2020 (12) TMI 1121 - AT - Income Tax

Revision u/s 263 - investment in Tata Sons Ltd - AO allegedly failed to verify the applicability of section 13(1)(c), 13(1)(d) and 13(2)(h) - what is the nature of scope of the provisions of Explanation 2(a) to Section 263 to the effect that an order is deemed to be erroneous and prejudicial to the interests of the revenue when Commissioner is of the view that the order is passed without making inquiries or verification which should have been made ? - HELD THAT - The true test for finding out whether Explanation 2(a) has been rightly invoked or not is, therefore, not simply existence of the view, as professed by the Commissioner, about the lack of necessary inquiries and verifications, but an objective finding that the AO has not conducted, at the stage of passing the order which is subjected to revision proceedings, inquiries and verifications expected, in the ordinary course of performance of duties, of a prudent, judicious and responsible public servant that the Assessing Officer is expected to be. In exercise of his powers under section 263, the Commissioner may as well direct the Assessing Officer that related addition to income or disallowance from expenditure be made, or remedial measures are taken. The second category of cases could be when the Commissioner finds that necessary inquiries are not made or verifications not done, but, based on material on record and in his considered view, even if the necessary inquiries were made or necessary verifications were done, no addition to income or disallowance of expenditure or any other adverse action would have been warranted. Clearly, in such cases, no prejudice is caused to the legitimate interests of the revenue. No interference will be, as such, justified in such a situation. That leaves us with the third possibility, and that is when the Commissioner is satisfied that the necessary inquiries are not made and necessary verifications are not done, and that, in the absence of this exercise by the Assessing Officer, a conclusive finding is not possible one way or the other. That is perhaps the situation in which, in our humble understanding, the Commissioner, in the exercise of his powers under section 263, can set aside an order, for lack of proper inquiry or verification, and ask the Assessing Officer to conduct such inquiries or verifications afresh. In the present case the assessee trust has made investments in Tata Sons Ltd, but that does not mean that Tata Sons Ltd is a property of the assessee trust- a proposition blatantly erroneous in law and in concept. What has been paid to the persons holding office as trustees, though in consideration for other roles played by them such as former directors and employees, has nothing to do with the determination of benefits to the trustees. The pension payments to Ratan N Tata and N A Soonawala, for example, have been held to be wholly and exclusively for the purposes of the business of Tata Sons Ltd and, therefore, the stand that these payments amounted to benefit to the trustees is ex facie incorrect. In any case, as we have noted earlier, all these aspects were duly examined at the assessment stage, and the defects that the learned Commissioner has pointed out in the said examination during the assessment proceedings, for the detailed reasons we have set out earlier, cannot meet our judicial approval. We are, therefore, of the considered view that learned Commissioner was not justified in subjecting the assessment order to revision proceedings on the ground that the Assessing Officer did not examine the matter regarding assessee s control over Tata Sons Ltd, and whether, by virtue of such alleged control, any of the specified persons under section 13(3) received any benefits, and whether the investments made by the assessee trust were in violation of Section 13(2)(h). Non-verification of accumulation of unspent surplus under section 11(2) was wrongly stated to be allowed though the same was neither asked nor required as the surplus was less than 15%. Learned Commissioner has been fair enough to state that though the order is erroneous on this issue, it is not prejudicial to the interest of the revenue . He has, however, also added that the claim of deduction of 15% of income under section 11(1)(a) is subject to verification of other issues . That, however, is irrelevant inasmuch as once it is not a legitimate ground on which revision proceedings can be initiated, inasmuch as to subject an order to revision proceedings it should be erroneous as also prejudicial to the interest of the revenue - which is admittedly not the case, there is no room for any other riders on verifications as a result of revision proceedings. This nonverification also, even if that be the correct position, cannot be ground enough to invoke the revision proceedings. Non-verification of interest income details about the entities from which the interest was earned were reported in Schedule VI to the financial statements, and interest income from each of these investments was also separately reported in Schedule XIII and XIV of the financial statements. The details were also before the Assessing Officer in form 26AS. In any event, it is not even in dispute that all the investments made by the assessee trust were in conformity with Section 11(5) requirements. In these circumstances, we are unable to see any reasons for holding the suspicion that some of the interest income may be from sources that are not qualified for exemption under section 11, and, for that reason, the verification about sources of interest income is required to be done extensively. Once all these details were on record, and there is not even a suggestion that any part of interest income is not qualified for exemption under section 11, we are unable to uphold the stand of the learned Commissioner that the subject assessment order was erroneous and prejudicial to the interest of the revenue for want of verifications of interest income sources. We disapprove of the action of the learned Commissioner on this point as well. Commissioner has also noted that even though the income from dividend was treated as exempt under section 10(34), the Assessing Officer should have nevertheless examined whether the entire income of the assessee trust was applied for the purposes of the assessee trust.The observations so made by the learned Commissioner show that he has not even applied his mind to the undisputed facts of the case. If he had cared to look at paragraph 8 of the subject assessment order, he would have noticed that the Assessing Officer has already included the dividend income of ₹ 95,63,30,094 in the available gross receipts of the assessee trust and examined the application of the said income. That is beside the point that such an action was contrary to the claim of the assessee that once this income of ₹ 96,63,30,094 is held to be exempt under section 10(34), it cannot be brought to taxation under section 11 of the Act, and the rejection of the said claim is the subject matter of assessee s appeal before the CIT(A). What was being directed by the learned Commissioner was already done by the Assessing Officer, and, therefore, these directions clearly show that there was a clear and glaring non-application of mind to even undisputed material facts of the case. We, therefore, cannot approve justification of the subject assessment order being held to be erroneous and prejudicial to the interests of the revenue for this reason as well. No other reason is pointed out to us. We hold the impugned revision order as devoid of legally sustainable merits - Decided in favour of assessee.

