2006 (10) TMI 185 - AT - Income Tax

List of Issues:
1. Denial of exemption under sections 11 and 12 of the IT Act due to alleged violation of sections 13(1)(c) and 13(2)(c).
2. Justification for the increase in salary and perquisites paid to Smt. Sudha Tewari.
3. Taxability of the entire gross receipts of Rs. 12,91,48,034.
4. Allowance of expenses amounting to Rs. 9,28,83,209.
5. Exclusion of the closing stock of medicines amounting to Rs. 32,83,353.
6. Treatment of donations and contributions as income.

Detailed Analysis:

1. Denial of Exemption under Sections 11 and 12:
The Revenue's appeal contended that the assessee violated sections 13(1)(c) and 13(2)(c) by making excessive payments to Smt. Sudha Tewari and M/s B.C. Dasgupta & Co. The AO noted significant increases in Tewari's salary and perquisites, which were not commensurate with the organization's performance. The CIT(A) upheld the AO's decision, confirming that the payments amounted to conferring undue benefits, thus violating sections 13(1)(c) and 13(2)(c). Consequently, the exemption under sections 11 and 12 was denied.

2. Justification for the Increase in Salary and Perquisites:
The AO observed that Smt. Sudha Tewari's salary increased by 98.4% in the assessment year 1998-99 compared to the previous year, which was deemed unreasonable. The CIT(A) examined the issue in detail and concluded that the 59% increase in Tewari's salary was disproportionate to the organization's income growth, which was only 17.79% over the preceding year. The Tribunal had previously considered a 25% annual increase as reasonable. The substantial increase was not justified by any extraordinary services rendered by Tewari, leading to the conclusion that the salary hike violated sections 13(1)(c) and 13(2)(c).

3. Taxability of the Entire Gross Receipts:
The AO assessed the entire gross receipts of Rs. 12,91,48,034 as taxable income. The CIT(A) held that even if exemptions under sections 11 and 12 were denied, only the net income after deducting expenses should be taxed. The AO's action of taxing the entire gross receipts was deemed unjustified.

4. Allowance of Expenses Amounting to Rs. 9,28,83,209:
The CIT(A) directed the AO to allow expenses amounting to Rs. 9,28,83,209 while computing the taxable income. However, the Tribunal found that the genuineness of these expenses needed verification, which was not done by the CIT(A). Therefore, the matter was remitted back to the AO for verification of the expenses.

5. Exclusion of the Closing Stock of Medicines:
The assessee's cross-objection argued that the closing stock of medicines amounting to Rs. 32,83,353 should be excluded from the income computation. The CIT(A) rejected this claim, stating that the purchases of medicines were already reflected and allowed as expenses in the income and expenditure account. Therefore, the exclusion of the closing stock was not warranted.

6. Treatment of Donations and Contributions as Income:
The CIT(A) held that donations and contributions are considered income for a trust unless exempt under specific provisions of the Act. Since the exemption was withdrawn, these receipts were to be taxed after allowing expenses incurred towards charitable objects. The assessee's plea to exclude donations and contributions from income was thus rejected.

Conclusion:
- The Tribunal upheld the denial of exemption under sections 11 and 12 due to violations of sections 13(1)(c) and 13(2)(c) concerning excessive payments to Smt. Sudha Tewari.
- The Tribunal agreed with the CIT(A) that only the net income should be taxed after allowing verified expenses.
- The matter of verifying the expenses amounting to Rs. 9,28,83,209 was remitted back to the AO.
- The assessee's cross-objection regarding the exclusion of the closing stock of medicines and donations was dismissed.
- The appeal of the Revenue was allowed for statistical purposes, and the cross-objection of the assessee was dismissed.

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