In absence of error causing prejudice to Revenue, Section 263 order passed by CIT(E) is not sustainable

Society For Dental Health Vs ITO (ITAT Ahmedabad)

On perusal of the findings of the Ld. CIT(E) and the contentions of the assessee, we find that while assessee had included endowment funds grants received from the Government in its total receipts to demonstrate that it was substantially financed by the Government, Ld. CIT(E) has excluded the endowment grants while calculating the percentage of Government financing and while doing so has given no reasons for excluding the same. There is therefore, we find no basis given by the Ld. CIT(E) for rejecting the claim of the assessee that it was entitled alternatively to claim its income as exempt u/s.10(23C)(iiiab) of the Act.

The Ld. CIT(E), we find has rejected this contention of the assessee by stating that the assessees claim of utilization of its income in capital asssets tantamounts to revising its return and therefore the contention is not acceptable. We are not in agreement with the same. The assesse’s claim of exemption of its entire income has remained unchanged and unrevised. What has only changed is the basis of the claim that too without foregoing its original basis and as an alternate only and that too when confronted with the prospect of being denied exemption of 15% of Govt. grants as originally claimed. The same does not tantamount to revising its return by any chance. Also if the alternate basis of claim of the assessee was as per law the assessment order could not be held erroneous in allowing benefit of exemption u/s 11 to the assessee. Without any finding to the contrary the Ld.CIT(E) we hold had erred in finding the assessment order erroneous on this count.

In view of the above, it is abundantly clear that there was no basis with the Ld. CIT(E) at all for arrive at his finding that the assessment order passed in the present case was in error by allowing the assessee exemption of 15% of its income from Government grants. We therefore hold that the Ld.CIT(E) has failed to find any error causing prejudice to the Revenue in the present case. The order passed by the Ld. CIT(E) u/s. 263 of the Act is therefore not sustainable in law and is accordingly set aside.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

The present appeal has been filed by the Assessee against the order passed by the Commissioner of Income Tax (Exemption), Ahmedabad, (in short referred to as CIT(E)), dated 18-03-2019, in exercise of his revisionary powers u/s. 263 of the Income Tax Act, 1961(hereinafter referred to as the “Act”) pertaining to Assessment Year (A.Y) 2014-15.

2. The Assessee has raised following grounds of appeal:

1. The learned Commissioner of Income Tax (Exemption), Ahmadabad, has erred in law and on facts in invoking provisions of section 263 of the Act and in holding that the assessment order dt.07-02-2016 was erroneous and prejudicial to the interest of revenue Society For Gujarat Dental Health Education and Research and in setting aside the said order u/s. 143(3) of the Act dt.27-10-2016 directing the AO to make de-novo assessment.

2. On the facts and in the circumstances of the case and in law the learned Commissioner of Income Tax (Exemption), Ahmadabad, ought to have dropped the proceedings initiated u/s. 263 of the Act.

3. It is therefore prayed that the order dt.22-03-2019 passed by the Commissioner of Income Tax (Exemption), Ahmadabad, u/s. 263 of the Act may be cancelled.

3. Brief facts of the case are that the assessee ,i.e Society For Gujarat Dental Health Education And Research had filed its return of income for the impugned assessment year i.e. 2014-15 declaring NIL income after claiming its income exempt u/s. 11 of the Act. Thereafter the case was selected for scrutiny assessment and the income assessed at Rs. 96,24,705/-. The Ld. CIT(E) on verification of records thereafter found that the assessing officer had not properly assessed the income, for the reason that the assessee had been granted excess exemption of 15% of its income on grants from state government of Rs. 4.72 crores. Para 2.1 of the order of the Ld. CIT(E) bringing out the above is as under:

2.1 On perusal of assessment order U/s 143(3) of the Act dated 27/10/2016, it was noticed that the AO has allowed irregular excess exemption. As per audit report, it is noticed that total receipts of the assessee as per the return was Rs. 9,58,41,751/- which was inclusive of Rs. 4,72,00,000/- received as grant from the State Government. The Assessing Officer has accepted the calculation of exemption @15% of the income of trust including Grant of Rs. 4,72,00,000/-. Further, said amount of grant of Rs. 4,72,00,000/-received by the assessee from the State Government has not been deducted from the net income on which the exemption of 15% was to be included.

