1. This is an appeal by the assessee against the order of the Commissioner under Section 263, of the Income-tax Act, 1961, for the assessment year 1983-84.
2. The assessee is a society registered under the Societies Registration Act. It was granted approval under Section 35(1 )(ii) of the Act, for carrying on research in the area of natural and applied science, vide Government of India Notification, dated 16-10-1981 being No. 4265 (F. No. 203/260/80-ITA, II). The notification was made valid for the period from 28-8-1981 to 31-3-1983. The previous year for the purpose of accounting and assessment was the calendar year and for the impugned year, it ended on 31-12-1982. As per its income and expenditure account, the income was Rs. 87,53,418 as against which the net income carried to the balance-sheet, after claiming expenditure, was Rs. 15,97,827. In other words, its expenditure was Rs. 71,55,591 which was claimed to be on scientific research. The income of Rs. 15,97,827 was claimed to be exempt under Section 10 of the Act. The assessee was also registered by the Commissioner at Serial No.INS/14970 under Section 12A of the Act, obviously for claiming exemption under Sections 11 and 12 of the Act, which registration though, not necessary was stated to have been obtained out of abundant caution. The assessee claimed its income to be exempt under Section 10 and filed a nil return. The Assessing Officer (AO) assessed the society at 'nil'. His order, which is a very short one, reads as under: In response to notice under Section 143(2) Shri V.K. Agarwal, C.A. attended. Audited copy of income and expenditure account and balance-sheet have been filed. As gross income exceeds Rs. 25,000 form No. 10B under Section 12A(b) has been filed. The trust is verified under Section 35(1)070 vide Notification No. 4265 (F. No. 203/260/80-ITA-II) dt. 16-10-1981. As such, the income of the trust is exempt from tax under Section 10(23)(e) of the Act as in last year. Surplus : Nil.
3. As the assessee was a scientific research association approved under Section 35(1)(ii) of the Act, its income applied solely to the purposes of that association was exempt under Section 10(21) of the Act For the impugned year, its income was held to be nil with the observation as if its income was exempt under Section 10(23) of the Act. In pursuance to a search operation, Sri R.P. Bhandari confessed that donations received by the trust were returned back to the donors after retaining ten to twenty per cent as commission. The Commissioner, therefore, issued notice under Section 263 dated 9-2-1988 for withdrawing the exemption.
Paras 2 and 3 of the said notice read as under: 2. It is noticed that the amounts shown in the accounts as applied for the objects of the trust were really not so applied. Shri R.P. Bhandari, the main trustee and Executive Vice-President of the trust has also been examined and he has also not claimed that the amounts shown as spent on the objects of the trust have really been so spent 3. Therefore, in exercise of the powers vested in me under Section 263, I proposed to direct the ITO to withdraw the exemption allowed under Section 11 of the IT Act, 1961.
4. In the order under Section 263, however, the Commissioner observed that "in the course of discussion it transpired that the assessee had claimed exemption under Section 10(21) and hence the question of exemption under Section 11 did not arise" and stated that "thus, in the show-cause notice there was only an inadvertent (perhaps typographical) mistake in mentioning Section 11" and that "it was clearly understood by Shri Joshi that what was meant to be conveyed was exemption already allowed under Section 10." The assessee stated before the Commissioner that it claimed exemption under Section 10(21) but the AO had, inadvertently, took it as under Section 10(23C) but the Commissioner did not agree. According to him, the AO meant application of Section 10(23C)(iv) and not Section 10(21) and had the AO meant to allow exemption under Section 10(21), he would have taken note of the excess of the sum of Rs. 15,97,827 and considered the question of its taxability which he did not. Even if the case was considered by the AO under Section 10(21), his order, according to the Commissioner, was erroneous insofar as it was prejudicial to the interests of the revenue. He, accordingly, set aside the order of the AO. The assessee had also raised many points including the one regarding obtaining of the statement of Shri R.K. Bhandari, at the back of the assessee, with regard to which he observed that matter could be thrashed out in greater details at the level of the AO. Aggrieved by the said order of the Commissioner, the assessee is in appeal before us.
