Section 271AAE — Benefits to Related Persons (Charitable / Religious Trusts and Institutions)
Case Laws & Commentary — Income-tax Act, 1961 (as amended by the Finance Act, 2026) — bharattax.co Treatise
Status: Live but narrow. Inserted by the Finance Act, 2022 (w.e.f. 1-4-2023). It penalises a registered charitable/religious trust or institution that applies its income, directly or indirectly, for the benefit of a person referred to in section 13(3) — the penalty equalling the amount of income so applied, with an enhanced penalty for a repeat violation in a subsequent year.
Finance Act, 2026: No amendment by the Finance Act, 2026.
Mechanism: During any proceeding it is found that a trust/institution (registered under section 12AB or approved under section 10(23C)) has applied income for the benefit of a section 13(3) "interested person" → penalty equal to the income so applied (first violation), and equal to twice that amount on a subsequent violation.
Litigation profile: Negligible direct litigation (the section is new). Its content is governed by the long-settled section 13(3) "interested person" and "benefit to settlor/specified person" jurisprudence, which supplies the substantive test.
Section 271AAE buttresses the substantive prohibition in section 13 against a charitable or religious trust diverting its income for the benefit of its founder, trustees, substantial contributors and their relatives (the section 13(3) persons). Until 2022 the consequence of such diversion was the loss of exemption under sections 11/12 (and, post-2022, taxation of the "specified income"); section 271AAE adds a dedicated penalty equal to the income so applied, doubling on a repeat violation. It is "without prejudice to any other provision of this Chapter".
Whether income has been "applied" for the benefit of an interested person is to be judged by the established section 13 jurisprudence — what constitutes a "benefit", who is an interested person, and whether the dealing was at arm’s length or on adequate consideration. Because section 271AAE is new, this body of section 13 authority is the practical guide to its operation.
B. STATUTORY TEXT (verbatim)
Reproduced from the Income-tax Act, 1961 as amended up to the Finance Act, 2025; Finance Act, 2026 changes are noted above.
Benefits to related persons.
271AAE. Without prejudice to any other provision of this Chapter, if during any proceedings under this Act,
it is found that a person, being any fund or institution referred to in sub-clause (iv) or any trust or institution
referred to in sub-clause (v) or any university or other educational institution referred to in sub-clause (vi) or
any hospital or other medical institution referred to in sub-clause (via) of clause (23C) of section 10, or any
trust or institution referred to in section 11 has violated the provisions of the twenty-first proviso to clause
(23C) of section 10, or clause (c) of sub-section (1) of section 13, as the case may be, the Assessing Officer
may direct that such person shall pay by way of penalty—
(a) a sum equal to the aggregate amount of income applied, directly or indirectly, by such person, for
the benefit of any person referred to in sub-section (3) of section 13, where the violation is noticed
for the first time during any previous year; and
(b) a sum equal to two hundred per cent of the aggregate amount of income of such person applied,
directly or indirectly, by that person, for the benefit of any person referred to in sub-section (3) of
section 13, where violation is noticed again in any subsequent previous year.
C. AUTHORITIES
Direct authority on section 271AAE has not yet developed; the candour rule applies. The substantive contours are supplied by section 13(3) authority, cited as cognate guidance.
1. The "benefit to interested person" test (section 13 jurisprudence)
Principle — diversion for an interested person
Proposition Income is "applied for the benefit" of a section 13(3) person where it is diverted to, or used to confer an advantage on, the settlor, trustees, substantial contributors or their relatives otherwise than at arm’s length; mere transactions on adequate consideration in the ordinary course do not amount to such application.
Principle — penalty equals the income so applied; doubles on repeat
Proposition The penalty is the amount of income applied for the interested person’s benefit, and twice that amount where a violation has occurred in any earlier previous year; the quantum is mechanical once the diversion is established.
Use Fixes the computation and signals the steep cost of recurrence.
Prepared for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text reproduced from the official Act; case-law holdings are the author’s summaries for professional use.
