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A note on the IndianTrusts Act, 1882

[In this article provisions of the Indian Trust Act, 1882 which are part of the syllabus for Departmental Examination for Inspector of Income Tax are discussed. To achieve simplicity some finer aspects are removed to give a firsthand account of the provisions of the Act. In case of any doubt please refer to the Act. Digit mentioned in third brackets refer to section]

The Indian Trusts Act, 1882 deals with law relating to Private Trusts and Trustees. This Act is not applicable to i) Waqf (an Islamic endowment of property to be held in trust and used for a charitable or religious purpose) ii) Property of a Hindu Undivided Family and iii) Public or private religious as charitable endowments (to deal with Public trusts there is no Central Act but some States have).
Interpretation-clause
i) A "trust" is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner: ii) the person who reposes or declares the confidence is called the "author of the trust", iii) the person who accepts the confidence is called the "trustee", iv) the person for whose benefit the confidence is accepted is called the "beneficiary", v) the subject-matter of the trust is called "trust-property" or "trust-money", vi) the "beneficial interest" or "interest" of the beneficiary is his right against the trustee as owner of the trust-property; and vii) the instrument by which the trust is declared is called the "instrument of trust", viii) a breach of any duty imposed on a trustee by any law in force, is called a "breach of trust" ix)"registered" means registered under the law in force for the registration of documents: x) a person is said to have "notice" of a fact either when he actually knows that fact, or when, but for willful abstention from inquiry or gross negligence, he would have known it, or when information of the fact is given to or obtained by his agent, under the circumstances mentioned in the Indian Contract Act, 1872 [3] Testamentary trust is created through a will and become effective when the author dies but non-testamentary trust is not related to will which is created and become effective during the lifetime of the author. A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties
Provisions relating to creation of trusts
Lawful purpose  A trust may be created for any lawful purpose. The purpose of a trust is lawful unless it is (a) forbidden by law, or (b) if permitted, the nature of trust would defeat the provisions of any law, or (c) is fraudulent, or (d) involves/ implies injury to the person or property of another, or (e) the Court regards it as immoral or opposed to public policy. Every trust of which the purpose is unlawful is void. And where a trust is created for two purposes, of which one is lawful and the other unlawful and the two purposes cannot be separated, the whole trust is void. [4]
Trust of immoveable property.-No trust in relation to immoveable property is valid unless declared by a non-testamentary instrument in writing signed by the author of the trust or the trustee and registered, or by the will of the author of the trust or of the trustee. Trust of moveable property  No trust in relation to moveable property is valid unless declared as aforesaid, or unless the ownership of the property is transferred to the trustee. These rules do not apply where they would operate so as to effectuate a fraud. [5]

Creation of trust  Complying with the provisions of section 5, a trust is created when the author of the trust indicates (a) an intention on his part to create thereby a trust, (b) the purpose of the trust, (c) the beneficiary, and (d) the trust-property, and (unless the trust is declared by will or the author of the trust is himself to be the trustee) transfers the trust-property to the trustee. [6]

Provisions relating to the duties and liabilities of trustees
Trustee to execute trust The trustee is bound to fulfill the purpose of the trust, and to obey the directions of the author of the trust given at the time of its creation, except as modified by the consent of all the beneficiaries being competent to contract. Where the beneficiary is incompetent to contract, his consent may be given by a principal Civil Court of original jurisdiction. However a trustee may not be required to obey any direction which is impracticable, illegal or manifestly injurious to the beneficiaries. Unless a contrary intention is expressed, the purpose of a trust for the payment of debts shall be deemed to be (a) to pay only the debts of the author of the trust existing and recoverable at the date of the instrument of trust, or, when such instrument is a will, at the date of his death, and (b) in the case of debts not bearing interest, to make such payment without interest. [11]

Accounts and information  A trustee is bound (a) to keep clear and accurate accounts of the trust-property, and (b), at all reasonable times, at the request of the beneficiary, to furnish him with full and accurate information as to the amount and state of the trust-property. [19]

Investment of trust-money  Where the trust-property consists of money which cannot be applied immediately the purposes of the trust, the trustee is bound (after complying with any direction contained in the instrument of trust) to invest the money only on certain specified securities, and on no others. Some of these are i) in promissory notes, debentures, stock or other securities of any State Government or of the Central Government ii) in stock or debentures of, or shares in, Railway or other Companies the interest whereon shall have been guaranteed by the Central Government or in debentures of the Bombay Provincial Co-operative Bank, Limited, the interest whereon shall have been guaranteed, by the State Government of Bombay; iii) in units issued by the UTI or; iv) on any other security expressly authorized by the instrument of trust or by the Central Government by notification in the Official Gazette, or by any rule which the High Court may from time to time prescribe in this behalf. [20]

