TMI Blog2004 (8) TMI 622X X X X Extracts X X X X X X X X Extracts X X X X ..... itted no such violation as alleged and that merely because one of the employee, namely, Mrs. Sudha Tiwari, has been paid allegedly excess remuneration (as a result of increase in her salary), the same amounts to violation of section 13(1)( c ) of the Income-tax Act; 1.3 That the ld. CIT (Appeals) has failed to appreciate that Mrs. Sudha Tiwari was neither the Trustee of the Trust nor a Manager of the Institution and as such, merely because she was an Ex-Officio Member, the same could not be held as a basis for concluding that she was a person covered by section 13(3) of the Income-tax Act; 2. That the ld. CIT (Appeals) has further failed to appreciate, that the salary paid to Mrs. Sudha Tiwari was commensurate with the terms of the services employed and that the ex gratia payment was not a part of salary. The adverse finding recorded by the ld. CIT (Appeals) in the impugned order that, ex gratia payment made was for valuable services resulting as a part of salary, is wholly arbitrary and is based on no material. In fact, the ld. CIT (Appeals) has over looked the evidence furnished by the assessee to establish that the amount of ex gratia payment made had no nexus to the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to make necessary efforts to find out whether any appeal is filed by the Revenue or not. On 9th January, 2004 again the learned Departmental Representative further sought adjournment and the Tribunal took a serious view on it and passed a specific direction while adjourning the case to 11th of February, 2004 that no adjournment would be granted on the next date of hearing. Thereafter the matter came up for hearing again on 11th May, 2004 and the Departmental Representative further sought an adjournment and again the Tribunal adjourned the hearing with final last opportunity and also with clear directions that "no further adjournment on any grounds to the Department would be allowed" and the hearing was adjourned to 22nd of June, 2004. Again on 22nd June, 2004 when the appeal came up for hearing, an adjournment was again sought by the Revenue on the ground that the CIT-DR is on leave. Keeping in view the past conduct of the Revenue, the Tribunal has rejected the request of the Revenue and decided to hear the appeal. Accordingly, the learned counsel for the assessee was asked to proceed with the hearing. As soon as the learned counsel for the assessee has opened the case, the learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the details of application of income or property of the trust for the benefit of the persons referred to under section 13(3) of the Act. From the details of salary and allowances paid to Smt. Sudha Tiwari the Assessing Officer noticed that her basic salary, ex gratia payments and perquisites were increased in this year by 98.4 per cent of which details are as under : " Assessment year Salary Perquisites % increase 1993-94 Rs. 2.65 lacs Nil 1994-95 Rs. 3.39 lacs 27.9 1995-96 Rs. 4.19 lacs 23.6 1996-97 Rs. 5.34 lacs 27.4 1997-98 Rs. 7.04 lacs 31.8 1998-99 Rs. 13.97 lacs 98.4" 6. The Assessing Officer further observed that Smt. Sudha Tiwari was paid an ex gratia amount of Rs. 2,80,000 over and above the salary and this ex gratia payment was not paid to any other person of sanstha, which consists of 500 highly professional team of members. The Assessing Officer further observed that the salary and perquisites paid to Smt. Sudha Tiwari had been increasing at a very un-reasonable rate per annum and that the salary etc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reason also the Assessing Officer invoked the provision of section 13(1)( c ) of the Act. The Assessing Officer also invoked the provisions of section 13(1)( c ) as was done in assessment year 1997-98, which was later on upheld by the CIT (Appeals). The Assessing Officer also invoked the provisions of section 13(12)( c ) and 13(2)( c ) of the Act on account of payment made to Mr. B.C. Das Gupta Co., of which Shri V.K. Govil, one of the partners was a member of the governing body. The Assessing Officer accordingly denied the exemption under sections 11 and 12 of the Act and bring to tax the gross receipt of the assessee-Sanstha at Rs. 12,91,48,034 which was assessed under the head income from other sources. 7. An appeal was preferred to the Commissioner of Income-tax (Appeals) by the assessee with the submission that the society was earlier known as Marie Stopes Society, which was later changed to Parivar Sewa Sanstha, the assessee, with effect from 24-11-1982 and as per its memorandum of association its objects are to promote/up-liftment without distinction of cast, community or creed. As per its Rule 7.1 the regulation and management and control of the affairs of the society ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 per cent, which was abnormally high. In response to the DDIT comments, the assessee filed its rejoinder with the submission that the increase in salary was done for only three months, being Rs. 70,000 in all i.e., from January to March in the financial year 1996-97 whereas this was continuing for all the 12 months being Rs. 2,80,000 in the financial year 1997-98, because of which the Assessing Officer had found the increase to be high. It was further contended that if this increase is taken out from these years, the salary increase in financial year 1997-98 over 1996-97 would be only 25 per cent, which has been found to be reasonable by the Tribunal. With regard to the reason- ableness of the increment, it was stated that Smt. Sudha Tiwari was the brain and soul of the institution and without her tireless efforts, the institution could not run efficiently and hence the increase given to her was justified. It was further contended that though Smt. Sudha Tiwari was the Chief Executive Officer of the assessee, but she cannot be said to be a person covered by section 13(3) of the Act as she had been employed on a salary since 1981. She was not a member of the governing body initial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been opposing this view in its submissions during the appellate proceedings, we may consider this aspect, in the interest of justice since it is also contended by the appellant before me that adequate opportunity was not afforded to it during the assessment proceedings. Firstly its plea that this was mentioned in the Audit Report because the department was repeatedly raising objections, is patently unacceptable. If this was so then the appellant should have offered its income also for tax as exemption was being denied to it in the past as well. Besides, the appellant has not taken this plea before the Hon ble ITAT where the question of reasonableness of the payments made to her alone were deliberated in the past as mentioned by the appellant. Clearly this mention in the Audit Report is very relevant and an indicator of the correct situation as shall appear in the discussion to follow. 