My trust paid an advance to a company in which the trustees are interested, under an agreement to buy land, and the deal was later cancelled. Is that a s.13(1)(c) violation even though no money went out in the year in question?
Yes, on these facts. The Delhi High Court held that where trust funds remain with a s.13(3) person without interest or security, that is a direct use of the funds for the benefit of a prohibited person, and s.13(2)(a) makes clear that it is enough that the money continues to be lent during the previous year — no fresh advance in that year is needed. The agreements to sell were treated as a device to take the payments out of the word 'lent', and exemption under s.11 was denied for both years.
Decided by the High Court (S. Ravindra Bhat J and R. V. Easwar J) on 2014-03-18, reported as ITA Nos. 321/2013, 322/2013 and 323/2013 (Delhi High Court). It bears on section 11, section 13, section 13(1)(c), section 13(2), section 13(2)(a), section 13(3), section 13(3)(e), section 2(15), section 12A, section 68, section 2(47)(v), section 131 of the Income Tax Act 1961, in Charitable Trusts & Exemption and Capital Gains Exemptions matters.
This is the leading Revenue-side authority on advances to related parties dressed as property transactions, and it is the answer to the argument that a running account or an agreement to purchase takes the case outside s.13. The Court's markers of a device are worth memorising because assessing officers use them: 95 per cent of the price paid without insisting on conveyance, no interest, no security, no damages clause, no minuted trustees' decision explaining the cancellation, the cancellation entry passed in the books almost a year late and on the last day of the accounting year, and further payments made after the agreement was cancelled. Two large caveats before relying on it or fearing it. First, the consequence stated at paragraph 22 — one instance of misuse and the trust loses exemption on its entire income — is the pre-amendment position; the Finance Act 2022 confined the denial to the offending income from AY 2023-24 (see the entry on Andhra Pradesh State Civil Supplies in this library). Second, the depreciation holding at paragraph 30 has been overtaken by s.11(6) from AY 2015-16. The 13(1)(c) analysis itself is what survives. Note that the Court took the opposite view on the advance to Charanjiv Educational Society, where the money went to the Chhattisgarh government for a private university and came back after the Supreme Court's ruling — the difference is the documented, verifiable purpose.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee, a charitable trust registered under s.12A on 28 May 1976, entered into agreements dated 18 and 24 March 2004 with APIL — a person falling within s.13(3)(e) — to purchase land at Palam Vihar, and paid Rs.8,60,16,000, about 95 per cent of the price, in FY 2003-04, treating it as application of income for charitable purposes in that year. In a letter dated 26 November 2008 the trust told the Assessing Officer that possession had not been taken; in a later letter dated 18 December 2008 it said possession had been handed over under clauses 16 and 20 of the agreements, which it had earlier overlooked, and enclosed its letter of 31 March 2005 cancelling the deal and APIL's acceptance of 21 April 2005. Summoned under s.131, APIL said it had shown no income from the transaction in its AY 2004-05 return, from which the officer concluded no possession had passed. The money remained with APIL through FY 2004-05 with no progress; the cancellation entry was passed in the trust's books only on 31 March 2006; and two further cheques of Rs.80 lakhs and Rs.75 lakhs were given to APIL on 29 November 2005 and 13 December 2005. The refund came in the year relevant to AY 2006-07. Separately the trust advanced money to Charanjiv Educational Society, which deposited it with the Chhattisgarh government to establish a private university; the money was returned after the Supreme Court held that entities established outside Chhattisgarh could not open private universities there. The Assessing Officer denied exemption for AY 2006-07 and AY 2007-08 under s.13(1)(c)(ii) read with s.13(2) and s.13(3)(e), and disallowed depreciation on assets whose cost had already been allowed as application. The CIT (Appeals) and the Tribunal decided both s.13 issues for the trust and allowed depreciation. The Revenue appealed.
In advancing Rs.8,60,16,000 to APIL the trust committed a violation of s.13(1)(c)(ii) read with s.13(2) and s.13(3), and was accordingly not eligible for exemption under s.11 for both years (paragraph 27), the Tribunal's findings on that aspect being set aside as superficial and contrary to the normal course of human conduct and probabilities (paragraphs 24 and 26). The Tribunal was not right in holding the trust entitled to exemption under s.11 for AY 2007-08 either (paragraph 32). On the advance to Charanjiv Educational Society the Tribunal was upheld — no violation (paragraph 28). The Tribunal was not justified in directing allowance of depreciation on assets whose cost had already been allowed as application of income (paragraph 30). The s.68 additions deleted by the Tribunal were not disturbed, the findings not being perverse (paragraphs 29 and 32). The appeals of the Revenue were partly allowed (paragraph 33).
