2025 (4) TMI 1555 - AT - Income Tax

Revision u/s 263 - denial of exemption u/s 11 - consequential assessment order passed based on the order passed by the CIT(E) u/s. 263 which was set aside by the Tribunal - pendency of appeal taken a ground to attack the order of the CIT(A) - HELD THAT - There is no dispute with regard to the fact that the assessment unit has made the assessment u/s. 143(3) on 01/03/2023 in which the exemption claimed u/s. 11 was disallowed by relying on the proviso to section 2(15) which was made based on the order passed by the CIT(E) u/s. 263 of the act. The appellate authority viz. the Tribunal which heard the challenge made to the order passed u/s. 263 set aside the said order and therefore the consequential order passed is not a valid order. When the main order which authorises the AO to make the assessment was not there the consequential order would not stand by itself. DR raised the plea that the Tribunal order setting aside the order passed u/s. 263 is under challenge before the Hon ble High Court of Kerala and therefore the Ld.DR requested the Tribunal to set aside the order of the Ld.CIT(A). DR had not produced any stay orders of the Hon ble High Court in support of his argument and only submitted that the matter is under sub-judice before the Hon ble High Court and therefore find fault with the order of the Ld.CIT(A). We are not accepting the argument advanced by the Ld.DR for the simple reason that as on date the order of the Tribunal was not set aside and a mere filing of the appeal would not be a reason for terming the order of the CIT(A) as illegal. We also found that the Ld.CIT(A) had explained the reasons in his order for allowing the appeal filed by the assessee which was not disputed by the Ld.DR and in that circumstances we have no hesitation to dismiss the appeal filed by the revenue and we confirm the finding of the Ld.CIT(A) as a valid one. Appeal filed by the revenue is dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

(a) Whether the order passed by the Assessing Officer (AO) under section 143(3) read with section 263 of the Income Tax Act, 1961 (the Act), dated 01/03/2023, denying exemption claimed under section 11 of the Act, is valid when the foundational revision order under section 263 was set aside by the Tribunal prior to the assessment order;

(b) Whether the appellate authority (CIT(A)) erred in allowing the assessee's appeal against the AO's order of 01/03/2023, despite the Revenue's appeal pending before the High Court challenging the Tribunal's order setting aside the section 263 revision order;

(c) Whether the denial of exemption under section 11 based on the proviso to section 2(15) of the Act was justified in the assessment order passed without awaiting the outcome of the appeal against the section 263 order;

(d) Whether the mere pendency of appeal before the High Court against the Tribunal's order setting aside the section 263 order is sufficient to sustain the consequential assessment order denying exemption;

(e) Whether the CIT(A) failed to consider substantive issues raised in the assessment order and whether the assessment order was passed following due legal procedure and justification.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Validity of the Assessment Order Passed Consequent to a Set Aside Section 263 Order

Relevant Legal Framework and Precedents: Section 263 of the Income Tax Act empowers the Commissioner of Income Tax (CIT) to revise any order passed by the AO if it is found to be erroneous in so far as it is prejudicial to the interests of the revenue. An order passed under section 263 forms the basis for subsequent assessment orders. If the section 263 order is quashed or set aside, the consequential assessment order premised on it loses its validity. This principle is well established in tax jurisprudence that a consequential order cannot survive independently if the foundational order is invalidated.

Court's Interpretation and Reasoning: The Tribunal recognized that the AO passed the assessment order under section 143(3) read with section 263 on 01/03/2023, disallowing exemption under section 11 based on the proviso to section 2(15). However, the Tribunal had already set aside the revision order passed under section 263 by the CIT(E) on 08/03/2023 in ITA No. 633/Coch/2022. The Tribunal reasoned that since the revision order under section 263 was invalidated, the consequential assessment order premised on it cannot stand independently. The CIT(A) rightly concluded that the assessment order dated 01/03/2023 does not sustain and is therefore infructuous.

Key Evidence and Findings: The Tribunal relied on the sequence of orders: the section 263 order dated 21/03/2022, the assessment order dated 01/03/2023 based on the section 263 order, and the Tribunal's order dated 08/03/2023 setting aside the section 263 order. The assessment order was found to be derivative and contingent on the validity of the section 263 order.

Application of Law to Facts: The Tribunal applied the principle that an order passed under section 263 must exist for the AO to validly pass a consequential assessment order. Since the section 263 order was quashed, the subsequent assessment order lacked a valid foundation and was thus illegal.

Treatment of Competing Arguments: The Revenue contended that the assessment order was valid and that the CIT(A) erred in allowing the appeal. However, the Tribunal rejected this argument, holding that the assessment order could not stand independently without a valid section 263 order.

Conclusion: The assessment order dated 01/03/2023 denying exemption under section 11 is invalid as it is based on a section 263 order that was set aside by the Tribunal.

