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Income Tax Appellate Tribunal, BENCH : COCHIN
Before: SHRI GEORGE GEORGE K. & Ms. PADMAVATHY S.
Date of hearing : 01.03.2023 Date of Pronouncement : 08.03.2023 O R D E R Per Padmavathy S, Accountant Member: These appeals are by two assessees viz., Malanadu Farmers Society & Malanadu Milk Producers Society against the separate orders of the CIT, Exemption, Kochi at Trivandrum dated 21.3.2022 passed u/s. 263 of the Income-tax Act, 1961 [the Act] for the assessment year 2017-18.
The assessee is a charitable institution approved u/s. 12A of the Act. The assessee filed return of income for AY 2017-18 on 31.10.2017 returning NIL income. The case was selected for scrutiny under CASS and notice u/s 143(2) was duly served on the assessee. The AO called for various details and based on the same completed the assessment accepting the income returned by the assessee.
Subsequently, the CIT(Exemption) [CIT(E)] perused the 3. assessment records and notice that the assessee had made a turnover from milk, milk cream, etc. to the tune of rs.111,87,70,264 and that the AO did not examine the claim of the assessee for an exemption u/s. 11 of the Act. Accordingly, the CIT(E) issued a show cause notice u/S. 263 of the Act which reads as under:-
“"2. In your case, for the AY 2017-18, assessment was completed on 11/10/2019 accepting the return of income filed at 'NIL' income. On perusal of the details /documents available on records, it is noticed that your activities falls within the residual clause of Section 2(15) of the Income Tax Act, i.e advancement of any other object of General public Utility. You are engaged in the business of the trade of purchase and sale of milk and milk products thereby incurring a profit. As per the proviso to Section 2(15) of the Act, any activity other than General public Utility shall not be for charitable purpose if gross income includes income derived from profit and gains of business unless the business is incidental to the attainment of its objectives.
In such circumstances, you are requested to explain why the proviso to Section 2(15) will not be applicable in your case and the exemption allowed by Assessing Officer should not be disallowed.
In such circumstances, you are requested to explain why the assessment order passed u/s 143(1) of the Act in your case on 11/10/2019 shall not be treated as erroneous and be revised accordingly.” 4. The assessee filed a detailed reply dated 2.3.2022 (pg. 45 to 51 of PB) where the assessee submitted that the main object of the assessee is to protect small and marginal farmers and increase the living standards of farmers. The assessee also submitted that the entire income generated has been utilized towards the objects of the trust. The assessee further submitted that the proviso to section 2(15) is not applicable to the assessee since the object of the assessee is not “advancement of any other object of general public utility”, but for the specific purpose of benefit of small and marginal farmers. The assessee relied on Circular No.11/2008 dated 19.12.2000 in this regard.
The CIT(E) did not accept the submissions of the assessee and proceeded to set aside the order of the AO by holding that –
“7. A perusal of the assessment order reveals that it is a brief and cryptic order of three short paragraphs wherein the assessee's claim of being eligible for exemption u/s 11 has not been examined. It is pertinent to mention here that w.e,f 01.04,2009 as per proviso to section 2(15) of Income Tax Act 1961, the advancement of any other object of general public utility shall not be a charitable purpose, if it involves carrying on of any activity in the nature of trade, commerce or business for a cess or fees or any other consideration irrespective of nature of use or application. In the backdrop of the specific provision, the AO was duty bound to verify and examine the claim of the assessee as to whether its activities falls under the first limb of section 2(15) i.e."Relief to poor" as claimed by the assessee. Alternatively, the AO was duty bound to examine as to whether the assessee s case falls under the proviso to section 2(15). However, the AO has neither verified/examined the assessees claim under "relief to the poor' nor it is examined from the perspective of proviso to section 2(15).
In view of the utter failure to make any inquiry by the assessing officer while passing a briefs cryptic and non-speaking order the assessment order is held to be erroneous and prejudicial to the interest of revenue. The assessing officer has passed a stereo-typed order which simply accepts what the assessee has stated in its return and failed to make any inquiries which are called for in the circumstances of the case. In this regard, the judicial precedents are relied upon as held in the cases of Rampyari Devi Saraogi v. CIT, (1988) 67 ITR 84(SC), Tara Devi Aggarwal v. C1T, (1973) 88 ITR 232(SC), Gee Vee Enterprises v. Addl.C1T, (1975) 991TR 375 386(Del).”
The assessee is in appeal against the order of the CIT(E) before the Tribunal.
