Remuneration to Trustees: When Is It Permissible Under Law?

Legal Framework and Bare Act Analysis

The Indian Trusts Act, 1882, governs private trusts, while public trusts fall under state-specific legislation. Section 50 of the Indian Trusts Act, 1882, explicitly states: “In the absence of express directions in the instrument of trust, or a contract to the contrary with the beneficiary or the Court at the time of accepting the trust, a trustee has no right to remuneration for trouble, skill, and loss of time in executing the trust.” This provision establishes that trustees are not entitled to payment unless:

• The trust deed explicitly authorizes remuneration.
• Acontract with the beneficiary or court approval permits it.

Exceptions apply to official trustees,such as the Official Trustee or Administrator General, who are statutorily entitled to remuneration.

For public charitable trusts, the Bombay Public Trusts Act, 1950, and Section 13 of the Income Tax Act, 1961, allow trustees to receive “reasonable” remuneration for services rendered, provided it is specified in the trust deed. Section13 (1)(c) of the Income Tax Act prohibits private benefits to related parties but permits reasonable payments for services. The term “reasonable” implies alignment with market rates for similar services, ensuring no undue enrichment.

Judicial Interpretations and Case Law

Judicial rulings have clarified the scope of trustee remuneration:

• PNR Society for Relief & Rehabilitation of the Disabled Trustv. DDIT (ITAT Ahmedabad, ITA No.2729/ Ahd/ 2010): The tribunal upheld that trustee salaries are permissible as trust expenditure if reasonable and tied to services like project management or fundraising.
• C.I.T. v. Kamla Town Trust (279 ITR 089, Allahabad High Court): The court allowed remuneration under Section 11 of the Income Tax Act for services directly related to trust objectives, emphasizing transparency.
• C.I.T. v. LucknowDiocesanTrustAssociation(AllahabadHighCourt): Payments to trustees were upheld if for specific services, reinforcing the need for documentation.
• Adhikar v. Income Tax Officer (ITAT Cuttack): The tribunal ruled that salaries are not excessive unless proven otherwise, protecting trusts from arbitrary tax challenges.
• These cases underscore that remuneration must be justified, reasonable, and documented to withstand scrutiny.

Practical Implications and Examples

Consider a public charitable trust,“Health for All,” running medical camps. If the trust deed permits, a trustee managing logistics can receive remuneration comparable to market rates for event management. For instance, paying ₹50,000 monthly for overseeing camps is reasonable if similar services cost ₹40,000 - ₹60,000. However, paying ₹2,00,000 for minimal work risks tax scrutiny and loss of exemptions under Section 12A.

In 2022, a Maharashtra - based trust faced penalties when trustees received ₹10,00,000 annually without clear service records, leading to a tax demand and Charity Commissioner investigation. Conversely, a Delhi trust avoided issues by documenting trustee roles, such as financial oversight, and aligning payments with market standards

Disadvantages of Non-Compliance

• Loss of Tax Exemptions: Excessive remuneration can lead to revocation of tax benefits under Sections 12A and 80G, increasing tax liabilities.
• Legal Challenges: Beneficiaries or authorities may challenge payments, leading to litigation.
• Reputational Damage: Perceived misuse of funds can erode donor trust.

Consequences of Non-Compliance

Tax Penalties: The Income Tax Department may treat excessive payments as taxable income.

Charity Commissioner Action: Under Section 41D (1) (d) of the Bombay Public Trusts Act, trustees can be suspended or removed for fund misuse.

Criminal Liability: Misappropriation may attract charges under Section 406 of the Indian Penal Code for criminal breach of trust.

Common Confusions

• Trusteeship vs. Services: Many assume trustees can be paid for their role, but payments are only for specific services.
• Privatevs. Public Trusts: Privatetrustsfacestricterrules, while publictrusts allow reasonable remuneration under state laws.
• Reasonable Amount: Determining “reasonable” remuneration is subjective, often leading to disputes.

Advantages of Compliance

• Legal Protection: Adhering to the trust deed and tax laws safeguards against penalties.
• Transparency: Proper documentation enhances donor confidence.
• Tax Benefits: Reasonable remuneration preserves exemptions under Sections 12A and 80G.

Professional Advice

• Include a clear remuneration clause in the trust deed, specifying services and payment limits.
• Conduct market research to ensure payments align with industry standards.
• Maintain detailed records of services rendered and payments made
• Engage a chartered accountant to review remuneration for tax compliance

Additional Points: Challenges and Recent Trends

A keychallenge is defining “reasonable” remuneration, as market rates vary by region and service type. Recent trends show increased Income Tax Department scrutiny, with audits focusing on trustee payments. In 2023, over 500 trusts lost tax exemptions due to excessive remuneration. Trusts should proactively document services and seek legal advice to mitigate risks.