Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “C” BENCH,
O R D E R
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
This appeal filed by the assessee is against the order of CIT(Exemptions), Mumbai vide Order No. ITBA/REV/F/REV5/2024- 25/1075306167(1) dated 30.03.2025 passed against assessment order u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 05.09.2022 for AY 2020-21.
2. Grounds taken by the assessee are reproduced as under: “1. On facts and circumstances of the case and in law, the Ld. Commissioner of Income-tax (Exemption) (CIT(E)) has erred in issuing a Notice and passing an AY 2020-21 Catholic Education Society order under section 263 of the Income-tax Act, 1961 (Act) when the assessment order is neither erroneous nor prejudicial to the interest of the Revenue.
On facts and circumstances of the case and in law, the Ld. CIT(E) has erred in issuing a Notice and passing an order under section 263 of the Act when the limited scrutiny assessment was initiated on the specific issue of payments made towards salary and rent, which was examined by the Ld. Assessing Officer (AO) in detail and was found reasonable and there was no violation of section 13 of the Act.
3. Without prejudice to above, on facts and circumstances of the case and in law, the Ld. CIT(E) has erred in issuing a Notice and passing an order under section 263 of the Act when the payments made towards salaries and rent are not excessive and there is no violation of section 13 of the Act hence the Revision order of the CIT (E) may be quashed and set aside.” 2.1. Grounds raised by the assessee are in respect of challenging the revisionary proceedings initiated u/s. 263 of the Act and passing order thereafter.
Brief facts of the case are that assessee is a charitable organization engaged in providing education since, 1987. It is a trust registered u/s. 12A vide Registration No. INS 25676 dated 16.04.1987. Return of income was filed on 31.01.2021 reporting total income at Nil by claiming exemption u/s.11. Assessee runs various schools and colleges in the name of Franciscan Nursery (K.G), Michael High School (Primary & Secondary), Marceline Junior College (Arts, Science & Commerce). The trust's main objective is to impart education to students ranging from primary school to junior. The trust consists of 282 teaching and non-teaching staff. It has a strength of nearly 8296 students enrolled in various institutions maintained by the assessee. Case of the assessee was selected for limited scrutiny under faceless assessment scheme as per CASS System to verify the following two issues:
AY 2020-21 Catholic Education Society a. Ratio of expenditure on Establishment, and Administration, to Expenditure on objects of the trusts is high in Schedule ER A&B of ITR b. Large payment of salary, rent, interest, etc. made to specified persons shown in (1) Annexure II of Form 10B (2) Gross receipts (Part B TI-2+3) of ITR.
3.1. Statutory notices u/s. 142(1) were issued requiring the assessee to explain its case on both the above stated issues which were duly complied with by furnishing detailed submissions along with corroborative documentary evidences. Ld. AO after being satisfied with the submissions so made completed the assessment by passing an order u/s. 143(1), accepting the return of income filed by the assessee. Subsequently, ld. PCIT from the perusal of records observed that assessment has been completed without making necessary enquiries and verification which should have been made in respect of trust making payments to specified persons u/s. 13(3). According to him, assessment was completed without making necessary enquiry or verification which should have been made in respect of reasonableness, genuineness and admissibility of expenses. Accordingly, a show cause notice dated 11.03.2025 was issued u/s. 263 which was duly complied with by the assessee. Ld. PCIT acknowledge the submissions made by the assessee in para 3.1. whereby it is noted that: “(i) The assessee submitted the details related to salary and rent expenses were duly submitted during the assessment proceedings. (ii) The assessee submitted that on similar issues for A.Y. 2017-18 and A.Υ. 2018-19, CIT(A) allowed the appeal of the assessee and for A.Y. 2017-18 the ITAT has also ruled in favour of the assessee.”
After considering the submissions made by the assessee, ld. PCIT by referring to explanation to Section 263 and various judicial precedents concluded impugned assessment order is erroneous in so AY 2020-21 Catholic Education Society far as it is prejudicial to the interest of revenue. He thus, set aside the impugned assessment order and gave direction to the ld. AO to verify the payments made to specified persons u/s. 13(3) so as to ascertain reasonableness, genuineness and admissibility of the expenses. Aggrieved, assessee is in appeal before the Tribunal.
