Manav Mangal Society Vs DCIT (ITAT Chandigarh)
Conclusion: Since the specified persons possessed the requisite qualifications and rendered the services, therefore, it cannot be held that payment of salary to the specified persons was unreasonable particularly when no comparable case was cited by AO. Therefore, the exemption could not be denied under section 13(1)(c).
Held: Assessee was registered as Society under the Society Registration Act and under section 12AA. Assessee filed the return of income declaring Nil income. Later on, the case was picked up for scrutiny under CASS. During the course of assessment proceedings, AO noted that assessee was providing some payments to its members against the services provided by them, which was not reasonable and was undue benefits for the members. He, therefore, denied the exemption under section 13(1)(c). Assessee submitted that salary paid had already been allowed vide order passed under section 143(3) therefore on account of consistency of the facts and circumstances being the same there could not be any deviation on account of principle of consistency. It was further stated that AO made the addition in respect of disallowance of salary though he proceeded with the fact that the salary was not commensurate with duties being performed and that up to the A.Y. 2012-13 the salary was allowed by the successive AO by way of orders under section 143(3). It was stated that even if there was violation of Section 13 then the relevant portion only was liable for addition not the entire surplus could be brought to tax. It was held that no material was brought on record to substantiate that how and in what manner, the salary paid to the specified persons considering their qualifications and the duty assigned to them was not reasonable since no comparable case was brought on record by the AO. In the present case, AO did not doubt the services rendered and qualifications of the specified persons, he disallowed the salary by observing that it was not reasonable, however, nothing was brought on record to suggest how and in what manner, it was not reasonable or was excessive. The specified persons possessed the requisite qualifications and rendered the services, therefore, it could not be held that payment of salary to the specified persons was unreasonable particularly when no comparable case was cited by AO.
FULL TEXT OF THE ORDER OF ITAT CHANDIGARH
Cross appeals by the Assessee and the Department for the A.Y. 2010-11 and 2011-12 are directed against the common order dated 15/11/2019 while the departmental appeals for the A.Y. 2013-14 to 2016-17 in ITA Nos. 27 to 30/Chd/2020 are directed against the common order dated 09/10/2019 of the Ld. CIT(A)-1, Chandigarh.
2. Since common issues are involved in the assessee’s as well as Departmental appeals which were heard together, so these are being disposed off by this consolidated order for the sake of convenience and brevity.
3. At the first instance both the parties argued the appeal of the Department in ITA No. 27/Chd/2020 for the A.Y. 2013-14. Following grounds have been raised in this appeal:
“i. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in law in holding the salary payments to the specified persons under section 13(3) as reasonable and justified when the assessee had failed to provide evidence of what work these specified persons were doing and had failed to justify the salaries paid to these specified persons.
ii. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in law in holding that the onus to prove the excessiveness of the
salary/remuneration paid to the specified persons lies on the Revenue Authorities contrary to the decision of the Hon’ble Supreme Court in the case of Commissioner Of Customs (Import), Mumbai vs M/S. Dilip Kumar And Company dated 30 July, 2018 in CIVIL APPEAL NO. 3327 OF 2007, wherein the Hon’ble Apex Court held that the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification, overruling its own judgment in the case of Sun Export [2002-TIOL-118-SC-CX-LB] and all the decisions which took similar view as in Sun Export Case.
iii. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in law in holding the high salary payments to the specified persons under section 13(3) as reasonable and justified when the payments to other nonspecified employees was much less.
iv. That on the facts and circumstances of the case, the Ld. CIT(A)has erred in law in holding the salary payment to Sh. G.S. Sardana as justified when the payment made to him in contradiction to the rules of Memorandum because he was a member of the executive committee and had the responsibility of managing the educational institutions of the assessee and, as per the clear terms of the Memorandum, he could not charge any remuneration for this function and had to work in honorary capacity.
v. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in law in holding the salary payment to Sh. Sanjay Sardana and Sh. Sandeep Sardana as justified when non- specified principals of other schools under the assessee society were getting much less salary for the same work and same post.
vi. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in law in holding the rent payment to the specified persons under section 13(3) for H.No. 3085, sector-21/D, Chandigarh and H.No. 3084, sector-21/D, Chandigarh as justified ignoring that this was not a genuine transaction and that the specified persons had simply made an arrangement whereby they were being paid rent for staying in their own house and all the regular upkeep of the house including whitewashing, minor repairs, etc. was borne out of the funds of the assessee.
vii. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in law in holding the rent payment to the specified persons under section 13(3) for H.No. 3085, sector-21/D, Chandigarh and H.No. 3084, sector-21/D, Chandigarh as justified ignoring the fact that the assessee had wrongly claimed that the rent-free accommodation was given to the “directors” when the lease deed says that the premises was leased out to the “principal(s)” of its school and not to the directors and no other non-specified principal of the other schools of the assessee society were provided this facility.
viii. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in law in holding the interest on unsecured loans paid to the specified persons @ 12% as justified when the Assessing Officer had clearly brought out that the assessee had given out funds to the specified persons under section 13(3) in the form of excessive salary, rent and this was the source of income of these specified persons and also the source of unsecured loans and therefore, it was rightly noted that the funds of the assessee were given out to the specified persons and then a part of it was taken back and interest was paid on this money.
ix. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in law in holding the interest on unsecured loans paid to the specified persons @ 12% as justified without appreciating the fact that the assessee was paying interest for its own funds and had these funds not been diverted to the specified persons in the first place, there would not be any need for unsecured loans.
x. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in law in holding the order of the Assessing Officer not right because the assessee had been running for the past many years and various assessments u/s 143(3) had been made for the earlier years and no such adverse view had been taken then completely ignoring that in the earlier assessments, the issues were not examined in detail and rather, material documents like lease deed, comparison of salaries with other employees, etc. was not asked/discussed.
xi. That the appellant craves to leave, add or amend the grounds of appeal on or before the appeal heard and disposed off.
4. Vide ground no. i to v the grievance of the Department relates to the deletion of addition made by the A.O. on account of salary payment to the specified persons by invoking the provisions of Section 13(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘Act’).
5. Facts of the case in brief are that the assessee is registered as Society under the Society Registration Act (XXI of 1860) against the registration no. 45 dated 31/05/1969. The assessee is also registered under section 12AA of the Act with Ld. CIT, Patiala vide Registration dated 03/10/1994. The assessee filed the return of income on 30/09/2013 declaring Nil income. Later on, the case was picked up for scrutiny under CASS.
5.1. During the course of assessment proceedings, the A.O. noted that the assessee was providing some payments to its members against the services provided by them, which was not reasonable and was undue benefits for the members. He therefore issued a notice to show cause the assessee as to why the exemption under section 13(1)(c) of the Act may not be denied. In response the assessee submitted as under:
“Kindly refer to the assessment proceedings pending in the above noted case and your notice dated 29.01.2016 regarding failure to explain justification of the payment of salary to members of the society and why the payment made on account of rent salary and increasing the same may not be disallowed under section 13(l)(c)(ii) & 13(2)(c) & (d) read with section 13(3) of IT Act.
In this regard it is submitted that Sh G S Sardana is the chairman of the Manav Mangal Schools. Sh. Sanjay Sardana and Sandeep Sardana are two Directors of the Manav Mangal Schools having three schools (Manav Mangal High School, Sector 21, Chandigarh, Manav Mangal School Sector 11 Panchkula and Manav Mangal Smart School Mohali.) Manav Mangal Smart School Mohali became operational during 2007-08 and other two schools were operational since long and are recognised with CBSE.
Salaries paid to the Sh. G S Sardana, Sanjay Sardana and Sandeep Sardana during the last three years and the current year is as below:
