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Facts
The assessee, a company promoting automobile component industry, was initially granted exemption under sections 11/12 of the Income-tax Act. However, for A.Y. 2009-10, it chose not to claim exemption due to an amendment in Section 2(15) and declared income. The Assessing Officer completed assessment, which was later revised by the DIT(E) under Section 263, stating that the assessee, being a mutual organization, was not eligible for exemption and accumulated funds were taxable. The DIT(E) directed a de-novo assessment. The assessee's appeal against the DIT(E) order was withdrawn.
Held
The Tribunal noted that the DIT(E)'s order under Section 263 had become final as no appeal was filed against it. However, considering the peculiar circumstances and the directions of the Hon'ble High Court, the Tribunal restored the appeal to the file of the CIT(A). The CIT(A) was directed to decide the appeal afresh, considering the assessee's claim in light of sections 11(2) and 11(3) of the Act.
Key Issues
Whether the unutilized accumulated funds are taxable under Section 11(3) of the Income Tax Act, 1961, when the assessee is a mutual organization and had ceased to be involved in charitable activity.
Sections Cited
11(2), 11(3), 263, 143(3), 2(15), 11, 12
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Income Tax Appellate Tribunal, DELHI ‘A’ BENCH,
Before: SHRI SAKTIJIT DEY, & SHRI N.K. BILLAIYA
PER N.K. BILLAIYA, ACCOUNTANT MEMBER:-
This appeal by the assessee is preferred against the order of the ld. CIT(A) – 40, Delhi dated 23.03.2017 pertaining to A.Y. 2009-10.
The grievances of the assessee read as under:
That the Commissioner of Income-Tax (Appeals) ('CIT(A)') erred on facts and in law in upholding the action of the assessing officer in completing assessment vide order dated 18.03.2015 passed under section 143(3) read with section 263 of the Income-tax Act, 1961 ('the Act'), at an income of 14,80,79,030.
2. That the CIT(A) erred on facts and in law in observing that the DIT (Exemptions) had, vide order dated 27.03.2014 passed under section 263 of the Act, given definite findings qua treatment of unutilized accumulated funds, under section 11 (2) of the Act, in the hands of the assessee as on 01.04.2008.
2.1 That the CIT(A) erred on facts and in law in not appreciating that the DIT(E), vide order dated 27.03.2014 passed under section 263 of the Act, had not given definitive finding in the above regard and had merely set-aside the matter to the file of the assessing officer for de-novo examination/consideration.
2.2 That the CIT(A) erred on facts and in law in not appreciating that since the assessment order dated 18.03.2015 under section 143(3) read with section 263, was passed after de- novo examination of the issue, the powers of CIT(A) were not circumscribed by the observation / findings of DIT(E) contained in the order passed under section 263 of the Act.
3. That the CIT(A) erred on facts and in law in not appreciating that the action of the assessing officer in treating the accumulated funds under section 11(2) as on 01.04.2008, as income under section 11(3) on the ground that the appellant did not claim exemption under section 11 of the Act during the year under consideration, was bad in law.
3.1 Without prejudice, the CIT(A) erred on facts and in law in not appreciating that, at best, only an amount ofRs. 2,07,59,997, being the amount utilized during the relevant previous year out of funds accumulated under section 11(2), could be brought to tax as income under section 11(3) of the Act.
3.2 Without prejudice, the CIT(A) erred on facts and in law in not appreciating that out of accumulated funds under section 11(2), sum of Rs. 7,09,91,548 was utilized in the subsequent assessment years where benefit of exemption under section 11 of the Act was allowed to the appellant, and the same could not be brought to tax under section 11(3) of the Act.
3.3 Further, without prejudice, the CIT(A) erred on fats and in law in not appreciating that out of the accumulated funds under section 11(2) of the Act, aggregating to 12,16,04,117 as on 01.04.2008, an amount of Rs. 2,98,52,572, remaining unutilized, had been suo-motu offered to tax as income of the assessee in the assessment year 2014-15, and the same was not liable to tax under section 11(3) of the Act during the relevant assessment year.”.
