Commissioner Of Income Tax, Faridabad v. M/S Idicula Trust Society, Faridabad

[.T_A. No.1 of 2011 -/- IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH (1) L.T.A. No.1 of 2011 (O&M).Assessment Year 2003-04.Decided on:-April 11, 2014. Commissioner of Income Tax, Faridabad. ....... Appellant, Versus M/s Idicula Trust Society, Faridabad. woe RESpOondent, (2) I.T.A. No.3 of 2011 (O&M).Assessment Year 2004-05. Commissioner of Income Tax, Faridabad. ....... Appellant, Versus M/s Idicula Trust Society, Faridabad. woe RESpOondent, (3) I.T.A. No.4 of 2011 (O&M).Assessment Year 2005-06. Commissioner of Income Tax, Faridabad. ....... Appellant, Versus M/s Idicula Trust Society, Faridabad. woe RESpOondent, (4) I.T.A. No.2 of 2011 (O&M).Assessment Year 2006-07. Commissioner of Income Tax, Faridabad. ....... Appellant, Versus M/s Idicula Trust Society, Faridabad. woe RESpOondent, [.T_A. No.1 of 2011 -)- (5) I.T.A. No.53 of 2011 (O&M).Assessment Year 2003-04. M/s Idicula Trust Society, Faridabad, ....... Appellant, Versus Commissioner of Income Tax, Faridabad. — woe RESpOondent, (6) L.T.A. No.54 of 2011 (O&M).Assessment Year 2004-05. M/s Idicula Trust Society, Faridabad, ....... Appellant, Versus Commissioner of Income Tax, Faridabad. woe RESpOondent, (7)I.T.A. No.55 of 2011 (O&M).Assessment Year 2005-06. M/s Idicula Trust Society, Faridabad, ....... Appellant, Versus Commissioner of Income Tax, Faridabad. — woe RESpOondent, (3)I.T.A. No.290 of 2012 (O&M).Assessment Year 2007-08. Commissioner of Income Tax, Faridabad. ....... Appellant, Versus M/s Idicula Trust Society, Faridabad. woe REeSpondent, [.T_A. No.1 of 2011 -3- (9)LTA. No.249 of 2012 (O&M).Assessment Year 2008-09. Commissioner of Income Tax, Faridabad. ....... Appellant, Versus M/s Idicula Trust Society, Faridabad. woe RESpOondent, CORAM: Hon'ble Mr. Justice Rajive BhallaHon'ble Mr. Justice Dr. Bharat Bhushan Parsoon. 33333 Argued by:- Mr. Tajinder K. Joshi, Advocat for the revenue. Mr. Aman Bansal, Advocate for the assessee. Dr. Bharat Bhushan Parsoon, J. First four appeals by the revenue pertaining to the assessmentyears 2003-04, 2004-05, 2005-06 and 2006-07 and next three appeals by theassessee pertaining to the assessment years 2003-04, 2004-05 and 2005-06are directed against a common order dated 21.5.2010 (Annexure A-III)passed by the Income Tax Appellate Tribunal, Delhi Bench “C”, New Delhi(hereinafter referred to as, the Tribunal) in ITA Nos.1769, 2620, 2621/Del/08and ITA No.4484/Del/09. Next two appeals pertaining to the assessmentyears 2007-08 and 2008-09 have been preferred by the revenue against theorders ot the Tribunal dated 13.72012 and 30.4.2012 in ITANos.2116/Del/2011 and 4514/Del/2011 respectively. 2 |Since issues to be adjudicated are common and inter-connected,for convenience, clarity and effective adjudication, all these appeals havebeen taken up together and are being decided by this common order. 3 |For clarity and better comprehension of the matter in dispute,facts of ITA No.1 of 2011 out of the appeals of the revenue and ITA No.53 of2011 out of the appeals of the assessee are being referred to. 4The assessee-trust is registered under Section 12A of theIncome Tax Act, 1961 (hereinafter referred to as, the Act) since 6.7.1971. Itis doing charitable work of imparting education through five schools. Theassessee carries on charitable work of education through its President,secretary, Member and Manager, who work in a dual capacity i.e. as wholetime administrators as also regular time teachers and are being paid salariesfrom earning of these schools. 5.Under Section 12A of the Act, the assessee was availing thebenefit of exemption of its income under Sections 11 and 12 of the Act. Itsaccounts and returns submitted regularly were being accepted by the revenueauthorities without any objections. 4The assessee-trust is registered under Section 12A of theIncome Tax Act, 1961 (hereinafter referred to as, the Act) since 6.7.1971. Itis doing charitable work of imparting education through five schools. Theassessee carries on charitable work of education through its President,secretary, Member and Manager, who work in a dual capacity i.e. as wholetime administrators as also regular time teachers and are being paid salariesfrom earning of these schools. 5.Under Section 12A of the Act, the assessee was availing thebenefit of exemption of its income under Sections 11 and 12 of the Act. Itsaccounts and returns submitted regularly were being accepted by the revenueauthorities without any objections. 6_The assessee had filed return on 31.10.2003 for the AssessmentYear 2003-04 with reference to Section 10 (23C)(v1). Excess of income overexpenditure amounting to Rs.9,10,225/- was claimed, though return wasfiled declaring nil income. The assessee had made payments to certainpersons which included salary to its members and employees. TheAssessing Officer (hereinafter referred to as the AO) was not satisfied withthe quantum of payments made by the assessee and thus had asked theassessee to justify the ‘reasonableness’ of those payments. yd Having found no response from the assessee, the AO came tothe conclusion that the assessee had become ineligible for the benefits ofexemption under Sections Il and 12 of the Act. Consequently, he hadcompleted the assessment by treating the assessee as a normal businessentity. However, presuming that those office bearers and salaried personshad rendered some service towards functioning of the assessee, allowing [.T_A. No.1 of 2011 -5- 1/3[rd]of the amount (shown as having been paid) as spent, rest of the statedamount was disallowed in terms of Section 40(A)(2b). The same course ofaction was followed