Income Tax Appellate Tribunal - Delhi
Deputy Director Of Income Tax ... vs Pariwar Sewa Sanstha on 13 October, 2006
Equivalent citations: (2007)110TTJ(DELHI)861
ORDER
N.K. Karhail, J.M.
1. This appeal of the Revenue is directed against the order dt. 28th Jan., 2003 passed by learned CIT(A), New Delhi for the asst. yr. 1998-99. The assessee has also filed the cross-objection in the matter.
2. The ground of appeal of the Revenue reads as under:
On the facts and circumstances of the case, the learned CIT(A) has erred in allowing the expenditure amounting to Rs. 9,28,83,209.
2.1 The ground of appeal of the assessee in cross-objection reads as under:
That the learned CIT(A) has erred while denying the exemption and computing the income not excluded an amount of Rs. 32,83,353, representing the stocks of the medicines held by the assessee trust. The aforesaid expenditure having been incurred and the amount utilized for charitable purpose, had to be excluded while computing the total income of the assessee, in respect of which income only, deduction could have been disallowed, in the event it is held there was violation of Sections 11 and 12 of IT Act.
3. Briefly stated facts are that assessee is a society registered under the Societies Registration Act 1860. It is engaged in the field of family planning as well as maternal and child health care. There is no change in the aims and objects during this year. The society is registered under Section 12A of IT Act, 1961. In the asst. yrs. 1996-97 and 1997-98 the exemption under Section 11 was denied to the assessee trust for violation of provision of Section 13(1)(c) of the Act. During the course of assessment the assessee was asked to give details of payments to persons who are covered under Section 13(1)(c) of the Act. As per the audit report filed by assessee under Section 12A(b), payments has been made during the year to:
(i) Mrs Sudha Tewari, member/executive secretary of governing body of the Sanstha and managing director of an amount of Rs. 10,21,820 and
(ii) M/s B.C. Dasgupta & Co., solicitors and advocate for professional services. Mrs. V.K. Govil, partner in this firm is a governing member of the Sanstha.
4. The AO pointed out that this was the first year when the assessee had itself disclosed in the audit report the details of application of income or property of the trust for the persons referred to under Section 13(3). In earlier no such mention had been specifically made by the assessee. From the details of salaries and allowance paid to Smt. Sudha Tewari, the AO noticed that her basic salary (Rs. 6,45,000), ex gratia payment (Rs. 2,80,000) and perquisites (Rs. 96,820), amounted to Rs. 10,21,820. The AO compared the salary etc. paid to Smt. Sudha Tewari and compared the same to see the increase in the same over the preceding years. She found that the percentage increase was as under:
Asst. yr. Salary and Per cent
Perquisites increase
1993-94 Rs. 2.65 lacs NIL
1994-95 Rs. 3.39 lacs 27.9
1995-96 Rs. 4.19 lacs 23.6
1996-97 Rs. 5.34 lacs 27.4
1997-98 Rs. 7.04 lacs 31.8
1998-99 Rs. 13.97 lacs 98.4s
5. The AO also stated that Smt. Sudha Tewari had been paid an ex gratia amount of Rs. 2,80,000 over and above the salary. It was stated before her that this had not been paid to any other person which consists of 500 highly professional team members. On the basis of above comparison, the AO stated that the salary and perquisites paid to Smt. Sudha Tewari had been increasing at a very unreasonable rate per annum that the salary etc. paid to her during the previous year relevant to the assessment year, under consideration was almost 100 per cent more than those received by her in the asst. yr. 1997-98. She also noticed that from an increment of Rs. 6,100 per month in January, 1997, she had received an increment of Rs. 38,333 per month from January, 1998. Before the AO it was explained by the trust that the salary etc. of Smt. Sudha Tewari was fixed as a result of the resolution dt. 9th March, 1993 wherein Dr. Tim Black, chief executive of Marie Stopes International was authorised to fix the same and that his decision would be final. The AO stated that it was very strange that a trust could be running on the arbitrary decisions of one trustee Dr. Tim Black who decides and fixes salaries as a single person. Besides, no other comparable increase was noticed in the salary of any other trustee or member of the organization. As Smt. Sudha Tewari was an executive secretary and member of the governing body since 22nd Jan., 1982, she was a person covered by Section 13(3), as had also been mentioned in the audit report. The AO looked into the justification for the increase in salary of Smt. Sudha Tewari. She was informed that she was a highly qualified person and the CYP of the organization since instruction was furnished before the AO along with data of growth of the income since inception. It was stated before her that the rise in salaries was related to the growth in CYP of the organization and the growth in the total income of the Sanstha. The AO examined the same and found that the income from CYPs had increased by 10.68 per cent, 40.07 per cent and 17.79 per cent over the preceding year in the financial years 1995-96, 1996-97 and 1997-98. As