ORDER
S.K. Yadav, J.M.
This appeal is preferred on behalf of the assessee against the order of the CIT (A) on various grounds enumerated hereunder :-
“1. That the learned CIT(Appeals)-XXlX, New Delhi has erred, both on facts and in law in directing the learned DDIT (E), Investigation Circle, New Delhi to bring to tax the purported resulting income of Rs. 3,62,64,825 and further holding that the assessee is not entitled to an exemption provided under section 11 of the Income Tax Act on the ground, that it has violated the provisions of section 13(1)(c) and 13(2) of the Income Tax Act;
1. 1 That the finding and the conclusion of the learned CIT (A) are based on misconceived facts and are wholly erroneous in law;
1.2 That in arriving at the aforesaid conclusion, the learned CIT (A) has over looked that the assessee Sanstha, a Charitable Institution, has committed no such violation as alleged and that merely because one of the employee, namely, Mrs. Sudha Tiwari, has been paid allegedly excess remuneration (as a result of increase in her salary), the same amounts to violation of section 13(1)(c) of the Income Tax Act;
1.3 That the learned CIT (A) has failed to appreciate that Mrs. Sudha Tiwari was neither the Trustee of the Trust nor a Manager of the Institution and as such, merely because she was an Ex-Officio Member, the same could not be held as a basis for concluding that she was a person covered by section 13(3) of the Income Tax Act;
2. That the learned CIT (A) has further failed to appreciate, that the salary paid to Mrs. Sudha Tiwari was commensurate with the terms of the services employed and that the ex gratia payment was not a part of salary. The adverse finding recorded by the learned CIT (A) in the impugned order that, ex gratia payment made was for valuable services resulting as a part of salary, is wholly arbitrary and is based on no material. In fact, the learned CIT (A) has over looked the evidence furnished by the assessee to establish that the amount of ex gratia payment made had no nexus to the payment of salary and had been paid for appreciation of the valuable services rendered by her on the basis whereof, the Sanstha was able to achieve the target of its charitable activities in the field of family planning;
2.1 That the order of the learned CIT (A) is based on irrelevant consideration and is in disregard of the evidence and material placed on record and is thus vitiated in law;
2.2 That the learned CIT (A) has further erred in holding that the payment of salary made to Mrs. Sudha Tiwari jumped up by 59 per cent as compared to the preceding year, is incorrect and is based on disregard of the factual material and detailed submissions made by the appellant, which evidence has been disregarded;
3. That the further finding that, other employees were not given increased salary, is based on no material and is further in disregard of the fact that other employees were also granted increment according to the nature of the services rendered by each of them;
4. That in any case and without prejudice, the learned CIT (A) has over looked that once it is held that the assessee is not entitled to an exemption under section 11 of the Income Tax Act, then, the income had to be computed in accordance with the provisions of section 28 of the Income Tax Act and as such, the grants aid and the contributions received by the assessee, could not be regarded as an income and there being thus no excess of income over expenditure, there was no valid justification for holding, that there was any income liable for an assessment;
5. That the learned CIT (A) has further erred in upholding the levy of interest under section 234B of the Income Tax Act.”
2. This appeal was filed in April, 2003 and vide order dated 5-9-2003 the Hon’ble President of the Tribunal has granted early hearing of the appeal. Accordingly it was fixed for hearing on 17-10-2003. On the date fixed it was informed that there may be possibility of an appeal filed by the revenue also. Accordingly the Departmental Representative was directed to check up whether any appeal was filed with the department, if so, then apply for consolidation and the hearing of the appeal was adjourned to 13-11-2003. Again on 13-11-2003 the learned Departmental Representative sought adjournment and accordingly the hearing was adjourned to 9-1-2004 with a direction to make necessary efforts to find out whether any appeal is filed by the revenue or not. On 9-1-2004 again the learned Departmental Representative further sought adjournment and the Tribunal took a serious view on it and passed a specific direction while adjourning the case to 11-2-2004 that no adjournment would be granted on the next date of hearing. Thereafter the matter came up for hearing again on 11-5-2004 and the Departmental Representative further sought an adjournment and again the Tribunal adjourned the hearing with final last opportunity and also with clear directions that “no further adjournment on any grounds to the department would be allowed” and the hearing was adjourned to 22-6-2004. Again on 22-6-2004 when the appeal came up for hearing, an adjournment was again sought by the revenue on the ground that the CIT-Departmental Representative is on leave. Keeping in view the past conduct of the revenue, the Tribunal has rejected the request of the revenue and decided to hear the appeal. Accordingly, the learned counsel for the assessee was asked to proceed with the hearing. As soon as the learned counsel for the assessee has opened the case, the learned Senior departmental Representative, Ms. Prabhjot Kour and Shri B.L. Kardam, again objected to the hearing of the appeal and when their objection was overruled by the Tribunal, they left the court showing great dis-respect to the Bench. Though the conduct of the Senior departmental Representatives amount to the contempt of the court, but we do not wish to initiate contempt proceedings against them. Yet we do not resist ourselves to express our anguish over the conduct of the learned Departmental Representatives as the behaviour of the Departmental Representative is highly deplorable and we wish that the Central Board of Direct Taxes may issue the necessary directions to the Departmental Representatives to behave properly as desired from the senior officers during the course of hearing of the appeal in the Tribunal. Before proceeding on merit, we direct the Registry to send a copy of this order to the Chairman of the C.B.D.T. for necessary action.
