Section 13(1) of the Income Tax Act lays down rules for certain incomes that are to be included in Assessee’s Total Income. Section 13(1) primarily deals with Income of Trusts and Charitable Organisations. Section 13(1) provisions shall be read and interpreted considering the related sections 11 and 12 of the Income Tax Act. Below, we will cover the total Scope of the Section 13(1), Defiinition of the word Relative under section 13(1) of the Income Tax Act and relevant case laws.
Clauses of Section 13(1) Income Tax Act
The exemption granted by Sections 11 or 12 of the Act would not, however, be available in the following cases and circumstances:
- Where any part of the income from property held under trust for private religious purposes does not enure for the benefit of the public;
- In the case of a trust for charitable purposes or an institution created or established for charitable purposes on or after 1.4.1962, any income of the trust will not qualify for tax exemption if the trust or institution is created or established for benefit of any particular religious community or caste. By virtue of explanation 2 to Section 13, any trust created for the benefit of Scheduled Castes, backward classes, or Scheduled Tribes or women or children would not be deemed to be a trust or institution created or established for the benefit of any particular religious community or caste for purposes of this exemption. Consequently, income derived by trusts or institutions established purely for the benefit of scheduled castes or tribes or backward classes or women or children would qualify for tax exemption even though the income is applied in reality for the benefit of a particular community or caste.
- In the case of a trust or institution established after 1.4.1962 or in the case of a trust, whenever created or established, if the income of the trust or institution is applied during the accounting year, directly or indirectly for benefit of any of the specified persons or if under the terms of the trust or the rules governing that institution, any part of the income of the trust enures for the benefit of such specified persons, whether directly or indirectly, the trust would not be given tax exemption under Section 11, with the exception that (i) where such use or application is by way of compliance with a mandatory term of the trust or a mandatory rule governing the institution, and (ii) where such use or application relates to any period before the 1st day of June, 1970, the aforementioned provision shall not apply.
- Where any business is owned by a religious or charitable trust or institution, the income of such business shall be determined by the Assessing Officer in the same way as the assessment of business income of any other assessee. Consequently, any additions to the business income shown in the accounts of the assessee made by the Assessing Officer is deemed to be income applied by the trust for purposes other than charitable or religious. Such additions, therefore, do not qualify for tax exemptions under Section 11(4).
Trusts before 1962 – Section 13(1) Income Tax Act
However, in the case of a trust or institution established before 1.4.1962, the exemption would not be forfeited merely on the ground that a part of the income or property of the trust or institution is applied directly or indirectly for the benefit of the specified persons if such use or application is for compliance with a mandatory term of the trust or a mandatory rule governing the institution.
Specified Persons under Section 13(1) Income Tax Act
For purposes of the disallowance of exemption, the ‘specified persons’ are the following namely:
- the author of the trust or the founder of the institution,
- any person who has made a substantial contribution to the trust or institution, that is to say, any person whose total contribution up to the end of the relevant previous year exceeds Rs.25,000
- where the author, founder or other substantial contributor is a Hindu Undivided Family, any member of the family,
- any trustee of the trust or manager, by whatever name called, of the institution,
- any relative of such author, founder, person, member, trustee or manager, referred to above, and
- any concern in which any of the above mentioned persons has a substantial interest.
Relative Definition Section 13(1) Income Tax Act
The expression ‘relative’ used for this purpose has been defined in the Explanation (1) to Section 13 to mean:
- the spouse of the individual
- brother or sister of the individual
- the brother or sister of the spouse of the individual,
- any lineal ascendant or descendant of the individual
- any lineal ascendant or descendant of the spouse of the individual, and
- the spouse of any of the persons referred to in (ii) to (v) above and any lineal ascendant or descendant of a brother or sister of either the individual or the spouse of the individual.