Invocation of revisional jurisdiction u/s 263 on mere conjectures, suspicions and surmises, is impermissible

Impact Foundation (India) Vs CIT (ITAT Mumbai)

ITAT Mumbai held that initiated revision jurisdiction under section 263 of the Income Tax Act on mere conjectures, suspicions and surmises, is not permissible in law.

Facts-

The assessee is a non-profit company (charitable institution) and it is registered u/s 12AA of the Act. The assessment in the hands of the assessee for the year under consideration was completed by the AO u/s 143(3) of the Act on 12-12-2019 accepting ROI filed by the assessee. CIT(E), upon examination of assessment record, noticed that the assessee had claimed deduction towards accumulation of income u/s 11(2) of the Act in the immediately preceding year, i.e., in AY 2016-17 for an amount of Rs.14.51 crores. And during the year under consideration [AY 2017-18], the assessee has claimed to have spent a sum of Rs.6.00 crores out of the above said accumulated amount and has duly reported the same in Schedule 1 of the return of income. CIT(E) noticed that the assessee has not submitted the details or any documentary evidence in support of claim of utilization of above said amount of Rs 6 crores. Accordingly, he took the view that the AO has not verified the issue at all and the same has rendered the assessment order erroneous and prejudicial to the interests of revenue. Accordingly, CIT(E) initiated revision proceedings u/s 263 of the Act.

Conclusion-

Held that in the present case AO has discharged the duty of investigator (on the utilization of Rs 6 crores), then before Ld. CIT(E) holds the view of AO as erroneous, it was imperative on the part of Ld CIT(E) to have made necessary enquiries or verification and should have arrived at a conclusion that there was breach/violation of clause (a) or clause (b) or clause (d) of sec. 11(3) of the Act. Admittedly, in the instant case, the Ld CIT(E) has not conducted any such enquiry or verification. In such a scenario, we have to hold that he has initiated revision jurisdiction on mere conjectures, suspicions and surmises, which is not permitted.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This is an appeal preferred by the assessee against the order of the Ld CIT (Exemptions), Mumbai passed u/s 263 of the Income tax Act, 1961 (hereinafter “the Act”) dated 24.03.2022 for assessment year 2017-18. The assessee is challenging the validity of invocation of jurisdiction by Ld CIT(E) u/s 263 of the Act.

2. The facts relating to the issue are discussed in brief. The assessee herein is a non-profit company (charitable institution) and it is registered u/s 12AA of the Act. This organization was formed as an NGO for helping organizations to improve their implementation of programs which help women and children in education, health and livelihoods. The assessment in the hands of the assessee for the year under consideration was completed by the AO u/s 143(3) of the Act on 12-12-2019 accepting the return of income filed by the assessee. The Ld CIT(E), upon examination of assessment record, noticed that the assessee had claimed deduction towards accumulation of income u/s 11(2) of the Act in the immediately preceding year, i.e., in AY 2016-17 for an amount of Rs.14.51 crores. And during the year under consideration [AY 2017-18], the assessee has claimed to have spent a sum of Rs.6.00 crores out of the above said accumulated amount and has duly reported the same in Schedule 1 of the return of income. The Ld CIT(E) noticed that the assessee has not submitted the details or any documentary evidence in support of claim of utilization of above said amount of Rs 6 crores. Accordingly, he took the view that the AO has not verified the issue at all and the same has rendered the assessment order erroneous and prejudicial to the interests of revenue. Accordingly, the Ld CIT(E) initiated revision proceedings u/s 263 of the Act.

3. Before Ld CIT(E), the assessee contended that the assessment order is neither erroneous nor prejudicial to the interests of revenue. In this regard, the assessee relied upon hosts of case laws. The Ld CIT(E) rejected the said contentions by taking support of Explanation 2 to sec. 263 of the Act inserted by Finance Act, 2015 w.e.f. 1.6.2015, as per which if the assessment order is passed without making inquiries or verification which should have been made, it shall be deemed to be erroneous in so far as it is prejudicial to the interests of revenue.

