Assessee succeeds: excess chairman salary disallowed; exemption limited to actual diverted amount under ss.11-12 and ss.13

ITAT RAIPUR allowed the assessee's appeal, holding that additions for alleged excessive salary to the society's chairman for AY 2016-17 could not be sustained because subsequent years treated identical remuneration as reasonable and the AO's comparisons were impermissible. Consequently, denial of exemption under ss.11-12 based on ss.13(1)(c)/13(2)(c) fell with the vacatur of the ss.13(3)/13(2C) addition. The Tribunal also endorsed the narrower remedy that, if any ss.13 breach exists, exemption should be restricted only to the extent of the excess payment diverted to a specified person rather than wholly denying s.11 relief.

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Issues Involved:
1. Addition of Rs. 8,28,636/- on account of excessive salary to Shri G.S. Patnaik within the meaning of section 13(3) and violation of section 13(2)(c).
2. Denial of exemption under sections 11 and 12 of the Income Tax Act due to alleged violation of sections 13(1)(c) and 13(2)(c).

Summary:

Issue 1: Addition of Rs. 8,28,636/- on account of excessive salary to Shri G.S. Patnaik within the meaning of section 13(3) and violation of section 13(2)(c)
The assessee, an educational society, challenged the addition made by the Assessing Officer (AO) of Rs. 8,28,636/- for excessive salary paid to Shri G.S. Patnaik, a specified person under section 13(3). The AO compared the salary of Mr. Patnaik with the highest salary paid to another employee and deemed the payment excessive. The CIT(A) upheld this addition. However, the Tribunal found that the same salary was paid in subsequent years and was accepted by the department, indicating no issue with the reasonableness of the salary. The Tribunal concluded that the AO's comparison was arbitrary and not justified. Therefore, the addition made by the AO was struck down, and ground no. 2 of the assessee was allowed.

Issue 2: Denial of exemption under sections 11 and 12 of the Income Tax Act due to alleged violation of sections 13(1)(c) and 13(2)(c)
The denial of exemption under sections 11 and 12 was consequential to the disallowance discussed in issue 1. Since the Tribunal vacated the primary addition under section 13(3) read with section 13(2)(c), there was no basis for denying the exemption under sections 11 and 12. The Tribunal also considered the alternate contention that even in case of violation of section 13, the denial of exemption should be limited to the extent of the excess payment. Citing various case laws, the Tribunal agreed that the entire exemption cannot be denied and should be restricted to the amount of unreasonable payment. Consequently, ground no. 3 of the present appeal was disposed of in favor of the assessee.

Conclusion:
The appeal of the assessee was allowed, and the addition of Rs. 8,28,636/- on account of excessive salary was struck down. The denial of exemption under sections 11 and 12 was also vacated, with the Tribunal emphasizing that any violation of section 13 should result in disallowance limited to the excess payment only.

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