HC: Reasonable salary given to specified under Section 13(3) do not attract violation of Section 13(1)(c) or disqualify the trust from exemption under Sections 11/12

IILM Foundation (formerly Ram Krishna Kulwant Rai Charitable Trust) is a charitable trust registered under Section 12A. The trust operates educational institutions, including IILM Undergraduate Business School and Banyan Tree World School. For AYs 2009–10 to 2011–12, the Assessing Officer (AO) questioned the payment of Rs. 16.20 lakh per annum as salary to Ms. Malvika Rai, the Chairperson of the trust. The AO disallowed 30% of the salary (Rs. 4.86 lakh in AY 2009–10) under Section 40A(2)(a) and alleged violation of Section 13(1)(c).

The AO also denied the Section 11/12 exemption, claiming that the trust operated for profit and catered to an elite class. CIT(A) deleted the disallowance and upheld the exemption claim, noting that the salary was reasonable and consistent with earlier years. ITAT upheld the CIT(A) findings based on detailed evidence and reversed an earlier order allowing the Revenue’s appeal. The Revenue appealed under Section 260A, raising substantial questions of law.

Revenue Relied on DIT (Exemption) v. Charanjiv Charitable Trust, arguing, “Even a single instance of benefit to a related person disqualifies the trust from exemption under Sections 11/12.” Revenue’s main contention was that since Ms. Rai was a person specified under Section 13(3), payment of salary, regardless of its reasonableness, triggered disqualification.

However, the Assessee’s argument was that Section 13(2)(c) applies only if the payment is excessive or unreasonable. The salary given to Ms. Malvika Rai was reasonable considering her active role and long-standing educational contributions.

The High Court agreed to the same and judged that section 13(1)(c) is attracted only where income/property is applied excessively for the benefit of a specified person. The court also added that reasonably paid compensation for genuine services does not disqualify the trust from exemption under Sections 11/12.