What the courts have decided on section 13(1)(c), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.
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CIT (E) v IILM Foundation
High CourtHelps taxpayerNo later treatment found
Our trust pays a salary to its chairperson, who is a trustee. Does that cost us the s.11 exemption?
No, provided the salary is no more than what the services are reasonably worth. Section 13(2)(c) is not a bar on paying a specified person at all: it deems a salary to be application for that person's benefit only to the extent it is in excess of what may reasonably be paid for the services, so a payment that is reasonable for the service is not caught by s.13(1)(c) at all. The Delhi High Court answered both questions of law against the revenue and dismissed its appeals. Note what was not in issue: the reasonableness of the Rs 16,20,000 salary had been found below and was not contested before the High Court, which recorded that there was no cavil about it, so the decision is on the legal point and not a finding on the facts of this trust's remuneration.
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CIT (E) v Hamdard National Foundation (India)
High CourtHelps taxpayer
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)?
No, not by itself. The burden of showing that the rent was inadequate is on the Department, and the market rate is not the only yardstick. Where the rent charged was higher than the valuation the municipal corporation had adopted for house tax, and the officer's only material was enquiries from estate agents and figures picked off the internet, the Delhi High Court held that s.13(2)(b) was not attracted and the s.11 exemption stood.
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DIT (Exemption) v Charanjiv Charitable Trust
High CourtHelps departmentSuperseded by amendment
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.
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Society for Human Transformation and Research v ITO (Exemptions)
ITATHelps taxpayerNo later treatment found
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?
Not on this record. Where the counterparties are themselves institutions registered under s.12A and s.80G and there is no material showing that any specified person derived a personal benefit, the transactions do not establish diversion of charitable funds for private benefit, and s.13(1)(c) is not attracted. Section 40A(2)(a) cannot be used at all: it disallows excessive or unreasonable expenditure paid to a related party in the course of business or profession, and does not authorise an addition for interest the trust failed to charge.
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Statutory position — s.164: the maximum marginal rate where beneficiaries' shares are indeterminate, and every proviso that takes a trust out of it, in sequence
CBDT Circulars & InstructionsCuts both ways
Our discretionary trust has been charged at the maximum marginal rate under section 164 because the beneficiaries' shares are not fixed. What exactly takes a trust out of that rate, and does it help that the trust was created by my father's will?
Section 164(1) charges the relevant income at the maximum marginal rate where income for which a section 160(1)(iii) or (iv) representative is liable is not specifically receivable on behalf of any one person, or where the individual shares of the persons for whose benefit it is receivable are indeterminate or unknown. The FIRST PROVISO takes a case out of that rate — not into exemption, but into tax 'as if it were the total income of an association of persons' — in four situations, and only four: (i) none of the beneficiaries has any other income chargeable under the Act exceeding the maximum amount not chargeable to tax in the case of an association of persons, and none is a beneficiary under any other trust; (ii) the relevant income is receivable under a trust declared by any person by will and such trust is the only trust so declared by him; (iii) the relevant income is receivable under a trust created before 1 March 1970 by a non-testamentary instrument which the Assessing Officer is satisfied was created bona fide exclusively for the benefit of the settlor's relatives, or, where the settlor is a Hindu undivided family, of the members of that family, in circumstances where they were mainly dependent on the settlor for support and maintenance; or (iv) the relevant income is receivable by trustees on behalf of a provident fund, superannuation fund, gratuity fund, pension fund or any other fund created bona fide by a person carrying on a business or profession exclusively for the benefit of persons employed in that business or profession. The SECOND PROVISO then cuts all four down where there is business income: where the income of a section 160(1)(iv) trustee consists of, or includes, profits and gains of business, the first proviso applies only if those profits and gains are receivable under a trust declared by a person by will exclusively for the benefit of a relative dependent on him for support and maintenance, and that trust is the only trust so declared by him.
Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.
