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2025 (5) TMI 2040 - AT - Income TaxRevision u/s 263 - exemption u/s 11 - AO failure to examine the objects of the donee institutions to whom the appellant charitable trust made donations HELD THAT - Undisputedly the appellant trust made donations to 72 institutions stated to be institutions duly registered u/s.12A of the Act as well as registered under FCRA. The said donations were made out of the current year s income of the appellant trust. Therefore it is only out of current income and not from accumulated income u/s. 11(2) of the Act. Therefore such donation is not hit by provisions of Explanation inserted to section 11(2)(a) by the Finance Act 2022 w.e.f. 01.04.2023. Therefore donations by the charitable trust to another charitable trust amount to application of income for charitable purposes as held in the case of CIT vs. Sri Aurobindo Memorial Fund Society 1999 (3) TMI 24 - MADRAS HIGH COURT affirmed by 1996 (3) TMI 10 - SUPREME COURT in 239 ITR 502. Only condition is that such donations should be consistent with the objects of the trust as laid down in the case of Shriram Education Foundation 2003 (12) TMI 51 - DELHI HIGH COURT following the judgement of Aditnar Educational Institution 1997 (2) TMI 3 - SUPREME COURT In the present case the assessment order is totally silent on this aspect nor was it is the case of the appellant trust that the AO had examined the aspect whether the donee trusts are having similar objects as that of the appellant trust. Merely because the donee trusts were duly registered u/s.12AA of the Act ispo facto does not qualify for deduction u/s.11 of the Act. The appellant trust could not demonstrate before us that this aspect of the issue was examined by the AO during the course of assessment proceedings which is crucial and important to decide the eligibility of the donations made to other trusts for exemption u/s.11 of the Act. Thus the AO had clearly failed to examine the question of the eligibility of the donations made by the trust to another institution and therefore the said assessment was palpably wrong and falls within the meaning of erroneous order. PCIT (Exemption) was justified in exercising the power of revision u/s. 263 of the Act by setting aside the assessment order - Decided against assessee.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal are: (a) Whether the assessment order passed by the Assessing Officer (AO) can be held to be erroneous and prejudicial to the interests of Revenue under section 263 of the Income Tax Act, 1961 ("the Act") for failure to examine the objects of the donee institutions to whom the appellant charitable trust made donations. (b) Whether the donations made by the appellant trust to other institutions registered under section 12A and Foreign Contribution Regulation Act (FCRA) qualify for exemption under section 11 of the Act without scrutiny of the objects of the donee trusts. (c) Whether the delay of 265 days in filing the appeal before the Tribunal can be condoned. (d) The scope and applicability of the revisional power under section 263 of the Act, particularly the threshold for an order to be considered erroneous and prejudicial to Revenue. 2. ISSUE-WISE DETAILED ANALYSIS Issue (c): Condonation of Delay in Filing Appeal The appellant filed the appeal before the Tribunal with a delay of 265 days. Initially, the Tribunal dismissed the appeal for failure to show sufficient cause for delay. However, the Hon'ble Kerala High Court set aside this order and directed the Tribunal to reconsider the condonation application after the appellant filed an additional affidavit explaining the delay. On reference to a Third Member due to difference of opinion, the delay was condoned, holding that there was sufficient reasonable cause for the delay. This procedural issue was thus resolved in favor of the appellant, enabling the Tribunal to hear the appeal on merits. Issue (a) and (b): Whether the Assessment Order is Erroneous and Prejudicial to Revenue for Failure to Examine the Objects of Donee Institutions Relevant Legal Framework and Precedents: Section 263 of the Income Tax Act empowers the Commissioner of Income Tax to revise an assessment order if it is found to be erroneous and prejudicial to the interests of Revenue. The Supreme Court in Malabar Industrial Co. Ltd. v. CIT clarified that the power under section 263 is not to be invoked for every mistake but only when the order is clearly erroneous, i.e., an incorrect assumption of facts or law, or passed without application of mind or principles of natural justice. Further, the Supreme Court in CIT v. Max India Ltd. reiterated that the error must be non-debatable and not a plausible view taken by the AO. The AO's role is both adjudicatory and investigative, and an order passed without enquiry or ignoring available material may be set aside under section 263. Regarding exemption under section 11, the law is settled that donations by a charitable trust to another charitable trust registered under section 12A and FCRA qualify as application of income for charitable purposes, provided such donations are consistent with the objects of the donor trust. This principle was upheld by the Madras High Court in CIT v. Sri Aurobindo Memorial Fund Society, affirmed by the Supreme Court, and further elaborated by the Delhi High Court in Shriram Education Foundation v. DIT (Exemption) following the Supreme Court's decision in Aditnar Educational Institution v. Addl. CIT. The Supreme Court in CIT v. Dawoodi Bohara Jamat held that even if the donee institutions have religious objects, they may still qualify for exemption under section 11. Court's Interpretation and Reasoning: The Tribunal noted that the appellant trust made donations amounting to over Rs. 20 crore to 72 institutions registered under section 12A and FCRA. The donations were made out of the current year's income, not accumulated income, thus not affected by the Explanation to section 11(2)(a) inserted by the Finance Act, 2022. However, the Tribunal observed that the assessment order was silent on whether the AO examined the objects of the donee institutions to ensure that the donations were applied to charitable purposes consistent with the appellant