3. On merit, we have heard the learned counsel for the assessee at length and carefully perused the orders of the lower authorities and the documents placed on record.
4. Though the assessee has raised various grounds of appeals, but all these grounds revolve around one issue whether the revenue is justified in refusing the exemption provided under section 11 of the Income Tax Act, 1961 on the ground that the assessee has violated the provisions of section 13(1)(c) and 13(2)(c) of the Income Tax Act (hereinafter called as an Act) by making excessive payment of salary to Mrs. Sudha Tiwari, Member/ Executive Secretary of the governing body of the assessee and taxed the entire income of the assessee at Rs. 3,62,64,825.
5. The facts in brief, borne out from the record on these controversial issues are that the assessing officer noticed from the audit report filed by the assessee under section 12A(b) of the Act that the payments have been made during the year to Ms. Sudha Tiwari, Member/ Executive Secretary of the governing body and Managing Director of the Sanstha i.e., the assessee, amounting to Rs. 10,21,820 and to M/s. B.C. Das Gupta & Co., Solicitor and Advocate for professional services and found that Shri V.K. Govil, partner of this firm was a partner of the governing body of this Sanstha. it was also noticed by the assessing officer that the assessee itself had disclosed in the audit report, the details of application of income or property of the trust for the benefit of the persons referred to under section 13(3) of the Act. From the details of salary and allowances paid to Smt. Sudha Tiwari the assessing officer noticed that her basic salary, ex gratia payments and perquisites were increased in this year by 98.4 per cent of which details are as under :-
Assessment year
Salary & Perquisites
96 increase
1993-94
Rs. 2.65 lakhs
Nil
1994-95
Rs. 3.39 lakhs
27.9
1995-96
Rs. 4.19 lakhs
23.6
1996-97
Rs. 5.34 lakhs
27.4
1997-98
Rs. 7.04 lakhs
31.8
1998-99
Rs. 13.97 lakhs
98.4
6. The assessing officer further observed that Smt. Sudha Tiwari was paid an ex gratia amount of Rs. 2,80,000 over and above the salary and this ex gratia payment was not paid to any other person of sanstha, which consists of 500 highly professional team of members. The assessing officer further observed that the salary and perquisites paid to Smt. Sudha Tiwari had been increasing at a very un-reasonable rate per annum and that the salary etc. paid to her during the previous year relevant to the assessment year under consideration was almost hundred per cent more than those received by her in assessment year 1997-98. In January, 1997, Mrs. Sudha Tiwari got an increment of Rs. 6,100 per month and in January, 1998 she received an increment of Rs. 38,333 per month, which was considered to be un-reasonable by the assessing officer. Before the assessing officer it was explained by the assessee that the salary of Mrs. Sudha Tiwari was fixed as a result of the resolution dated 9-3-1993 wherein Dr. Tim Black, Chief Executive of Marie Stopes International was authorized to fix the same and his decision would be final and the assessing officer took a note of this fact and observed how the trust could be run on the arbitrary decisions of one trustee, Dr. Tim Black to decide and fix the salary. It was further noticed that there was no other comparable increase in the salary of any other trustee or member of the organization. It was further observed that Mrs. Sudha Tiwari was an Executive Secretary and Member of the governing body since 22-1-1982, as such, she was a person covered by section 13(3) and this fact is also admitted by the assessee in its audit report. The assessing officer also examined the reasonableness for increase in salary of Smt. Sudha Tiwari and he noticed that the income from CYP had increased by 10.68 per cent; 40.07 per cent and 17.79 per cent over the preceding years in the financial years 1995-96,1996-97 and 1997-98, but the salary etc. paid to Smt. Sudha Tiwari was increased by 27.9 per cent, 23.6 per cent, 27.4 per cent, 31.8 per cent and 98.4 per cent in financial years 1993-94 to 1997-98 respectively. Since the increase in the salary to Smt. Sudha Tiwari was not related to the growth of the organization, it was not held to be justified having considered the fact that in assessment year 1998-99, the performance of the assessee was not an extra-ordinary. She accordingly invoked the provisions of section 13(1)(c) and 13(2)(c) since Smt. Sudha Tiwari was a person covered by section 13(3) being the Executive Secretary/ Member of the governing body of the assessee-Sanstha. It was also observed by the assessing officer that house Rent was paid to Smt. Sudha Tiwari at the rate of Rs. 8,000 per month in the name of M/s. Gopal Tiwari & Sons, HUF, of which Shri Gopal Tiwari was her husband. For this reason also the assessing officer invoked the provision of section 13(1)(c) of the Act. The assessing officer also invoked the provisions of section 13(1)(c) as was done in assessment year 1997-98, which was later on upheld by the CIT (A). The assessing officer also invoked the provisions of section 13(12)(c) and 13(2)(c) of the Act on account of payment made to Mr. B.C. Das Gupta & Co., of which Shri V.K. Govil,, one of the partners was a member of the governing body. The assessing officer accordingly denied the exemption under sections 11 and 12 of the Act and bring to tax the gross receipt of the assessee-Sanstha at Rs. 12,91,48,034 which was assessed under the head income from other sources.
