2021 (6) TMI 446 - AT - Income Tax

Exemption u/s 11 - salary payments to the specified persons under section 13(3) - there was increase in the salary of the specified persons from year to year which was not reasonable since the increase was in the cases of the specified persons and not in the case of other employees - onus to prove the excessiveness of the salary/remuneration paid to the specified persons - CIT-A allowed the claim of the assessee for the salary - HELD THAT - In the instant case, it is relevant to point out that the A.O. although mentioned that the salary paid was not reasonable, however, he disallowed the entire salary paid to the specified persons without pointing out excessive salary, if any. All the specified persons are having the educational qualifications required for the job assigned to them and they are whole time employees of the assessee society for achieving the object of education for which the assessee society had been formed and are not carrying on any other business/profession. Sarvshri Sanjay Sardana and Sandeep Sardana apart from working as Principals of the schools at Chandigarh and Panchkula respectively are also having additional assignment of Directors of all the schools. The remunerations paid to the specified persons were considered to be genuine in the preceding years however, for the first time, the disallowance was made by the A.O. for the year under consideration. The assessee society had been maintaining regular books of accounts which were duly audited and the returns of income had been filed on the basis of such books of accounts. The payments of salary to the specified persons were made through banking channel and the issue had been examined years to years since A.Y. 1997-98 U/s 143(3) of the Act till the A.Y. 2012-13. Copies of the assessment orders framed u/s 143(3) of the Act for those assessment years are placed of the assessee s compilation. It is relevant to point out that the different Assessing Officers, after proper examination, accepted the salary paid to the specified persons in the earlier years and the first time, the disallowance was made in the assessment framed for the A.Y. 2013-14 by assigning the reason that the salary paid to the specified persons was not reasonable and undue benefit was given to those related persons. No material is brought on record to substantiate that how and in what manner, the salary paid to the specified persons considering their qualifications and the duty assigned to them was not reasonable since no comparable case was brought on record by the A.O. In the present case, the A.O. did not doubt the services rendered and qualifications of the specified persons, he disallowed the salary by observing that it was not reasonable, however, nothing is brought on record to suggest how and in what manner, it was not reasonable or was excessive. As the specified persons possessed the requisite qualifications and rendered the services, therefore, it cannot be held that payment of salary to the specified persons was unreasonable particularly when no comparable case was cited by the A.O. As the salary had been paid to the specified persons against the services provided by them the income from salary had been shown in their individual return of income and nothing is brought on record by the A.O. to substantiate that any extra salary was paid for the administrative function and that the salary was excessive in comparison to any similar case, therefore, the disallowance made by the A.O. was rightly deleted by the ld. CIT(A). The assessee furnished all the details relating to the payment of salary, tuition fee received from the students and nothing is brought on record to substantiate that the expenditure on salary or facilities to the relatives of the trustees of the assessee society were excessive having regard to the fair market value of the services provided by them. Therefore, the A.O. was not justified in making disallowance U/s 13(3) - Decided against revenue. Disallowance on account of rent paid to the specified persons by invoking provisions of Section 13(3) - CIT-A deleted the addition - HELD THAT - In the present case, it is not in dispute that the assessee provided accommodation to the Principals-cum-Directors of the assessee society who were also managing administrative work from the residential premises. It was not the case of the A.O. that the rent paid was excessive as compared to the similar accommodation. The contention of the ld. Counsel for the assessee that the specified persons had shown the value of the rent as perquisites in their respective hands which has been accepted by the department has not been rebutted and that in earlier years also for the similar payments, no disallowance was made by the department. The payment of rent was not doubted and the A.O. did not bring any material on record to substantiate that the rent paid was excessive and the specified persons to whom accommodation was provided had shown the valuation of the said properties as perquisites in their respective hands. Therefore, the ld. CIT(A) rightly deleted the disallowance made by the A.O. particular when the rent paid for the same accommodation has been accepted in the preceding years - No valid ground to interfere with the findings given by the ld. CIT(A) on this issue. Disallowance on account of interest on unsecured loans paid to the specified persons - CIT-A deleted the addition - HELD THAT - As assessee was paying interest at a higher rate than the interest paid to the specified persons and Members of the assessee society. In other words, the interest paid by the assessee society to its Members and specified persons was not excessive, therefore, the disallowance made U/s 13(1)(c) of the Act was not justified and the ld. CIT(A) rightly deleted the same. We do not see any valid ground to interfere with the findings of the ld. CIT(A) on this issue. Exemption u/s 11 - Claim denied for the reason that the assessee society was earning high profit year after years - HELD THAT - In the present case, it is noticed that the issue relating to the exemption U/s 11 of the Act has been settled by the ITAT Chandigarh Bench for the A.Y. 2003-04 which was affirmed by the Hon ble Jurisdictional High Court and the SLP against the judgment of the Hon ble Jurisdictional High Court was dismissed by the Hon ble Apex Court 2010 (7) TMI 1196 - SC ORDER therefore, we do not see any merit in the arguments put forth by the ld. CIT-DR on the issue relating to exemption U/s 11 of the Act. Disallowance of running expenses of the Mercedes cars - Mercedes Cars were purchased and used by the Directors - HELD THAT - In the present case, nothing is brought on record by the A.O. that the Mercedes Cars given to the Directors for the administrative work relating to the assessee society were used for personal purposes - this contention of the ld. Counsel for the assessee that perquisite values of the cars was being disclosed by the Directors in their individual returns as per the law and accepted by the department was not rebutted. We, therefore, do not see any merit in the submissions of the ld. CIT-DR. Reopening of assessment u/s 147 - salary, rent and interest paid to the specified persons - HELD THAT - In the present case, it is an admitted fact that the A.O. framed original assessment U/s 143(3) of the Act and before completing the original assessment, the A.O. asked the assessee about the payment of salary, rent and interest by issuing questionnaire - A.O. vide question No. 9 specifically asked the assessee to furnish the details of payments made to the specified persons and vide question No. 12, the details were asked relating to the total receipts as well as the expenditures. The A.O. vide Q.No. 17also asked the details of loans borrowed or repaid, therefore, it is clear that the A.O. asked the assessee specific informations. A.O. properly examined all the details furnished by the assessee and made disallowance also for those expenses which in his view were personal in nature - A.O. considered the expenses relating to the salary to the specified persons amounting to ₹ 1,09,12,261/- as non-genuine. However, the same were considered to be genuine while framing the assessment U/s 143(3) of the Act, so it was a change of opinion. Similar was the position with regard to the rent and the interest. Now the question arises as to whether the assessment can be reopened on the basis of change of opinion. A.O. accepted the claim of the assessee, not only in the earlier years but also in the later years and considered the expenses on account of salary, rent and interest paid to the specified persons as genuine. Moreover, the A.O. for the year under consideration did not bring any material on record to substantiate that the expenses incurred for the specified persons by the assessee were excessive in comparison to the expenses incurred by another comparable cases. A.O. not only asked the assessee to furnish the details relating to the payment made to the specified persons on account of salary, rent and interest but also examined those and thereafter framed the assessment U/s 143(3) of the Act, therefore, the issuance of the notice U/s 148 r.w.s. 147 of the Act, on the basis of the same issue was a mere change of opinion which was not permissible. CIT(A) was not justified in confirming the action of the A.O. in reopening the assessment, therefore, the reassessment framed by the A.O. is quashed. - Decided in favour of assessee.

