The Delhi High Court has made a significant ruling clarifying that a Charitable Trust will not lose its exemption under Section 11/12 of the Income Tax Act, 1961, simply because it paid a reasonable salary to a related party. This decision came in the case of IILM Foundation where the exemption was previously withdrawn due to payments made to Ms. Malvika Rai, the Chairperson of the Trust.
"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." — Delhi High Court
Background of the Case
The IILM Foundation, formerly known as Ram Krishna Kulwant Rai Charitable Trust, had its registration under Section 12A of the Act cancelled by the Director of Income Tax (Exemptions), who claimed that a payment of ₹16.2 lakhs made to Ms. Malvika Rai was excessive. The Assessing Officer disallowed 30% of this payment and added ₹4.86 lakhs to the trust’s income.
However, the Trust argued that the salary was in line with the responsibilities and experience of Ms. Rai, who had over two decades of experience in the education sector.
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The CIT(A) and the Income Tax Appellate Tribunal (ITAT) both supported the Assessee, concluding the payment was reasonable. The ITAT also reinstated the trust’s registration under Section 12A, previously cancelled.
“The annual salary of ₹16,20,000/- is apparently reasonable… there is no proper justification for making the estimated disallowance.” — CIT(A)
Detailed records and evidence of Ms. Rai’s involvement in academic and administrative functions were presented, showing her active contribution to various educational events and daily operations.
A Division Bench of Justices Vibhu Bakhru and Tejas Karia affirmed that Section 13(1)(c) read with Section 13(2)(c) only disqualifies the exemption if the payment is in excess of what is reasonably payable. The court noted there was no dispute over the reasonableness of the salary.
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Revenue cited the Charanjiv Charitable Trust case to argue that any benefit to a related party nullifies the entire exemption. The High Court rejected this broad application, stating that:
"Such payment would not fall within the exception of clause (c) of subsection (1) of Section 13 of the Act."
The Delhi High Court dismissed the Revenue’s appeal, restoring the exemption to IILM Foundation. It emphasized that reasonable payments for actual services, even to related persons, do not violate Section 13.
Appearance: For the Appellant : Mr Abhishek Maratha, Mr Apoorv Agarwal, Mr Parth Samwal, Ms Nupur Sharma, Mr Gaurav Singh, Mr. Bhanukaran Singh Jodha, Ms Muskaan Goel and Mr Himanshu Gaur, Advocates. For the Respondent : Mr Rohit Jain, Mr Aniket D. Agrawal, Mr Samarth Chaudhari, Mr V.K. Anand and Ms Ankita, Advocates
Case title: Commissioner Of Income Tax Exemption Delhi v. IILM Foundation
Case no.: ITA 179/2023 and batch