7. An appeal was preferred to the CIT (A) by the assessee with the submission that the society was earlier known as Marie Stopes Society, which was later changed to Parivar Sewa Sanstha, the assessee, with effect from 24-11-1982 and as per its memorandum of association its objects are to promote/ up-liftment without distinction of cast, community or creed. As per its rule 7.1 the regulation and management and control ofthe affairs of the society vested in the governing body, which shall administer and control the funds of the society and shall consist of President and such other members as are elected at Annual General Meeting of the society. It was further contended on behalf of +the assessee that the society is registered under section 12A of the Income Tax Act and once the certificate under section 12A is granted, it is to be treated as a charitable institution and its income is to be computed in accordance with the provisions contained in sections 11 and 12 of the Income Tax Act provided that no violation should be made under section 13 of the Act. The assessing officer had invoked the provisions of section 13(1)(c) of the Act and denied the exemption without providing a proper opportunity of being heard to the assessee and taxed the entire gross receipts of the assessee without allowing the out-goings /expenditures. It was further contended before the CIT (A) that in earlier assessment years i.e., 1995-96 and 1996-97 the assessing officer denied the exemption, but it was restored by the CIT (A) and the revenue’s appeals before the Tribunal were dismissed. As such, the assessing officer had committed the act of judicial indiscipline by not following the earlier orders of the appellate authorities. It was further contended before the CIT (A) that Mrs. Sudha Tiwari was the oldest employee having joined in 1981 and over the period she had gained experience and great managerial skill and as such, the payment of salary to her cannot be said that it was in excess of what may reasonably be paid for her services as similar person in other organizations were receiving substantially higher salary. With respect to this invocation of provisions of section 13(1)(c) and 13(2)(c) of the Act, it was contended that Smt. Sudha Tiwari was neither the trustee of the trust nor a manager of the institution. She was only an ex officio member of the governing body. As such, it could not be said that she was a person prohibited under section 13(3) of the Act. The written submissions filed by the assessee were referred to the DDIT/ assessing officer for his comments and in his report, DDIT admitted that the correct amount of salary paid to Smt. Sudha Tiwari was Rs. 11,17,600 and not Rs. 19.67 lakhs as mentioned by the assessing officer and the increase in salary came to 59 per cent, which was abnormally high. In response to the DDIT comments, the assessee filed its rejoinder with the submission that the increase in salary was done for only three months, being Rs. 70,000 in all ie., from January to March in the financial year 1996-97 whereas this was continuing for all the 12 months being Rs. 2,80,000 in the financial year 1997-98, because of which the assessing officer had found the increase to be high. It was further contended that if this increase is taken out from these years, the salary increase in financial year 1997-98 over 1996-97 would be only 25 per cent, which has been found to be reasonable by the Tribunal. With regard to the reasonableness of the increment, it was stated that Smt. Sudha Tiwari was the brain and soul of the institution and without her tireless efforts, the institution could not run efficiently and hence the increase given to her was justified. It was further contended that though Smt. Sudha Tiwari was the Chief Executive Officer of the assessee, but she cannot be said to be a person covered by section 13(3) of the Act as she had been employed on a salary since 1981. She was not a member of the governing body initially, but was taken later on 21-1-1982. She was neither a trustee nor a manager, but merely a member of the governing body and hence not covered by section 13(3) of the Income Tax Act, 1961.
8. The CIT (A) re-examined the impugned issue in the light of assessee’s contentions and held that if such high salaries were not paid to Smt. Sudha Tiwari, the income of the Sanstha would have been higher and more funds would be available to the assessee-Sanstha for charitable activities. But in giving abnormally high salaries and raises in some form or the other the Sanstha have clearly moved away from its charitable activities. He accordingly upheld the action of the assessing officer in denying exemption under sections 11 and 12 of the Act, So far as the issue of taxing the entire gross receipts of Rs. 12,91,48,034 is concerned, the CIT (A) directed the assessing officer to allow the expenses reflected in the income and expenditure account amounting to Rs. 9,28,83,209 and bring to tax the resulting income of Rs. 3,62,64,825. The other plea of the assessee that the amount of closing stock of medicines reflected in the income and expenditure account should be excluded was not accepted by the CIT (A) because the purchases of medicines debited to the income and expenditure account are also reflected in this account on debit side and have been allowed as expense in the total expenditure mentioned above. Since the CIT (A) has made threadbare analysis of the facts before confirming the action of the assessing officer, we feel it appropriate to extract the relevant observations of his order as under :-
“8.1 At the very outset, the issue to be decided is whether Smt. Sudha Tiwari to whom various benefits are alleged to have been given by the Sanstha in the form of increased salary and perquisites was a person covered by section 13(3) or not. it is seen and has been pointed out by the assessing officer in the assessment order itself, that the appellant Sanstha had itself declared in its audit report filed under section 12A(b), that she was a person covered by section 13 (3) and to whom various payments had been made by the Sanstha. Since this has been admitted by the appellant itself in its Audit Report, nothing more needs to be discussed on the issue. However, since the appellant has been opposing this view in its submissions during the appellate proceedings, we may consider this aspect, in the interest of justice since it is also contended by the appellant before me that adequate opportunity was not afforded to it during the assessment proceedings. Firstly its plea that this was mentioned in the Audit Report because the department was repeatedly raising objections, is patently unacceptable. If this was so then the appellant should have offered its income also for tax as exemption was being denied to it in the past as well. Besides, the appellant has not taken this plea before the Honble Income Tax Appellate Tribunal where the question of reasonableness of the payments made to her alone were deliberated in the past as mentioned by the appellant. Clearly this mention in the Audit Report is very relevant and an indicator of the correct situation as shall appear in the discussion to follow.