for the subsequent assessment years. S_Taking clue from the earlier assessment years and makingcomparison with the present remuneration paid, the AO had concluded thatsuch payments were not reasonable keeping in view the provisions ofsection 40(A)(2b) of the Act. Consequently, only 1/3[rd]expenditure wastaken to be permissible, whereas 2/3[rd]of the expenditure amounting toRs.15,10,000/- incurred on making payment of remuneration to themanagement personnel etc. was disallowed under Section 40(A)(2b) of theAct. For furnishing inaccurate particulars, penalty proceedings under Section2/1(1)(c) were also ordered to be initiated separately. Q |When the matter was taken in appeal before the Commissionerof Income Tax (Appeals) [hereinafter referred to as, the CIT(A)], thedisallowance made by the AO was tound to be wrong and without merit.Rejecting the claim of the revenue, plea of the assessee was accepted. Therevenue then had brought these appeals before the Tribunal, which upheldthe decision of the CIT(A) only with regard to two of its trustees viz. thePresident and Secretary, but with regard to the other two, comparing theirSalaries with other teachers, had modified the order of the CIT(A) and thushad upheld part of the disallowance made by the AO qua the said twotrustees. — 10.Aggrieved with order of the Tribunal, the revenue claims thatorder of the AO refusing to treat the assessee as a charitable organization andtaking it to be an ordinary association of persons, had rightly rejectedamount allegedly paid as salaries to its trustees as it was unreasonable andthus, had rightly disallowed the exemption from income sought by theassessee. ll.So far as the assessee is concerned, it claimed that once the [.T_A. No.1 of 2011 assessee was registered as a charitable organization and its accounts werebeing accepted since the very beginning, it was entitled to the benefits ofexemption in terms of Sections 12A and 10(23C)(v1) as also under Sectionsll and 12 of the Act.. 12.In ITA No.l of 2011 filed by the revenue is concerned,following substantial questions of law had been formulated by the revenue,for adjudication by this court: ll.So far as the assessee is concerned, it claimed that once the [.T_A. No.1 of 2011 assessee was registered as a charitable organization and its accounts werebeing accepted since the very beginning, it was entitled to the benefits ofexemption in terms of Sections 12A and 10(23C)(v1) as also under Sectionsll and 12 of the Act.. 12.In ITA No.l of 2011 filed by the revenue is concerned,following substantial questions of law had been formulated by the revenue,for adjudication by this court: |“Whether, on the facts and in the circumstances ofthe case, the Ld. ITAT was right in law inallowing the benefit of exemption to the assesseeu/s 11 of the Income Tax Act, 1961 ignoring itsown finding that excessive remuneration was paidto specified persons, in violation of section13(1)(c)(i) read with section 13(2)(c) of theIncome Tax Act, 19612”the case, the Ld. ITAT was right in law inallowing the benefit of exemption to the assesseeu/s 11 of the Income Tax Act, 1961 ignoring itsown finding that excessive remuneration was paidto specified persons, in violation of section13(1)(c)(i) read with section 13(2)(c) of theIncome Tax Act, 19612” {I“Whether, on the facts and in the circumstances ofthe case, the Ld. ITAT was right in law in notanswering the question of not adjudicating onapplicability of section 11 of the Income Tax Act,1961 in light of its own findings that excessiveremuneration was indeed paid to _ specifipersons leading to violation of the provisions ofsection 13(1)(c)(Qi) read with section 13(2)(c) ofthe Income Tax Act, 1961?”the case, the Ld. ITAT was right in law in notanswering the question of not adjudicating onapplicability of section 11 of the Income Tax Act,1961 in light of its own findings that excessiveremuneration was indeed paid to _ specifipersons leading to violation of the provisions ofsection 13(1)(c)(Qi) read with section 13(2)(c) ofthe Income Tax Act, 1961?” 13.So far as ITA No.53 of 2011 filed by the assessee is concerned,following substantial questions of law had been put forth by the assessee, foradjudication by this Court: AWhether the ITAT can treat as a basic issue thecomputation of the salaries of the members of atrust running a charitable educational institution asOne of computation under the Head Business orProfession when a charitable institution under theIncome Tax Act, 1961 is neither a business nor aprofession? [.T_A. No.1 of 2011 : $ 1 A Whether the [TAT can treat as a basic issue thecomputation of the salaries of the members of atrust running a charitable educational institutionas one of computation under the Head Business orProfession when the appeal before it is from adecision of the CIT(A) which has held that theapproach has to be that of a charitable institutionwhile reversing the Assessing Officer's Businessor Profession approach? Whether an ITAT can simply assume away thelegal issue of applying to an assessee the incometax provisions of a charitable institution to a dulyregistered charitable educational trust as done bythe CIT(A) instead of the Business or Professionprovisions as done by the A.O. and reversed bythe CIT(A)? Whether an ITAT even while wrongly applyingthe Business or Profession approach in taxing aduly registered charitable institution, ignore thestandard in Section 40(2)(a) of the Act, or the fairmarket value of the administration and teachingservices of the Secretary and manager trustees,and instead apply the standard of the salaries ofthe teaching staff viz the Principal and vicePrincipal in the non-market charitable