8.1.1 As regards her position within the Sanstha, the MOA and the various submissions of the appellant in appeal clearly show that she was not just an ordinary employee, as the appellant has attempted to project to take her out of the ambit of section 13(3). It is seen that Smt. Sudha Tewari ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serted to give a wider ambit to the definition of a manager and is to be seen to mean any person who is in a position to influence the management of and decision making in the organization and derive personal benefit there from. By the appellant s own admission, she was in a position to do so as an Executive Secretary of the Governing Body which even administered and controlled the funds of the Sanstha as mentioned in Rule 7.1. This is buttressed by the fact that she had been taking rent for the house of her husband s HUF. Thus the Executive Member of the Governing Body of the organization could not be equated with any other person or employee, as has been attempted by the appellant. The support taken from the case of the Tata Charitable Trust is also therefore misplaced. Hence, being a prohibited person, the payments in the form of salary and perquisites made to her have been correctly examined by the Assessing Officer for the purpose of verifying any breach of sections 13(1)( c ) and 13(2)( c ). 8.2 The other plea taken by the appellant is that merely because Smt. Sudha Tewari was paid a salary section 13(1)( c ) could not be invoked unless it could be said that she had been pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... last several years. The preceding assessment years also saw similar increases in the month of January and this would cancel out the so-called uneven comparison mentioned by the appellant. The appellant has not referred to this pattern over the years, but only to the last year, to create this confusion. Besides, income is computed for a particular financial year and comparisons have to be made from year to year, irrespective of the months in which raises were given. In the earlier years also the increases have been compared on year to year basis. The Assessing Officer was therefore perfectly justified in comparing the percentage increase in the salary of Smt. Sudha Tewari since assessment year 1993-94 up to the present assessment year. Had the raise from January to March, 1997 been for the first time then the appellant s view could have been accepted that the increase in this assessment year was not comparable to the preceding assessment year. But, since as mentioned above, this is the uniform pattern followed by the appellant - that is increasing the salary from January each year - comparison of the total salary received each assessment year with that received in the immediately p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alaries to Smt. Sudha Tewari had increased disproportionately by 59 per cent. The financial results achieved by any organization are a safe and scientific parameter to judge whether the higher payments made for achieving such results were justified. Since their had been a fall in the rate of increase of income, there was no justification for enhancing the salary etc. of Smt. Tewari, much higher than the increase of any of the earlier years. 8.4 The Hon ble ITAT in its order for assessment years 1995-96 and 1996-97 had stated that an increase of about 25 per cent p.a. in the salary and perquisites could be considered to be the normal increase given by an organization. However, in its order for assessment year 1997-98 at para 9, the Hon ble ITAT stated that if there is a change, the reasonableness thereof has to be again examined. That is to say that if there are material changes compared to the earlier years the Assessing Officer would be free to examine the appellant s claim again with reference to the facts obtaining in that assessment year. Thus the appellant s reliance on the decisions of the Hon ble ITAT in earlier years is misplaced since there is a substantial change in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als) the assessee preferred an appeal before the Tribunal raising various grounds, but all grounds relate to an issue whether Mrs. Sudha Tiwari falls within the category of prohibited persons as defined in section 13(3) of the Income-tax Act and if so whether the salary paid to her is excessive and not commensurate with the services rendered by her for the assessee - Sanstha. During the course of hearing, the learned counsel for the assessee has invited our attention to the comparative details of the salary paid to Smt. Sudha Tiwari, which is appearing at page 162 of the compilation of the assessee, according to which salary was increased in the month of January, 1998 from Rs. 64,100 to Rs. 86,900, which is approximately 25 per cent and this increment in salary cannot be made a basis to disallow the exemption particularly when it had not been disputed that Mrs. Sudha Tiwari was the brain and soul of the society rendering not only exemplary, but indispensable service. He placed reliance upon the order of the Tribunal pertaining to the assessment year 1997-98 in which the Tribunal has treated the increase in the salary as reasonable and directed the Assessing Officer to allow exempti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Act and thereafter the second