2004 (8) TMI 622 - AT - Income Tax

Summary

Issues Involved:
1. Denial of exemption under Section 11 of the Income-tax Act.
2. Alleged violation of provisions of Section 13(1)(c) and 13(2) of the Income-tax Act.
3. Reasonableness of salary and ex gratia payments to Mrs. Sudha Tiwari.
4. Computation of income under Section 28 of the Income-tax Act.
5. Levy of interest under Section 234B of the Income-tax Act.

Detailed Analysis:

1. Denial of Exemption under Section 11:
The primary issue revolves around whether the Revenue was justified in refusing the exemption provided under Section 11 of the Income-tax Act, 1961, on the grounds that the assessee violated the provisions of Section 13(1)(c) and 13(2)(c) by making excessive payments to Mrs. Sudha Tiwari, a Member/Executive Secretary of the governing body.

2. Alleged Violation of Section 13(1)(c) and 13(2):
The Assessing Officer observed that the salary and perquisites paid to Mrs. Sudha Tiwari had increased unreasonably. The officer noted that Mrs. Tiwari was paid an ex gratia amount of Rs. 2,80,000 over and above her salary, which was not paid to any other employee of the Sanstha. The officer concluded that such payments were excessive and invoked the provisions of Section 13(1)(c) and 13(2)(c), denying the exemption under Sections 11 and 12 and taxing the gross receipts of the assessee-Sanstha at Rs. 12,91,48,034.

3. Reasonableness of Salary and Ex Gratia Payments:
The Commissioner of Income-tax (Appeals) held that the high salaries paid to Mrs. Tiwari were not justified and that the Sanstha had moved away from its charitable activities. The Commissioner directed the Assessing Officer to allow the expenses reflected in the income and expenditure account amounting to Rs. 9,28,83,209 and bring to tax the resulting income of Rs. 3,62,64,825. The Commissioner noted that Mrs. Tiwari was not just an ordinary employee but wielded considerable influence in the Sanstha's affairs, and her salary increases were disproportionately high compared to the organization's income growth.

4. Computation of Income under Section 28:
The assessee contended that once it is held that the assessee is not entitled to an exemption under Section 11, the income had to be computed in accordance with the provisions of Section 28, and the grants and contributions received could not be regarded as income. The Commissioner of Income-tax (Appeals) rejected this argument, holding that the entire gross receipts should be taxed, and the expenses should be allowed as deductions.

5. Levy of Interest under Section 234B:
The assessee also challenged the levy of interest under Section 234B of the Income-tax Act. However, the Tribunal did not find any infirmity in the order of the Commissioner of Income-tax (Appeals) on this count and upheld the levy of interest.

Conclusion:
The Tribunal upheld the findings of the Commissioner of Income-tax (Appeals) and dismissed the appeal filed by the assessee. The Tribunal concluded that Mrs. Sudha Tiwari fell within the category of prohibited persons as defined under Section 13(3) of the Income-tax Act and that the increase in her salary was unreasonable and not commensurate with the services rendered. Consequently, the claim of exemption under Section 11 was hit by the provisions of Section 13(1)(c). The Tribunal also upheld the computation of income and the levy of interest under Section 234B.