4.1. Before us, ld. Counsel for the assessee pointed out that case of the assessee was selected for limited purpose of examining payments of salary and rent. Ld. AO had issued notice u/s.142(1) dated 12.11.2021. In the annexure to this notice in para 4 and 5, he raised specific query to justify reasonableness of the payments made to specified persons u/s.13(3) as well as in respect to expenditure incurred under the head establishment and administration. The content in para 4 and 5 of annexure to notice u/s. 142(1) are extracted below for ready reference: “4. On perusal of the Form No. 10B, it is observed that the following payments were made to the following persons. Please justify the reasonableness of these payments vis-à-vis provisions of section 13(2) of the Act and also prove these payments were not excessive. Sr.no Name of the person Amount Salary Rent 1 Mr. Moses Gomes 15,52,083 13,93,050 2 Jean Gomes 24,01,489 8,35,830 3 Tereasa Tellis 17,30,116 4 Mr. Savvy Mendonca 13,51,265 5,57,220 5 Elton Mendonca 10,69,215 6 Tulip Mendonca 7,01,741 7 Anita Gomes 2,85,700 8 Lauretta Gomes 1,48,580 9 Natty Gomes 1,48,580 10 Allwyn Gomes 10,83,123 5. On perusal of the schedule ER of ITR, it is noticed that the assessee-trust have been claimed huge expenditure under the heads establishment and Administration. Please furnish the copies of ledger extract for the said expenses. Also give Justification as to how the above transaction is as per the objects of the trust and not in violation of the same.” 4.2. Assessee made detailed reply thorough its electronic submissions on 23.12.2021. It furnished all the details including name, address,
AY 2020-21 Catholic Education Society designation, nature of duty, education qualification, amount paid, date of joining and years of experience in respect of salary paid to specified persons. It also furnished the comparison sheet of salary paid in the preceding 3 years for its top 50 employees. Details were also furnished in respect of all 296 employees with their PAN, education qualification, nature of duties. Assessee also furnished copies of ITR and computation of the trustees to demonstrate salary and rent which has been offered by them as income in their individual returns. In respect of rent, it furnished details of class room wise rent allocation for each section of the school, its calculation as well as valuation report issued by registered valuer. These detailed submissions form part of the paper book at page 63 to 70 and have been perused.
4.3. Ld. AO issued another notice u/s. 142(1) dated 07.03.2022 seeking inter alia, details about the employees and rent agreement as well as fare rent certificate from local municipality. Contents of the annexure forming part of notice u/s. 142(1) in this respect are reproduced as under: “5. Please state whether the conveyance allowance debited of Rs.4.33.876/-is added to trustees salaries for Income tax deduction purpose or not. Please produce evidence for the same.
6. In respect of reasonableness of rent to trustees being paid, please produce the Fair rent certificate from Local Municipality or from any other Government school/college within a radius of 2 k.m. from your trust compound.
Please produce the rental agreements with the trustee land owners. Please state whether both the land and buildings of the trust compound are owned by trustees?. If so, please state how there is addition to buildings of Rs. 1,27,84,680/- was shown in addition to Land & Buildings.” 4.4. In this respect also, assessee made a detailed submission dated 23.03.2022, along with furnishing copies of appointment letters, comparative salary, education qualification etc. This detailed submission forms part of the paper book at page 74 to 81 and has been perused. Ld. Counsel then refereed to observation of ld. AO in the AY 2020-21 Catholic Education Society impugned assessment order whereby in para 3 he stated “submissions of the assessee were perused and found to be reasonable and thus, additions are not warranted in this issue also.”. Thus, ld. Counsel asserted that ld. AO had made detailed quires on the two issues for which the case was selected for limited scrutiny and after having satisfied with the submissions made by the assessee, completed the assessment by accepting the returned income. Ld. AO had made specific queries to explain the reasonableness of the expenses claimed by the assessee which has been duly complied with to the satisfaction of the ld. AO.
