2018 (8) TMI 748 - AT - Income Tax

Exemption u/s 11 - educational institution / university - addition of surplus - founder of the trust, treasure of the trust, member of trust are getting personal benefit in the form of salary - Application or use of income or property for the benefit of persons referred to section 13(3) - Held that - It is apparent that the payment made to these persons clearly attracts the provisions of Sections 13(1) and 13(2) of the Act however, only to the extent of the payment which is found to be excess of what may be reasonably paid for such service. In case no services were rendered then the entire payments to such persons would be treated as the application of income of the trust in violation of the provision of Section 13(1) r.w.s. 13(3) of the Act and therefore, to the extent of the payment the benefit of Section 11 will not be available. Since neither the AO nor the ld. CIT(A) has examined the relevant facts on the point whether all these persons possess the requisite qualification for holding the position as shown by the assessee and further whether they have rendered any services to the trust. - Matter remanded back.

Summary

Issues Involved:
1. Deletion of addition of surplus due to rejection of exemption under Section 11 invoking provisions of Section 13(1)(c)(ii) of the Income Tax Act, 1961.
2. Reasonableness of salary payments to specified persons under Section 13(3) of the Act.
3. Consideration of facts and auditor's certification regarding salary payments to specified persons.
4. Application of Section 164(2) regarding taxation of surplus at maximum marginal rate.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Surplus Due to Rejection of Exemption under Section 11 Invoking Provisions of Section 13(1)(c)(ii):
The Revenue challenged the CIT(A)'s decision to delete the addition of ?3,20,75,265/-, which was made due to the rejection of exemption under Section 11. The Assessing Officer (AO) had invoked Section 13(1)(c)(ii) of the Act, asserting that the trust's income was used for the benefit of specified persons, thus denying the exemption. The CIT(A) overturned the AO's decision, allowing the trust's claim for exemption under Section 11.

2. Reasonableness of Salary Payments to Specified Persons under Section 13(3) of the Act:
The AO noted that the trust paid ?58,49,909/- in salaries to its founder, treasurer, and other specified persons under Section 13(3). The AO argued that these payments constituted personal benefits and were therefore unreasonable. The CIT(A) disagreed, finding the payments reasonable based on the services rendered by these individuals. However, the Tribunal noted that neither the AO nor the CIT(A) adequately examined whether these individuals rendered actual services or possessed the requisite qualifications for their positions.

3. Consideration of Facts and Auditor's Certification Regarding Salary Payments to Specified Persons:
The AO relied on the auditor's report (Form 10B) which certified that salaries were paid to specified persons. The CIT(A) did not find sufficient evidence from the AO to prove that the payments were excessive. The Tribunal emphasized that the CIT(A) should have examined whether the payments were reasonable and whether the individuals rendered actual services. The Tribunal cited various judicial precedents to support the principle that payments to specified persons should be reasonable and justified by the services rendered.

4. Application of Section 164(2) Regarding Taxation of Surplus at Maximum Marginal Rate:
The AO applied Section 164(2) to tax the surplus at the maximum marginal rate, arguing that the trust's income was used for the benefit of specified persons. The CIT(A) found this application incorrect, as the conditions for invoking Section 164(2) were not met. The Tribunal agreed, stating that Section 164(2) applies only when the share ratio of beneficiaries is unknown and the income is held in violation of Section 13.

Conclusion:
The Tribunal set aside the CIT(A)'s order and remitted the matter back to the AO for fresh adjudication. The AO was directed to verify whether the specified persons rendered actual services and possessed the requisite qualifications for their positions. The Tribunal emphasized that only the portion of payments found to be excessive should be disallowed under Sections 13(1)(c)(ii) and 13(2)(c). The Tribunal also noted that other issues decided by the CIT(A) were not challenged and thus attained finality. The appeal was allowed for statistical purposes.