2025 (5) TMI 1473 - AT - Income Tax

Revision u/s 263 - Addition on account of payment made to entities in which specified persons are substantially interested treating the same as excessive and unreasonable under section 13(3) r.w.s 13(1)(c) r.w.s 13(2)(c) - disallowance of 50% of salaries paid to specified persons u/s 13(3) of the Act - HELD THAT - CIT(A) has applied the principle of consistency and also disapproved the adhoc disallowance of salary payment to specified persons in the absence of any evidence on fair market value of services. CIT(A) also took cognizance of the fact that respective recipients of salary have duly paid taxes on such salaries at maximum marginal rate of tax and thus no loss was caused to the Revenue. CIT(A) further observed that the dominant profiles of recipients of salary adequately justify the bonafides of the salary payments.CIT(A) thus reversed the action of the AO. The process of reasoning adopted by the CIT(A) cannot be set to be lacking in merits. The CIT(A) has examined the issue holistically while granting relief to the assessee. We see no error in the approach adopted by the CIT(A). We thus decline to interfere. Disallowance on account of professional charges being 50% of the total professional charges paid to Ms. Pooja Chauhan - Having regard to the factual position emerging that the recipient Ms. Pooja Chauhan is adequately experienced and accomplished to carry out the complex work on such large scale spread though out India the remuneration paid cannot be prima facie regarded as excessive per se. The recipient in any case has offered the receipts at a maximum marginal rate and therefore the payments made are not detrimental to the interest of Revenue in any manner. We thus see no reason to interfere with the conclusion drawn by the CIT(A). Additions made on account of payments to concerns in which persons specified u/s 13(3) are substantially interested treating the same as excessive payment - AO disallowed 50% of the total payments made to such concerns - CIT(A) confirmed disallowance at the extent of 20% of payments made to other two concerns on estimated basis - assessee thus contends that similar payments have been made in earlier years as well as in the succeeding years which has not been disturbed and therefore principle of consistency should be applied - HELD THAT - The material facts that emerges are receipts from the assessee by these concerns have been duly offered to tax and therefore overall position is tax neutral. AO or the CIT(A) has brought nothing on record to substantiate fair market value of services rendered by these concerns while resorting to estimations. Assessee has provided the particulars on nature of services provided by each concerns doctrine of principle of consistency needs to be given due weight the concerns are established for more than 20 years and are competent and accomplished to deliver services to such big institution and the amounts paid to the Directors by the concerns are within permissible limits provided under the Companies Act 2013. Payments made to these concerns contribute only 15% of the total payments made by the society to these concerns. There appears to be ample justification in the plea of the assessee. The CIT(A) has confirmed 20% of the payments made to Cross Border Placement Pvt. Ltd. Tegro India Pvt. Ltd. without any credible material. The action of the AO as well as the CIT(A) in resorting to estimations are mere ipse dixit. As noted the specified persons have paid taxes at maximum marginal rate and thus the position is tax neutral. No additions towards such payments were made in the preceding AYs. Thus in totality the unsupported action of the lower authorities deserves to be set aside. Addition towards purported violation of sec 11(1)(a) r.w.s 11(1)(c) - assessee pointed out that the society had set up a branch in Dubai after obtaining all the necessary permissions and approvals from the concerned authorities including RBI - HELD THAT - The assessee in the instant case has explained the source of investment source of transfer of money to its Dubai Branch to be out of term loan and credit facilities. Necessary RBI approval in this regard has been placed on record together with NOC issued by the Ministry of External Affairs for setting up campus in Dubai. The assessee has categorically submitted that no benefit has been obtained u/s 11 in relation to such foreign remittances. The assessee has prepared the computation of income and has claimed exemption only in regard to the income applied for charitable purposes in India. No expenditure incurred abroad has been claimed as applied in India. Under these facts the nuanced analysis by the CIT(A) in AYs 2018-19 and 2017-18 cannot be faulted with. No cogent reasons has been brought on record by the Revenue to depart from the view expressed by the CIT(A). Denial of exemption u/s 11/12 arising out of violation of sec 13(1)(c) - Exemption u/s 11 is to be restricted on that part of income which been applied for charitable purposes in accordance with law. The observations of the CIT(A) are sync with the position of law and does not call for any inference. Allowing the claim of the assessee in respect of amount retained to the extent of 15% of the total income to be applied for charitable purposes in terms of provision of sec 11(1)(a) - The action of CIT(A) allowing exemption of 15% of gross income u/s 11(1)(a) of the Act is prima facie in accordance with law. Hence no interference is called for. Addition of capital expenditure - For the purposes of computation of income in respect of charitable trust registered u/s 12A the capital expenditure is allowable to be treated as applied for charitable purpose. The CIT(A) thus has taken a correct view in favour of the assessee in accordance with law. Hence we decline to interfere with the findings of CIT(A). Allowance of professional charges paid to specified persons as relevant documentary evidences have been filed to support the bonafides of the payments and corresponding adequacy of services. Payments made to concerns in which persons referred under s. 13(3) are substantially interested - Similar services were obtained year after year. The services rendered were not disturbed by the AO. Besides similar estimated additions on payments to specified concerns cropped up in Ground No.3 in AY 2017-18. The process of reasoning adopted in AY 2017-18 shall apply mutatis mutandis. Consequently the order of CIT(A) is partly modified and the estimated additions of 20% in relation to payments to two entities stands reversed. Investment made abroad i.e. Dubai - The reasoning noted above are self-explanatory. The assessee himself has disallowed the expenditure incurred applied outside India for the purposes of eligible exemption u/s 11 of the Act. Thus no further disallowance is called for. We thus decline to interfere with the findings of CIT(A). foreign remittances by the Trust - It is the essential contention of the assessee that the provision of s.11(1)(a) of the Act clearly shows that words used are is applied to such purpose in India . The words are not is applied in India . Having regard to the judgements quoted and also in view of the order of the AO giving appeal effect on the issue and relief granted by the CIT(A) we see no compelling reason to take a different view.