issue whether the increase in the salary is reasonable and commensurate with the services rendered by her for the assessee-Sanstha. Admittedly, Smt. Sudha Tiwari had joined the service with the assessee-Sanstha in 1981 and thereafter in 1982 vide resolution dated 23rd February, 1982 she was appointed as an ex officio member of the governing body of the society with the designation Director to fill the vacancy caused by the resignation of Mr. Hira Malani and was also resolved that she would hold office till the next annual general meeting of the society. Since 1982 Mrs. Sudha Tiwari remained on the managerial board. Thereafter Mrs. Sudha Tiwari was made executive secretary/member of the governing body. Though the assessee has contended before us that Mrs. Sudha Tiwari remained the ex officio member of the governing body, but no evidence was filed before us as to what happened in the annual general meeting held after 1982 when Mrs. Sudha Tiwari was initially appointed as ex officio member of the governing body. The assessee has filed the copy of the memorandum of associations before us and on the back of this memorandum of associat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 there was an enhancement in the salary of Rs. 15,000 per month besides an ex gratia payment of Rs. 70,000 for three months. Had this factor been noticed by the Tribunal the conclusion of the Tribunal regarding the reasonableness might be different. We, however, restrained ourselves to make any comments on the order of the Tribunal for the assessment year 1997-98, but we certainly do not agree with the contention of the assessee that since the enhancement was considered to be reasonable in the assessment year 1997-98, the enhancement then in the impugned assessment year should also be considered as reasonable. We, therefore, would examine the reasonableness in the enhancement of the salary and perquisites etc. afresh in the light of the totality of the facts and circumstances of the case. Before going to the reasonableness of the enhancement we have to decide first whether Mrs. Sudha Tiwari falls within the category of persons mentioned in section 13(3) of the Act and if so, whether the assessee s claim of exemption of total income is hit by provisions of section 13(1)( c ) of the Act. For the sake of reference, we reproduce the extract of sub-sections (1) (3) of section 13 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d sub-section (2) are the following, namely, ( a )the author of the trust or the founder of the institution; ( b )any person who has made a substantial contribution to the trust or institution, that is to say, any person whose total contribution up to the end of the relevant previous year exceeds fifty thousand rupees; ( c )where such author, founder or person is a Hindu undivided family, a member of the family; ( cc )any trustee of the trust or manager (by whatever name called) of the institution; ( d )any relative of any such author, founder, person, member, trustee or manager as aforesaid; ( e )any concern in which any of the persons referred to in clause ( a ), ( b ), ( c ), ( cc ) and ( d ) has a substantial interest." 12. Admittedly, Mrs. Sudha Tiwari was the heart and soul of the society and was controlling its all affairs. Whatever decisions are taken by Mrs. Sudha Tiwari, these were approved by the governing body and this inference can be drawn from the resolutions passed by the governing body in April, 1985 and other correspondence and the balance sheet. The assessee has filed a copy of the resolution dated 22nd January, 1982, through which Mrs. Sudh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ari not only be the Manager of the Institution, but she was the main controlling authority of the society being an executive secretary/member or Managing Director of the assessee society. In these circumstances, Mrs. Sudha Tiwari cannot be called to be an ordinary employee of the society. We are, therefore, of the considered view that Mrs. Sudha Tiwari certainly falls within the category of prohibited persons specified in sub-section (3) of section 13 of the Act. 13. Now the next question comes whether the increase in the salary of Mrs. Sudha Tiwari is reasonable or commensurate with the services rendered by her for the assessee-society. From the details of salary appearing at page No. 121 of the compilation of the assessee, we find that the increment in the salary was given at the beginning of the English calendar year i.e., in the month of January. In assessment year 1994-95 the salary was increased from Rs. 27,000 to Rs. 33,225. Since the increment was of Rs. 5,225 per month, it was considered to be reasonable. Again in the assessment year 1995-96 the salary was increased from Rs. 32,225 to Rs. 43,000 and this was also considered to be reasonable by the Revenue. Again in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We have also carefully examined the order of the Commissioner of Income-tax (Appeals) and we find that the CIT(Appeals) has also examined the impugned issues exhaustively in his order and before coming to the conclusion that the increase in the salary is unreasonable, he has examined all the aspects of income of the society vis-a-vis the increment in the salary of Mrs. Sudha Tiwari. Other factors were also examined by him before upholding the view of the Assessing Officer that Mrs. Sudha Tiwari falls within the category of prohibited persons. Having examined the order of the Commissioner of Income-tax (Appeals) in the light of material placed before us, we are of the considered view that the enhancement in the salary in the impugned assessment year as well as in January, 1997 was not reasonable and, as such, the claim of exemption of the assessee under section 12 is hit by section 13(1)( c ) of the Income-tax Act, 1961. 15. We have also examined the following judgments referred to by the assessee with regard to his submissions that the employees of the society does not fall within the category of prohibited persons : ( i ) CIT v. Edward Keventer (P.) Ltd. [1972] 86 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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