5. The learned counsel for the assessee submitted that in coming to the conclusion that the order of the AO was erroneous, the Commissioner had gone beyond the record and taken into consideration the statement of Shri Bhandari recorded subsequent to the order made by the AO. This, according to him, is not permissible in law. Reference in this connection was made to the decision of the Tribunal (Hyderabad Bench 'A') in the case of Sri Vegi Bhadrachalam v. WTO [1987] 21 ITD 58. It was further submitted that it was not necessary that the income was to be utilised under Section 10(21) of the Act in that very year itself and for this proposition, he relied upon the judgment of the Orissa High Court in the case of Dalmia Institute of Scientific & Industrial Research v. ITO [1979] 118 ITR 575. He further submitted that the notice was bad as it meant to withdraw the exemption under Section 11 which was never allowed to the assessee by the AO. The assessee being not charitable trust or institution, the contribution received, a major part of the receipts, was not in the nature of income and in this connection, he brought to our notice the amended provisions of Section 2(24)(iia) introduced with effect from 1-4-1989.
6. The learned Departmental Representative, on the other hand, submitted that the AO having made no enquiry about the applicability of the provisions of Section 10(21) vis-a-vis its utilisation for the purposes of scientific research, his order was erroneous and prejudicial to the interests of the revenue. Reference in this connection was invited to the judgment of the Delhi High Court in Gee Vee Enterprises' v. Addl. CIT [1975] 99 ITR 375. "Record", according to him, include the entire record of the assessee available at the time of revision and in this context, he invited our attention to Explanation (b) to Section 263. The statement of Shri Bhandari, he submitted, was there before the Commissioner and, therefore, he could have taken that into consideration and looked into, at the time when he exercised the jurisdiction. As regards the validity of the notice, he invited our attention to para 2 of the notice issued to the assessee and the provisions of Section 292B and stated that the notice being in substance for the purposes of the Act, some minor irregularity should not invalidate the proceedings. In any case, as stated by the Commissioner, the assessee understood it to withdraw the exemption under Section 10(21), he was heard on that ground and therefore, the assessee is not justified in raising such a plea before the Tribunal.
As regards the decision of the Orissa High Court, he submitted that the emphasis is on the utilisation and the assessee, as admitted by one of the trustees Shri Bhandari, has not utilised the money for scientific research, the said decision does not help the case of the assessee. He further submitted that having admitted in its accounts that the contribution was income and also making application for registration and having granted registration under Section 12A of the Act by the Commissioner, there donations received were income under Section 2(24)(iia) and, therefore, the assessee is not justified in submitting that the receipts of donations were not its income. In reply to the submissions on behalf of the revenue, the learned counsel for the assessee submitted that the amended provisions of Section 263 incorporating definition of the term "record" would not be applicable to the proceedings prior to 1-6-1986 and, in this connection, reliance was placed on the judgment of the Bombay High Court in the case of Ritz Ltd. v. Union of India [1990] 184 ITR 599.
7. We have heard the parties and considered their rival submissions.
Three points are involved in this case: (i) what is record and whether the Commissioner could take into consideration the material came on record subsequent to the making of the assessment by the AO; (ii) whether the notice issued was such as invalidating the proceedings; and (iii) whether the receipts of the assessee by way of donations/ contributions were in the nature of income.
8. Section 263 of the Act provides that the Commissioner may call for and examine the record of any proceeding under the Act and if he considers that any order passed therein by the AO was erroneous insofar as it was 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 enquiry 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. This power of revision to be exercised by the Commissioner is upon examination of the record of the proceedings under the Act. What did "record" mean was not defined in the Act prior to its insertion by the Finance Act, 1988 with effect from 1-6-1988. It provides that "for removal of doubt, it is hereby declared that, for the purposes of Sub-section (1), of Section 263....
(b) record includes all records relating to any proceedings under this Act available at the time of examination by the Commissioner....
This definition of the term "record" was subsequently modified by the Finance Act, 1989 with retrospective effect from 1-6-1988 (the day when the definition of the term "record" was inserted by the Finance Act, 1988) to the following effect: Record shall include and shall be deemed always to have included all records relating to any proceedings under this Act available at the time of examination by the Commissioner.