Section 13(1)(c)(ii) denies exemption where any part of the income or property of the trust is during the previous year used or applied directly or indirectly for the benefit of a s.13(3) person, and s.13(2) sets out illustrative instances, without prejudice to the generality of s.13(1)(c), in which income or property is deemed to have been so used; on the then law, one instance was enough to lose the exemption on the entire income (paragraphs 21 and 22). These provisions must be applied stringently, having regard to their object of preventing misuse of the exemption (paragraph 24). A trust serious about its objects would not part with 95 per cent of the price without insisting on conveyance within a reasonable time or at least stipulating interest, compensation or damages; the trust took contradictory positions on possession; no minutes recorded the decision to cancel; the cancellation entry was passed almost a year later on the last day of the accounting year; and further sums of Rs.80 lakhs and Rs.75 lakhs were advanced after the cancellation, without interest or security (paragraph 24). The argument that this was a running account was rejected because s.13(1)(c)(ii) read with s.13(2) draws no distinction between a running account and a pure advance, and clause (a) of s.13(2) covers income or property that continues to remain lent without security or interest for any period during the previous year, so no advance in the relevant year is required (paragraph 25). Had the money simply been given to APIL without agreements there would have been no defence; the documentation appeared to have been conceived as a device to make it appear that the money was not lent but given to acquire land, which explains the change of stand about possession, and possession was never established by evidence (paragraph 25). The Tribunal had been led by the documentation, had looked at the facts component by component instead of cumulatively, and had ignored the probabilities (paragraph 26). By contrast, the advance to Charanjiv Educational Society was supported by documentary evidence of deposit with the Chhattisgarh government for a private university and of return of the money once the Supreme Court ruling made the project impossible (paragraph 28). On depreciation, allowing it on assets whose cost had already been allowed as application would be a double deduction on the principle of Escorts Ltd. v Union of India; the Tribunal had relied on DIT v Vishwa Jagrati Mission without keeping in view the CIT (Appeals)'s distinction between assets whose cost had been allowed as application and assets whose cost had not (paragraph 30).
When funds of assessee trust are lying with APIL - even though they were not advanced in the relevant accounting year - and no interest or security is taken, it is a case of direct use of the funds for the benefit of a prohibited person.
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Handle my notice → Ask a CA on WhatsAppYes, on these facts. The Delhi High Court held that where trust funds remain with a s.13(3) person without interest or security, that is a direct use of the funds for the benefit of a prohibited person, and s.13(2)(a) makes clear that it is enough that the money continues to be lent during the previous year — no fresh advance in that year is needed. The agreements to sell were treated as a device to take the payments out of the word 'lent', and exemption under s.11 was denied for both years. This was decided by the High Court (S. Ravindra Bhat J and R. V. Easwar J) and bears on section 11, section 13, section 13(1)(c), section 13(2), section 13(2)(a), section 13(3), section 13(3)(e), section 2(15), section 12A, section 68, section 2(47)(v), section 131 of the Income Tax Act 1961. It is reported as ITA Nos. 321/2013, 322/2013 and 323/2013 (Delhi High Court). This is the leading Revenue-side authority on advances to related parties dressed as property transactions, and it is the answer to the argument that a running account or an agreement to purchase takes the case outside s.13. The Court's markers of a device are worth memorising because assessing officers use them: 95 per cent of the price paid without insisting on conveyance, no interest, no security, no damages clause, no minuted trustees' decision explaining the cancellation, the cancellation entry passed in the books almost a year late and on the last day of the accounting year, and further payments made after the agreement was cancelled. Two large caveats before relying on it or fearing it. First, the consequence stated at paragraph 22 — one instance of misuse and the trust loses exemption on its entire income — is the pre-amendment position; the Finance Act 2022 confined the denial to the offending income from AY 2023-24 (see the entry on Andhra Pradesh State Civil Supplies in this library). Second, the depreciation holding at paragraph 30 has been overtaken by s.11(6) from AY 2015-16. The 13(1)(c) analysis itself is what survives. Note that the Court took the opposite view on the advance to Charanjiv Educational Society, where the money went to the Chhattisgarh government for a private university and came back after the Supreme Court's ruling — the difference is the documented, verifiable purpose. If it applies to you, the first step is this: Test any payment to a s.13(3) person against s.13(2)(a) first: if trust money remains with that person during the year without adequate interest and adequate security, the deeming clause bites regardless of when it was advanced.
