Income Tax Law Doesn't Prescribe ₹50,000 Salary Ceiling For Trustees Of Charitable Trusts: ITAT Chennai

The Income Tax Appellate Tribunal (ITAT), Chennai, has ruled that a charitable trust does not automatically violate tax provisions merely because its founder or trustee receives a salary in excess of ₹50,000.

The law restricts payments to certain persons connected with a trust when the remuneration exceeds what may reasonably be paid for the services rendered. The tax authorities must establish whether the payment was actually made and, if so, whether it was excessive.

“Section 13(3) does not prescribe a general salary ceiling of Rs.50,000/-. The mere fact that a person is a founder or trustee does not, by itself, establish a violation of section 13(2)(c). The relevant facts and statutory conditions must be examined before the consequences u/s. 13 are determined. Further, the effect of a violation on the exemption claimed u/s. 11 and 12 must be determined in accordance with the applicable provisions of the Act. The extent of the income affected cannot be determined solely by treating every payment to a specified person as automatically excessive. ,” the tribunal observed.

A bench comprising Judicial Member Manu Kumar Giri and Accountant Member Inturi Rama Rao made the observation while restoring a dispute involving Akara Foundation for Education and Research to the Assessing Officer (AO) for fresh examination. The case concerns an alleged salary payment of ₹33 lakh to the trust's founder trustee, which the trust claimed was mistakenly reported by its auditors.

The dispute arose after Akara Foundation, a charitable trust established on January 8, 2016, and registered under Section 12A of the Income Tax Act, 1961, filed its return for Assessment Year 2018-19 declaring nil income.

During scrutiny, the AO noticed that the trust's original audit report in Form 10B, filed along with its return on October 31, 2018, disclosed a salary payment of ₹33 lakh to the founder trustee, a specified person under Section 13(3)(a).

Treating the reported payment as a violation of Sections 13(1)(c) and 13(2)(c), the AO denied the trust exemptions under Sections 11 and 12, added ₹33 lakh to its income and raised a tax demand of ₹11.40 lakh.

The trust contended that its auditors had made a clerical error and that no salary had actually been paid to the founder trustee during the relevant year. It submitted that a revised Form 10B was filed on March 15, 2021, correcting the disclosure. According to the trust, salary payments during the year were made only to regular employees of the educational institutions it operated.

The Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, rejected the explanation and upheld the addition. The appellate authority noted that the revised report was filed after the AO issued a notice on February 26, 2021, seeking details of transactions with specified persons. It also found that the trust had not produced sufficient supporting evidence, including contemporaneous books of account, bank statements and payment records, to establish that no payment had been made to the founder trustee.

Before the tribunal, the trust argued that the authorities had relied primarily on the original audit report without adequately examining its salary ledger, financial statements and other records. The Revenue maintained that the original report was relevant evidence and that the subsequent revision could not automatically displace it. It also argued that the trust had not adequately substantiated its claim that the disclosure was erroneous.

The tribunal held that neither report could be considered in isolation. The original report could not be disregarded merely because a revised version was filed, but the revised report could not be rejected solely because it was filed after scrutiny proceedings had begun. Both had to be examined alongside the trust's books of account and other relevant records.

The key question was whether ₹33 lakh had actually been paid or credited to the founder trustee as remuneration during the relevant year or whether the original disclosure resulted from a reporting error.

Even if the payment were established, the AO would have to examine the nature of the payment, the services actually rendered, the responsibilities discharged by the trustee and whether the remuneration was reasonable. The tribunal observed that describing a payment as salary would not, by itself, establish that the remuneration was reasonable.

The tribunal directed the AO to verify the original and revised Form 10B against the trust's financial statements and books of account. The officer must also examine the salary matrix, relevant ledgers, bank statements, payment records, tax deduction at source (TDS) particulars, and the auditor's explanation, wherever available and relevant.

If payment to the founder trustee is established, the AO must assess its reasonableness in light of the services rendered and the applicable provisions of Section 13. The officer must then determine the trust's eligibility for exemption under Sections 11 and 12 in accordance with law.

The tribunal clarified that the revised report should not be rejected merely because it was filed after a notice had been issued, nor accepted as conclusive without checking the underlying records. It expressed no final opinion on whether the alleged clerical error was genuine or whether the trust qualified for the exemptions.

The appeal was allowed for statistical purposes.

For Appellant: S. Ramesh, FCA

For Respondent: Banoth Akhil Ram Naik, JCIT