Can NRIs Serve as Trustees in Indian Public Charitable Trusts?

Can an NRI Become a Trustee in a Public Charitable Trust in India?

Many Non-Resident Indians (NRIs) and residents alike have raised the question of whether an NRI can serve as a trustee in a Public Charitable Trust in India. NRIs often express a desire to establish trusts for social work, while existing Indian trusts may seek to include an NRI on their board of trustees. This blog explores the legal provisions and implications surrounding this issue.

Legal Framework Governing Trusts in India

Trusts in India are primarily governed by the Indian Trusts Act, 1882. While most states have adopted this Act, some have made slight modifications. The Act outlines the operational framework of trusts and specifies eligibility for trustees.

NRI Trustee Eligibility under the Indian Trusts Act, 1882

The Indian Trusts Act, 1882, does not expressly prohibit NRIs from becoming trustees. However, certain indirect provisions may complicate their eligibility:

Explanation 1 to Section 60 states that individuals domiciled abroad, or termed as alien enemies—meaning those not residing in India or from countries at war with India—are considered inappropriate persons to serve as trustees of trusts for Indian residents.
Indian judicial precedent indicates that an NRI cannot act as a trustee of an Indian resident trust unless they are domiciled in India. This requirement is based on the principle that trustees must remain within the jurisdiction of Indian courts to enforce the trust's terms effectively. If a trust lacks a resident trustee, the trust may need to be challenged in court.

Further Restrictions Imposed by the Act

Additionally, Section 73 of the Indian Trusts Act provides grounds for appointing a new trustee if the current one is absent for a continuous period of six months or chooses to reside abroad. Under the Exchange Control Regulations in India, trusts holding immovable property cannot include non-resident trustees.

Based on these provisions, it is concluded that NRIs generally cannot serve as trustees in Public Charitable Trusts in India.

Case Study: CIT (Exemption) vs. Jagnath Gupta Trust

During a survey conducted under Section 133A of the Income Tax Act, the Income Tax Department scrutinized a donation of ₹37,00,000 made to a trust. The Department claimed that this donation was fictitious, prompting the Commissioner of Income Tax (CIT) (Exemption) to initiate proceedings for the cancellation of the trust’s registration.

Case Summary

Trust Registration: The trust in question was registered under Section 12AA of the Income Tax Act, 1961, and under Section 80G(5) for charitable purposes, including medical relief and education. It operated an Engineering College.
Investigation Results: On January 27, 2014, the Income Tax Department conducted a survey at the School of Human Genetics and Population Health in Kolkata. It flagged a donation entry of ₹37,00,000 received in two installments in February and March 2013, labeling it as bogus.
Legal Proceedings: The CIT issued a show-cause notice for potential cancellation of the trust's registration, which resulted in the trust contesting the claims, arguing procedural violations against natural justice. The initial authority canceled the registration based on allegations of improper activities. However, the ITAT set aside this order for further review. Subsequently, the Kolkata High Court allowed an appeal, asserting that a single suspicious donation did not invalidate the trust's entire operation.

The Supreme Court later overturned the High Court's ruling, asserting the need for the CIT to explore the allegations thoroughly. The Supreme Court's decision emphasized that it did not rule on the merits of the case but required a fair examination based on the complaints.

Recent Developments in Registration Cancellation

Under the newly amended sub-sections 4 and 5 of Section 12AB, the power of registration cancellation now lies with the department. Upon specified violations, the Commissioner may annul registration either independently or upon referral from the Assessing Officer.

Specified Violations Include:

Application of trust income for purposes other than the trust's objectives.
Engaging in business activities not aligned with the trust's goals without maintaining separate accounts for incidental actions.
Application of income for private religious purposes, not benefiting the public (relevant for trusts under Sections 12AA and 12AB).
Charitable trusts applying income to specific communities or groups post-Act initiation.
Non-genuine activities contrary to registered conditions.
Non-compliance with prevailing laws.

Conclusion

In summary, NRIs face significant barriers to serving as trustees in Public Charitable Trusts in India due to legal stipulations and regulatory frameworks. The case of CIT (Exemption) vs. Jagnath Gupta Trust reinforces the importance of compliance and proper governance within trusts to safeguard their registrations and operations. Understanding these provisions is essential for both NRIs and local entities contemplating the role of NRIs as trustees.