The assessee, a charitable trust registered under s.12A on 28 May 1976, entered into agreements dated 18 and 24 March 2004 with APIL — a person falling within s.13(3)(e) — to purchase land at Palam Vihar, and paid Rs.8,60,16,000, about 95 per cent of the price, in FY 2003-04, treating it as application of income for charitable purposes in that year. In a letter dated 26 November 2008 the trust told the Assessing Officer that possession had not been taken; in a later letter dated 18 December 2008 it said possession had been handed over under clauses 16 and 20 of the agreements, which it had earlier overlooked, and enclosed its letter of 31 March 2005 cancelling the deal and APIL's acceptance of 21 April 2005. Summoned under s.131, APIL said it had shown no income from the transaction in its AY 2004-05 return, from which the officer concluded no possession had passed. The money remained with APIL through FY 2004-05 with no progress; the cancellation entry was passed in the trust's books only on 31 March 2006; and two further cheques of Rs.80 lakhs and Rs.75 lakhs were given to APIL on 29 November 2005 and 13 December 2005. The refund came in the year relevant to AY 2006-07. Separately the trust advanced money to Charanjiv Educational Society, which deposited it with the Chhattisgarh government to establish a private university; the money was returned after the Supreme Court held that entities established outside Chhattisgarh could not open private universities there. The Assessing Officer denied exemption for AY 2006-07 and AY 2007-08 under s.13(1)(c)(ii) read with s.13(2) and s.13(3)(e), and disallowed depreciation on assets whose cost had already been allowed as application. The CIT (Appeals) and the Tribunal decided both s.13 issues for the trust and allowed depreciation. The Revenue appealed. The matter was decided on 2014-03-18 by the High Court (S. Ravindra Bhat J and R. V. Easwar J). On those facts the High Court held as follows. In advancing Rs.8,60,16,000 to APIL the trust committed a violation of s.13(1)(c)(ii) read with s.13(2) and s.13(3), and was accordingly not eligible for exemption under s.11 for both years (paragraph 27), the Tribunal's findings on that aspect being set aside as superficial and contrary to the normal course of human conduct and probabilities (paragraphs 24 and 26). The Tribunal was not right in holding the trust entitled to exemption under s.11 for AY 2007-08 either (paragraph 32). On the advance to Charanjiv Educational Society the Tribunal was upheld — no violation (paragraph 28). The Tribunal was not justified in directing allowance of depreciation on assets whose cost had already been allowed as application of income (paragraph 30). The s.68 additions deleted by the Tribunal were not disturbed, the findings not being perverse (paragraphs 29 and 32). The appeals of the Revenue were partly allowed (paragraph 33).