trust's objects. Merely because the donee trusts were registered under section 12A and FCRA does not ipso facto entitle the appellant to exemption under section 11 without such examination. The appellant failed to demonstrate that the AO had examined this crucial aspect during the assessment proceedings. The AO's failure to do so rendered the assessment order erroneous and prejudicial to Revenue. The Tribunal relied on the Kerala High Court's decision in Cochin International Airport v. ACIT, which clarified that section 263 applies where the order sought to be revised: (a) contains error for lack of reasoning; (b) proceeds on incorrect assumption of facts and applies the law incorrectly; and (c) is a stereotyped order passed without enquiry merely accepting the assessee's version. The Tribunal found that the AO's order fell within these categories because it did not apply mind to the issue of eligibility of donations for exemption, which is a vital fact and legal requirement. Key Evidence and Findings: The appellant's submissions included that all donee institutions were registered under section 12A and FCRA and engaged in charitable activities. Reliance was placed on the Supreme Court's decision in CIT v. Dawoodi Bohara Jamat and the Calcutta High Court's ruling in CIT (Exemption) v. St. Joseph Convent Chandannagar to support the claim that even religious institutions may qualify for exemption. The Revenue's contention was that the AO's failure to examine the objects of the donee institutions rendered the order erroneous. The Tribunal accepted the Revenue's contention, emphasizing that registration alone does not suffice and the AO must examine the objects to ensure consistency with the donor trust's objects. Application of Law to Facts: Applying the principles of section 263 and the established precedents, the Tribunal held that the AO's failure to examine the objects of the donee trusts was a clear error. Since the donations were substantial and central to the exemption claim, this omission prejudiced the Revenue. Therefore, the revisional power under section 263 was rightly exercised by the Principal Commissioner of Income Tax (PCIT) in setting aside the assessment order and directing reassessment after proper examination. Treatment of Competing Arguments: The appellant's argument that registration under section 12A and FCRA and the Supreme Court's ruling in Dawoodi Bohara Jamat suffice for exemption was acknowledged but held insufficient without AO's examination of the objects. The Revenue's reliance on Malabar Industrial Co. Ltd. was accepted to stress that non-examination of crucial facts is an error attracting revision under section 263. Conclusions: The Tribunal concluded that the PCIT was justified in invoking section 263 to set aside the assessment order for failure to examine the eligibility of donations made by the appellant trust to other institutions for exemption under section 11. The appeal was accordingly dismissed. 3. SIGNIFICANT HOLDINGS The Tribunal preserved the following crucial legal reasoning verbatim: "The Parliament had conferred the power of revision on the Commissioner of Income Tax u/s 263 of the Act in case the assessment order passed is erroneous and prejudicial to the interests of revenue. In order to invoke the power of revision, the above two conditions are required to be satisfied cumulatively. References in this regard can be made to the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT, 243 ITR 83 (SC) and in the case of CIT vs. Max India Ltd., 295 ITR 282 (SC). The error in the assessment order should be one that it is not debatable or plausible view. In a case where the Assessing Officer examined the claim took one of the plausible views, the assessment order cannot be termed as an 'erroneous'." "Merely because the donee trusts were duly registered u/s. 12AA of the Act ispo facto does not qualify for deduction u/s. 11 of the Act. The appellant trust could not demonstrate before us that this aspect of the issue was examined by the AO during the course of assessment proceedings which is crucial and important to decide the eligibility of the donations made to other trusts for exemption u/s. 11 of the Act. Thus, the AO had clearly failed to examine the question of the eligibility of the donations made by the trust to another institution and, therefore, the said assessment was palpably wrong and falls within the meaning of erroneous order." "It is true that all orders, which are erroneous, are not liable to be subjected to proceedings under Section 263 of the Income Tax Act, 1961. To invoke Section 263, the Principal Commissioner of Income Tax must be satisfied that the erroneous order also causes prejudice to the Revenue. The real purport of Section 263 is to remove the prejudice caused to the Revenue by the erroneous order passed by the assessing officer and it empowers the Commissioner to initiate suo motu proceedings, when either the assessing officer takes a wrong decision without considering materials available on record or renders a decision without enquiry." Core principles established include: - The revisional power under section 263 is to be exercised only where the order is clearly erroneous and prejudicial to Revenue, not for every error or difference of opinion. - Registration of donee trusts under section 12A and FCRA alone does not automatically entitle the donor trust to exemption under section 11; the AO must examine whether the donations are consistent with the objects of the donor trust. - The AO's failure to examine crucial facts and pass an order without application of mind or enquiry renders the order erroneous and justifies revision under section 263. - Delay in filing appeal can be condoned if sufficient cause is shown, enabling adjudication on merits. Final determinations: (i) The delay of 265 days in filing appeal before the Tribunal was condoned. (ii) The assessment order passed by the AO was erroneous and prejudicial to Revenue for failure to examine the objects of the donee institutions. (iii) The revisional order passed by the PCIT under section 263 setting aside the assessment order was justified. (iv) The appeal filed by the appellant was dismissed.
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