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Facts
The assessee, Mailam Subramaniya Swamy Educational Trust, appealed the Pr. CIT's invocation of revisionary jurisdiction under section 263. The Pr. CIT alleged that the trust paid remuneration to three trustees, which violated Clauses 19 and 20 of the Trust Deed, and this led to denial of exemption under sections 11 and 12. The assessment officer had previously accepted the returned income after scrutiny.
Held
The Tribunal held that the payment of remuneration was authorized by the trustees for managerial functions performed in addition to their trustee roles, and this was accepted by the revenue in previous years. The Pr. CIT's action was not justified as the Assessing Officer had made necessary inquiries and taken a plausible view. The issue of whether the remuneration was excessive or a breach of trust was also not conclusively established to warrant revision.
Key Issues
Whether the Pr. CIT was justified in invoking revisionary jurisdiction u/s 263 for payments made to trustees, allegedly in violation of the trust deed, when the Assessing Officer had made necessary inquiries and accepted the expenditure during regular assessment.
Sections Cited
263, 143(3), 13(1)(c), 11, 12, 164, 161(2), 13(2)(c), 13(3), 92, 116, 142(1)
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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM & HON’BLE SHRI MANU KUMAR GIRI, JM
(िनधा9रणवष9 / Assessment Year: 2018-19) Mailam Subramaniya Swamy DCIT बनाम/ Educational Trust Central Circle-3(3) 54, Meenatchi Nagar, Poonthottam Chennai. Vs. Villupuram-605 602. �थायीलेखासं./जीआइआरसं./PAN/GIR No. AAATM-3311-L (अपीलाथ�/Appellant) : (� थ� / Respondent) अपीलाथ� कीओरसे/ Appellant by : Shri J. Prabhakar (FCA)-Ld.AR � थ�कीओरसे/Respondent by : Shri R. Clement Ramesh Kumar (CIT)-Ld. DR सुनवाई की तारीख/Date of Hearing : 11-09-2024 घोषणा की तारीख /Date of Pronouncement : 09-10-2024 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member)
1.1 By way of this appeal, the assessee assails invocation of revisionary jurisdiction u/s 263 by Ld. Pr. Commissioner of Income Tax (Central), Chennai-1 (Pr.CIT) vide impugned order dated 30-03-2024 in the matter of an assessment framed by Ld. AO u/s.143(3) of the Act on 26-05-2021. 1.2 The grounds taken by the assessee read as under: - 1. The CIT is not justified in invoking his jurisdiction u/s.263 to deny the benefit of Chapter III on the alleged violation of clause 20 of the trust deed.
The CIT is not justified in treating payment of Rs.86.40 lakhs to trustees as ultra vires the trust deed.
The CIT is not justified in deliberately suppressing the doctrine of cy-pres countenanced in the show cause notice u/s.263 and overriding the binding nature of the interpretation of the said doctrine to prejudice the payment to trustees as allegedly violative of Clause 20 of the trust deed. 4. The CIT is not justified in invoking amended clause of Sec 13(1)(c) effective from Assessment Year 2023-24 as curative and retrospective in operation for earlier Assessment Year 2018-19. 5. The CIT is not justified in interpreting clause 20 in isolation without construing the trust deed as a comprehensive instrument without concatenating the complementary clause 16 permitting the set off of remuneration to trustees as a charge on the receipts of the appellant trust. 6. The CIT is not justified in dismissing the claim that the subject matter of revision was already a matter of scrutiny under regular assessment with disdain to create deliberate prejudice on the Assessing Officer's integrity in the assessment process. 7. The CIT is not justified in ignoring query u/s.142(1) dated 15.04.2021 during the assessment on justification to transfer remuneration and justifying interference u/s.263 thereon as if the CIT alone is arbiter on tax assessment while putting down the Assessing Officer on his reasoned acceptance on such payments. 8. The CIT is not justified in omitting to articulate on the reply dated 23/03/2024 as regards the alleged violation of Clauses in the trust deed is only an alleged breach of trust which can be questioned only by an interested person such as the author or co-trustee and the department cannot take cudgels against the payment to trustees. The CIT is not justified in omitting to address the issue of non-applicability of Indian 9. Trust Act to public charities, while the gravamen of charges on breach of clauses in trust deed is not addressed qua the Indian Trust Act 1882. 10. The CIT is not justified in deliberately misinterpreting the decision of the Supreme Court in Max India Ltd case [2007] 295 ITR 282 (SC) as if the decision confers unfettered right upon the CIT to revise an assessment u/s.263 while the said decision unequivocally favour the appellant. 11. The CIT is not justified in attributing contumacious conduct on the Assessing Officer framing the assessment as to non-application of mind when the subject matter of payment of remuneration to trustees was adumbrated during assessment proceedings and prohibition in clause 20 of the trust deed was not considered fatal to the allowance of such remuneration. 12. The CIT is not justified in presuming the then Assessing Officer framing the assessment was not aware of the doctrine of cy-pres to favourably interpret clause 20 of the trust deed on payment to trustees. 