Section 13(1)(c)(ii) denies exemption where any part of the income or property of the trust is during the previous year used or applied directly or indirectly for the benefit of a s.13(3) person, and s.13(2) sets out illustrative instances, without prejudice to the generality of s.13(1)(c), in which income or property is deemed to have been so used; on the then law, one instance was enough to lose the exemption on the entire income (paragraphs 21 and 22). These provisions must be applied stringently, having regard to their object of preventing misuse of the exemption (paragraph 24). A trust serious about its objects would not part with 95 per cent of the price without insisting on conveyance within a reasonable time or at least stipulating interest, compensation or damages; the trust took contradictory positions on possession; no minutes recorded the decision to cancel; the cancellation entry was passed almost a year later on the last day of the accounting year; and further sums of Rs.80 lakhs and Rs.75 lakhs were advanced after the cancellation, without interest or security (paragraph 24). The argument that this was a running account was rejected because s.13(1)(c)(ii) read with s.13(2) draws no distinction between a running account and a pure advance, and clause (a) of s.13(2) covers income or property that continues to remain lent without security or interest for any period during the previous year, so no advance in the relevant year is required (paragraph 25). Had the money simply been given to APIL without agreements there would have been no defence; the documentation appeared to have been conceived as a device to make it appear that the money was not lent but given to acquire land, which explains the change of stand about possession, and possession was never established by evidence (paragraph 25). The Tribunal had been led by the documentation, had looked at the facts component by component instead of cumulatively, and had ignored the probabilities (paragraph 26). By contrast, the advance to Charanjiv Educational Society was supported by documentary evidence of deposit with the Chhattisgarh government for a private university and of return of the money once the Supreme Court ruling made the project impossible (paragraph 28). On depreciation, allowing it on assets whose cost had already been allowed as application would be a double deduction on the principle of Escorts Ltd. v Union of India; the Tribunal had relied on DIT v Vishwa Jagrati Mission without keeping in view the CIT (Appeals)'s distinction between assets whose cost had been allowed as application and assets whose cost had not (paragraph 30). In the words reproduced by the source cited on this page: "When funds of assessee trust are lying with APIL - even though they were not advanced in the relevant accounting year - and no interest or security is taken, it is a case of direct use of the funds for the benefit of a prohibited person." The decision followed or applied Kanahya Lal Punj Charitable Trust v. Director of Income Tax (Exemptions) (2008) 297 ITR 66 (Delhi) — relied on by the Assessing Officer; Escorts Ltd. v. Union of India (SC) — applied on double deduction; DIT v. Vishwa Jagrati Mission (Delhi) — distinguished.
It was decided by the High Court on 2014-03-18 and is reported as ITA Nos. 321/2013, 322/2013 and 323/2013 (Delhi High Court). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 11, section 13, section 13(1)(c), section 13(2), section 13(2)(a), section 13(3), section 13(3)(e), section 2(15), section 12A, section 68, section 2(47)(v), section 131, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. In advancing Rs.8,60,16,000 to APIL the trust committed a violation of s.13(1)(c)(ii) read with s.13(2) and s.13(3), and was accordingly not eligible for exemption under s.11 for both years (paragraph 27), the Tribunal's findings on that aspect being set aside as superficial and contrary to the normal course of human conduct and probabilities (paragraphs 24 and 26). The Tribunal was not right in holding the trust entitled to exemption under s.11 for AY 2007-08 either (paragraph 32). On the advance to Charanjiv Educational Society the Tribunal was upheld — no violation (paragraph 28). The Tribunal was not justified in directing allowance of depreciation on assets whose cost had already been allowed as application of income (paragraph 30). The s.68 additions deleted by the Tribunal were not disturbed, the findings not being perverse (paragraphs 29 and 32). The appeals of the Revenue were partly allowed (paragraph 33). It arises in Charitable Trusts & Exemption and Capital Gains Exemptions matters, on section 11, section 13, section 13(1)(c), section 13(2), section 13(2)(a), section 13(3), section 13(3)(e), section 2(15), section 12A, section 68, section 2(47)(v), section 131 of the Income Tax Act 1961, and was decided by S. Ravindra Bhat J and R. V. Easwar J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If the payment is under an agreement to purchase, put the commercial protections in the agreement itself — a conveyance deadline, interest or damages on default, and security — and be able to show them. Minute the trustees' decision to enter into and to cancel any such transaction, with reasons; the absence of minutes and a vague plea of 'various factors' was held against the trust. Pass the accounting entry for a cancellation when the cancellation happens, not at the year end, and make no further payments to the counterparty afterwards. Be consistent in correspondence with the Assessing Officer about possession and the state of the transaction; contradictory letters were a substantial part of what defeated this trust. For AY 2023-24 and later, quantify the offending income separately — the whole-income forfeiture stated in this judgment no longer follows.
