SHEILA GOPAL FOUNDATION ,MUMBAI vs. THE CIT (EXEMPTIONS), MUMBAI

The assessee has raised the following grounds:- “1. On the facts and in the circumstances of the case and in law, the learned CIT(Exemptions) has erred in invoking provisions of Section 263 of the Act- a.) when appeal filed before CIT (A) is pending for hearing on the same subject matter; b.) CIT(Exemptions) erred in applying his views where two views are possible, and c.) CIT(Exemptions) erred in treating order passed by the A.O. as an erroneous order in insofar as it is prejudicial to the interest of the revenue without considering the documents and submission made by the assessee during assessment proceedings.

The assessee is a charitable trust and was granted registration under section 12A of the Income-tax Act, 1961. The assessee filed return of income on 30/09/2016 for the assessment year under consideration declaring total income at Nil after claiming exemption under sections 11 & 12 of the Income- tax Act, 1961. The assessment was completed under section 143(3) on 14/12/2018 at the total income of Rs.11,64,89,840/-. Thereafter, the Commissioner of Income-tax (Exemption) noticed that the assessment order passed by the Assessing Officer under section 143(3) dated 14/12/2018 is erroneous sofar as it is prejudicial to the interest of Revenue as the Assessing Officer has allowed the claim of expenditure on account of donation made by the assessee to another trust after holding the assessee as not eligible for exemption under section 11 of the Income-tax Act, 1961, due to violation of provisions of section 13(2) of the Income-tax Act. The Commissioner of Income-tax (Exemption) issued a show cause notice under section 263 on 09/02/2021 raising following issues:- “(a) During the assessment proceedings the Assessing Officer had invoked provisions of section 13(2) to deny the exemption u/s 11 since the assessee had advanced donation of Rs. 12,51,00,000 to another charitable trust where the trustee of the assessee is a trustee. Scrutiny of the computation of the income in the assessment order revealed that the assessing officer had allowed expense

Before the Tribunal, the Ld.AR of the assessee has submitted that the donation given by the assessee trust is an expenditure incurred by the assessee on charitable activity of providing education. He has further submitted that the object of the assessee trust as well as Sind Education Trust are common and identical and, therefore, the donation given to the said trust would amount to applying the income of the assessee for charitable purpose. The Ld.AR has further contended that since the issue of denial of eligibility of exemption is binding in appeal before the Commissioner of Income-tax (Appeal), therefore, the Commissioner of Income-tax (Exemption) has no jurisdiction to invoke the provisions of section 263 on such issue pending in appeal. He has referred to clause (c) of Explanation (1) of section 263(1) of the Income-tax Act and submitted that the jurisdiction of the Commissioner is barred on an order of the Assessing Officer which is subject matter of any appeal and only to the extent where such matters had not been considered and decided in such appeal can be taken up under the provisions of section 263. The decision of the Assessing Officer in allowing the donation to another trust as expenditure while determining the total income of the assessee is one of the possible views and, therefore, the Commissioner is not permitted to invoke the provisions of section 263 merely because he does not agree with the view of the Assessing Officer. In support of his contention, he has relied upon the judgement of Hon’ble Supreme Court in case of Malabar Industries Ltd vs CIT 243 ITR 83(SC) as well as in case of CIT vs Max India Ltd 295 ITR 282 (SC) and submitted that the Hon’ble Apex Court has held that on every loss of revenue as a consequence of an order of Assessing Officer, cannot be treated as prejudicial to the interest of the Revenue. If Assessing Officer has adopted one of the course permissible in law and it has resulted in loss of revenue or where two views are possible and Assessing Officer has taken one view with which the Commissioner of Income-tax does not agree, it cannot be treated as an erroneous order prejudicial to the interest of Revenue, unless the view taken by the Assessing Officer is unsustainable in law. He has also referred various other decisions of Hon’ble High Courts on this point to substantiate his argument. The Ld.AR has also contended that the provisions of section 13 of Income-tax Act are not applicable in the case of the assesse and violation of provisions of section 13(1)(c) does not tantamount to denial of total exemption under section 11 of the Act. Thus, the Ld.AR has submitted that the impugned revision order passed by the Commissioner of Income-tax (Exemption) is not sustainable in law and liable to be quashed.

