Overview on Supplementary & Amendment in Trust Deed - India Financial Consultancy (2024)

All About Trust Deed Amendment & Supplementary Trust Deeds

INTRODUCTION

• It is difficult to made an amend in the trust deed since a trust by its inherent nature is irrevocable. So, amending clause should be included in the trust deed itself. But, if the trust deed contains too many revision clauses, the trust may not be regarded as irrevocable. If there is no provision for alteration in the trust deed, the amendment must be approved by a civil court.
• Even the Civil Courts are limited in their ability to alter cases. According to the doctrine of Cy pres, which states that the settlor’s original intent should take precedence, the Civil Courts enable revision.
• So, only such kind of amendments that are consistent with the settlor’s original intent should be made. It should also be underlined that no one, not even the settlor, has the authority to change the trust deed.

TRUST DEED AMENDMENT BY TRUSTEES

• It is Normal well-established rule of trust law that once a trust is established with specific objects, none of those original objects may be deleted. This was further supported by the Madras High Court in Sakthi Charities v. CIT [1984], which ruled that a deed of rectification that removed some of a trust deed’s original objects was illegal.
• The landmark decision on this issue was given by the Supreme Court in the matter CIT v. Palghat Shadi Mahal Trust [2002] (Supreme Court), a trust was established for the economic, social, and educational advancement of Muslims from lower socioeconomic classes.
• These objectives were made applicable to all communities, regardless of faith or creed, by a general body resolution. The SC determined that this amendment would be illegal because it reflected a change in the trust deed’s purpose that the settlor had not intended.

FOUNDER OR SETTLOR HAS NO POWER TO REVOKE

• The High Court of Madras in the matter of Thanthi Trust v. Income Tax Officer [1973] noted, it was held that if there has already been a complete dedication (total turnover of the property), the founder of the trust’s subsequent activities and conduct cannot damage the trust.
• If an appropriate and complete dedication has been made, the founder would no longer have the authority to revoke it, and no statement made by him or any actions taken by him or his heirs in the future that are inconsistent with the dedication would have the same impact.
• Any deviation from the trust’s declared purposes by the founder or the trustees would only constitute a breach of trust and not affect the validity of the trust’s declaration if it has been legitimately and honestly established. In this regard the Supreme Court ruling In the Matter of Sri Agasthyar Trust v. CIT [1999] (Supreme Court) is also relevant.
• We may notes that the trustees inherently do not possess any power to amend the trust deed, for that matter even the settlor does not have the power of any subsequent

• The power to amend shall be limited to the extent provided in the trust deed itself. So, drafting of trust deed becomes very important and suitable clauses should be kept for future need of changes and contingencies.

• Moreover, care should be taken to ensure that the amendment clauses are not too wide or discretionary in nature which may render the trust invalid and revocable.

The SC held this amendment to be invalid because it implied alteration in the object of the trust deed which was not contemplated by the settlor.

LIMITED POWER OF RECTIFICATION BY CIVIL COURT

• In the Matter of Supreme Court case CIT v. Kamla Town Trust(1996),The power to change a trust deed has been granted to a civil court, and the income tax officer has to be notified of such an amendment.
• The Honourable Supreme Court ruled that a Trust Deed cannot be changed unless it expressly permits so. Approaching the registrar or a Court of law shall only be relevant if a change is legally permissible.
• Hon’ble SC held this amendment to be invalid because it implied alteration in the object of the trust deed which was not contemplated by the settlor.
• The Hon’ble Civil Courts have power to direct changes in the trust deed in the spirit of the Doctrine of Cy pres which implies that the original intent of the settlor should not fail. But once a civil court has allowed amendment, it is not open on the part of the Income Tax Officer or any other person to challenge such rectification.

SPECIFIC RELIEF ACT (SECTION 26) – IS THE REMEDY & NOT SECTION 34 OF TRUST ACT

• The Hon’ble Supreme Court noted in the aforementioned Kamla Town case (above) that Section 34 of the Indian Trust Act, 1882 was not applicable as far as the alteration of the Trust deed was concerned. You should be aware that Section 34 of the Indian Trust Act of 1882 gives you the option to ask The Honourable Court for guidance on managing Trust property.
• The apex The Hon’ble court, was of the opinion that section 34 could not be used to change the deed and objects because it was only intended to be used for managing trust property. Additionally, it was noted that section 26 of the Specific Relief Act of 1963 was the appropriate legal provision under which a request for a trust deed alteration could be submitted.

The Tax Dept. or any other authority cannot decline to accept an amended deed only on the ground that they were not made party to such amendment.