4. Accordingly, show cause notice was issued to the assesssee dated 16/07/2018 and jurisdiction assumed by the Ld. CIT(E) for initiating revisionary proceedings u/s. 263 of the Act. Due reply was filed by the assessee contending that since it was substantially financed by the state its income in any case was exempt u/s 10(23C)(iiiab) of the Act and that alternatively even after denying exemption of 15% of the grants of Rs.4.72 crores, the assessee was still eligible for exemption of its entire income u/s 11 of the Act on account of application of its income for capital purposes. The Ld.CIT(E) rejected both the contentions of the assessee and held that the assessment order had been passed without proper application of law and mind to the facts of the case. Accordingly he held the assessment order to be erroneous causing prejudice to the Revenue and set aside the order with the direction to make a denovo assessment.

5. We have heard both the parties. We have also gone through the order of the Ld.CIT(E) and we find that the exercise of revisionary powers in the present case ,right from the assumption of jurisdiction on issuing show cause notice u/s 263 of the Act, to the ultimate finding of error causing prejudice to the Revenue, was not in accordance with law.

6. As stated above the jurisdiction u/s 263 of the Act was assumed by the Ld.CIT(E) on finding that the assessment order was erroneous in granting exemption to the assessee @ 15% of the State government grants. But why the assessee was not entitled to the exemption and which provisions of law disentitled it to the same finds no mention in the show cause notice and for that matter in the findings of the Ld.CIT(E) also while holding the assessment order as erroneous so as to cause prejudice to the Revenue. There is nothing in the entire show cause notice bringing out how and why the assessee was not eligible, as per the provisions of law, to claim exemption of 15% of the grants received. The contents of the show cause notice are reproduced hereunder for clarity:

To,
The Managing Trustee,
Society for Gujarat Dental Health Education & Research,
Civil Hospital Campus, Asarwa, Ahmedabad-380016
Sir,

Sub: Proceedings U/s 263 of the I. T. Act in the case of Society for Gujarat Dental Health Education & Research (PAN: AAKTS0210N) for A.Y. 2014-15 – reg.

Kindly refer to the above.

2. On verification of the case record, it is found that return of income for F.Y. 2013­14 relevant to the A.Y. 2014-15 was filed on 17/09/2014, by declaring the total income of Rs. NIL alongwith the Auditor’s report U/s 12A(b) of the Act in Form No. 10B. The same was selected for scrutiny and thereafter, Order U/s 143(3) of the I. T. Act for A.Y. 2014-15 was passed on 27/10/2016 determining total income of Rs. 96,24,705/-, by making addition on account of claim of depreciation.

3. During the course of assessment proceedings, the AO has allowed irregular exemption. As per audit report, it is noticed that total income of the assessee trust was Rs. 958.42 lakh which was inclusive of Rs. 472 lakh received as grant from the State Government. It is also observed that while calculating the exemptionof 15% of the income of the trust, the AO has calculated it on total income including Grant.

3.1. As per the provisions of Section 11(1) subject to the provisions of Section 60 to 63, following income shall not be included in the total income of the previous year of the person in receipt of the income (a) 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; and, where any such income is accumulated or set apart is not in excess of 15% of the income from such property. Further as per the Section 12(1) of the I. T. Act, any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall from part of the corpus of the trust or institution) shall for the purposes of section 11 be deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provisions of that section and section 13 shall apply accordingly.