8.1.1 As regards her position within the Sanstha, the MOA and the various submissions of the appellant in appeal clearly show that she was not just an ordinary employee, as the appellant has attempted to project to take her out of the ambit of section 13(3). It is seen that Smt. Sudha Tewari had joined service with the Sanstha in 1981 and in 1982 she was made the Member/Executive Secretary of the Governing Body. As per rule 7.1 of the Rules and Regulations, the management and control of the affairs of the society vested in the Governing Body which shall administer and control the funds of the society and shall consist of the president and such other members as are elected at an AGM of the society. Thus members of the Governing Body clearly were not equitable with the other employees. That she wielded a considerable influence on the matters of the Sanstha is clear from the fact that her salaries and perquisites were not a matter of debate but were fixed and increased on the basis of the decision of one person, namely, Mr. Tim Black, Chief Executive of Maric Stopes International, Salaries of other persons were not increased similarly. It may be mentioned here that earlier the Sanstha itself was known as Marie Stopes Society before becoming a separate entity.
8.1.2 As regards her role as a manager, the submissions of the appellant themselves throw considerable light on her position and role in the Sanstha. It is admitted by the appellant in its various submissions that she was a Member/ Executive Secretary of the governing body and Managing Director. A managing director is not only a manager but much more. He not only manages but also directs the day to day working. It is further admitted that she was the oldest employee, havingjoined in 1981 and over the period had gained experience and great managerial skill. Manager skills of a person can be known when he is actually performing manageria tasks. At another place it is submitted that she was the Chief Executive Officer of the Sansthan but cannot be said to be a person covered by section 13(3). In one of the submissions it is even stated that she was neither a trustee nor a manager but merely a Member of the governing body, whereas it is also stated that she was the brain and soul of the Sansthan.
8.1.3 It is therefore clear that as M ember/ Executive Society of the Governing Body, its Managing Director and CEO, in the appellant’s own submissions, Smt. Sudha Tewari was very much playing a managerial role in the affairs of the Sanstha since 1982. The name or designation was not material. Section 13(3)(cc) itself says manager (by whatever name called). The words in brackets were intentionally inserted to give a wider ambit to the definition of a manager and is to be seen to mean any person who is in a position to influence the management of and decision making in the organization and derive personal benefit there from. By the appellant’s own admission, she was in a position to do so as an Executive Secretary of the Governing Body which even administered and controlled the funds of the Sanstha as mentioned in rule 7. 1. This is buttressed by the fact that she had been taking rent for the house of her husband’s HUF. Thus the Executive Member of the Governing Body of the organization could not be equated with any other person or employee, as has been attempted by the appellant. The support taken from the case of the Tata Charitable Trust is also therefore misplaced. Hence, being a prohibited person, the payments in the form of salary and perquisites made to her have been correctly examined by the assessing officer for the purpose of verifying any breach of sections 13(1)(c) and 13(2)(c).
8.2 The other plea taken by the appellant is that merely because Smt. Sudha Tewari, “as paid a salary section 13(1)(c) could not be invoked unless it be said that she had been paid in gratis, or a donation was given to her, or unless the increase in her salary was more than what would be reasonably paid. I am in agreement with this principle. In fact the assessing officer too has not invoked the provision of section 13(1)(c) only for the reason that she was being paid salary. She has given good reasons why the raise in salary this year was disproportionately high.
8.2.1 Let us now examine the issue of the salary paid to Smt. Sudha Tewari and the issue of abnormal increase in the same, as raised by the assessing officer. It is seen that she was paid a total of Rs. 11,17,600 (and not Rs. 13,97,596 as mentioned by the assessing officer, since the ex gratia payment of Rs. 2,80,000 was already included) which gave an increase of salary of 59 per cent over the immediately preceding assessment year, when it was Rs. 7,04,199. The appellant has statcd that since the increase has been compared by including the raise given to her in January, 1997, the comparison with the immediately preceding financial year was incorrect. This is stated to be for the reason that while the increase in assessment year 1997-98 from Rs. 49, 100 p.m. to Rs. 87,433 p.m. was only for 3 months, this continued to be paid from April, 1997 till March 1998 i.e., for the whole of the assessment year under consideration. From January, 1998 for three months there was a further raise from Rs. 87,433 p.m. to Rs. 1,10,233. Thus, the appellant states that since the raise is given in the month of January, the salary of twelve months comprised in the assessment year under consideration is not comparable with the salary paid to her in the immediately preceding assessment year. This argument has been given by the appellant in his rejoinder to the DDIT’s report as well. It has argued that likes can be compared with like. Further if the ex gratia payment is taken out then the increase is only 25 per cent.
8.2.2 I have considered this submission of the appellant and find the same to be completely untenable. Every year since assessment year 1993-94, the appellant has been giving a raise to Smt. Sudha Tewari in the month of January. Thus, if the increase is seen between the different years this raise for three months of each year as against the continuing higher salary in the next year gets nullified, since the pattern of increasing salary in January has been the same over the last several years. The preceding assessment years also saw similar increases in the month of January and this would cancel out the so-called uneven comparison mentioned by the appellant. The appellant has not referred to this pattern over the years, but only to the last year, to create this confusion. Besides, income is computed for a particular financial year and comparisons have to be made from year to year, irrespective of the months in which raises were given. In the earlier years also the increases have been compared on yearto year basis. The assessing officer was therefore perfectly justified in comparing the percentage increase in the salary of Smt. Sudha Tewari since assessment year 1993-94 up to the present assessment year. Had the raise from January to March, 1997 been for the first time then the appellant’s view could have been accepted that the increase in this assessment year was not comparable to the preceding assessment year. But, since as mentioned above, this is the uniform pattern followed by the appellant – that is increasing the salary from January each year – comparison of the total salary received each assessment year with that received in the immediately preceding assessment years becomes correct and justified.
