No withdrawal of exemption of charitable trust for payments to a related party so long as it is reasonable and for actual services: Delhi HC
The Delhi High Court recently held that exemption of charitable trust under Sections 11 and 12 of the Income Tax Act, 1961, cannot be withdrawn solely because it made payments to a related party, as long as those payments were reasonable and made for actual services rendered. The Court clarified the interpretation of Section 13, which generally denies exemptions if the trust’s income benefits certain “prohibited persons” listed under Section 13(3). However, section 13(2)(c) of the Act which prescribes that if the amount paid by way of a salary or allowance to a person specified under Section 13(3) is for any service rendered by such person and the amount paid is reasonable, the same cannot be deemed to have been applied for the benefit of the said person.
In the case of the IILM Foundation, its exemption was cancelled by the Director of Income Tax (Exemptions) on the grounds that it had paid a salary to its Chairperson, Malvika Rai, who is a related party. The Income Tax Appellate Tribunal (ITAT) overturned this decision, noting that the payment was reasonable and in exchange for services rendered. The Revenue appealed against this decision, arguing that even a single instance of benefit to a prohibited person should disqualify the trust from exemption.
The Delhi High Court dismissed the Revenue’s appeal, observing that reasonableness of the payment had not been contested. It concluded that payments made at fair value for services rendered do not violate the conditions of Section 13(1)(c). Thus, the income of trust cannot be said to have been misapplied.
Case Title: CIT(Exemption)- Delhi v. IILM Foundation, ITA No 179/2023
The copy of the order is as under:
