ITAT allows section 11 exemption as payment of Salary & Rent to specified persons was not excessive 

DCIT (Exemption)-1(1) Vs Catholic Education Society (ITAT Mumbai)

Introduction: In a recent decision, the Income Tax Appellate Tribunal (ITAT) Mumbai upheld the allowance of exemptions under Section 11 of the Income Tax Act for the Catholic Education Society. The Revenue’s appeal, which challenged the exemption on grounds of excessive payments of rent and salary to specified persons, was dismissed. This article provides an in-depth analysis of the case and the tribunal’s reasoning behind the decision.

Detailed Analysis: The case under consideration involved the Catholic Education Society, a registered charitable trust under Section 12A of the Income Tax Act. The trust had filed its income tax return for the assessment year 2017–18, claiming exemptions under Section 11. The Revenue, however, challenged these exemptions, citing excessive payments of rent and salary to persons specified under Section 13(3) of the Act.

Revenue’s Grounds for Appeal

The Revenue raised three main grounds in its appeal:

1. Excessive Payments to Specified Persons: The Revenue argued that the assessee trust had made excessive payments on account of salary and rent to persons specified under Section 13(3), thereby attracting provisions of Sections 13(1)(c), 13(2)(c), and 13(2)(g).

2. Unjustifiable Salaries: The payments made to specified persons were deemed unjustifiable compared to payments made to other individuals rendering similar services.

3. Violation of Section 13(3): By making these payments, the assessee trust was alleged to have violated Section 13(3) of the Act, and thus, the exemption under Section 11 should not be allowed.

Assessee’s Defense: The assessee countered these claims by providing detailed justifications for the payments made. The trust argued that the salaries and rents paid were commensurate with the qualifications, experience, and roles of the specified persons within the institution. Additionally, the rent paid was supported by a market rental report from a government-approved valuer, establishing the genuineness of the payments.

ITAT’s Findings

The ITAT, after considering the submissions and evidence presented, found as follows:

1. Reasonableness of Salaries: The tribunal observed that the specified persons held significant experience and qualifications, justifying the higher salaries paid. For instance, Mrs. Jean M. Gomes, the President, held multiple advanced degrees and had 29 years of experience, which warranted her salary.

2. Validation of Rent Payments: The tribunal noted that the rent payments were supported by a valuation report from M/s. Powle P. N. & Associates, a government-approved valuer. The Assessing Officer’s ad hoc reduction of the allowable rent was found to be without scientific basis.

3. Consistent Assessment History: The tribunal also took into account that in previous assessment years, similar payments were not questioned, indicating consistency and reasonableness in the trust’s financial practices.

4. Compliance with Section 11: Given that the payments made were reasonable and justified, the tribunal concluded that the provisions of Section 13(3)(c), 13(2)(c), and 13(2)(g) were not attracted. Thus, the trust was entitled to the exemptions claimed under Section 11.

Conclusion: The ITAT Mumbai’s decision in favor of the Catholic Education Society highlights the importance of thorough documentation and justification of expenses by charitable trusts. By providing detailed explanations and supporting evidence, the trust successfully defended its exemption claims.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The present appeal has been filed by the Revenue challenging the impugned order dated 23/06/2023, passed u/s 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], for the assessment year 2017–18.

2. In its appeal, the Revenue has raised following grounds:–

“A. Whether, on the facts and circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate that the assessee trust has made excessive payments on account of salary and rent to the persons specified u/s 13(3) as such these transactions attract provisions of section 13(1)(c), 13(2)(c) r.w.s. 13(2)(g) and allowing the assessee‟s claim of exemption u/s 11?.

B. Whether, on the facts and circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate that the assessee trust has made huge salary to the persons specified which are not justifiable as compared to the payments made to the other persons who rendered same services and are more qualified?.

C Whether, on the facts and circumstances of the case and in law, the Ld. CIT(A) has justified in allowing the benefit of exemption u/s 11 of the IT Act, to the assessee ignoring the fact that the assessee has violated the provision of section 13(3) of the Act by making the payment to persons specified u/s 13(3).”

3. The solitary grievance of the Revenue, in the present appeal, is against the allowance of benefit of exemption u/s 11 of the Act to the assessee.

4. The brief facts of the case, as emanating from the record, are: The assessee is registered as a Charitable Trust with DIT(Exemption), Mumbai u/s 12A of the Act. Accordingly, the assessee claimed exemption u/s 11 of the Act and filed its return of income, for the year under consideration, on 31/10/2017 declaring a total income of Rs. Nil. The return filed by the assessee was selected for limited scrutiny to examine large payment of salary, rent, interest and other expenses made to specified persons u/s 13(3) of the Act. During the assessment proceedings, notice u/s 142(1) of the Act was issued to the assessee to furnish specific details in respect of aforesaid payments to specified persons. In response thereto, the assessee furnished the details regarding the name of persons/designation and amount of salary and rent paid to them. The assessee submitted that these expenses are genuine in nature and are justified by the respective clauses of the trust deed. It was further submitted that the specified persons are in occupation with the Educational Institutes run by the trust and are paid competitive salaries as required. It was further submitted that the amount of rent paid to the specified persons are genuine in nature and are as per the local rent in the localities of the trust. The assessee also furnished the report from the valuer in support of the rent payment to specified persons u/s 13(3) of the Act.

