BHARAT DIAMOND BOURSE,MUMBAI vs. DY CIT (EXEMPTION)-1(1), MUMBAI

ORDER PER OM PRAKASH KANT, AM These three appeals by the assessee are directed against three separate revision orders each dated 16/03/2021, passed under section 263 of Income Tax Act, 1961 (in short ‘the Act’) by the Learned Commissioner of Income Tax Bharat Diamond Bourse 2 917 & 918/M/2021 (Exemption)-Mumbai [in short ‘the Ld. CIT(E)’] for assessment year 2009-10, 2010-11 and 2011-12 respectively. As common issue in dispute is involved in these appeals, same were heard together and disposed off by way of this consolidated order for convenience and avoid repetition of facts.

2.1 The parties agreed that appeal for assessment year 2011-12 should be argued first and therefore accordingly, the for Bharat Diamond Bourse 3 ITA Nos 916, 917 & 918/M/2021 assessment year 2011-12 is being adjudicated firstly. The grounds raised in the appeal for AY 2011-12 are reproduced as under:

On the fActs and in the circumstances of the case and in law, the Ld. CIT(E) erred in exercising powers under section 263 of the Act and thereby setting aside the assessment order passed by the Ld. Assessing Officer under section 143(3) read with section 254 of the Act. The Ld. CIT(E) failed to appreciate the explanation offered by the appellant in response to the show cause notice issued u/s 263 of the Act. The appellant prays that the order u/s 263 of the Act passed by the Ld. CIT(E) be quashed/set aside or struck down as bad in law and without jurisdiction.

Bharat Diamond Bourse 4 917 & 918/M/2021 3.1 The assessee filed its return of income for the year under consideration on 30/09/2011 declaring total income at Nil. The major activity carried out by the assessee included providing infrastructural facilities of handling, storage and clearance of import and export cargoes of diamonds, precious and semiprecious stones etc. Meanwhile, the Director of Income Tax (Exemption), Mumbai cancelled the registration (i.e. which was granted to the assessee on 21.01.1986 under section 12 of the Act), in terms of section 12AA(3) dated 27/12/2011. During assessment proceedings, the Assessing Officer noted this fact of cancellation of the registration and accordingly denied the benefit of section 11 in the assessment order passed on 27/03/2014 under section 143(3) of Act. The Assessing Officer also held that in view of fee charged for commercial activity of handling, carting, custom expenses etc., which exceeded threshold limit of ₹25 lakh, the assessee was hit by the amended provisions of section 2(15) of the Act i.e. advancement of any other object of general public utility in the nature of trade and commerce, and therefore, he assessed the reimbursement of ‘handling’, ‘carting’, ‘custom expenses’ and ‘other expenses’ as “business income” of the assessee.

3.2 On further appeal, the Ld. CIT(A) upheld the finding of the Assessing Officer.

Bharat Diamond Bourse 5 917 & 918/M/2021 3.3 On further appeal, the Tribunal in order dated 16/08/2017 in ITA No. 5299/Mum/2015, following the finding of the Tribunal in assessee’s own case for assessment year 2009-10 and 2010-11, restored the matter back to the file of the Ld. Assessing Officer for fresh adjudication on merits after considering the activity of the assessee that are hit by the amended definition of section 2(15) of the Act and accordingly decide the issue of tax exemption u/s 11 of the Act on such activities. In assessment year 2009-10, the Tribunal restored the registration under section 12A of the Act.