The ld. AR submitted that the AO during the course of assessment proceedings specifically enquired about the applicability of section 2(15) and directed the AR of the assessee to file a reply in this regard. The assessee filed reply dated 11.10.2019 along with Circular No.11/2008 and other details called for such as statement of income, assessment orders of earlier years, etc. The ld AR therefore submitted that the AO after perusing the said details has applied his mind to conclude the assessment accepting the income returned by the assessee. The ld AR drew our attention to the assessment orders of AYs 2011-12, 2012-13, 2014-15 & 2016-17 where the AO has verified the applicability of proviso to section 2(15) in assessee’s case and allowed the claim (pg. 71 to 83 of PB). The ld AR contended that the objects of the assessee remain the same and therefore the findings of the AO in earlier years have also been considered by the AO while concluding the assessment for the year under consideration.
8. On merits, the ld. AR submitted that –
“ The learned CIT(E) erred in declaring and limiting the activities of the appellant to that of only purchase and sale of milk. He has not appreciated the fact that the appellant society was formed with the main objective of protecting Nor, Small and Marginal Farmers and to increase their living standard, and the activity of purchase and sale of milk is incidental to the attainment of the objectives of the society. The entire activity of your appellant are for providing relief to poor, with special attention to small and marginal milk farmers, and none of the objects of the society is in nature of advancement of any other objects of public utility. Memorandum of Association reflecting the object of the same is enclosed herewith.(Page No. 58-68) As part of its objective, your appellant has established a model cattle farm at Theni. The Society is also educating and promoting farmers especially in the kcal areas of Tamilnadu, Viz. Surandai, Perayoor, Dindigul, Theni, about the benefits of milk farming for their betterment and as a means for their livelihood. The society is procuring milk generated by these farmers, by giving the best price and after chilling and basic processing, the same is sold to the pasteurization centres. The farmers are deriving a price benefit in the range of Rs. 2.94 to Rs.3.47 per litre based on the quality of milk provided by them, in comparison with the rice of Aavin (Tamilnadu Co- operative Milk Producers' Federation Ltd, a Govt. of Tamilnadu undertaking). Comparison chart showing benefit derived by lie farmers is enclosed herewith. (Page No. 84-86) This gives a great relief to is small and marginal farmers to meet their regular need for livelihood. The surplus generated from the activity is utilised for achieving its objectives which include assistance in various forms to the farmers. During the Year your appellant spent a sum of Rs.15,24,75,259/- for its objectives, ie for the welfare of the small and marginal farmers. (details enclosed Page No.70) The sales of the appellant are not in the nature of commercial receipts in the course of advancement of any other object of public utility as laid down in the proviso to Sec. 2(15), but these are receipts within the meaning of Sec. Ii4A). The net surplus from the above activity is used for relief of poor, which mentioned as 1st limb of Sec. 2(15). The Hon'ble Income Tax Appellate Tribunal, Hyderabad Bench A, in the case of DCIT, Circle 1(1) Hyderabad vs A.P State Civil Supplies Corporation Ltd (2016)160 ITD 117, held that, providing essential commodities to the people at subsidized rates should be considered to be providing relief to poor and, thus eligible for exemption under section 11. Your appellant is also doing the same activity, mentioned in the above decision, in a different way. The Society is purchasing milk from the small & marginal farmers at a reasonably high price, as compared to other organizations which are procuring milk from farmers and thereby helping, the poor, small and marginal farmers to find a better livelihood. This activity amounts to relief of poor. Your appellant is a charitable institution engaged in the activity in the relief of poor. The object for which the society was formed and the activities done groves that the society is existing solely for the relief of the poor, Small& Marginal Farmers. (Copy of Memorandum of Association and Rules and halation is enclosed Page No. 58-68) It is also submitted that proviso to Sec. 2(15) is not applicable in this case, as the activities of the society is covered under the 1s` limb of Sec 2(15).The proviso to Section 2(15) is applicable only in respect of residual clause of Soction2(15), ie." advancement of any other object of general public utility". Circular No. 11/2008 dated 19.12.2008 clearly clarifies that proviso to Sec. 2(15) of the Income Tax Act will not apply in respect of the first three blabs of Sec.2(15) ie 1. Relief of poor, 2. Education and 3. Medical relief. The relevant portion of the circular No. 11/2008 dated 19.12.2008 read as under:- “The newly inserted proviso to section 2(15) will not apply in respect of the first three limbs of section 2(15), i.e., relief of the poor, education or medical relief. Consequently, where the purpose of a trust or institution is relief of the poor, education or medical relief it will constitute 'charitable purpose' even if it incidentally involves the carrying on of commercial activities. 'Relief of the poor' encompasses a wide range of objects for the welfare of the economically and socially disadvantaged or needy. It will, therefore, include within its ambit purposes such as relief to destitute, orphans or the mod. disadvantaged women or children, small and marginal farmers, indigent artisans or senior citizens in need of aid. Entities who have these objects will continue to be eligible for exemption even if they incidentally carry on a commercial activity, subject, however, to the conditions stipulated under section 11(4A) or the seventh proviso to section 10(23C) which are that (i) the business should be incidental to the attainment of the objectives of the entity, and (ii) separate books of account should be maintained in respect of such business. Similarly, entities whose object is 'education' or 'medical relief' would also continue to be eligible for exemption as charitable institutions even if they incidentally carry on a commercial activity subject to the conditions mentioned above.” The Hon'ble Income Tax Appellate Tribunal - Kolkata in the case of ITO(E), Kolkota Vs. Sasha Association for Craft Producers (ITA NO 439¬441. Kat 201 7. held that "The newly Inserted Proviso to Section 2(15) will not apply in respect of the First Three limbs of Sec.2(15), ie relief of poor, education or medical relief. Consequently where the purpose of a trust or institution is relief of poor, education or medical relief it will constitute Charitable Purpose even if it incidentally involves the carrying on of commercial activities." The above Sasha Association for craft producers is engaged in uplifting indigent artisans, which is covered within the definition of relief of poor. The object of the appellant society is to protect the small and marginal fawn from the exploitation and betterment of the small and marginal farmers, and hence the activities are coming under the definition of relief of poor.”