5. The Assessing Officer (“AO”) vide order dated 29/10/2019 passed u/s 143(3) of the Act did not agree with the submission of the assessee and held that the assessee trust has made huge payments to the specified persons which are not justifiable as compared to the payments made to the other persons who have rendered same services and are more qualified. Accordingly, the AO made disallowance of Rs.41,59,236/- on account of excessive salary paid to the specified persons u/s 13(3) of the Act. Further, the AO, after pointing out various discrepancies in the valuation report submitted by the assessee to support rent paid to the specified persons u/s 13(3) of the Act, held that the Market Rental Report is a self-serving document and is not an acceptable basis for ascertaining the fair rental value of the property. Accordingly, the AO considered it fair and reasonable to allow monthly rent of Rs.60,000/-, which comes to Rs.7,20,000/- for the entire year and made the addition of the balance rent of Rs.9,12,000/- paid by the assessee to the specified persons u/s 13(3) of the Act. Since the assessee was found to have made unreasonable payments in the form of salary and rent to the specified persons u/s 13(3) of the Act, the AO by invoking the provisions u/s 13(3)(c), 13(2)(c) r.w.s. 13(2)(g) of the Act rejected the claim of exemption u/s 11 of the Act.

6. The learned CIT(A), vide impugned order, after taking into consideration the experience of the persons, their role in the institution and the services rendered by them, found the salaries paid to the specified persons as reasonable and deleted the disallowance made by the AO. Further, the learned CIT(A) also deleted the disallowance on account of rent paid by the assessee to the specified persons u/s 13(3) of the Act. Accordingly, the learned CIT(A) directed the AO to allow the exemption claimed by the assessee u/s 11 of the Act. Being aggrieved, the Revenue is in appeal before us.

7. During the hearing, the learned Authorised Representative (“learned AR”) by reiterating the submissions made before the lower authorities submitted that the salary was paid to the specified persons u/s 13(3) of the Act after considering their education qualification, years of experience and their role in the institution. The learned AR further submitted that the rent paid by the assessee to the specified persons u/s 13(3) of the Act is duly supported by the Market Rental Report obtained by the assessee, while there is no basis in the figure of monthly rent of Rs.60,000/- considered reasonable by the AO. By referring to the assessment order for the assessment years 2015-16 and 2016-17, the learned AR submitted that no addition on account of payment of salary and rent was made. The learned AR further submitted that even in the assessment year 2020-21, no addition on aforesaid aspects were made in the scrutiny assessment concluded u/s 143(3) r.w.s. 144B of the Act.

8. On the other hand, the learned Departmental Representative vehemently relied upon the assessment order.

9. We have considered the submissions of both sides and perused the material available on record. In the present case, on the basis that the assessee has made excessive payment on account of salary and rent to the specified persons u/s 13(3) of the Act, the AO denied the exemption claimed by the assessee u/s 11 of the Act. During the assessment proceedings, the AO noted that the assessee trust has made payment to specified persons u/s 13(3) of the Act as under: –

S. No	Name of the person	Designation	Amount
			Salary	Rent	Total
1	Mr. Moses M Gomes	Secretary	14,93,022	4,89,600	19,82,622
2	Mrs. Jean M. Gomes	President	20,32,594	4,08,000	24,40,594
3	Mrs. Tereasa Gomes	Treasurer	14,77,482	0	14,77,482
4	Ms. Savvy M. Mendonca	Jt. Treasurer	11,16,954	2,44,800	13,61,754
5	Mr. Elton I. Gomes	Member	8,05,716	2,44,800	10,50,516
6	Mr Allwyn Gomes	Member	8,93,468	2,44,800	11,38,268
7	Mrs. Tulip Gomes	Member	5,42,542	0	5,421,542
8	Mrs Anita Gomes	Member	2,38,400	0	2,38,400
9	Mrs. Lauretta Gomes	Member	1,07,000	0	1,07,000
10	Mrs. Natty Gomes	Member	1,07,000	0	1,07,000
	Total		88,14,178	16,32,000	1,04,46,17

10. Accordingly, the AO asked the assessee to explain and justify the payments made to the specified persons u/s 13(3) of the Act. After considering the submissions of the assessee, the AO considered the payment of salary total amounting to Rs.36,60,000/- as reasonable in comparison to the salary total amounting to Rs.78,19,236/- paid by the assessee and disallowed the excess of Rs.41,59,236/- as under: –

