under section 10(22)Held: Invocation of section 263 by the CIT was not justified as the AO after examining the survey report with reference to record and after making inquiry into facts, came to the conclusion that exemption under section 10(22) could not be denied on mere allegation of misutilization of funds, therefore, as such it cannot be said that the order of AO was erroneous as well as prejudicial to the interest of revenue.
1. These four appeals by the assessee raise several common grounds against the four different orders passed under Section 263 of the Act by learned CIT-II, Jaipur, challenging jurisdiction, correctness of the action taken and the same being based on suspicion and being arbitrary, needs to be quashed. The issues involved being common, all the appeals are directed to be disposed of by a common order.
2. Briefly the facts are that the appellant is a society registered with Registrar of Societies, Jaipur, since 19th Oct., 1975. The society was set up amongst others with the object of imparting technical education and training. Over a number of years, the appellant has grown from running a primary school to an engineering college inter alia, diploma courses in pharmacy and business management, etc. A survey by the Investigation Wing of the Department was carried on the premises of the appellant on 11th Feb., 1999. The appellant had not been assessed to tax. As a sequel of survey an action under Section 147 was initiated for asst. yrs, 1996-97 to 1999-2000. In response thereto, the appellant filed returns of income for all the four years claiming exemption of its income under Section 10(22) of the Act. Returns were scrutinized, notice under Sections 142{1) and 143(2) were issued, enquiries with reference to survey report on record were made and assessment completed at NIL income after accepting the claim of exemption under Section 10(22) of the Act.
3. The learned CIT, after giving show-cause notice to the appellant and after examination - of record, was of the view that the assessment orders are erroneous insofar as it is prejudicial to the interest of Revenue. She, therefore, cancelled the assessment for all the four years with a direction to frame fresh assessment in accordance with provisions of law, in the backdrop of observations/allegations as under: (i) The assessee had maintained hand-written books of account as well as computerised accounts. The AO failed to examine the difference between the two and enquire the difference, if any and also on issues raised at the time of taking statement of Shri Sanjay Parashar.
(ii) There is no reference in the Order to any queries raised or any independent investigation made.
(iii) The AO failed to bring any evidence on file and examine the accounts to show diversion of funds for the personal use of proprietor/members of the family who set up the institute. The claim under Section 10(22) was prima facie inadmissible in the light of apparent benefits derived by Parashar family.
(iv) The AO did not cross examine the witnesses, did not examine Sandhiya Parashar, Shalini Parashar nor the genuineness of cash credits. He also did not make reference to Valuation Cell for elucidation of cost of construction of the building.
(v) The AO failed to take into account the fact of diversion of funds to the members of Parashar family and proprietary character of Samiti.
4. The learned counsel for the assessee contends that the learned CIT did not herself find any notable discrepancy in the books of account when examined by her in revision proceedings. She has also not found any diversion of income to the personal benefit of any of the Parashar family members or otherwise nor that the appellant paid anything excessive or unreasonable for services taken from any of the such persons. There is no allegation by the learned CIT that the surplus generated has not been utilised for the purpose of achieving its main object of imparting education. The AO had carried out necessary enquiries with reference to the survey report and it is only thereafter the assessment was completed by him. The learned CIT however based her conclusion merely on suspicion without showing as to how there is any error in the Order of the AO and as to how it has caused loss of revenue or any prejudice to them. Reliance has been placed to the findings recorded by the AO besides written submissions dt. 29th Jan., 2004 and paper book filed on 20th Jan., 2004 with specific reference to order-sheet entries at assessee's paper book pp. 28 to 86 and written reply before the AO and learned CIT on different dates. A prayer was made to quash the orders passed under Section 263 of the Act.
5. On the other hand, the learned CIT, Departmental Representative, Shri Chopra vehemently argues that there has been no application of mind by the AO to the provisions contained under Section 10(23C) of the Act which were applicable to asst. yr. 1999-2000 and thus the AO allowed exemption under a wrong section. For all other years, the learned CIT has recorded findings to show that the AO failed to make deep investigation into the facts nor did he verify the facts of inflation of expenses by the appellant. Diversion of income to the benefit of members was prima facie available on record and as such the exemption under Section 10(22) could not have been granted. In the written submissions dt. 29th Jan., 2004 and also on 28th April, 2004 and placing reliance thereon, it was pointed out that the AO collected various information and those information were considered simply by raising questions to the assessee and thus failed to make necessary enquiries on the important aspects as were noticed during the course of survey under Section 133A of the Act. The AO was not only an adjudicator but also an investigator and he having failed to carry out investigations, the Order has to be termed as erroneous insofar as it is prejudicial to the interests of Revenue. Reference was made to the following judgments : 6. In rejoinder, the learned counsel for assessee objects to the new pleas being raised by Revenue at this stage inasmuch as the learned CIT herself did not make the amended provisions of law for asst. yr.
