The Income Tax Appellate Tribunal (ITAT), Chandigarh Bench ruled that the disallowance made without pointing out excessive salary was not sustainable.
The assessee, M/s Manav Mangal Society is registered as Society under the Society Registration Act against the registration. The assessee is also registered under section 12AA of the Act with Ld. CIT, Patiala vide Registration. The assessee filed the return of income declaring Nil income. Later on, the case was picked up for scrutiny under CASS.
During the course of assessment proceedings, the A.O. noted that the assessee was providing some payments to its members against the services provided by them, which was not reasonable and was undue benefits for the members. He, therefore, issued a notice to show cause the assessee as to why the exemption under section 13(1)(c) of the Act may not be denied.
The A.O. however did not find merit in the submissions of the assessee and held that the amount paid to the specified persons was not reasonable and liable to be disallowed.
The assessee carried the matter to the CIT(A) and submitted that salary paid had already been allowed vide order passed under section 143(3) of the Act, therefore on account of consistency of the facts and circumstances being the same there could not be any deviation on account of the principle of consistency.
It was stated that the various statements were recorded during the course of a survey conducted by the Department at school premises on 28th and 29th of September 2016 which had verified that all the interested persons had been working in the school. It was further stated that the A.O. made the addition in respect of disallowance of salary though he proceeded with the fact that the salary was not commensurate with duties being performed and that up to the A.Y. 2012-13 the salary was allowed by the successive assessing officer by way of orders under section 143(3) of the Act. It was stated that even if there was a violation of Section 13 of the Act then the relevant portion only was liable for addition, not the entire surplus could be brought to tax.
The CIT(A) pointed out that a survey was conducted on the business premises of the assessee and the survey report was given vide letter for the comments. The gist of the said report has been reproduced of the impugned order and the reply of the assessee on the said report is reproduced of the impugned order. For the cost of repetition, the same are not reproduced herein. The CIT(A) after considering the submissions of the assessee, survey report of the AO, and the rebuttal to the said survey report by the assessee, allowed the claim of the assessee for the salary.
The CIT strongly supported the order passed by the AO and reiterated the observations made in the assessment order. It was further submitted that the payment of salary to the trustee/members and the specified persons under section 13(3) of the Act was unreasonable.
Mr. Sudhir Sehgal, the counsel for the assessee submitted that the assessee had been maintaining regular books of accounts which were duly audited and the returns of income had been filed on the basis of such books of account, all the payments of salary to the specified persons and others had been made through normal banking channel year after year which had been accepted by the A.O. while framing the assessment since the assessment year 1997-98 to 2012-13 under section 143(3) of the Act after examining the issue in detail.
The coram of Judicial Member, R.L.Negi and Technical Member, N.K.Saini, it is noticed that the AO disallowed the salary paid to the specified persons by invoking the provisions of Section 13(1)(c) read with section 13(3) of the Act. The main reason for making the disallowance was that there was an increase in the salary of the specified persons from year to year which was not reasonable since the increase was in the cases of the specified persons and not in the case of other employees. In the instant case, it is relevant to point out that the AO, although mentioned that the salary paid was not reasonable, he disallowed the entire salary paid to the specified persons without pointing out excessive salary, if any.
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