2022 (4) TMI 289 - AT - Income Tax

Revision u/s 263 - allowing the donation of given by the assessee to another charitable trust after denying the exemption under section 11 of the Income-tax Act and held that the order passed by the AO is erroneous insofar as prejudicial to the interest of the Revenue - HELD THAT - It is clear from the finding of the AO that he held the assessee trust is not eligible for any exemption under section 11 and consequently taxed the entire income of the assessee trust by denying the benefit of exemption under section 11 in totality. AO added the entire surplus to the income of the assessee. Therefore, the issue of claim of donation is directly consequential to the decision taken by the Assessing Officer on the eligibility of exemption under section 11 of the Act. Thus, the claim of donation allowed by the AO while passing the assessment order is contradictory to the decision taken by the Assessing Officer. To that extent we do not find any error or illegality in the impugned order of the Commissioner of Income-tax (Exemption) as well as invoking the provisions of section 263 - allowability of the claim on account of donation to another charitable trust is also subjected to the outcome of issue of denial of the exemption under section 11 in totality which is pending before the CIT(A). Therefore, even if the Assessing officer has to consider this issue of allowability of the claim of donation given to another trust, the same has to be finally decided as per the outcome of the appeal filed by the assessee. Sofar as objection raised by the assessee that the Commissioner of Income-tax (Exemption) cannot invoke the provisions of section 263 when the issue is pending before the CIT(A), we find that when the Assessing Officer has allowed the claim of donation without even without even examining such claim despite denial of benefit of exemption under section 11 in totality then the said issue cannot be said to have been pending in the appeal before the CIT(A). Even otherwise, as per clause (c) of Explanation 1 of section 263(1), the Commissioner has the power to such matter which has not been considered and decided in the appeal. Accordingly, we do not find any merit or substance in this contention and the issue raised by the assessee. We modify the impugned order of the Commissioner of Income-tax (Exemption) to the extent of para 4 and remit the issue of allowability of the claim of donation to the Assessing Officer instead of doing the assessment de novo. Appeal of assessee partly allowed.

Issues Involved:
1. Invocation of Section 263 by CIT(Exemptions) while an appeal is pending before CIT(A).
2. Application of two possible views by CIT(Exemptions).
3. Treatment of the Assessing Officer's order as erroneous and prejudicial to the interest of the revenue.
4. Non-consideration of donation to Sind Education Trust as an expenditure.
5. Denial of exemptions under Section 11 due to alleged violation of Section 13(2).
6. Jurisdiction of CIT(Exemptions) under Section 263 when the matter is pending in appeal.

Issue-wise Analysis:

1. Invocation of Section 263 by CIT(Exemptions) while an appeal is pending before CIT(A):
The assessee argued that the CIT(Exemptions) erred in invoking Section 263 of the Income-tax Act, 1961, as the appeal on the same subject matter was pending before CIT(A). The tribunal noted that the Assessing Officer (AO) had denied the exemption under Section 11 and taxed the entire income, making the issue of donation a direct consequence of the AO's decision. The tribunal found no error in the CIT(Exemptions) invoking Section 263 since the AO had allowed the donation claim without proper verification.

2. Application of two possible views by CIT(Exemptions):
The assessee contended that the CIT(Exemptions) applied his views where two views were possible. The tribunal referenced the Supreme Court judgments in Malabar Industries Ltd vs CIT and CIT vs Max India Ltd, which state that if the AO has adopted one of the permissible legal courses, it cannot be treated as prejudicial to the revenue's interest. However, the tribunal found that the AO's decision was contradictory, as the donation was allowed despite the denial of exemption under Section 11.

3. Treatment of the Assessing Officer's order as erroneous and prejudicial to the interest of the revenue:
The CIT(Exemptions) treated the AO's order as erroneous and prejudicial to the revenue's interest. The tribunal agreed, noting that the AO's allowance of the donation claim contradicted his decision to deny the exemption under Section 11, making the order erroneous and prejudicial to the revenue's interest.

4. Non-consideration of donation to Sind Education Trust as an expenditure:
The assessee argued that the donation to Sind Education Trust was for educational purposes, aligning with the assessee's charitable objectives. The tribunal found that the AO had not properly examined the donation claim, and the CIT(Exemptions) was correct in revising the assessment order. The tribunal remitted the issue of the donation's allowability to the AO for reconsideration.

5. Denial of exemptions under Section 11 due to alleged violation of Section 13(2):
The AO denied the exemption under Section 11 due to the assessee's loan to another charitable trust, where the trustee of the assessee was also a trustee. The tribunal noted that the AO's decision to deny the exemption under Section 11 was pending appeal, and the allowability of the donation claim was contingent on the appeal's outcome.

6. Jurisdiction of CIT(Exemptions) under Section 263 when the matter is pending in appeal:
The assessee contended that the CIT(Exemptions) lacked jurisdiction to invoke Section 263 when the issue was pending appeal. The tribunal found that the AO's failure to examine the donation claim allowed the CIT(Exemptions) to invoke Section 263. The tribunal clarified that the CIT(Exemptions) could address matters not considered and decided in the appeal, per Explanation 1(c) of Section 263(1).

Conclusion:
The tribunal modified the CIT(Exemptions)'s order to limit the remand to the issue of the donation's allowability, rather than a de novo assessment. The tribunal did not express a view on the AO's denial of exemption under Section 11 or the donation's allowability, leaving these issues for the AO's independent determination. The appeal was partly allowed.

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