The Income Tax Appellate Tribunal, Bangalore, has remanded a case concerning the tax exemption eligibility of a charitable trust running a hospital, where the Assessing Officer disallowed Rs. 20,50,000 paid as honorarium to its trustees. The Tribunal directed a fresh examination to determine whether the remuneration was reasonable and commensurate with the services rendered, emphasizing that the burden of proof lies with the assessee to establish this under Section 13(1)(c) of the Income-tax Act, 1961.
Background & Facts
The Dispute
The appellant, Bantval Sulochana Madhava Shenoi Trust (the Trust), is a charitable trust registered under Section 12A of the Income-tax Act, 1961. It operates Kamakshi Hospital in Bengaluru, which provides healthcare services primarily to poor and middle-class patients at subsidized rates. The Trust filed its return for the assessment year 2018-19 on 11 October 2018, along with an 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 on 31 March 2021.
Key Facts
- The Trust paid honorarium totaling Rs. 20,50,000 to three specified persons (trustees) during the previous year relevant to assessment year 2018-19:
- Rs. 6,45,000 to Shri M. Mahesh Shenoy, Managing Trustee
- Rs. 8,20,000 to Dr. K.R. Kamath, Trustee Administrator
- Rs. 5,85,000 to Shri M. Ashok Shenoy, Joint Managing Trustee
- The Trust contended that these payments were reasonable, as the trustees performed substantial duties, including hospital administration, financial management, statutory compliance, and overseeing the construction of a new hospital.
- The total honorarium constituted only 0.65% of the hospital's total revenue of Rs. 31,51,78,759 for the year.
- The Trust submitted detailed responses dated 4 January 2021 and 19 March 2021, along with vouchers, bills, and other documentary evidence to justify the payments.
Procedural History
- 11.10.2018: Trust filed return of income for AY 2018-19 along with Form 10B.
- 31.03.2021: National e-Assessment Centre passed assessment order under Section 143(3) read with Section 144B, disallowing Rs. 20,50,000 paid as honorarium to trustees.
- 28.03.2026: Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, dismissed the Trust's appeal.
- 26.05.2026: Appeal heard by ITAT Bangalore.
- 29.06.2026: ITAT pronounced order, remanding the matter to the Assessing Officer for fresh adjudication.
Relief Sought
The Trust sought the following reliefs:
- Quashing of the assessment order dated 31.03.2021 and the appellate order dated 28.03.2026.
- Allowance of exemption under Section 11 of the Act for the honorarium paid to trustees.
- Direction to the Assessing Officer to accept the payments as reasonable and not violative of Section 13(1)(c).
The Legal Issue
The central question before the Tribunal was whether the payment of honorarium to trustees, who are specified persons under Section 13(3), constitutes a violation of Section 13(1)(c) of the Income-tax Act, 1961, merely by virtue of the payment, or whether the Trust must establish that the remuneration was reasonable and commensurate with the services rendered.
Arguments Presented
For the Appellant (Trust)
- The Trust contended that the honorarium paid to the trustees was reasonable and proportionate to their duties, which included hospital administration, financial management, statutory compliance, and overseeing the construction of a new hospital.
- It relied on judicial precedents, including 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 argue that reasonable remuneration for services actually rendered does not attract Section 13(1)(c).
- The Trust emphasized that the total honorarium of Rs. 20,50,000 was only 0.65% of the hospital's total revenue, and that the trustees performed functions comparable to those of a CFO or CEO, whose market remuneration would be substantially higher.
- It argued that the Assessing Officer failed to examine the evidence submitted and passed a non-speaking order.
- The Trust also pointed out that the same issue was accepted in scrutiny proceedings for assessment year 2017-18 without any addition.
For the Respondent (Revenue)
- The Revenue argued that the burden of proof lies on the assessee to establish that the remuneration paid to trustees was reasonable and commensurate with the services rendered.
- It contended that the Trust failed to produce independent benchmarks, such as comparable salary data or valuation reports, to justify the honorarium.
- The Revenue submitted that mere internal resolutions, agreements, vouchers, and administrative records do not objectively establish the reasonableness of the payments.
- It further argued that acceptance of similar payments in earlier years does not operate as res judicata, as each assessment year is separate.
The Court's Analysis
The Tribunal observed that the Trust is a charitable institution engaged in medical relief and is eligible for exemption under Sections 11 and 12 of the Act. However, Section 13(1)(c) withdraws this exemption where any part of the trust's income or property is applied for the benefit of a specified person under Section 13(3), including trustees, to the extent that the payment exceeds what may reasonably be paid for the services rendered.
The Tribunal noted that the assessee had explained the nature of services performed by the trustees, but the critical issue was whether the amounts paid exceeded what could reasonably be allowed for those services. The Tribunal emphasized that the initial burden lies on the assessee to establish:
- That the services were actually rendered by the trustees.
- That the remuneration paid for those services was reasonable.
The Tribunal further held that the reasonableness of remuneration should ideally be determined at the time of appointment or fixation of remuneration, supported by a trustee resolution recording the basis for payment and confirming that it is not excessive. The Assessing Officer must then examine whether the payment exceeds what could reasonably be paid for the services rendered.
"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."
The Tribunal found that neither the assessee nor the Assessing Officer had undertaken this exercise. It therefore restored the matter to the file of the Assessing Officer with the following directions:
- The assessee must establish, with adequate supporting material, that the remuneration paid to the trustees was reasonable having regard to the services rendered.
- The assessee must also provide documentation showing that, for similar services, comparable remuneration would not have been lower in ordinary commercial circumstances.
- The Assessing Officer must examine such material objectively, considering the trustees' educational qualifications, expertise, and the nature and extent of work performed.
The Verdict
The Tribunal allowed the appeal for statistical purposes and remanded the matter to the Assessing Officer for fresh adjudication. The Assessing Officer was directed to:
- Re-examine the evidence submitted by the Trust.
- Determine whether the honorarium of Rs. 20,50,000 paid to the trustees was reasonable and commensurate with the services rendered.
- Decide the issue afresh in accordance with law, considering the trustees' qualifications, expertise, and the nature of their duties.
What This Means For Similar Cases
Burden of Proof Lies on the Assessee
- Charitable trusts paying remuneration to trustees must proactively establish that the payments are reasonable and commensurate with the services rendered.
- The assessee must provide independent benchmarks, such as comparable salary data, valuation reports, or market surveys, to justify the remuneration.
- Internal documents, such as resolutions or agreements, are insufficient unless supported by objective evidence of reasonableness.
Reasonableness Must Be Determined at the Outset
- The Tribunal emphasized that the reasonableness of remuneration should be determined at the time of appointment or fixation of remuneration, supported by a trustee resolution.
- Trusts should maintain contemporaneous records, including:
- Detailed job descriptions for trustees.
- Market surveys or salary benchmarks for comparable roles.
- Resolutions or agreements justifying the remuneration as reasonable.
No Res Judicata for Tax Assessments
- The acceptance of similar payments in earlier assessment years does not preclude the Revenue from questioning the reasonableness of remuneration in subsequent years.
- Each assessment year is treated separately, and trusts must be prepared to justify payments afresh if challenged.
Fact-Based Exercise for Assessing Officers
- The Assessing Officer must undertake a fact-based exercise to determine whether the remuneration exceeds what could reasonably be paid for the services rendered.
- Trusts should ensure that their submissions to the Assessing Officer are comprehensive, including:
- Evidence of the trustees' qualifications and expertise.
- Documentation of the nature and extent of services performed.
- Comparative data to establish the reasonableness of the remuneration.