S. No	Name of the person specified u/s 13(3) of the Act	Amount
		Claimed	Allowable	Disallowance
1	Mr. Moses M Gomes	14,93,022	6,00,000	8,93,022
2	Mrs. Jean M Gomes	20,32,594	9,00,000	11,32,594
3	Mrs. Tereasa Gomes	14,77,482	6,00,000	8,77,482
4	Ms. Savvy M. Mendonca	11,16,954	6,00,000	5,16,954
5	Mr. Elton I. Gomes	8,05,716	4,80,000	3,25,716
6	Mr. Allwyn Gomes	8,93,468	4,80,000	4,13,468
	Total	78,19,236	36,60,000	41,59,236

11. As per the assessee, Mr. Moses M Gomes is designated as Secretary, and is assigned the duty of Head-Clerk. The assessee further submitted that Mr. Moses M Gomes is having Educational Qualification of B.Sc. and having total experience of 29 years in the service. Accordingly, he was paid a salary of Rs.14,93,022/- during the year under consideration. We find that the AO compared Mr. Moses M Gomes with other staff members who are simple graduates and found that their salary is less than Rs.5 lakh for the year under consideration. Accordingly, the AO considered it fair and reasonable to allow monthly salary of Rs.50,000/-, which comes to Rs.6 lakh for the year under consideration, and disallowed the remaining amount of Rs.8,93,022/- paid to Mr. Moses M Gomes. From the perusal of the details of members and other staff with their experience and educational qualification filed by the assessee, we find that Mr. Moses M Gomes is having the highest experience, i.e. 29 years in service, as compared to the other staff members having similar educational qualification. Accordingly, we find no infirmity in the findings of the learned CIT(A) in deleting the addition made by the AO in respect of salary paid to the aforesaid member.

12. As per the assessee, Mrs. Jean M Gomes is designated as President, and is assigned the duty of Head- Mistress (Principal). The assessee further submitted that Mrs. Jean M Gomes is having educational qualification of B.A., M.A., B.Ed., M.Ed., P.G. Dipl. Mgmt., and having experience of 29 years in service. Accordingly, she was paid the salary of Rs.20,32,594/- during the year under consideration. We find that the AO noted that she is the highest paid employee amongst 212 employees and another employee having similar educational qualification, i.e. B. Sc. M.Sc, B.Ed., M.Ed., was paid salary lesser than Mrs. Jean M Gomes. Accordingly, the AO considered it fair and reasonable to allow monthly salary of Rs.75,000/-, which comes to Rs.9 lakh for the year under consideration, and disallowed the remaining amount of Rs.11,32,594/-paid to Mrs. Jean M Gomes. We find that Mrs. Jean M Gomes is having the highest experience, i.e. 29 years in service, as compared to the other staff member having similar educational qualification. Accordingly, we find no infirmity in the findings of the learned CIT(A) in deleting the addition made by the AO in respect of salary paid to the aforesaid member.

13. As per the assessee, Mrs. Tereasa Gomes is designated as Treasurer and is assigned the duty of Deputy Head Mistress. The assessee further submitted that Mrs. Tereasa Gomes is having educational qualification of B.A., B.Ed and having experience of 21 years in service. Accordingly, she was paid the salary of Rs.14,77,482/- during the year under consideration. We find that the AO compared Mrs. Tereasa Gomes with other staff member, Mr Nazrath Gomes, having educational qualification of B.Com and MBA, who has paid salary of Rs.6,78,760/- during the year under consideration. Accordingly, the AO considered it fair and reasonable to allow monthly salary of Rs.50,000/- which comes to Rs.6 lakh for the year under consideration and disallowed the remaining amount of Rs.8,77,482/- paid to Mrs. Tereasa Gomes. From the perusal of the details of members and other staff with their experience and educational qualification, we find that Mr Nazrath Gomes is a Senior Accountant, while Mrs. Tereasa Gomes is assigned the duty of Deputy Head Mistress with 21 years of experience. Accordingly, we find no infirmity in the findings of the learned CIT(A) in deleting the addition made by the AO in respect of salary paid to the aforesaid member.

