2025 (5) TMI 1311 - AT - Income Tax

Denial of exemption u/s 11 and 12 - Addition invoking the provisions of Section 13(1)(c)(ii) r/w Section 13(2)(c) by stating that the remuneration paid to a specified person was unreasonable and excessive - HELD THAT - We find that the AO has invoked the provisions of section 13(3)(cc) r.w.s. 13(2)(c) of the Act without making any enquiry regarding the payments being made to the members were in excess of what may be reasonably paid for such service. When the Specified Person is having relevant qualification for the job and when there is no material brought on record to substantiate that the salary or remuneration paid to the members was excessive the provisions of Section 13(1)(c) cannot be invoked to deny the exemption u/s 11 of the Act. AO had failed to establish as to why salary paid by the assessee to the specified person Mrs. Renuka Gupta is considered by him excessive to invoke the provisions of Section 13(1)(c) of the Act. The decision of the CIT(A) to allow the exemption u/s 11 of the Act to the assessee is justified. Further the onus to prove that salary payments made to specified persons are excessive and unreasonable lies on the Revenue department. We find the salary payments made by the assessee to Mrs. Renuka were genuine and reasonable given the nature and scale of operations of the assessee. Decided against revenue.

The core legal questions considered in this appeal revolve around the applicability and interpretation of Section 13(1)(c) of the Income-tax Act, 1961, particularly in relation to the denial of exemption under Sections 11 and 12. The key issues are:

1. Whether the exemption under Sections 11 and 12 can be denied under Section 13(1)(c) when salary payments are made to a specified person, specifically the CEO of the trust, and whether such payments are excessive or unreasonable.

2. The relevance and applicability of judicial precedents concerning payments to trustees or specified persons, especially regarding whether such payments constitute application of income for the benefit of prohibited persons under Section 13(1)(c).

3. Whether the Assessing Officer (AO) correctly invoked Section 13(1)(c) read with Section 13(2)(c) to deny exemption by treating the salary paid to Mrs. Renuka Gupta, the CEO, as excessive and thus violating the provisions.

4. The evidentiary burden and standard required to establish that payments to specified persons are excessive and unreasonable, and the role of the AO and appellate authorities in evaluating such claims.

Issue-wise Detailed Analysis

Issue 1: Applicability of Section 13(1)(c) for denial of exemption due to payments to specified persons

The legal framework under Section 13(1)(c) stipulates that exemption under Sections 11 and 12 shall not be allowed if income is applied for the benefit of any person specified under Section 13(3), including managers or trustees, unless the payments are reasonable and not excessive. Section 13(3)(cc) specifically includes managers "by whatever name called," which would encompass a CEO.

Precedents relied upon include the Supreme Court decision in CIT (Exemptions) vs. Bholaram Educational Society, where it was held that rent paid to trustees at fair market value does not attract denial of exemption under Section 13(1)(c). Similarly, the Hon'ble Karnataka High Court in CIT vs. Krupanidhi Education Trust held that salary payments to members acting as professors or administrative officers could not be deemed excessive if justified by their role and responsibilities.

The Court interpreted these precedents to mean that mere payment to specified persons does not automatically trigger denial of exemption; rather, the payments must be shown to be excessive or unreasonable.

In the present case, the salary and reimbursements paid to Mrs. Renuka Gupta, the CEO, were challenged by the AO as excessive. However, the Tribunal found that the AO failed to conduct any enquiry or produce material evidence to prove excessiveness or unreasonableness. The Tribunal noted that Mrs. Gupta's qualifications and responsibilities justified the payments, and the payments were supported by documentary evidence.

The Tribunal emphasized that the burden of proof lies on the Revenue to establish that payments were excessive, which was not discharged. Consequently, the invocation of Section 13(1)(c) to deny exemption was not justified.

Issue 2: Interpretation of "reasonable payment" and application of relevant judicial decisions

The Tribunal relied heavily on the Delhi High Court decision in CIT (Exemptions) vs. IILM Foundation, which clarified the scope of Section 13(1)(c). The Court held that if the amount paid to a specified person for services rendered is reasonably payable, it cannot be treated as income applied for the benefit of that person under Section 13(1)(c). The relevant extract states:

"If any amount is paid by way of salary, allowance or otherwise... in excess of what may be reasonably paid for such services" triggers denial; otherwise, reasonable payments are permissible.

This interpretation aligns with the statutory language and legislative intent to prevent misuse of exemptions but not to penalize bona fide payments for genuine services. The Tribunal applied this principle, finding no evidence that the salary paid was excessive.

Issue 3: Validity of Assessing Officer's invocation of Section 13(1)(c)

The AO invoked Section 13(1)(c)(ii) read with Section 13(2)(c) to deny exemption, alleging that salary payments to the CEO were unreasonable and excessive. However, the Tribunal found that the AO did not make any enquiry or gather material to substantiate this allegation. The AO's action was thus deemed arbitrary and lacking in evidentiary basis.

The Tribunal observed that the trust's bylaws did not explicitly mention the CEO position, but this did not invalidate the payments or render them excessive. The role and responsibilities undertaken by Mrs. Gupta were considered sufficient to justify the remuneration.

Therefore, the AO's denial of exemption was not sustainable, and the appellate authority's deletion of the addition was upheld.

Issue 4: Burden of proof and evidentiary standards regarding excessiveness of payments

The Tribunal reiterated that the onus to prove that payments to specified persons are excessive and unreasonable lies with the Revenue. Mere assertion without supporting evidence is insufficient.

The assessee produced documentary evidence to demonstrate the genuineness and reasonableness of the salary and reimbursements paid. The Tribunal found this evidence credible and persuasive.

In absence of contrary material or enquiry by the AO, the Tribunal concluded that the exemption under Section 11 could not be denied on the grounds of Section 13(1)(c).

Significant Holdings

"If the amount paid for services is such as is reasonably payable for such service, the same cannot be construed as applied for the benefit of a prohibited person notwithstanding that it is paid to such a person. Consequently, such payment would not fall within the exception of clause (c) of sub-Section (1) of Section 13 of the Act."

The Tribunal established the core principle that payments to specified persons under Section 13(3), including managers or CEOs, do not attract denial of exemption under Section 11 unless it is demonstrated that such payments are excessive beyond reasonable remuneration for services rendered.

The final determination was that the Assessing Officer's denial of exemption under Section 11 on the ground of violation of Section 13(1)(c) was not justified due to lack of evidence of excessiveness. The appellate authority's deletion of the addition was upheld, and the Revenue's appeal was dismissed.

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