Sometime back a CA friend of mine
specializing in tax planning, who normally consults me on legal issues before
formulating any tax saving plan, casually asked me whether I had an occasion to
consider the question as to whether a trust can be named to be one of the
beneficiaries of another trust.
My friend being conscientious and
thorough does not recommend to any client of his any tax saving plan unless he
is fully satisfied with all applicable legal and other issues. He had some reservation on this question and
added that a particular Big Four CA firm was
using this idea in its tax saving recommendations. As I needed research to answer the point, I
could not respond to the inquiry spontaneously.
The result of the research undertaken by me was quite interesting. The purpose of this article is to share with
the readers of your esteemed journal the result of my research on the issue.
Section 9 to the Indian Trusts Act,
1882 provides that every person capable of holding property may be a
beneficiary. Therefore, the two basic
requirements of being a beneficiary is that (i) the beneficiary should be a
person and (ii) should also be capable of holding property.
The term “person” is not defined in the
Indian Trusts Act. It is therefore,
necessary to look at the definition of the term under the General Clauses Act,
1897. The said Act defines a large
number of words and expression and such definitions apply to all Central Acts
and Regulations thereunder. The said Act defines the term ‘a person’ to include
any company or association or body of individuals, whether incorporated or
not. Even the Indian Penal Code, 1860
which also defines the term “person” gives same definition of the term to
include any company or association or a body of persons whether incorporated or
not. It may be noted that both these
definitions are inclusive definitions and not exclusive.
Therefore, to answer the question it is
necessary to determine whether a trust can be considered a “person”.
In the case of Abraham Memorial
Educational Trust vs. C. Suresh Babu
reported in [2012] 175 Comp Cas 361 (Mad) the Madras High Court had occasion to
consider the meaning of the term “person”.
It was a criminal case arising under Section 138 of the Negotiable
Instruments Act, 1881 and the court was required to interpret the meaning of
the term ‘company’ used in the Act.
Section 141 of the said Act defines the word to mean ‘any body corporate
and includes a firm or other association of individuals’. In that case the Court has held that
applying the doctrine of “ejusdem generis” and going by the purpose and
context, while interpreting the definition clause, a Public Charitable Trust
falls within the definition of the term “company”. This definition will also apply in the
interpretation of the term ‘person’ in Section 11 of the Indian Penal Code and
Section 3(42) of the General Clauses Act.
In that case, the Hon’ble Court, inter alia, referred to
a passage from the decision of the Supreme Court in case of Shiromani Gurdwara
Prabandhak Committee vs. Som Nath Dass
(reported in (2000) 4 SCL 146 para 19) as under:
“19. Thus,
it is well settled and confirmed by the authorities on jurisprudence and courts
of various countries that for a bigger thrust of socio-political-scientific
development evolution of a fictional personality to be a juristic person became
inevitable. This may be any entity,
living, inanimate, objects or things. It
may be a religious institution or any such useful unit which may impel the
courts to recognise it. This recognition
is for subserving the needs and faith of the society. A juristic person, like any other natural
person is in law also conferred with rights and obligations and is dealt with
in accordance with law. In other words,
the entity acts like a natural person but only through a designated person,
whose acts are processed within the ambit of law.”
After considering some other Supreme Court case law, the
Hon’ble Court held as follows:
“26. From
the foregoing discussions, it is manifestly clear that the moment a Trust
(organisation) is formed with an obligation attached to the same, an artificial
person is born and because such artificial person is recognised by law,
conferring upon such artificial person right to own property, to enjoy certain
other rights and also to discharge certain obligations, it attains the status
of a “juristic person”. Thus, a Trust,
whether private or public, is a juristic person who can sue / be sued or
prosecute / be prosecuted.”
The Court further considered the point whether omission
of the word ‘trust’ within the meaning of term ‘company’ had any effect and
held that:
“64. When
there is omission to expressly mention the expression ‘Trust’ within the
meaning of the term ‘company’, by applying the principle of casus omissus,
whether this Court could fill up the said gap by reading the expression ‘Trust’
into the interpretation clause of Section 141 of the Act. In this regard, I may refer to the
Constitution Bench Judgment of the Hon’ble Supreme Court in Punjab Land
Development and Reclamation Corporation Ltd., Chandigarh Vs.