Here in this case, the AO, while passing order U/s 143(3) on 27/10/2016, has allowed deduction of Rs. 1,43,76,263/- being 15% of total receipts of Rs. 9,58,41,751/- on account of accumulation/ set apart. While allowing the said deduction, he has wrongly considered grant of Rs. 4,72,00,000/- received from Government, thus, allowed excess deduction of Rs. 70,80,000/- thereon. The AO was required to exclude government grant of Rs. 4,72,00,000/- from total receipt and then allow relief @15% on the remaining receipt on account of accumulation/ set apart. Therefore, there was total excess allowance of accumulation of Rs. 70,80,000/- as above. Under the context, the assessment order passed by the AO is thus, erroneous and prejudicial to the interest of the revenue to the above extent.

4. In light of the above facts, it is to inform you that proceeding U/s 263 of the Act is initiated in your case for the A.Y. 2014-15. In this connection, you are requested to attend before the undersigned in person or through an Authorised Representative on 01/08/2018 at 11:30 A.M. in my office to present your case, alongwith all relevant documents.

5. In case of non-compliance, it will be presumed that you have nothing to say in your case and the matter will be decided on merits and on the basis of documents available on record.

Yours faithfully,

(D.P. GUPTA)
Commissioner of Income tax, (Exemptions),
Ahmedabad

7. As is evident from the above the Ld. CIT(E) has merely stated that the assessee was not entitled to exemption of 15% of the grants received by it from the Government amounting to Rs. 4.72 crores. He has referred to the provisions of Section 11 of the Act but has not mentioned as to how the provisions of Section 11 disentitle the assessee to the said exemption. There is absolutely no basis mentioned in the show cause notice for this interpretation of law by the Ld. CIT(E) and it appears to be totally on his own whims and fancies . The Ld.DR, during the course of hearing before us, was unable to enlighten the bench as to which provision of law denied claim of exemption @ 15% of government grant .

7.1 The initial opinion of the Ld. CIT(E) of the assessment order being erroneous, we find ,is therefore without any basis at all. The Ld.CIT(E) has just arbritrarily found the assessment order erroneous. The section (263 of the Act) requires that if the commissioner “considers”(italics provided by us) any order passed by the AO being erroneous, jurisdiction to initiate revisionary proceedings may be exercised. Section 263 states so as under:

263. (1) The 67[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 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, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.

8. The basis for assuming jurisdiction u/s 263 of the Act is the consideration of the Commissioner of the Order of the AO being erroneous. The literal meaning of the word consider is to judge, deem or have an opinion. Surely the same cannot be in vaccum, without any basis. If so exercised without any basis, there cannot be said to be any opinion /consideration of any error in the order of the AO. Even otherwise though for the purposes of assuming jurisdiction u/s 263 of the Act there need not be a concrete finding of error, but at the same time, since the Revisionary powers empower the Commissioners to correct any error in the order of the AO, there has to be a preliminary finding of error to justify assumption of revisionary power. After all once revisionary proceedings are initiated the assessee is required to go through the whole rigmarole of participating in the proceedings, making his case before the commissioner which entails involvement of both time and resources of the assessee .Any initiation of revisionary proceeding, therefore, in an arbritray manner without any basis, we hold, is clearly not in accordance with law. And any order passed in consequence of such arbritraily initiated proceedings, we hold, are not sustainable in law.

9. In the present case there being no basis at all with the Ld. CIT(E) for considering the assessment order to be erroroneous , the initiation of revisionary proceedings by the Ld. CIT(E) u/s. 263 of the Act,we hold, is without jurisdiction and invalid. The order passed in pursuance to such invalid assumption of jurisdiction is also therefore, we hold, no sustainable in law and for this reason alone is set aside.

10. Further we have noted that nowhere in the entire order passed by the Ld.CIT(E) any basis has been given for finding the assesses claim to exemption of 15% of the government grants not being as per law. The finding of the assessment order being erroneous on this count is therefore, we find, without any basis or justification. And in the light of the same, we hold, that there is no finding of the assessment order being erroneous.

