2022 (3) TMI 217 - AT - Income Tax

Revision u/s 263 - eligibility to Exemption u/s 11 - AO had not properly assessed the income, for the reason that the assessee had been granted excess exemption of 15% of its income on grants from state government - as per AO had not properly assessed the income, for the reason that the assessee had been granted excess exemption of 15% of its income on grants from state government assessee contending that since it was substantially financed by the state its income in any case was exempt u/s 10(23C)(iiiab) of the Act and that alternatively even after denying exemption of 15% of the grants of ₹ 4.72 crores, the assessee was still eligible for exemption of its entire income u/s 11 of the Act on account of application of its income for capital purposes. - HELD THAT - assessee contending that since it was substantially financed by the state its income in any case was exempt u/s 10(23C)(iiiab) of the Act and that alternatively even after denying exemption of 15% of the grants of ₹ 4.72 crores, the assessee was still eligible for exemption of its entire income u/s 11 of the Act on account of application of its income for capital purposes. Alternative contentions of the assessee that even without claiming 15% exemption of its income from Government grants, it was entitled to exemption u/s. 11 of the Act after taking into account the amounts utilized for capital purposes - CIT(E), we find has rejected this contention of the assessee by stating that the assessee's claim of utilization of its income in capital asssets tantamounts to revising its return and therefore the contention is not acceptable. We are not in agreement with the same. The assesse s claim of exemption of its entire income has remained unchanged and unrevised. What has only changed is the basis of the claim that too without foregoing its original basis and as an alternate only and that too when confronted with the prospect of being denied exemption of 15% of Govt. grants as originally claimed. The same does not tantamount to revising its return by any chance. Also if the alternate basis of claim of the assessee was as per law the assessment order could not be held erroneous in allowing benefit of exemption u/s 11 to the assessee. Without any finding to the contrary the Ld.CIT(E) we hold had erred in finding the assessment order erroneous on this count. Thus it is abundantly clear that there was no basis with the Ld. CIT(E) at all for arrive at his finding that the assessment order passed in the present case was in error by allowing the assessee exemption of 15% of its income from Government grants. We therefore hold that the Ld.CIT(E) has failed to find any error causing prejudice to the Revenue in the present case - Decided in favour of assessee.

Issues Involved:
1. Invocation of provisions of Section 263 of the Income Tax Act, 1961.
2. Determination of erroneous and prejudicial assessment order.
3. Entitlement to exemption under Section 11 and Section 10(23C)(iiiab) of the Income Tax Act, 1961.
4. Validity of the show cause notice issued under Section 263.
5. Jurisdictional validity of the Commissioner of Income Tax (Exemption) [CIT(E)]'s order.

Issue-wise Detailed Analysis:

1. Invocation of Provisions of Section 263 of the Income Tax Act, 1961:
The CIT(E) invoked Section 263, considering the assessment order dated 27-10-2016 as erroneous and prejudicial to the interests of the revenue. The CIT(E) noted that the Assessing Officer (AO) allowed an irregular excess exemption of 15% on the total income, including a government grant of ?4.72 crores, which should have been excluded. The Tribunal found that the CIT(E) did not provide a clear basis for why the assessee was not entitled to the exemption and which provisions of law disentitled it to the same.

2. Determination of Erroneous and Prejudicial Assessment Order:
The CIT(E) held the assessment order erroneous for granting excess exemption without proper application of law. However, the Tribunal noted that the CIT(E) failed to specify how the provisions of Section 11 disentitled the assessee to the exemption. The Tribunal emphasized that the CIT(E) must have a preliminary finding of error to justify the assumption of revisionary power under Section 263, which was absent in this case.

3. Entitlement to Exemption under Section 11 and Section 10(23C)(iiiab) of the Income Tax Act, 1961:
The assessee contended that it was entitled to exemption under Section 10(23C)(iiiab) as it was substantially financed by the government, with more than 90% of its receipts from government grants. Alternatively, the assessee argued that even without the 15% exemption on government grants, its entire income was exempt under Section 11 due to application in capital assets. The CIT(E) rejected both contentions without providing adequate reasons. The Tribunal found that the CIT(E) did not consider the endowment funds grants in calculating the percentage of government financing, which was crucial for determining the exemption eligibility under Section 10(23C)(iiiab).

4. Validity of the Show Cause Notice Issued under Section 263:
The Tribunal scrutinized the show cause notice and found that it merely stated the assessee was not entitled to the 15% exemption on government grants without specifying the legal basis. The notice lacked clarity and justification for the CIT(E)'s interpretation of law, making the initial opinion of the assessment order being erroneous baseless.

5. Jurisdictional Validity of the CIT(E)'s Order:
The Tribunal held that the CIT(E) assumed jurisdiction under Section 263 without any basis, making the initiation of revisionary proceedings arbitrary and invalid. The Tribunal emphasized that the revisionary powers under Section 263 require a preliminary finding of error, which was not present. Consequently, the order passed by the CIT(E) was deemed unsustainable in law and set aside.

Conclusion:
The Tribunal concluded that the CIT(E) failed to establish any error causing prejudice to the revenue in the assessment order. The Tribunal allowed the appeal of the assessee, setting aside the order of the CIT(E) under Section 263 of the Income Tax Act, 1961. The Tribunal emphasized the necessity of a clear and justified basis for invoking revisionary powers and found the CIT(E)'s actions arbitrary and without jurisdiction.

Order Pronounced:
The appeal of the Assessee was allowed, and the order was pronounced in the open court on 23-02-2022.

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