1999-2000 as a basis for cancellation of assessment. The Order cannot be termed erroneous on the basis of such a new plea. Reference was made to the decision of Hon'ble Calcutta High Court decision reported in Jai Kumai Kankaria v. CIT (2001) 251 ITR 707 (Cal). Even otherwise, the assessee's application seeking exemption under Section 10(23C) was well in time made on 30th Nov., 1999. The learned CIT made only sweeping statements without bringing on record any single mistake or instance of diversion of income by the assessee. She has also failed to show as to how the enquiries carried by the AO were not proper and complete nor did she show as to how the conclusion arrived at by the AO was incorrect. Deep investigation is outside the purview of assessment procedure. The AO carried necessary enquiry and made investigation of facts essential for assessment.
7. We have heard the parties with reference to written submissions, material placed on record and precedents referred before us as well as in the written submissions. The perusal of assessment orders reveals that the AO after examining the survey report with reference to records and after making inquiry into facts, came to the conclusion that exemption under Section 10{22) of the Act cannot be denied on mere allegation of misutilisation of funds. He also recorded a finding of fact that it is not possible to deduce from the' records and facts that any amount or fund of the society was not utilised for educational purposes. We have also perused the orders under Section 263 passed by the learned CIT, Jaipur, very carefully, There is no finding recorded by her to say that the appellant did not pursue the main object of imparting technical education or training, etc. There is also no finding that the institution exists solely for the purpose of making profit. We find that the profits which have accrued to the assessee from year to year have also been utilised by the assessee in making infrastructure for the society in attaining its objective. The learned Departmental Representative before us also did not raise a dispute that the assessee is not engaged in imparting technical education or has failed to achieve its main objects. The profits which accrued to it as an incidence of carrying out of its main objects resulted in creation of assets of the appellant society and not of any of the members personally or individually. Essentially the appellant is entitled to exemption under Section 10(22) of the Act. This is what exactly the AO has done in the assessment so framed for all the years under consideration before us. The findings have not been found wrong or perverse on facts or in law by the learned CIT.8. The perusal of his orders, the order-sheet entries placed on record in assessee's paper book pp. 78 to 86 and assessee's replies to the queries raised reveal that it is not a case where after carrying out a survey upon the assessee by Investigating Wing of the IT Department, the report which they furnished to the AO was kept on racks by him but he is found to have carried out enquiry on each and every issue raised in that report and thereafter after due application of mind on various aspects as well as proper utilisation of funds for the purpose of the main objects of the society and being satisfied, he proceeded to allow exemption under Section 10(22} of the Act and assessing at nil income.
Once the society was found to have utilised the surplus for achieving its objects and entitled to exemption under Section 10{22) of the Act in respect of its income, the computation provisions as laid down under Chapters' IV, V and VI of the IT Act, 1961, did not remain relevant to the assessability and as such the application of Section 68 or Section 145 of the IT Act also had no material effect to the Order being erroneous which can be said to have caused any prejudice to Revenue.
The Allahabad Tribunal in the case of City Montessori School v. Asstt.
CIT (1999) 64 TTJ (All) 475 : (1999) 107 Taxman 116 (All)(Mag) and CBDT in their Circular No. F.No. 194/16- 17-IT (Al) has aptly dealt with the issue of surplus by coming to the conclusion that if the surplus is used for the purposes of the institution, then exemption cannot be denied. The apex Court in Aditanai Education Institution, Etc. v. Addl CIT (1997) 224 m 310 (SC) has held as under : "After meeting the expenditure, if any surplus results incidently from the activity lawfully carried on by the educational institution, it will not cease to be one existing solely for educational purposes, since the object is not to make profit." The AO took decision to allow exemption after having due regard to the aforesaid legal principle and the judicial pronouncements which had a binding effect under Article 141 of the Constitution of India on all the subordinate Courts and the persons working under their jurisdiction including the AO himself.