Summary

The core legal issues considered in the appeals relate to the application and interpretation of various provisions of the Income Tax Act, 1961, especially sections 11, 12A, 13(1)(c), 13(3), 143(3), 154, 260, 263, and 270A, concerning the tax treatment of a society registered under the Societies Registration Act and under section 12A of the Income Tax Act, and notified under section 80G, engaged in charitable educational activities. The key questions include:

• Whether disallowances made by the Assessing Officer (AO) under section 13(1)(c) relating to payments to specified persons and concerns in which specified persons have substantial interest are justified.
• Whether adhoc disallowances are permissible under section 13(1)(c) in the absence of evidence on fair market value of services.
• Whether the principle of consistency applies to disallowances and exemptions claimed across different assessment years.
• Whether payments made abroad without prior approval under section 11(1)(c) are to be disallowed.
• Whether capital expenditure incurred by the trust is allowable as application of income under section 11(1)(a).
• Whether exemption under section 11(1)(a) is rightly allowed to the extent of 85% application of income for charitable purposes.
• Whether payments for professional and other services rendered by specified persons or related concerns are excessive or unreasonable under section 13(1)(c).
• Whether foreign remittances for advertisement and other services related to charitable objectives are allowable under section 11.
• Whether the revisional proceedings under section 263 and rectification under section 154 were valid and correctly applied.

Issue-wise detailed analysis:

1. Disallowance of Salary Payments to Specified Persons under Section 13(1)(c)

The AO disallowed 50% of the salary payments made to specified persons associated with the society, deeming them excessive and unreasonable. The assessee submitted detailed profiles, justification of payments, and evidence that the recipients had offered the salary income to tax at maximum marginal rates. The AO's adhoc disallowance was challenged before the CIT(A), who reversed the disallowance on the grounds that:

• No disallowance was made in the original assessment order on these facts.
• The salaries were commensurate with qualifications and responsibilities.
• Adhoc disallowances without evidence of fair market value are impermissible under section 13(1)(c).
• The recipients had paid tax on the income, so Revenue suffered no loss.
• The Revenue cannot sit in the armchair of the assessee to decide payment structures.

The CIT(A) relied on precedents, including a Supreme Court dismissal of Revenue's Special Leave Petition in a similar case, which held that the Revenue cannot interfere with managerial decisions on salary payments absent evidence of diversion of income.

The Tribunal upheld the CIT(A)'s reasoning, emphasizing the principle of consistency and the absence of any evidence to justify adhoc disallowance. The Tribunal held that the AO cannot take a different view in reassessment when the original order accepted the payments, and adhoc disallowances are not permissible.

2. Disallowance of Professional Charges Paid to Specified Persons

The AO disallowed 50% of professional charges paid to a specified person for internal audit services, considering them excessive and a diversion of funds. The assessee demonstrated the recipient's qualifications, experience, and the scale of work, and showed that the income was offered to tax. The CIT(A) reversed the disallowance, noting:

• The AO failed to bring evidence of fair market value to justify disallowance.
• The payments were reasonable considering the complexity and scale of work.
• Tax neutrality was established as the recipient paid tax on the income.

The Tribunal agreed with the CIT(A), holding that without cogent evidence, the AO's action was unsustainable.

3. Disallowance of Payments to Concerns in Which Specified Persons Are Substantially Interested

The AO disallowed 50% of payments made to three companies in which specified persons had substantial interest, on an estimated basis. The assessee submitted detailed justifications, including nature of services, long operational history, tax compliance of recipients, and consistency of payments over years. The CIT(A) deleted the disallowance relating to one company (Stratega Finance Co. Pvt. Ltd.) and confirmed 20% disallowance on the other two concerns, reasoning that some disallowance was justified but 50% was excessive.

The Tribunal examined the facts and found:

• Payments were consistent over years and no disallowance was made in earlier years.
• No evidence was produced by AO or CIT(A) to substantiate fair market value or excessiveness.
• Recipients had paid tax at maximum marginal rates, indicating no diversion of income.
• Doctrine of consistency applies, barring Revenue from taking inconsistent views across years.

The Tribunal held the 20% disallowance to be arbitrary and unsupported, set aside the disallowance, and allowed the assessee's cross-objection.

