This is not a completely new concept when the Indian trust act was brought into
action lots of businesses operated as sole proprietorship's taking on debt and
lending money to others and having debtors and creditors et cetera. Very few
people at that time would incorporate companies to do business; in such
situations the business did not have perpetual succession like in the case of
The management and ownership of a sole proprietorship vests in the same person,
not the case in a company. More often than nought the proprietor would pass away
without a capable successor to manage the business.
Firms requiring a high level of skill and technical processes like sugar
industries or engineering concerns need to be assured of continuity. Unlike a
basic industry like a rice mill where the rice is polished, a partnership or a
proprietorship fails to serve the purpose, as while the ownership can be
transferred in the case of death of the concerned person, the management is also
thrust upon the same person. That is to say that the ownership and management of
an enterprise would necessarily go hand in hand in the case of a partnership or
In events like these the sole proprietor would leave his business in a trust and
appoint suitable trustees to manage the affairs of such a business for the
benefit of his family. In the trust act itself we see many cases where the
settlor creates a trust for discharging his debts. This would happen as sole
proprietorships accumulate debt or credit supplies for the day to day
operations, leading to the need of a capable person to discharge such debt.
It is important to note that only businesses that satisfy the conditions laid in
section 4 of the Indian trust act of 1882 maybe put into trust i.e. illegal
enterprises cannot be put into trust for the benefit of one's family example a
prostitution brothel or smuggling racket or Dacoity enterprises etc.
When the act was made the beneficiary was envisioned to be a natural person,
someone in the relation of the settler or someone the settlor cared for. And
generally the settlor would be dead when such a trust was made. Or would make
such a trust by his testament.
Today even a few companies have use this model of using a trust as a subsidiary
or a separate business entity under their holding company; all this is possible
due to section 7 of the Indian trust act which says a trust may be created by
every person competent to contract this includes: a joint stock company as per
section 11 of the act contract act. A very good example of this is the media
trust called 'Network 18' under Reliance industries Ltd.
Why should business be done in a Trust?
A major reason to form a trust instead of a subsidiary company would be to avoid
the corporate scrutiny imposed by the Ministry of corporate affairs and also the
mounting corporate fees that have to be paid in the ROC's office to keep the
company and its directors from being struck off the books and being imposed with
heavy fines recently in 2016 a large number of companies was struck off due to
non-filing of corporate returns using trust can avoid this scrutiny.
When you do business under a private trust you are not required to disclose the
sales or the number of employees or, even the registered office for that matter
to the public such information may be kept confidential
One of the greatest advantages is that the top management doesn't have to be
disclosed, like in a company where the directors of the company are known to the
public. Trusts enable such information to be kept confidential and under wraps.
Like forming a subsidiary company a trust may also offer limited liability to
the holding company as the beneficiary or the holding company in this case is
not liable for the actions of the trustee as stated by section 11 to section 29
of the Indian trust act this provides great relief to the holding company
moreover additional liabilities may be added in the trust deed completely
exempting the beneficiary or the holding company from any whatsoever.
One of the biggest benefits is that the profit of the trust can directly be
transferred to the holding company and be taxed at the slab rate rather than
having taxation twice and also there is no question of any dividend distribution
tax of course now dividend distribution tax has been abolished and it is also
important to note that the income tax act provides relief to companies having
hundred percent subsidiaries by allowing 100% deduction of dividend distributed
my hundred percent subsidiaries but it is still important to note.
That if such incidents of tax is restored the trust will provide relief by
allowing the balance profit of the trust to directly be transferred to the
balance sheet of the holding company or beneficiary
A very important feature is that when you transfer immovable property from the
trust to its beneficiaries there are no incidents of stamp duty. This is unlike
the case of 100% subsidiary company to the holding company; here the stamp duty
is payable however in the case of mergers and amalgamations a court order can be
filed with the registrar to reduce the burden of stamp duty. However this is a
length procedure and most ineffective if the company in question was
incorporated for the purpose of investment.
Who should look at creating trust instead of a subsidiary company?
A company with 100% subsidiary who is not looking to sell the subsidiary or any
part of it in the near future should certainly look into forming a trust instead
of a subsidiary company as the profit can directly be transferred to the holding
company and liability be limited and restricted to the trustees of the trust.
A small company looking for the benefits of a subsidiary company but without
adequate funds to create such a subsidiary company or a small company which
needs to diversify itself into various verticals of business but does not wish
to have the corporate compliance or disclose a lot of information to the public.
If a company wishes to hide or keep a part of its business or assets or
liabilities under wraps and does not wish to disclose such items to the public a
business trust is the ideal method to deal with this problem
To avoid dividend distribution tax or other instances where taxation is charged
to subsidiary companies
A different GST registration may be provided giving small companies the
flexibility to try out new products and services in the market at a discounted
rate and get a flavour of the market meanwhile providing a low incidence cost to
Company secretaries, Chartered Accountants and lawyers should look into the
possibility of using the Indian Trust act to create SPVs for small businesses to
better facilitate experimental technology and services while providing limited
liability to the parent entity, which is sometimes not available in Partnerships
or business divisions within a company. Separation of ownership and control
isn't contemplated in the Partnership act, however this can be achieved through
Award Winning Article Is Written By: Mr.Madhavraje Ramraje Patwardhan
Authentication No: NV43014570329-16-1122