institution'sown schools? Whether an ITAT can simply assume away thelegal issue of applying to an assessee the incometax provisions of a charitable institution to a dulyregistered charitable educational trust as done bythe CIT(A) instead of the Business or Professionprovisions as done by the A.O. and reversed bythe CIT(A)? Whether an ITAT even while wrongly applyingthe Business or Profession approach in taxing aduly registered charitable institution, ignore thestandard in Section 40(2)(a) of the Act, or the fairmarket value of the administration and teachingservices of the Secretary and manager trustees,and instead apply the standard of the salaries ofthe teaching staff viz the Principal and vicePrincipal in the non-market charitable institution'sown schools? Whether the ITAT can arbitrarily adopt a filty-fitty approach towards the issue of the taxtreatment of the salaries of the Founder, Secretaryand two Managers of the duly registeredcharitable educational trust, by treating the salaryof the Founder and one Manager under Section40(2)(a) in one manner and that of the Secretaryand another Manager in another manner, withoutapplying to any of them the legal standard of thefair market value of their services to assesswhether the salaries are reasonable or notexcessive vis a vis this legal standard? &Whether the ITAT was right in substituting theSalaries paid to the Secretary and to the Manageras teacher-cum-administrator/s solely on basis ofscales applicable to the teaching staff, without anymaterial to support the same? 14.Since the questions of law in ITA No.1 of 2011 of the revenueand ITA No.53 of 2011 of the assessee primarily cover the field ofcontroversy in all the appeals of the revenue as also of the assessee, entireadjudication is being made keeping those in view. 15,We have heard counsel for the parties while going through thepaper books.| 16.The revenue contends that the assessee had not only failed tofurnish details with regard to services rendered by the named persons buthad also nowhere mentioned about ‘reasonableness’ of the amount paid tothem with reference to the services rendered in terms of Section 13(2)(c) ofthe Act. It is thus canvassed that the assessee has become ineligible for thebenefit of exemption of income under Sections 11 and 12 of the Act. It isalso claimed that neither Memorandum of Association of the assessee northe Rules made thereunder contains any provision for payment of the statedamount to these persons, 17.Plea of the assessee, on the other hand, is that the stated personshave not only huge teaching experience to their credit but are also wholetime employees of the assessee and thus are closely associated withmanagement as also in running of the schools of the assessee. It is claimedthat completion of assessment against the assessee as a normal businessentity was also wrong and misfounded on facts of the case. 18.The assessee is engaged in imparting of education through fiveschools, four of which are located and run at Faridabad, whereas one is in [.T_A. No.1 of 2011 the State of Kerala. The assessee is registered under Section 12A of the Actand claims that its income is exempted under Sections 11 and/or 12 of theAct. Payment made to the specified persons is as under: “Salary to T:l.John, President of GoverningRs.06,84, 000/Body. Salary to Joseph John, Secretary ofRs. 04, 94, 50Governing Body. Salary to Mrs. A.John, Member of GoverningRs.05,88, 000/Body. In addition, Salary to Mrs. S.Joseph (relativeRs.03,29, 760/ofMember) has also been given. Total:- Rs.20,96,260/-” 18.The assessee is engaged in imparting of education through fiveschools, four of which are located and run at Faridabad, whereas one is in [.T_A. No.1 of 2011 the State of Kerala. The assessee is registered under Section 12A of the Actand claims that its income is exempted under Sections 11 and/or 12 of theAct. Payment made to the specified persons is as under: “Salary to T:l.John, President of GoverningRs.06,84, 000/Body. Salary to Joseph John, Secretary ofRs. 04, 94, 50Governing Body. Salary to Mrs. A.John, Member of GoverningRs.05,88, 000/Body. In addition, Salary to Mrs. S.Joseph (relativeRs.03,29, 760/ofMember) has also been given. Total:- Rs.20,96,260/-” 19.The AQ was dissatisfied with the details of the servicesrendered by these persons to the assessee and had also found that thepayments made to them were ‘unreasonable’. However, presuming that theyhad rendered at least some services for the functioning of the petitioner-society, had allowed Rs.6,98,753/- 1.e. 1/3[rd]of the total Rs.20,96,260/- andthe balance payment was disallowed under Section 40A(2)(b) of the AcctRecording his satisfaction that the assessee had furnished inaccurateparticulars of income, penalty proceedings had also been separately initiatedunder Section 271(1)(c) of the Act. 20.Keeping in view the totality of facts and circumstances, theCIT(A) had found no merit in the appeal of the revenue. Findings of theCIT(A) on this count contained in para 3.4 of the order (Annexure A-II)dated 28.2.2008, are to the following effect; “IT have enquired into the genuineness of_ theremuneration paid to the above trustee membersfrom Sr. I to 3and I family member at Sr. No.4. From the data supplied by theLd. AR in his written submissions for the Financial year 2000-01, 2001-02 and 2002-05 from which it is quite evident that -]0- compared to the earlier years, the remuneration has been moreor less the same and tifthere is any increase in the remunerationof Mrs. S. Joseph, it is due to the services rendered to theInstitution in the dual capacity of a full time teacher andadministrator, the responsibilities of which are increasing