3.4 In consequential assessment order dated 23/12/2018, the Assessing Officer after taking into consideration detailed submission of the assessee, again held that entire activities of the assessee are in the nature of advancement of the object of general public utility which relates to trade, commerce and business or activity rendering services in relation to trade, commerce or business of Gems, Diamond and Jewelry. The Assessing Officer observed that turnover of the assessee was exceeding the maximum threshold limit for availing exemption u/s 11 of the Act, and therefore, it was hit by section 2(15) of the Act. In view of the detailed finding, [available in para 7 (sub para a to q) of the impugned assessment order], the Assessing Officer denied exemption under section 11 of the Act. Thereafter, he bifurcated the assessed income Bharat Diamond Bourse 6 917 & 918/M/2021 under the head ‘profit and gains of the business’ and ‘income from other sources’, observing as under: “9. From the Income & Expenditure Account, it is seen that the total receipts of the assessee are Rs.42,19,03,724/- (Rs.12,84,98,203/- credited to the I&E A/c. and Rs.29,34,05,522/- being "Income during the Construction Period".) The Business Income is computed taking into account receipts of Rs.7,66,10,612/-. The remaining Income of Rs.34,52,93,113/- (Rs.42,19,03,724/-minus Rs.7,66,10,612/-) to be taxed as 'Income from Other Sources'.

10. Similarly, the total expenditure as per Income & expenditure Account is Rs.57,50,16,327/- and deduction allowed as Business expenditure is Rs.2,53,01,887/- (being Payment of Expenses to MMTC and Customs). Thus, Business Income' works out to Rs.5,13,08,725/-.

3.5 Further, following the direction of the Tribunal (supra), the Assessing Officer verified the claim of the assessee regarding IAAI handling charges, and allowed relief to the assessee observing as under:

Bharat Diamond Bourse 7 917 & 918/M/2021 “14.1 The submission made by the assessee is verified with the records. The same is found to be correct. While completing the assessment for Assessment Year 2005 - 2006, a sum of ₹4,38,34,270/- has been assessed as income in respect of the outstanding liability for IAAI handling Charges as at 31.03.2005 Rs. 4,12,83,280/- and Provision for IAAl Handling charges for the year 2004 - 2005 Rs. 25,50,990/-, Similarly, the remaining two items of Rs. 25,91,640/- and Rs. 3,99,150/- have also been disallowed in the assessments for Assessment Years 2006 – 2007 and 2007 - 2008 respectively. Since the same amount cannot be taxed twice, the assessee is entitled to deduction for the said sum of Rs.4,68,25,060/-.” 3.6 Finally, the Assessing Officer assessed total income at loss of ₹19,99,37,660/- observing as under: ₹ Business Income 5,13,08,725/- Less: IAAI Handling Charges written back during the year as 4,68,25,060/- discussed Para 14 Income from Other Sources as per Order dated 24.05.2016 (-)20,44,21,328/- u/s 154 of the Act Total Income (-)19,99,37,663/- Rounded Off u/s 288A (-)19,99,37,660/- 4. Against the assessment order, the assessee preferred appeal before the Ld. CIT(A). Meanwhile, during pendency of the appeal before the Ld. CIT(A), the Ld. CIT (Exemption) called for the assessment records and found that assessment order was erroneous insofar as prejudicial to the interest of the revenue and accordingly, he issued notice under section 263 of the Act to the assessee on following two issues:

Bharat Diamond Bourse 8 917 & 918/M/2021 “(b) However, it is seen that the claim of donation of ₹3,75,00,000/- which was claimed as application has been allowed as expenditure. This was not allowable. (c) While going through the assessment records, it is further noticed that the Return of Income for AY.2011-12 was filed on 30/09/2011 at Sr.No.1372 wherein the assessee has disclosed Nil Income. The computation attached along with RO1 has also shown that the income from property held under trust at Rs.60,30,56,669/- and application on the objects of the trust of Rs.59,75,29,565/- resulting into surplus of Rs.55,27,104/- which is allowed u/s.11(1) as such the total income. was disclosed at Rs.Nil. However, it is noticed that in the assessment order passed u/'s. 143(3) r.w.s. 254 of the Act dated 23/12/2018 the AO has allowed loss of Rs. 19, 93,37,660/-. From these facts it is noticed that the returned income was Nil and assessed income is Loss of Rs.19,93,37,660/- as such the assessed income is less than the returned income. As the proceedings w/s. 143(3) were initiated for assessment and these does not permit that assessed income can be less than the returned income.”