9. The next plea about allowing exemption under wrong Section for asst.
yr. 1999-2000 raised by the learned CIT, Departmental Representative, was duly objected by the learned counsel for the assessee. While agreeing with the learned counsel for the assessee for not allowing the Revenue to take such a plea at this stage we also agree that in asst.
yr.. 1999-2000 the allowing of exemption under a wrong Section was not taken a basis by the learned CIT for terming the Order as erroneous.
The same therefore cannot be held to be a ground for upholding her Order in revision. Such a view is fortified by the decision of Hon'ble Calcutta High Court in Jai Kumar Kankaria v. CIT. (supra).
10. Learned Departmental Representative has placed reliance on the under mentioned decisions before us : In Emery Stone (supra) the facts were totally different. There was a firm belonging to four brothers. Three of .them retired and family member of only one remained. The firm was reconstituted and the fixed assets were revalued at a higher figure and, depreciation was claimed at the higher value. The IAC allowed the depreciation at a higher figure without calling for any explanation in the matter, and did not pay any heed to the provisions of Expln. 3 to Section 43(1} of the Act.
No query was raised at all. In fact depreciation was allowed on value of land also. Thus there was a clear case of non-application of mind and as such the Order was termed as erroneous insofar as prejudicial to the interest of Revenue. Such a situation did not exist in the present case before us. There is no misapplication or ignorance of the provision of law. The desired enquiries have been made by the AO. The conclusion based on the enquiries has to be that of AO and not of learned CIT and it is an established principle and the Section does not visualise substitution of the judgment of the CIT for that of the AO.This case therefore does not help the Revenue.
11. The second case relied on by the learned Departmental Representative is of the Delhi High Court in the case of Gee Vee Enterprises (supra). A perusal of the said judgment reveals that in this case assessee filed a writ petition against the Order under Section 263. The High Court dismissed the said writ in limine by holding that the assessee should have availed alternative remedy and should have filed appeal under Section 253 of the Act. No exceptional circumstances were proved requiring the Court to intervene and prima facie circumstances existed so as to hold that CIT could assume jurisdiction. The High Court therefore, did not decide on the merits of the case. It also did not speak of carrying out deep investigation where the AO acts as an investigator while performing his function as an adjudicator. Therefore, this case also does not advance the case of the Revenue.
12. In the case of Malabar Industrial Co. Ltd. (supra) the apex Court laid down the following principles : "(a) The provision of Section 263 cannot be invoked to correct each and every type of mistake or error committed by the AO. It is only when an Order is erroneous that the Section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the Order being erroneous.
(b) If due to erroneous Order of the ITO, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interest of the Revenue.
(c) The phrase 'prejudicial to the interest of Revenue1 has to be read in conjunction with an erroneous Order passed by the AO. Every loss of revenue as a consequence of an Order of the AO cannot be treated as prejudicial to the interests of the Revenue. If the ITO adopted one of the courses permissible in law and it has resulted in a loss of revenue or where two views are possible and the ITO has taken ,one view with which the CIT does not agree, it cannot be treated as an erroneous Order prejudicial to the interest of Revenue, unless the view taken by the ITO is unsustainable in law." 13. The principles enunciated in Malabar Industrial Co. Ltd. (supra), admittedly have to be kept in mind. Viewing the case of appellants in that light, we find that this decision nowhere advances the case of Revenue. The CIT has nowhere proved what wrong facts the AO has assumed or what misapplication of law has been made by him. She has stated that the AO has not properly applied the provision of Sections 68 and 145 of the Act. The CIT did not realise that the appellant is an assessee whose income is exempt under Section 10(22) of the Act and consequently these provisions will have no effect on taxability of income and shall cause no prejudice to Revenue. Here the purpose of assessment is totally different unlike the assessment of a normal assessee. It is not a case of computation of taxable income but on the contrary is a case to grant exemption from taxation. The AO has to see the objects of the trust and the activities carried out by the assessee and whether the same satisfies the conditions for grant of exemption. Again it is not necessary that the view which the AO has taken on the matter should have matched with that of the CIT. The satisfaction arrived at the time of assessment has to be that of the AO. Therefore, viewing from this aspect also there was nothing wrong in the assessment Order for all these years which was completed after reaching satisfaction in accordance with law.
