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Payments to persons under Section 13(3) – must be ‘reasonable’ and ‘commensurate’ to services rendered; does not result in complete denial of exemptions u/s 11/ 12: Delhi HC May 14, 2025
Published in: TaxBuzz
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As per Sections 11 and 12, income of institutions/ trusts/ organization for “charitable purpose” are exempt from tax under the Act so long as the mandatory conditions under Sections 2(15)/ 12A of the IT Act are satisfied. Section 13 specifies certain prohibited instances of payments/ transactions; for e.g., Section 13(1)(c) provides that Sections 11/12 shall not exempt any income of the trust/ institution, which is applied directly or indirectly for the benefit of any person specified under Section 13(3) of the Act. Section 13(2), specifically clause (c) thereof, stipulates that income of the trust or institution shall be deemed to have been applied for the benefit of such person, if any amount is paid by way of salary, allowance, etc. by the trust/ institution to such person and the amount so paid is in excess of what may be reasonably paid for such services.
In the recent case of IILM Foundation[1], the Delhi HC has answered an important question regarding the interpretation and purport of Section 13 and its impact on the claim of exemption under Sections 11/12 of the Income Tax Act, 1961 (‘IT Act’).
Statutory Scheme:
As per Sections 11 and 12, income of institutions/ trusts/ organization for “charitable purpose” are exempt from tax under the Act so long as the mandatory conditions under Sections 2(15)/ 12A of the IT Act are satisfied. Section 13 specifies certain prohibited instances of payments/ transactions; for e.g., Section 13(1)(c) provides that Sections 11/12 shall not exempt any income of the trust/ institution, which is applied directly or indirectly for the benefit of any person specified under Section 13(3) of the Act. Section 13(2), specifically clause (c) thereof, stipulates that income of the trust or institution shall be deemed to have been applied for the benefit of such person, if any amount is paid by way of salary, allowance, etc. by the trust/ institution to such person and the amount so paid is in excess of what may be reasonably paid for such services.
Brief Facts of the case:
Judgment by Delhi HC: The High Court, negating the aforesaid contention, opined as follows:
Accordingly, HC answered the questions of law in favour of Assessee and against Revenue.
The case was represented on behalf of the Respondent-Assessee by team of Vaish Associates Advocates, comprising of Mr. Rohit Jain, Senior Partner; Mr. Aniket D. Agrawal, Associate Partner and Mr. Samarth Chaudhari, Sr. Associate.
VA Comments
The decision clarifies two major aspects – (1) Firstly, the IT Act does not make any absolute prohibition on payments by Charitable Institutions to (specified) persons, so long as such payments are reasonable and commensurate having regard to the services rendered by said persons; and (2) Secondly and more importantly, even in cases where payments have been made by the Charitable Institution to any of the (specified) persons, the same would not warrant forfeiture of entire exemption claimed under Sections 11/12 of the IT Act; exemption would only be disallowed to the extent of payments made, which are in excessive and unreasonable. Importantly, the High Court also clarified that the earlier decision in Charanjiv Charitable Trust (supra) cannot be construed to authorise complete withdrawal of exemption under Sections 11/12, in cases of violation of Section 13, and ought to be read in conjunction with the facts of that case.
On the latter aspect, section 13 was amended by the Finance Act, 2022, w.e.f. 1.04.2023 to specifically provide that exemption shall be denied to the extent of violation, thereby, clarifying the legal position from assessment year 2023-24 and onwards.
For any further information or clarification, please feel free to write to:
Mr. Rohit Jain, Senior Partner ([email protected])
Mr. Aniket D. Agrawal, Associate Partner ([email protected])
Mr. Samarth Chaudhari, Senior Associate ([email protected])
……
[1] 2025:DHC:2745-DB
[2] DIT(E) vs. Charanjiv Charitable Trust 2014 SCC OnLine 7776
[3] As identified under Section 13(3) of the Act
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