day-by-day. Moreover, the AO has pointed out only a needle ofsuspicion towards the managerial remuneration to the abovepersons specified u/s 13(3) of the I.T_-Act which has beenconfirmed by the auditors in the audit report inform 3CD dated15.3.2003, but the AO has not given a proper basis or validityof remuneration for restricting it to the extent of Rs.6,98,753/-being 1/3[rd]allowable worked out by him out of total ofRs.20,96,260/- only and_ disallowing the _ balance aRs.13,97,506/- u/s 40A(2)(b) of the I.T. Act, as is evident frompara-4 of the assessment order which 1s patently merely on thepresumption that the above persons had rendered some servicesfor the functioning of the society. The disallowance has beenpurely on an arbitrary basis without bringing rationale orfindings by consulting the previous assessment records of theappellant, which he was required to, in order to make anassessment on the basis of material available on records. Hehas just resorted to the Explanatory stands of the section13(1)(3) and 13(1)(c) and bringing the above persons under theClauses (cc) & (d) ofsection 13(3) without consulting rules andregulations of the appellant society already available on theassessment records, the terms and rules of payments of theabove mentioned personas being already available on theassessment records which in the year under consideration, havenot been confronted with the appellant by the AO, beforemaking disallowance u/s 13(2)(c) of the I.T-Act, 1961.” IAThe Tribunal disagreeing with the AO had partially endorsedthe view of the CIT(A). In case of Mr. T.I. John and his wite Mrs. A. John,the Tribunal completely agreed with the CIT(A) whereas in case of Mr,Joseph John and his wife Mrs. Sonia Joseph, the Tribunal, on facts andcircumstances, restricted payment of monthly salary to Mr. Joseph John toRs.30,000/- and to his wife Mrs. Sonia Joseph to Rs.20,000/- per month. IAThe Tribunal disagreeing with the AO had partially endorsedthe view of the CIT(A). In case of Mr. T.I. John and his wite Mrs. A. John,the Tribunal completely agreed with the CIT(A) whereas in case of Mr,Joseph John and his wife Mrs. Sonia Joseph, the Tribunal, on facts andcircumstances, restricted payment of monthly salary to Mr. Joseph John toRs.30,000/- and to his wife Mrs. Sonia Joseph to Rs.20,000/- per month. 22.Before further discussion is made, it would be appropriate torefer to certain facts about which, there is no dispute. [.T_A. No.1 of 2011 -/]- Admitted facts The assessee, a charitable organization is registered as suchunder Section 12A of the Act since 6.7.1971. It is engaged in charitable workof imparting education through various schools run by it. Accountsmaintained by the assessee as also returns of income filed by it regularlyyear after year have always been accepted by the revenue since then. Thefour trustee members are not only engaged in regular teaching to thestudents as is done by their other teachers but in addition to such assignmentof teaching, those are engaged in managing the affairs of the schools run bythe assessee as well and are not being paid separately for such managerialwork done by them. These trustee members are also furnishing their incometax returns regularly as individuals and are duly showing their incomereceived as salaries from the assessee and their said returns had also beencontinuously accepted by the revenue. They do not have any other incomeexcept as salaries received from the assessee. Relevant provisions of law At this stage, it would be appropriate to refer to few provisionsot the Act. These are as under: Section 2(15)-’ Charitable purpose” includes relief of the pooreducation, medical relief, and the advancement of any otherobject ofgeneral public utility. | Section IT-Income from property held for charitable orreligious purpose:- (1)Subject to the provisions of Section 60 to 63, thefollowing income shall not be included in the total income ofthe previous year ofpersons in receipt of the income (A) incomederivedfrom property held under trust wholly for charitable orreligious purposes to the extent to which such income is appliedto such purposes in India. Section 13 (2)(c)- [If any amount is paid by way of salaryallowance or otherwise during the previous year to any personreferred to in sub-section (3) out of the resources of the trust orinstitution for services rendered by that person to such trust orinstitution and the amount so paid is in excess of what may bereasonably paidfor such services. Section 13(3)- The persons referred to in clause (c) of sub-section (I) and sub-section (2) are thefollowing, namely, :(a)the author of the trust or thefounder ofthe institution; (b)any person who had made a substantial contribution tothe trust or institution, that is to say, any person whose totalcontribution up to the end of the relevant previous year exceedsfifty thousand rupees; (c) where such author, founder or person is a Hinduundividedfamily, a member ofthefamily, (cc) any trust of the trust or manager (by whatever namecalled) ofthe institution; (d)any relative of any such action, founder, person (membertrustee or manger) as aforesaid; and, (e)any concern in which any of the persons referred to aclause (1), (b), (c), (cc) and (d) has a substantial interest Section 13(3)- The persons referred to in clause (c) of sub-section (I) and sub-section (2) are thefollowing, namely, :(a)the author of the trust or thefounder ofthe institution; (b)any person who had made a substantial contribution tothe trust or institution, that is to say, any person whose totalcontribution up to the end of the relevant previous year exceedsfifty thousand rupees; (c) where such author, founder or