Presiding Officer, Labour Court, Chandigarh reported in 1990 (3) SCC 682,
wherein the Hon’ble Supreme Court has held as follows:-
However,
a judge facing such a problem of interpretation cannot simply fold his hands
and blame the draftsman. Lord Denning in
his Discipline of Law says at p.12: “Whenever a statute comes up for
consideration it must be remembered that it is not within human powers to foresee
the manifold sets of facts which may arise, and, even if it were, it is not
possible to provide for them in terms free from all ambiguity. The English language is not an instrument of
mathematical precision. Our literature
would be much the poorer if it were.
This is where the draftsman of Acts of Parliament have often been
unfairly criticised. A judge, believing
himself to be lettered by the supposed rule that he must look to the language
and nothing else, laments that the draftsmen have not provided for this or
that, or have been guilty of some or other ambiguity. It would certainly save the judges trouble if
Acts of Parliament were drafted with divine prescience and perfect clarity. In the absence of it, when a defect appears a
judge cannot simply fold his hands and blame the draftsman. He must set to work on the constructive task
of finding the intention of Parliament, and he must do this not only from the
language of the statute, but also from a consideration of the social conditions
which gave rise to it, and of the mischief which it was passed to remedy, and
then he must supplement the written word so as to give ‘force and life’ to the
intention of the legislature.”
Based on this discussion the Court held that:
“65. Applying
the above law laid down by the Constitution Bench of the Hon’ble Supreme Court,
as I have already concluded, considering the intention of the Legislature while
bringing in Chapter – XVII of the Negotiable Instruments Act and the fact that
a Trust having two or more trustees will squarely fall within the ambit of
‘association of individuals’ which in turn will fall within the meaning of the
term ‘company’, I am of the view that a Trust having a single trustee should
also be brought within the definition of the term ‘company’.”
Thus, based on the decision, a trust
(public or private) held to be a person and the first requirement condition of
being a beneficiary as required under Section 9 of the Indian Trusts Act is
satisfied.
Even otherwise, the Supreme Court had
many occasions to consider the meaning of the term ‘person’ under a number of
Central and State laws and has given very wide and extended meaning to the term
‘person’. Illustratively, in Agarwal
Trading Corporation v. Collector of
Customs, the word ‘person’ is held to include a company or association or body
of individuals whether incorporated or not.
(See (1972) 1 SCC 553). Again in
M M Ipoh v. CIT (1968) ISCR 65, it is held to include a firm so also in CIT v.
S.C. Angidi Chettiar (AIR 1962 S.C. 970).
Moreover, while interpreting the word ‘person’ in Section 154(1) of U.P.
Zamindari Abolition and Land Reforming Act, 1950 the Supreme Court has held
that keeping in view the object of legislation and by applying the rule of
contextual interpretation it becomes clear that the same would include human
being and a body of individuals which have juridical or non-juridical status. (
See Oswal Fats & Oils Ltd. v. Commr. (Admn.), (2010)4SCC728. )
Therefore, the first requirement of the
legal provision being satisfied, we have to consider the second condition. As far as the second requirement is
concerned, it does not need any elaboration to say that a trust is capable of
holding property.
Therefore, both the requirements to be
a beneficiary under Section 9 of the Indian Trusts Act are satisfied and a
trust can be a beneficiary in another trust.
Our trust laws mostly follow the
principles of English trust laws.
Interestingly, however, the English Law does not recognise this
principle. The general rule under
English Law is that a trust must have a ‘cestui que trust’. A (private) trust to be valid must be for the
benefit of individuals …. or must be in that class of trusts for the benefit of
the public which the courts recognise as charitable in the legal sense of the
term (see Lewin on Trusts, 2008 edition, page 102 para 4.38). The term ‘cestui que trust’ is defined to
mean ‘a beneficiary under / of a trust; one entitled to the income and profits
of trust funds; a person in whose favour the trust is created’ (see P. Ramanathan
Aiyar’s Law Lexicon 4th Edition Volume 2 page 1079).
Halsbury’s Laws of England also provides that a trust may be created in
favour of any person to whom a gift can legally be made and a trust may also be
created for charitable purposes but not in general for a non-charitable purpose
or object or a non-human beneficiary … in general equity will refuse to
recognise a trust other than a charitable trust unless it is for benefit of
ascertained or ascertainable beneficiaries.
Therefore, it is clear that under English Law a private trust has to be
for the benefit of individuals and that another trust cannot be named as a
beneficiary under a trust.
Accordingly, it is established that under Indian Law a
trust can be named as a beneficiary under another trust.