11. Going further, we find that the assessee had explained as to why the order of the A.O. was not in error. He had stated that though the assessee had claimed exemption u/s. 11 of the Act, it was rightfully and legally entitled to claim its income as exempt as per the provisions of Section 10(23C)(iiiab) of the Act since it was wholly/substantially financed by the Government. Working depicting more than 90% of its receipts from government, to substantiate its claim, was also filed by the assessee. Alternatively, it was pleaded that even as per the provisions of section 11 of the Act its entire income was exempt, even after denying exemption of 15% of the grants received from the Government as contended by the Ld. CIT(E) ,since its application in capital assets was sufficient to cover the gap. Computation to this effect was also filed by the Ld. Counsel for the assessee. But we find that the Ld. CIT(E) rejected both the contentions without giving any reasons and totally arbitrarily.

12. The explanation of the assessee that it was entitled to exemption u/s. 10(23C)(iiiab) of the Act was submitted to the Ld. CIT(E) vide letter dated 21st August, 2018. The relevant portion is as under:

To,
Commissioner of Income Tax,
(Exemptions),
Ahmedabad

Sir,

Sub: Show cause notice u/s. 263 of the I.T. Act, 1961- Society for Gujarat Dental Health Education & Research (PAN: AAKTS0210N) for A.Y. 2014-15 – Submissions regarding-

Kind reference is invited to your Honour’s notice bearing No, CIT(E)/Ahd/263/SGDHER/2018-19/376 dt. 16-07-2018 on the subject cited above. In this regard we beg to make the following submissions for your Honour’s kind consideration,

2. We find that the order passed u/s. 143(3) of the Act on 27-10-2016 is taken to be erroneous and prejudicial to the of revenue and proceedings u/s. 263 have been initialed in view of the facts stated in paragraph 3,1 (page 2) of the notice under reply. The relevant facts as appearing in the computation of income and taken into consideration are as under,

i. Total receipts are Rs.9,58,41,751/-.

ii. Amount taken to be available for being set apart @ 15% of the total receipt is Rs. 1,43,76,263/-(15% of Rs.9,58,41,75I-).

iii. Total receipts includes government grant of Rs.4,72.00,000/-.

iv. The view taken as per the notice under reply is that the government grant of Rs.4,72,00,000/-. was required to be excluded from the total receipts of Rs.9,58,41,751/-in computing 15% available for being set apart.

v. That the AO having not done so has excess allowance of Rs.70,80,000/- has been given.

2,2. In this regard we enclose herewith the following documents to enable your Honour to appreciate the relevant facts properly.

i. Copy of Government of Gujarat Resolution/Notification establishing the Society for Gujarat Dental Health Education & Research

ii. Copy of Memorandum of Association and the rules and Regulations of Society for Gujarat Dental Health Education & Research.

iii. Copy of acknowledgment of the return of income for A,Y. 2014-15 and the computation of income.

iv. Copy of Auditor’s report and the detailed accounts including balance sheet, income and expenditure account and schedules thereto.

3, At the outset we submit this is government educational institution. It has been established by the Government of Gujarat. While it is registered as a Public Charitable Trust and under the Societies Registration Act, 1960, it is managed by the officers of the Government appointed as trustees, it would be seen from the object of the Memorandum of Association that the Society is established by the government of Gujarat solely for the educational purposes in the field of dentistry not for the purposes of profit. Therefore the income of the Society is exempt u/s. 10(23C)(iiiab) of the I, T. Act, 1961, The relevant provision is reproduced for ready reference,

(iiiab) any university or other educational institution existing solely for educational purposes and not for purposes of profit, and which is wholly or substantially financed by the Government; or]

(iiiac)……..

[Explanation.-For the purposes of sub-clauses (iiiab) and (iiiac), any university or other educational institution, hospital or other institution referred therein, shall be considered as being substantially financed by the Government for any previous year, if the Government grant to such university or other educational institution, hospital or other institution exceeds such percentage of the total receipts including any voluntary contributions, as may be prescribed, of such university or other educational institution, hospital or other institution, as the case may be, during the relevant previous year.:]

We submit that the institution will be considered as being substantially financed by the Government under Rule 2BBB of the I. T. Rules 1962, if the Government grant to such institution exceeds 50% of the total receipts including voluntary contributions during the relevant previous year.