person is a Hinduundividedfamily, a member ofthefamily, (cc) any trust of the trust or manager (by whatever namecalled) ofthe institution; (d)any relative of any such action, founder, person (membertrustee or manger) as aforesaid; and, (e)any concern in which any of the persons referred to aclause (1), (b), (c), (cc) and (d) has a substantial interest 23.Notwithstanding the fact that employees of the assessee havenot been placed under the specified clauses enumerated in the provisionsreferred to above but none of the authorities of the revenue has ever disputedthe fact that the four persons to whom salaries have been paid during theyear under appeal either happen to be members of the governing bodyperforming function of management and administration and in addition tothat, they are full time teachers of the schools run by the assessee. In short,they have also been assigned functions of management of the said schoolsand are paid their salaries out of the income of the schools and not fromfunds of the trust. On this account, payment of salaries to them have [.T_A. No.1 of 2011 -/35 protection provided under Section 13(2)(c) of the Act which clearlyStipulates that salaries etc. may be made to the persons covered underSection 13(3) of the Act. D4.The AO without disputing these facts and details clearly fell inerror prominently on the following counts; (1) Without mentioning as to what was already onrecord before it and without specifying as to whatwere the documents and details required by himwhich had not been supplied by the assessee despitedemand, had drawn a conclusion that the assesseewas not a charitable organization as it had notfurnished vital details and documents. Betore coming to this conclusion, the AO didnot take into account the fact that the revenue hadbeen assessing the assessee as a_ charitableorganization since its very inception. Though the sole question before the AO wasallowance or disallowance of the salaries paid to thetrustee members and to a manager of the assessee-trustee and there was no question as to whether thetrust is a charitable trust or not, the AO wrongly heldthat it was not a charitable organization; (11) Despite availability of complete documentarydetails with him revealing the services rendered bythe members of the trust, without disputing the factthat such members were engaged in full timeteaching as also in whole time management of theschools assigned to them, digressing from the legaltest under Section 13(2)(c) of the Act went on toquestion reasonableness of the quantum of paymentmade as salary to the members. Even when he came to a conclusion thatpayments were ‘unreasonable’, the test to determinereasonableness of such services was to makereference to sums paid for similar administrative andteaching work in an institution of similar studentsStrength. -/4- But, the AO neither made reference toSection 13(2)(c) of the Act nor to any similarinstitution with same students strength. Thus, withoutgoing into the aspect of payments made toadministrators-cum-teachers in an _ institution Similar students strength, the AO simply assessed theassessee aS an association of persons as a businessentity under Section 40A read with Section 28 of theAct, even though the assessee is neither a ‘business’in terms of Section 2(13) nor is a profession notifiedby the Board under Section 44AA of the Act. Even when he came to a conclusion thatpayments were ‘unreasonable’, the test to determinereasonableness of such services was to makereference to sums paid for similar administrative andteaching work in an institution of similar studentsStrength. -/4- But, the AO neither made reference toSection 13(2)(c) of the Act nor to any similarinstitution with same students strength. Thus, withoutgoing into the aspect of payments made toadministrators-cum-teachers in an _ institution Similar students strength, the AO simply assessed theassessee aS an association of persons as a businessentity under Section 40A read with Section 28 of theAct, even though the assessee is neither a ‘business’in terms of Section 2(13) nor is a profession notifiedby the Board under Section 44AA of the Act. (111)Even if impugned order of the AO is evaluated in itslegal merit, when he took the assessee a charitabletrust aS a business or profession, he did not makecompliance with Section 40A(2)(a) for determining‘reasonableness’ of the payments. The test enshrinedin Section 40A(2)(a) is the “fair market valueServices’ which qua _ trustee members-cum-employees of the assessee was then to be assessed.Though reference was made to Section 40A(2)(a) butthe test of ‘fair market value’ was given a go bye andthe AO on flat basis without any reasonableparameters, disallowed 2/3[rd]of the total salaries paidto all the four members and even proceeded toimpose penalty.legal merit, when he took the assessee a charitabletrust aS a business or profession, he did not makecompliance with Section 40A(2)(a) for determining‘reasonableness’ of the payments. The test enshrinedin Section 40A(2)(a) is the “fair market valueServices’ which qua _ trustee members-cum-employees of the assessee was then to be assessed.Though reference was made to Section 40A(2)(a) butthe test of ‘fair market value’ was given a go bye andthe AO on flat basis without any reasonableparameters, disallowed 2/3[rd]of the total salaries paidto all the four members and even proceeded toimpose penalty. D5.When we move a little further, it is found that though themistake committed by the AO in its order of 17.3.2006 (Annexure Al) wasrectified by the CIT(A) in its order of 28.2.2008 (Annexure A2) holding thatthe documents were available on record and that the disallowance by the AOwas arbitrary and had also ignored the previous assessment records of theassessee and further that the AO had not rebutted the comparative detailsfurnished by the assessee. The CIT(A) rather held that the appellant-trust is acharitable institution and disallowance made by the AO under Section|40A(2) was arbitrary. Consequently, CIT(A) had set aside the order of theAO. The Tribunal in its order of 21.5.2010 (Annexure A3), in partiallyaffirming the salaries paid to two of the trustee members had rejected theclaim of the assessee with regard to two others. The Tribunal thus had [.T_A. No.1 of 2011 faulted like the AO, when it arbitrarily fixed the quantum of salaries takingthem only as teachers. The Tribunal, in our considered opinion, had nojurisdiction to adopt such a course. 