CIT (Exemption) Vs Dhaneswar Rath Institute of Engineering & Medical Sciences (Orissa High Court)
The Orissa High Court examined an appeal by the Commissioner of Income Tax (CIT – Exemption) against an order of the Income Tax Appellate Tribunal (ITAT). The core issue revolved around the CIT’s decision to revise an assessment order under Section 263 of the Income Tax Act, 1961. The Assessing Officer (AO) had allowed Dhaneswar Rath Institute of Engineering & Medical Sciences (the assessee) to claim depreciation on assets as an application of income for charitable purposes under Section 11, despite the full cost of the assets not being claimed as such application in the year of purchase. The CIT deemed the AO’s order “erroneous and prejudicial to the interest of the revenue” due to alleged lack of sufficient inquiry.
The High Court noted that the ITAT found the AO had indeed made adequate inquiries. The assessee had consistently claimed depreciation as an application of income in preceding years, a fact known to the AO who had access to previous records. The assessee demonstrated it had opted for claiming depreciation consistently, rather than claiming the full asset cost upon acquisition. The court emphasized the “rule of consistency,” citing precedents like K. Ajit Babu vs. Union of India and Jayaswals NECO Ltd. vs. CCE, which underscore the importance of predictability and uniformity in judicial and quasi-judicial decisions. While acknowledging that res judicata doesn’t strictly apply to different assessment years (Bharat Sanchar Nigam Limited vs. Union of India), the principle of consistency dictates that authorities should generally adhere to previous findings on the same facts and law unless material changes occur.
The court rejected the Revenue’s assertion that the assessee failed to provide documentary evidence. It pointed to the ITAT’s finding, based on audited financial statements from assessment year 2012-13 to 2016-17, that the assessee consistently claimed only depreciation, not the cost of assets, as application of income under Section 11. This factual finding, uncontroverted by the Revenue in the appeal, demonstrated that the AO’s inquiry was sufficient, considering the established pattern. The court referenced Gee Vee Enterprise vs. Additional Commissioner of Income Tax, which clarified that an order could be erroneous if an AO fails to inquire when circumstances warrant, but found that the consistent practice negated the need for further detailed probing in this specific instance.
Furthermore, the court examined the legal validity of claiming depreciation as an application of income for charitable trusts. It referred to decisions like CIT vs. Institute of Banking (Bombay High Court), affirmed by the Supreme Court in CIT vs. Rajasthani and Gujarati Charitable Foundation, and CIT vs. Jayashree Charity Trust (Calcutta High Court). These judgments, along with a CBDT circular, support the view that the income of a charitable trust under Section 11 should be computed on commercial principles, which allows for deductions like depreciation, especially when the cost of the asset itself was not claimed as application in the year of acquisition. The court also criticized the CIT’s mechanical reliance on an unrelated ITAT decision (ACIT vs. Grama Vidiyal Trust) without establishing factual similarity, deeming the exercise of revisional power flawed.
Concluding that the AO had conducted sufficient inquiry and was bound by the principle of consistency given the assessee’s past accepted practice, and affirming the legal permissibility of claiming depreciation as application of income in these circumstances, the High Court found the CIT’s initiation of revision proceedings under Section 263 untenable both on facts and law. Consequently, the court dismissed the Revenue’s appeal, upholding the ITAT’s decision favouring the assessee.
FULL TEXT OF THE JUDGMENT/ORDER OF ORISSA HIGH COURT
1. Assailing Order dated 17.05.2022 passed in ITA No.134/CTK/2021 by the Income Tax Appellate Tribunal, Cuttack Bench, Cuttack, directed against the Order dated 31.03.2021 of Commissioner of Income Tax (Exemption), Hyderabad under Section 263 of the Income Tax Act, 1961 pertaining to Assessment Year 2016-17, the Appellant has raised the following questions:
“i) Whether on the facts and in the circumstances of the case, the Hon’ble ITAT is justified in law in quashing the notice under Section 263 and revisionary order under Section 263 of the Income Tax Act, 1961, passed by the CIT, (Exemptions) holding that revisionary order of CIT(E) under Section 263 dated 31.03.2021 is not sustainable being bad in law and passed in violation of principle of natural justice where the CIT, (Exemptions) has categorically found that the order under Section 143(3) passed by the AO is erroneous and prejudicial the interest of revenue?
ii) Whether on the facts and in the circumstances of the case and in law is the order of the Hon’ble ITAT not perverse in holding that the Assessing Officer has made sufficient enquiry during the course of assessment proceedings under Section 143(3) when the assessee has failed to submit the details in respect of the claim of depreciation for Rs.4,77,03,665/-?
iii) Whether on the facts and in the circumstances of the case and in law is the order of the Hon’ble ITAT not perverse in holding that the Assessing Officer has made sufficient enquiry during the course of assessment proceedings under Section 143(3) when the assessee has failed to submit the details in respect of claim of depreciation for Rs.4,77,03,665/- even during the reassessment proceedings completed under Section 143(3) read with Section 263 read with Section 144B on 26.03.2022 consequent to the order passed under Section 263 of the Income Tax Act, 1961, prior to the date of passing of order by the Hon’ble ITAT?
iv) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in quashing the consequential proceedings and orders, allowing depreciation on the assets, the cost of which has been fully allowed as application of income under Section 11 in the past years?”