8.2.3 Besides, when we compare the raise in salary for the last several years, what we get is a comparative position of the rate at which salary has been increasing. As mentioned above, in this comparison, the appellant’s argument that salary is raised in January will get cancelled out as this feature exists in all the earlier years. This has also been brought out by the assessing officer. The increase over the years i.e., from assessment year 1993-94 to 1998-99 (over each preceding assessment year) is found to be nil, 27.9 per cent, 23.6 per cent, 27.4 per cent, 31.8 per cent & 59 per cent respectively. Thus, there is no doubt that there has been a quantum jump in the salaries paid to her in the assessment year under consideration over the immediately preceding assessment year. Even the rate of increase is much higher compared to any of the earlier years. Further, it is also seen that the increase in the increment given to her in January itself shows a quantum jump in January 1997 as well as 1998. The increments from January 1993 to January 1998 over the preceding December have been Rs. 6,500 p.m, Rs. 5,225 p.m, Rs. 10,775 p.m, Rs. 6, 100 p.m, Rs. 38,333 and Rs. 22,800 p.m. respectively. Here also, the monthly increase has been disproportionately high compared to the earlier years.
8.3 Having said that the increase of 59 per cent was indeed there in this assessment year over the last assessment year, it is now to be examined whether the same was justified and reasonable so as to attract section 13(1)(c). An increase in salary would normally be on account of two reasons. Firstly, normal increase on account of inflation as occurs in any organization, and as considered by the Hon’ble Income Tax Appelate Tribunal and secondly on account of some extraordinary work that may have been done by a person which translates into a better performance or higher returns/ profits for the organization. In this connection, as brought out by the assessing officer the percentage increase in income of the Sanstha for assessment year 1998-99 was only 17.99 per cent over the preceding assessment year, as compared to 40.07 per cent in assessment year 1997-98 over assessment year 1996-97. That is to say that in terms of total of income of the Sanstha, the rate of increase had actually decreased compared to assessment year 1997-98, whereas the salaries to Smt. Sudha Tewari had increased disproportionately by 59 per cent. The financial results achieved by any organizattlon are a safe and scientific parameter to judge whether the higher payments made for achieving such results were justified. Since their had been a fall in the rate of increase of income, there was no justification for enhancing the salary etc. of Smt. Tewari, much higher than the increase of any of the earlier years.
8.4 The Hon’ble Income Tax Appellate Tribunal in its order for assessment years 1995-96 and 1996-97 had stated that an increase of about 25 per cent p.a. in the salary and perquisites could be considered to be the normal increase given by an organization. However, in its order for assessment year 1997-98 at para 9, the Hon’ble ITAT stated that if there is a change, the reasonableness thereof has to be again examined. That is to say that if there are material changes compared to the earlier years the assessing officer would be free to examine the appellant’s claim again with ref erence to the facts obtaining in that assessment year. Thus the appellant’s reliance on the decisions of the Hon’ble ITAT in earlier years is misplaced since there is a substantial change in the quantum as well as in the rate of increase this year, as discussed above. in fact, if the decision of the Hon’ble ITAT is followed, then too the increase of 59 per cent was more than twice than that considered as reasonable by the ITAT. As against the increases in the salary and perquisites given by the appellant in the earlier years, this year the increase in salary shows a quantum jump compared to any of the earlier years, both in terms of the annual salary, rate of increase as well as in the monthly increase given in the month of January over the preceding month. The assessing officer was therefore justified in examining the matter again and coming to a conclusion that since the total income of the appellant did not show a matching increase, in fact the rate of increase of income was actually lower than last year, and hence the huge jump in the salary and perquisites paid to Smt. Sudha Tewari amounted to conferring a benefit on her which was not commensurate with the income of the appellant trust or her efforts. And since, she was a person covered by section 13(3), this amounted to a violation of section 13(1)(c) and 13(2)(c), because of which the assessing officer had rightly denied exemption to the appellant Sanstha under sections 11 & 12. Added to this is the fact that no such quantum jump in the salaries etc. was noticed in respect of the other persons to whom salaries had been paid. This militates against the appellant’s argument that she was just an employee as any other. It is clear therefore that undue benefit had been granted to Smt. Sudha Tewari who was very much in a position to influence the decisions of the organization by virtue of her long standing association with the organization and her being an Member/ Executive Secretary of the Governing Body and its Chief Executive Officer/ Managing Director. In fact if such high salaries were not paid to her, the income of the Sanstha would have been higher and more funds would have been available to the Sanstha for charitable activities. But in giving abnormally high salaries and raises in some form or the other, the Sanstha had clearly moved away from its charitable motives. Thus, the assessing officer’s action in denying exemption under sections 11 & 12 of the Income Tax Act, 1961 for this reason, was justified and is upheld.”