3.2. We have now to invite your Honour’s attention to the grants received by the assessee-Society.

Your Honour will kindly find that in view the provisions of S. 10(23C)(iiiab) of the I, T. Act, 1961, r. w. s. Rule 2BBB of I. T. Rules, 1962, and the factual position of the receipts of the Society being nearly 90% from the grants received from the Government, the entire income of the Society is exempt and not liable to tax. The error, which may be contributory from either side, is computation of income applying the provisions of S. 1 1 of the I. T. Act, 1961 instead of S. 10(23C)(iiiab) of the L T. Act, 1961 . The fact however remains that no amount which may be chargeable to tax has remained to be taxed.

3.3. In view of the above position your Honourwill kindly see that the action proposed to be taken u/s. 263 of the Act deserves to be dropped. In case of queries, if any, we request your Honour to kindly intimate the same and give us an opportunity for submitting explanation.

4. In view of the submissions made hereinabove your Honour will kindly appreciate that the income of the Institution being exempt no prejudice is caused to the Revenue. We therefore request your Honour to kindly drop the proceedings u/s.263 of the act and oblige.

5. Letter of Authority is attached herewith.

Thanking your Honour.

Yours faithfully,
For Society for Gujarat Health Education & Research

13.. And then vide letter dated 28th August, 2018 reproduced under:

To,
Commissioner of Income Tax,
(Exemptions),
Ahmedabad

Sir,

Sub: Show cause notice u/s. 263 of the I.T. Act, 1961- Society for Gujarat Dental Health Education & Research (PAN: AAKTS0210N) for A.Y. 2014-15 – Submissions regarding-

With reference to the above subject and in continuation to our previous written submission dt.2 1-08-201 Sand also with reference to the hearing that took place on 21­08-2018, we beg to make the following further submissions for your Honour’s kind consideration.

2. In the course of hearing we have been desired to make further submissions in respect of the issues raised as under.

i. To provide working u/s. 10(23C)(iiiab) of the Act for the A. Yrs. 2012-13, 2013-14 and 2014-15.

ii. To submit explanation on merits in respect of the issue raised in the notice issued u/s. 263 of the Act.

iii. Copies of sanction letters for the A. Yrs. 2012-13, 2013-14 and 2014-15.

2.2. We are enclosing herewith the copies of sanction letters relatable to the three assessment years as mentioned at item No. (iii) above, for your Honour’s kind perusal and record.

3. At the outset we submit, with regard to the first query/requirement to provide working u/s. 10(23C)(iiiab) of the Act for the A. Yrs. 2012-13, 2013-14 and 2014-15, that the provisions u/s. 10(23C)(iiiab) of the Act are applicable on a year to year basis. However, the working as required by your Honour is submitted as under.

Receipts during the previous year are as under.

The government grants works out to Rs.31,88,56,000/- which comes to 86.76% of the total receipts. Accordingly the income of the trust is exempt u/s. 10(23C)(iiiab) of the Act.

A. Y. 2013-14(preceding year).

The government grants works out to Rs.35,48,10,0007- which comes to 93.50% of the total receipts. Accordingly the income of the trust is exempt u/s. 10(23C)(iiiab) of the Act.

A. Y. 2012-13 (year before preceding year). ‘

Receipts during the previous year are as under.

The government grants works out to Rs.14,50,00,000/- which comes to 98.97% of the total receipts. Accordingly the income of the trust is exempt u/s. 10(23C)(iiiab) of the Act.

14. The assessee had ,as is evident demonstrated that it was substantially financed by the state government and for the said purpose had shown that more than 90% of its total receipts was by way of endowment funds and grants and subsidies from the state government.

