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:

• CIT (A) did not provide any opportunity while accepting addition evidence produced by assessee.
• The assessee has not produced any evidence to show that the salary paid to the Executive Director in the initial year of appointment is Rs.10,80,000 and not Rs.7,20,000.
• The facts stated in the letter prodiced before CIT (A), were never brought to the notice of the AO, the matter may be remitted back to the Assessing Officer for examining the matter afresh. Also since the director is trustee of the assessee trust, violation of S.13(1)(c) also requires to be examined.

Contention of the revenue:

• AO without considering the total salary, including allowances, paid to the Executive Director, for the period from 1.5.1.2008 to 14.1.2009 has only considered the basic pay of Rs.7,20,000 with the total emoluments of the assessment year under dispute amounting to Rs.14,51,226.
• If the total salary paid for the period from 15.1.2008 to 14.1.2009 which amounted to Rs.10,80,000 is compared to the total salary paid for the AY under consideration, then the increment value is very much low and it cannot be said that the incremental amount paid is not reasonable.
• All the information relating to salary paid by the assessee to Shri Chabra, in the initial year of appointment as well as in the assessment year under consideration, was before the Assessing Officer. Therefore, it cannot be said that the information submitted before the learned CIT(A) is in the nature of additional evidence.

Held by CIT (A)

• CIT(A), after considering the submissions of the assessee found merit in the same and deleted the addition by observing that the AO while coming to the conclusion has considered wrong facts.
• CIT (A) also observed that the amount of salary to be paid to its Executive Director is within the authority of the assessee to determine and therefore, no disallowance under S.13(1)(c) can be made.
• CIT(A) deleted the addition made by the Assessing Officer.

Held by the ITAT:

• Compared to the salary paid in the initial year of appointment of Rs.10,80,000, the salary paid to executive director in the year under consideration of Rs.14,51,226 cannot be said to be excessive or unreasonable, so as to bring it within the purview of S.13(1)(c) of the Act.
• AO has not mentioned any valid reason in the assessment order to indicate that the salary paid to the Executive Director is not commensurate with the responsibilities/duties performed by him.
• There being no material brought on record by the Assessing Officer to indicate that the salary paid is unreasonable or excessive, we do not see any reason to interfere with the order of the learned CIT(A).
• The information submitted before the learned CIT(A) is not in the nature of additional evidence, on which the learned CIT(A) could have asked the Assessing Officer to verify authenticity of the assessee’s claim. It is a fact on record that assessment for the assessment year 2008-099 has been completed by the Assessing Officer under S.143(3).