2019 (7) TMI 603 - HC - Income Tax

Rectification u/s 154 - exemption u/s 10(23C)(vi) rejected - non affording an opportunity to the petitioner trust to explain - application made by the assessee/trust for review of the rejection order passed by the CCIT, Coimbatore u/s 10(23C)(vi) was rejected - Tribunal opined that there is no error that needs to be rectified and nothing is glaring or apparent on the face of the order to invoke Section 154 - HELD THAT - We find that both in the first order of rejection dated 24.06.2013 and second order of rejection dated 06.05.2016. The only reason assigned by the CCIT is by stating that the trust deed does not specifically mention that the educational institution established by it, is not running for the purpose of profit. Though the Statute does not specifically contemplate an opportunity of personal hearing on facts, the CCIT could have afforded an opportunity of personal hearing especially, when the assessee has come forward with the plea that the funds are utilized for educational activities and the same is pursued as a charitable activity. Therefore, we hold that there has been violation of principles of natural justice and this is also grant one more ground to interfere with the orders passed by the CCIT, dated 06.05.2016. We find from the order impugned before us that the income and receipts of the assessee from the various institutions run by it have been noted from paragraph 13 of its order. There has been no exercise done by the Department to find out as to whether the assesee/Trust has generated a reasonable surplus to enable them to sustain the institution and in the event of them earning a higher surplus, whether they had ploughed back or utilising the same for achieving the objects of the trust. This exercise ought to have been done at the first instance or at least when the assessee had filed a review petition dated 28.04.2014. Thus, for the above reasons, we are of the considered view that the matter should be remanded back to the CCIT with a direction to examine the entire financials of the assessee and take a decision on merits and in accordance with law.

Summary

Issues:
1. Review/rectification under Section 10(23C)(vi) of the Income Tax Act, 1961.
2. Interpretation of power of review under Section 10(23C)(vi) of the Act.
3. Claim for tax exemption under Section 10(23C)(vi) in computation of taxable total income.
4. Interpretation of provisions of Section 12A(2) and registration under Section 12AA.
5. Applicability of registration granted under Section 12AA to pending assessment proceedings.
6. Nature of amendments brought in by the Finance Act, 2014 under Section 12A(2) - retrospective or prospective.

Detailed Analysis:

1. Review/Rectification under Section 10(23C)(vi) of the Income Tax Act, 1961:
The appeals were filed against the rejection of the claim for exemption under Section 10(23C)(vi) of the Act. The Tribunal confirmed the Chief Commissioner's rejection order, stating that the trust deed did not specify that the educational institution was not run for profit. The appellant argued that the educational activities were charitable, supported by financial statements. The Court found that the rejection lacked examination of financials and violated principles of natural justice. The matter was remanded for a fresh decision considering all financial records.

2. Interpretation of Power of Review under Section 10(23C)(vi) of the Act:
The appellant questioned the Tribunal's rejection of the review petition, citing the need to interpret the power of review harmoniously. The Court found that the rejection was based solely on the absence of a specific mention in the trust deed regarding profit motive, without considering the substance of charitable activities. It held that the review process should include an examination of financials and a fair opportunity for the appellant to explain.

3. Claim for Tax Exemption under Section 10(23C)(vi) in Computation of Taxable Total Income:
The Tribunal's rejection of the claim for tax exemption under Section 10(23C)(vi) led to the assessment orders for the relevant years. The Court found that the rejection was based on a narrow interpretation without considering the financial sustainability of the trust. It directed a reevaluation of the financials to determine the eligibility for tax exemption.

4. Interpretation of Provisions of Section 12A(2) and Registration under Section 12AA:
The Court addressed the interpretation of Section 12A(2) in relation to registration under Section 12AA. It noted a discrepancy in the application of these provisions, leading to a denial of tax exemption. The Court emphasized the need for a comprehensive assessment of the trust's financial activities to align with the charitable purpose.

5. Applicability of Registration Granted under Section 12AA to Pending Assessment Proceedings:
The Court examined the applicability of registration granted under Section 12AA to pending assessment proceedings. It highlighted the need for a consistent approach in extending the benefits of registration to ongoing assessment processes, emphasizing clarity in the legal framework.

6. Nature of Amendments Brought in by the Finance Act, 2014 under Section 12A(2) - Retrospective or Prospective:
The Court deliberated on the nature of amendments introduced by the Finance Act, 2014 under Section 12A(2), questioning their retrospective or prospective application. It emphasized the importance of clarity in the retrospective or prospective effect of legislative changes for effective implementation and compliance.

In conclusion, the Court allowed the appeals, set aside the Tribunal's orders, and remanded the matters for a fresh decision considering all financial records and relevant legal provisions. The Court emphasized the importance of a thorough examination of financial activities and adherence to principles of natural justice in determining tax exemptions for charitable trusts.