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Income Tax Appellate Tribunal, CHANDIGARH BENCH ‘A’, CHANDIGARH
Before: SHRI SANJAY GARG & SMT.ANNAPURNA GUPTA
आदेश/ORDER Per Annapurna Gupta, Accountant Member:
The present appeal has been preferred by the assessee against the order of the Learned Commissioner of Income Tax (Exemptions), [(in short referred to as ‘Ld. CIT(E)’] dated 04.03.2021, Ludhiana relating to assessment year 2016-17, passed u/s 263 of the of the Income Tax Act, 1961 (hereinafter referred to as ‘Act’).
A.Y. 2016-17 Page 2 of 8
A perusal of the order of the Ld.CIT(E) reveals that on finding the assessment order having been passed by incorrect application of law, the Ld.CIT(E) exercised his revisionary jurisdiction and cancelled the assessment order so passed directing the AO to pass an order afresh in accordance with law. The incorrect application of law by the AO noted by the Ld.CIT(E) was the denial of exemption u/s 10(23C(vi) of the Act suo moto, while the law authorized only the Pr. Commissioner of Income Tax or Chief Commissioner of Income Tax to do so.
The background and facts of the present case are that the assessee society was running a school under the name of Chinmaya Vidyalaya at Nauni Solan and was approved for claiming the exemption u/s 10(23C(vi) of the Act vide order of the Chief Commissioner of Income Tax, Shimla, dated 29.09.2011. The return for the impugned assessment year was filed by the assessee declaring nil income. Thereafter scrutiny assessment proceedings were initiated during the course of which the AO noted that the assessee society had paid salaries to two of its Directors which were very high in comparison to the salaries paid to other staff members of the school. He further noted that the approval had been A.Y. 2016-17 Page 3 of 8 granted by the Chief Commissioner of Income Tax, Shimla mentioning that no part of its income or property would be paid or transferred directly or indirectly to any interested persons. The AO held that undue benefit was being provided to two Directors by paying them huge salaries and which showed that there was a profit motive of the society. He accordingly held that the assessee society had violated the conditions for grant of approval for exemption provided u/s 10(23C)(vi) of the Act as per proviso (iiia) and thus withdrew the benefit of exemption to the assessee society, assessing its income in the status of ‘AOP’.
The Ld.CIT(E) noted that the provision of law required the AO to refer the matter of violation of conditions for claiming exemption u/s 10(23C(vi) of the Act to the Pr.
Commissioner of Income Tax or the Commissioner and only after the orders were passed by said such higher authority withdrawing the approval, the AO could have proceeded to finalize the assessment. The relevant provision in this regard related to section 143(3) of the Act, 1s t proviso, prescribing such reference by the AO to the higher authorities and section 153 of the Act, excluding such period of reference made by the AO till the date of receipt of A.Y. 2016-17 Page 4 of 8 the order of Commissioner or Pr. Commissioner, from the prescribed period of limitation for passing the assessment order u/s 153 of the Act. The Ld.CIT(E), therefore, held that the AO had passed the order by an incorrect application of law. That the AO had erroneously proceeded to withdraw the exemption granted to the assessee when he should have referred the matter to the CIT(E) for revocation of the exemption. That the AO could have passed an assessment order only after the issue was decided by the CIT(E). He, therefore, held that the view taken by the AO denying exemption to the assessee was in violation of the provisions of section 10(23C)(vi) read with Explanation to section 153 of the Act and the same was unsustainable in law and, therefore, the order was erroneous as well as pre-judicial to the interest of the Revenue. He accordingly, cancelled the order passed by the AO directing him to pass an order afresh in accordance with law.
We have heard both the parties. The primary contention of the Ld.Counsel for the assessee is that there is no prejudice caused to the Revenue because the assessee in any case has been denied exemption by the AO and even if the prescribed procedure had been followed, the result still A.Y. 2016-17 Page 5 of 8 would have been the same. Therefore, the exercise of revisionary jurisdiction by the Ld.CIT(E), it was pleaded, was not in accordance with law.
We have heard both the parties. It is not disputed that the law mandates that the power of denial of exemption u/s 10(23C(vi) of the Act does not lie with the AO. Section 143(3) of the Act, first proviso, stipulates that where an assessee who has been granted exemption u/s 10(23C)(vi) of the Act is found to be functioning in violation of the conditions granting approval, then the matter is to be brought to the notice of the Pr. Commissioner of Income Tax or Commissioner of Income Tax by the AO by making a reference to them, who after considering the same, may cancel the approval granted to the assessee and only after consideration of the reference by the AO by way of passing an order by the Commissioner of Income Tax/Pr.
Commissioner of Income Tax, the AO can proceed with the assessment. Section 153 of the Act, which prescribes limitation for passing of assessment order, takes care of this period of reference by excluding the said period for the purpose of limitation prescribed for passing an assessment order. There are not two views, therefore, that it is only the A.Y. 2016-17 Page 6 of 8 Pr. Commissioner of Income Tax or Chief Commissioner of Income Tax who is authorized to decide whether an assessee is entitled to avail exemption or not. The AO clearly has no power to decide the same under law. In the present case, therefore, denial of exemption by the AO is beyond his powers. We, therefore, agree with the Ld.CIT(E) that the order so passed by the AO by incorrect application of law is clearly unsustainable in law and this in itself makes the order of the AO erroneous as well prejudicial to the interest of the Revenue. The denial of exemption by the AO being beyond his powers, the assessment order cannot survive and the assessee therefore would be reverted back to his original claim of exemption u/s 10(23C)(vi) of the Act. This is the prejudice caused to the Revenue by the erroneous order of the AO .And which has been revised and set right by the Ld.CIT(E) by exercising his revisionary powers u/s 263 of the Act setting aside the assessment order and directing the AO to pass afresh order in accordance with law. As rightly pointed out by the Ld.CIT(E), the Hon’ble Apex court in the case of Max Power Ltd. 295 ITR 282 (SC) has held that view of the AO which is unsustainable in law invites the application of section 263 of the Act. A.Y. 2016-17 Page 7 of 8
Moreover, prejudice is also caused on account of the AO not having disallowed the excess remuneration paid after finding so, while computing the assessable income of the assessee.
In view of the same, therefore, we uphold the order of the Ld.CIT(E) and dismiss the appeal of the assessee.
In the result, the appeal of the assessee is dismissed
Order pronounced on 25 th August, 2021.