CIT Vs IILM Foundation (Delhi High Court)
Conclusion: Charitable Trust’s status could not be taken away citing violation of Section 13 merely because it made reasonable payment for services rendered by a related party. If the amount paid for services was such as was reasonably payable for such service, the same could not be construed as applied for the benefit of a prohibited person notwithstanding that it was paid to such a person.
Held: Assessee was predominantly engaged in activities of imparting education and also involving the certain educational institutions. Assessee had filed its return of income for AY 2009-10 on disclosing nil income. The said return was picked up for scrutiny and the proceedings culminated in the assessment order passed under Section 143(3). The registration granted to assessee under Section 12A was withdrawn by the DIT (Exemption) with effect from AY 2003-04 and thus, AO had proceeded to examine assessee’s return on the premise that it was not registered under Section 12A and thus, not entitled to benefit of the exemptions under Section 11/12. During the financial year relevant to AY 2009-10, assessee had paid a salary of ₹16,20,000/- to Ms Malvika Rai, who was the Chairperson of assessee trust. AO held that the same was excessive and not commensurate with her educational qualifications, experience and duties. Since Ms Rai was a related party, AO disallowed 30% of the payments made to her and added a sum of ₹4,86,000/- to the income as declared by assessee. AO also found that assessee was running institutions, which were catering to an elite class of society with the sole purpose of making profit. Apart from the disallowance under Section 40A(2)(a) in respect of salaries paid to Ms Rai, AO also added expenditure incurred by assessee in maintaining cars and fuel expenses as well as donations made by assessee. In aggregate, AO disallowed a sum of ₹26,06,844/-, which was booked as expenditure by assessee in its accounts. Assessee’s income was, accordingly, assessed at ₹12,69,57,640/- and assessee was treated as an association of persons for the purposes of levy of income tax on the assessed income. It was held that by virtue of clause (c) of sub-section 2 if any amount was paid by way of a salary or allowance to a person, which was specified under sub-section (3) of Section 13, it would be deemed that the income of the property or trust had been applied for the benefit of that person for the purposes of Clause (c) and (d) of sub-section (1) of Section 13. However, if a person specified under sub-section (3) had rendered any service and the amount or allowance paid to such person was such, that was, reasonably paid for such services, the same could not be deemed to have been applied for the benefit of the said person for the purposes of clauses (c) or (d) of Section 13(1). This was apparent from the plain language of clause (c) of sub-section (2) of Section 13. The opening words of the said clause must be read in conjunction with the last words of the said clause – “If any amount is paid by way of salary, allowance or otherwise …. in excess of what may be reasonably paid for such services”. Thus, if the amount paid for services was such as was reasonably payable for such service, the same could not be construed as applied for the benefit of a prohibited person notwithstanding that it was paid to such a person. Consequently, such payment would not fall within the exception of clause (c) of subsection (1) of Section 13.