4. On merits, the assessee submitted that the AO has called for details of accumulation of funds in the earlier years, amounts utilized out of those funds etc., during the course of assessment proceedings. The assessee also furnished the details of Rs.6.00 crores spent by it during the year under consideration out of the amounts accumulated in the preceding year as under:-

The Ld CIT(E), however, took the view that the assessee has furnished utilization of accumulated amounts under broad heads. He took the view that the AO should have called for break-up details, examined them with supporting evidences that the said utilization is as per the objects of the assessee. He also expressed the view that the AO was expected to have made test check third party verifications in order to satisfy himself of the correctness of assessee’s claim. Since the AO has not verified the issue on the above said line, the Ld CIT(E) held that the assessment order is rendered erroneous and prejudicial to the interests of revenue. Accordingly, he set aside the assessment order for the limited purpose of examining the details of utilization of the amount of Rs.6.00 crores. The assessee is aggrieved by the impugned action of Ld CIT(E) and has challenged the validity of invocation of jurisdiction by Ld CIT(E) u/s 263 of the Act.

5. The Ld A.R submitted that the AO, during the course of assessment proceedings, has examined the issue of utilization of Rs.6.00 crores out of the funds accumulated u/s 11(2) of the Act in AY 2016-17. In this regard, he submitted that the AO has made specific enquiries through notice dated 17-01-2019 issued u/s 142(1) of the Act and also through another notice dated 11-10-2019. He submitted that the assessee has furnished the details of utilization of Rs.6.00 crores, vide its letters dated 30-01-2019 and 03-12-2019. The assessee has furnished the details of accumulation of funds made u/s 11(2) of the Act in the earlier years, details of utilization of funds, copy of Form no.10 and board resolutions. The Ld A.R submitted that the AO was satisfied with the details furnished by the assessee and accordingly accepted the same. He submitted that the assessee has used the accumulated funds only for the purposes for which it was accumulated. Accordingly, he submitted that the AO has taken a possible view of the matter and it is not a case of non-enquiry as alleged by Ld CIT(E).

6. The Ld A.R further submitted that the funds accumulated during the year ending 31.3.2016 could be utilized by the assessee within next five years. Hence the question of non-utilization of funds and the consequences thereon should be examined in the assessment year 2022-23. He further submitted that the Ld CIT(E) has not found fault with the submission of the assessee. He submitted that the assessee has furnished all the relevant details before Ld CIT(E) also. However, the Ld CIT(E) has proceeded to hold that the assessment order is erroneous without considering the fact that the AO had made due enquiries during the course of assessment proceedings and was satisfied with the replies given by the assessee. He submitted that the Ld CIT(E) has failed to point out the error, if any, in the assessment order, i.e., he has proceeded to hold the assessment order as erroneous without actually pointing out the error, if any, in the order despite AO conducting enquiry.

7. On the contrary, the Ld D.R supported the order passed by Ld CIT(E). He submitted that the AO has not examined the finer details of utilization of accumulated funds and the same has rendered the assessment order erroneous and prejudicial to the interests of revenue.

8. We have heard rival contentions and perused the record. The scope of revision proceedings initiated under section 263 of the Act was examined by Hon’ble Bombay High Court, in the case of Grasim Industries Ltd. V CIT (321 ITR 92) by taking into account the law laid down by the Hon’ble Supreme Court. The relevant observations are extracted below:

“Section 263 of the Income-tax Act, 1961 empowers the Commissioner to call for and examine the record of any proceedings under the 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, to pass an order upon hearing the assessee and after an enquiry as is necessary, enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment. The key words that are used by section 263 are that the order must be considered by the Commissioner to be “erroneous in so far as it is prejudicial to the interests of the Revenue”. This provision has been interpreted by the Supreme Court in several judgments to which it is now necessary to turn. In Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83, the Supreme Court held that the provision “cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer” and “it is only when an order is erroneous that the section will be attracted”. The Supreme Court held that an incorrect assumption of fact or an incorrect application of law, will satisfy the requirement of the order being erroneous. An order passed in violation of the principles of natural justice or without application of mind, would be an order falling in that category. The expression “prejudicial to the interests of the Revenue”, the Supreme Court held, it is of wide import and is not confined to a loss of tax.

What is prejudicial to the interest of the Revenue is explained in the judgment of the Supreme Court (headnote) :

“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.”

