Facts of the Case

The respondent, IILM Foundation (formerly Ram Krishna Kulwant Rai Charitable Trust), is a charitable trust registered under Section 12A of the Income-tax Act and engaged in imparting education through various institutions. For Assessment Years 2009-10, 2010-11 and 2011-12, the trust filed returns declaring nil income and claimed exemption under Sections 11 and 12.

During assessment proceedings for AY 2009-10, the Assessing Officer noted that the trust had paid salary of ₹16,20,000 per annum to Ms. Malvika Rai, Chairperson of the trust, who was a related person under Section 13(3). The Assessing Officer held the salary to be excessive and disallowed 30% of the amount under Section 40A(2)(a), also alleging violation of Section 13(1)(c). The trust was further treated as an association of persons and its exemption was denied.

The Commissioner of Income Tax (Appeals) deleted the disallowance holding the salary to be reasonable and also allowed exemption under Sections 11 and 12, particularly noting that cancellation of registration under Section 12A had already been set aside by the ITAT. The ITAT, after considering additional evidence demonstrating the services rendered by Ms. Rai, dismissed the Revenue’s appeals. Aggrieved, the Revenue approached the Delhi High Court under Section 260A.

Issues Involved

Whether payment of salary to a related trustee automatically results in violation of Section 13(1)(c), whether reasonable remuneration paid for services rendered to a person specified under Section 13(3) disentitles a charitable trust from exemption under Sections 11 and 12, and whether the ITAT’s findings were perverse in law or on facts.

Petitioner’s Arguments

The Revenue argued that once it was admitted that salary was paid to a prohibited person under Section 13(3), the trust stood disentitled to exemption under Sections 11 and 12 in entirety, irrespective of whether the payment was reasonable. Reliance was placed on the Delhi High Court decision in Director of Income Tax (Exemption) vs. Charanjiv Charitable Trust to contend that even a single instance of benefit to a prohibited person would forfeit exemption.

Respondent’s Arguments

The assessee contended that Section 13(1)(c) read with Section 13(2)(c) permits payment of salary to persons specified under Section 13(3) provided such payment is reasonable and commensurate with services rendered. It was submitted that extensive evidence was placed on record to establish Ms. Rai’s active role, experience of over two decades in education, and her involvement in academic and administrative functions. The salary paid was reasonable and consistently accepted in earlier and subsequent years.

Court Order / Findings

The Delhi High Court examined the statutory scheme of Section 13(1)(c) and Section 13(2)(c) and held that the exemption under Sections 11 and 12 is denied only to the extent income is applied for the benefit of a prohibited person. Where salary is paid for services rendered and is not excessive or unreasonable, such payment cannot be treated as income applied for the benefit of a prohibited person.

The Court noted that it was undisputed that the salary paid to Ms. Malvika Rai was reasonable and commensurate with her qualifications, experience and services rendered. The Revenue did not contest the factual findings of the ITAT in this regard. The Court clarified that the decision in Charanjiv Charitable Trust was rendered in a different factual context and could not be read to mean that every payment to a related person, irrespective of reasonableness, results in forfeiture of exemption.

Accordingly, the Court held that there was no violation of Section 13(1)(c) and the trust was entitled to exemption under Sections 11 and 12.

Important Clarification

The High Court clarified that payment of salary or remuneration to a person specified under Section 13(3) does not automatically trigger denial of exemption. Only payments that are excessive or unreasonable having regard to services rendered fall within the mischief of Section 13(1)(c) read with Section 13(2)(c). Reasonable remuneration for genuine services does not disentitle a charitable trust from exemption.

Final Outcome

The appeals filed by the Revenue were dismissed. The questions of law were answered in favour of the assessee and against the Revenue, and the ITAT’s order allowing exemption under Sections 11 and 12 to IILM Foundation was upheld.

Link to download order https://www.mytaxexpert.co.in/uploads/1769755918_COMMISSIONEROFINCOMETAXEXEMPTIONDELHIVsIILMFOUNDATION.pdf 

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