4. Addition on Account of Foreign Remittances and Investments Without Approval under Section 11(1)(c)

The AO added substantial amounts representing remittances and investments made abroad without prior approval from the CBDT as required under section 11(1)(c). The assessee submitted RBI approvals, Ministry of External Affairs No Objection Certificates, details of loans and credit facilities used for funding, and explained that no exemption under section 11 was claimed for such foreign expenditure. The CIT(A) deleted the additions, applying the principle of consistency because similar expenditures were admitted in prior years without disallowance, and because the assessee had suo-moto disallowed expenditure incurred outside India in the computation.

The Tribunal upheld the CIT(A)'s decision, noting:

• Every assessment is a fresh proceeding but the principle of consistency prevents Revenue from taking contradictory stands on identical facts.
• The assessee had complied with regulatory approvals and had not claimed exemption on foreign expenditure.
• Double addition would arise if the AO's additions were sustained.

5. Allowance of Capital Expenditure as Application of Income under Section 11(1)(a)

The AO disallowed capital expenditure claimed by the assessee on the ground that it is capital in nature and not allowable. The assessee contended that for charitable trusts registered under section 12A, capital expenditure applied for charitable purposes is exempt under section 11(1)(a), irrespective of its capital or revenue nature. The CIT(A) allowed the claim, relying on the rectification order and principles of consistency with earlier years where such expenditure was allowed.

The Tribunal agreed, holding that capital expenditure incurred for charitable purposes is allowable as application of income under section 11(1)(a) and that the AO erred in disallowing it.

6. Denial of Exemption under Section 11/12 on Account of Violation of Section 13(1)(c)

The Revenue contended that exemption under section 11 should be denied due to violation of section 13(1)(c) relating to payments to specified persons. The CIT(A) found that the AO had allowed exemption except to the extent of income attributable to violation of section 13(1)(c), which was taxed at maximum marginal rate, consistent with judicial precedents. The Tribunal upheld this view, rejecting Revenue's contention that exemption was wrongly allowed.

7. Additions on Account of Foreign Remittances for Advertisement and Other Services

The AO disallowed payments made to foreign entities such as Facebook Ireland Ltd. for advertisement and to other foreign companies for consultancy and legal services, on the ground that these were not related to charitable purposes in India and lacked approval under section 11(1)(c). The assessee argued that advertisements were aimed at enrolling foreign students with the Indian institutions and that payments were integral to charitable objectives. The CIT(A) deleted the addition relating to Facebook Ireland Ltd. and confirmed disallowance relating to payments for acquisition of property abroad.

The Tribunal upheld the CIT(A)'s view, relying on judicial precedents that expenditure incurred outside India is allowable if applied to charitable purposes in India, emphasizing the distinction between place of expenditure and place of application of income.

8. Validity of Revisional Proceedings under Section 263 and Rectification under Section 154

The assessee challenged the validity of revisional proceedings and rectification orders, contending that no fresh disallowance could be made on the same facts accepted in original assessments. The CIT(A) upheld the revisional and rectification orders to the extent consistent with law and facts. The Tribunal found no infirmity in the CIT(A)'s approach, emphasizing that while every assessment or reassessment is a fresh proceeding, principles of consistency and fairness prevent Revenue from taking contradictory views on identical facts.

Significant holdings and principles established:

• "The Revenue cannot sit in the armchair of the assessee and decide the payment structure of salary/remuneration to be paid to the professors/administrative staffs."
• Adhoc disallowances under section 13(1)(c) are impermissible in absence of evidence on fair market value of services rendered.
• Principle of consistency applies in income tax proceedings such that Revenue cannot take one view in certain years and a contradictory view in other years on identical facts.
• Capital expenditure incurred for charitable purposes is allowable as application of income under section 11(1)(a) irrespective of its capital or revenue nature.
• Foreign expenditure incurred for charitable purposes in India is allowable under section 11 even if incurred outside India, provided the application of income is for charitable purposes in India.
• Exemption under section 11 is to be denied only to the extent of income attributable to violation of section 13(1)(c), and such income is taxable at maximum marginal rates.
• Revisional and rectification proceedings must respect principles of natural justice and cannot be used to take contradictory views on the same facts.

Final determinations on each issue:

• The disallowances of salary and professional payments to specified persons under section 13(1)(c) were deleted as adhoc and unsubstantiated.
• The estimated disallowances of payments to concerns in which specified persons have substantial interest were set aside, deleting the 20% disallowance confirmed by CIT(A).
• The additions on account of foreign remittances and investments without approval under section 11(1)(c) were deleted based on compliance and principle of consistency.
• Capital expenditure was allowed as application of income under section 11(1)(a).
• Exemption under section 11(1)(a) was allowed to the extent of 85% application of income for charitable purposes.
• The denial of exemption under section 11 was upheld only to the extent of income attributable to violation of section 13(1)(c), consistent with judicial precedents.
• Additions relating to foreign remittances for advertisement and consultancy services were partly deleted, recognizing the charitable purpose of such expenditure.
• Revisional and rectification orders were upheld to the extent consistent with law and facts, but Revenue's attempts to take contradictory views on identical facts were rejected.