Bengaluru ITAT: Payment to Trustees Does Not Automatically Violate Section 13(1)(c); Reasonableness Must Be Examined

Bantval Sulochana Madhava Shenoi Trust Vs CIT (Exemptions) (ITAT Bangalore)

Bengaluru ITAT: Payment to Trustees Does Not Automatically Violate Section 13(1)(c); Reasonableness Must Be Examined

The Bengaluru ITAT held that payment of remuneration or honorarium to trustees is not, by itself, a violation of section 13(1)(c). The real issue is whether the remuneration paid to specified persons is excessive or unreasonable having regard to the services actually rendered. In this case, a charitable trust running Kamakshi Hospital, Mysuru, paid ₹20.50 lakh as honorarium to its Managing Trustee, Joint Managing Trustee and Trustee Administrator for managing the hospital’s administration, finance, statutory compliances and expansion activities. The Assessing Officer disallowed the entire amount, holding that any payment to specified persons constituted a violation of section 13(1)(c), and the CIT(A) confirmed the addition on the ground that the trust had not produced independent market benchmarks to establish the reasonableness of the remuneration.

The Tribunal observed that section 13(1)(c) is attracted only to the extent the remuneration exceeds what may reasonably be paid for the services rendered. It held that determining the reasonableness of remuneration is a fact-intensive exercise, requiring the assessee to demonstrate the nature of duties performed, qualifications and expertise of the trustees, and comparable market remuneration through internal or external benchmarks. Since neither the assessee nor the Assessing Officer had undertaken this exercise, the Tribunal restored the matter to the Assessing Officer with directions to objectively examine whether the honorarium was excessive after considering the trustees’ qualifications, responsibilities, experience and comparable remuneration for similar services. The appeal was allowed for statistical purposes.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

1. ITA No. 1324/Bang/2026 is filed by Bantval Sulochana Madhava Shenoi Trust[ the Assessee/ Appellant/ Trust] for the assessment year 2018-19 against the appellate order dated 28 March 2026 passed by the Commissioner of income Tax (Appeals), National Faceless Appeal Centre, whereby the assessee’s appeal against the assessment order passed under section 143(3) read with section144B of the Income-tax Act, 1961, [ The Act ] by the National e-Assessment Centre [learned Assessing Officer] dated 31/03/2021 was dismissed.

2. The appellant is a charitable trust registered under section 12A of the Income-tax Act, 1961. It runs Kamakshi Hospital, as stated which provides healthcare services mainly to poor and middle-class patients who cannot afford the high cost of treatment at other hospitals. The hospital’s charges are also stated considered reasonable by the public and are lower than those of other private hospitals. It is established in 1973.

3. For assessment year 2018-19, it filed its return on 11 October 2018 along with the audit report in Form 10B. The case was selected for scrutiny under section 143(3) of the Act, and the assessment was completed by the National e-Assessment Centre by order dated 31 March 2021.

4. In the assessment, the Assessing Officer made an addition of Rs. 20,50,000 towards honorarium paid to specified persons, comprising Rs. 6,45,000 paid to Shri M. Mahesh Shenoy, Managing Trustee; Rs. 8,20,000 paid to Dr. K.R. Kamath, Trustee Administrator; and Rs. 5,85,000 paid to Shri M. Ashok Shenoy, Joint Managing Trustee. The Assessing Officer held that the payment of honorarium to the specified persons was not in accordance with the objects referred to in section 11(1) and amounted to a violation under section 13(1)(1)(c) of the Act. The ld.AO heldthat any payment of honorarium to a specified person constitutes a violation of that provision.

5. Assessee submitted detailed list of duties performed by the specified persons and the supporting evidence filed in that regard. It submitted responses dated 4 January 2021 and 19 March 2021, along with samples of vouchers, bills and other documents evidencing the duties discharged by those persons.

6. The learned Assessing Officer noted that, during the previous year relevant to assessment year 2018-19, the assessee paid honorarium of Rs. 20,50,000 to specified persons from the trust’s income, namely Rs. 6,45,000 to Shri M. Mahesh Shenoy, Managing Trustee; Rs. 8,20,000 to Dr. K.R. Kamath, Trustee Administrator; and Rs. 5,85,000 to Shri M. Ashok Shenoy, Joint Managing Trustee. The assessee explained that these trustees were managing the hospital’s day-to-day affairs, financial transactions, technical administration, patient consultancy, and construction of the new hospital, and that the remuneration was reasonable for their substantial services. The learned Assessing Officer, however, held that the assessee had not produced substantive evidence to justify the payments or establish their reasonableness. He therefore treated the honorarium as not being in accordance with section 11(1) and as a violation of section 13(1)(c) of the Act, and disallowed Rs. 20,50,000 as income of the assessee.

7. Before the learned CIT(A), the appellant submitted that the trustees were actively involved in the hospital’s administration, financial management, statutory compliance, expansion, and construction of another hospital, and that the honorarium paid to them was reasonable, proportionate to their duties, and below market remuneration. It was further contended that section 13(1)(c) would apply only if the payments were excessive; similar payments had been accepted in earlier years; and the Assessing Officer had ignored the evidence and passed a non-speaking order. After considering the record, the learned CIT(A) held that remuneration to trustees is permissible only when it is reasonable and commensurate with the services rendered, and that the burden to prove this lay on the assessee. Since the trustees were specified as persons under section 13(3), and the assessee had not produced independent benchmarks such as comparable salary data or valuation reports, the CIT(A) held that internal resolutions, agreements, vouchers, and administrative records did not objectively justify the honorarium. The CIT(A) also held that acceptance in earlier years did not operate as res judicata, as each assessment year is separate, and that the assessment order was not invalid merely because the assessee disagreed with its conclusion. Accordingly, for want of convincing evidence that the honorarium of Rs. 20,50,000 was reasonable and not excessive, the CIT(A) upheld the application of section 13(1)(c), denial of exemption under section 11 to that extent, and dismissed the appeal.

8. The learned Authorized Representative submitted that the Assessing Officer erred in treating the mere payment of honorarium to specified persons as a violation of section 13(1)(c) of the Act. According to him, the relevant enquiry was whether the payments were reasonable, which the Assessing Officer failed to examine. The assessee had furnished detailed replies dated 4 January 2021 and 19 March 2021, along with vouchers, bills, documents, and other evidence showing the duties performed by the Managing Trustee, Joint Managing Trustee and Trustee Administrator. It was contended that the assessment order was non-speaking, as the Assessing Officer rejected the assessee’s elaborate reply and supporting evidence running into 181 pages without any meaningful discussion. The assessee also pointed out that, in assessment year 2017-18, the same issue of honorarium to specified persons was examined in scrutiny proceedings and accepted without any addition. Before the learned CIT(A), the assessee further relied on the decisions in CIT(E) and JDIT v. CMR Janardhara Trust, DIT(E) v. Manav Bharti Institute of Child Education & Child Psychology, and PNR Society for Relief & Rehabilitation of the Disabled Trust v. DDIT(E), to submit that reasonable remuneration for services actually rendered by trustees does not attract section 13(1)(c), particularly where the Assessing Officer brings no material to show that the payment is excessive. It was emphasized that the total honorarium of Rs. 20,50,000 was only 0.65% of the hospital’s total revenue of Rs. 31,51,78,759, and that the trustees had performed substantial responsibilities in hospital administration, finance, statutory compliance, expansion, and construction of the new hospital. The learned Authorized Representative also submitted that the Managing Trustee and Joint Managing Trustee were performing functions comparable to those of a CFO and CEO, whose market remuneration would be substantially higher, while Dr. K.R. Kamath, Trustee Administrator and a doctor with about 50 years’ experience, received only Rs. 8,20,000 for the year, averaging Rs. 68,333 per month. He further relied on Apne Apne Women Worldwide (India) Trust v. ITO and Manav Mangal Society v. DCIT to contend that denial of exemption is unjustified where the Revenue fails to bring comparative material showing that the payments are excessive or unreasonable. It was therefore submitted that the learned CIT(A) erred in confirming the disallowance merely for want of external benchmarks, despite accepting that the specified persons had performed substantial and responsible work. The assessee accordingly prayed that the order of the learned CIT(A) be set aside and appropriate relief be granted.