15. Ld. CIT(E), we find has rejected this contention by stating that the claim made by the assessee is incorrect and that it is not substantially financed by the Government ,its percentage of Government grants to total receipt being only 49.24%. The relevant findings of the Ld. CIT(E) in this regard at para 9(i) of the order is as under:

(i) With regard to assessee’s contention that it falls u/s 10(23C)(iiiab), it is not found acceptable in view of the fact during the year under revision, it has not satisfied the basic condition that it was wholly or substantially financed by the government. The same is evidenced by following working :

This shows that percentage of government grant to total receipt is 49.24 % meaning thereby it can not be termed as institution wholly or substantially financed by the government so as to elligible for exemption u/s 10(23C)(iiiab).

16. On perusal of the findings of the Ld. CIT(E) and the contentions of the assessee, we find that while assessee had included endowment funds grants received from the Government in its total receipts to demonstrate that it was substantially financed by the Government, Ld. CIT(E) has excluded the endowment grants while calculating the percentage of Government financing and while doing so has given no reasons for excluding the same. There is therefore, we find no basis given by the Ld. CIT(E) for rejecting the claim of the assessee that it was entitled alternatively to claim its income as exempt u/s.10(23C)(iiiab) of the Act.

16.1 As for the alternative contentions of the assessee that even without claiming 15% exemption of its income from Government grants, it was entitled to exemption u/s. 11 of the Act after taking into account the amounts utilized for capital purposes, the same was furnished vide letter dated 28th August, 2018 as under:

4. We have also been desired to submit the working on merits in the context of the subject matter of notice u/s. 263 of the Act, which is under reply. As per the said notice excess deduction of Rs.70,80,000/- has been given on account of the fact that the government grant of Rs.4, 72,00,000/- has not been excluded in computing permissible amount of 15% that could be accumulated. In this regard we submit that the computation u/s. 11 of the Act, even assuming that Rs.70,80,000/- is not available for accumulation u/s. 11 of the Act, is as under.

Your Honour will kindly see from the above working that there would be no tax liability even 11 of the Act even in a case it is assumed that provisions of S.10(23C)(iiiab) are inapplicable.

17. The same was rejected by the Ld. CIT(E) holding at para 9(ii) of his order as under:

ii. With regard to assessee’s other contention as mentioned in para 6.b above, the same can not be accepted as in its computation of income formed part of return of income filed on 17.09.2014,it has claimed accumulation or set apart to the extent of 15 % of total income which comes to Rs. 1,43,76,263/-. Now, without filing revised return of income, the assessee can not revised its claim for the same simply by way of a written submission as above. Hence, the same is not tenable and therefore, rejected. In other words, no claim of exemption of income u/s 10(23C)(iiiab) has been made in the return of income. Thus it can not allowed at this stage. Moreover, there are other conditions to be satisfied for claiming the exemptions u/s 10(23C)(iiiab) of Income Tax Act.

18. The Ld. CIT(E), we find has rejected this contention of the assessee by stating that the assessees claim of utilization of its income in capital asssets tantamounts to revising its return and therefore the contention is not acceptable. We are not in agreement with the same. The assesse’s claim of exemption of its entire income has remained unchanged and unrevised. What has only changed is the basis of the claim that too without foregoing its original basis and as an alternate only and that too when confronted with the prospect of being denied exemption of 15% of Govt. grants as originally claimed. The same does not tantamount to revising its return by any chance. Also if the alternate basis of claim of the assessee was as per law the assessment order could not be held erroneous in allowing benefit of exemption u/s 11 to the assessee. Without any finding to the contrary the Ld.CIT(E) we hold had erred in finding the assessment order erroneous on this count.

19. In view of the above, it is abundantly clear that there was no basis with the Ld. CIT(E) at all for arrive at his finding that the assessment order passed in the present case was in error by allowing the assessee exemption of 15% of its income from Government grants. We therefore hold that the Ld.CIT(E) has failed to find any error causing prejudice to the Revenue in the present case. The order passed by the Ld. CIT(E) u/s. 263 of the Act is therefore not sustainable in law and is accordingly set aside.

20. In effect, appeal of the Assessee is allowed.

Order pronounced in the open court on 23 -02-2022