Section 13(3)

Section 13(3) — the law in short

What the courts have decided on section 13(3), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• CIT (E) v IILM Foundation High CourtHelps taxpayerValidity unconfirmed
  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.
• 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.
• CIT (Exemptions) v Audyogik Shikshan Mandal High CourtHelps taxpayer
  Trust funds went to a trustee. Does the trust lose exemption on all its income or only that amount?
  Only that amount. Denial of exemption under s.11 is confined to the sum actually diverted in breach of s.13; s.13 withdraws the benefit in respect of the offending income or property, not for the trust as a whole.
• 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.
• Delhi Development Authority v Union of India High CourtHelps taxpayerValidity unconfirmed
  The Assessing Officer has directed a special audit under s.142(2A) reciting that my accounts are voluminous and need detailed verification. Is that enough?
  No — not on that reasoning. Section 142(2A) is not a provision by which the Assessing Officer delegates to a chartered accountant the scrutiny and verification he is himself required to do. The reasons recorded must be genuine and must have a nexus with the statutory requirements, and where the officer lifted the assessee's own notes of accounts verbatim as his reasons, that disclosed non-application of mind and the directions were quashed for every year. Note the amendment: for the years before this Court (AY 2003-04 to 2009-10) the section spoke only of the nature and complexity of the accounts and the interests of the revenue, and the holding that a large number of entries is not by itself complexity is a construction of that text. The section as it now stands, substituted by the Finance Act 2023 with effect from 1 April 2023, lists volume of the accounts as an independent trigger.
• Society for Human Transformation and Research v ITO (Exemptions) ITATHelps taxpayerValidity unconfirmed
  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.

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.