against this, the percentage increase in the salary etc. paid to Smt. Sudha Tewari was 27.9, 23.6, 27.4, 31.8 and 98.4 from the financial years 1993-94 to 1997-98. After examining the above, the AO stated that the increase in salary etc. paid to Smt. Sudha Tewari was not related to the growth of the organization and was not justified considering that in the asst. yr. 1998-99 the performance of the Sanstha was not extraordinary. Hence, she invoked the provisions of Section 13(1)(c) since Smt. Sudha Tewari was a person covered by Section 13(3) being the executive secretary/member of the governing body. The AO also found that house rent was paid to Smt. Sudha Tewari @ Rs. 8,000 p.m. in the name of Gopal Tewari & Sons, HUF and that Shri Gopal Tewari was her husband. For this reason also, she invoked the provisions of Section 13(1)(c) as was done in asst. yr. 1997-98 and which had been upheld by the learned CIT(A). The AO further noticed that the Sanstha continued to make payment to M/s B.C. Dasgupta & Co. which was mentioned as a person covered under Section 13(3) in the audit report and the AO, therefore, invoked the provisions of Sections 13(1)(c) and 13(2)(c) as had been done in asst. yr. 1997-98 and had been confirmed by the learned CIT(A). Thus, on account of the high salaries and perquisites paid to Smt. Sudha Tewari, the rent paid to Gopal Tewari & Sons, HUF and the payments paid to M/s B.C. Dasgupta & Co., the AO invoked the provisions of Sections 13(1)(c) and 13(2)(c) and proceeded to deny exemption under Sections 11 and 12 and bring to tax the gross receipt of the Sanstha at Rs. 12,91,48,034, which was assessed under the head 'Income from other sources'.
6. On appeal the learned CIT(A) after having considered the submission of the assessee has held that Smt. Sudha Tewari being a prohibited person, the payment in the form of salary and perquisites made to her have been correctly examined by the AO for the purpose of verifying any breach of Section 13(1)(c) and 13(2)(c). The learned CIT(A) has proceeded to examine the issue of salary paid to Smt. Sudha Tewari and issue of abnormal increase in the same. The learned CIT(A) after having examined the matter in great details has observed that she was paid a total of Rs. 11,17,600 (and not Rs. 13,97,596 as mentioned by the AO, since the ex gratia payment of Rs. 2,80,000 was already included) which gave an increase of 59 per cent over the immediately preceding year, when it was Rs. 7,04,199. He has further considered whether the increase of 59 per cent in this year over the last year was justified and reasonable so as to attract the Section 13(1)(c). He has observed that an increase would normally be on account of two reasons. Firstly, normal increase on account of inflation as occurs in any organization and as considered by Tribunal, and secondly on account of some extraordinary work that may have been done by a person which translates into a better performance or higher relieves/profits for the organization. The percentage income of the Sanstha for asst. yr. 1998-99 was only 17.79 per cent over the preceding assessment year as compared to 40.07 per cent in asst. yr. 1997-98 over 1996-97. That is to say that in terms of total income of the Sanstha, the rate of increase had actually decreased compared to asst. yr. 1997-98, whereas the salaries to Smt. Sudha Tewari had increased disproportionately by 59 per cent. The financial results achieved by any organization are a safe and scientific parameter to judge whether higher payments made for achieving such result were justified. Thus he has held that since there had been fall in the rate of increase of income, there was no justification for enhancing the salary etc. of Smt. Sudha Tewari much higher than the increase of any of the earlier years. He has further mentioned that the Tribunal in its order for asst. yrs. 1995-96 and 1996-97 have stated that increase of about 25 per cent per annum in the salary and perquisites could be considered to be the normal increase given by an organization. However, in its order for asst. yr. 1997-98 at para 9, the Tribunal has stated that if there is a change, the reasonableness thereof has to be again examined. That is to say that if there are material changes compared to the earlier years the AO would be free to examine the assessee's claim again with reference to the facts obtaining in the assessment year. Thus, according to learned CIT(A) the assessee's reliance on the decision of Tribunal is misplaced since there is a substantial change in the quantum as well as in the rate of increase this year. In fact, if the decision of Tribunal is followed then too the increase of 59 per cent was more than twice than that considered as reasonable by Tribunal. As against the increases in salary and perquisites given by the assessee in earlier year, this year the increase in salary shows a quantum jump compared to any of the earlier years, both in terms of annual salary, rate of increase as well as in the monthly increase given in the month of January over the preceding month. Thus he has held that the AO was justified in examining the matter again and coming to a conclusion that since the total income of the assessee did not show a matching