Section 6 of the Indian Trust Act, 1882 ("Act") provides for "Creation of Trusts":
"a trust is created when the author of the trust indicates with reasonable certainly by any words or acts (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."
Therefore, while creating a Trust, one must ensure that amongst the other requirements under the Act, the trust deed must clearly state with reasonable certainty the beneficiaries of the trust. The term reasonable certainty has not been defined in the Act and is indeed a matter of fact.
Whether or not the beneficiary has been described with reasonable certainty is a subjective matter will have to be judged on the basis of the facts of each case.
The following judgments help in interpretating what "reasonable certainty" with respect to a beneficiary may imply:
- Chichester Diocesan Board of Finance vs. Simpson and Others, [1944] UKHL 2; and
- Turnbull's Trustees vs. Lord Advocate, [1918] UKHL 3;
- The Deputy Commissioner of Income Tax vs. India Advantage Fund before the The ITAT, Bangalore Bench, Bangalore 2014 (36) ITR (Trib) 304 (Bangalore).
The primary argument in the aforesaid cases was that the beneficiary (even if power if vested in the Trustee to decide) should be in such certain words and description that they must be absolutely ascertainable, classifiable and distinguishable.
In Chichester Diocesan Board of Finance vs. Simpson And Others1, the testator had directed his executors to apply the very substantial residue of his property "for such charitable institution or institutions or other charitable or benevolent object or objects in England as they should select", this was termed as vague and therefore void for uncertainty.
In Turnbull's Trustees vs. Lord Advocate2, the question raised was as to the validity of a clause in the trust-disposition and settlement of one Mrs. Turnbull. The testatrix directed that the residue of her estate should be disposed of as she should direct by any writing or codicil under her hand. The clause then proceeded as follows: "And failing any such, then I hereby direct my trustees to hold such residue till such time or times as they see fit and apply the same for such public, benevolent, or charitable purposes in connection with the parish of Lesmahagow or the neighbourhood in such sums and under such conditions as they in their discretion shall think proper". Lord Shaw of Dunfermline, opined that that the local connexion cannot limit the area of selection of purpose, unless the reference of the testator is to persons, societies, agencies, or institutions actually existing or projected to be established in a particular district.
Even though the question raised in The Deputy Commissioner of Income Tax vs. India Advantage Fund before The ITAT, Bangalore Bench, Bangalore3 was with respect to assessment under the provisions of the Income Tax Act, 1961, the judgment still highlights on the question of certainty of a beneficiary:
Brief Facts: The Assessee is a trust constituted under an instrument of trust. ICICI Venture Funds Management Company Limited (therein referred to as "Settlor" or "Author of Trust") by an indenture of Trust transferred a sum of Rs.10,000/- to The Western India Trustee and Executor Company Limited (therein referred as the "Trustee") as initial corpus to be applied and governed by the terms and conditions of the instrument of trust. The Trustee therein was empowered to call for contributions from the contributors which were to be invested by the Trustees in accordance with the objects of the trust. The contributors to the fund were also its beneficiaries. The object of the trust was to invest in certain securities called mezzanine instruments and to achieve commensurate returns to the contributors and facilitate investment by the contributors residing in India and achieve returns for such contributors.
One of the objections raised by the Department was that the beneficiaries and the shares of the beneficiaries are not mentioned in the instrument of trust and relied on inter-alia the following judgements:
CIT vs. P. Sekar Trust MANU/TN/0895/2009: 321 ITR 305 (Mad) the Hon'ble Madras High Court held that so long as the trust deed gives the details of the beneficiaries and the description of the person who is to be benefited, the beneficiaries cannot be said to be uncertain, merely because wife/children cannot be known until the marriage and begetting of children by the stated beneficiaries.
224 ITR 473 (AAR): The Authority for Advance Ruling (AAR) held that if the trust deed sets out expressly the manner in which the beneficiaries are to be ascertained and also the share to which each of them would be entitled without ambiguity, then it cannot be said that the Trust deed does not name the beneficiaries or that their shares are indeterminate. The persons as well as the shares must be capable of being definitely pin-pointed and ascertained on the date of the trust deed itself without leaving these to be decided upon at a future date by a person other than the author either at his discretion or in a manner not envisaged in the trust deed. Even if the Trust deed authorises addition of further contributors to the trust at different points of time in addition to initial contributors, than the same would not make the beneficiaries unknown or their share indeterminate. Even if the scheme of computation of income of beneficiaries is complicated, it is not possible to say that the share income of the beneficiaries cannot be determined or known from the trust deed.
Footnotes
1. [1944] UKHL 2
2. [1918] UKHL 3
3. 2014 (36) ITR (Trib) 304 (Bangalore)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