The principle which has been laid down in Malabar Industrial Co. Ltd. [2000] 243 ITR 83 (SC) has been followed and explained in a subsequent judgment of the Supreme Court in CIT v. Max India Ltd. [2007] 295 ITR 282.”

The principles laid down by the courts are that the Learned CIT cannot invoke his powers of revision under section 263 if the Assessing Officer has conducted enquiries and applied his mind and has taken a possible view of the matter. If there was enquiry and a possible view has been taken, it would not give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has a different opinion in the matter. The consideration of the Commissioner as to whether an order is erroneous in so far it is prejudicial to the interests of Revenue must be based on materials on record of the proceedings called for by him. If there are no materials on 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 proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to start fishing and roving enquiries in matters or orders which are already concluded unless he is able to hold that AO’s view on the issue is unsustainable in law.

8. In the instant case, it has been brought to our notice that the AO during assessment proceedings has asked specific queries on the details of accumulation of funds. The copies of replies filed by the assessee are given in the paper book. Vide letter dated 30-01-2019, the assessee has furnished the details of accumulation of income made u/s 11(2) of the Act for the past 6 years along with details of utilization. The same was annexed as Annexure 12 along with the copy of Form 10 and board resolution for the subject years. The details are available at pages 14 and 15 of the paper book. The assessee has specifically stated that the amount of Rs.6.00 crores have been utilized for the specified purposes of accumulation. Further, vide letter dated 3^rd December, 2019, the assessee has again stated that the above said details have been furnished through the earlier letter. Accordingly, it can be seen that the AO has, in fact, made inquiries about the accumulation of income and utilization thereof. So it cannot be said in the facts and circumstances of the case that it is a case of no enquiry but at best the Ld. CIT(A) can say it is lack of enquiry in the manner he thought the enquiry ought to have been conducted. But we are afraid that cannot confer jurisdiction to invoke revisional jurisdiction u/s 263 of the Act unless the Ld. CIT(E) himself conducts enquiry on the issue and recording a finding which would show that AO’s view despite enquiry was erroneous/unsustainable in law.

9. And we note that even before Ld CIT(E), the assessee has furnished the specific details of utilization of funds. The case of the Ld CIT(E) is that the AO has failed to examine the break-up of the details of the said expenditure in order to satisfy himself that the said amount of Rs.6.00 crores was indeed used for the purpose for which it was accumulated. However, the question is whether the Ld CIT(E) can hold such a view when the AO has enquired about the issue and that too without pointing out the error, if any, in the assessment order in the revision proceeding u/s 263 of the Act?. According to us, the Ld. CIT(E) cannot do so, because AO has enquired about it and in such an event the Ld. CIT(E) himself has to enquire about the issue and point out that AO’s view was erroneous/un-sustainable in law.

10. In this context, it would be gainful to refer to case-law in the case of Gabriel India Ltd. (supra) wherein their Lordship answered the question as to when an order can be termed as “erroneous” which was explained as under:-

“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”

11. In the case of Nagesh Knitwears P Ltd (2012)(345 ITR 135), the Hon’ble Delhi High Court has elucidated and explained the scope of the provisions of sec. 263 of the Act and the same has been extracted by the Delhi High court in the case of CIT Vs. Goetze (India) Ltd (361 ITR 505) as under:-

“Thus, in cases of wrong opinion or finding on merits, the Commissioner of Income tax has to come to the conclusion and himself decide that the order is erroneous, by conducting necessary enquiry, if required and necessary, before the order under section 263 is passed. In such cases, the order of the Assessing Officer will be erroneous because the order is not sustainable in law and the said finding must be recorded. The Commissioner of Income tax cannot remand the matter to the Assessing Officer to decide whether the findings recorded are erroneous. In cases where there is inadequate enquiry but not lack of enquiry, again the Commissioner of Income tax must give and record a finding that the order/inquiry made is erroneous. This can happen if an enquiry and verification is conducted by the Commissioner of Income tax and he is able to establish and show the error or mistake made by the Assessing officer, making the order unstainable in law. In some cases possibly though rarely, the Commissioner of Income tax can also show and establish that the facts on record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the Assessing officer had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable. The matter cannot be remitted for a fresh decision to the Assessing Officer to conduct further enquiries without a finding that the order is erroneous. Finding that the order is erroneous is a condition or requirement which must be satisfied for exercise of jurisdiction under section 263 of the Act. In such matters, to remand the matter/ssie to the Assessing Officer would imply and mean the Commissioner of Income tax has not examined and decided whether or not the order is erroneous but has directed the Assessing Officer to decide the aspect/question….”

