S.13 Income Tax Act | Charitable Trust's Status Not Affected For Making Reasonable Payments On Services Rendered By Related Party: Delhi HC

Ordinarily, Charitable Trusts are not allowed to make payments for the benefit of 'prohibited parties'.

Section 13 states that exemptions to Charitable Trust under Section 11/12 of the Act would not be available to the extent that the said income is applied for the benefit of (prohibited) persons described under Section 13(3).

The division bench of Justices Vibhu Bakhru and Tejas Karia however ruled that if such payment is reasonable, in exchange for the services offered by such a prohibited person, the exemption can be claimed. It observed,

“The opening words of the said clause must be read in conjunction with the last words of the said clause – “If any amount is paid by way of salary, allowance or otherwise …. in excess of what may be reasonably paid for such services”. Thus, if the amount paid for services is such as is reasonably payable for such service, the same cannot be construed as applied for the benefit of a prohibited person notwithstanding that it is paid to such a person.”

In the case at hand, the Charitable status of Respondent-assessee IILM Foundation was cancelled by the Director of Income Tax (Exemptions), citing payments made by the former to Malvika Rai, who was the Chairperson of the Trust.

As ITAT set aside the Revenue's order cancelling exemption, it preferred an appeal before the High Court.

Revenue submitted that the exemption under Section 11/12 was unavailable to the Assessee as it was admitted that it had paid salary to a related party. It contended that even if there is one instance where the income of the property is directly or indirectly used to the benefit of a prohibited person, the trust would lose its exemption.

At the outset, the High Court noted it is an admitted position that the payment made to Malvika Rai was reasonable.

It then proceeded to consider Section 13(2)(c) of the Act which prescribes that if the amount paid by way of a salary or allowance to a person specified under Section 13(3) is for any service rendered by such person and the amount paid is reasonable, the same cannot be deemed to have been applied for the benefit of the said person.

“Such payment would not fall within the exception of clause (c) of subsection (1) of Section 13 of the Act,” said the Court and dismissed Revenue's appeal.

Appearance: For the Appellant : Mr Abhishek Maratha, Mr Apoorv Agarwal, Mr Parth Samwal, Ms Nupur Sharma, Mr Gaurav Singh, Mr. Bhanukaran Singh Jodha, Ms Muskaan Goel and Mr Himanshu Gaur, Advocates. For the Respondent : Mr Rohit Jain, Mr Aniket D. Agrawal, Mr Samarth Chaudhari, Mr V.K. Anand and Ms Ankita, Advocates

Case title: Commissioner Of Income Tax Exemption Delhi v. IILM Foundation

Citation: 2025 LiveLaw (Del) 467

Case no.: ITA 179/2023 and batch

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