In a significant ruling, the Delhi High Court has clarified that the charitable status of a trust cannot be revoked solely on the grounds of reasonable payments made to related parties for services rendered. The verdict reaffirms the position that exemptions under Sections 11 and 12 of the Income Tax Act, 1961 remain available if the payments are justified and not excessive.
Background of the Case
The matter pertained to IILM Foundation, a recognized charitable trust, whose exemption status was cancelled by the Director of Income Tax (Exemptions). The reason cited was the trust’s payment of salary to Malvika Rai, the Chairperson of the Trust, a person considered “prohibited” under Section 13(3) of the Act.
The Income Tax Appellate Tribunal (ITAT) had previously overturned the cancellation, prompting the Revenue Department to escalate the matter to the Delhi High Court.
Revenue’s Argument
The Revenue argued that under Section 13(1)(c) of the Act, if even a single instance exists where the trust’s income benefits a prohibited person, the exemption under Sections 11 and 12 should be denied. They contended that the admission of payment to a related party was sufficient ground to trigger Section 13 provisions.
Court’s Observation and Verdict
The Division Bench, comprising Justices Vibhu Bakhru and Tejas Karia, ruled in favor of the IILM Foundation. The court noted that it was an admitted fact that the payments made to Malvika Rai were reasonable and in exchange for actual services rendered.
The bench interpreted Section 13(2)(c), which permits payments to related parties provided they are not in excess of what is reasonable for the services offered. The court emphasized:
“The opening words of the said clause must be read in conjunction with the last words of the clause… If the amount paid for services is such as is reasonably payable for such service, the same cannot be construed as applied for the benefit of a prohibited person notwithstanding that it is paid to such a person.”
It concluded that such payments do not amount to misuse of the trust’s income or property and therefore do not violate the exemption conditions. Consequently, the High Court dismissed the Revenue’s appeal and upheld the ITAT’s decision.
Legal Significance
This judgment reinforces the principle that reasonable compensation to related parties for actual services does not invalidate a trust’s charitable status under Indian tax laws. It brings much-needed clarity to Section 13 of the Income Tax Act, often invoked by authorities to challenge exemptions of charitable institutions.
Case Details
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Case Title: Commissioner of Income Tax Exemption Delhi v. IILM Foundation
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Case No.: ITA 179/2023 and related batch
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Court: Delhi High Court
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Coram: Justice Vibhu Bakhru and Justice Tejas Karia
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Counsel for Appellant: Mr. Abhishek Maratha, Mr. Apoorv Agarwal, Mr. Parth Samwal, and team
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Counsel for Respondent: Mr. Rohit Jain, Mr. Aniket D. Agrawal, Mr. Samarth Chaudhari, and team
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