the month in which the application was received.

(4) Where registration of a trust or an institution has been granted under clause (a) or clause (b) of sub-section (1) and subsequently, the Principal Commissioner or Commissioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution after affording a reasonable opportunity of being heard.

(5) Without prejudice to the provisions of sub-section (4), where registration of a trust or an institution has been granted under clause (a) or clause (b) of sub-section (1) and subsequently, it is noticed that—

(a) the activities of the trust or the institution are being carried out in a manner that the provisions of sections 11 and 12 do not apply to exclude either whole or any part of the income of such trust or institution due to operation of sub-section (1) of section 13; or

(b) the trust or institution has not complied with the requirement of any other law, as referred to in item (B) of sub-clause (i) of clause (b) of sub-section (1), and the order, direction or decree, by whatever name called, holding that such non-compliance has occurred, has either not been disputed or has attained finality, then, the Principal Commissioner or the Commissioner may, by an order in writing, after affording a reasonable opportunity of being heard, cancel the registration of such trust or institution.

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