2017 (3) TMI 1318 - AT - Income Tax

Revision u/s 263 - Applicability of section 11(4) - disallowance of provision for gratuity - Held that - In the instant case, the assessee is running a hospital and medical college, both of which fall under the terms charity within the definition of charitable purposes as defined in section 2(15) of the I T Act. Section 11(4) is attracted only in a situation where the property held under trust includes a business undertaking . Since the assessee is not having any business undertaking , section 11(4) will not be attracted to the facts and circumstances of the case. Hence, the CIT erred in invoking the provisions of section 11(4) of the I T Act. Sub-section (4) of section 11 can be invoked only if the income determined by the Assessing Officer is in excess of the income as shown in the accounts of the undertaking. Any disallowance of expenditure is not hit by subsection 4 of section 11. Section 11 (4) is attracted only in a situation where the income determined by the Assessing Officer is in excess of the income as shown in the accounts of the undertaking; i e; only if there any income which is hidden from the books of accounts. In assessee s case, issue in question is disallowance of provision for gratuity. The provision for gratuity has already disclosed in the books of account. The total income to be determined even after disallowance of provision for gratuity is Nil. Disallowance of provision for gratuity will not result in a situation where income determined by the Assessing Officer is in excess of the income as shown in the accounts of the assessee. Commissioner of Income Tax has erred in invoking section 263 since the order passed by the Assessing Officer u/s 143(3) was not prejudicial to the interest of the revenue. In the return of income, the assessee had declared total income at Nil. Even after disallowance or provision for gratuity, the total income is Nil as there is already excess utilization or ₹ 16.32 crorcs. Hence, the order passed by the Assessing Officer cannot be said to be prejudicial to the interest or the revenue. - Decided in favour of assessee

Summary

Issues Involved:
1. Allowability of provision for gratuity under section 40A(7) of the Income Tax Act.
2. Applicability of section 11(4) of the Income Tax Act to the assessee's case.
3. Justification for invoking section 263 by the Commissioner of Income Tax.

Issue-wise Detailed Analysis:

1. Allowability of Provision for Gratuity:
The Commissioner issued a notice under section 263 of the Income Tax Act, asserting that the assessment order dated 28.2.2014 was erroneous and prejudicial to the interests of revenue because it allowed a deduction of ?44,96,547/- for the provision of gratuity, which is not allowable under section 40A(7) of the Income Tax Act. The assessee contended that even after disallowing the provision for gratuity, the total income for the assessment year 2011-12 would still be nil due to excess application of income for charitable purposes. The Tribunal upheld the Commissioner’s decision to disallow the provision for gratuity, affirming that it is not an allowable deduction under section 40A(7).

2. Applicability of Section 11(4):
The Commissioner also invoked section 11(4), arguing that the provision for gratuity should be taxed at the maximum marginal rate as it was deemed to be applied for purposes other than charitable purposes. The Tribunal analyzed the provisions of sections 11(4), 2(13), and 2(15) of the Income Tax Act. It concluded that section 11(4) is applicable only when the "property held under trust" includes a "business undertaking." Since the assessee is running a hospital and medical college, which fall under "charitable purposes" as defined in section 2(15), and does not have a "business undertaking," section 11(4) was not applicable. The Tribunal cited the ITAT Ahmedabad Bench's decision in Gujarat Industrial Development Corporation vs. ACIT and the Calcutta High Court's decision in Commissioner of Income Tax Vs. Birla Education Trust to support its conclusion that section 11(4) is not applicable in cases where the income determined by the Assessing Officer is not in excess of the income shown in the accounts.

3. Justification for Invoking Section 263:
The Tribunal found that the Commissioner erred in invoking section 263 since the order passed by the Assessing Officer under section 143(3) was not prejudicial to the interest of the revenue. The assessee had declared a total income of nil in its return, and even after disallowing the provision for gratuity, the total income remained nil due to excess utilization of ?16.32 crores for charitable purposes. Hence, the Tribunal held that the order passed by the Assessing Officer could not be considered prejudicial to the revenue’s interest.

Conclusion:
The Tribunal quashed the Commissioner’s order under section 263 and allowed the appeal filed by the assessee, concluding that the CIT was not justified in invoking his revisionary powers under section 263 of the Income Tax Act. The order was pronounced in the open court on March 17, 2017.