It has often been debated whether HUF can settle a Trust by becoming a Settlor (i.e., a person who can create a trust). In this regard, it is pertinent to refer to the provisions of the Indian Trust Act, 1882. Section 7 of the Indian Trust Act, 1882 defines a settlor as follows:
A trust may be created —
- by every person competent to contract
There is a sub-section (b) also to this section, which is not produced here as it is not relevant here.
A person competent to contract is defined by Section 11 of the Indian Contract Act, 1872 as follows:
Every person is competent to contract:
-
who is of the age of majority according to law to which he is subject to
-
who is of sound mind’
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Who is not disqualified from contracting by any law to which he is subject.
Thus, it is important to note that it is only a person who is competent to contract can form a trust.
The definition of the word “person” under the Income-tax Act,- 1961 as defined in Section 2(31) of the Act includes a Hindu Undivided family, but for the purposes of the Indian Trust Act, 1882, the definition of the person as given in the Income Tax Act,1961 cannot be applied and in absence of a definition of the word person in the Indian Trust Act,1882, the definitipn as given by the General Clauses Act,1897 has to be applied. The word person has been defined by Section 3(42) of the General Clauses Act, 1897 as follows:“
Person” shall include any company or association or body of individuals whether incorporated or not.
Thus, it can be seen that the definition of the word person as given in the General Clauses Act,1897 is an inclusive definition and not an exclusive definition and it includes Company, Association as well Body of Individuals whether incorporated or not.
In view of the above, a HUF being competent to contract and being an Association of Persons can very well settle a Trust. Reference in this regard can be had to the decision of the Apex court in the case of CIT vs Ratilal Nathalal(1954) 25 ITR 426 wherein the Apex Court was dealing. with a case of a settlement of a Trust by HUF.
Moreover, it is important to note that the rights of alienation of the trust property vested with the karta are limited to that for the benefit of the members of the HUF and therefore, it essentially follows that any trust which is settled by a HUF should be for the benefit of its members and the adult members should pass a resolution of forming the Trust.
Trustee
According to Section 10 of the Indian Trust Act, Every person capable of holding property may be a trustee; but where the trust involves the exercise of discretion, he cannot execute it unless he is competent to contract.
We have seen as above that the word lrustee has not been defined in the Trust Act and therefore following the general meaning as above, a HUF can become trustee of a trust.
Rights of Karta to alienate the Properties of HUF in a Trust
However, it is important to note that the rights of alienation of the trust property vested with the. Karta are limited to that for the benefit of the members of the HUF and therefore it essentially follows that any trust which is settled by a HUF should be for the benefits of its members only. A number of court cases have time and again dealt upon this issue. In this regard, the Apex Court in the case of Moti La! Chhadami La! fain vs CIT, 1991 Supp (1) SCC 229 1=(1991) 190 ITR 1], while dealing with a case where the Karta of a HUF had settled some properties belonging to HUF in a Trust whose sole trustee was the karta held as follows in Para 22.
22. We are of the opinion that the view of the High Court proceeds on an unduly narrow construction of the deeds of 1947 and 1960. We have pointed out that, under the deed of 1947, the karta of the assessee family is the sole trustee to execute the objects of the Trust. It appears to have been overlooked that while a registered conveyance to the trustees by the owner of immovable property is necessary where the trustees are persons other than the author, this requirement does not arise where the author of the trust is to be the sole trustee. While a trust is not complete until the trust property is vested in trustees for the benefit of the cestui que trust, this can be done by the settlor, where he is himself the trustee, by a declaration of trust, using language which, taken in connection with his acts, shows a clear intention on his part to divest himself of all beneficial interest in it and to exercise dominion and control over it exclusively in the character of a trustee. Section 6 of the Indian Trusts Act, makes this clear beyond all doubt. In the present case there is a deed which makes clear the unequivocal intention to utilise the income from the properties in the manner set out in the deed of trust.
Thus, in the aforesaid case though on the date when the properties were settled, there was no registered document by which the property was transferred, but the Apex Court held the settlement to valid in view of the fact that settler was the sole trustee and the intention was clear and unequivocal. |