Fact of the case:
2. It is revealed from the record that the respondent-Dhaneswar Rath Institute of Engineering & Medical Sciences, Cuttack, a charitable trust being granted registration under Section 12AA, claimed exemption under Section 11 of the Income Tax Act, 1961 (for brevity, “IT Act”) which was selected for scrutiny. The Assessing Officer completed assessment under Section 143(3) on 23.10.2018 on a total income determined at Rs.NIL.
2.1. Keeping in view the decision of the ITAT, Chennai ‘D’ Bench in the case of ACIT Vrs. Grama Vidiyal Trust, (2016) 71 taxmann.come 88 to the effect that where cost of asset was allowed under Section 11 as application of income in the earlier assessment years, depreciation is not entitled to be claimed, the instant respondent-assessee having gross block of fixed assets of Rs.96,78,84,619/- as on 01.04.2015 and such cost of asset having been allowed under Section 11, the CIT (Exemption), Hyderabad considered the assessment order erroneous insofar as prejudicial to the interests of revenue.
2.2. Said CIT (Exemption) issued show cause notice under Section 263 on 26.03.2021 on the basis that depreciation of Rs.4,77,03,665/- should not have been allowed as application of trust income for charitable purposes and, thereby, income accumulated worked out to Rs.5,65,70,741/- which exceeded 15% of the income derived from property held under the trust. Time petition of the assessee being rejected, said Authority passed Order dated 31.03.2021 which is to the following effect:
“Therefore, in view of the facts stated above, the said assessment order passed by the Assessing Officer under Section 143(3) of the IT Act, 1961 for the A.Y. 2016-17, so far as it pertains to the issues discussed above, is erroneous, prejudicial to the interest of the revenue, hence, is hereby set aside with a direction to the Assessing Officer to examine the issues mentioned supra, and to redo the assessment, after verification of the issues, in accordance with law.”
2.3. The respondent-assessee questioned the hot-haste decision of the CIT (Exemption) before the ITAT and distinguishing the case of Grama Vidiyal Trust (supra), submitted that in a case where the cost of asset was allowed under Section 11 of the IT Act in favour of the assessee-charitable trust as application of income in the year of purchase, the assessee could not claim or be allowed deprecation on the said assets. Nonetheless, in the instant case, the respondent-charitable trust having not claimed the amount as application of income at the time of purchase, there is no restriction of claiming depreciation on those assets which have not been included in the amount of application of receipts in the financial statement.
2.4. It was the case of the respondent-assessee before the ITAT that notice under Section 263 being issued on 26.03.2021 at the verge of time barring on 31.03.2021, inadequate opportunity was afforded to the respondent to present material.
2.5. While appreciating that the basic requirement to exercise power under Section 263 of the IT Act was not adhered to by the CIT (E), it is observed that during the course of scrutiny assessment, the assessee, in compliance of notice under Section 142(1), furnished details of depreciation claimed before the Assessing Officer. Therefore, the CIT (E) could not have been apprehensive of the fact that the Assessing Officer without conducting any enquiry allowed the claim of depreciation. After taking note of further fact that there has been consistent claim of depreciation as application income for earlier years which stood allowed, the learned ITAT allowed the appeal of the respondent-charitable trust and quashed not only the Order passed by the CIT (E) under Section 263, but also all consequential proceedings and orders related thereto.
2.6. Aggrieved, the department-CIT (E), therefore, has approached this Court under Section 260A of the IT Act.
Argument(s) advanced by the Senior Standing Counsel:
3. Sri Radhashyam Chimanka, learned Senior Standing Counsel for Income Tax Department submitted that the assessee having complained inadequacy of time being granted to it for presenting its matter before the CIT (E), the learned ITAT, instead of quashing the Order under Section 263 of the IT Act, should have remanded the case for fresh adjudication by the CIT (E).
3.1. The learned Senior Standing Counsel further went on to submit that participating in the proceeding undertaken under Section 142(1)/143(3) by the Assessing Officer pursuant to Order dated 31.03.2021 of the CIT (E), the assessee merely prayed for keeping the proceeding in abeyance till disposal of appeal before the ITAT against the order in revision. Rather it should have placed material/evidence to support its contention that “it has never taken the acquisition of fixed assets during the previous year or in any earlier years as application of income under Section 11 of the Income Tax Act, 1961”.
Arguments advanced by the learned Counsel for the respondent-assessee:
4. Sri Chitrasen Parida, learned advocate appearing for the respondent-assessee would submit that the charitable trust furnished related material before the Assessing Officer during the course of scrutiny assessment undertaken under Section 143(3) of the IT Act. Considering the fact that the respondent-assessee was registered under Section 12AA since 2000, the learned Assessing Officer verified books of account vis-à-vis claim for depreciation made in the return and accepted the total income as disclosed by the assessee.
The CIT (E), therefore, was incompetent to invoke power under Section 263 without causing any enquiry. The Order in revision being passed with undue haste without affording reasonable opportunity there has been flagrant violation of the principles of natural justice.