Power to purchase redeemable stock at a premium A trustee may invest in any of the securities mentioned in section 20, even if that the same may be redeemable and the price exceeds the redemption value. However a trustee may not purchase at a price exceeding its redemption value to some specified security mentioned in section 20 which is liable to be redeemed within fifteen years of the date of purchase at par or at some other fixed rate and a trustee may retain until redemption any redeemable stock, fund or security which may have been purchased in accordance with section 20A. [20A]

Liability for breach of trust  Where the trustee commits a breach of trust, he is liable to make good the loss which the trust property or the beneficiary has sustained. But if the beneficiary has by fraud induced the trustee to commit the breach, or the beneficiary, being competent to contract, has himself, without coercion or undue influence concurred in the breach, or subsequently acquiesced therein, with full knowledge of the facts of the case and of his rights as against the trustee then the trustee is not liable. A trustee committing a breach of trust is not liable to pay interest except in a few cases like the trustee i) has actually received interest ii) unreasonably delayed in paying trust-money to the beneficiary iii) failure to invest trust money and to accumulate the interest or dividends thereon and so on. For further details refer to the section and its illustrations. [23]

Provisions relating to the rights and liabilities of the beneficiary
Right to transfer beneficial interest Where the beneficiary is competent to contract, he may transfer his interest. But the circumstances and extent of such interest should be as per law. Where property is transferred for the benefit of a married woman, she shall have no power to deprive herself of her beneficial interest and she shall not be authorized to transfer such interest during her marriage. [58]

Saving of rights of certain transferees When a trustee wrongfully invests trust money in a property then the beneficiary is entitled to the property. But when the purchase money was paid, or the conveyance was executed and when a transferee in good faith for consideration and without having notice of the trust transfers the trust money then the beneficiary shall not have any right in the property. This provision shall not apply i) for a judgment-creditor of the trustee attaching and purchasing trust-property, ii) to money, currency notes and negotiable instruments in the hands of a bona fide holder to whom they have passed in circulation, iii) to the liability of a person to whom a debt or charge is transferred.[64]

Wrongful employment by partner-trustee of trust-property for partnership purposes  Where a partner, being a trustee, wrongfully employs trust-property in the business or on partnership account, unless other partners had notice of the breach of trust they will not be liable for such trust-property in their personal capacity to the beneficiaries But where the partners having such notice they are jointly and severally liable for the breach of trust. [67]
Provisions relating to the extinction of trust.
Revocation of trust  A trust created by will may be revoked at the pleasure of the testator. A trust otherwise created can be revoked only-- (a) where all the beneficiaries are competent to contract-- by their consent; (b) where the trust has been declared by a non-testamentary instrument or by word of mouth--in exercise of a power of revocation expressly reserved to the author of the trust; or (c) where the trust is for the payment of the debts of the author of the trust, and has not been communicated to the creditors--at the pleasure of the author of the trust. But if the creditors are parties to the arrangement, the trust cannot be revoked without their consent [78]

Provisions relating to certain obligation in the nature of trust
[Syllabus includes section 81 of the Indian Trusts Act, 1882. But section 7 of the Benami Transactions (Prohibition) Act, 1988 (which is an act to prohibit benami transctions and the right to recover property held benami for matters connected therewith or incidental thereto) has repealed w.e.f. 19/05/1988 section 81, 82 and 94 of the Indian Trusts Act, 1882 and section 281A of the Income tax Act, 1961.]

Bequest for illegal purpose  Where a testator gives property by will upon trust and the purpose of the trust appears to be unlawful, or during the testator's lifetime the legatee agrees with him to apply the property for an unlawful purpose, the legatee must hold the property for the benefit of the testator's legal representative. Where property is bequeathed and the revocation of the bequest is prevented by coercion, the legatee must hold the property for the benefit of the testator's legal representative. [85]
Advantage gained by fiduciary  Where a trustee, executor, partner, agent, director of a company, legal adviser, or other person, being a fiduciary, gains for himself any monetary advantage or enters into any dealings under circumstances in which his own interests are, adverse to those of such other person and thereby gains for himself a monetary advantage, he must hold for the benefit of such other person the advantage so gained. [88]

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