Public charitable trust ("Public Trust") is created to undertake charitable activities for public good and support and manage the Public Trust for charitable, religious or educational purposes. Given that the intended purpose of a Public Trust is charitable in nature and is entitled to tax exemption under Section 11 of the Income Tax, 1961 ("IT Act"), it is essential to regulate the management and administration of the Public Trust and its properties to promote its main objective and to ensure accountability. This article covers the legal principles and procedure for regulation and sale of Public Trust properties in India.
Procedure for the sale of Public Trust property
The Public Trust and its assets are governed by the provisions of its trust deed ("Trust Deed") which also details the manner and procedure for the sale of Public Trust property and the trustees are obligated to comply with such provisions for the sale of Public Trust property. In addition, there are some states which have enacted state legislations for regulation and governance of charitable institutions and sale of trust properties is regulated by such enactments. For instance, the Madhya Pradesh Public Trust Act, 1951 1("MP Act") requires that any sale, mortgage, exchange or gift of immovable properties or leases exceeding seven years for agricultural land or three years for non-agricultural land or buildings belonging to Public Trust will be subject to seeking prior approval from the office of the Registrar of Public Trust. The Registrar is required to assess the sale transaction and grant his approval provided such a sale is not prejudicial to the interests of the Public Trust and the sale proceeds are utilised for the benefit of the Public Trust.
Similarly, the Maharashtra Public Trust Act, 19502 ("Maharashtra Act") provides that no sale, exchange, or gift of immovable property, nor any lease exceeding ten years for agricultural land or three years for non-agricultural land or buildings, belonging to a charitable trust, will be valid without the prior approval of the Charity Commissioner ("Charity Commissioner"). Such sanction may be granted subject to conditions that the Charity Commissioner deems appropriate, considering the trust's interest, benefit, or protection. The Charity Commissioner is also empowered to modify any conditions imposed before the completion of the transaction, especially in cases where a time-limit for the execution of conveyance is involved.
It is also advisable to assess whether the tax exemption registration sought by the Public Trust under section 12AA of the IT Act imposes any conditions related to seeking prior approval from the income tax commissioner for alienation of the trust property. Further, there are several relevant judicial precedents which require that the sale of Public Trust property should be conducted through public auctions unless exceptional circumstances justify private sale.
Judicial Precedents
In R. Venugopala Naidu and Ors. Vs. Venkatarayulu Naidu Charities and Ors3 ("Venugopala Case"), the Hon'ble Supreme Court of India emphasized that the sale of Public Trust property should be conducted through public auction as sale conducted through private negotiation could raise suspicions and should therefore be avoided. As the sale of Public Trust property should be fair and transparent, private sale should be adopted only under special circumstances with justifiable reasons only.
Similarly, the Supreme Court of India in Cyrus Rustom Patel vs. The Charity Commissioner Maharashtra, State & Ors ("Cyrus Case")4 observed that the properties of a public trust shall not be sold through private negotiation unless in exceptional circumstances. The Court clarified that in the absence of urgent or compelling reasons selling trust property in a manner that undermines the trust's purpose would be detrimental to its objectives, particularly when the property holds cultural or religious significance.
In Shree Brahmanath Devasthan vs. The Joint Charity Commissioner5, the Bombay High Court examined a writ petition challenging the sale of trust property under the Maharashtra Act. The Court emphasized that such sales must prioritize the trust's interest, benefit, and protection while aligning with its objectives. In case of sale of such property trustees should act as fiduciaries, manage trust property with care and transparency, and ensure the fair market value is achieved through public auctions.
In Ramchandra Dev Peth v. Joint Charity Commissioner, Kolhapur ("Ramchandra Case")6, the Bombay High Court observed that (i) Section 36(1)(a) mandates that the Charity Commissioner ensure that the sale of trust property is in the interest, benefit, and protection of the trust, considering factors such as market value and beneficial interest (ii) the rejection of the application must be based on substantial evidence. Oral statements without supporting material do not suffice to establish higher market valuation (iii) a bid exceeding the ready reckoner value, obtained through a transparent process, is a valid basis for granting permission if it aligns with the trust's objectives.
Conclusion:
In the absence of state specific legislations governing charitable institutions, the sale of Public Trust property should be conducted as per the provisions of Trust Deed and the trustees would be obligated to manage and sell the property only for the benefit, interest, and promotion of the charitable objectives of the Public Trust. While the Trust Deed may permit sale of the properties through private contract, the aforesaid judicial precedents emphasize that private sales should only occur in exceptional circumstances, with public auctions being preferred to ensure transparency and to establish the fair market value of the property. Courts have repeatedly encouraged the public auction route for sale of Public Trust property to avoid any possibility of impropriety and to ensure that the best possible price is obtained for the trust's assets. Once the sale is concluded, the necessary legal documents, such as conveyances and transfers, must be executed in tandem with the Trust Deed and in the best interest of the Public Trust.
Footnotes
1 Section 14 of the MP Act
2 Section 36(1) of the Maharashtra Act
3 AIR 1990 SC 444
4 Cyrus Rustom Patel vs. The Charity Commissioner Maharashtra, State & Ors
5 2024 SCC OnLine Bom 800
6 (2022) SCC OnLine Bom 1484
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