Transactions by Charitable Trust with Persons Specified U/s. 13(3) of Income Tax Act, 1961

 

1. Introduction:

Income Tax Law does not prohibit the transactions per se between the specified  persons (relatives) and  the Charitable Trusts. Transactions are allowed,  provided that the  payment of the goods and services are equivalent to their market values and not excessive, so as not to pass any undue benefit to specified persons.

2. Meaning of Relative U/S 13(3):

The term “relative” in Section 13(3) of the Income Tax Act includes:

The author of the trust or founder of the institution.

Any trustee, manager, or substantial contributor (person contributing ₹50,000 or more).

Their relatives, as defined under Section 2(41) (which generally includes spouse, children, siblings, parents, and lineal descendants).

Any concern (company, firm, etc.) in which such a person has a substantial interest.

3. Section 13(2) prescribes  following class of transactions with specified persons are allowed: (a) Where any part of the income or property of the trust or institution is lent to any ‘specified person’ during the previous year with either adequate security or adequate interest or both; (b) Any land, building or other property of the trust or institution is made available to the ‘specified persons’ after charging adequate rent or other compensation (c) Any amount paid by way of salary or allowance or otherwise to the ‘specified persons’ which may be reasonably paid for such services; (d)  If the services of the trust or institution are made available to such ‘specified persons’ on adequate remuneration or other compensation; (e) If any share, security or other property was purchased from such ‘specified persons’ for consideration which is adequate; (f) If any share, security or other property was sold to such ‘specified persons’ for consideration which is adequate; (g) If any income or property is diverted during the previous year in favour of such ‘specified persons’ provided the amount does not  exceed Rs. 1,000; and (h) If any funds of the trust or institution are not invested in any concern in which the ‘ specified persons’ has substantial interest.

4. Proposed amendment in the Budget 2025:

As per Section 13(3) of the Act, author of the trust or founder of the trust or institution or substantial contributor to the trust or institution or any relative of author, founder or substantial contributor, etc.

“Substantial Contributor” for this purpose means a contributor whose total contribution up to end of relevant previous year exceeds Rs.50,000[Section 13(3)(b)].

It is proposed that the amount of contribution should be increase from Rs.50,000 to Rs. 1,00,000