Superseded by amendment. The finding on what amounts to a benefit to a s.13(3) person — funds remaining with a prohibited person without adequate interest or security, and the treatment of an agreement to sell as a device — is unaffected and remains usable. Two of the judgment's other propositions are not. First, the statement at paragraph 22 that one instance of misuse costs the trust its exemption on the entire income is the pre-amendment position; from assessment year 2023-24 the loss of exemption is confined to the offending income, and this library carries Andhra Pradesh State Civil Supplies Corporation Ltd v ITO on that point. A practitioner meeting an order that denies exemption on the whole income for a later year should take that point first, because it is often the difference between a manageable demand and a ruinous one. Second, the depreciation holding at paragraph 30, which applied the double-deduction principle of Escorts Ltd v Union of India to assets whose cost had already been allowed as application, has been overtaken by s.11(6), inserted with effect from assessment year 2015-16; this library carries CIT v Rajasthan and Gujarati Charitable Foundation on the position for earlier years. No appeal to the Supreme Court against this judgment, and no later High Court treatment of it, is recorded here, so the entry should not be read as asserting that it has been approved above. What survives is the s.13(1)(c)(ii) analysis read with s.13(2)(a) and s.13(3)(e), and that analysis is fact-heavy: the Court set aside the Tribunal's findings as superficial and as contrary to the normal course of human conduct and probabilities, which means the case is authority for how the facts are to be looked at cumulatively rather than for any rule that an advance to a related party is always a violation. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment runs to thirty-three numbered paragraphs, and this entry is built on paragraphs 20 to 33. Paragraphs 1 to 19 are not covered, so everything stated here comes from the later stretch, and a reader who needs the Court's account of the earlier proceedings must go to the judgment. One figure is printed inconsistently: the advance to APIL appears as Rs.86,01,600 at paragraph 23 and as Rs.8,60,16,000 later in the same paragraph and again at paragraphs 24 and 27. The larger figure is the one the reasoning proceeds on and the one used here. Paragraph 31 ends mid-sentence in the report — 'Since we have reversed the order of the Tribunal on the question of exemption under Section 11 for the assessment year 2006-07.' — and nothing is attributed to what would have followed. Paragraph 20 reproduces the questions of law in a mixture of blockquote and code formatting in the electronic copy; that is a rendering artefact and not part of the judgment. On substance, three things are worth flagging for anyone using the entry. The operative statutory step is s.13(2)(a): income or property that continues to remain lent to a s.13(3) person without adequate security or adequate interest for any period during the previous year is deemed to have been used for his benefit, so the Revenue does not have to show a fresh advance in the year under assessment, and the running-account answer fails for the same reason. The Court's markers of a device are the useful part of paragraph 24 and they are what an officer will copy: ninety-five per cent of the price paid without insisting on conveyance, no interest, no security, no damages clause, no minuted trustees' decision explaining the cancellation, a cancellation entry passed almost a year late and on the last day of the accounting year, and further payments of Rs.80 lakhs and Rs.75 lakhs made after the agreement was cancelled. Against that, possession under clauses 16 and 20 of the agreements was never established by evidence, and the s.2(47)(v) argument that possession had passed fell with it, APIL having told the officer on summons under s.131 that it had returned no income from the transaction. Finally, the contrast with the advance to Charanjiv Educational Society at paragraph 28 is the whole lesson: that money went to the Chhattisgarh government for a private university and came back when the project became impossible, and the documented, verifiable purpose saved it. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
In advancing Rs.8,60,16,000 to APIL the trust committed a violation of s.13(1)(c)(ii) read with s.13(2) and s.13(3), and was accordingly not eligible for exemption under s.11 for both years (paragraph 27), the Tribunal's findings on that aspect being set aside as superficial and contrary to the normal course of human conduct and probabilities (paragraphs 24 and 26). The Tribunal was not right in holding the trust entitled to exemption under s.11 for AY 2007-08 either (paragraph 32). On the advance to Charanjiv Educational Society the Tribunal was upheld — no violation (paragraph 28). The Tribunal was not justified in directing allowance of depreciation on assets whose cost had already been allowed as application of income (paragraph 30). The s.68 additions deleted by the Tribunal were not disturbed, the findings not being perverse (paragraphs 29 and 32). The appeals of the Revenue were partly allowed (paragraph 33).
TaxSphere, “DIT (Exemption) v Charanjiv Charitable Trust”, https://taxnotice.vittsphere.com/caselaw/case/dit-e-v-charanjiv-charitable-trust-13-1-c-advance-to-specified-person/ (validity last checked 2026-09-08)
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My trust gave interest-free or low-interest advances to entities connected with its trustees. The Assessing Officer has treated the interest not charged as a benefit to specified persons, disallowed it under s.40A(2)(a) and denied exemption on the whole income. Can he do that?
The officer says we let our building to a related party below market rent. Is that by itself a breach of s.13(2)(b)?
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Trust funds went to a trustee. Does the trust lose exemption on all its income or only that amount?