increase, in fact the rate of increase of income was actually lower than last and hence huge jump in the salary and perquisites paid to Smt. Sudha Tewari amounted to conferring a benefit on her which was not commensurate with the income of the assessee trust. Since she was a person covered by Section 13(3) this amounted to a violation of Sections 13(1)(c) and 13(2)(c), therefore, AO had rightly denied the exemption to assessee for this reason under Sections 11 and 12. With regard to denial of exemption on the ground of payment of rent to M/s Gopal Tewari & Sons, HUF and to M/s B.C. Dasgupta & Co., the learned CIT(A) has held that AO was not justified to deny the exemption under Sections 11 and 12. As regards the action of AO in bringing to tax the entire receipt of Rs. 12,91,48,034, the learned CIT(A) has held thus:
Ground No. 2 relates to the AO's action in bringing to tax entire gross receipts of Rs. 12,91,48,034 as reflected in the income and expenditure account. Even if the AO denies exemption under Sections 11 and 12 of the IT Act and assesses the income of the appellant under the head 'Income from other sources', what is to be brought to tax is the net income after allowing the expenses incurred for earning that income. The AO was therefore not justified in bringing to tax the entire gross receipts of the appellant. The AO is, therefore, directed 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 appellant's objection that the amount of closing stock of medicines reflected in the income and expenditure account should be excluded, however, cannot be accepted since the purchases of medicines debited in the income and expenditure account are also reflected in this account on the debit side and have been allowed as expense in the total expenditure mentioned above. Also, the appellant's plea that donations and contributions should be excluded as they did not constitute income can also not be accepted. In the case of a trust, the receipts in the form of donations and contributions are income and amounts spent on charitable objects are the expenditure. All donations are income as long as they are not exempt under some provision of the Act. Once exemption is withdrawn, they are to (be) brought to tax after allowing the expenses incurred towards the charitable objects. Thus, the AO was justified in considering the entire receipts, but had erred in not allowing the outgo or expenses claimed, which he is directed to allow.
7. We have heard the parties and perused the material to which our attention was drawn during the course of hearing. It is seen that the issue with regard to denial of exemption provided under Sections 11 and 12 on the ground that assessee has violated the provision of Sections 13(1)(c) and 13(2)(c) of the Act by making excessive payment of salary to Mrs. Sudha Tewari, member executive secretary of the governing body came for consideration also in the earlier years. It would be seen that the Tribunal in its order for asst. yrs. 1995-96 and 1996-97 have stated that an increase of 25 per cent per annum in salary and perquisites could be considered to be normal increase given by an organization and in asst. yr. 1997-98 it has stated that if there is a change, the reasonableness thereof has to be again examined. It is seen the matter has again been examined and found that increase in salary and perquisites of Smt. Sudha Tewari of 59 per cent in the year under consideration as compared to last assessment year, whereas the total income of assessee did not show matching increase and in fact the rate of increase of income was actually lower than last year. The assessee has not brought any material to substantiate its claim that in the assessment year under consideration Mrs. Sudha Tewari has rendered extraordinary service for which the substantial increment in salary was awarded. Thus we find no infirmity in the impugned order confirming the action of the AO in denying the exemption under Sections 11 and 12 of the Act, As regard action of the AO in bringing the entire gross receipt of Rs. 12,91,48,034 of the assessee to tax, (same) is not justified. The learned CIT(A) has correctly observed that what is to be brought to tax is the net income after allowing the expenses incurred for earning that income. However, we find that the direction of the learned CIT(A) to allow the expenses reflected in the income and expenditure account amounting to Rs. 9,28,83,209 are not justified inasmuch as the same needs to be verified, which has not been done by the learned CIT(A). As regard the direction of learned CIT(A) to tax the resulting income of Rs. 3,62,64,825 the assessee has placed no material on record to rebut the finding of learned CIT(A) made in this regard. Hence, we find no reason to interfere with the order of learned CIT(A) so far the direction to tax the said amount of Rs. 3,62,64,825. In the circumstance for the limited purpose we set aside the matter to the file of the AO to examine the genuineness of the expenditure of Rs. 9,28,83,209 shown by the assessee. Needless to mention the assessee may be provided an opportunity of being heard.
8. In the result, the appeal of the Revenue is allowed for statistical purpose and the cross-objection of the assessee is dismissed.