Director Salary not excessive in absence of any material on record

Brief of the case:

The assessee in this case is a registered society who paid salary to its director along with some perks in addition to the basic salary. AO doubted that excessive salary has been paid to the director and he made addition of excessive salary than the salary mentioned in the appointment letter. CIT(A) deleted the addition made by AO after examining the letter in which details of perks other than salary are mentioned. On further appeal ITAT examined the facts and held that salary paid cannot be held as excessive in absence of any material on record.

Facts of the case:

• The assessee, a society registered under the Societies Registration Act is also granted registration under S12AA of the Income Tax Act,1961.
• For the year under consideration, the assessee filed its return of income on 28.9.2011, declaring ‘nil’ income after claiming exemption under S.11 of the Act.
• During the assessment proceedings, the Assessing Officer noticed as per the audit report, the assessee had paid an amount of Rs.14,51,226 as salaries to its Executive Director.
• The Assessing Officer has therefore, called upon the assessee to verify the details like appointment order of director, work allotted to him, etc.
• In response to the query made by the Assessing Officer, the assessee submitted the appointment letter of director, wherein the details of responsibilities and salary, etc. of director have been mentioned.
• The Assessing Officer on verifying the details observed that the appointment of director, commenced from 15 th January, 2008 with a salary of Rs.7,20,000 per annum. However, during the financial year 2010-11, relevant to assessment year under dispute, the assessee has paid salary of Rs.14,51,226 which indicates more than 100% increment.
• The Assessing Officer therefore, was of the view that the increment of more than 100% within two years of appointment by any standard is abnormal. He also observed that the assessee did not produce any evidence to show the increment to be given to the Executive Director.
• AO also noted that the appointment letter does not mention payment of bonus, ex-gratia etc., whereas director has been paid an amount of Rs.80,000 as Christmas Gift.
• AO concluded that the payment being made by the assessee to Shri Chabra is in violation of provision contained in S.13(1)(c) or the Act, and therefore, the assessee will not be eligible for exemption under S.11 of the Act on the excess salary paid to director, during the year.
• The Assessing Officer while quantifying the reasonable salary for the impugned assessment year allowed increment of 10% per annum and fixed the salary for the year under dispute at Rs.8,71,200. Resultantly, the excess payment of Rs.5,80,256 was disallowed and added back to the income of the assessee.

Contention of the revenue: