2023 (3) TMI 975 - AT - Income Tax

Revision u/s 263 - As per CIT-E AO did not examine the claim of the assessee for an exemption u/s. 11 - HELD THAT - It is not the right reason for exercising revisionary powers u/s. 263 of Act for the reason that the assessee in response to AO s specific query has substantiated by submitting various documents that the main objects of the trust is relief of the poor small and marginal farmers which it is covered by Circular No. 11/2008 and the AO based on the submissions made has taken a conscious decision to accept the claim of the assessee. In our view the error envisaged by Section 263 of the Act is not one that depends on possibility as a guess work but it should be actually an error either of fact or of law. We are of the opinion that the PCIT in the present case has wrongly invoked the jurisdiction under section 263 and the controversy in the present case is fully covered by the judgment in the case of Gabriel India Ltd. 1993 (4) TMI 55 - BOMBAY HIGH COURT . Accordingly the impugned order of the PCIT with regard to the issue of setting aside the order of AO u/s.143(3) with regard to this issue is quashed. Appeal of assessee allowed.

Summary

Issues Involved:
1. Applicability of Section 2(15) of the Income-tax Act, 1961.
2. Validity of the order passed under Section 263 by the CIT(Exemption).
3. Examination of the Assessing Officer's (AO) inquiry and assessment process.

Issue-wise Detailed Analysis:

1. Applicability of Section 2(15) of the Income-tax Act, 1961:

The core issue revolves around whether the activities of the assessee societies, Malanadu Farmers Society and Malanadu Milk Producers Society, fall under the proviso to Section 2(15) of the Act, which excludes entities engaged in trade, commerce, or business from being considered charitable if their gross receipts include income from such activities. The CIT(Exemption) argued that the societies' activities of purchasing and selling milk and milk products constituted a business, thus disqualifying them from exemption under Section 11. The assessee contended that their primary objective was to protect small and marginal farmers and improve their living standards, which falls under "relief of the poor" and not "advancement of any other object of general public utility." They relied on Circular No. 11/2008, which clarifies that the proviso to Section 2(15) does not apply to entities whose primary purpose is relief of the poor, education, or medical relief, even if they incidentally engage in commercial activities.

2. Validity of the Order Passed Under Section 263 by the CIT(Exemption):

The CIT(Exemption) invoked Section 263, claiming the AO's assessment order was erroneous and prejudicial to the interests of the revenue because it did not adequately examine whether the societies' activities fell under the proviso to Section 2(15). The CIT(Exemption) argued that the AO's order was brief, cryptic, and lacked proper inquiry. The assessee countered that the AO had indeed examined the applicability of Section 2(15) during the assessment proceedings and had accepted their claim after considering detailed submissions and past assessments. 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, and there must be some prima facie material to show that the tax lawfully exigible had not been imposed.

3. Examination of the Assessing Officer's (AO) Inquiry and Assessment Process:

The Tribunal scrutinized whether the AO had conducted a proper inquiry into the applicability of Section 2(15). The assessee had provided a detailed reply to the AO's query regarding Section 2(15), including supporting documents and past assessment orders. The Tribunal found that the AO had indeed applied his mind and made a conscious decision to accept the assessee's claim based on the submissions. The Tribunal emphasized that an order cannot be deemed erroneous merely because the CIT(Exemption) would have approached the matter differently. The Tribunal concluded that the CIT(Exemption) had not provided any material evidence to substantiate the claim that the assessee's activities were covered under the proviso to Section 2(15), and thus, the invocation of Section 263 was not justified.

Conclusion:

The Tribunal quashed the orders passed by the CIT(Exemption) under Section 263 for both Malanadu Farmers Society and Malanadu Milk Producers Society, concluding that the AO had conducted a proper inquiry and the assessment orders were neither erroneous nor prejudicial to the interests of the revenue. The appeals of both assessees were allowed.