ITO, RUDRAPUR vs. M/S. DEVBHOOMI SHIKSHA PRASAR SAMITI, RUDRAPUR

In the departmental appeal, the solitary ground raised reads as under:

Facts of the case in brief, are that the assessee filed his return of income on 29.9.2010 declaring NIL income. Later on, the case was selected for scrutiny. During the course of assessment proceedings, the AO noticed that the assessee paid salary to the tune of Rs. 6 lakhs each to three persons, namely Shri Nichal Pandey, Shri Mannu Pandey and Shri Manish Koshiyari who are the persons referred to in section 13(3) of the Income-tax Act, 1961 [hereinafter referred to as ‘the Act’]. The AO also noticed that the highest salary paid to the interested person was Rs. 3,60,000/- paid to group director, namely, Shri B.D. Lakhchaura whose qualification was Ph.D. He, therefore, restricted the salary to each of the above said persons to Rs. 3,60,000/- and rest of the salary of Rs. 2,40,000/- paid to each person was disallowed and exemption u/s 11 of the Act was not allowed. The AO also noticed that the ld. CIT, Haldwani had also cancelled the registration of the society u/s 12A vide order dated 20.6.2012 which was made after proper examination of audited accounts of the assessee society from F.Ys. 2006-07 to 2009-10, therefore, the society’s activities were of commercial nature and there was no element of charity indulged in it. The AO held that the assessee society was not eligible to get exemption u/s 11 and 12 of the Act. He also mentioned that the assessee society was not granted approval u/s 10(23C(vi) of the Act and application had been rejected by the ld. CCIT, Dehradun.

The ld. D.R. strongly supported the order of the A.O and further submitted that the ld. CCIT rejected the application of the assessee for exemption u/s 10(23C)(vi) of the Act and the ld. CIT, Haldwani also cancelled the registration, earlier granted u/s 12A of the Act. Therefore, the activities of the assessee for the year under consideration were commercial in nature and there was no element of charity, as such, the AO rightly denied exemption u/s 11 and 12 of the Act and the ld. CIT(A) was not justified in reversing the action of the AO.

In his rival submissions, the ld. AR reiterated the submissions made before the authorities below and further submitted that the registration although was cancelled by the ld. CIT(A) on 20.6.2012, however, it was again granted on 12.9.2013 w.e.f. 1.4.2012. Reference was made to page 1 of the assessee’s paper book. It was further submitted that the cancellation of the registration u/s 12A of the Act vide order dated 20.6.2012 was not retrospective. Therefore, the AO was not justified in holding that the assessee was not eligible for exemption u/s 11 and 12 of the Act and the ld. CIT(A) rightly allowed the claim of the assessee.

After considering the rival submissions and material on record, in the present case, it is an admitted fact that registration u/s 12A was not cancelled by the ld. CIT retrospectively vide order dated 20.6.2012 and later on, the ld. CIT, Dehradun allowed registration vide order dated 12.9.2013 w.e.f 1.4.2012. Therefore, for the year under consideration, the assessee was having benefit of registration u/s 12A of the Act. As such, the AO was not justified in denying the claim of the assessee for exemption u/s 11 and 12 of the Act on the basis that the registration u/s 12A was cancelled by the ld. CIT(A) vide order dated 20.6.2012. In our opinion, the ld. CIT(A) rightly held that the action of the AO in denying the benefit of section 11 and 12 of the Act on the basis of cancellation dated 20.6.2012 cannot be upheld. We do not find any infirmity in the impugned order of the ld. CIT(A) on this issue.

In the assessee’s cross objection, the only effective ground raised, reads as under:

Facts relating to this issue, in brief, are that during the course of assessment proceedings, the AO noticed that the assessee paid salary to the tune of Rs. 6 lakhs each to three persons, namely Shri Nichal Pandey, Shri Mannu Pandey and Shri Manish Koshiyari who are the persons referred to in section 13(3) of the Income-tax Act, 1961 [hereinafter referred to as ‘the Act’]. The AO also noticed that the highest salary paid to the interested person was Rs. 3,60,000/- paid to group director, namely Shri B.D. Lakhchaura, whose qualification was Ph.D. He, therefore, restricted the salary to each of the above said persons to Rs. 3,60,000/- and rest of the salary of Rs. 2,40,000/- paid to each person was disallowed and exemption u/11 of the Act was not allowed. Being aggrieved, the assessee carried the matter to the ld. CIT(A) and submitted that it had paid salary to the tune of RS. 6 lakhs each to three persons, namely Shri Nichal Pandey, Shri Mannu Pandey and Shri Manish Koshiyari. All the aforesaid three persons are actively associated with day to day running of the colleges and do not have any other regular employment or business. The AO partly disallowed the salary paid amounting to Rs. 2,40,000/- for each person, treating it as unreasonable merely on his own estimates. The ld. AR further submitted that the salary had been paid by account payee cheques and were assessed in the personal hands of the concerned persons. The AO had not found any defects in the regular books of account of the assessee. Under these circumstances, the ld. AR prayed that the part disallowance of salary paid merely on estimates is arbitrary and against the provisions of the Act. He, therefore, pleaded that the addition made on account of disallowance of salary, may be deleted.

The ld. CIT(A) after considering the submissions of the assessee upheld the action of the AO by observing that the AO has clearly been able to demonstrate that the “interested persons” were getting much more salary than the technically qualified director [who was not an interested person]. Now the assessee is in appeal.

The ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that same remuneration paid to the director has been accepted in the preceding as well as succeeding years. He further submitted that on similar issue, assessment was reopened for the A.Y 2009-10, however, the same was dropped. Reference was made to pages 6 to 8 of the assessee’s paper book.

The ld. D.R. strongly supported the orders of the authorities below and further submitted that excessive salary was paid to the interested persons. Therefore, disallowance was rightly made by the AO u/s 13(2)(c) of the Act and the ld. CIT(A) was justified in sustaining the disallowance made by the AO.

We have heard the rival submissions and have carefully perused the entire material on record. In the present case, the contention of the ld. Counsel for the assessee that similar remuneration has been accepted in the preceding as well as succeeding year and that on similar grounds the assessment reopened for A.Y 2009-10 was dropped later on, has not been rebutted. In our opinion, when the department has accepted similar remuneration in the preceding and succeeding A.Y and facts are similar for the year under consideration, then there was no reason to deviate from the stand taken in the preceding and succeeding year. In that view of the matter, the disallowance made by the AO and sustained by the ld. CIT(A) is deleted.

In the result, the appeal of the department is dismissed whereas the cross objection of the assessee is allowed. [Order Pronounced in the Court on 18.11.2015]