4.5. He further referred to the order of Co-ordinate Bench in the assessee’s own case for AY 2017-18 in dated 04.06.2024, wherein additions were made by holding that assessee had made excessive payment on account of salary and rent to specified persons u/s. 13(3) and exemption claimed u/s.11 was denied. On these issues, the Co-ordinate Bench after considering the merits of the case, allowed the claim of the assessee. Factual position from the said order is extracted below: “9. We have considered the submissions of both sides and perused the material available on record. In the present case, on the basis that the assessee has made excessive payment on account of salary and rent to the specified persons u/s 13(3) of the Act, the AO denied the exemption claimed by the assessee u/s 11 of the Act. During the assessment proceedings, the AO noted that the assessee trust has made payment to specified persons u/s 13(3) of the Act as under:
Accordingly, the AO asked the assessee to explain and justify the payments made to the specified persons u/s 13(3) of the Act. After considering the submissions of the assessee, the AO considered the payment of salary total amounting to Rs.36,60,000/- as reasonable in comparison to the salary total amounting to Rs.78,19,236/- paid by the assessee and disallowed the excess of Rs.41,59,236/- as under: - 4.6. After considering the factual position, the Co-ordinate Bench held in para 18 in favour of the assessee by allowing the claim of expenses. It held that the payment made by the assessee on account of salary and rent is not found to be excessive, paid to specified persons u/s.13(3) and thus, held that assessee has rightly claimed exemption u/s.11. Para 18 in this respected is extracted below: “18. It is evident from the record, in order to justify that the payment of rent paid total amounting to Rs.16,32,084/-, the assessee furnished Market Rental Report prepared by M/s. Powle P. N. & Associates, Government Approved Registered Valuer, who computed the market rent of Rs.14,80,024/-. However, the AO merely on ad hoc basis considered Rs. 60,000/- as the monthly rent and AY 2020-21 Catholic Education Society disallowed the balance rental payments of Rs.9,12,000/-paid by the assessee. Therefore, we agree with the finding of the learned CIT(A) that the AO made the impugned addition on account of rental payment to specified persons u/s 13(3) of the Act without any basis. Accordingly, we find no infirmity in the findings of the learned CIT(A) on this issue and therefore, the same are upheld. Since the payment made by the assessee on account of salary and rent is not found to be excessive of what may be reasonably paid to specified persons u/s 13(3) of the Act, we are of the considered view that the provisions u/s 13(3)(c), 13(2) (c) r.w.s. 13(2)(g) of the Act are not attracted in the present case, and the assessee has rightly claimed the exemption u/s 11 of the Act. As a result, the grounds raised by the Revenue are dismissed.” 4.7. Ld. Counsel submitted that this issue had been addressed by the Co-ordinate Bench of ITAT Mumbai in assessee’s own case in the preceding years and, therefore, revisionary proceeding initiated by ld. PCIT when ld. AO had verified the payment of salary and rent to his satisfaction by issuing to notices u/s.142(1) in the present year, the said impugned assessment order ought not to be held as erroneous in so far as, it is, prejudicial to the interest of revenue. Per Contra, ld. CIT DR relied on the order of ld. PCIT.
We have heard both the parties and perused the material on record. We have gone through the submissions made by the ld. Counsel including the corroborative documents in the paper book. Admittedly, it is a fact on record that case of the assessee was selected for limited scrutiny for the two aforestated issues. Also, ld. AO had issued two notices u/s. 142(1) raising queries and asking detailed explanation with documentary evidence, on the issues for which revisionary proceeding was invoked. Assessee had made detailed submissions along with documentary evidences to justify the claim which was accepted by ld. AO. All these form part of paper book, relevant extracts from which are already reproduced above.
5.1. We find that it is not a case where there was no enquiry at all made by the ld. AO. Ld. PCIT has drawn his consideration by observing that ld. AO has not made necessary enquiries or verification which AY 2020-21 Catholic Education Society should have been made while completing the assessment. The issue regarding whether the assessment order is erroneous or prejudicial on the ground of insufficiency of enquiry has been dealt by the Hon'ble Delhi High Court in the judgment of ITO v. DG Housing Projects Ltd. (supra), which has been followed by various co-ordinate benches of the ITAT in various cases. Hon’ble High Court while adverting to the issue held that in cases of wrong opinion for finding on merit, the CIT has to come to the conclusion and himself decide that order is erroneous, by conducting necessary enquiry, if required and necessary before the order u/s 263 of the Act is passed. In such cases, the order of the AO will be erroneous because the order passed is not sustainable in law and the said finding must be recorded by CIT who cannot remand the matter to the assessing officer to decide whether the findings recorded are erroneous. In cases where there is inadequate enquiry but not lack of enquiry, again the CIT must give and record a finding that the order/enquiry made is erroneous. This can happen if an enquiry and verification is conducted by the CIT and he is able to establish and show the error or mistake made by the AO, making the order unsustainable in law. In some cases, possibly though rarely, the CIT can also show and establish that the facts on record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the AO had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable. The matter cannot be remitted for a fresh decision to the AO to conduct further enquiries without a finding that the order is erroneous, the condition or requirement which must be satisfied for exercise of jurisdiction u/s 263 of the Act. In such matters, to remand the matter/issue to the AO would imply and mean that the CIT has not examined and decided whether or not the order is erroneous but has directed the AO to decide the aspect/question. The Hon'ble Court further held that this distinction
AY 2020-21 Catholic Education Society must be kept in mind by the CIT while exercising jurisdiction u/s 263 of the Act and in the absence of the finding that the order is erroneous and prejudicial to the interest of revenue, exercise of jurisdiction under the said section is not sustainable. In most cases of alleged “inadequate investigation”, it will be difficult to hold that the order of the AO, who had conducted enquiries and had acted as an investigator, is erroneous, without CIT conducting verification/enquiry himself. The order of the AO may be or may not be wrong. CIT cannot direct reconsideration on this ground but only when the order is erroneous. An order of remit cannot be passed by the CIT to ask the AO to decide whether the order was erroneous. This is not permissible. An order is erroneous, unless the CIT holds and records reason why it is erroneous. Therefore, CIT must after recording reasons, hold that order is erroneous. The jurisdictional pre-condition stipulated is that CIT must come to the conclusion that the order is erroneous and is unsustainable in law. It was further observed by the Hon’ble High Court that the material, which the CIT can rely up on includes not only the records as it stands at the time when the order in question was passed by the AO but also records as it stands at the time of the examination by the CIT. Nothing prohibits CIT from collecting and relying new/additional material which evidence to show and state that the order of the AO is erroneous.”
5.2. We find that ld. PCIT in the present case has not carried out any enquiry of own and has merely set aside the assessment to the file of ld. AO directing him to verify the payments to specified persons and enquire in respect of reasonableness, genuineness and admissibility of expenses towards such payments. We find that Ld. PCIT in Para 4.1 of the impugned order has taken note of the amendment made in section 263 w.e.f. 01.06.2015. This amendment relates to Explanation 2 inserted in section 263 of the Act. The co-ordinate bench of Mumbai
AY 2020-21 Catholic Education Society ITAT has dealt with Explanation 2 as inserted by the Finance Act, 2015 in the case of Narayan Tatu Rane v. Income Tax Officer [2016] 70 taxmann.com 227 (Mum) to hold that the said Explanation cannot be said to have overridden the law as interpreted by the Hon'ble Delhi High Court in DG Housing Projects Ltd (supra), according to which the Ld. PCIT has to conduct an enquiry and verification to establish and show that the assessment order is unsustainable in law. The co-ordinate bench of Mumbai ITAT has further held that the intention of the legislature could not have been to enable the Ld. PCIT to find fault with each and every assessment order, without conducting any enquiry or verification in order to establish that the assessment order is not sustainable in law, since such an interpretation will lead to unending litigation and there would not be any point of finality in the legal proceedings. The opinion of the Ld. PCIT referred to in section 263 of the Act has to be understood as legal and judicious opinion and not arbitrary opinion.
5.3. Considering the above observations, on the issue considered by the Ld. PCIT in the impugned order, no action u/s.263 of the Act is justifiable and therefore revisionary order cannot be sustained under the facts and circumstances of the present case and judicial precedents dealt herein above. We, therefore, quash the impugned revisionary order u/s. 263 of the Act and allow the grounds raised by the assessee.
In the result, appeal of the assessee is allowed.