Summary

Issues Involved:
1. Reasonableness of salary payments to specified persons under Section 13(3) of the Income Tax Act.
2. Justification of rent payments to specified persons under Section 13(3).
3. Justification of interest payments on unsecured loans to specified persons.
4. Validity of reopening assessments under Section 147/148 of the Income Tax Act.
5. Eligibility for exemption under Section 11 of the Income Tax Act.

Detailed Analysis:

1. Reasonableness of Salary Payments to Specified Persons under Section 13(3):

The Assessing Officer (A.O.) disallowed the salary payments to specified persons, arguing that the payments were not reasonable and provided undue benefits. The A.O. noted that the salary increments were higher for specified persons compared to other employees and questioned the justification for such payments. The assessee argued that the specified persons, including Sh. G.S. Sardana, Sh. Sanjay Sardana, and Sh. Sandeep Sardana, were highly qualified and experienced, contributing significantly to the society's growth. The CIT(A) and ITAT found that the payments were justified based on the qualifications, experience, and contributions of the specified persons. The ITAT emphasized that the burden of proving unreasonableness lies with the Revenue Authorities, and in the absence of such evidence, the disallowance was not justified.

2. Justification of Rent Payments to Specified Persons under Section 13(3):

The A.O. disallowed rent payments to specified persons, arguing that the transactions were not genuine and provided undue benefits. The assessee contended that the rent payments were based on fair market value, supported by valuation reports, and were included as perquisites in the income tax returns of the specified persons. The CIT(A) and ITAT found that the rent payments were justified, noting that the specified persons used the premises for official purposes and the rent was in line with market rates. The ITAT emphasized that the A.O. did not provide evidence to show that the rent payments were excessive.

3. Justification of Interest Payments on Unsecured Loans to Specified Persons:

The A.O. disallowed interest payments on unsecured loans to specified persons, arguing that the funds were sourced from excessive salary and rent payments, constituting a diversion of funds. The assessee argued that the interest rate of 12% was reasonable and lower than the interest rates on secured loans from banks. The CIT(A) and ITAT found that the interest payments were justified, noting that the specified persons provided unsecured loans without security, and the interest rate was lower than market rates. The ITAT emphasized that the A.O. did not provide evidence to show that the interest payments were unreasonable.

4. Validity of Reopening Assessments under Section 147/148:

The A.O. reopened the assessments for the A.Y. 2010-11 and 2011-12, citing reasons related to payments to specified persons and the commercial nature of the society's activities. The assessee argued that the reopening was based on a mere change of opinion, as the issues were already examined during the original assessments. The CIT(A) upheld the reopening, but the ITAT quashed the reassessments, noting that there was no new tangible material to justify the reopening and that it was based on a change of opinion, which is not permissible.

5. Eligibility for Exemption under Section 11:

The A.O. questioned the society's eligibility for exemption under Section 11, arguing that the society was earning high profits and engaging in commercial activities. The assessee argued that the surplus was ploughed back for educational purposes, and the society's primary objective was to provide education. The CIT(A) and ITAT found that the society's activities were in line with its charitable objectives, and the surplus was used for educational purposes. The ITAT emphasized that the mere fact of earning a surplus does not disqualify the society from claiming exemption under Section 11.

Conclusion:

The ITAT upheld the CIT(A)'s decision to allow the salary, rent, and interest payments to specified persons, finding them reasonable and justified. The ITAT also quashed the reassessments for the A.Y. 2010-11 and 2011-12, ruling that the reopening was based on a change of opinion without new tangible material. The ITAT further upheld the society's eligibility for exemption under Section 11, noting that the surplus was used for educational purposes and the society's activities were charitable in nature.