On verification of assessment records, it is apparent that the AO has passed an order that is erroneous in so far as it is prejudicial to the interests of Revenue. The AO has framed an order allowing loss to the assessee, without basic verification / scrutiny of the facts on record. It is undisputed that the total, income disclosed by the assessee was NIL by the Hon'ble Supreme Court in the case of Goetz (India)Ltd. Vs. CIT (2006] 284 ITR 323 (SC) that an additional claim cannot be made before the Assessing Officer, as there is no provisions under the Income Tax Act to make amendment/modification in the return income without filing a revised return within the time tallowed under Section 139 of the Act. In the present case the Assessing Other has modified the income of the assessee in his can be assessed at a figure higher than the returned lass, nor a further refund can be given except what was due on the basis of returned income.

In view of the facts and circumstances as narrated above, by virtue of powers vested in the undersigned vide Section 263 of the Act, the assessment order is set aside with direction to the AO to redo the assessment in the light of the above observations and after giving the assessee due opportunity of being heard.”

7.1 Further he referred to copy of original assessment order dated 27/03/2014 passed under section 143(3) of the Act, available on page 32 to 46 of the paperbook. He submitted that the Assessing Officer has made identical Bharat Diamond Bourse 11 917 & 918/M/2021 bifurcations of the total income under the heads ‘profit and gains of the business’ and ‘income from other sources’ and worked out loss of ₹20,44,21,328/- under the head ‘income from other sources’. The Ld. counsel submitted that the then CIT (exemption), initiated revision proceeding under 263 of the Act against the said assessment proceeding. He referred to copy of show cause notice issued under section 263 of the Act dated 2/02/2016, a copy of which is available on page 50 to 52 of the paperbook. After considering the submission of the assessee, the said proceedings were dropped by the Ld. CIT(exemption) vide order dated 16.03.2016, a copy of which is available on page 61 of the paperbook. In view of the background of the proceedings u/s 263 dropped against the original assessment proceeding, the Ld. counsel of the assessee submitted that on the basis of the identical facts of bifurcating the total income into the heads ‘profit and gains of the business’ and ‘income from other sources’, the action of the present CIT(exemption) amounts to merely change of opinion, which is not permitted in law. In support of his contention, he relied on the decision of the Hon’ble High Court of Delhi in the case of Deputy Director of Income Tax (E) Vs Petroleum sports promotion Board reported in (2014) 88 CCH 0128 (Delhi). The Ld. counsel also relied on the decision of the Hon’ble Supreme Court in the case of Greenwood Corporation reported in 314 ITR 81 (SC).

Bharat Diamond Bourse 12 917 & 918/M/2021 8. The Ld. DR on the other hand relied on the order of the Ld. CIT(E) and submitted that assessment order has been held erroneous by the CIT(E), both on the ground of erroneously allowing donation paid as expenditure and assessed income less than the returned income. He submitted that Assessing Officer has not examined the issues in the assessment proceeding and therefore Ld. CIT(E) is justified in revising the assessment order. He also contested the argument of the Ld. counsel of the assessee that there is change of opinion on the same set of facts. He submitted that Ld. CIT(E) while dropping the 263 proceedings vide order dated 16/03/2016, has not given any reasoning as why the proceedings were dropped and therefore present proceeding cannot be treated as change of opinion.

9.1 On the second issue of assessed income being less than the returned income and thus loss was allowed by the Assessing Officer erroneously, is concerned, the CIT(E) has held that Assessing Officer has allowed loss to the assessee without basic verification/scrutiny of the facts on record. However, on perusal of the assessment order, we find that the Assessing Officer has merely allowed the claim of the IAAI handling charges on the direction of the Tribunal (supra) and no other claim has been allowed. The Assessing Officer has denied exemption u/s 11 of the Act on the entire surplus and held the activity of the assessee as business activity. Accordingly, the Assessing Officer has assessed the income of the assessee as business activity under that ‘profit and gains of the business’ and residual income under the head ‘income from other sources’.