Similar view has been expressed by Hon’ble Madras High Court in the case of CIT Vs. Amalgamations Ltd (238 ITR 963).

12. The law as laid down by the Hon’ble High Courts makes it clear that when the AO has conducted enquiry on an issue, then the Ld Pr. CIT before holding an order to be erroneous, should conduct necessary enquiries or verification in order to show that the finding given by the AO on that issue is erroneous/unsustainable in law.

13. At this juncture, we may refer to the provisions of sec. 11(2) and 11(3) of the Act, which is extracted below:-

“11(2) Where eighty-five per cent of the income referred to in clause (a) or clause (b) of sub-section (1) read with the Explanation to that sub-section is not applied, or is not deemed to have been applied, to charitable or religious purposes in India during the previous year but is accumulated or set apart, either in whole or in part, for application to such purposes in India, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income, provided the following conditions are complied with, namely:—

(a) such person furnishes a statement in the prescribed form and in the prescribed manner to the Assessing Officer, stating the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed five years;

(b) the money so accumulated or set apart is invested or deposited in the forms or modes specified in sub-section (5);

(c) the statement referred to in clause (a) is furnished on or before the due date specified under sub-section (1) of section 139 for furnishing the return of income for the previous year:

Provided that in computing the period of five years referred to in clause (a), the period during which the income could not be applied for the purpose for which it is so accumulated or set apart, due to an order or injunction of any court, shall be excluded.

Explanation.—Any amount credited or paid, out of income referred to in clause (a) or clause (b) of sub-section (1), read with the Explanation to that sub-section, which is not applied, but is accumulated or set apart, to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, shall not be treated as application of income for charitable or religious purposes, either during the period of accumulation or thereafter.

(3) Any income referred to in sub-section (2) which—

(a) is applied to purposes other than charitable or religious purposes as aforesaid or ceases to be accumulated or set apart for application thereto, or

(b) ceases to remain invested or deposited in any of the forms or modes specified in sub-section (5), or

(c) is not utilised for the purpose for which it is so accumulated or set apart during the period referred to in clause (a) of that sub-section or in the year immediately following the expiry thereof,

(d) is credited or paid to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10,

shall be deemed to be the income of such person of the previous year in which it is so applied or ceases to be so accumulated or set apart or ceases to remain so invested or deposited or credited or paid or, as the case may be, of the previous year immediately following the expiry of the period aforesaid.”