Though the assessee has raised additional grounds, but at the very outset, the ld. counsel for the assessee stated that under instructions, he is not pressing the additional grounds. Therefore, the same are dismissed as not pressed.
Coming to the merits of the grounds, we note the following facts emanating from the orders of the authorities below.
The assessee is a company engaged in promoting interests of automobile component industry in India and is registered u/s 12A of the Income-tax Act, 1961 [the Act, for short]. Upto A.Y 2008-09, the assessee was allowed exemption u/ss 11/12 of the Act and also from A.Ys 2010-11 to 2013-14, exemption claimed u/ss 11/12 was allowed.
It is only in the impugned A.Y i.e. 2009-10, because of the amendment to section 2(15) of the Act w.e.f. 01.04.2009, out of abundant caution, the assessee decided not to claim exemption u/ss 11/12 and filed return of income on 29.09.2009 declaring total income at Rs. 1,92,16,240/-.
Assessment was completed vide order dated 13.12.2011 framed u/s 143(3) of the Act at an income of Rs. 2,64,74,910/-. Thereafter, the DIT(E), assuming powers conferred upon him by provisions of section 263 of the Act, set aside the assessment by making the following observations:
“The assessee has admitted that it is a mutual organization and a mutual organization is not entitled to claim exemption u/s 11 and 12. Thus, the unutilized accumulated balance u/s 11(2) to the tune of Rs. 12,16,04,117/- ceases to be accumulated for the objects of the trust and is taxable u/s 11(3) of the Act. Since the Assessing Officer failed to look into this aspect, assessment order was prejudicial to the interest of the Revenue.”
The said order u/s 263 of the Act was challenged before the Tribunal but the appeal was dismissed as withdrawn by the Tribunal in vide order dated 12.01.2017.
Pursuant to the order u/s 263 of the Act, the Assessing Officer reframed the assessment order and held that the assessee is not eligible for exemption u/ss 11/12 of the Act under the Principles of Mutuality and unutilized amount of Rs. 12,16,04,117/- accumulated u/s 11(2) of the Act in the preceding years ceased to be for the objects of the assessee and is taxable u/s 11(3) of the Act.
This assessment order was challenged before the ld. CIT(A) who dismissed the appeal holding that the directions of the DIT(E) have attained finality.
11. On proper appreciation of the entire factual matrix discussed hereinabove, we find that the ld. CIT(A) dismissed the appeal of the assessee by holding as under:
“4.1 I have considered the impugned order and also the submissions of the' appellant. I have also seen the order under section 263 dated 27.03.2014 passed by the ld. OIT (E) against which no appeal has been filed in the ITAT. In the return of income filed, the assessee on its own had not claimed exemption u/s 11 based on circular no. 11/2008 since the assessee association had dealt with non-members. Subsequently on going through the assessment records, the ld. DlT (E) noticed that there was total unutilized balance of Rs. 12,16,04,117/-. During the period under consideration, since the assessee had ceased to be involved in charitable activity, the amount so accumulated also teased to be accumulated or set apart for application for charitable purpose. It was noted that as the unutilized amount was not charged to tax, this mistake resulted in under- assessment of income by Rs. 12,16,04,1"17/ -. After giving an opportunity of being heard to the assessee, an order was passed under section 263 by the ld, DlT (E) held as under:
“6. It is seen that the AO did not examine the issue of taxability of the unutilized amount accumulated u/s. 11(2) of the Act once the assessee has ceased to be a charitable organization. By assessee's own admission, it is mutual organization. A mutual organization cannot be held to be a charitable organization in terms of section 2(15) of the Act and, t7U1S, is not eligible for any benefit u/s. 11 of the Income Tax Act, 1961. The amount accumulated u/s. 11(2) thus ceases to be accumulated for the objects of the trust and is thus taxable u/s. 11(3) of the income Tax Act, 1961. As the AO [ailed to look into this aspect, the assessment so framed is held to be erroneous. It is also prejudicial to the interest of revenue as unutilized accumulated balance of Rs. 12~16,04,117/- escaped to be assessed to tax.
