NAUGHTYS PET SANCTUARY,KERALA vs. CIT( EXEMPTION), KOCHI

3. The Appellant submits that the provisions of section 13 provide exceptional circumstances under which section 11 or 12 shall not operate so as to exclude from the total income (certain amounts) of the previous year. Reading of the section 13 makes it abundantly clear that the provisions of section 13 are to be applied at the time of assessment of income / exemption under section 11/12 of the income Tax Act, 1961. it is humbly submitted by the Appellant that the provisions of section 13 cannot be called upon to reject that application filed under section 12A of the income Tax Act, 1961.

4. The Appellant humbly submits that the order has been passed in hasty and no fair opportunity was provided to the Appellant to cure the alleged defect in the trust deed. Also, the provisions of section 13 have not been violated because no payment were made to any person referred to in section 13(3). in the absence of any payment of salaries to persons referred to in section 13(3) allegation of violation of the provisions is illegal and the impugned order deserves to be set aside by the Hon'ble Tribunal.

5. The Appellant submits that the various amendments were to the trust deed on the instruction of the Department vide its letter dated 25th Oct 2023. in the letter dated 25th Oct 2023 no objection was raised in respect of the clause that is under question now. Further the notice of the CIT dated 4th Jan 2024 also did not have any mention regarding the clause of the Trust deed based on which the application is rejected. The Appellant submits that the application has been rejected arbitrarily and in haste. Hence the order of the CIT (Exemption) Kochi merits to be set aside by the Hon'ble Tribunal.

6. Appellant humbly submits that if the provisions of the Trust deed were in violation of any provision of the law a fair opportunity must have been provided to the Appellant to cure the defect. Without providing such opportunity rejecting the application is unjust and is in violation of principles of natural justice. Hence the impugned order merits to be set aside by the Hon'ble Tribunal.

Naughtys Pet Sanctuary, Thiruvananthapuram Page 3 of 10 7. The Appellant draw Hon'ble Tribunal's attention to the provision of section 13 quoting which the application is rejected. It is humbly submitted that the said section can be pressed into play at the time of assessment of the income for any year and not during the processing or application under section 12A. There is no condition in the provisions of section 12 A that suggest that the trust deed of the trust must not provide for payment of honorarium to the trustees. This is without prejudice to the basic contention that in the instant case no honorarium has been paid to e trustees. The reasoning accorded by the Ld. Commissioner are legally flawed due to the following reasons: a. The provision of section 13 can be pressed into play only during the assessment of income to ascertain whether the said honorarium can form part of application of income or not. b. As there was no honorarium paid there was no contravention at all.

Naughtys Pet Sanctuary, Thiruvananthapuram Page 4 of 10 13. Surprisingly the Appellant Trust received a communication from the Office of ITO Exemption ward TVM vide ITBA/COM/F/17/202324/1061843015(1) dated 1st March 2024 asking for bank statement and also some clarification regarding a particular clause in the trust deed.

3.1 The Assessee Trust filed an application for final registration/approval under section 12A of the Act in form 10ABvide acknowledgment number 354853000300923 dated 30thSeptember,2023.

3.2 The ld. CIT(E)on verification of the documents as submitted by the assesseefound that the trust deed of the assessee is having the following clause under the head "Powers of Trustees" which is violation of section 13(3) of the Act: (8) To receive honorarium or salary against his/her services or involvement in any of the project or programs run by the Trust, which must be decided by the Trustee and approved by the Board of Trustees." 3.3 Thereafter, the assessee was given the opportunity to file any objections, if any, on or before 26/02/2024. The assessee filed reply vide letter dated 22/02/2024 relevant part of which is reproduced below : “2. It is humbly submitted that the section 13(3) can be pressed into play only at the time of assessment of income for each year and if in any previous year there is payment of salary to the specified person the exemption can be denied only ang only if payment of such salary is in excess of what may be reasonably paid for such services rendered by specified person, We submit that this provision cannot be pressed into play to decide the eligibility of registration filed in the form Naughtys Pet Sanctuary, Thiruvananthapuram Page 5 of 10 IOAB. Even if it is assumed that this provision can pressed into play we re-iterate that no salary has been paid to any trustee.”

3.4 The reply of the assessee was not accepted by the ld. CIT (Exemption)on the ground that when the said clause is in the trust deed of the assessee, which is in violation of section 13(3) of the Act, regardless of whether any payment in honorarium or salary is made to specified persons, the assessee is ineligible for registration u/s 12A of the Act.

3.5 In view of the above, the application in Form 10AB filed u/s. 12A(1)(ac)(iii) of the Act by the assessee was rejected and the provisional approval u/s 12A in Form in 10AC was also cancelled by the ld. CIT (Exemption).