4.1. The learned ITAT having rendered its positive finding on the grounds urged by the assessee that not only there was inadequate time granted for placing material, but also there was inherent lack of jurisdiction in initiating proceeding under Section 263 by the CIT (E) coupled with illogical appreciation of basic fact in deviation of rule of consistency that the assessee had been claiming depreciation since several previous assessment years for which audited financial statements for the financial years 2012-13 to 201516 were available on concerned record.
Consideration of rival contentions:
5. It is first contended by Sri Chimanka, the learned Senior Standing Counsel that the Assessing Officer while completing assessment under Section 143(3) of the IT Act pertaining to Assessment Year 2016-17 failed to conduct enquiry as to the claim of depreciation to the tune of Rs.4,77,03,665/-, which fact upon being noticed, the CIT (E), in exercise of power under Section 263 initiated proceeding for revision considering the assessment order as erroneous in so far as it is prejudicial to the interests of revenue. The learned Tribunal committed error of law in interfering with the revisional jurisdiction of the CIT (E).
5.1. In this regard the learned ITAT has found that when the CIT (E) viewed that the Assessing Officer did not conduct proper enquiry before allowing claim of relief by the assessee, it was incumbent upon it to call for the concerned record and examine the same.
5.2. It is well-settled that exercise of power of revision can only be permissible on fulfilment of twin condition laid in Section 263 of the IT Act. In Malabar Industrial Co. Ltd. Vrs. CIT, (2000) 243 ITR 83 (SC), the Supreme Court held that a bare reading of Section 263 makes it clear that the pre-requisite for exercise of jurisdiction by the Commissioner for suo motu revision is that the order of the Income Tax Officer is “erroneous in so far as it is prejudicial to the interests of the Revenue”. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent— if the order of the Income Tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but it is prejudicial to the Revenue— recourse cannot be had to Section 263(1) of the Act. It is also held as follows:
“The phrase ‘prejudicial to the interests of the Revenue’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. For example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of Revenue; or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income Tax Officer is unsustainable in law. It has been held by this court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the Revenue. Rampyari Devi Saraogi Vrs. CTT[1968] 67 ITR 84 (SC) and in Smt. Tara Devi Aggarwal Vrs. CIT[1973] 88 ITR 323 (SC).”
5.3. There is difference between purported incomplete or inadequate verification or no verification whatsoever by the assessing officer. One has to keep in mind the distinction between ‘lack of inquiry’ and ‘inadequate inquiry’. If there was any inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under Section 263 of the IT Act, merely because he has a different opinion in the matter. It is only in cases of ‘lack of inquiry’ that such a course of action would be open. Refer: CIT Vrs. Sunbeam Auto Ltd., (2011) 332 ITR 167 (Del).
5.4. From reading of sub-section (1) of Section 263, it is clear that the power of suo motu revision can be exercised by the Commissioner only, on examination of the records of any proceedings under the Act, he considers that any order passed therein by the Income Tax Officer is ‘erroneous in so far as it is prejudicial to the interests of the Revenue’. It is not an arbitrary or unchartered power, it can be exercised only on fulfilment of the requirements laid down in subsection (1). The consideration of the Commissioner as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on the record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceeding by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well-accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi judicial controversies as it must in other spheres of human activity. An order cannot be termed as erroneous unless it is not in accordance with law. If an Income Tax Officer acting in accordance with 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 the 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 re-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 formed 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 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. Refer: CIT Vrs. Gabriel India Ltd., (1993) 203 ITR 108 (Bom).
5.5. The Hon’ble Andhra Pradesh High Court in Spectra Shares & Strips Pvt. Ltd. Vrs. CIT, (2013) 354 ITR 35 (AP) culled out the following propositions:
(a) The Commissioner has to be satisfied of twin conditions, namely,
(i) the order of the Assessing Officer sought to be revised is erroneous; and
(ii) it is prejudicial to the interests of the Revenue. If one of them is absent— if the order of the Income Tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but it is prejudicial to the Revenue— recourse cannot be had to Section263(1) of the Act.
(b) Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. For example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue: or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income Tax Officer is unsustainable in law.
(c) To invoke the suo motu revisional powers to reopen a concluded assessment under Section 263, the Commissioner must give reasons; that a bare reiteration by him that the order of the Income Tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue, will not suffice; that the reasons must be such as to show that the enhancement or modification of the assessment or cancellation of the assessment or directions issued for a fresh assessment were called for, and must irresistibly lead to the conclusion that the order of the Income Tax Officer was not only erroneous but was prejudicial to the interests of the Revenue. Thus, while the Income Tax Officer is not called upon to write an elaborate judgment giving detailed reasons in respect of each and every disallowance, deduction, etc., it is incumbent upon the Commissioner not to exercise his suo motu revisional powers unless supported by adequate reasons for doing so that if a query is raised during the course of the scrutiny by the Assessing Officer, which was answered to the satisfaction of the Assessing Officer, but neither the query nor the answer were reflected in the assessment order, this would not by itself lead to the conclusion that the order of the Assessing Officer called for interference and revision.
(d) The Commissioner cannot initiate proceedings with a view to start fishing and roving inquiries in matters or orders which are already concluded; that the Department cannot be permitted to begin fresh litigation because of new views they entertain on facts or new versions which they present as to what should be the inference or proper inference either of the facts disclosed or the weight of the circumstance; that if this is permitted, litigation would have no end except when legal ingenuity is exhausted.
(e) Whether there was application of mind before allowing the expenditure in question has to be seen; that if there was an inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under Section 263 merely because he has a different opinion in the matter; that it is only in cases of lack of inquiry that such a course of action would be open; that an assessment order made by the Income Tax Officer cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately; 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.
(f) The power of the Commissioner under Section 263(1) is not limited only to the material which was available before the Assessing Officer and, in order to protect the interests of the Revenue, the Commissioner is entitled to examine any other records which are available at the time of examination by him and to take into consideration even those events which arose subsequent to the order of assessment.
5.6. In Malabar Industrial Co. Ltd. Vrs. CIT, (2000) 2 SCC 718 the Assessing Officer accepted the entry in the statement of the account filed by the assessee in the absence of any supporting material and without making any inquiry. On these facts the conclusion that the order of the Income Tax Officer was erroneous was considered to be irresistible. The Hon’ble Supreme Court, therefore, was of the opinion that the High Court had rightly held that the exercise of jurisdiction by the Commissioner under Section 263(1) was justified.
5.7. Nevertheless, in the present case, the Assessing Officer vide Order dated 23.10.2018 passed under Section 143(3) of the IT Act recorded the following fact:
“*** Subsequently, the case was selected for scrutiny assessment through CASS under category of ‘complete scrutiny’ to verify whether amount spent on charitable purposes is correctly shown in return of income, ***
*** In response to the said notice, the assesse furnished the details and documents as asked vide notice referred as above time to time electronically through e-compliance and the same were examined with reference to the books of account and other documents furnished and filed respectively through e-proceeding facilities of the Income Tax Department.
***
During the course of assessment proceedings the assesse produced the relevant documents as per questionnaire through e-proceeding. The Books of account including bank statements and the ledgers furnished for verification were examined wherever considered necessary. Considering the submissions made and after verification of the documents submitted by the assesse the total income of the assesse trust is hereby accepted.”
5.8. From the aforesaid, it cannot be said that the Assessing Officer had not conducted any enquiry as to the depreciation with reference to material produced. It is noteworthy to refer to following observation of the learned ITAT:
“For the purpose of exercising jurisdiction under Section 263 of the Act, the conclusion that the order of the Assessing Officer is erroneous and prejudicial to the interest of the revenue has to be preceded by some minimal enquiry by CIT (E). If the CIT (E) is of the view that the Assessing Officer did not undertake any enquiry, it becomes incumbent on the CIT (E) to conduct such enquiry. If the CIT (E) does not conduct such basic exercise then the CIT (E) is not justified in setting aside the Order under Section 263 of the Act.”
5.9. The Hon’ble Supreme Court of India in CIT Vrs. Amitabh Bachchan, (2016) 384 ITR 200 (SC) stated that it may be that in a given case and in most cases it is so done a notice proposing the revisional exercise is given to the assessee indicating therein broadly or even specifically the grounds on which the exercise is felt necessary. But there is nothing in the Section 263 of the IT Act to raise the said notice to the status of a mandatory show cause notice affecting the initiation of the exercise in the absence thereof or to require the CIT to confine himself to the terms of the notice and foreclosing consideration of any other issue or question of fact. This is not the purport of Section 263. Of course, there can be no dispute that while the CIT is free to exercise his jurisdiction on consideration of all relevant facts, a full opportunity to controvert the same and to explain the circumstances surrounding such facts, as may be considered relevant by the assessee, must be afforded to him by the CIT prior to the finalization of the decision.
5.10. In the instant case, the notice contemplating initiation of proceeding for revision was issued on 26.03.2021 and the order in revision was passed on 31.03.2021 by rejecting request of the assessee for grant of 15days’ time.
5.11. The Hon’ble Supreme Court in Zenit Mataplast (P) Ltd. Vrs. State of Maharashtra, (2009) 10 SCC 388 laid down that:
“39. Anything done in undue haste can also be termed as arbitrary and cannot be condoned in law (vide M.P. Hasta Shilpa Vikas Nigam Ltd. Vrs. Devendra Kumar Jain, (1995) 1 SCC 638 and Bahadursinh Lakhubhai Gohil Vrs. Jagdishbhai M. Kamalia, (2004) 2 SCC 65).
5.12. Therefore, the learned ITAT was correct in holding that CIT (E) passed the order without giving any opportunity to the assessee and “Hence, on the said ground the CIT (E) is not justified in directing the Assessing Officer to redo the assessment”. The question No. (i) of paragraph 8 as posed by the Appellant is answered in the positive, i.e., in favour of the Assessee-Respondent and against the Revenue-Department.
6. Question raised by the Appellant with regard to enquiry being conducted by the Assessing Officer and allegation of failure of the assessee-respondent to furnish details in respect of claim of depreciation for Rs.4,77,03,665/-, it is revealed from the record that the learned ITAT as a matter fact recorded as follows:
“*** In our considered opinion, the Assessing Officer cannot remain passive on the facts which, in his opinion, need to be probed further, but then an Assessing Officer, unless he has specific reasons to do so after a look at the details, is not required to prove to the last point everything coming to his notice in the course of the assessment proceedings. In our humble opinion, when the facts as emerging or revealed out of the scrutiny along with explanation and reply of the assessee are apparently in order, and no further inquiry is warranted in his bona fide opinion, he need not conduct further enquiries just because it is lawful to make further inquiries in the matter. ”
6.1. In the present case, the Assessing Officer has issued notice under Section 142(1) along with questionnaire instructing the assessee to furnish details and basis of claim of depreciation as application income of the assessee, which was replied by the assessee. It is noted by the learned ITAT that records of the preceding assessment years were with the Assessing Officer and the assessee had been consistently claiming depreciation as application of income without making the claim under Section 11 of the IT Act at the time of acquisition or purchase of assets as application of income. Therefore, there arose no necessity for the Assessing Officer to go further to analyse and examine the issue as he is duty bound to follow the “rule of consistency” and, hence, it is not a case of “no enquiry”. Rather the Assessing Officer has made proper, sufficient and adequate enquiry with regard to claim with reference to books of account, which is evident from the Assessment Order itself.
6.2. The aforesaid observation may find support of Gee Vee Enterprise Vrs. Additional Commissioner of Income Tax, (1975) 99 ITR 375 (Del). In the said Judgment, it has been made clear as follows:
“*** The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income Tax Officer should have made further inquiries before accepting the statements made by the assessee in his return.
The reason is obvious. The position and function of the Income Tax Officer is very different from that of a civil court. The statements made in a pleading proved by the minimum amount of evidence may he accepted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The Income Tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word ‘erroneous’ in Section 263 emerges out of this context. It is because it is incumbent on the Income Tax Officer to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word ‘erroneous’ in Section 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct.”
6.3. It has been the stance of the respondent-assessee that revenue has been accepting the claim of depreciation as made in the returns for the earlier years. The learned ITAT noted that:
“29. *** In the present case, the assessee submitted audited financial statements for Financial Years 2012-13 to 2015-16 including the subject-Assessment Year 2016-17 and “has successfully demonstrated that it has not claim the cost of asset as application of income at the time of purchase or acquisition of the asset but only claimed depreciation as application of income availing second option to claim depreciation and this was consistently claimed by the assessee and allowed by the Department, thus the Assessing Officer was not required to go into micro details of claiming of depreciation by the assessee.”
6.4. It is oft said that consistency is the cornerstone of the administration of justice and it is the consistency in approach which creates confidence in the system. This consistency can never be achieved without respect to the rule of finality. In K. Ajit Babu Vrs. Union of India, (1997) 6 SCC 473, it has been emphasized that consistency, certainty and uniformity in the field of judicial decisions as it sets a pattern upon which future conduct may be based. One of the basic principles of the administration of justice is that identical/similar cases should be decided alike. Apt here to have regard to the following observation of the Hon’ble Supreme Court in Jayaswals NECO Ltd. Vrs. CCE, (2007) 13 SCC 807:
“7. This Court in Birla Corpn. Ltd. Vrs. CCE [(2005) 6 SCC 95] relying upon an earlier decision of this Court, held that the Department having accepted the principles laid down in the earlier case cannot be permitted to take a contra stand in the subsequent cases. In para 5 of the said judgment it was observed, thus: (SCC p. 97)
‘5. In the instant case the same question arises for consideration and the facts are almost identical. We cannot permit the Revenue to take a different stand in this case. The earlier appeal involving identical issue was not pressed and was therefore, dismissed. The respondent having taken a conscious decision to accept the principles laid down in Pepsico India Holdings Ltd. [CCE v. Pepsico India Holdings Ltd., (2001) 130 ELT 193 (cegat)] cannot be permitted to take the opposite stand in this case. If we were to permit them to do so, the law will be in a state of confusion and will place the authorities as well as the assessees in a quandary.’ …”
6.5. The Hon’ble Supreme Court of India while accepting that though principle of binding precedents cannot be applied to interlocutory orders, enunciated that consistency in approach is to be maintained. In Vishnu Traders Vrs. State of Haryana, 1995 Supp (1) SCC 461 it has been observed as follows:
“In the matters of interlocutory orders, principle of binding precedents cannot be said to apply. However, the need for consistency of approach and uniformity in the exercise of judicial discretion respecting similar causes and the desirability to eliminate occasions for grievances of discriminatory treatment requires that all similar matters should receive similar treatment except where factual differences require a different treatment so that there is assurance of consistency, uniformity, predictability and certainty of judicial approach.”
6.6. It is to be mentioned here that, in Bharat Sanchar Nigam Limited Vrs. Union of India, (2006) 3 SCC 1 the Hon’ble Court of 3-Judge Bench has held as follows:
“20. The decisions cited have uniformly held that res judicata does not apply in matters pertaining to tax for different assessment years because res judicata applies to debar courts from entertaining issues on the same cause of action whereas the cause of action for each assessment year is distinct. The courts will generally adopt an earlier pronouncement of the law or a conclusion of fact unless there is a new ground urged or a material change in the factual position. The reason why the courts have held parties to the opinion expressed in a decision in one assessment year to the same opinion in a subsequent year is not because of any principle of res judicata but because of the theory of precedent or the precedential value of the earlier pronouncement. Where facts and law in a subsequent assessment year are the same, no authority whether quasi-judicial or judicial can generally be permitted to take a different view. This mandate is subject only to the usual gateways of distinguishing the earlier decision or where the earlier decision is per incuriam. However, these are fetters only on a coordinate Bench which, failing the possibility of availing of either of these gateways, may yet differ with the view expressed and refer the matter to a Bench of superior strength or in some cases to a Bench of superior jurisdiction.”