9. Aggrieved with the findings of the CIT (A) the assessee preferred an appeal before the Tribunal raising various grounds, but all grounds relate to an issue whether Mrs. Sudha Tiwari falls within the category of prohibited persons as defined in section 13(3) of the Income Tax Act and if so whether the salary paid to her is excessive and not commensurate with the services rendered by her for the assessee – Sanstha. During the course of hearing, the learned counsel for the assessee has invited our attention to the comparative details of the salary paid to Smt. Sudha Tiwari, which is appeing at page 162 of the compilation of the assessee, according to which ,,,tlary was increased in the month of January, 1998 from Rs. 64,100 to Rs. 86,900, which is approximately 25 per cent and this increment in salary cannot be made a basis to disallow the exemption particularly when it had not been disputed that Mrs. Sudha Tiwari was the brain and soul of the society rendering not only exemplary, but indispensable service, He placed reliance upon the order of the Tribunal pertaining to the assessment year 1997-98 in which the Tribunal has treated the increase in the salary as reasonable and directed the assessing officer to allow exemption under section 11 of the Act. The revenue went to the High Court against the order of the Tribunal, but the same was dismissed by the Honble High Court. The assessee has also brought to our notice that the exemption under section 80-G of the Income Tax Act was also denied by the revenue against which a writ petition was filed before the Honble High Court and the Hon’ble High Court directed the revenue to grant the registration under section 80-G of the Act. Accordingly a certificate under section 80-G was granted. The learned counsel for the assessee further contended that the denial of exemption on the ground that the salary paid to Smt. Sudha Tiwari amounted to violation of provisions of section 13(1)(c) and 13(2)(c) of the Income Tax Act was without any basis because the increase in the salary was quite reasonable and also done in the same ratio as was done in the earlier years. The learned counsel for the assessee further contended that the issue whether Mrs. Sudha Tiwari falls within the category of persons defined under section 13(3) of the Act is still left open for the Tribunal to adjudicate it as in the earlier order for assessment year 1997-98 the Tribunal has not expressed its view on this issue. In the copy of memorandum and articles of association the name of Mrs. Sudha Tiwari did not appear and she had been merely appointed as an ex officio member of the governing body being in service on the basis of the resolution passed. The learned counsel for the assessee further contended that had Mrs. Sudha Tiwari falls in the category of prohibited persons, the assessee could not have been allowed exemption under sections 11 and 12 of the Income Tax Act in earlier years if the excessive payments had been made to Mrs. Sudha Tiwari, after herjoining the service. Since the salary paid to Smt. Sudha Tiwari was accepted by the Tribunal as reasonable in earlier years the increased salary should be treated as reasonable in the impugned assessment year too because the increase in salary was done according to the services rendered by her.
10. After giving a thoughtful consideration to the assessee’s contentions and from a careful perusal of the orders of the lower authorities and the paper book filed by the assessee, we are of the view that we have to decide whether Smt. Sudha Tiwari falls within the category of prohibited persons as defined under section 13(3) of the Income Tax Act and thereafter the second issue whether the increase in the salary is reasonable and commensurate with the services rendered by her for the assessee Sanstha. Admittedly, Smt. Sudha Tiwari had joined the service with the assessee Sanstha in 1981 and thereafter in 1982 vide resolution dated 23-2-1982 she was appointed as an ex officio member of the governing body of the society with the designation Director to fill the vacancy caused by the resignation of Mr. Hira Malani and was also resolved that she would hold office till the next annual general meeting of the society. Since 1982 Mrs. Sudha Tiwari remained on the managerial board. Thereafter Mrs. Sudha Tiwari was made executive secretary/ member of the governing body. Though the assessee has contended before us that Mrs. Sudha Tiwari remained the ex officio member of the governing body, but no evidence was filed before us as to what happened in the annual general meeting held after 1982 when Mrs. Sudha Tiwari was initially appointed as ex officio member of the governing body. The assessee has filed the copy of the memorandum of associations before us and on the back of this memorandum of associations the details of the members of the governing body is given and as per these details Mrs. Sudha Tiwari was shown as executive secretary /member of the governing body. Not only that, in the balance sheet for the financial years 1994-95 to 1997-98 Smt. Sudha Tiwari was shown as the Managing Director of the assessee-Sanstha. Nothing has been placed before us on behalf of the assessee as to how Smt. Sudha Tiwari became the Managing Director of the assessee-Sanstha without being elected as an ordinary member of the governing body.