Issue (b): Impact of the Pending Appeal Before the High Court on the Validity of the CIT(A) Order

Relevant Legal Framework and Precedents: The pendency of an appeal before a higher forum does not automatically suspend or invalidate the orders passed by the lower appellate authorities unless a stay is granted. The legal effect of an order remains until it is stayed or reversed by a competent authority.

Court's Interpretation and Reasoning: The Revenue argued that since the Department had filed an appeal before the High Court against the Tribunal's order setting aside the section 263 order, the CIT(A) order allowing the assessee's appeal should be set aside. The Tribunal observed that the Revenue failed to produce any stay order from the High Court suspending the Tribunal's order. In the absence of a stay, the Tribunal's order remains binding and effective.

Key Evidence and Findings: The Tribunal noted that the Revenue's appeal before the High Court (ITA 27/2023) was pending, but no stay was granted. The CIT(A)'s order was based on the Tribunal's valid and subsisting order.

Application of Law to Facts: The Tribunal applied the principle that mere pendency of appeal does not affect the validity of the lower appellate order unless stayed. Therefore, the CIT(A)'s order was valid and required no interference.

Treatment of Competing Arguments: The Revenue's contention was rejected due to lack of supporting stay order and absence of legal basis to treat the CIT(A) order as illegal on mere pendency of appeal.

Conclusion: The pendency of the appeal before the High Court does not invalidate the CIT(A) order allowing the assessee's appeal, and the Tribunal confirmed the CIT(A)'s order.

Issue (c): Justification of Denial of Exemption Under Section 11 Based on Proviso to Section 2(15)

Relevant Legal Framework and Precedents: Section 11 provides exemption to income of charitable or religious trusts, subject to conditions. Section 2(15) defines "charitable purpose," and the proviso excludes certain activities from charitable purpose, particularly those involving business activities not incidental to the main objects. The AO's denial of exemption was premised on the proviso to section 2(15), alleging that the assessee's activities did not qualify as charitable.

Court's Interpretation and Reasoning: The Tribunal did not directly adjudicate on the substantive issue of applicability of section 2(15) proviso in this appeal, as the matter was contingent upon the validity of the section 263 order. Since the section 263 order was set aside, the consequential assessment order denying exemption on this ground was invalid.

Key Evidence and Findings: The Tribunal noted that the substantive issue was raised in the assessment order but was not addressed in the appeal since the foundational order was quashed.

Application of Law to Facts: The Tribunal implicitly held that the denial of exemption based on the proviso to section 2(15) could not be sustained in the absence of a valid revision order under section 263.

Treatment of Competing Arguments: The Revenue emphasized the substantive issue of charitable purpose, but the Tribunal refrained from deciding on it due to procedural invalidity of the assessment order.

Conclusion: The denial of exemption under section 11 based on the proviso to section 2(15) in the assessment order is invalid as the order itself is not sustainable.

Issue (d): Whether the CIT(A) Failed to Consider Substantive Issues and Followed Legal Procedures

Relevant Legal Framework and Precedents: The CIT(A) is required to consider all relevant facts, evidence, and legal submissions before deciding an appeal. The appellate order must be reasoned and comply with principles of natural justice.

Court's Interpretation and Reasoning: The Tribunal examined the CIT(A)'s order and found that it had adequately considered the facts and submissions, including the pendency of the appeal before the Tribunal and the invalidation of the section 263 order. The CIT(A) gave reasoned findings explaining why the assessment order was invalid and allowed the appeal accordingly.

Key Evidence and Findings: The CIT(A)'s order excerpts were quoted, showing detailed consideration of the sequence of events and legal position.

Application of Law to Facts: The Tribunal held that the CIT(A) complied with legal procedures and adequately addressed the issues raised.

Treatment of Competing Arguments: The Revenue contended that the CIT(A) failed to consider substantive issues, but this was not substantiated by record or legal reasoning.

Conclusion: The CIT(A) did not fail in considering substantive issues or legal procedures, and its order is valid.

3. SIGNIFICANT HOLDINGS

"When the main order which authorises the AO to make the assessment was not there, the consequential order would not stand by itself."

"In view of the above, the order u/s 143(3) r.w.s. 263 dated 01.03.2023 of the assessment year 2017-18, does not sustain and accordingly the appeal against this order is infructuous and hence treated as allowed."

The Tribunal established the core principle that an assessment order passed under section 143(3) read with section 263 is dependent on the validity of the section 263 revision order; if the latter is set aside, the former cannot survive independently.

The Tribunal also held that the mere pendency of an appeal before a higher forum does not affect the binding nature of the lower appellate order unless a stay is granted.

Final determinations:

(i) The assessment order dated 01/03/2023 denying exemption under section 11 is invalid and set aside as it is based on a section 263 order which was quashed by the Tribunal;

(ii) The CIT(A) order allowing the assessee's appeal is confirmed as valid and requires no interference;

(iii) The Revenue's appeal is dismissed.