Our trust pays rent, or a salary, to a trustee. How is the officer supposed to test whether the amount is right, and who has to prove it?
The statute does not prohibit the transaction; it prohibits the shortfall or the excess. Section 13(2)(b) is engaged only where property is made available to a person listed in s.13(3) 'without charging adequate rent or other compensation', and s.13(2)(c) only where a payment is 'in excess of what may be reasonably paid for such services'. The burden of establishing that is on the Department, and market rate has been held not to be the only yardstick.
Section 13(1)(c) withdraws ss.11 and 12 where income or property of the trust is used or applied, directly or indirectly, for the benefit of a person referred to in s.13(3). Sub-section (2) then deems certain things to be such a use or application. Read on its own, s.13(1)(c) looks absolute. It is not, because each of the deeming clauses in sub-section (2) that matters in practice carries a measure inside it.
The two clauses that come up most are these. Section 13(2)(b): 'if any land, building or other property of the trust or institution is, or continues to be, made available for the use of any person referred to in sub-section (3), for any period during the previous year without charging adequate rent or other compensation'. Section 13(2)(c): 'if any amount is paid by way of salary, allowance or otherwise during the previous year to any person referred to in sub-section (3) out of the resources of the trust or institution for services rendered by that person to such trust or institution and the amount so paid is in excess of what may be reasonably paid for such services'. Section 13(2)(g) is the residual one: 'if any income or property of the trust or institution is diverted during the previous year in favour of any person referred to in sub-section (3)', with a proviso that it does not apply where the diversion does not exceed one thousand rupees.
The drafting matters. Clause (b) is not breached by letting to a trustee; it is breached by letting without adequate rent. Clause (c) is not breached by employing a trustee; it is breached by paying more than the services are reasonably worth. Clause (g), by contrast, has no measure of adequacy in it at all beyond the Rs 1,000 de minimis — which is why the Department reaches for it when it cannot make out the shortfall or the excess, and why the answer to a clause (g) charge is usually that there was consideration and so no diversion.
Section 13(3) sets out who is an interested person: the author or founder, a person who has contributed more than Rs 50,000 in aggregate up to the end of the relevant previous year, a member of a Hindu undivided family that is such an author or contributor, any trustee or manager of the trust, any relative of any of them, and any concern in which any of them has a substantial interest, taken at twenty per cent.
On who has to prove what, the position taken in commentary and applied in the decided cases is that the burden lies on the Revenue. The Assessing Officer has to establish the violation on positive evidence; raising a doubt about the arrangement is not enough. That follows from the structure of s.13 — exemption is the rule once registration and ss.11 to 12A are satisfied, and s.13 is the exception the Department invokes.
On how adequacy is tested for rent, the Delhi High Court in CIT (Exemptions) v. Hamdard National Foundation (India) held that market rate is not the sole yardstick, that the surrounding circumstances of the letting have to be examined, and that estate-agent enquiries and figures taken off the internet are not corroborative evidence capable of supporting a s.13(2)(b) addition. It treated the fact that the rent received exceeded the valuation adopted by the municipal corporation for house tax as material telling against inadequacy. Commentary also records a line of Delhi authority using standard rent under rent control legislation as a floor — rent above the standard rent computed under the rent control law being treated as adequate — but I could not corroborate the underlying decisions, so use that argument on the statute and on the valuation evidence rather than on a borrowed citation.
On salary, the test is stated in the clause itself and was applied by the Delhi High Court in CIT (Exemption) v. IILM Foundation: where the amount paid is what is reasonably payable for the service, it cannot be construed as applied for the benefit of a prohibited person, so s.13(1)(c) is not engaged. The relevant evidence is therefore about the person and the role — qualifications, experience, the work actually done — and about what that role commands elsewhere. It is not about whether the recipient is a trustee.
One consequence point, because it changes what is worth fighting. Until AY 2022-23 there was a real dispute about whether a proved breach cost the trust its exemption on the diverted amount alone or on the whole of its income; the corpus records that dispute under CIT (Exemptions) v. Audyogik Shikshan Mandal. From AY 2023-24 the Finance Act 2022 has settled it prospectively: only the part of the income applied in violation goes into total income, and s.115BBI charges that specified income at thirty per cent. So on a modern year the argument about adequacy is an argument about the quantum of the excess, not about the whole surplus.
Most s.13 notices are written as though any dealing with a trustee is fatal. It is not, and the clause the officer is relying on will usually contain the word 'adequate' or 'reasonably'. Reading the clause back to him narrows the dispute to a valuation question, on which the Department carries the burden and on which portal listings have been held not to be evidence. From AY 2023-24 the exposure is capped at thirty per cent of the excess rather than the whole exemption, which changes whether the fight is worth having at all.
We charge fees for our public utility work. Does that cost us charitable status under s.2(15)?
A binding decision that covers my point was never considered when my order was passed. Is that a mistake apparent from the record?
Our trust runs a business and puts the profit into its objects. Does s.11(4A) still deny the exemption?
Our trade association promotes commerce in our industry, but the work it does throws up a surplus every year. Does the surplus stop it being charitable?
Our trust benefits one caste. Can that be a charitable purpose at all?
Our trust was formed weeks ago and has done nothing yet. Can registration be refused for that?
My trade association only helps its own trade and its members get a benefit from it — can it still be charitable?
The Commissioner has refused my trust registration under section 12AA because our objects are tied to one religious community — can he refuse registration on that ground?
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