11. We have also carefully examined the various correspondence made on behalf of the assessee-Sanstha to the DDIT in which Mrs. Sudha Tiwari has signed the correspondence in the capacity of the Managing Director. One of the documents is appearing at page No. 86 of the compilation of the assessee. We have also carefully perused the order of the Tribunal for the assessment year 1997-98 appearing at page Nos. 70 to 75 of the compilation of the assessee in which an issue whether Smt. Sudha Tiwari was the person within the ambit of section 13(3) of the Act was racked up before the Tribunal, but the Tribunal has not given a specific finding thereon and left it open for future considerations. The Tribunal, however, proceeded on the assumption that Mrs. Sudha Tiwari was one of the persons mentioned in section 13(3) of the Income Tax Act. Thereafter the Tribunal has examined the reasonableness of increase in the salary and the Tribunal took a note that there was only an increase of Rs. 6,100 per month with effect from 1-1-1997. The Tribunal did not take a note of payment of ex gratia of Rs. 70,000 paid to Mrs. Sudha Tiwari during the financial year relevant to the assessment year 1997-98. From a chart showing details of salary of Mrs. Sudha Tiwari appearing at page No. 121, it is noticed that since January, 1997 the salary of Mrs. Sudha Tiwari was increased from Rs. 49,100 to Rs. 64,100. Besides, a consolidated ex gratia amount of Rs. 70,000 was also given for three months ie. January, 1997 to March, 1997. These factors were not taken into account while deciding the reasonableness of the enhancement in the salary of the assessee. The Tribunal has only taken a note of the enhancement in the salary made in January, 1996 and also for the period of April to December, 1996, which was only of Rs. 6,100 whereas in the month of January, 1997 there was an enhancement in the salary of Rs. 15,000 per month besides an ex gratia payment of Rs. 70,000 for three months. Had this factor been noticed by the Tribunal the conclusion of the Tribunal regarding the reasonableness might be different. We, however, restrained ourselves to make any comments on the order of the Tribunal for the assessment year 1997-98, but we certainly do not agree with the contention of the assessee that since the enhancement was considered to be reasonable in the assessment year 1997-98, the enhancement then in the impugned assessment year should also be considered as reasonable. We, therefore, would examine the reasonableness in the enhancement of the salary and perquisites etc. afresh in the light of the totality of the facts and circumstances of the case. Before going to the reasonableness of the enhancement we have to decide first whether Mrs. Sudha Tiwari falls within the category of persons mentioned in section 13(3) of the Act and if so, whether the assessee’s claim of exemption of total income is hit by provisions of section 13(1)(c) of the Act. For the sake of reference, we reproduce the extract of subsections (1) & (3) of section 13 as under :-
“13(1) Nothing contained in section 11 (or section 12) shall operate so as to exclude from the total income of the previous year of the person in receipt thereof-
(a) any part of the income from the property held under a trust for private religious purposes which does not ensure for the benefit of the public;
(b) in the case of a trust for charitable purposes or a charitable institution created or established after the commencement of this Act, any income thereof if the trust or Institution is created or established for the benefit of any particular religious community or caste;
(bb) ** ** **
(c) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof-
(i) if such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution, any part of such income ensures; or
(ii) if any part of such income or any property of the trust of the institution (whenever created or established) is during the previous year used or applied, directly or indirectly for the benefit of any person referred to in sub-section (3) :
Provided that in the case of a trust or institution created or established before the commencement of this Act, the provisions of sub-clause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub-section (3), if such use or application is by way of compliance with a mandatory term of the trust or a mandatory rule governing the institution:
Provided further that in the case of a trust for religious purposes or a religious institution (whenever created or established) or a trust for charitable purposes of a charitable institution created or established before the commencement of this Act, the provisions of sub-clause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub-section (3) in so far as such use or application relates to any period before the 1-6-1970;
13(3) The persons referred to in clause (c) of sub-section (1) and subsection (2) are the following, namely,
(a) the author of the trust or the founder of the institution;
(b) any person who has made a substantial contribution to the trust or institution, that is to say, any person whose total contribution up to the end of the relevant previous year exceeds fifty thousand rupees;
(c) where such author, founder or person is a Hindu undivided family, a member of the family;
(cc) any trustee of the trust or manager (by whatever name called) of the institution;
(d) any relative of any such author, founder, person, member, trustee or manager as aforesaid;
(e) any concern in which any of the persons referred to in clause (a), (b), (c), (cc) and (d) has a substantial interest.”
12. Admittedly, Mrs. Sudha Tiwari was the heart and soul of the society and was controlling its all affairs. Whatever decisions are taken by Mrs. Sudha Tiwari, these were approved by the governing body and this inference can be drawn from the resolutions passed by the governing body in April, 1985 and other correspondence and the balance sheet. The assessee has filed a copy of the resolution dated 22-1-1982, through which Mrs. Sudha Tiwari was initially admitted as a member of the society with immediate effect and later on vide resolution dated 23-2-1982, Mrs. Sudha Tiwari was appointed as ex officio member of the governing body of the society with the designation of Director to fill the vacancy caused by resignation by Mr. Hira Malani and would hold office till the next annual general meeting of the society. Nothing has been placed before us in respect of the minutes of the next AGM in order to verify whether Mrs. Sudha Tiwari continued to be the ex officio member. From the correspondence made to DDIT and the balance sheet for the financial years 1994-95 to 1997-98, Mrs. Sudha Tiwari not only remained the ex officio member of the governing body, but became the executive secretary/member and/or Managing Director of the assessee-Sanstha. Upto March, 1993 Mrs. Sudha Tiwari was shown as member/executive secretary, but thereafter in the balance sheet for the financial years 1994-95 to 1997-98 and the correspondence made to the DDIT, Mrs. Sudha Tiwari has signed as a Managing Director of the Sanstha. It is also noticed from the record that the assessee-Sanstha was initially known as Marie Stopes Society. Major decisions of the society regarding the substantial increase in the salary of the Managing Directors are required to be taken by the governing body as per clause 7 of the memorandum of association, but in the instant case, the governing body has authorized Dr. Tim Black. Chief Executive of Marie Stopes International to make enhancement in the salary of Mrs. Sudha Tiwari at his own whims per year regularly. Dr. Tim Black was never shown to be the member of the governing body. The assessee has filed a list of members of the governing body along with the memorandum of association in which Mrs. Sudha Tiwari was shown as executive secretary/member. It is also noticed from clause 4 of the memorandum of association that the society will be represented or be sued in the name of the executive member/ secretary. From a careful perusal of the memorandum of association it is noticed that the member/ executive secretary of the society is the main person who executes the programmes formulated by the society. If we examine the status of Mrs. Sudha Tiwari in the society in the light of list of persons enumerated in section 13(3) of the Income Tax Act. we would find that Mrs. Sudha Tiwari not only be the Manager of the Institution, but she was the main controlling authority of the society being an executive secretary /member or Managing Director of the assessee society. In these circumstances, Mrs. Sudha Tiwari cannot be called to be an ordinary employee of the society. We are, therefore, of the considered view that Mrs. Sudha Tiwari certainly falls within the category of prohibited persons specified in sub-section (3) of section 13 of the Act.
