Vaishali Nagar Sikshan Samiti Vs CIT (ITAT Indore)
Section 12AB Registration: Salary to Secretary’s Family Member Requires Proper Examination Before Treating It as Diversion of Funds
The controversy
The Indore Bench of the Income Tax Appellate Tribunal examined the rejection of an educational society’s application for renewal of registration under Section 12AB, based on an alleged diversion of funds through salary paid to a society member who was also a family member of its Secretary.
The Commissioner of Income Tax (Exemption) treated the payment as a benefit to a specified person under Section 13(3) and concluded that the society had failed to maintain its charitable character.
The Tribunal set aside the rejection and directed fresh consideration. It emphasised the need to examine the society’s evidence concerning its educational activities and the justification for the remuneration through a speaking and reasoned order.
Educational society sought renewal of registration
The assessee was a society registered with the Registrar of Firms and Societies since 15 July 1978. It had previously obtained registration under Section 12AA and was carrying on educational activities through Sharda Vidyalaya.
To comply with the applicable registration requirements, it filed Form 10AB under Section 12A(1)(ac)(ii), seeking regular registration under Section 12AB.
During the proceedings, the CIT(E) sought clarification regarding the school’s current affiliation, ledger accounts of persons covered by Section 13(3), and the reasonableness of salary paid to Smt. Mamta Ojha, a member of the society and a family member of its Secretary, Shri Sanjay Ojha.
The society submitted explanations supporting the payments. Nevertheless, the CIT(E) rejected the application by an order dated 26 March 2026.
CIT(E) treated the salary payment as an undue benefit
The CIT(E) observed that the recipient was a specified person under Section 13(3). According to the authority, the society had not furnished independent valuation or market benchmarks establishing that the remuneration was neither excessive nor unreasonable.
On that basis, the CIT(E) invoked Section 13(1)(c) and concluded that the society’s income had been applied for the benefit of its members.
The authority further characterised the alleged diversion as a “specified violation” and inferred that the society’s activities were not being conducted in accordance with its objects. These conclusions formed the basis for rejecting the registration application.
Actual services and comparable salaries relied upon
Before the Tribunal, the society contended that the remuneration was paid for actual administrative and operational services rendered to the school. It maintained that the payment was commensurate with the recipient’s qualifications, responsibilities and duties.
The society argued that Section 13(2)(c) does not impose an absolute prohibition on paying salary to a specified person. Its contention was that a payment for genuine services could not automatically be treated as an undue benefit merely because of the recipient’s relationship with the management.
It also relied on a comparative salary chart concerning other educational institutions, submitting that the remuneration was consistent with—and below—the prevailing benchmark for similarly qualified administrators in the region.
The assessee additionally filed an application dated 30 June 2026 seeking admission of additional evidence under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963.
Society questioned the basis for rejecting its charitable status
The society relied upon its audited financial statements, ledger accounts, educational activity note and current CBSE affiliation certificate.
It argued that these records demonstrated the genuine conduct of educational activities and the application of receipts towards educational purposes. According to the assessee, the CIT(E) had drawn an adverse inference without bringing contrary material establishing excessive remuneration.
The society also advanced broader arguments concerning the scope of scrutiny at the registration stage and the consequences of any alleged excess payment. These submissions were not conclusively adjudicated by the Tribunal, which ultimately restored the application for fresh examination.
The Revenue supported the rejection and relied upon the Supreme Court’s decision in Ananda Social and Educational Trust v. CIT.
Tribunal required proper consideration of the evidence
The Tribunal noted the society’s explanation that the salary was reasonable, necessary for its functioning and below the prevailing market rate. It also recorded the explanation that remuneration to key managerial personnel represented a legitimate administrative expense rather than diversion for personal enrichment.
The Bench found that the CIT(E) had failed to properly appreciate the society’s longstanding educational activities and the supporting financial and operational records.
In its view, the audited accounts, ledgers and activity note required examination in their proper perspective, with specific and reasoned consideration of the relevant aspects.
Accordingly, the Tribunal set aside the rejection and directed the CIT(E) to reconsider the application afresh, in accordance with law, after granting a reasonable opportunity of hearing. The appeal was allowed for statistical purposes; registration was not directly granted.
Author’s comments
The central lesson is the importance of examining services rendered, responsibilities discharged and the reasonableness of remuneration before drawing a conclusion of diversion of charitable funds.
A relationship with the management warrants scrutiny, but the society’s evidence answering that scrutiny must also receive meaningful consideration. Appointment records, qualifications, duties and comparable remuneration can therefore be crucial.
Equally, this order should be read within its limits. The Tribunal ordered reconsideration; it did not finally certify the salary as reasonable or rule that Section 13 concerns can never affect registration. The fresh decision must rest on the evidence and clearly stated reasons.
Cases Discussed
- Ananda Social and Educational Trust Vs CIT ( Supreme Court); Civil Appeal Nos. 5437–5438/2012, dated 19 February 2020. Cited by the Revenue; the Tribunal did not undertake an extended analysis of this authority.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT INDORE
This appeal filed by the assessee is directed against the impugned order dated 26.03.2026 passed by the learned Commissioner of Income-tax (Exemption), Bhopal [“CIT(E)”], whereby the application of the assessee for approval under section 12AB of the Income-tax Act, 1961 (“the Act”) was rejected.
2. The brief facts of the case are that the assessee, is a society duly registered under the Registrar of Firms and Societies (Registration No.6758) since 15.07.1978. The assessee was previously granted registration u/s 12AA of the Act and has been carrying out its education activities in accordance with its stated objects. To comply with the new statutory requirement assessee filed an application in Form No. 10AB for registration/approval 12A(1)(ac)(ii) of the Act, 1961 submitted seeking regular approval under section 12AB. During the course of proceedings, the ld. CIT(A) issued notices on 15.01.2026 and 19.03.2026 seeking clarifications on the school’s affiliation for the current period, ledger accounts of persons covered under section 13(3) and justification regarding the reasonableness of the salary paid to Smt. Mamta Ojha who is a member of the society and a family member of the Secretary, Shri Sanjay Ojha. In response the assessee submitted detailed reply stating that the payment made are reasonable and also the issuance payment paid for the secretary is common practice. The reply of the assessee was duly considered. However, the same can not be allowed on the following points:
“(i) It is observed that Smt Mamta Sharma is member of the society who is also a family member of secretary of this society shri Sanjay, Ojha. The recipient is “Specified Person” as defined under Section 13(3) (Founders/Members of the Governing Body).
(ii) No independent valuation or market benchmarks were provided to prove that the payments were not excessive or unreasonable. Under Section 13(1)(c), any income. of a trust used or applied directly or indirectly for the benefit of any person referred to in Section 13(3) results in the loss of exemption.
(iii) The society has failed to maintain its charitable character by diverting funds to its members. This constitutes a “specified violation” and proves that the activities are not being carried out in accordance with the objects of the society.”
3. Therefore, the CIT(E) has clarified that the assessee has failed to maintain its charitable character by diverting funds to its members. This constitutes a “specified violation” and proves that the activities are not being carried out in accordance with the objects of the society. After that the CIT(E) has passed order on 26.03.2026 itself and rejected the application of the form No.10AB for renewal u/s 12A(1)(ac)(ii) of the Act.
4. Being aggrieved by the aforesaid order, the assessee is in appeal before the Tribunal and the grounds of appeal are as under:
“1. General Ground: That the order passed by the Ld. Commissioner of Income Tax (Exemption), Bhopal [CIT(E)] dated 26/03/2026, rejecting the application of the Appellant Form 10AB for renewal of registration under Section 12AB of the Income Tax Act, 1961, is arbitrary, illegal, bad in law, and against the facts and circumstances of the case.
2. Denial of Natural Justice: That the Ld. CIT(E) erred in law and on facts by rejecting the application without affording a proper 2 and reasonable opportunity to the Appellant to submit independent valuation OR market benchmarks regarding the salary paid, thereby violating the principles of natural justice.
3. Erroneous Invocation of Section 13(1)(c) read with Section 13(3): That the Ld. CIT(E) erred in law and on facts in holding that the salary paid to Smt. Mamta Ojha was excessive OR unreasonable under Section 13(1)(c) of the Act. The Ld. CIT(E) failed to appreciate that the remuneration was paid for actual services rendered to the educational institution and was commensurate with her qualifications and duties, and thus does not amount to any undue benefit to a specified person under Section 13(3).
