Section 13 of the Income Tax Act, 1961 specifies situations where the tax exemptions under Section 11 (for charitable/religious trusts) will NOT be available. These are anti-abuse provisions to prevent misuse of trust funds for private gain.
1. Private Benefit to Specified Persons [Section 13(1)(c)]
Exemption is denied if trust income/property benefits:
- Founder/authorof the trust
- Substantial contributors(donors giving >₹50,000)
- Relativesof above persons (as defined in Section 2(41))
- Trustees(beyond reasonable remuneration)
- Any businessin which these persons have significant interest
Example: A school trust paying excessive salary to founder’s son.
2. Investment Violations [Section 13(1)(d)]
Exemption is lost if:
- Accumulated funds are not invested as per Section 11(5)
- Investments are made in prohibited modes(e.g., private company shares, speculative assets)
Example: Trust deposits funds in trustee’s personal business.
3. Religious Trusts with Restricted Benefits [Section 13(1)(b)]
For religious trusts only, exemption is denied if:
- Benefits are restricted to specific caste/community/religion
- Not available to general public
Exception: Trusts established before 1.4.1962 are exempt.
4. Business Income Conditions [Section 13(1)(bb)]
Business income exemption (under Section 11(4A)) is denied if:
- Business is not incidentalto charitable objectives
- Separate books are not maintained
- Work is not done by beneficiaries
Example: A medical trust running a commercial pharmacy.
5. Consequences of Violation
- Partial Denial: Only the violative portion is taxed (post-2023 amendment)
- Tax Rate: 30% under Section 115BBI
- Retrospective Effect: From year of violation, not registration date