26.When order of the Tribunal impugned in these appeals is testedon legal pedestal, it also is found to be flawed on the following counts; (i)From the tabular presentation, as given below, ittranspires that there had hardly been any substantialvariation in the salaries paid to the named fourteachers-cum-administrators of the assessee over theyears. Expenditure on payment of salaries made bythe assessee-trust had regularly been accepted whenthere was no substantial variation.transpires that there had hardly been any substantialvariation in the salaries paid to the named fourteachers-cum-administrators of the assessee over theyears. Expenditure on payment of salaries made bythe assessee-trust had regularly been accepted whenthere was no substantial variation. This position is continuing since assessment year2001-02. The Tribunal has accepted even quantum ofSalaries paid to Mr. Joseph John and Mrs. Sonia Joseph. (i)From the tabular presentation, as given below, ittranspires that there had hardly been any substantialvariation in the salaries paid to the named fourteachers-cum-administrators of the assessee over theyears. Expenditure on payment of salaries made bythe assessee-trust had regularly been accepted whenthere was no substantial variation.transpires that there had hardly been any substantialvariation in the salaries paid to the named fourteachers-cum-administrators of the assessee over theyears. Expenditure on payment of salaries made bythe assessee-trust had regularly been accepted whenthere was no substantial variation. This position is continuing since assessment year2001-02. The Tribunal has accepted even quantum ofSalaries paid to Mr. Joseph John and Mrs. Sonia Joseph. (11)Attention of the Tribunal was wrongly focussed onSection 40A of the Act when it has mentioned that“hasic issue before us is the disallowance undersection 40A”. Concededly, the assessee is registeredas a ‘charitable trust! under Section IZA of the Actand had been furnishing its returns in terms ofSection 10(23C) of the Act and had been availingbenefits under Sections 11 and 12 of the Act.Section 40A of the Act when it has mentioned that“hasic issue before us is the disallowance undersection 40A”. Concededly, the assessee is registeredas a ‘charitable trust! under Section IZA of the Actand had been furnishing its returns in terms ofSection 10(23C) of the Act and had been availingbenefits under Sections 11 and 12 of the Act. [.T_A. No.1 of 2011 Sequelly, making disallowance under Section40A to be the ‘basic issue for adjudication’ by it, theTribunal went entirely on a wrong path. Needless toState that Section 40A relates to computation ofincome under the Head Business gains andprofession whereas status of the assessee as acharitable institution duly registered under the Act,was nowhere in question. (111) The Tribunal also completely ignored the provisionsof Section 13(2)(c) of the Act as also issue of burdenof proof regarding reasonableness of payment ofservices of the trustee in a Similar institution. TheTribunal clearly fell in error when it compared theSalaries of the Secretary and the Manager of theassessee/trust with teachers of the school run by thisTrust completely ignoring the fact that in addition toregular teaching at par with other teachers, the saidtwo teachers were also engaged as Secretary andManager of Trust and of the schools and were thus,completely engrossed for all 365 days of the year inrendering their services to the schools run by theassessee as also in running of the Trust and inperformance of their duties with that regardmanagement and administration assigned to them. (iv)Even when tested on the line of thinking of theTribunal, the rational criteria of services and salariespaid in a Similar institution of similar strength forthe same type of services rendered by the memberswas not even referred to. (v)Even taken on its own merit, when the Tribunalreversed the order of CIT(A) concerning salariespaid to the Secretary and the Manager whileupholding the order of CII(A) concerning thePresident and Member of the assessee Trust, it didnot follow a coherent approach. Application ofdifferent standards to the same issue giving differenttreatment to the salaries of the paid members of thetrust, was clearly a flawed approach; and, ©reversed the order of CIT(A) concerning salariespaid to the Secretary and the Manager whileupholding the order of CII(A) concerning thePresident and Member of the assessee Trust, it didnot follow a coherent approach. Application ofdifferent standards to the same issue giving differenttreatment to the salaries of the paid members of thetrust, was clearly a flawed approach; and, © [.T_A. No.1 of 2011 -[7- [.T_A. No.1 of 2011 -[7- (v1)Making reference to Section 40A(2)(a) of the Actwithout invoking the test of “fair market value of theServices” enshrined in this provision for determiningas