13. Now the next question comes whether the increase in the salary of Mrs. Sudha Tiwari is reasonable or commensurate with the services rendered by her for the assessee-society. From the details of salary appearing at page No. 121 of the compilation of the assessee, we find that the increment in the salary was given at the beginning of the English calendar year i.e., in the month of January. In assessment year 1994-95 the salary was increased from Rs. 27,000 to Rs. 33,225. Since the increment was of Rs. 5,225 per month, it was considered to be reasonable. Again in the assessment year 1995-96 the salary was increased from Rs. 32,225 to Rs. 43,000 and this was also considered to be reasonable by the revenue. Again in the assessment year 1996-97 the increment in the salary was of Rs. 6,100 and no dispute was raised by the revenue regarding the reasonableness, but in the assessment year 1997-98 the increment in the salary was jumped from Rs. 49, 100 to Rs. 64, 100 which is around 30 per cent of the original salary. Besides this increment, an ex gratia payment of Rs. 70,000 for January to March was also made to Smt. Sudha Tiwari. While dealing with the issue of increment in the salary in the assessment year 1997-98 the Tribunal did not take into account the unreasonable enhancement in the salary of Rs. 15,000 and a consolidated payment of ex gratia of Rs. 70,000. The Tribunal has only taken a note of increment in salary of Rs. 6, 100. Now in the impugned assessment year the salary was further increased from Rs. 64,100 to Rs. 86,900 i.e., (Rs. 22,800) which is around 35 per cent in the month of January, 1998. Besides this increment a substantial payment of ex gratia at Rs. 2,80,000 was also made to Mrs. Sudha Tiwari. The assessee has not filed any copy of the resolution of the governing body in which this much of increment in the salary was considered to be reasonable in the light of percentage of increase in the income of the assessee – Sanstha. While treating this enhancement in the salary as unreasonable, the assessing officer has also worked out the percentage increase in the income of the assessee society for assessment year 1998-99 at 17.79 per cent over the preceding assessment year. Whenever salary is paid to a person, who falls within the category of the prohibited persons, the salary paid to him/her must be commensurate with the services rendered. Nothing has been placed before us on behalf of the assessee in support of his claim that in the impugned assessment year, Mrs. Sudha Tiwari, has rendered extra-ordinary services for which the substantial increment in the salary besides ex gratia payment was awarded. Moreover, in the impugned assessment year the percentage increase in the income of the society was only 17.79 per cent over the preceding assessment year, as compared to 40.07 per cent in assessment year 1997-98 over assessment year 1996-97 meaning thereby the percentage increase in income in the impugned assessment year is lesser than the earlier year, but percentage increase in the salary of Mrs. Sudha Tiwari is much higher than the earlier year.
14. We have also carefully examined the order of the CIT (A) and we find that the CIT(A) has also examined the impugned issues exhaustively in his order and before coming to the conclusion that the increase in the salary is unreasonable, he has examined all the aspects of income of the society vis-a-vis the increment in the salary of Mrs. Sudha Tiwari. Other factors were also examined by him before upholding the view of the assessing officer that Mrs. Sudha Tiwari falls within the category of prohibited persons. Having examined the order of the CIT (A) in the light of material placed before us, we are of the considered view that the enhancement in the salary in the impugned assessment year as well as in January, 1997 was not reasonable and, as such, the claim of exemption of the assessee under section 12 is hit by section 13(1)(c) of the Income Tax Act, 1961.
15. We have also examined the following judgments referred to by the assessee with regard to his submissions that the employees of the society does not fall within the category of prohibited persons :-
(i) CIT v. Edward Keventer (P) Ltd. (1972) 86 ITR 370 (Cal.).
(ii) CIT v. Edward Keventer (P) Ltd. (1978) 115 ITR 149 (SC).
(iii) CIT v. Tata Steel Charitable Trust (1993) 203 ITR 764 (Pat.).
Having carefully perused the aforesaid judgments we have no dispute with regard to the submissions of the assessee that an employee of the society does not fall within the category of prohibited persons, but in the instant case, Mrs. Sudha Tiwari is not only an employee of the assessee society, but she was rather a brain and soul of the assessee society as admitted by the assessee being an executive secretary/member and Managing Director of the assessee society, who was running the entire affairs of the society. In these circumstances, we find no hesitation in holding that Mrs. Sudha Tiwari falls within the category of persons enumerated in sub-section (3) of section 13 of the Act and the increment in the salary was also unreasonable and not commensurate with the services rendered by her for the society. As such, the claim of exemption is hit by section 13(1)(c) of the Income Tax Act, 1961. We, therefore, do not find any infirmity in the order of the CIT (A), who has rightly upheld the action of the assessing officer.
16. So far as the issue of grant of aids and contributions received by the assessee is concerned, we are of the view that the assessing officer has rightly treated it to be the part of the income of the assessee. We, therefore, do not find any infirmity in the order of the CIT (A) on this count also. Accordingly, we uphold the same.
17. In the result, the appeal filed by the assessee, is dismissed.