14. Sec. 11(3) deals with the situation, when the assessee fails to utilize the income accumulated u/s 11(2) of the Act. Before us, the Ld A.R made reference to clause (c) of sec. 11(3) and submitted that the taxability of the accumulated income u/s 11(2) of the Act if any, is required to be examined only in the year immediately following the expiry of period of accumulation is not correct in the facts of this case because clause (c) of sec. 11(3) is attracted only in the event assessee fails to utilize the accumulated income within the period for which it is set-apart as per sec. 11(2)(a) of the Act; and that is not relevant to be considered. As far as the relevant facts of the present case are concerned, a perusal of Form 10 would reveal that the accumulated amount in AY 2016-17 was to the tune of Rs 14.51 crores up to 31.03.2021 i.e, AY 2021-22; and therefore non-utilization of accumulated amount as per clause (c) of sec 11(3) will attract taxation in the previous year immediately following the expiry of the period i.e, in AY 2022-23. However, it has to be taken note that is not the case of the Ld CIT(E) about the non-utilization of amount accumulated in AY. 2016-17 (i.e. Rs.14.51 crores). Whereas the fault pointed out by the Ld. CIT(E) is regarding the issue of non-examination by AO of Rs 6 crores expended by assessee in this relevant AY (out of accumulated amount of Rs 14.51 crores) which in such a situation according to us, clause (a) or (d) of sec. 11(3) of the Act is applicable. And clause (a) of Section 11(3) of the Act states that if the amount so accumulated is applied to purposes other than charitable or religious purposes or ceases to be accumulated or set apart for application thereto, then in such an event [when there is violation of clause (a)], then, the amount so applied shall be deemed to be the income of the previous year in which it is so applied ; or as per clause (d) of sec 11 (3) of the Act, if the amount is credited or paid to any Trust or Institution as stated therein, then the amount so credited or paid to the Trust or Institution shall be deemed to be the income of assessee of the previous year in which it is so credited or paid. Therefore, according to us, the AO is duty bound to enquire about the accumulated amount which has been claimed to have been expended and examine whether it has violated clause (a), or (b) or (d) of sec. 11(3) of the Act because in the event there is any breach then it shall be deemed to be the income of the previous year in which it is so applied or ceases to be invested or credited/paid as the case may be. So in the event if there is any expenditure of accumulated amount within the set-apart period and if there is any violation of clause (a), or (b) or (d) of sec. 11(3) of the Act, then in such a factual situation only, the tax liability could be imposed upon the assessee. Therefore the contention of Ld AR that the expenditure of Rs 6 crores can be looked in to by AO only in AY 2022-23 is devoid of merit and so rejected. Having said so, as held by the Hon’ble Supreme Court in the case of Malabar Industrial company (supra) before the Ld Commissioner invokes revisional jurisdiction u/s 263 of the Act, twin conditions should be satisfied viz., (i) the order of AO should be erroneous and (ii) as a consequence of passing of erroneous order, prejudice is caused to the interest of revenue. Unless both the conditions are satisfied, the Ld. CIT cannot invoke the provisions of sec. 263 of the Act. Hence, in the facts of the present case, it is possible to show that there was violation of clause (a) of sec. 11(3) which would attract tax liability, which may cause prejudice to the interests of revenue.

15. Though the perusal of the impugned revision order passed by Ld CIT(E) it is not clear, we infer that the case of Ld CIT(E) is that the assessee might have violated the provisions of clause (a) of Section 11(3) of the AO and the AO has failed to examine the same. However, we cannot countenance such a view of Ld. CIT(E) because, we have already taken note (supra) that AO has enquired about the accumulation of income of Rs. 6 crores and utilization thereof for the purpose for which it was accumulated and have allowed it, which is a plausible view unless the Ld CIT(E) has conducted during revisional proceedings enquiry or verified the facts in order to come to a conclusion that AO’s view was erroneous/un-sustainable in law. As noticed (supra) by Hon’ble High Courts had made it clear that once AO has conducted enquiry (on an issue) then the Ld Pr. CIT before holding the order of AO to be erroneous, should have conducted necessary enquiries or verification in order to show that the finding given by the AO on that issue is erroneous/unsustainable in law. Coming back to the present case, once we have found that AO has discharged the duty of investigator (on the utilization of Rs 6 crores), then before Ld. CIT(E) holds the view of AO as erroneous, it was imperative on the part of Ld CIT(E) to have made necessary enquiries or verification and should have arrived at a conclusion that there was breach/violation of clause (a) or clause (b) or clause (d) of sec. 11(3) of the Act. Admittedly, in the instant case, the Ld CIT(E) has not conducted any such enquiry or verification. In such a scenario, we have to hold that he has initiated revision jurisdiction on mere conjectures, suspicions and surmises, which is not permitted.

16. As noticed earlier the AO has conducted necessary enquiries regarding utilization of the accumulated income of Rs.6 crores was for the purpose for which it was accumulated and has accepted the same which is a plausible view. Therefore Ld. CIT(E) could have invoked jurisdiction u/s 263 of the Act only after enquiring himself, which we have already noticed that he has omitted to do so. In such a scenario, his impugned action of finding the action of AO to accept the claim of expenditure of Rs.6 crores as erroneous and prejudicial to the interests of revenue is untenable. Accordingly, we are of the view that the impugned revision order passed by Ld PCIT is not sustainable in law and assessee succeeds on the legal issue raised before us.

Accordingly, we quash the impugned revision order passed by Ld CIT(E).

17. In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on this 02/01/2023.