13. In any event the order of the CIT assuming jurisdiction u/s.263, when ex-facie there exists neither error nor prejudice to the interest of revenue to tax Rs.1.44 crores as alleged violation of Chapter III and invoking Sec.164 to tax the said remuneration in the status of AOP. 14. The CIT has no basis to give directions on taxing 86.40 lakhs u/s.164(2) when deficit of application of income at Rs.2.57 crores subsume the alleged disallowance of the said sum u/s.13(1)(c) of the Act. 15. The CIT is not justified in deliberately ignoring the provisions of Sec.161(2) preventing dual assessment of same income, once in the hands of the beneficiary and again in the hands of the trustee, in as much as the remuneration has already been offered to tax in the respective hands of the individuals thereby prohibiting an artificial tax on the trustee qua the trust once again u/s.164(2).
The CIT is not justified in misinterpreting the provisions of Sec.13(1)(c) to infer that no remuneration for services rendered factually and legally by the trustees is allowable when the disallowance therefore is only in respect of excess remuneration paid to interested persons.
In any event the order of the CIT is illegal, capricious, and rendered with a jaundiced view by misinterpreting Clause 20 of the trust deed and ignoring the doctrine of cy-pres on interpretation on the said clause. 1.3 The assessee has filed additional grounds of appeal which read as under: - 14A. The learned PCIT is not justified in alleging breach of trust on payment of remuneration to trustees based on inchoate interpretation of clause 20 of trust deed when jurisdiction to question breach of trust is lacking qua his role as an income tax authority u/s 116 of the Act. 14B. The PCIT erred in invoking breach of trust without the mandate of section 92 of Code of Civil Procedure, 1908. 14C. The PCIT is not justified in misinterpreting clause 20 of the trust deed without due regard to clause 3 of section 92 of Code of Civil Procedure, 1908. 1.4 The Ld. AR advanced arguments assailing the revision of the order on the ground that adequate enquiry with respect to the impugned issue was already made by Ld. AO during the course of regular assessment proceedings. The Ld. AR filed written submission supporting assessee’s case. The Ld. CIT-DR also advanced arguments and submitted that the issue as flagged in the revisionary order was not examined / verified by Ld. AO. The written submissions have also been filed on behalf of the revenue. Having heard rival submissions and upon perusal of case records, our adjudication would be as under. Assessment Proceedings 2.1 From the case records, it emerges that the assessee trust is engaged in imparting engineering education and it is part of Shri Manakula Vinayagar Education Trust, Puducherry. The return of income as filed by the assessee was scrutinized for this year vide notice u/s 143(2) on 22-09-2019. During the course of assessment proceedings, notices u/s 142(1) were issued on 04-03-2020, 15-04-2021 and 14-05- 2021 calling for various details / explanations from the assessee. In response, the assessee made various submissions which were accepted by Ld. AO and the assessment was framed accepting the returned income. 2.2 In notice u/s 142(1) dated 15-04-2021 (kept on Page No.100 of the paperbook), Ld. AO raised a query as under: - As per you audit report filed u/s 12A(b) of the Act, payments to specified person were made to the following list of person : 1. M. Dhanasekaran – 33,60,000/- 2. S.V. Sugumaran – 28,80,000 3. K. Narayanasamy – 24,00,000 Please provide the supporting documents evidencing the nature of service provided by the abovementioned person along with proof to establish the payments made were made in excess and what may be reasonably paid for such services. Also provide the details of the payments made to the abovementioned specified person in previous 3 financial years. 2.3 The assessee furnished a reply on 20-04-2021 and submitted that the above persons were engaged in carrying out various day-to-day administrative and management functions relating to the regular operations of the college for which they were drawing salary just like any other employees. It was explained that the functions being performed by them were very crucial for the institution and therefore, salary paid to them was very reasonable taking into account the actual services rendered by them. All the three persons were stated to be assessed to tax and these incomes were duly taxed in the hands of the payees. The assessee also tabulated the remuneration paid to them in the previous 3 financial years as under: - Name PAN Designation Payments Made during the year FY 2014-15 FY 2015-16 FY 2016-17 M. Dhanasekaran AGFPD3736R Chairman & Managing 20,40,000 24,00,000 27,60,000 Trustee S.V. Sugumaran APCPS9359D Vice Chairman 15,60,000 19,20,000 22,80,000 K. Narayanasamy AFXPN1503K Secretary 0 0 18,00,000 It was further submitted that Mr. Dhanasekaran was also subjected to scrutiny assessment for this year. 2.4 Apparently, Ld. AO was satisfied with aforesaid explanation of the assessee and accordingly, chose not to disturb the returned income of the assessee.