7.1 We are of the considered opinion that for the purpose of granting registration/approval, the ld. CIT(E) should call for all the relevant documents/information from the trust or make such enquiries in order to satisfy himself about the genuineness of the activity of the trust and the compliance of such requirement of any other law for time being in force by the trust as are material for the purpose of achieving its object and shall pass an order in writing either by granting the registration of the trust or cancelling its registration after affording a reasonable opportunity of being heard.Section 12AB undoubtedly requires the Commissioner to satisfy himself about the objects of the trust or institution and genuineness of its activities and grant a registration only if he is so satisfied. The said section requires the Commissioner to be so satisfied in order to ensure that the object of the trust and its activities are charitable since the consequence of such registration is that the trust is entitled to claim benefits under sections 11 and 12 of the Act. In other words, if it appears that the objects of the trust and its activities are not genuinethat is to say notcharitable 7.2In the present case, the ld. CIT(E) found in the trust deed that under the head “Powers of Trustees” there exist clause regarding payment of honorarium or salary to the trustee against the services or involvement which in his opinion is in violation of section 13(3) of the Act. The CIT(E) is of the view that the assessee is ineligible for registration u/s 12A of the Act regardless of whether any payment of honorarium or salary is made to the specified persons or not. We are of the considered view that mere fact that the trust deed is having clause under the head “Powers of the Trustees” to receive honorarium or salary against the services or involvement by the trusteedoes not render the trust non-genuine or its activity becomes ineligible for registration u/s 12AB of the Act. Further, as rightly contended by the ld. A.R. of the assessee, as per provisions contained in section 13(2)(c) of the Act, if any amount is actually paid by way of salary, allowance or otherwise during the previous year to any person referred to in sub-section (3) out of the resources of the trust or institution for services rendered by that person to such trust or institution and the amount so paid is in excess of what may be reasonably paid for such services then the income of the property shall be deemed to have been used or applied for the benefit of a person referred to in section 13(3) of the Act.In the present case, as contended by the ld. AR of the assessee, no salary has been actually paid to any of thetrustee. Therefore, we are of the opinion that merely because there is a clause in the trust deed regarding payment of honorarium or salary to the trustee for his services or involvement in any of the project or programme run by the trust, the application for registration/approval cannot be rejected on this sole ground 7.3 Further, we are of the opinion that the provisions of section 13(3) of the Act will trigger only in cases where the amount so paid to the trustee by way of salary or allowance or otherwise out of the resources of the trust or institution for services rendered by that person is in excess of what may be reasonably paid for such services. Therefore, merely by paying the salary or honorarium for the services or involvement in any of the project or program run by the trust which are paid reasonably for the services rendered will not violate the conditions for applicability of section 11 & 12. The law pertaining to remuneration or fees paid to Trustees orBoard Members is very enabling and allows reasonableremuneration to Trustees or Board Members under section 13(1)(c)read with section 13(2)(c) of the Act.The Supreme Court in CIT Vs Kamala Town Trust [2005] 279 ITR89 (All) held that section 13 of the Act, carves out an exception tothe general exemption granted under sections 11 and 12 of theAct, to the income derived by a trust / charitable institution. Theonus lies on the Revenue to bring on record cogent material /evidence to establish that the trust / charitable institution is hitby the provisions of section 13.

7.4 Further We are of the considered opinion that any contractual compensation against servicesrendered is permissible, however any benefit paid / provided is notpermissible. A benefit means something which is not due to a person.Under this understanding any unreasonable over and above what isreasonably due shall be treated as a benefit. Forfeiture under section13(1)(c) of the Act can be done only if any benefit is provided to the Board membersor interested functionaries. Section 13(1)(c) does not Naughtys Pet Sanctuary, Thiruvananthapuram Page 9 of 10 prohibit payment ofremuneration; it gets attracted if any benefit is provided to interestedpersons. If the functionary is a salaried employee under an employmentcontract and therefore, is being paid salary which is a contractualobligation on the part of the Trust then such remuneration is permissible.There has to be a reason or cause of action to infer and conclude that anybenefit was provided to the functionary. A benefit implies payment ofanything which is not legally due to a person, therefore, the salaries paidcannot be treated as a benefit. It may also be noted that payment of salaryper se is not a benefit. To establish that some benefit was passed undersection 13(1)(c) of the Act, it will be incumbent on the AO to have reasons to believethat the remuneration were legally not due to the employees/functionaries.Once the legal eligibility of the trustees/board members to receive salaryas full time employee is not disputed, then the only option available is tosee the reasonableness of the salaries under section 13(2)(c) of the Act.Therefore, we agree with the contention of the ld. A.R. of the assessee that the provision of section 13(3) of the Act cannot be pressed into play to decide the eligibility of registration of the Trust. In view of the above discussion, we set aside the order of the rejection passed by the ld. CIT(E), Kochi and direct to grant the registration to the assessee as sought vide application in form 10AB dated 30/09/2023.