CIVIL PROCEDURE CODE (CPC)- SECTION 92

• In Kamla Town Trust v. CIT [1982](All.), the question debated was whether the Civil Court had the power to rectify the trust deed U/s 92. It was observed that Section 92 nowhere enables the Civil Court to alter or rectify the terms of a trust. It only enables the Civil Court in suitable cases to remove any trustee, appoint a new trustee, vesting any property in a trustee, directing any ex-trustee to deliver possession of the trust property to the person entitled to the possession of such property, directing accounts and enquiries, declaring that portion of the trust property or interest therein shall be allotted to any particular objects of the trust or to settle a scheme.
• So, The Hon’ble court has got power to allocate the trust properties to any particular field of the trust. In this case the Civil Court had deleted from the trust deed certain objects so as to enable the trustees to claim the benefit of exemption under the Income Tax Act, 1961. It was held that section 92 of Civil Procedure Code was not the appropriate section / statute for amendment of Trust Deed.
• U/s 92 of Civil Procedure Code, The Hon’ble court can give a direction which is necessary for the administration of any But, it can only exercise the powers expressly set out thereunder, and by exercising the power U/s 92, it cannot alter the objects of the trust deed.

REVENUE REQUIRED NOT BE A PARTY TO RECTIFICATION

• The Tax Dept or any other authority cannot decline to accept an amended deed only on the ground that they were not made party to such In the Matter of CIT v. Kamla Town Trust [1996] (The Hon’ble Supreme Court) one of the contentions of the revenue was that the rectification decree of the trust deed was in personam and not in rem to which the revenue was not a party and, So, it was not binding on the income-tax authorities. It was held that in such proceedings, the order granting rectification of such instrument of trust would certainly remain relevant. Consequently,
• Even Via the revenue or the Income Tax Officer was not a party to such rectification proceedings, it cannot be said that such rectification orders passed by Civil Courts permitting rectifications of trust deeds under the applicable provisions of the Specific Relief Act could not be relied upon by the assessee-trust in assessment proceedings before the Income ITO.
• In order to determine whether the assessee-trust had qualified for exemption from paying income tax under the relevant laws, the income tax officer must take into account the true scope and ambit of the trust deed as it was provided to him in rectified form.
• In this reference it is pertinent to note that a judgment in rem is a judgement pronounced on the status of some particular subject or property or thing (as opposed to one pronounced on persons). In the Matter of Trust Deed amendment, Via the rectification orders of the Civil Court is not judgments in rem, still it is binding in assessment proceedings before the Income Tax Officer and will have to be given effect to for whatever they are worth

WHETHER EFFECT OF TRUST DEED RECTIFICATION IS NOT RETROSPECTIVE

• The accomplish bench of The Hon’ble Delhi High Court observed in Matter of Bhriguraj Charity Trust v. CIT [1997] (FB) that any rectification would only have prospective operation and would not affect the assessment years in question, which were prior to the date of the Civil Court’s decision.

NORMS RELATED TO SUPPLEMENTARY TRUST DEEDS

• In the Matter of Laxmi Narain Lath Trust v. CIT [2000] (Raj. ), Cour was decided that a supplementary trust deed that had been approved by the appropriate civil court was legitimate and enforceable against the department.
• The Hon’ble court cited Laxminarain Lath Trust v. CIT [1988], where it had determined that the supplementary deed bound the trustees who were parties to the said deed as well as future trustees of the assessee-trust and that the trustees of the assessee were no longer permitted to use the trust funds as a result of the supplementary deed so we can say that in view of the supplementary deed it was no longer permissible for the trustees of the assessee to use the trust funds.

CONCLUSION

• It is essential to provide the amending clause should be included in the trust deed itself.
• If the Trust Deed doesn’t contain an amendment clause, any amendments require the approval of a Civil Court.
• The Income Tax Officer and other parties are not permitted to contest an alteration once the Civil Court has granted authorization for it.
• The initial aim of the Settlor should be followed by any Trust Deed amendments made, and they should not be negated or departed from.
• In order to create a trust that is legally binding, all of the trust’s assets must be transferred, and once that is done, neither the founder nor the settlor may revoke or invalidate the trust’s objectives.
• Specific Relief Act is the appropriate provision under which an application for Trust Deed amendment can be made. (Section 26 of the Specific Relief Act, 1963)
• It should be keep in mind that the Indian Trust Act, 1882 only provides the right to apply to court for direction in the management/administration of the Trust.( Section 34 of the Indian Trust Act, 1882).
• In a similar vein, a Civil Court cannot, by exercising its authority under Section 92 of the Civil Procedure Code, modify the purposes of the Trust Deed; instead, it can only give direction for administration of any Trust.
• The Tax Department or any other authority cannot turn down a Trust Deed alteration just because they were not made parties to it.
• Even Via the Tax Department was not a party to the change’s implementation, the Assessee Trust may rely on the Trust Deed alteration for income tax purposes in order to claim exemptions.
• The Trust Deed change issued in accordance with a Civil Court order is effective as of the date of the Civil Court’s decree and is not applicable to assessment years that occurred earlier than that date.
• Civil Court also permits Supplementary Trust Deeds. The Trustees are likewise bound by the Supplementary Trust Deed in the same way that the Original Trust Deed.

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