3. Revisionary Proceedings 3.1 Subsequently, Ld. Pr. CIT, upon perusal of case records, sought revision of the order and issued a show cause notice on 21-03-2024 on the ground that the assessee paid remuneration to three trustees. However, Clause 19 and Clause 20 of the Trust Deed dated 10-10-1996 prohibits payment of remuneration to the trustees. The aforesaid clauses were never amended. Therefore, if there was violation in terms of provisions of Sec.13 i.e., any part of the income of the trust is applied directly or indirectly for the benefit of specified persons including trustees, then the exemption of Sec.11 and 12 would not apply. Despite clear prohibition in the trust deed, the assessee had paid remuneration. The Ld. AO ought to have computed income as applicable in the case of an AOP and taxed accordingly. However, the exemption was allowed without taking cognizance of the relevant clauses in the trust deed and there was no proper application of mind which justify revision of the order. 3.2 The assessee refuted the allegation of Ld. Pr. CIT on legal ground as well as on merits. It was submitted that as per Sec.13(1), exemption u/s 11 could not be denied to the entire income of the trust but only with respect to that part which has violated the provisions of Sec.13. Further, the provisions of Sec.13(1)(c) read with Sec.13(2)(c) deems the circumstances to indicate the payment to the trustees to be violative to the extent of excessive remuneration paid to specified persons in terms of Sec.13(3) and not the entire payment be subjected to taxation. Sec.13(2)(c) provide for allowance of reasonable payment by way of salary etc. even to specified persons who sacrificed his time and efforts to render services to the trust. The prohibition to pay remuneration to trustees vide Clause 20 of the Trust Deed was only in respect of discharge of their functions as trustees per-se dehors their role as management executives which is allowable to the assessee. Further, all the trustees offered the said income to tax in their respective returns of income. On legal submissions, it was stated that requisite details, in this regard, was already furnished to Ld. AO. The Ld. AO had enquired into the aforesaid issue and formed an opinion on allowability of the same. The assessee had also submitted an extract of resolution of the trust dated 24-03-2011 which provide that the trustees who were engaged in the management activities of the institutions, in addition to their role as trustees, would be entitled for reasonable salary as any other management employees. 3.3 However, Ld. Pr. CIT, referring to Clause 20 of trust deed, rejected the submissions of the assessee. Upon violation of the same, the exemption u/s 11 was to be denied. Further, Ld. AO did not consider the provisions of Sec.13(1)(c) and did not question the assessee whether the exemption u/s 11 could be denied. Therefore, it could not be said that AO had considered the issue and taken a view which was one of the possible views. The assessee’s claim that exemption u/s 11 could not be denied with respect to entire income of the trust and has to be restricted to that part which was in violation of the provisions of Sec.13, was acceptable considering the amendment introduced by Finance Act, 2022. Finally, Ld. AO was directed to revise the assessment order denying exemption u/s 11 with respect to amount of remuneration paid to the trustees which was claimed as application in the computation of total income by the assessee and assess the said amount at maximum marginal rate (MMR). Pursuant to the same, consequential order has been passed by Ld. AO u/s 143(3) r.w.s. 263 on 03-04-2024 wherein the remuneration of Rs.86.40 Lacs has been brought to tax at MMR. Aggrieved, as aforesaid the assessee is in further appeal before us. Our findings and Adjudication 4. From the facts, it emerges that the only issue as flagged in the revisionary order is the allegation of Ld. Pr. CIT that the assessee has paid remuneration to Trustees which is in violation of Trust Deed of the assessee. Clause 19 of the Trust Deed provides that no part of the income of the trust shall be applied for the benefits of specified persons including trustees. The said prohibition, in fact, is the prohibition provided under the statute to prevent misuse of trust income / property. The Clause 20 provide that the trustee shall not be entitled to draw any remuneration from the trust. However, the assessee’s case hinges on the point that the three trustees are performing managerial functions and engaged in management activities of the trust. In other words, the remuneration is being given for their time and efforts towards trust activities. As a matter of fact, this remuneration has been authorized by the Board of Trustees in their meeting held on 24-03-2011 which read as under: - Extracts from the Minutes of the Meeting of the Trustees of Mailam Subramaniya Swamy Educational Trust held on 24 March 2011 @ 10.30 AM held at No. 54, Meenatchi Nagar, Poonthottam, Villupuram - 605 602.