4. Genuineness of Charitable Activities: That the Ld. CIT(E) erred in concluding that the Appellant society has failed to maintain its charitable character and has diverted funds to its members. The Ld. CIT(E) ignored the audited financials, the note on educational activities, and the fact that the society has been genuinely running a school (Sharda Vidyalaya) since 1978 solely for educational purposes.
5. Non-Appreciation of Evidences: That the Ld. CIT(E) passed a non- speaking order regarding the justification submitted by the Appellant on 23.03.2026, summarily rejecting the explanation without bringing any contrary material on record to prove that the salary paid was higher than the prevailing market rates for similar services. 6.Residuary Ground: The Appellant craves leave to add, alter. 6 modify, amend, OR DLEETE/withdraw any of the grounds of appeal at OR before the time of hearing of the appeal.”
5. Ld. Counsel for the assessee submitted that the assessee had submitted that the copy of the current affiliation certificated of Sharda Vidayalaya with CBSE Board and the Id. CIT(E) should only have to satisfy himself about the genuineness of the activities of the trust and the statutory provisions of section 12AB do not empower the Ld. CIT(E) to conduct a detailed assessment of individual expenditures or invoke section 13(1)(C) to deny the registration as the same falls under the jurisdiction of the AO. Further Ld. CIT(E) was not justified in observing that any payment to Smt. Mamta Ojha automatically results in the loss of the exemption as u/s 13(2)(c), there is no absolute bar on paying salary to her because she is actively involved in the administration and daily operations of Sharda Vidayalaya and Ld. CIT(E) failed to bring any contrary material to prove that the salary paid was higher than the prevailing market rates for similar services rather the assessee has placed on record a comparative salary chart of the other educational institutions which clearly demonstrate that the salary paid to Smt. Mamta Ojha is fully commensurate with and, in fact, lower than the bench mark similarly qualified administrators in the region. Even the so called deemed excessive salary cannot lead to blanket rejection of registration u/s 12AB because only the excessive portion of the payment, if any, can be taxed and the over all charitable status of the institution remains intact but the Ld. CIT(E) erred in concluding that the society diverted funds to its members which was unjustified because it is just a baseless assumption in view of the fact that the assessee has been genuinely running Shrada Vidayalaya since 1978 and the audited financials, ledger accounts, and the detailed note on education activities submitted during the proceedings clearly prove that all receipts were applied solely for educational purposes. Thus, Ld. counsel for the assessee submitted that CIT(E) failed to appreciate the genuineness and justification of the remuneration paid to Smt. Mamta Ojha and has drawn adverse inferences regarding the services rendered by her to the assessee society. The denial of registration is based on hyper- technical grounds and surmises, without bringing any concrete material on record to prove that the salary paid was excessive or unreasonable compared to the fair market value. In supports his contention of the Ld. AR filed an application dated 30.06.2026 seeking admission of additional evidence under rule 29 of the Income Tax (Appellate) Rules, 1963.
6. The Ld. DR relied on the impugned order passed by the CIT(E) and also relied on the judgment of Hon’ble Supreme Court in the case of M/s. Ananda Social and Educational Trust vs. CIT & Anr. Civil Appeal No.5437-5438/2012 dated 19.02.2020.
7. We have heard the rival submissions and perused the material available on record. We find that the assessee has submitted that the salary paid was highly reasonable, commensurate with the prevailing market rates, and necessary for the functioning of the society. That salary being paid is much below the prevailing market rate and the reasons for salary are proper. Furthermore, it was clarified that salary paid to key managerial personnel is a standard, common practice and a legitimate administrative expense, not a diversion of funds for personal enrichment. We further find that CIT(E) failed to appreciate the fact that the assessee has been genuinely running Shrada Vidayalaya since 1978 and it filed the audited financials, ledger accounts, and the detailed note on education activities during the proceedings and which, in our humble view, would require to have been considered by the Ld. CIT(E) in proper perspective by pinpointing out each and every aspects of the same in speaking manner as the assessee trust claimed that the same clearly prove that all receipts were applied solely for educational purposes.
8. Accordingly, in the interest of substantial justice, we set aside the impugned order of the learned CIT(E) and restore this matter, with a direction to reconsider the assessee’s application under section 12A(1)(ac)(ii) of the Act afresh in accordance with law, after affording the assessee a reasonable opportunity of being heard. The learned CIT(E) shall pass a speaking order in accordance with law.
9. In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open court on 12 /10/2026.
