CONSERVATION ACTION TRUST,MUMBAI vs. EXEM. WARD 1(2), MUMBAI, MUMBAI

The assessee has taken the following grounds: “ 1. On the facts and in the circumstances of the case, the Ld. AO was not justified in treating the Appellant as having violated the conditions prescribed in section 13(1)(c) and section 11(3) of the Income Tax Act, 1961 (“the Act”) and thus denying the exemption under section 11 of the Act and the Ld. CIT (Appeals) was not justified in upholding the same.

The brief facts of the case are that the assessee is a charitable trust registered under section 12AA of the Act and is also registered under section 80G of the Act. For the assessment year under consideration, i.e., A.Y. 2018-19, the assessee filed its return of income on 11.09.2018 declaring total income at Nil and claimed exemption under section 11 of the Act. The case was selected for limited scrutiny for verification of transactions of the trust with specified persons. During the course of assessment proceedings, the Ld. AO noticed from the Income & Expenditure Account and audit report in Form No.10B that the assessee had paid professional fees of Rs.34,18,250/- to Shri Debi Goenka, one of the trustees, out of the total revenue expenditure of Rs.99,75,859/-. The Ld. AO observed that the said payment constituted about 34.26% of the revenue expenditure and 32.09% of the income/receipts considered by him, and accordingly questioned the reasonableness of the payment. In response, the assessee explained that Shri Debi Goenka had substantial experience in the field of environmental conservation and was actively involved in the activities and projects undertaken by the trust. The assessee further submitted comparative figures of remuneration stated to have been paid to senior functionaries of certain other NGOs. The assessee's case was that the reasonableness of the remuneration had to be examined with reference to the nature and extent of services rendered and the expertise of the person concerned, rather than merely with reference to the receipts of the trust.

The Ld. AO, however, was not satisfied with the explanation. According to the Ld. AO, the comparative figures relating to other NGOs were not supported by adequate documentary evidence and relevant particulars such as the nature of duties, qualifications, terms of engagement and comparable functions had not been furnished. The Ld. AO accordingly invoked the provisions relating to payment to a specified person and denied the exemption claimed under section 11. The total income was assessed at Rs.46,92,499/-, which included the professional fees of Rs.34,18,250/- paid to the trustee.

Aggrieved, the assessee preferred an appeal before the Ld. CIT(A). The Ld. CIT(A) sustained the action of the Ld. AO. The appellate order records that, according to the first appellate authority, no contemporaneous agreement, trustees' resolution determining remuneration, independent benchmarking, detailed description of the services rendered or documentary comparative analysis was produced to demonstrate the reasonableness of the payment. Being further aggrieved, the assessee is in appeal before us. The grounds, inter alia, challenge the application of section 13(1)(c), the finding that the remuneration was unreasonable and the consequential denial of exemption under section 11.

Before us, the Ld. AR filed a paper book comprising pages 1 to 363, which is placed on record. The Ld. AR submitted that the authorities below erred in treating the professional fees of Rs.34,18,250/- paid to Shri Debi Goenka as excessive or unreasonable merely by comparing the amount with the receipts or expenditure of the trust. The Ld. AR submitted that Shri Debi Goenka is one of the founder trustees and has extensive experience in environmental conservation. He was stated to be the principal person identifying conservation projects and placing them before the Board of Trustees for approval and was actively involved in carrying out the objects of the trust. It was therefore contended that the payment represented consideration for actual professional services rendered to the trust and was not a diversion of the trust's resources for his personal benefit. The assessee's explanation before the revenue authority also records that the remuneration was allocated amongst the various projects on which Shri Debi Goenka was working. The Ld. AR further contended that, for the purpose of section 13(2)(c), the relevant consideration is whether the amount paid is in excess of what may reasonably be paid for the services rendered. According to the Ld. AR, the reasonableness of the payment therefore has to be examined having regard to the experience, expertise, nature of responsibilities and actual services rendered by the trustee, and not merely as a percentage of the gross receipts of the trust.

The Ld. AR accordingly prayed that the findings of the authorities below be reversed. Alternatively, it was submitted that an opportunity may be granted to the assessee to substantiate the reasonableness of the professional fees by placing the relevant evidence on record.

Per contra, the Ld. DR relied upon the orders of the revenue authorities. The Ld. DR submitted that Shri Debi Goenka is admittedly a trustee and, therefore, a specified person for the purposes of the relevant provisions. Once a substantial amount had been paid to a specified person out of the resources of the trust, it was incumbent upon the assessee to establish, by cogent evidence, that the payment was commensurate with the services actually rendered.

The Ld. DR further submitted that mere reference to the experience and reputation of the trustee or remuneration allegedly paid by other NGOs could 5 not, by itself, establish the reasonableness of the impugned payment. The Ld. AO had specifically required the assessee to furnish the basis on which the remuneration was fixed, the agreement/arrangement governing the services and a proper comparative analysis. According to the Ld. DR, the comparative figures relied upon by the assessee were not supported by sufficient documentary material concerning the functions, qualifications, nature of engagement and other relevant parameters of the alleged comparables. Accordingly, the Ld. DR supported the findings of the authorities below.

We have heard the rival submissions and perused the materials available on record. The controversy before us essentially revolves around the reasonableness of the professional fees of Rs.34,18,250/- paid by the assessee- trust to Shri Debi Goenka, who is one of its trustees. The record indicates that the Ld. AO had called upon the assessee to justify the amount paid by furnishing the basis of determination of remuneration, details of professional services rendered and appropriate comparables.

We find that the reasonableness of such payment cannot be examined merely with reference to its percentage of the receipts or expenditure of the trust. At the same time, where payment is made to a specified person, the assessee is required to substantiate, on the basis of relevant and verifiable material, that the amount paid is commensurate with the nature, extent and value of the services actually rendered. Section 13(2)(c), as reproduced and relied upon by the assessee before the Ld. AO, itself brings into consideration whether the amount paid is in excess of what may reasonably be paid for such services.

In the facts of the present case, we consider it appropriate that the issue of reasonableness of the professional fees be examined afresh on the basis of 6 objective and comparable material. Accordingly, the impugned issue is set aside to the file of the Ld. AO for the limited purpose of verification of the reasonableness of the professional fees paid to Shri Debi Goenka. For this limited verification, the assessee shall furnish before the Ld. AO adequate documentary evidence, including, inter alia:

The Ld. AO shall examine the aforesaid evidence and any other material which the assessee may place on record and determine the issue afresh in accordance with law. The assessee shall be afforded reasonable opportunity of being heard and shall extend necessary cooperation by furnishing the requisite details and supporting documents. We make it clear that the remand is confined to verification and determination of the reasonableness of the professional fees paid to Shri Debi Goenka on the aforesaid parameters, and we have not expressed any opinion on the merits thereof.

The consequential issues raised in the other grounds, to the extent dependent upon the above determination, shall also be reconsidered by the Ld. AO in accordance with law after deciding the aforesaid limited issue.

In the result, the appeal of the assessee bearing ITA No.7869/Mum/2026 is allowed for statistical purpose.