to whether expenditure of salaries was ‘reasonableor unreasonable’, the Tribunal simply comparedSalaries of the Secretary and the Manager with otherteachers, ignoring the fact that in addition to wholetime teaching, they were also whole time Secretaryand Manager of the schools and were performingwhole time duties assigned to them.without invoking the test of “fair market value of theServices” enshrined in this provision for determiningas to whether expenditure of salaries was ‘reasonableor unreasonable’, the Tribunal simply comparedSalaries of the Secretary and the Manager with otherteachers, ignoring the fact that in addition to wholetime teaching, they were also whole time Secretaryand Manager of the schools and were performingwhole time duties assigned to them. QT.Though there is no clear finding of the Tribunal regarding‘charitable status' of the assessee, since the CIT(A) had restored it to theassessee reversing order of the AO, it is to be taken that to that extent, thefindings of the CIT(A) have not been interfered with by the Tribunal.D8.Plea of the revenue is that neither the assessee is entitled tostatus of a charitable trust nor benefits of provisions of Sections 11 and 12 ofthe Act regarding exemption of income from taxation are to follow for it. Itis claimed that exorbitant salaries paid to its members could not be approvedand thus, order of the AO should be restored. The assessee, on the otherhand, seeks complete restoration of the order of the CIT(A), denouncing theorder of the AQ as also of the Tribunal to the extent it had modified the orderof the CIT(A) against the assessee. 29.Evaluation of the entire issue on this aspect requires some morediscussion which thus follows: 30.The very fact that 1/3[rd]of the total expenditure made onpayment of salaries to these stated persons had been allowed by the AQ, isclearly indicative that engagement of the stated persons by the petitioner forrendering services to it, is neither disputed nor disbelieved by the revenue.However, the AO has not explained any formula or the parameters videwhich he allowed 1/3[rd]of the total expenditure, whereas rest of the paymentwas disallowed. No basis much less objective, transparent and verifiable [.T_A. No.1 of 2011 have been spelled out. Merely because Form No.10-B (giving completedetails of the expenditure incurred on payment of managerial remunerationto persons specified under Section 40A(2)(b) and in terms of Section 13(3)of the Act) instead of being filed alongwith the return was furnishedafterwards, was not a circumstance to reject the claim of the assessee. 31.Payment was made to the stated persons and was confirmed bythe tax-auditors as well, is not in dispute. The payments have been made andthe expenditure is actually incurred by the assessee (which is a charitablesociety existing solely for the purpose of education). There is nothing toshow that the payments made to the persons mentioned in the return as alsoin tax audit reports, were excessive. 3).Conclusion drawn by the AO that the petitioner-society is not acharitable society but exists for the benefit of persons specified in Section13(3) of the Act, is misfounded. It is, rather, to be noticed that the appellanttrust/society is pursuing an object of general public utility. Even the AO hasnot given any finding that the activities of the assessee had ceased to be inthe nature of general public utility. It remains a fact that the petitioner is alsocatering to poor or economically weaker sections by imparting education totheir children either without any fee or at concessional rates. 3).Conclusion drawn by the AO that the petitioner-society is not acharitable society but exists for the benefit of persons specified in Section13(3) of the Act, is misfounded. It is, rather, to be noticed that the appellanttrust/society is pursuing an object of general public utility. Even the AO hasnot given any finding that the activities of the assessee had ceased to be inthe nature of general public utility. It remains a fact that the petitioner is alsocatering to poor or economically weaker sections by imparting education totheir children either without any fee or at concessional rates. 33)It is noteworthy that four persons to whom the payments havebeen made are full time employees of the four schools being run by thepetitioner at Faridabad and they were being paid their salaries from theincome of the schools. When we examine the matter a little further on thefacts becoming available in the paper book, it transpires that Mr. T.I.John,Manager of Saint John School, Faridabad and of Kerala schools has 40 yearsof teaching experience. He is himself an individual income tax payee. Hliremuneration turns out to be only Rs.57,000/- per month which is quitejustifiable and reasonable for the services rendered by him as a full-time [.T_A. No.1 of 2011 employee managing the entire show. He has also shown this income as‘salary receipt’ in his individual income tax return which has been dulyaccepted and assessed by the Income Tax Department, Faridabad. 34.So far as Mrs. A. John, Manager of Saint John School,sector 23, Faridabad is concerned, she has 35 years of teaching experience.Her remuneration comes only to Rs.49,000/- per month which is just andreasonable. She jis also an individual income tax assessee and has submitteher return of income showing salary receipts of Rs.5,88,000/- for the year inquestion which have been accepted and attested by the Income TaxDepartment, Faridabad. 