Is salary to director allowed as expense to an educ society?

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Sushant Mahajan (Querist)
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25 November 2013 Can an Educational Society give salary to its Director for the services he renders to the society?

Will it be allowable as an expense to the AOP?

Please reply.

Sanket

Sanket (Expert)
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25 November 2013 Yes it is an allowable expense.

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Sushant Mahajan

Sushant Mahajan (Querist)
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25 November 2013 Thank You Sir....can you please give any proviso in this regard?

Sir, will it make any difference if he is a member of the AOP?

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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01 August 2024 Yes, an Educational Society (registered as a society under the Societies Registration Act) can pay a salary to its Director for the services he renders to the society. This payment can be considered as an allowable expense under the Income Tax Act, provided it meets certain conditions.

### Allowability as an Expense

The salary paid to the Director will be allowed as an expense under Section 37(1) of the Income Tax Act, 1961, which allows any expenditure laid out or expended wholly and exclusively for the purposes of the business or profession. However, the following conditions must be satisfied:

1. **Genuine Services Rendered**: The payment must be for genuine services rendered by the Director to the society.
2. **Reasonable and Not Excessive**: The salary must be reasonable and not excessive compared to the services provided.
3. **Duly Authorized**: The salary payment should be duly authorized by the governing body of the society and must be in line with the rules and regulations of the society.

### Provisions in the Income Tax Act

The relevant provisions in the Income Tax Act that deal with the allowability of such expenses include:

1. **Section 37(1)**: General deduction for business expenditure.
2. **Section 40A(2)**: Disallows excessive or unreasonable payments to related parties.

### Director as a Member of the AOP

If the Director is also a member of the Association of Persons (AOP), the payment must be carefully scrutinized to ensure it is not excessive or unreasonable. The Income Tax Department may disallow any payment that is deemed excessive under Section 40A(2)(b), which deals with payments to relatives and associated persons.

### Steps to Ensure Allowability

1. **Documentation**: Maintain proper documentation and records of the services rendered by the Director and the justification for the salary amount.
2. **Approval**: Ensure the payment is approved by the governing body of the society.
3. **Benchmarking**: Benchmark the salary against industry standards to ensure it is reasonable.
4. **Contract/Agreement**: Have a formal employment contract or agreement outlining the terms of the salary and services rendered.

### Case Law Reference

While there is no specific case law directly addressing the salary paid to a Director of an educational society, general principles from related cases can be applied. Courts have upheld the allowability of salaries to directors and key personnel provided they are for genuine services and are reasonable in nature.

### Conclusion

An Educational Society can pay a salary to its Director for services rendered, and this expense can be allowable under the Income Tax Act, provided it meets the conditions of genuineness, reasonableness, and proper authorization. It is advisable to maintain proper documentation and have the salary approved by the governing body to avoid any disallowances during tax assessments.

Consulting with a tax advisor or chartered accountant is recommended to ensure compliance with all relevant provisions and to structure the payments appropriately.