4.2 It is seen from the above that the ld, DlT (E) gave a definite finding. in the matter and set aside the matter to the Assessing Officer to examine and frame the assessment order after calling and examining necessary details/evidences and after giving the assessee due opportunity of being heard. An appeal had been filed against the order under section 263 passed by the ld. DlT (E) in the ITAT but the same was subsequently withdrawn. In pursuance of the directions- given;- the- matter-was- examined- and the –assessing officer proceeded - to- tax- the unutilized accumulated balance which is the subject matter of this appeal.
4.4 In the case of Herdillia Chemicals Ltd. vs .Commissioner of lncome-tax [(l997) 90 TAXMAN 314 (80M.)], the Hon'ble Bombay High Court have held that though appeal was maintainable from the fresh order passed by the Assessing Officer to give effect to a revisional order or an appellate order, only such issues could be agitated in such appeal which had not attained finality by virtue of earlier orders of revisional or appellate authorities, It was not open in such an appeal to agitate any point which had already been decided by the revisional or appellate authorities in their order. The Hon'ble Court have held as under:
'10 .... The Tribunal, in this case, in our opinion, was right in holding that the revisional order, wherein a definite finding is recorded on both the points at issue, having become final on account of the failure of the assessee to pursue the statutory remedies provided in the Act against that order, the assessee cannot be allowed to challenge such concluded findings collaterally in an appeal filed against the fresh order passed by the ITO with. a view to giving effect to the same.
In our opinion, though appeal is maintainable from the order passed by the ITO to give effect to a . reuisional order or an appellate order, only such issues can be agitated in such appeal which hate not attained finality by virtue of earlier orders of the revisional! or appellate authorities. J t is not open. in such an appeal to agitate any point which has already been decided by the revisional or the appellate authorities in their order.
4.5 In the case under consideration, no appeal has been filed against the order of the ld. ClT(E) under section 263 and hence the issue regarding taxing the unutilized accumulated balance has become final. In view of the decision of the Hon'ble Bombay High Court in the case of .Herdillia Chemi&;ls Lt .vs. Commissioner of Income-tax (supra), this issue cannot be agitated in appeal. “
Order of the ld. CIT(A) is dated 23.03.2-017 which means that at the time of passing of the order, order of the Hon'ble High Court of Delhi was not available, which is available before us.
We have carefully perused the order of the Hon'ble High Court of Delhi preferred by the assessee against the order of this Tribunal in order dated 12.01.2017 by which the Tribunal dismissed the appeal of the assessee preferred against the order of the DIT(E) u/s 263 of the Act. The order of the Hon'ble High Court reads as under:
“The assessee had questioned the invocation of Section 263 of the Income Tax Act, 1961 (hereafter referred to as "the Act") by the Commissioner in an appeal to the IT A T which was subsequently withdrawn. The impugned order recorded the withdrawal of that appeal.
In the meanwhile, the concerned AO gave effect to the substantive order of the CIT(A) and brought to tax the amounts under Section 11(3) of the Act. The assessee's appeal to the CIT(A) was rejected primarily on the ground that it had withdrawn its previous appeal questioning the assumption under Section 263 of the Act. It is not disputed that the assessee's appeal (appeal to the IT AT) against the order of the CIT(A) (dated 23.03.2017) is pending before the IT AT.
Having regard to these peculiar circumstances, it is clarified that the ITA T should consider the substantive merits of the appeal with respect to the assessee's taxability of amounts under Section 11(3) of the Act without in any manner holding adversely against it, for the withdrawal of the previous appeal (which was concerned only with the question of assumption of taxability under Section The appeal is disposed of in the above terms.”
It can be seen from the above findings of the Hon'ble High Court [supra] that the contention of the assessee has to be considered within the provisions of section 11(3) of the Act. Therefore, in the interest of justice and fair play and in line with the directions of the Hon'ble High Court of Delhi [supra], we restore this appeal to the file of the ld. CIT(A). The ld. CIT(A) is directed to decide the appeal afresh considering the claim of the assessee in light of provisions of section 11(2) and 11(3) of the Act after affording reasonable and adequate opportunity of being heard to the assessee.
In the result, the appeal of the assessee in is allowed for statistical purposes.
The order is pronounced in the open court on 03.01.2024.