2020 (9) TMI 674 - HC - Income Tax

Court upholds Tribunal decisions, dismissing appeals for lack of substantial legal questions.

M/s. Avvai Village Welfare Society Versus The Income Tax Officer, Exemptions Ward, Thiruchirapalli.

M/s. Avvai Village Welfare Society Versus The Income Tax Officer, Exemptions Ward, Thiruchirapalli. - TMI Issues Involved:1. Disallowance of salary paid to the Secretary as excessive and unreasonable under Section 13(2)(c) of the Income Tax Act, 1961.2. Eligibility for exemption under Section 11 of the Income Tax Act due to microfinance activities.3. Alleged violation of Foreign Contribution Regulation Rules, 2011 by defraying more than 50% of foreign contributions towards administrative expenses.4. Tribunal's reliance on the Supreme Court decision in Maddi Venkatraman & Co. (P) Ltd. vs. CIT.Issue-wise Detailed Analysis:1. Disallowance of Salary Paid to the Secretary:The Tribunal confirmed the disallowance of Rs. 4,47,400, being 50% of the salary paid by the Appellant Society to its Secretary, as excessive and unreasonable under Section 13(2)(c) of the Income Tax Act, 1961. The Tribunal did not apply their independent mind and failed to provide coherent and germane reasons for the disallowance. The salary was paid out of budgeted grants received from two foreign NGOs, not from the Society's resources. The appellant argued that the reasonableness of the salary should be judged from the perspective of the donor NGOs, who deemed the amount reasonable for the services rendered. Additionally, the appellant argued that the Income-tax Department should not disallow the salary as it would result in double taxation since tax was already collected from the Secretary's salary income.2. Eligibility for Exemption Under Section 11:The Tribunal remanded the issue of whether the appellant-Society is eligible for exemption under Section 11 of the Act due to its microfinance activities to the Commissioner of Income Tax (Appeals) (CIT(A)). The appellant contended that their activities fall under the first limb of sub-Section 2(15) of the Act, 'relief of the poor,' and not under 'advancement of any other object of general public utility.' The Assessing Officer erroneously categorized the Society's activities under the latter, leading to the denial of exemption. The appellant argued that the microfinance activities were conducted by Namadhu Deepam, and the Society merely acted as a facilitator, thus not engaging in any trade, commerce, or business.3. Alleged Violation of Foreign Contribution Regulation Rules, 2011:The Tribunal upheld the Assessing Officer's finding that the appellant-Society violated the Foreign Contribution Regulation Rules, 2011, by spending more than 50% of the foreign contribution on administrative expenses. The appellant argued that the entire grant was spent according to the donors' commands, and the relevant authority under the FCR Act had not found any violation. The appellant also contended that the grants from the European Community were exempt from the FCR Act, as per a notification by the Ministry of Home Affairs. The CIT(A) agreed that any violation of the FCR Act should not impact the computation of exempted income under the Income Tax Act.4. Tribunal's Reliance on Supreme Court Decision:The Tribunal relied on the Supreme Court's decision in Maddi Venkatraman & Co. (P) Ltd. vs. CIT, which held that it is against public policy to allow deductions under one statute for expenditures that violate another statute. The appellant argued that the decision was not applicable to their case and that the Tribunal erred in applying it to their situation.Conclusion:The High Court dismissed the appeals, holding that no substantial questions of law arose for consideration. The Tribunal's findings were based on factual determinations, and the High Court refrained from acting as a third appellate authority. The appeals were dismissed, and no costs were awarded.