2021 (1) TMI 224 - AT - Income Tax

Revision u/s 263 - investment in Tata Sons Ltd - as per CIT AO allegedly failed to verify the applicability of section 13(1)(c), 13(1)(d) and 13(2)(h) - what is the nature of scope of the provisions of Explanation 2(a) to Section 263 to the effect that an order is deemed to be erroneous and prejudicial to the interests of the revenue when Commissioner is of the view that the order is passed without making inquiries or verification which should have been made ? - HELD THAT - As decided in case of SIR DORABJI TATA TRUST 2020 (12) TMI 1121 - ITAT MUMBAI assessee trust has made investments in Tata Sons Ltd, but that does not mean that Tata Sons Ltd is a property of the assessee trust- a proposition blatantly erroneous in law and in concept. What has been paid to the persons holding office as trustees, though in consideration for other roles played by them such as former directors and employees, has nothing to do with the determination of benefits to the trustees. The pension payments to Ratan N Tata and N A Soonawala, for example, have been held to be wholly and exclusively for the purposes of the business of Tata Sons Ltd and, therefore, the stand that these payments amounted to benefit to the trustees is ex facie incorrect. In any case, as we have noted earlier, all these aspects were duly examined at the assessment stage, and the defects that the learned Commissioner has pointed out in the said examination during the assessment proceedings, for the detailed reasons we have set out earlier, cannot meet our judicial approval. We are, therefore, of the considered view that learned Commissioner was not justified in subjecting the assessment order to revision proceedings on the ground that the Assessing Officer did not examine the matter regarding assessee s control over Tata Sons Ltd, and whether, by virtue of such alleged control, any of the specified persons under section 13(3) received any benefits, and whether the investments made by the assessee trust were in violation of Section 13(2)(h). Non-verification of accumulation of unspent surplus under section 11(2) was wrongly stated to be allowed though the same was neither asked nor required as the surplus was less than 15%.This nonverification also, even if that be the correct position, cannot be ground enough to invoke the revision proceedings. Non-verification of interest income - Once all these details were on record, and there is not even a suggestion that any part of interest income is not qualified for exemption under section 11, we are unable to uphold the stand of the learned Commissioner that the subject assessment order was erroneous and prejudicial to the interest of the revenue for want of verifications of interest income sources. We disapprove of the action of the learned Commissioner on this point as well. Commissioner has also noted that even though the income from dividend was treated as exempt under section 10(34), the Assessing Officer should have nevertheless examined whether the entire income of the assessee trust was applied for the purposes of the assessee trust.The observations so made by the learned Commissioner show that he has not even applied his mind to the undisputed facts of the case. What was being directed by the learned Commissioner was already done by the Assessing Officer, and, therefore, these directions clearly show that there was a clear and glaring non-application of mind to even undisputed material facts of the case. We hold the impugned revision order as devoid of legally sustainable merits - Decided in favour of assessee.

Issues Involved:
1. Initiation of proceedings under Section 263 of the Income-tax Act.
2. Adequacy of verification by the Assessing Officer (AO).
3. Prejudice to the interest of the Revenue.
4. Directions for de novo assessment.
5. Investments in prohibited modes under Section 11(5) and Section 13(1)(d).
6. Application of Section 13(2)(h) regarding substantial interest.
7. Control over Tata Sons Ltd and benefits to trustees.
8. Verification of interest income and dividend application.

Issue-wise Analysis:

1. Initiation of Proceedings under Section 263:
The appellant challenged the initiation of proceedings under Section 263, arguing that the assessment order was neither erroneous nor prejudicial to the interests of the Revenue. The Tribunal examined the legal standards for invoking Section 263 and concluded that the Commissioner must demonstrate that the AO's order was both erroneous and prejudicial to the Revenue.

2. Adequacy of Verification by the AO:
The Tribunal noted that the AO had conducted extensive inquiries and obtained detailed information from the assessee regarding investments and compliance with Sections 11(5) and 13(1)(d). The AO had asked for details of investments, and the assessee had provided comprehensive information, including the history of shareholdings and accretions by way of bonus shares. The Tribunal found that the AO's inquiries were adequate and in line with the duties of a prudent, judicious, and responsible public servant.

3. Prejudice to the Interest of the Revenue:
The Tribunal emphasized that for an order to be revised under Section 263, it must be both erroneous and prejudicial to the interests of the Revenue. The Tribunal found that even if the AO's order was considered erroneous, it was not prejudicial to the Revenue because the dividend income, if not exempt under Section 11, would be exempt under Section 10(34). Therefore, there was no loss of revenue.

4. Directions for De Novo Assessment:
The Tribunal disapproved of the Commissioner's direction for a de novo assessment. It held that the AO had already conducted necessary inquiries and verifications, and there was no need for a fresh assessment. The Tribunal also noted that the AO had left a window open for further action if required, based on the material received at the last minute.

5. Investments in Prohibited Modes under Section 11(5) and Section 13(1)(d):
The Tribunal found that the AO had examined the compliance with Section 11(5) and Section 13(1)(d) and was satisfied with the details provided by the assessee. The Tribunal noted that the shares held by the assessee were part of the corpus as on 1st June 1973, and subsequent accretions by way of bonus shares were also part of the corpus. Therefore, the investments were not in violation of Section 13(1)(d).

6. Application of Section 13(2)(h) Regarding Substantial Interest:
The Tribunal held that the AO had examined the applicability of Section 13(2)(h) and found no substantial interest held by the trustees in Tata Sons Ltd. The Tribunal noted that the AO had sought and obtained detailed information from the assessee and third parties, and there was no evidence to suggest that the trustees had substantial interest in Tata Sons Ltd.

7. Control over Tata Sons Ltd and Benefits to Trustees:
The Tribunal found that the AO had examined the issue of control over Tata Sons Ltd and benefits derived by the trustees. The AO had raised specific queries and obtained detailed responses from the assessee. The Tribunal held that the AO's inquiries were adequate and that the control exercised by the assessee trust over Tata Sons Ltd was in line with its rights as a shareholder. The Tribunal also noted that any benefits received by the trustees were in their capacity as former directors/employees and not as trustees.

8. Verification of Interest Income and Dividend Application:
The Tribunal found that the AO had verified the sources of interest income and the application of dividend income. The AO had included the dividend income in the gross receipts and examined its application. The Tribunal held that the AO's verification was adequate and that there was no need for further inquiries.

Conclusion:
The Tribunal quashed the revision order under Section 263, holding that the AO's order was neither erroneous nor prejudicial to the interests of the Revenue. The Tribunal emphasized that the AO had conducted adequate inquiries and verifications, and there was no need for a de novo assessment. The appeal was allowed.

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