6.7. In Principal Commissioner of Income Tax Vrs. Maruti Suzuki (India) Limited, (2020) 18 SCC 331 it has been succinctly said that:
“37. We find no reason to take different view. There is a value which the Court must abide by in promoting the interest of certainty in tax litigation. The view which has been taken by this Court in relation to the respondent for AY 2011-12 must, in our view be adopted in respect of the present appeal which relates to AY 2012-13. No doing so will only result in uncertainty and displacement of settled expectations. This is a significant value which must attach to observing the requirement of consistency and certainty. Individual affairs are conducted and business decisions are made in the expectation of consistency, uniformity and certainty. To detract from those principles is neither expedient nor desirable.”
6.8. Coming back to the present subject-matter, it is not gainsaid by the Revenue that the respondent-assessee has been following the practice of claiming depreciation in earlier years as that is claimed in the present year under assessment. Furthermore there is no denial of fact by the Income Tax Department that the assessee is consistently claiming the depreciation as application of income without making the claim under Section 11 of the IT Act at the time of acquisition or purchase of assets as application of income. Mere statement in the appeal filed by the Revenue before this Court that “no documentary evidence is submitted by the assessee in support of its claim” cannot be countenanced in view of categorical finding of fact by the Assessing Officer as also the learned ITAT that the assessee-respondent did furnish statements, documents and details as sought for in compliance of notice issued for assessment under Section 143 of the IT Act before the Assessing Officer. The learned ITAT at paragraph 25 of its Order has candidly made the following fact-finding which remained uncontroverted in the present appeal:
“In the present case from audited financial statement for assessment years 2011-12 to 2015-16 pertaining to assessment years 2012-13 to 2016-17 including the assessment year under consideration i.e. A.Y. 2016-17, it is clearly demonstrated that the assessee has not claimed cost of asset in the year of purchase or during any subsequent period but it has only claimed depreciation thereon as application of income, which is permissible in a case where the assessee has not claimed cost of asset as application of income under Section 11 of the Act in the year of purchase or acquisition of assets.”
6.9. Therefore, such finding of fact falsifies the statement of the Revenue in paragraph 7 of the appeal that “no documentary evidence is submitted by the assessee in support of its claim”. Thus, the view of the Tribunal in allowing the Assessee-Respondent’s appeal on the principle of consistency cannot, in the present facts, be faulted with.
6.10. In the aforesaid view of the matter, the question No.(ii) at paragraph 8 of the appeal is answered in the positive, i.e., in favour of the Assessee-Respondent and against the Appellant-Revenue.
7. While adjudicating the question No.(ii) at paragraph 8 of the Appeal, it has been held that sufficient enquiry was undertaken by the Assessing Officer and he could not have varied with the view already taken in the previous years on the basis of “principle of consistency in approach”, question No.(iii) at paragraph 8 is answered accordingly in favour of the Respondent-Assessee.
8. As question Nos. (i), (ii) and (iii) are held against the Revenue and in favour of the Assessee in the foregoing paragraphs, and it has been held that the proceeding initiated by the Commissioner of Income Tax (Exemption), Hyderabad by exercise of power under Section 263 of the IT Act is not tenable either on facts or in law, the learned ITAT has rightly quashed the consequential proceedings and orders allowing claim of depreciation on the assets.
Interpretation of statutory provision and views expressed by different Courts qua dispute sought to be raised by initiating proceeding for revision:
9. Taking note of Section 11 of the IT Act, the Hon’ble Gujarat High Court in the matter of Commissioner of Income Tax Vrs. Shri Plot Swetamber Murti Pujak Jain Mandal, (1995) 211 ITR 293 (Guj) made the following observation:
“3. A bare perusal of the above-referred provisions of the Act shows that the income derived from property held under trust wholly for charitable or religious purposes to the extent to which such income is applied to such purposes in India is to be excluded for the purposes of computing the income of the trust for the purpose of assessment. There are no words of limitation in this section providing that the income should have been applied for charitable or religious purposes only in the year in which the income had arisen. The word “applied” means “to put to use” or “to turn to use” or “to make use” or “to put to practical use”. Having regard to the provisions of Section 11 of the Act, it is clear that when the income of a trust is used or put to use to meet the expenses incurred for religious or charitable purposes, it is applied for charitable or religious purposes. The said application of the income for charitable or religious purposes takes place in the year in which the income is adjusted to meet the expenses incurred for charitable or religious purposes. In other words, even if expenses for charitable and religious purposes have been incurred for the earlier year and the said expenses are adjusted against the income of a subsequent year, the income of that year can be said to have been applied for charitable and religious purposes in the year in which the expenses incurred for charitable and religious purposes had been adjusted.