9. The learned Departmental Representative strongly submitted that the assessee bears the burden of proving that the remuneration paid to its trustees, who are specified persons, was reasonable and commensurate with the services rendered. Any payment exceeding a reasonable amount for such services would, according to him, attract section 13(1)(c) of the Act and result in denial of exemption. He contended that the assessee was required to establish the nature of services performed by each trustee, the applicable market rate for those services, and the basis on which the remuneration was fixed. Only after such material is produced can the learned Assessing Officer examine whether the payment is excessive or unreasonable. He further submitted that no resolution, profile, or other supporting material had been produced before the Assessing Officer to justify the remuneration. Mere references to the trust’s growth or charitable character, he argued, do not advance the assessee’s case.

10. We have carefully considered the rival submissions and perused the orders of the lower authorities. The assessee is admittedly a charitable trust engaged in medical relief and eligible for exemption under sections 11 and 12 of the Act. It is also undisputed that remuneration was paid to its trustees. The question for consideration is whether such remuneration was excessive or unreasonable having regard to the services rendered by them, so as to attract section 13(1)(c) of the Act.

11. Section 13 withdraws the exemption otherwise available under sections 11 and 12 where, during the relevant previous year, any part of a charitable or religious trust’s income or property is applied for the benefit of a person specified in section 13(3). This includes any salary, allowance, or other payment made from the trust’s funds to such person for services rendered, but only to the extent the payment exceeds what may reasonably be paid for those services.

12. There is no dispute that the recipients of the remuneration are trustees of the assessee-trust or that such remuneration was paid to them. The assessee has explained the nature of the services said to have been rendered by the trustees. The real issue is whether the amounts paid exceeded what could reasonably be allowed for those services. This requires an examination of the nature and extent of the work performed by each trustee, followed by a determination of whether the remuneration was consistent with market rates or otherwise reasonable. The initial burden lies on the assessee to establish that the services were actually rendered and that the payment made for them was reasonable. Such justification may be supported by internal comparables within the trust or by external benchmarks. Ideally, the reasonableness of remuneration should be determined when the trustees are appointed or when their remuneration is fixed, supported by a trustee resolution recording the basis for payment and confirming that it is not excessive having regard to the services rendered. Based on such material, the learned Assessing Officer must examine whether any amount paid by the assessee-trust exceeded what could reasonably be paid for the services actually rendered. Thus, determining the market rate or reasonableness of remuneration is a fact-based exercise to be first undertaken by the assessee and then placed before the learned Assessing Officer for examination.

13. In the present case, neither the assessee nor the learned Assessing Officer has undertaken the above exercise. We therefore restore the issue to the file of the learned Assessing Officer, with a direction to the assessee to first establish, with adequate supporting material, that the remuneration paid to the trustees was reasonable having regard to the services rendered by them. The assessee shall also place on record appropriate documentation to show that, for similar services, comparable remuneration would not have been lower in ordinary commercial circumstances than the amounts paid to the trustees. The learned Assessing Officer shall examine such material and decide the issue afresh in accordance with law. This exercise shall be carried out objectively, having regard to the educational qualifications of the trustees, their expertise, and the nature and extent of work performed by them for trust.

14. In the result, the appeal filed by the assessee is allowed for statistical purposes in the terms indicated above.

Order pronounced in the open court on 29^th June, 2026.