RESOLVED that the Trustees, who are also engaged in the Management activities of the Institutions, in addition to their role as trustee of the Trust, shall be entitled to reasonable Salary, as any other management employee. FURTHER RESOLVED that such reasonable salary may be subject to annual increments, in line with the increase in the management activities and shall further be subject to tax deduction at source as per applicable rates."
The trustees have resolved to provide for such payment for trustees who are engaged in management activities of the trust to reward their time and efforts. The same is also evident from the fact that the assessee has paid such remuneration during earlier three financial years also which has been accepted by the revenue and no interference has been made with respect to exemption claim of the assessee.
We also find that a specific query was raised by Ld. AO during the course of assessment proceedings in this regard and the assessee was required to provide the supporting documents evidencing the nature of service provided by the three persons and establish that the payments were reasonable. The assessee, in its reply dated 20-04-2021, duly submitted that the above persons were engaged in carrying out various day-to-day administrative and management functions relating to the regular operations of the college for which they were drawing salary just like any other employees. It was also explained that the functions being performed by them were very crucial for the institution and therefore, salary paid to them was very reasonable taking into account the actual services rendered. All the three persons were stated to be assessed to tax and these incomes were duly taxed in the hands of the payees. The assessee also tabulated the remuneration paid to them in the previous 3 financial years which show that such payments were being made regularly considering the services being rendered by them. Having satisfied with the aforesaid explanations as furnished by the assessee, Ld. AO accepted the claim of the assessee and chose not to make any interference in the exemption claim. The rule of consistency favored the case of the assessee. It could very well be said that the issue as flagged in the impugned order was verified by Ld. AO during the course of assessment proceedings and one of the possible views was taken in the matter. The same is not shown to be in violation of any statutory provisions.
The Hon’ble Supreme Court in Malabar Industrial Co. Ltd. vs. CIT (109 Taxman 66) has held that the phrase 'prejudicial to the interests of the revenue has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of the revenue. For example, when an Income- tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue, unless the view taken by the Income-tax Officer is unsustainable in law. The said principal has been reiterated by Hon’ble Court in its subsequent judgment titled as CIT V/s Max India Ltd. (295 ITR 282). Similar principal has been followed in Grasim Industries Ltd. V/s CIT (321 ITR 92). The ratio of all these decisions is that where two views are possible and AO has preferred one view against another view, order could not be said to be erroneous or prejudicial to the interest of the revenue. In our opinion, the ratio of these decisions would apply to the facts of the present case before us.
Therefore, on the given facts, the allegation of Ld. Pr. CIT that Ld. AO did not make necessary enquiries, could not be accepted. Accordingly, the impugned revision u/s 263 could not be upheld. We order so. The assessment framed by Ld. AO stand restored back. The assessee succeeds on legal grounds which render additional ground merely academic in nature and accordingly, dismissed as infructuous.
The appeal stand allowed in terms of our above order. Order pronounced on 9th October, 2024 Sd/- Sd/- (MANU KUMAR GIRI) (MANOJ KUMAR AGGARWAL) �ाियक सद3 / JUDICIAL MEMBER लेखा सद3 / ACCOUNTANT MEMBER चे3ई Chennai; िदनांक Dated : 09-10-2024 DS आदेशकीQितिलिपअ/ेिषत/Copy of the Order forwarded to : 1. अपीलाथ�/Appellant 2. � थ�/Respondent 3. आयकरआयु</CIT Chennai. 4. िवभागीय�ितिनिध/DR 5. गाडAफाईल/GF