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7. Viewing the question from a different angle also, we are of the opinion that the claim made by the assessee was well-founded. In the case of CIT Vrs. Ganga Charity Trust Fund, (1986) 162 ITR 612, this court considered the question as to whether deduction of income tax liability must be taken as an outgoing before the surplus could be ascertained in order to give meaning to the expression “income”. The court also considered the question as to whether for the purpose of determining the income or surplus available to the trust for the purpose of application of its income towards charitable or religious objects, the surplus realised or available on commercial principles should be taken into consideration or not. After reviewing the case law on the subject, it has been held that income derived from the trust property must be determined on commercial principles and in doing so, all outgoings including outgoings by way of income tax paid by the assessee-trust must be deducted and it is only from the surplus income in the hands of the trustees that the question of application or accumulation or setting apart of income arises. While holding that the income derived from the trust property must be determined on commercial principles, this court has noted that if such an interpretation is not placed on Section 11(1)(a) of the Act, it would render the benevolent provisions found in clause (a) of Section 11(1) of the Act nugatory.
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9. In view of the two decisions of this court above referred to, it is the well-settled position that income derived from the trust property has to be determined on commercial principles and if commercial principles for determining the income are applied, it is but natural that the adjustment of the expenses incurred by the trust for charitable and religious purposes in the earlier year against income earned by the trust in the subsequent year will have to be regarded as application of income of the trust for charitable and religious purposes in the subsequent year in which such adjustment has been made having regard to the benevolent provisions contained in Section 11 of the Act and will have to be excluded from the income of the trust under Section 11(1)(a) of the Act. In view of the above discussion, we are of the opinion that, on the facts and in the circumstances of the case, the assessee is entitled to carry forward expenses for set off in the subsequent year. The question referred to us is, therefore, answered in the affirmative, i.e., in favour of the assessee and against the Revenue.”
9.1. This Court is not oblivious of the decision of the Hon’ble Bombay High Court rendered in the case of CIT Vrs. Institute of Banking, (2003) 264 ITR 110 (Bom). In the said case the said Court framed the following issue:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in directing the Assessing Officer to allow depreciation on the assets the cost of which has been fully allowed as application of income under Section 11 of the past years?”
Answering said issue it held as follows:
“As stated above the first question which requires consideration by this court is: whether depreciation was allowable on the assets, the cost of which has been fully allowed as application of income under Section11 in the past years? In the case of CIT Vrs. Munisuvarat Jain, [1994] Tax LR 1084 (Bom), the facts were as follows: The assessee was a charitable trust. It was registered as a public charitable trust. It was also registered with the Commissioner of Income Tax, Pune. The assessee derived income from temple property which was a trust property. During the course of assessment proceedings for the assessment years 1977-78, 1978-79 and 1979-80, the assessee claimed depreciation on the value of the building at 21/2 per cent, and they also claimed depreciation on furniture at 5 per cent. The question which arose before the court for determination was: whether depreciation could be denied to the assessee, as expenditure on acquisition of the assets had been treated as application of income in the year of acquisition? It was held by the Bombay High Court that Section 11 of the Income Tax Act makes a provision in respect of computation of income of the trust from property held for charitable or religious purposes and it also provides for application, and accumulation of income. On the other hand, Section 28 of the Income Tax Act deals with chargeability of income from profits and gains of business and Section 29 provides that income from profits and gains of business shall be computed in accordance with Section 32 to Section 43C. That Section 32(1) of the Act provides for depreciation in respect of building, plant and machinery owned by the assessee and used for business purposes. It further provides for deduction subject to Section 34. In that matter also a similar argument, as in the present case was advanced on behalf of the Revenue, namely, that depreciation can be allowed as deduction only under Section 32 of the Income Tax Act and not under general principles. The court rejected this argument. It was held that normal depreciation can be considered as a legitimate deduction in computing the real income of the assessee on general principles or under Section 11(1)(a) of the Income Tax Act. The court rejected the argument on behalf of the Revenue that Section 32 of the Income Tax Act was the only section granting benefit of deduction on account of depreciation. It was held that income of a charitable trust derived from building, plant and machinery and furniture was liable to be computed in a normal commercial manner although the trust may not be carrying on any business and the assets in respect whereof depreciation is claimed may not be business assets. In all such cases, Section 32 of the Income Tax Act providing for depreciation for computation of income derived from business or profession is not applicable. However, the income of the trust is required to be computed under Section 11 on commercial principles after providing for allowance for normal depreciation and deduction thereof from gross income of the trust. In view of the aforesaid judgment of the Bombay High Court, we answer question No. 1 in the affirmative, i.e., in favour of the assessee and against the Department.”
9.2. Aforesaid view taken by the Bombay High Court in Institute of Banking (supra) has been affirmed in the case of CIT Vrs. Rajasthani and Gujarati Charitable Foundation, (2018) 402 ITR 441 (SC).
9.3. This Court is also aware of the decision rendered in the case of CIT Vrs. Jayashree Charity Trust, (1986) 159 ITR 280 (Cal) wherein the following view was taken:
“The Madras High Court, in the case of CIT Vrs. Rao Bahadur Cala-vala Cunnan Chetty Charities, [1982] 135 ITR 485 (Mad) held that taking into account the purposes for which the conditions of Section 11(1)(a) were imposed, it would be clear that the income to be considered will be that which is arrived at in the context of what is available in the hands of the assessee subject to an adjustment of any expenses extraneous to the trust. It was held that the income from properties held under trust would have to be calculated in the commercial manner. It was observed that Section 11 contemplates an application of the income for charitable purposes. The charity can accumulate 25 per cent, of the income. The application as well as the accumulation has necessarily to be of the income as accounted for in the accounts and not as computed under the Income Tax Act, subject, of course, to what is provided in sub-section (4) of Section 11.