Summary

Issues Involved:
1. Initiation of proceedings under section 263 of the Income Tax Act.
2. Assessment order being erroneous due to lack of verification by the Assessing Officer.
3. Jurisdiction under section 263 in relation to prejudicial interest to the Revenue.
4. Direction for de novo assessment due to non-verification of applicability of sections 13(1)(c), 13(1)(d), and 13(2)(h) of the Act.
5. Allegation of non-enquiry into payments to Trustees.

Detailed Analysis:

1. Initiation of Proceedings under Section 263 of the Income Tax Act:
The appellant challenged the initiation of proceedings under section 263 by the Commissioner of Income Tax (Exemptions) [CIT(E)], arguing that the necessary inquiries and verification had already been carried out by the Assessing Officer (AO). The Tribunal noted that the AO had indeed sought details regarding payments to trustees and investments held by the Trust, and the appellant had provided comprehensive responses. The Tribunal found that the AO had conducted reasonable inquiries and had no reason to doubt the correctness of the claims made by the appellant. Thus, the initiation of proceedings under section 263 was not justified.

2. Assessment Order Being Erroneous Due to Lack of Verification by the AO:
The CIT(E) contended that the AO's assessment order was erroneous as it lacked due verification. The Tribunal observed that the AO had asked for and received detailed information from the appellant, including the remuneration paid to trustees and the investments held by the Trust. The AO had examined these details and found them to be in order. The Tribunal concluded that the AO had conducted adequate verification and that the assessment order was not erroneous.

3. Jurisdiction under Section 263 in Relation to Prejudicial Interest to the Revenue:
The CIT(E) argued that the assessment order was prejudicial to the interest of the Revenue. The Tribunal noted that for an order to be revised under section 263, it must be both erroneous and prejudicial to the interests of the Revenue. The Tribunal found that the AO had applied his mind to the facts and circumstances of the case and had determined the income accordingly. The Tribunal held that the assessment order was neither erroneous nor prejudicial to the interests of the Revenue.

4. Direction for De Novo Assessment Due to Non-Verification of Applicability of Sections 13(1)(c), 13(1)(d), and 13(2)(h) of the Act:
The CIT(E) directed the AO to pass a de novo assessment, alleging that the AO had failed to verify the applicability of sections 13(1)(c), 13(1)(d), and 13(2)(h) of the Act. The Tribunal found that the AO had sought and received detailed information regarding the Trust's investments and payments to trustees. The AO had examined these details and found them to be in compliance with the provisions of the Act. The Tribunal concluded that the AO had conducted adequate verification and that the direction for a de novo assessment was not warranted.

5. Allegation of Non-Enquiry into Payments to Trustees:
The CIT(E) alleged that the AO did not inquire whether the payments to trustees were as per the Trust Deed and reasonable under the Act. The Tribunal found that the AO had specifically asked for details of any fees, remuneration, or salary paid to trustees, and the appellant had provided comprehensive responses. The AO had examined these details and found them to be in order. The Tribunal held that the AO had conducted adequate verification and that the allegation of non-enquiry was unfounded.

Conclusion:
The Tribunal quashed the revision order under section 263, concluding that the AO had conducted adequate verification and that the assessment order was neither erroneous nor prejudicial to the interests of the Revenue. The appeal was allowed in favor of the appellant.