CHAPTER XXI — PENALTIES IMPOSABLE
Section 271AAE — Benefits to Related Persons (Charitable / Religious Trusts and Institutions)
Case Laws & Commentary — Income-tax Act, 1961 (as amended by the Finance Act, 2026) — bharattax.co Treatise
Status: Live but narrow. Inserted by the Finance Act, 2022 (w.e.f. 1-4-2023). It penalises a registered charitable/religious trust or institution that applies its income, directly or indirectly, for the benefit of a person referred to in section 13(3) — the penalty equalling the amount of income so applied, with an enhanced penalty for a repeat violation in a subsequent year.
Finance Act, 2026: No amendment by the Finance Act, 2026.
Mechanism: During any proceeding it is found that a trust/institution (registered under section 12AB or approved under section 10(23C)) has applied income for the benefit of a section 13(3) "interested person" → penalty equal to the income so applied (first violation), and equal to twice that amount on a subsequent violation.
Litigation profile: Negligible direct litigation (the section is new). Its content is governed by the long-settled section 13(3) "interested person" and "benefit to settlor/specified person" jurisprudence, which supplies the substantive test.
A. COMMENTARY
A new penalty enforcing the section 13 bar
Section 271AAE buttresses the substantive prohibition in section 13 against a charitable or religious trust diverting its income for the benefit of its founder, trustees, substantial contributors and their relatives (the section 13(3) persons). Until 2022 the consequence of such diversion was the loss of exemption under sections 11/12 (and, post-2022, taxation of the "specified income"); section 271AAE adds a dedicated penalty equal to the income so applied, doubling on a repeat violation. It is "without prejudice to any other provision of this Chapter".
The substantive test comes from section 13(3)
Whether income has been "applied" for the benefit of an interested person is to be judged by the established section 13 jurisprudence — what constitutes a "benefit", who is an interested person, and whether the dealing was at arm’s length or on adequate consideration. Because section 271AAE is new, this body of section 13 authority is the practical guide to its operation.
B. STATUTORY TEXT (verbatim)
Reproduced from the Income-tax Act, 1961 as amended up to the Finance Act, 2025; Finance Act, 2026 changes are noted above.
Benefits to related persons.
271AAE. Without prejudice to any other provision of this Chapter, if during any proceedings under this Act,
it is found that a person, being any fund or institution referred to in sub-clause (iv) or any trust or institution
referred to in sub-clause (v) or any university or other educational institution referred to in sub-clause (vi) or
any hospital or other medical institution referred to in sub-clause (via) of clause (23C) of section 10, or any
trust or institution referred to in section 11 has violated the provisions of the twenty-first proviso to clause
(23C) of section 10, or clause (c) of sub-section (1) of section 13, as the case may be, the Assessing Officer
may direct that such person shall pay by way of penalty—
(a) a sum equal to the aggregate amount of income applied, directly or indirectly, by such person, for
the benefit of any person referred to in sub-section (3) of section 13, where the violation is noticed
for the first time during any previous year; and
(b) a sum equal to two hundred per cent of the aggregate amount of income of such person applied,
directly or indirectly, by that person, for the benefit of any person referred to in sub-section (3) of
section 13, where violation is noticed again in any subsequent previous year.
C. AUTHORITIES
Direct authority on section 271AAE has not yet developed; the candour rule applies. The substantive contours are supplied by section 13(3) authority, cited as cognate guidance.
1. The "benefit to interested person" test (section 13 jurisprudence)
Principle — diversion for an interested person
Proposition Income is "applied for the benefit" of a section 13(3) person where it is diverted to, or used to confer an advantage on, the settlor, trustees, substantial contributors or their relatives otherwise than at arm’s length; mere transactions on adequate consideration in the ordinary course do not amount to such application.
Use The substantive gateway to section 271AAE, drawn from settled section 13 law.
Principle — penalty equals the income so applied; doubles on repeat
Proposition The penalty is the amount of income applied for the interested person’s benefit, and twice that amount where a violation has occurred in any earlier previous year; the quantum is mechanical once the diversion is established.
Use Fixes the computation and signals the steep cost of recurrence.
Prepared for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text reproduced from the official Act; case-law holdings are the author’s summaries for professional use.