We are in respectful agreement with the view expressed by the Madras High Court. This judgment is also in consonance with the view taken by the Andhra Pradesh High Court in the case of CIT Vrs. Nizam’s Suppl. Religious Endowment Trust (Trustees of HEH), (1981) 127 ITR 378 (AP).
It also appears that the view we have taken has also been adopted by the Central Board of District Taxes in Board’s Circular No. 5-P (LXX-6) dated May 19, 1968. It was stated in that circular, inter alia (see [1969] Indian Tax Laws, Appx. II, p. Ixxxv):
2. Section 11(1) provides that subject to the provisions of Sections 60 to 63 the following income shall not be included in the total income of the previous year… The reference in sub-section (1)(a) is invariably to “income” and not to “total income”. The expression “total income” has been specifically defined in Section 2(45) of the Act as “the total amount of income… computed in the manner laid down in this Act”. It would, accordingly, be incorrect to assign to the word “income”, used in Section 11(1)(a), the same meaning as has been specifically assigned to the expression “total income”, vide Section 2(45)…
4. Where the trust derives income from house property, interest on securities, capital gains, or other sources, the word “income” should be understood in its commercial sense, i.e., book income, after adding back any appropriations or applications thereof towards the purposes of the trust or otherwise, and also after adding back any debits made for capital expenditure incurred for the purposes of the trust or otherwise. It should be noted, in this connection, that the amounts so added back will become chargeable to tax under Section 11(3) to the extent that they represent outgoings for purposes other than those of the trust. The amounts spent or applied for the purposes of the trust from out of the income computed in the aforesaid manner, should be not less than 75 per cent., of the latter, if the trust is to get the full benefit of the exemption under Section 11(1).
5. To sum up, the business income of the trust as disclosed by the accounts plus its other income computed as above, will be the “income” of the trust for purposes of Section 11(1). Further, the trust must spend at least 75 per cent., of this income and not accumulate more than 25 per cent., thereof. The excess accumulation, if any, will become taxable under Section 11(1).’
This circular makes it clear that the word “income” in Section 11(1)(a) must be understood in a commercial sense. The entire income of the trust in the commercial sense, has been spent for the purpose of charity. There is no reason to deny the benefit of exemption granted by Section 11 to that portion of the income which has been taken away by deduction at source on the ground that the amount has not been spent or accumulated for the purpose of charity.”
9.4. The aforesaid view has been reaffirmed in the case of Commissioner of Income Tax Vrs. Siliguri Regulated Market Committee, (2014) 366 ITR 51 (Cal).
9.5. This Court while interpreting in the context of similarly worded provision contained in Rule 80 of the Odisha Sales Tax Rules, 1947, compared to Section 263 of the IT Act, in the case of R.B. Agarwal and Co. Pvt. Ltd. Vrs. State of Odisha and Others, 2009 (Supp.-I) OLR 973 made the following observation:
“9. The jurisdiction conferred upon the Assistant Commissioner under Rule 80 of OST Rules read with Rule 22 of the CST(O) Rules for exercising suo motu power of revision is not administrative but quasi judicial in nature. Therefore, while exercising such power the Assistant Commissioner must bear an unbiased mind and decide the dispute according to the norms of judicial procedure consistent with the principles of natural justice. He cannot permit his judgment to be influenced by the materials not disclosed to the assessee nor by dictation of another authority. [See Sirpur Paper Ltd. Vrs. Commissioner of Wealth Tax, (1970) 77 ITR 6 (SC)]. The revisional power conferred by Section 263 is undoubtedly a quasi judicial power. [See CIT Vrs. Kashi Nath & Co., (1988) 170 ITR 28 (30) (All). Cf. Dwarka Nath Vrs. ITO, (1965) 57 ITR 349 (SC)]. The Hon’ble Gauhati High Court in Baijnath Biswanath & Anr. Vrs. State of Assam & Others, (2003) 133 STC 300 (Gauhati), held that the power of revision reposed in the Commissioner, is a power of judicial in nature and, therefore, such power is to be exercised lawfully and with due application of mind. The power cannot be exercised mechanically or at the behest of some other authority.”
9.6. It appears from the record that, the Revisional Authority-CIT (E) in his order, while exercising power under Section 263 of the IT Act on 26.03.2021, placed reliance on a decision of ITAT, Chennai ‘D’ Bench in the case of ACIT Vrs. Grama Vidiyal Trust, (2016) 71 taxmann.com 88 without mentioning anything as to how there was factual similitude with that of the case of the respondent-assessee. Since the Revisional Authority has mechanically sought to apply the decision of learned ITAT in Grama Vidiyal Trust (supra) without application of mind, the impugned Order passed in exercise of power of suo motu revision stands vitiated.
Conclusion:
10. In view of aforesaid analysis of facts, position of law as discussed supra and reasons ascribed in the foregoing paragraphs, in the result, the Appeal preferred by the Income Tax Department under Section 260A of the Income Tax Act, 1961 is hereby dismissed, but in the circumstances, there is no order as to costs.
