2012 (5) TMI 137 - AT - Income Tax

Deleting the addition made by the A.O. on account of excessive payment to the persons specified in section 13(3) Revenue appeal - Held that - If an assessee made payments for availing benefit, services or any facility from the persons mentioned in section 40A(2(b) and similar type of benefit or service can be availed from the open market at a cheaper rate then the excess amount considered by the AO is to be disallowed to the assessee out of his business expenditure - Since the income of the assessee is being not computed as a business income and computed under sec. 11, 12 and 13 - Clause b of section 40A(2) provides no reference to an assessee who is a society or trust and whose income is to be assessed as per sections 11, 12 and 13 - Because a similar mechanism has been provided therein section 13(1)(ii) and 13(3) of the Act it appears that the Assessing Officer has made reference to this section unnecessarily - section 13(3) is an analogous to sub-clause (b) of section 40A(2) against revenue. Violation of sec. 13(1)(c)(ii) r.w.s.13(3) and thus lose status of a charitable institution and exemption under sec. 11 Held that - Restriction is applicable to those amounts which have been applied directly or indirectly for the benefit of any person referred to in sub-section (3) of the Act and will not lead to any conclusion that assessee would loose its charity status - if a small amount is to be disallowed that would not disqualify to enjoy the status of charity- against revenue. Whether assessee has extended any undue benefit directly or indirectly to the persons referred to in sub-section (3) Held that - As far as the salary paid to two persons is concerned in assessment years 2005-06 and 2006-07, AO made the disallowance and the ITAT has upheld the deletion of disallowance looking to 6th Pay Commission which resulted into a handsome enhancement by 30% to 40%. in the salary of government teaching staff the increase in the salary of Shri Joseph John allowed to him by the ITAT in 2004-05, is being looked into with this angle also then sum of ₹ 55,000 would not be on a higher side against revenue.

Summary

Issues Involved:

1. Deletion of addition of Rs. 14,64,000 made by the Assessing Officer (A.O.) on account of excessive payment to persons specified in Section 13(3) of the Income-tax Act, 1961.
2. Allowing exemption under Section 11 of the Income-tax Act despite alleged violations of Section 13(1)(c)(ii) read with Section 13(2).
3. Overriding the observations of the ITAT in the assessee's own case for A.Y. 2006-07 regarding excessive salary payments to office bearers and members.

Issue-wise Detailed Analysis:

Issue 1: Deletion of Addition of Rs. 14,64,000

The revenue contended that the CIT(Appeals) erred in deleting the addition of Rs. 14,64,000 made by the A.O. for excessive payment to persons specified in Section 13(3). The A.O. had disallowed 2/3rd of the total remuneration of Rs. 21,96,000 paid to four individuals, invoking Section 40A(2)(b) of the Income-tax Act, 1961. The CIT(Appeals) deleted this disallowance, referencing the ITAT's decisions in previous assessment years (2003-04 to 2006-07) where similar disallowances were deleted. The ITAT noted that the A.O. did not provide evidence that the services could be availed at a lower rate from the open market. The salaries paid were consistent with those in previous years and were justified considering the qualifications and contributions of the individuals.

Issue 2: Allowing Exemption Under Section 11

The revenue argued that the CIT(Appeals) erred in allowing exemption under Section 11 despite the society allegedly violating Section 13(1)(c)(ii) read with Section 13(2). The CIT(Appeals) observed that even if undue benefits were extended to persons specified in Section 13(3), it would not lead to the society losing its charitable status. The ITAT agreed, stating that any undue benefits would not be considered as application of income for charitable purposes, but would not disqualify the society from enjoying the status of charity. Thus, the exemption under Section 11 was rightly allowed.

Issue 3: Overriding ITAT Observations for A.Y. 2006-07

The revenue claimed that the CIT(Appeals) erred by overriding the ITAT's observations from A.Y. 2006-07, which noted excessive salary payments. The ITAT found that the CIT(Appeals) had correctly referenced the ITAT's orders from previous years, where disallowances were deleted for similar payments. The salaries paid in the current year were not higher than those in A.Y. 2007-08, which the A.O. had allowed. The ITAT noted that the A.O. did not provide new evidence to justify the disallowance and relied on outdated salary comparisons. Considering the duties performed and the qualifications of the individuals, the salaries were not excessive.

Conclusion:

The ITAT upheld the CIT(Appeals)'s decision to delete the disallowance of Rs. 14,64,000 and allow the exemption under Section 11, dismissing the revenue's appeal. The ITAT emphasized the need for the A.O. to provide current market comparisons and evidence, which was lacking in this case. The consistent salary payments and the individuals' contributions justified the remuneration, and the society retained its charitable status.