2022 (1) TMI 693 - HC - Income Tax

Revision u/s 263 by CIT - Eligibility of benefit of exemption to assessee Trust on its income being charitable Trust - As per CIT no verification or enquiry was made by the AO even on reasons for scrutiny selection and exemption was allowed without verification of charitable nature of activities of trust? - HELD THAT - The respondent Trust is a registered charitable trust. AO for the assessment year 2016-17 accepted the return filed by the trust and granted exemption as applicable under law - CIT took the said order in revision u/s 263 and held that the activities of the trust were not charitable in nature but were commercial activities and therefore denied the exemption. This order was carried in appeal and Tribunal by the impugned judgment reversed the judgment of the Commissioner primarily on the ground that the registration of the Trust u/s 12AA of the Act still continues. Meaning thereby that the revenue does not dispute the nature of the charitable activities. Secondly that the commercial activities are not primary activities of the trust and predominant activity of the trust is charitable. The generation of reasonable surplus would not indicate that the trust is not engaged in charitable activities. The Tribunal was also of the opinion that the assessing officer having made proper inquiry and having taken plausible view the Commissioner in exercise of revisional powers could not have reversed the assessment order. We are broadly in agreement with the view of the Tribunal. It is well settled through a series of judgments that power u/s 263 of the Act can be exercised only when twin conditions of the order of assessing officer being erroneous and prejudicial to the interest of revenue are satisfied. The Jurisdiction of the Commissioner u/s 263 is restricted and cannot be equated with the appellate jurisdiction. The Commissioner does not sit in appeal. The Tribunal also correctly noticed that the registration of the Trust under Section 12 AA of the Act has not been disturbed - no question of law arises.

Summary

Issues:
1. Interpretation of Section 263 of the Income Tax Act regarding the applicability of Explanation 2(a) and 2(b) in the case.
2. Examination of payments made to specified persons under Section 13(3) and capital expenditure by the Assessing Officer (AO) and the role of Commissioner of Income Tax (CIT) in conducting necessary inquiries.
3. Application of the proviso to Section 2(15) concerning the commercial activities of the assessee despite being engaged in objects of general public utility.
4. Comparison of the present case with a judgment of the Kerala High Court regarding income from a mid-day meal program.

Analysis:
1. The High Court considered the challenge to the Income-Tax Appellate Tribunal's decision by the revenue under Section 263 of the Income Tax Act. The Tribunal had set aside the revisional order passed by the Commissioner of Income-Tax, which denied exemption to the respondent-assessee Trust on the grounds of its activities not being charitable but commercial. The Court agreed with the Tribunal's view that the assessing officer had conducted proper inquiry and granted exemption based on plausible grounds, hence the Commissioner could not reverse the assessment order under Section 263.

2. The Court emphasized the limited scope of the Commissioner's jurisdiction under Section 263, highlighting that the power can only be exercised if the assessing officer's order is both erroneous and prejudicial to the revenue's interest. The Court noted that the registration of the Trust under Section 12AA remained undisturbed, indicating the nature of charitable activities. Additionally, the previous order by the Commissioner (Appeals) had already reversed the denial of exemption to the trust, further supporting the Tribunal's decision.

3. Regarding the proviso to Section 2(15), the Court upheld the Tribunal's decision that the commercial activities of the assessee, despite receiving more than 20% of its receipts through contracts, did not negate its engagement in objects of general public utility. The Court found that the generation of a reasonable surplus does not automatically disqualify the trust from being considered charitable, especially when the predominant activity remains charitable in nature.

4. Lastly, the Court addressed the comparison drawn with a judgment of the Kerala High Court concerning a trust running a mid-day meal program. The Court concurred with the Tribunal that despite similarities in the income sources, the nature of activities and the predominant charitable nature of the trust in question warranted the grant of exemption. The Court dismissed the appeal, concluding that no substantial question of law arose from the Tribunal's decision in favor of the respondent-assessee Trust.