2024 (2) TMI 220 - AT - Income Tax

Assessment of trust - Addition on account of excessive salary to Chairman of the society within the meaning of section 13(3) and in violation of section 13(2)(c) - principle of consistency - main source of the income of the assessee society is the fee received from the students - HELD THAT - Since as contended by the Ld. AR, the salary paid to Chairman of the society in the subsequent assessment years i.e. from AY 2017-18 to 2023-24 has been considered by the department as reasonable for the services rendered which is equal to the salary in the relevant year i.e., AY 2016-17, therefore, the addition made by Ld. AO cannot be sustained for the relevant year. Observation of the Ld. AO considering the salary paid Chairman of the society in excess of the reasonable remuneration based on comparison with an employee, who is not performing the duties which can be compared with or are commensurate with the qualifications and services rendered by Mr. Patnaik. Such presumptions adopted by the Ld. AO are not permissible to invoke the provisions of section 13(3) r.w.s. 13(2C). Also, following the principle of consistency, since the reasonableness of salary to specified person has not been challenged by the revenue in the ensuing assessment years, no negative inference can be drawn in the relevant assessment year without any reasonable basis. Addition made by Ld. AO on account of payments in excess of reasonable salary u/s 13(2)(c), deserves to be struck down, and we do so. In the result, ground of the assessee is allowed. Exemption u/s 11 and 12 - denial of exemption on the ground that the assessee society has violated the provisions of section 13(1)(c) and 13 (2)(c) of the Income Tax Act - HELD THAT - As in ground no. 2 of the present appeal, wherein we have observed that the addition made by invoking provisions of section 13(c) r.w.s. 13(2C) is not sustainable and thus, have been vacated subject to certain verifications. We, therefore, are of the view that once the primary addition of u/s 13(3) r.w.s. 13(2b) have been vacated therefore, there is no basis remains for denying the exemption u/s 11 and 12 of the Act. Accordingly, ground no. 3 of the present appeal is disposed-off in favour of the assessee. Disallowance on violation of provision of section 13 to the extent excess payment instead of denying the entire exemption u/s 11 - HELD THAT - We draw inference from the decisions of coordinate bench of ITAT, Delhi in the case of IILM Foundation 2021 (2) TMI 528 - ITAT DELHI wherein the analogy laid down in the case of CIT vs. Working Women's Forum ( 2014 (8) TMI 681 - MADRAS HIGH COURT and CIT Vs. Fr Mullers Charitable Institutions ( 2014 (2) TMI 1033 - KARNATAKA HIGH COURT ) have been relied upon and have observed that in the event of any violation of provision of section 13, the entire exemption under section 11 cannot be denied and would be restricted only to this extent of income misused by the Trust. Thus we are also of the view that in case of violation of provisions of section 13, the exemption u/s 11 cannot be entirely refused but the same can be restricted to the amount of unreasonable payment of to the extent of income of the trust diverted and misused to the benefit of specified person. Consequently, we find force and concur with the alternate contention raised by the assessee th at even in case of violation of provisions of sections 13, denial of total exemption u/s 11 is not justified and it has to be limited to the extent of excess payment only.

Summary

Issues Involved:
1. Addition of Rs. 8,28,636/- on account of excessive salary to Shri G.S. Patnaik within the meaning of section 13(3) and violation of section 13(2)(c).
2. Denial of exemption under sections 11 and 12 of the Income Tax Act due to alleged violation of sections 13(1)(c) and 13(2)(c).

Summary:

Issue 1: Addition of Rs. 8,28,636/- on account of excessive salary to Shri G.S. Patnaik within the meaning of section 13(3) and violation of section 13(2)(c)
The assessee, an educational society, challenged the addition made by the Assessing Officer (AO) of Rs. 8,28,636/- for excessive salary paid to Shri G.S. Patnaik, a specified person under section 13(3). The AO compared the salary of Mr. Patnaik with the highest salary paid to another employee and deemed the payment excessive. The CIT(A) upheld this addition. However, the Tribunal found that the same salary was paid in subsequent years and was accepted by the department, indicating no issue with the reasonableness of the salary. The Tribunal concluded that the AO's comparison was arbitrary and not justified. Therefore, the addition made by the AO was struck down, and ground no. 2 of the assessee was allowed.

Issue 2: Denial of exemption under sections 11 and 12 of the Income Tax Act due to alleged violation of sections 13(1)(c) and 13(2)(c)
The denial of exemption under sections 11 and 12 was consequential to the disallowance discussed in issue 1. Since the Tribunal vacated the primary addition under section 13(3) read with section 13(2)(c), there was no basis for denying the exemption under sections 11 and 12. The Tribunal also considered the alternate contention that even in case of violation of section 13, the denial of exemption should be limited to the extent of the excess payment. Citing various case laws, the Tribunal agreed that the entire exemption cannot be denied and should be restricted to the amount of unreasonable payment. Consequently, ground no. 3 of the present appeal was disposed of in favor of the assessee.

Conclusion:
The appeal of the assessee was allowed, and the addition of Rs. 8,28,636/- on account of excessive salary was struck down. The denial of exemption under sections 11 and 12 was also vacated, with the Tribunal emphasizing that any violation of section 13 should result in disallowance limited to the excess payment only.