35.It is, thus, to be seen that the Tribunal though agreed with theCIT(A) in deletion of 2/3[rd]disallowance made by the AO in respect of Mr.T.I.John and that of Mrs. A.John but with respect to the remuneration paid toMr. Joseph John and Mrs. Sonia Joseph, the Tribunal disagreeing with theCIT(A) wrongly tended to considerably side with the AO when it made acomparison of their salaries with the salaries paid to other teachers, came toan opinion that their remunation has to be at the same level as was beinggiven to other teachers of the schools. Observations of the Tribunal on thiscount are as below: “Now we come to the remuneration paid to Mr. JosephJohn and Mrs. Sonia Joseph. The assessee had only submittedthejob profile and experience ofShri Joseph John. He has beensaid to be a Joint Manager. He is said to have 10 yearsexperience in teaching and administration line. As regards Mrs.Sonia Joseph it has been claimed that she is wife ofShri JosephJohn, is a postgraduate and is working full time teacher cumadministrator. Now in the case of the above two persons, wefind that yardsticks as applicable to TT John and Mrs. A. Johncannot apply. Shri Joseph John did his graduation in 1997 andMrs. Sonia Joseph did her graduation in 1998. In ourconsidered opinion, their remuneration has to be of the samelevel as that being given to senior teachers/Principals of theschools. [.T_A. No.1 of 2011 -)() 19.For the assessment year 2004-05, the staff salary andsenior teachers salary is as under. Hence in our considered opinion the salary paid to Mr.Joseph John should not exceed Rs.30,000/-. Keeping in mindthe difference in salary maintained by the assessee, the salaryofMrs. Sonia Joseph should not exceed Rs.20,000/- per month.Hence, we restore the disallowance to the extent as indicated inthis regard.” 36.Though the Tribunal has tried to draw distinction on facts incase of Mr. Joseph John and his wife Mrs. Sonia Joseph but the same is notresting on sound pedestal against the assessee. [.T_A. No.1 of 2011 -)() 19.For the assessment year 2004-05, the staff salary andsenior teachers salary is as under. Hence in our considered opinion the salary paid to Mr.Joseph John should not exceed Rs.30,000/-. Keeping in mindthe difference in salary maintained by the assessee, the salaryofMrs. Sonia Joseph should not exceed Rs.20,000/- per month.Hence, we restore the disallowance to the extent as indicated inthis regard.” 36.Though the Tribunal has tried to draw distinction on facts incase of Mr. Joseph John and his wife Mrs. Sonia Joseph but the same is notresting on sound pedestal against the assessee. 37.It is to be noticed that Mr. Joseph John has 10 years of teachingand administrative experience and his remuneration comes only toRs.41,200/- per month which is not only justifiable but also reasonable in theterms of quantum of services rendered by him to the school as full timeteacher as also as Secretary of the assessee-trust. He is also an individualincome tax assessee and has shown salary receipt of Rs.4,94,500/- and returnof income submitted by him for the year in question, has been accepted bythe Income Tax Department. 38.Similarly, in case of Ms. Sonia Joseph, she is a post graduateteacher and is working as full time teacher-cum-administrator. Her salarycomes to only Rs.27,480/- per month. She is an existing income tax assesseeand return of income submitted by her for the year in question has beenaccepted and assessed by the Income Tax Department, Faridabad. — 39.It is, thus, clear that the Tribunal had clearly faultered in taking [.T_A. No.1 of 2011 -) / Mr. Joseph John and his wite Mrs. Sonia Joseph merely as teachers when ithas fixed their salaries Rs.30,000/- and Rs.20,000/- respectively comparablewith other teachers of the school, completely ignoring the fact that Mr.Joseph John was also engaged in whole time management activities of theTrust and also was rendereing administrative functions qua running of theschools tor which he was not being paid any extra salary. Similarly, Mrs.Sonia Joseph in addition to whole time teaching as was being done by otherteachers had also been assigned the duties of administrator of the schoolwhich she was doing over and above her duties as a teacher for which shewas not being paid any extra salary or remuneration and before and after theregular teaching. A().Resultantly, order of the Tribunal fixing salary of Mr. JosephJohn to Rs.30,000/- per month and of his wife Mrs. Sonia Joseph toRs.20,000/- per month being neither correct on facts nor in law would nothold good. When finding of the Tribunal to the effect that excessiveremuneration was paid to these two specified persons, being bad on facts andin law, is set aside and order of CIT(A) is restored, allowing benefit ofexemption to the assessee under Section 11 of the Act, being legallysustainable. Consequently, questions of law framed in ITA No.1 of 2011 asdepicted in para No.12 of this judgment in this light are answered against theTEVEeENUE A].Consequently, reversing the order dated 21.5.2010 passed bythe Tribunal to the extent it had modified the order of the CIT(A) against theassessee, order dated 28.2.2008 passed by the CIT(A) is restored. © A’).So far aS questions of law tramed in ITA No.53 of 2011 by theassessee are concerned, computation of salaries of members of the trust inquestion could not have been done under the head “business or profession”.To this extent, order of the AO as also partially of ITAT are wrong and -))- untenable in law. Order of CIT(A) is restored in toto. All these questions oflaw are answered in favour of the assessee and against the revenue. A].Consequently, reversing the order dated 21.5.2010 passed bythe Tribunal to the extent it had modified the order of the CIT(A) against theassessee, order dated 28.2.2008 passed by the CIT(A) is restored. © A’).So far aS questions of