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2019 (8) TMI 806 - HC - Income TaxRevision u/s 263 - interpretation of will - exclusion of payment to charities by applying the principle of diversion of income by overriding title - HELD THAT - CIT while issuing the show cause notice did not rely upon any independent material nor on any interpretation of law but on perusal of the records was of the view that the expenditure cannot be allowed as deduction. Along with the filled in questionnaire, the assessee had filed the copy of the last will and testament of his father, sale deed of the Bangalore property and the legal opinion given by the learned counsel for the assessee. After perusal of the same, the Assessing Officer has taken a stand and passed the order. Therefore, it cannot be stated that the AO did not apply his mind to the issue, after all the AO cannot be expected to write a judgment. Admittedly there was an inquiry conducted by the AO and it is not the case of the CIT that there was a lack of inquiry or inadequate inquiry. On a reading of the order passed u/s 263 one can easily form an opinion that the order is based upon the interpretation which the CIT has given to the terms and conditions of the last will and testament of the assessee's father dated 30.10.2008. Thus, it is evident that the CIT has made a roving enquiry and substituted his view to that of the view taken by the AO who had done so after conducting an enquiry into the matter and after calling for all documents from the assessee, one of which is the last will and testament executed by the assessee's father. Therefore, we are of the clear view that this is not a case where the Commissioner could have invoked the power u/s 263. For all the above reasons, the Substantial Questions of Law 1 and 4 are answered in favour of the assessee. Interpretation of will - Exclusion of payment to charities by applying the principle of diversion of income by overriding title - HELD THAT - The assessee at no point of time was entitled to receive the entire sale consideration. The sale was to be executed by the executor of the will who was directed to distribute the money to the respective organisations, defray the expenses, pay the property tax, deduct his professional fee and the remaining amount was directed to be paid to the assessee. Therefore, to interpret the will in any other fashion would be doing injustice to the intention of the testator and the interpretation given by the CIT is wholly erroneous as the CIT appears to have done the same cherry picking in the last will and testament which is not the manner in which a will needs to be interpreted. The intention of the testator was very clear as the assessee was not entitled to the entire sale consideration. In fact if the interpretation of the CIT and the Tribunal were to be accepted, we would be rewriting the last will and testament. The testator did not bequeath the Bangalore property but bequeathed part of the sale consideration which was left behind after meeting the commitments mentioned in the will to be truly and faithfully performed by the executor of the will. Thus, we can safely conclude that the major portion of the sale consideration on being received from the purchase of the property stood diverted before it reached the assessee and under the will there was no obligation cast upon the assessee to receive the sale consideration and distribute the same in the manner desired by the testator. For the above reasons, we answer the Substantial Question of law No.2 in favour of the assessee. Allowability of expenditure u/s 48(i) - The assessee had produced documents before the AO who had scrutinized the same and accepted the genuinity of the claim and granted the benefit. The CIT disallowed the expenses on the ground that the AO did not make an indepth inquiry. A similar finding was tested for its correctness by the High Court of Delhi in the case of CIT vs. Sunbeam Auto Ltd. 2009 (9) TMI 633 - DELHI HIGH COURT and it was held that one has to keep in mind the distinction between lack of inquiry and inadequate inquiry . If there was an inquiry, even adequate that would not by itself give occasion to the Commissioner to pass orders u/s 263 merely because he has a different opinion in the matter and it is only in cases of lack of inquiry that such a course of action would be open. As mentioned by us in the preceding paragraphs, the assessee has responded to the notice issued u/s 142 and produced documents and records including their statement of total income wherein they had given the entire details including the receipts issued by the respective persons to whom payments were effected, all of which were through banking channels. Therefore CIT was perverse which ought not to have been affirmed by the Tribunal more so for the reason that there was no evidence with regard to the expenses like professional fee, etc. The Tribunal failed to note that the assessee had produced the copies of the receipts signed by the respective party before the AO who was satisfied with the same and in the absence of any fraud being alleged with regard to the authenticity of those documents, the CIT could not have revised the assessment by invoking Section 263. For the above reasons, the Substantial Question of law No.3 is answered in favour of the assessee.
Issues Involved:
1. Jurisdiction of the CIT to invoke Section 263 of the Income Tax Act. 2. Exclusion of payment to charities by applying the principle of diversion of income by overriding title. 3. Disallowance of expenditure incurred in connection with the sale of property. 4. Correctness of the Tribunal's order upholding the CIT's order under Section 263. Issue-wise Detailed Analysis: 1. Jurisdiction of the CIT to invoke Section 263 of the Income Tax Act: The court examined whether the CIT had the authority to invoke Section 263 of the Act. The CIT issued a show cause notice under Section 263, proposing to disallow certain payments and expenses. The court noted that the power under Section 263 can only be exercised if the order of the Assessing Officer (AO) is both erroneous and prejudicial to the interest of revenue. The court found that the AO had conducted a proper inquiry, reviewed all necessary documents, and accepted the assessee's claims. The CIT's show cause notice did not rely on any new material but was based on the existing records. The court held that the CIT's action amounted to a substitution of judgment, which is not permissible under Section 263. Therefore, the invocation of Section 263 by the CIT was deemed unjustified. 2. Exclusion of payment to charities by applying the principle of diversion of income by overriding title: The court analyzed the will of the assessee's father, which directed specific payments to charitable institutions from the sale proceeds of a property. The court determined that these payments were a diversion of income by overriding title, as the amounts were earmarked to be paid before the remaining sale proceeds reached the assessee. The court emphasized that the intention of the testator was clear in the will, and the payments to charities were not merely an application of income but a diversion before the income accrued to the assessee. The court concluded that the CIT and the Tribunal had misinterpreted the will and the nature of the payments, leading to an erroneous decision. The court ruled in favor of the assessee on this issue. 3. Disallowance of expenditure incurred in connection with the sale of property: The court reviewed the assessee's claim for expenses incurred in connection with the sale of the property, which the AO had allowed after examining the supporting documents. The CIT disallowed these expenses, arguing that the AO did not conduct an in-depth inquiry. The court distinguished between "lack of inquiry" and "inadequate inquiry," noting that the AO had indeed conducted an inquiry and was satisfied with the evidence provided. The court found that the CIT's disallowance was based on a different opinion rather than a lack of inquiry. The court held that the expenses were rightly allowed by the AO and disallowing them was unjustified. Therefore, the court ruled in favor of the assessee on this issue as well. 4. Correctness of the Tribunal's order upholding the CIT's order under Section 263: The court examined the Tribunal's order, which had upheld the CIT's decision under Section 263. The court found that the Tribunal had misinterpreted the will and the nature of the payments to charitable institutions. The Tribunal's reasoning was based on an incorrect understanding of the testator's intention and the principle of diversion of income by overriding title. The court also noted that the Tribunal failed to appreciate the evidence provided by the assessee regarding the expenses incurred in connection with the sale. The court concluded that the Tribunal's order was erroneous and should be set aside. Consequently, the court ruled in favor of the assessee, answering all substantial questions of law in their favor and allowing the appeal. Conclusion: The appeal filed by the assessee was allowed, with all substantial questions of law answered in favor of the assessee. The court found that the CIT's invocation of Section 263 was unjustified, the payments to charities were a diversion of income by overriding title, and the disallowance of expenses incurred in connection with the sale was incorrect. The Tribunal's order upholding the CIT's decision was set aside.
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