The right of all citizens to form associations or unions is guaranteed by the Constitution of India, Article 19(1)(c).
There are three pertinent legal forms of not-for-profit entities under Indian law: trusts, societies, and section 25 companies (as well as cooperatives and trade unions, which, as mutual benefit organizations, are not discussed in this note). Many state and central government agencies have regulatory authority over these not-for-profit entities. For example, all not-for-profit organizations are required to file annual tax returns and audited account statements with various agencies. At the state level, these agencies include the Charity Commissioner (for trusts), the Registrar of Societies (referred to in some states by different titles, including the Registrar of Joint Stock Companies), and the Registrar of Companies (for section 25 companies). At the national or federal level, the regulatory bodies include the income tax department and Ministry of Home Affairs (only for not-for-profit organizations receiving foreign contributions).
Public charitable trusts, as distinguished from private trusts, are designed to benefit members of an uncertain and fluctuating class. In determining whether a trust is public or private, the key question is whether the class to be benefited constitutes a substantial segment of the public. There is no central law governing public charitable trusts, although most states have "Public Trusts Acts." Typically, a public charitable trust must register with the office of the Charity Commissioner having jurisdiction over the trust (generally the Charity Commissioner of the state in which the trustees register the trust) in order to be eligible to apply for tax-exemptionIn general, trusts may register for one or more of the following purposes:
Relief of Poverty or Distress;
Provision for facilities for recreation or other leisure -time occupation (including assistance for such provision), if the facilities are provided in the interest of social welfare and public benefit; and
The advancement of any other object of general public utility, excluding purposes which relate exclusively to religious teaching or worship.
At least two trustees are required to register a public charitable trust. In general, Indian citizens serve as trustees, although there is no prohibition against non-natural legal persons or foreigners serving in this capacity.
Legal title of the property of a public charitable trust vests in the trustees. Trustees of a public charitable trust may not, however, in any way use trust property or their position for their own interest or private advantage. Trustees may not enter into agreements in which they may have a personal interest that conflicts or may possibly conflict with the interests of the beneficiaries of the trust (whose interests the trustees are bound to protect). Trustees may not delegate any of their duties, functions or powers to a co-trustee or any other person, except that trustees may delegate ministerial acts. In essence, trustees may not delegate authority with respect to duties requiring the exercise of discretion.
Trustees of religious or charitable trusts are charged with discharging their duties with the degree of care that an ordinarily prudent person would exercise with respect to his personal property. This is a slight variant on the duty of care applicable in many U.S. jurisdictions, which requires directors and officers to act with the degree of diligence, care and skill that ordinarily prudent persons would exercise under similar circumstances in like positions (as opposed to in the management of their personal affairs). Public charitable trusts are highly regulated. For instance, in many states, purchases or sales of property by a trust must be approved in advance by the Charity Commissioner.
Indian public charitable trusts are generally irrevocable. If a trust becomes inactive due to the negligence of its trustees, the Charity Commissioner may take steps to revive the trust. Furthermore, if it becomes too difficult to carry out the objects of a trust, the doctrine of cy pres, meaning "as near as possible," may be applied to change the objects of the trust. Thus, it appears that grantors can feel fairly secure that the charitable nature of a trust will be honored, even if the original, specific purposes of the trust cannot be carried out.
Societies are governed by the Societies Registration Act 1860, which is an all-India Act. Many states, however, have variants on the Act.
Societies are similar in character to trusts, although there a few essential differences. While only two individuals are required to form a trust, a minimum of seven individuals are required to form a society. The applicants must register the society with the state Registrar of Societies having jurisdiction in order to be eligible to apply for tax-exempt status. A registration application includes the society's memorandum of association and rules and regulations. In general, Indian citizens serve as members of the managing committee or governing council of societies, although there is no prohibition in the Societies Registration Act against non-natural legal persons or foreigners serving in this capacity.
According to section 20 of the Act, the types of societies that may be registered under the Act include, but are not limited to, the following:
Societies established for the promotion of science, literature, or the fine arts,
For education; and
Public art museums and galleries, and certain other types of museums.
The governance of societies also differs from that of trusts; societies are usually managed by a governing council or managing committee, whereas trusts are governed by their trustees.
Individuals or institutions or both may be members of a society. The general body of members delegates the management of day-to-day affairs to the managing committee, which is usually elected by the membership. Members of the general body of the society have voting rights and can demand the submission of accounts and the annual report of the society for inspection. Members of the managing committee may hold office for such period of time as may be specified under the bylaws of the society.
Societies, unlike trusts, must file annually, with the Register of Societies, a list of the names, addresses and occupations of their managing committee members. Furthermore, in a society, all property is held in the name of the society, whereas all of the property of a trust legally vests in the trustees.
Unlike trusts, societies may be dissolved. Dissolution must be approved by at least three-fifths of the society's members. Upon dissolution, and after settlement of all debts and liabilities, the funds and property of the society may not be distributed among the members of the society. Rather, the remaining funds and property must be given or transferred to some other society, preferably one with similar objects as the dissolved entity.
The Indian Companies Act, 1956, which principally governs for-profit entities, permits certain companies to obtain not-for-profit status as "section 25 companies." A section 25 company may be formed for "promoting commerce, art, science, religion, charity or any other useful object." A section 25 company must apply its profits, if any, or other income to the promotion of its objects, and may not pay a dividend to its members. At least three individuals are required to form a section 25 company. The founders or promoters of a section 25 company must submit application materials to the Regional Director of the Company Law Board. The application must include copies of the memorandum and articles of association of the proposed company, as well as a number of other documents, including a statement of assets and a brief description of the work proposed to be done upon registration.
The internal governance of a section 25 company is similar to that of a society. It generally has members and is governed by directors or a managing committee or a governing council elected by its members.
Like a society (but unlike a trust), a section 25 company may be dissolved. Upon dissolution and after settlement of all debts and liabilities, the funds and property of the company may not be distributed among the members of the company. Rather, the remaining funds and property must be given or transferred to some other section 25 company, preferably one having similar objects as the dissolved entity.
Public Benefit Status
To be eligible for tax-exemption under the Income Tax Act, 1961, a not-for-profit entity must be organized for religious or charitable purposes. Charitable purposes include "relief of the poor, education, medical relief and the advancement of any other object of general public utility."
Public charitable trusts, by definition, must be created for the benefit of the public. Societies likewise may be registered for charitable purposes. Section 25 companies are formed for the limited purposes of "promoting commerce, art, science, religion, charity or any other useful object."