Exemption under section 11 not denied for remuneration paid to CEO of trus

By | May 30, 2025
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Remuneration paid to a specified person by a charitable trust is not subject to disallowance under Section 13 if the person is qualified and the revenue fails to prove excessiveness.

Issue:

Whether exemption under Section 11 of the Income-tax Act, 1961, can be denied to a charitable trust by invoking Section 13(1)(c)(ii) read with Section 13(2)(c) on the ground that remuneration paid to a specified person (CEO) was unreasonable and excessive, when the specified person possessed relevant qualifications and the revenue failed to provide material evidence to substantiate the claim of excessiveness.

Facts:

  • For Assessment Year 2018-19, the assessee trust was registered under Section 12AA and also had Section 80G approval.
  • During the year, the assessee paid remuneration to one R.G., who served as the CEO of the assessee-trust.
  • The assessee claimed exemption under Section 11 of the Income-tax Act.
  • The Assessing Officer (AO) denied the exemption under Section 11 and made additions by invoking provisions of Section 13(1)(c)(ii) read with Section 13(2)(c). The AO’s reason was that the remuneration paid to R.G., a “specified person” (as defined under Section 13(3)), was unreasonable and excessive.
  • The assessee contended that the specified person had the relevant qualifications for the job, and the remuneration was reasonable given the nature and scale of the trust’s operations.

Decision:

The court held in favor of the assessee. It ruled that since the specified person had the relevant qualification for the job and there was no material brought on record by the revenue to substantiate that the salary/remuneration paid to the specified person was excessive, the provisions of Section 13(1)(c) could not be invoked to deny exemption under Section 11. The court further clarified that the onus to prove that the salary payments made to specified persons were excessive and unreasonable lies on the revenue. Since the salary payments made by the assessee to the specified person were found to be genuine and reasonable given the nature and scale of the assessee’s operations, there was no reason to interfere with the order of the Commissioner (Appeals) (who presumably ruled in favor of the assessee).

Key Takeways:

  • Section 13(1)(c) and 13(2)(c) – Denial of Exemption for Private Benefit: These sections deny exemption under Section 11 if any part of the income or property of the trust is used directly or indirectly for the benefit of a “specified person” (e.g., author of the trust, trustee, managing trustee, relative of any of these, or a substantial contributor) in a manner that is unreasonable or excessive.
  • “Unreasonable or Excessive” Remuneration: The crucial aspect is whether the remuneration paid to a specified person is “unreasonable or excessive.” This is a factual determination.
  • Onus on Revenue to Prove Excessiveness: The judgment clearly places the burden of proof on the revenue. The Assessing Officer cannot simply allege that remuneration is excessive; they must bring “material on record” to substantiate this claim. This could involve comparing the remuneration with industry standards for similar roles, the person’s qualifications, the scale of the organization, etc.
  • Qualifications and Scale of Operations: The court considered the specified person’s “relevant qualification for the job” and the “nature and scale of operations of the assessee” as key factors in determining the reasonableness of the remuneration. If the payment is commensurate with these factors, it is unlikely to be deemed excessive.
  • No Blanket Disallowance for Payments to Specified Persons: Section 13 does not prohibit any payment to a specified person. It only disallows payments that are “unreasonable or excessive.” Legitimate and reasonable remuneration for services rendered by a qualified specified person is permissible.
  • Importance of Factual Findings: The court’s acceptance of the genuineness and reasonableness of the payments, in the absence of contrary material from the revenue, was central to its decision.
  • Consequence of Section 13 Invocation: If Section 13 is successfully invoked, the trust loses its exemption under Section 11, and its income becomes taxable. Therefore, the conditions for invoking Section 13 must be strictly met.
IN THE ITAT DELHI BENCH ‘F’
Deputy Commissioner of Income-tax (Exemption)
v.
Pardada Pardadi Educational Society
SATBEER SINGH GODARA, Judicial Member
and Naveen Chandra, Accountant Member
IT Appeal No. 5149 (DELHI) OF 2024
[Assessment year 2018-19]
MAY  5, 2025
Manuj Sabharwal, Drona Negi and Devrat Tiwari, Advs for the Appellant. Ms. Nimisha Singh, CIT-DR for the Respondent.
ORDER
Naveen Chandra, Accountant Member. – This appeal by the Revenue is directed against the order of the Id. CIT(A), New Delhi dated 20.09.2024 for A.Y 2018-19.
2. The grounds raised by the Revenue read as under:
1. The Ld. CIT(A) has erred in law and facts in deleting addition of Rs. 5,95,71,306/- without appreciating the provisions of 1 section 13(1)(c), which clearly states that exemption u/s 11 and 12 cannot not be allowed to the assessee if there is any violation under the said provisions of section 13(1)(c).
2. The Ld. CIT(A) has erred in law and facts on relying on the decision of Hon’ble Gujrat High Court in the case of CIT v. Bholaram Education Society reported in, wherein the Hon’ble High Court have held that rent paid to trustees for using land and building was not excessive consideration the fair market value of the property, exemption cannot be denied. Whereas in the instant case, assessee paid salary/rumination to Mrs. Renuka Gupta (CEO) of the trust, who falls under the categorisation of the specified person as per section 13(3)(cc).
3. The Ld. CIT(A) has erred in law and facts on relying on the decision of Hon’ble Karnataka High Court in the case of CIT v. Krupanidhi Education Trust reported in wherein the Hon’ble High Court have held where salary to individuals, who were also members of the Trust, who were action acting as a Professor and as an Administrative Officer in the college, run by the Society. The High Court held that in such case, denying exemption u/s 11 by making reference to Sec 13(1)(c) of the act is unjustifiable. Whereas in the instant case, assessee paid salary/rumination to Mrs. Renuka Gupta (CEO) of the trust MAO, which is not exists in the bylaws of the trust. In the said bylaws of the trust, the Rules and regulations of the Trust at para 10 clearly states the constitution of Managing committee wherein the office bearers would compromise of 1 President, 2. Vice President, 3. Secretary, 4. Treasurer and 5. Members.
4. The order of Ld. CIT(A) be cancelled and the order of the AO be restored.”
3. Briefly stated, the facts of the case are that the assessee was incorporated on July 12, 2002 as a Society, and was registered under Section 12AA and 80G of the Income-tax Act, 1961, (‘the Act’). During the year under consideration, the assessee filed its return of income on October 31,2018 declaring ‘NIL’ taxable income. In the ROI, the assessee claimed exemption under Section 11 of the Act for eligible amount and refund of credit of tax deducted/collected at source aggregating to Rs. 1,97,370/-. The return was selected for limited scrutiny assessment and statutory notices were issued and served upon the assessee.
4. Thereafter, assessment order was passed by the Assessing Officer wherein, the Assessing Officer denied the exemption claimed by the assessee under Section 11 of the Act and made the additions totaling to Rs.6,22,62,017 by invoking the provisions of Section 13(1)(c)(ii) read with Section 13(2)(c) by stating that the remuneration paid to Mrs. Renuka Gupta, a specified person, was unreasonable and excessive in the facts of the present case.
5. When the aggrieved assessee went in appeal before the ld. CIT(A), the ld. CIT(A) deleted the addition.
6. Now the Revenue is aggrieved and has come in appeal before us.
7. The ld. DR relied upon the order of the Assessing Officer.
8. Before us, the ld. counsel for the assessee vehemently supporting the order of the ld. CIT(A) stated that during the subject year under consideration, the assessee had paid to Mrs. Renuka Gupta, a salary of Rs.25,37,496/- and made reimbursement of expenses amounting to Rs.3,02,563/- against various expenses incurred by her for the assessee such as travelling, food expenses, etc. The ld. counsel for the assessee submitted that the provision of Section 13(3) of the Act covers payment inter-alia to “managers (by whatever name called) of the institution”, and presuming CEO are by enlarge a kind of manager of the institution, salaries paid to Mrs. Renuka Gupta were included in the category of specified person as she was the CEO of the assessee.
9. The ld. counsel for the assessee further submitted that the salary payments to Mrs. Renuka Gupta duly justify the role and responsibility undertaken by her in the assessee and are reasonable and genuine given the nature and scale of operations of the assessee. In view of the above, the ld. counsel for the assessee submitted that the assessee has fully discharged its onus by producing all the documentary evidences before the learned Assessing Officer to prove the genuineness and reasonableness of the salary payment. Hence, the action of Assessing Officer to deny the exemption u/s 11 of the Act by invoking provisions of Section 13(1)(c)(ii) read with Section 13(2)(c) is incorrect.
10. We have heard the rival submissions and have perused the relevant material on record. We find that the assessee has relied upon the decision of Hon’ble Apex Court in the case of CIT (Exemptions) v. Bholaram Educational Society wherein it was held that where rent paid by assessee-trust to a trustee for using land and building was not found to be excessive, the exemption could not be denied to assessee under Section 11 by invoking provisions of Section 13(1)(c).
11. In the decision of Hon’ble Delhi High Court in the case of CIT (Exemptions), Delhi v. IILM Foundation/ (ITA 179/2023), the Hon’ble Delhi High court dismissed the appeal filed by the revenue by stating that 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. Consequently, such payment would not fall within the exception of clause (c) of sub-Section (1) of Section 13 of the Act. Relevant extract of the decision is as under:
“22. By virtue of clause (c) of sub-Section 2 of the Act if any amount is paid by way of a salary or allowance to a person, which is specified under sub-Section (3) of Section 13 of the Act, it would be deemed that the income of the property or trust has 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) has rendered any service and the amount or allowance paid to such person is such, that is, reasonably paid for such services, the same cannot 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) of the Act. This is apparent from the plain language of clause (c) of sub-Section (2) of Section 13 of the Act. 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 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. Consequently, such payment would not fall within the exception of clause (c) of sub-Section (1) of Section 13 of the Act.
23. The observations made by this Court in Director of Income Tax (Exemption) v. Charanjiv Charitable Trust (supra) must be read in the context of the facts of that case.
24. In view of the above the questions of laws as noted in paragraph no.3 of the order is answered in favour of the Assessee and against the Revenue,”
12. We find that the Assessing Officer has invoked the provisions of section 13(3)(cc) r.w.s. 13(2)(c) of the Act without making any enquiry regarding the payments being made to the members were in excess of what may be reasonably paid for such service. When the Specified Person is having relevant qualification for the job and when there is no material brought on record to substantiate that the salary or remuneration paid to the members was excessive, the provisions of Section 13(1)(c) cannot be invoked to deny the exemption under Section 11 of the Act. We are of the considered view that the Assessing Officer had failed to establish as to why salary paid by the assessee to the specified person, Mrs. Renuka Gupta is considered by him excessive to invoke the provisions of Section 13(1)(c) of the Act. The decision of the CIT(A) to allow the exemption under Section 11 of the Act to the assessee is justified.
13. Further, the onus to prove that salary payments made to specified persons are excessive and unreasonable lies on the Revenue department. We find the salary payments made by the assessee to Mrs. Renuka were genuine and reasonable given the nature and scale of operations of the assessee.
14. In that view of the matter, we find no plausible reason to interfere with the well-reasoned findings of the ld. CIT(A) and dismiss the grounds raised by the Revenue.
15. In the result, appeal of Revenue in ITA No. 5149/DEL/2024 is dismissed.