14. As per the assessee, Ms. Savvy M. Mendonca is designated as Joint Treasurer and is assigned the duty of Supervisor (Asst. Manager). The assessee further submitted that Ms. Savvy M. Mendonca is having educational qualification of B.Sc., B.Ed., M.Ed., P.G.Dipl.M.E., P.G. Dipl. H.R.M. and having experience of 9 years in service. Accordingly, she was paid the salary of Rs.11,16,954/- during the year under consideration. We find that the AO noted that the other members who have been assigned non-teaching duties like supervisor, head-clerk, Sr. Accountant, are being paid within the range of Rs.5-6 lakh per year. Accordingly, the AO considered it fair and reasonable to allow monthly salary of Rs.50,000/- which comes to Rs.6 lakh for the year under consideration and disallowed the remaining amount of 5,16,954/- paid to Ms. Savvy M. Mendonca. From the perusal of the details of members and other staff with their experience and educational qualification, we find that Ms. Savvy M. Mendonca is not only having good educational qualification but also has experience of 9 years in service. Accordingly, we find no infirmity in the findings of the learned CIT(A) in deleting the addition made by the AO in respect of salary paid to the aforesaid member.

15. As per the assessee, Mr. Elton I. Gomes is designated as member and is assigned the duty of Clerk. The assessee further submitted that Mr Elton I. Gomes is having educational qualification of Com and having experience of 19 years in service. Accordingly, he was paid the salary of Rs.8,05,716/- during the year under consideration. We find that the AO by considering other employees at the position of clerk and having similar educational qualification noted that they are being paid within the range of Rs.3-5 lakh per year. Accordingly, the AO considered it fair and reasonable to allow monthly salary of Rs.40,000/- which comes to Rs.4,80,000/- for the year under consideration and disallowed the remaining amount of Rs.3,25,716/- paid to Mr Elton I. Gomes. We find that Mr Elton I. Gomes is having the highest experience, i.e. 19 years in service, as compared to the other staff member at the position of clerk and having similar educational qualification. Accordingly, we find no infirmity in the findings of the learned CIT(A) in deleting the addition made by the AO in respect of salary paid to the aforesaid member.

16. As per the assessee, Mr. Allwyn Gomes is designated as member and is assigned the duty of clerk. The assessee further submitted Mr. Allwyn Gomes is having educational qualification of B.Com and having experience of 17 years in service. Accordingly, he was paid the salary of Rs.8,93,468/- during the year under consideration. We find that the AO by considering other employees at the position of clerk and having similar educational qualification noted that they are being paid within the range of Rs.3-5 lakh per year. Accordingly, the AO considered it fair and reasonable to allow monthly salary of Rs.40,000/-which comes to Rs.4,80,000/- for the year under consideration and disallowed the remaining amount of Rs.4,13,468/- paid to Mr. Allwyn Gomes. We find that Mr Allwyn Gomes is having the experience of 17 years in service, as compared to the other staff member at the position of clerk and having similar educational qualification. Accordingly, we find no infirmity in the findings of the learned CIT(A) in deleting the addition made by the AO in respect of salary paid to the aforesaid member.

17. We find that the learned CIT(A) deleted the disallowance of on account of rent paid to the specified persons u/s 13(3) of the Act was observing as under:-

5.2 As regards the disallowance of rent paid to the specified persons, the AO made an addition of Rs. 9,12,000/-. towards the rent paid in excess to persons specified u/s. 13(3) of the Act. The appellant submitted a valuation report which states computed rent as Rs. 14,80,024/- as against the rent expenses of Rs. 16,32,084/- shown as per the Income and Expenditure Statement and the difference ^„is around 10% which is stated to be reasonable. Hence, the appellant adopted certain method to arrive at its claim. However, the AO summarily rejected such claim and restricted the allowance only to Rs. 60,000/- per month without assigning any scientific methodology to arrive at such figure. It is further stated by the appellant ~that the respective amounts were admitted by the individual persons in their Income Tax Returns. In view of the above, without considering factual report, the AO‟s adoption of a different method with no basis is devoid of merits. Hence, the addition made by the AO is deleted and the relevant ground of appeal is allowed.”

18. It is evident from the record, in order to justify that the payment of rent paid total amounting to Rs.16,32,084/-, the assessee furnished Market Rental Report prepared by M/s. Powle P. N. & Associates, Government Approved Registered Valuer, who computed the market rent of Rs.14,80,024/-. However, the AO merely on ad hoc basis considered Rs. 60,000/- as the monthly rent and disallowed the balance rental payments of Rs.9,12,000/-paid by the assessee. Therefore, we agree with the finding of the learned CIT(A) that the AO made the impugned addition on account of rental payment to specified persons u/s 13(3) of the Act without any basis. Accordingly, we find no infirmity in the findings of the learned CIT(A) on this issue and therefore, the same are upheld. Since the payment made by the assessee on account of salary and rent is not found to be excessive of what may be reasonably paid to specified persons u/s 13(3) of the Act, we are of the considered view that the provisions u/s 13(3)(c), 13(2)(c) r.w.s. 13(2)(g) of the Act are not attracted in the present case, and the assessee has rightly claimed the exemption u/s 11 of the Act. As a result, the grounds raised by the Revenue are dismissed.

19. In the result, the appeal by the Revenue is dismissed.

Order pronounced in the open Court on 04/06/2024