On the other hand, the Ld.DR has submitted that the Assessing Officer has committed an error by not considering the issue of allowability of claim of donation given by the assessee to another trust after the assessee was held to be not eligible for exemption under section 11 of the Income-tax Act. He has further submitted that it is a logical legal consequence that the donation given by the assessee cannot be allowed as an expenditure after the assessee’s eligibility for exemption under section 11 is denied. He has relied upon the impugned order of the Commissioner of Income-tax (Exemption).

We have considered the rival submissions as well as the relevant material available on record. The issue before us is limited, as to whether allowing the claim of donation to another trust given by the assessee would render the assessment order as erroneous insofar as prejudicial to the interest of the Revenue. At the outset, we note that the assessee has given the loan during the year under consideration to another charitable trust where the trustee of the assessee is also one of the trustees of that trust. Therefore, the Assessing Officer held that the donation given by the assessee of Rs.12,51,00,000/- to another trust is in contravention of the provisions of section 13(2) of the Income-tax Act as one of the trustees of the assessee is also the trustee of that trust. The assessee has not disputed the factual position on the transaction of advancing loan of Rs.12,51,00,000/- during the year under consideration to another trust where the trustee of the assessee is also one of the trustees. The Assessing Officer finally held in para 4.3 as under:- “4.3. In view of the above discussion, once the assessee has committed default / violation of provisions of Section 13 of the Act, the assessee is not allowed to claim exemption under section 11 and 12 of the Act in respect of any income of the assessee. I therefore reject the claim of the assessee and hold that the assessee trust is not eligible for any exemption U/s.11 and accordingly tax entire income of the assessee trust denying the benefit of exemption U/s.11I in totality. Thus, surplus of Rs. 11,64,89,8407- is being added back to the income of the assessee.”

It is clear from the finding of the Assessing Officer that he held the assessee trust is not eligible for any exemption under section 11 and consequently taxed the entire income of the assessee trust by denying the benefit of exemption under section 11 in totality. The Assessing Officer added the entire surplus to the income of the assessee. Therefore, the issue of claim of donation is directly consequential to the decision taken by the Assessing Officer on the eligibility of exemption under section 11 of the Act. Thus, the claim of donation allowed by the Assessing Officer while passing the assessment order is contradictory to the decision taken by the Assessing Officer as referred in para 4.3 of the assessment order. To that extent we do not find any error or illegality in the impugned order of the Commissioner of Income-tax (Exemption) as well as invoking the provisions of section 263 of the Act. However, the allowability of the claim on account of donation to another charitable trust is also subjected to the outcome of issue of denial of the exemption under section 11 in totality which is pending before the CIT(A). Therefore, even if the Assessing officer has to consider this issue of allowability of the claim of donation given to another trust, the same has to be finally decided as per the outcome of the appeal filed by the assessee.

Sofar as objection raised by the assessee that the Commissioner of Income-tax (Exemption) cannot invoke the provisions of section 263 when the issue is pending before the CIT(A), we find that when the Assessing Officer has allowed the claim of donation without even without even examining such claim despite denial of benefit of exemption under section 11 in totality then the said issue cannot be said to have been pending in the appeal before the CIT(A). Even otherwise, as per clause (c) of Explanation 1 of section 263(1), the Commissioner has the power to such matter which has not been considered and decided in the appeal. Accordingly, we do not find any merit or substance in this contention and the issue raised by the assessee.

In the facts and circumstances as discussed above, we modify the impugned order of the Commissioner of Income-tax (Exemption) to the extent of para 4 and remit the issue of allowability of the claim of donation to the Assessing Officer instead of doing the assessment de novo. At the cost of repetition, we may clarify that we have not expressed any view either on the issue of denial of exemption under section 11 as the view taken by the Assessing Officer or the allowability of the claim of donation given to another trust. The Assessing Officer has to take his independent view on the issue of allowability of donation.

In the result, appeal is partly allowed. Order pronounced in the open court on 01/04/2022