2018 (11) TMI 1864 - AT - Income Tax

Exemption u/s 11 and 12 - salary paid to three persons/employees as excessive u/s 13 - CIT-A deleted the addition - HELD THAT - To find out whether the payment of salary is excessive then same has to be examined on commercial considerations i.e. in comparison to market value of services rendered. The AO has not brought anything on record to show that salary paid to these three persons was excessive in comparison to the market value of services rendered. Merely because there is increase in salary by 15% compared to earlier year will not lead to conclusion that salary paid is excessive or it is personal benefit as envisaged in Section 13(1) of the Act Excessive salary has to be shown not with reference to increase in salary over earlier year but with reference to excessiveness in comparison to market value of the services that is with reference to commercial considerations. Such a finding is clearly missing in the assessment order. AO has just made a general comment that salary given is excessive and disallowed ₹ 50,000/- out of salary given. No finding has been given as to why it is excessive or what is the basis of making the disallowance. No comparative case has been given to justify the disallowance. A disallowance based on a general comment is not called for. The action of the AO defies the logic. In view of these facts the disallowance u/s 13 made by the AO is hereby deleted. Addition on account of amounts paid to other partner NFOs - CIT(A) has deleted the addition - HELD THAT - On this issue the law stands well settled that when a sum has been disbursed to another entity carrying out similar object and registered u/s 12A of the Act then it is application of income for purpose of section 11 and 12 - Hon'ble Jurisdictional High Court in the case of J.K Charitable Trust 1991 (4) TMI 19 - ALLAHABAD HIGH COURT held that Donation to another charitable trust out of contributions received by assessee trust is application of income for charitable purpose and such donation cannot be treated as income of assessee trust in year of contribution either under unamended as amended section 12 of the Act. The decision of Hon'ble Gujrat High Court in case of Nirmala Baku Bhai Foundation 1996 (7) TMI 100 - GUJARAT HIGH COURT too is in favour of the appellant on this issue itself.CIT(A) while deciding the above ground has considered various judicial pronouncements and has exhaustively dealt with the issue which needs no interference from our side. Addition on account of difference of interest on FDRs and saving bank account - assessee has shown total interest income as different from interest as per certificate issued by the bank - CIT(A) has deleted the additions - HELD THAT - It is clear that the assessee is following cash system of accounting. The interest actually received during the year is shown under the Interest income. The accrued Interest income is shown in the year of actual receipt. This disputed amount of interest i.e. ₹ 6,17,903/- has been offered for taxation by the assessee in F.Y. 2013-14 relevant to A.Y. 2014-15 i.e. the year of receipt of this interest. If the same sum is added during the year under consideration i.e. A.Y. 2013-14 on accrual basis then it will result in double taxation of the same interest income which is not permissible under the law. In view of these facts, we do not find any infirmity in the findings of learned CIT(A). Revenue appeal dismissed.

Summary

Issues Involved:
1. Disallowance of excessive salary paid to regular/part-time employees under Section 13 of the Act.
2. Disallowance of application of income/deduction of expenses paid to other partner NGOs under Section 12A of the Act.
3. Addition of interest income not shown by the assessee due to the difference between actual and accrued interest.

Detailed Analysis:

1. Disallowance of Excessive Salary Paid to Regular/Part-Time Employees:
The Revenue contested the deletion of disallowances amounting to ?50,000 and ?96,152 made by the Assessing Officer (AO) under Sections 13(1)(c)(ii), 13(2)(c), and 13(3) on account of excessive salary paid to employees. The CIT(A) deleted these additions, noting that the AO was provided with detailed job descriptions and remuneration histories. The CIT(A) found the 15% salary increase reasonable given the employees' roles and market conditions, and criticized the AO for not providing a basis for the disallowance or comparing the salaries with market rates. The Tribunal upheld the CIT(A)’s decision, emphasizing that the AO’s general comments and lack of comparative analysis were insufficient grounds for disallowance.

2. Disallowance of Application of Income/Deduction of Expenses Paid to Other Partner NGOs:
The Revenue challenged the deletion of the addition of ?62,40,012 made by the AO, arguing that amounts paid to other NGOs registered under Section 12A were not allowable. The CIT(A) cited judicial precedents and CBDT instructions, asserting that donations to other charitable entities with similar objects are considered proper application of income under Sections 11 and 12. The Tribunal affirmed the CIT(A)’s decision, referencing the Hon'ble Jurisdictional High Court’s ruling in J.K Charitable Trust and other relevant cases, thereby dismissing the Revenue's ground.

3. Addition of Interest Income Not Shown by the Assessee:
The Revenue disputed the deletion of the addition of ?6,17,903 made by the AO for interest income not shown by the assessee. The CIT(A) noted that the assessee follows the cash system of accounting, and the disputed interest was included in the subsequent year’s income. The Tribunal agreed, stating that adding the interest on an accrual basis for the current year would result in double taxation, which is impermissible. Consequently, the Tribunal upheld the CIT(A)’s deletion of the addition.

Conclusion:
The Tribunal dismissed the Revenue’s appeal, affirming the CIT(A)’s decisions on all contested issues. The judgment emphasized the necessity of concrete evidence and comparative analysis in disallowing expenses and the importance of consistent accounting practices to avoid double taxation.