Prior to the insertion of the Explanation (b) below Section 263(1), it has been held that the word "record" in Section 263(1) could not mean the record as it stood at the time of examination by the Commissioner but it meant the record as it stood at the time the order was passed by the AO.Exercise of the revisional jurisdiction was not on the basis of subsequent events as it would otherwise conflict with the jurisdiction of the AO under other provisions of the Act. It was held by Their Lordships of the Bombay High Court in the case of Bennett Coleman & Co.
Ltd. v. ITO [1983] 141 ITR 239 that the order of the Valuation Officer passed in reference under Section 55A of the Act was not in existence at the time the ITO passed the order and, therefore, it could not and did not form part of the record on which the order of the ITO was based and thus, the proceedings initiated by the Commissioner in exercise of his powers under Section 263 were held to be without jurisdiction and invalid. In similar circumstances, the Calcutta High Court in the case of Ganga Properties v. ITO [1979] 118 ITR 447 that Section 263 refers to "record" as existed before the ITO and not the record as existed at the time the Commissioner took action under Section 263 and that the Commissioner could not revise an order which was correct and could not be said to be erroneous on the material existed at the time it was made by taking into consideration the material came into existence later on.
This was the view expressed by the Tribunal in the case of Sri Vegi Bhadrachalam (supra). The statement of the managing trustee, Sri Bhandari, was admittedly recorded after the assessment was made by the AO. In these circumstances in our opinion, the same could not form a part of the record on the basis of which the Commissioner could have exercised his jurisdiction under Section 263. It is true that the effect of the Explanation of Mr. Bhandari was that what was stated before the AO at the time of assessment was not true but having this information came into existence after the completion of the assessment by the AO, it was not a part of the record on the basis of which the Commissioner could have based his order of revision.
9. The reliance by the revenue on the definition of the term "record" as was inserted by the Finance Act, 1988 with effect from 1-6-1988, as amended by the Finance Act, 1989 and the statement of the learned author Shri Palkhivala in his Commentary on Income-tax Law & Practice, VIII Edition, Vol. I, page 1566, stating that the decision of the Calcutta High Court was retrospectively superseded by the Explanation, is, in our opinion, not of much help. The contention of the learned Departmental Representative is contrary to the view taken by the Bombay High Court in the case of Ritz Ltd. (supra), wherein it was held that when the main proviso [in that case Clause (c)] was with effect from l-6-1988,the amendment by the Finance Act, 1989 could not give effect to the insertion prior to that date, i.e., 1-6-1988. In these circumstances, the benefit of the introduction of the definition of the term "record" with effect from 1 -6-1988 could not have been taken by the Commissioner as his order was passed prior to the said date, namely, on 17-3-1988. Therefore, he could not have possibly taken note of Sri Bhandari's statement which came subsequent to the order of the AO as the same could not form part of the "record" for examination by the Commissioner for the purpose of exercising revisional jurisdiction.
10. We have, therefore, to see as to whether the assessment was erroneous ignoring the statement of Sri Bhandari. In other words, was there any material before the Commissioner which could justify his order under Section 263 of the Act. The Commissioner was of the opinion that under Section 10(21), the AO was bound to consider the taxability of the receipts of Rs. 15,97,827 and having not considered that, there was certainly an error in his order. As stated by the Orissa High Court in the case of Dalmia Institute of Scientific & Industrial Research (supra), there is nothing in Section 10(21) which requires that to qualify for exemption, the income should be spent in the relevant year itself. On the date of assessment there was nothing on record to suggest that the surplus of Rs. 15,97,827 was utilised by the assessee for the purposes other than for research activities. We are, therefore, of the opinion that there was no material before the Commissioner to come to the conclusion that the order passed by the AO was erroneous and prejudicial to the interests of the revenue. We, therefore, vacate the impugned order and restore that of the AO.11. In view of our aforesaid finding, the other contentions raised on behalf of the assessee regarding invalidity of the notice and consequently the proceedings; and that the donations or contributions were not in the nature of income need not be discussed.