2004 (6) TMI 294 - AT - Income Tax

Jurisdiction of CIT u/s 263 - society registered with Registrar of Societies - Allegations of suspicion and arbitrariness in the CIT's order - diversions of funds for the personal use of properties/family members - Cross-examination of the witnesses - HELD THAT - AO formed an opinion on the genuineness of the claim of such expenditure incurred for the objects of the society on the basis of the evidence in the shape of vouchers produced before him. Looking into the magnitude of the receipts vis-a-vis the payment for services taken, the view taken by the AO upon examination of accounts and facts did not lead to a view that there was a diversion of funds for personal benefit of Parashar family. The view entertained by the AO to accept the claim of the assessee was thus a reasonable and possible view. The learned CIT did not show as to what different view was possible on the basis of glaring facts brought on record by the AO. Whatever may be the facts but one thing is certain that neither the survey team nor the CIT was able to bring anything on record to show that there was a diversion of income of society for the benefit of its members or the persons related thereto. In any event, the AO paid due regard to the decision of jurisdictional High Court in Dy. CIT vs. Cosmopolitan Education Society 1999 (8) TMI 13 - RAJASTHAN HIGH COURT , for the proposition that for any misappropriation of funds by the members of society, action lies in their individual hands and the exemption u/s 10(22) cannot be denied to the society. The AO, therefore, did not commit any wrong by following the decision which was binding on him. On appreciation of facts if the AO was satisfied about the correctness and completeness of the claim and did not find any power vested in him for elucidation of cost by making reference to DVO, no error can be said to have been committed by him. The learned CIT herself did not refer to any of the provisions where the AO had powers to make any reference for elucidation of cost of construction. The very purpose that would have been attained by making reference or a reference was necessary has also not been stated by the learned CIT. In fact the apex Court in the case of Smt. Amiya Bala Paul vs. CIT 2003 (7) TMI 4 - SUPREME COURT has settled the controversy by holding that the AO has no powers under the IT Act to take opinion for the purpose of ascertaining cost of construction of a building. On this count also the allegation of the learned CIT is vague, irrelevant and unwarranted to facts on record and cannot be held a valid ground for terming the orders of assessment as erroneous. The overall appraisal of facts and material on record reveals that the order of learned CIT is replete with conjecture and surmises and without pointing out any specific deficiency or error in the order of assessment. Learned CIT is not empowered to proceed u/s 263 of the Act on the basis of mere suspicion. The jurisdictional High Court in CIT vs. Trustees of Anupam Charitable Trust 1986 (9) TMI 26 - RAJASTHAN HIGH COURT has upheld this view. The apex Court has already upheld in Malabar Industrial Co. Ltd. 2000 (2) TMI 10 - SUPREME COURT that in order to assume jurisdiction u/s 263 of the Act, conditions of an order being erroneous and secondly that the same is prejudicial to interest of Revenue have to be satisfied. Not only that the first condition but the second condition also was not satisfied inasmuch as the learned CIT has not been able to make out a case and point out in her order the amount of loss to Revenue due to any of the alleged errors. Once it has been found and held that the appellant is engaged in the education activity and entitled for exemption u/s 10(22) of the Act, all other allegations take a back seat leaving no room for action u/s 263 of the Act. Thus, the order of learned CIT in all the four years for identical reasons cannot be sustained, which we hereby quash. As a result, the appeals in all the four years stand allowed.

Summary

Issues Involved:
1. Jurisdiction of CIT u/s 263
2. Examination of Books of Account
3. Independent Investigation by AO
4. Diversion of Funds and Personal Use
5. Cross-Examination of Witnesses
6. Application of Wrong Section for Exemption

Summary:

1. Jurisdiction of CIT u/s 263:
The assessee challenged the jurisdiction of the CIT-II, Jaipur, who passed orders u/s 263 of the Act. The CIT's orders were contested on the grounds of being arbitrary, based on suspicion, and lacking correctness.

2. Examination of Books of Account:
The CIT alleged that the AO failed to examine differences between hand-written and computerized accounts. However, the CIT did not identify any notable discrepancies upon her own examination. The Tribunal noted that the AO had scrutinized the accounts and found no evidence of misutilization of funds.

3. Independent Investigation by AO:
The CIT claimed that the AO did not conduct independent investigations. The Tribunal found that the AO had carried out necessary inquiries, including examining the survey report and making inquiries into the facts. The AO's satisfaction was based on these inquiries, and the CIT did not demonstrate how these were inadequate.

4. Diversion of Funds and Personal Use:
The CIT alleged that the AO failed to show diversion of funds for personal use by the Parashar family. The Tribunal observed that the AO found no evidence of such diversion and that the payments to family members were reasonable and not excessive. The Tribunal upheld that the AO's view was reasonable and that the CIT did not provide any specific instances of fund diversion.

5. Cross-Examination of Witnesses:
The CIT criticized the AO for not cross-examining witnesses and not examining certain individuals. The Tribunal noted that the AO had sufficient records and explanations regarding the payments and services of the family members, and the CIT did not find any factual errors in the AO's findings.

6. Application of Wrong Section for Exemption:
The CIT-DR argued that the AO applied the wrong section (s. 10(22) instead of s. 10(23C)) for the assessment year 1999-2000. The Tribunal agreed with the assessee that this was not a basis for the CIT's order and cited the decision of the Hon'ble Calcutta High Court in Jai Kumar Kankaria vs. CIT. The Tribunal found that the AO's application of the section was based on a reasonable and possible view of the law.

Conclusion:
The Tribunal quashed the CIT's orders for all four years, finding that the CIT's conclusions were based on suspicion and lacked specific evidence of errors or prejudice to revenue. The appeals were allowed, and the assessments completed by the AO were upheld as valid and reasonable.