2020 (9) TMI 674 - HC - Income Tax

Exemption u/s 11 - Denial of exemption u/s 11 due to the activities not in accordance with the objects - allowance of 50% of salary to the Secretary granted by the CIT(A) - Substantial question of law - HELD THAT - We find that the CIT(A) has not assigned any reasons as to why only 50% of the addition made by the Assessing Officer should be sustained. It is not clear as to why the Revenue did not file any appeal to sustain the entire addition. If according to the CIT(A), AO committed an error in making the entire addition and the same requires to be interfered or modified, then the CIT(A) is expected to assign reasons. We find that there is no such reason assigned by the CIT(A) in its order dated 04.11.2016 and therefore, the relief granted by the CIT(A) to the assessee is based on personal opinion of the CIT(A) and not supported by any facts or legal precedence. However, since the Revenue is not on appeal, we refrain from making any further observations in this regard. Tribunal decided the correctness of the decision of the CIT(A) by which, it sustained only 50% of the addition to the tune of ₹ 4,47,500/-. The Tribunal pointed out that the allowance of 50% of salary to the Secretary granted by the CIT(A) was not disputed by the Department in their appeal before the Tribunal and therefore, found no reason to interfere with the order passed by the Tribunal. We find that no such contention was advanced based upon the documents, which are now pressed into service. Much reliance was placed on the Grant Contract with the European contributors and the conditions contained therein and contended that the payments made were in accordance with the terms of the contract and there is no possibility for the assessee to deviate. The documents, which were not placed before the CIT(A) if are to be placed before the Tribunal, then leave of the Tribunal should have been sought for. Appeals before us are under Section 260A of the Act and we are to decide as to whether a substantial question of law arises for consideration in these appeals. We are not here to exercise powers as a third appellate authority. We have set out the relevant facts in the preceding paragraphs to demonstrate that the entire matter, which culminated in the order of Tribunal, is fully factual. On consideration of the fact situation, the Assessing Officer completed the assessment drawing certain conclusions, which were wholly adverse to the assessee-Society. CIT(A) granted partial relief. Whatever relief granted by the CIT(A) was affirmed by the Tribunal on re-examination of the facts, added to that one of the additions with regard to the rent paid for the Accountant was deleted, certain issues have been remanded to the CIT(A) for fresh decision. Thus, we find, there is no question of law, much less substantial question of law arises for consideration in these appeals. No substantial questions of law

Summary

Issues Involved:
1. Disallowance of salary paid to the Secretary as excessive and unreasonable under Section 13(2)(c) of the Income Tax Act, 1961.
2. Eligibility for exemption under Section 11 of the Income Tax Act due to microfinance activities.
3. Alleged violation of Foreign Contribution Regulation Rules, 2011 by defraying more than 50% of foreign contributions towards administrative expenses.
4. Tribunal's reliance on the Supreme Court decision in Maddi Venkatraman & Co. (P) Ltd. vs. CIT.

Issue-wise Detailed Analysis:

1. Disallowance of Salary Paid to the Secretary:
The Tribunal confirmed the disallowance of ?4,47,400, being 50% of the salary paid by the Appellant Society to its Secretary, as excessive and unreasonable under Section 13(2)(c) of the Income Tax Act, 1961. The Tribunal did not apply their independent mind and failed to provide coherent and germane reasons for the disallowance. The salary was paid out of budgeted grants received from two foreign NGOs, not from the Society's resources. The appellant argued that the reasonableness of the salary should be judged from the perspective of the donor NGOs, who deemed the amount reasonable for the services rendered. Additionally, the appellant argued that the Income-tax Department should not disallow the salary as it would result in double taxation since tax was already collected from the Secretary's salary income.

2. Eligibility for Exemption Under Section 11:
The Tribunal remanded the issue of whether the appellant-Society is eligible for exemption under Section 11 of the Act due to its microfinance activities to the Commissioner of Income Tax (Appeals) (CIT(A)). The appellant contended that their activities fall under the first limb of sub-Section 2(15) of the Act, 'relief of the poor,' and not under 'advancement of any other object of general public utility.' The Assessing Officer erroneously categorized the Society's activities under the latter, leading to the denial of exemption. The appellant argued that the microfinance activities were conducted by Namadhu Deepam, and the Society merely acted as a facilitator, thus not engaging in any trade, commerce, or business.

3. Alleged Violation of Foreign Contribution Regulation Rules, 2011:
The Tribunal upheld the Assessing Officer's finding that the appellant-Society violated the Foreign Contribution Regulation Rules, 2011, by spending more than 50% of the foreign contribution on administrative expenses. The appellant argued that the entire grant was spent according to the donors' commands, and the relevant authority under the FCR Act had not found any violation. The appellant also contended that the grants from the European Community were exempt from the FCR Act, as per a notification by the Ministry of Home Affairs. The CIT(A) agreed that any violation of the FCR Act should not impact the computation of exempted income under the Income Tax Act.

4. Tribunal's Reliance on Supreme Court Decision:
The Tribunal relied on the Supreme Court's decision in Maddi Venkatraman & Co. (P) Ltd. vs. CIT, which held that it is against public policy to allow deductions under one statute for expenditures that violate another statute. The appellant argued that the decision was not applicable to their case and that the Tribunal erred in applying it to their situation.

Conclusion:
The High Court dismissed the appeals, holding that no substantial questions of law arose for consideration. The Tribunal's findings were based on factual determinations, and the High Court refrained from acting as a third appellate authority. The appeals were dismissed, and no costs were awarded.