The ld. DR submitted that the major income of the assessee is from sale of milk & milk products and therefore the O should have carried out a detailed enquiry in this regard as to whether proviso to section 2(15) is applicable to the assessee. The ld. DR also submitted that the AO has written a cryptic order and accordingly the CIT(E) has correctly invoked the provisions of section 263.
We have heard the rival submissions and perused the material on record. The PCIT has stated the order of the AO to be erroneous to the extent that the AO has not verified whether the activities of the assessee falls under the first limb of section 2(15) i.e. relief to the poor as claimed by the assessee and the that the AO failed to examine the assessee’s claim from the perspective of proviso to section 2(15). Before proceeding further, it is apposite to take note of the relevant extract of section 263 and the Explanation (2) to section 263 of the Act, which read as under :-
“Revision of orders prejudicial to revenue. 263. (1) The [Principal Chief Commissioner or Chief Commissioner or Principal Commissioner] or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer 89[or the Transfer Pricing Officer, as the case may be,] is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, 90[including,— **** Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer 94[or the Transfer Pricing Officer, as the case may be,] shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal 95[Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner,— (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.”
Thus, from close scrutiny of the provisions of section 263, it is evident that twin conditions are required to be satisfied for exercise of revisional jurisdiction under section 263 of the Act i.e., firstly, the order of the Assessing Officer is erroneous; and secondly, it is prejudicial to the interests of the revenue on account of error in the order of assessment. The Bombay High Court in the case of Gabriel India Ltd. (1993) 203 ITR 108 has explained as to when an order can be termed as erroneous as follows:-
From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an income tax officer acting in accordance with the law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order, unless the decision is held to be erroneous. Cases may be visualised where the Income tax officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income tax officer. That would not vest the Commissioner with power to examine the accounts and determine the income himself at a higher figure. It is because the Income tax officer has exercised the quasi judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion ………….. There must be some prima facie material on record to show that the tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed.
There is no dispute that u/s. 263 of the Act, the PCIT does have the power to set aside the assessment order and send the matter for a fresh assessment if he is satisfied that further enquiry is necessary and the assessment order is prejudicial to the interests of the Revenue. However, in doing so, the PCIT must have some material which would enable to form a prima facie opinion that the order passed by the AO is erroneous, insofar as it is prejudicial to the interests of the Revenue. In the present case, the PCIT has not brought out any material on record to substantiate that the activities of the assessee are covered under the proviso to section 2(15). We notice that the AO during the course of hearing has raised a query with regard to the applicability of proviso to section 2(15) and the assessee has filed a detailed reply in this regard (page 39 to 41 of paper book). The PCIT in his order has stated that further enquiry should have been done to verify the applicability of proviso to section 2(15) in assessee’s case. This view of the ld. PCIT, in our opinion, is not the right reason for exercising revisionary powers u/s. 263 of Act, for the reason that the assessee in response to AO’s specific query has substantiated by submitting various documents that the main objects of the trust is relief of the poor, small and marginal farmers which it is covered by Circular No. 11/2008 and the AO based on the submissions made has taken a conscious decision to accept the claim of the assessee. In our view the error envisaged by Section 263 of the Act is not one that depends on possibility as a guess work, but it should be actually an error either of fact or of law.
In view of the above discussion, we are of the opinion that the PCIT in the present case has wrongly invoked the jurisdiction under section 263 and the controversy in the present case is fully covered by the judgment of the Hon'ble Bombay High Court in the case of Gabriel India Ltd. (supra). Accordingly the impugned order of the PCIT with regard to the issue of setting aside the order of AO u/s.143(3) with regard to this issue is quashed.
This appeal of the assessee viz., Malanadu Milk Producers Society arises in identical facts and circumstances as in for the same AY 2017-18, except change in figures, and therefore for the reasons stated therein, the order u/s. 263 passed by the CIT(E) in this case is also quashed.
In result, both the appeals of the assessees are allowed.