Bharat Diamond Bourse 14 917 & 918/M/2021 He has accordingly bifurcated the receipt and expenditure under the heads ‘profit and gain of the business’ and profession’ and ‘income from other sources’. Thus in the result, there is no change in the total assessed income of the assessee vis-à-vis returned income of the assessee except claim of IAAI handling charges allowed as per the direction of the Tribunal (supra). The Assessing Officer has given above finding after due verification, which is evident from the query raised and reproduced in para 6.1.1 of the assessment order. The submission made by the assessee in response have also been reproduced in para 6.2 of the assessment order. Thereafter only, the Assessing Officer has given detailed finding in para seven of the assessment order. In the above circumstances, the finding of the Ld. CIT(E) that loss has been allowed without verification or scrutiny is fallacious and without appreciation of the finding of the Assessing Officer. In the relevant assessment year, an assessment order could be held erroneous if there is total lack of enquiry on the issue in dispute. The Hon’ble Delhi High Court in decision dated 09.07.2013 in the case of Director of Income Tax v. Jyoti Foundation in ITA No. 267/2013, held that order which are passed without inquiry or investigation are treated as erroneous and prejudicial to the interest of Revenue, but orders which are passed after inquiry/investigation on the question/issue are not per se or normally treated as erroneous and prejudicial to the interest of Revenue Bharat Diamond Bourse 15 ITA Nos 916, 917 & 918/M/2021 because the Revisionary Authority feel and opines that further inquiry/investigation was required or deeper or further scrutiny should be undertaken. In cases, where there is inadequate inquiry but not lack of inquiry, the Commissioner must record a finding that order/inquiry made is erroneous. This can happen if any inquiry and verification is conducted by the Commissioner and he is unable to establish and show the error or mistake made by the AO, making the order unsustainable in law. An order of merit cannot be passed by the Commissioner to ask the Assessing Officer to decide whether the order was erroneous. But in the instant case, Ld. CIT(E) has wrongly assumed that Assessing Officer has allowed loss to the assessee and failed to establish total lack of enquiry on the issue of loss allowed to the assessee. In the circumstances, we set aside the finding of the Ld. CIT(E) of holding the assessment order erroneous insofar as prejudicial to the interest of the revenue. The grounds of the appeal of the assessee are accordingly allowed.

9.2 Now we take up the appeal of the assessee for assessment year 2009-10 and 2010-11. We find that grounds identical to assessment year 2011-12 have been raised and therefore, for brevity we are not reproducing the same.

9.3 Both in assessment years 2009-10 and 2010-11, the Ld. CIT(E) has held the assessment order is erroneous insofar as prejudicial to the interest of the Bharat Diamond Bourse 16 917 & 918/M/2021 revenue on the ground of application of donation was allowed by the Assessing Officer as expenditure erroneously. In assessment year 2009-10 the amount of such a donation is of ₹1.62 crores whereas in assessment year 2010-11, amount of said donation is ₹3.25 crore. The finding of the Ld. CIT(E) in assessment year 2009-10 is reproduced as under:

On verification of assessment records, I find that despite the charitable states of the assessee trust being rejected; and proviso to Section 2(15) of the-Act-being invoked, the claim of application on account of donation was allowed as expenditure. In doing so, the AO has passed an order that erroneous in so far as it is prejudicial to the interests of revenue within the meaning of Section 263 of the Act. Hence the assessment order dated 24/12/2018 is set aside with a direction to the AO to redo the assessment in the light of above observations. The AO is also directed to examine the alternate plea raised by the assessee trust and decide the same on merits. Needless to state, the AO will give the assessee trust reasonable opportunity of presenting its case before finalizing the assessment.

Bharat Diamond Bourse 18 917 & 918/M/2021 11. In the result, the appeals of the assessee for assessment years 2009-10 and 2010-11 are dismissed, whereas appeal for the assessment year 2011-12 is allowed.

Order pronounced in the open Court on 28/02/2022.