14. Now we proceed to examine the allegations and the objections taken by the learned CIT who enjoys a superior position in the IT Department and expected to know various intricacies of law and the procedures involved in making and scrutinising the assessment and also evaluation of the material by virtue of vast experience of number of years of service in the IT Department. In this case, the learned CIT has been able enough to call for the record and examine the same. Before terming the Order as erroneous insofar as prejudicial to the interests of revenue, the books of account both computerised and as well as hand-written were also called and examined by her by the scope of the power vested in her. She has merely alleged that the AO did not examine these books and failed to enquire into the difference, if any. Upon examination of such accounts she herself was not able to point out any material difference, what she expects the AO to have enquired into is not spelt out by showing difference in these books. No instances have been brought on record to show any procedural lapse committed by the AO which could cause any prejudice to Revenue. The AO is found to have carried out inquiries from Shri Sanjay Parashar who appeared before him and who is director (finance) and also happens to be a landlord for hostel accommodation hired by the appellant from him. The assessee had also taken accommodation from persons who were not the members of the governing body. The AO found in the reply submitted by the assessee that the payment to Shri Sanjay Parashar and Bharti Parashar is not excessive. The, learned CIT also did not find such payment excessive or unreasonable. In case the AO was satisfied on all the aspects, there was nothing wrong to have completed the assessment for all the years oh the same very day. The Order made by the AO under such circumstances cannot be termed as erroneous.
15. The second issue raised by the learned CIT is that there is no reference in the assessment Order to any query raised or independent investigation made by the AO. We have perused the proceedings taken by the AO placed at assessee's paper book pp. 78 to 86. The AO completed the assessment in 19 sittings which continued from 15th Feb., 2001 to 23rd July, 2001 by raising various queries for collecting information, analysis thereof and thereafter coming to the conclusion within his competence as a quasi-judicial authority. These order-sheets entries as well as the written replies given by the assessee on the aspect of the facts of the case as well as the legal position with reference to the various judicial pronouncements speak volumes about the appropriate necessary enquiries made by the AO. It was not necessary for him to make all that as part of the assessment Order what was being revealed by the Departmental file on record. This could not therefore be termed as a lapse on the part of the AO so as to hold the Order as erroneous.
16. Issue Nos. 3 and 5 relate to diversions of funds for the personal use of properties/family members of Parashar's family. Assessee's paper book pp. 48 to 54 reveals the broad position as under: The survey party has totalled up payment of Rs. 14.5 lakhs only to the Parashar family in a total period of four years. Neither the learned Departmental Representative nor the learned CIT, Jaipur, gave detail of any such payment in her order. She has also not pointed out in any of the year as to which payment to the Parashar family is undesirable or excessive. In his reply to the AO as per paper book p. 25 and before CIT as per paper book p. 8 the assessee has stated that the rent paid was commensurate with market rate. The salary paid to various members of Parashar family were less than pay scale of Government employees. It has also been claimed that the provision for car and telephone facility to Mrs. Parashar is not undesirable as she is the chairperson of the society, devotes full time to the society and does not charge any remuneration for the work done for the society. Moreover, these payments have not to be looked in isolation but in conjunction with total receipts of the appellant. Paper book p. 49 reveals gross receipts Rs. 579.75 lakhs in all the four years as against which the total such payments are meagrely 2.5 per cent. This is beyond the comprehension as to how such meager payments can be classified as diversion of funds particularly when the premises have factually been used by the assessee for which reasonable rents were paid and also the services of the family members were taken for which salary was paid to them in consideration of the work done by them. The CIT is not found to have raised any dispute about the use of the building for the hostel accommodation. She only disputes the amount of rent paid that too without pointing out any evidence of excessive payment made by the appellant. Assessee's paper book p. 51 reveals a payment of Rs, 10,68 lakhs only in a period of four years as against aggregate receipt of Rs. 579.75 lakhs. This works out to 1.8 per cent only and as such cannot be termed as a huge payment, From pp. 50 to 54 the expenditure, on cleaning charges, security charges, electricity and water charges aggregate to Rs. 8.5 lakhs in the. period of four years. This also is only 1.46 per cent of the total receipts. Such a payment also is not a huge payment as alleged by the learned CIT. In the said expenditure of Rs. 8.50 lakhs, the expenditure on electricity charges alone is Rs. 7.18 lakhs. For running such a big institution the expenditure cannot be held unreasonable. Correctness or genuineness of these payments have also not been disputed by the learned CIT nor by the learned Departmental Representative. The learned Departmental Representative was not able to show that failure to strike daily cash balances caused any difficulty in determination of total income of the assessee. The learned CIT did not find shortage of cash on any of the day even after examining all the books of account herself. The learned CIT also did not point or find that the assets owned or built by the various members of the Parashar family have been generated by diversion of funds of society. Even a single instance has not been given to support the allegation in her order. The AO formed an opinion on the genuineness of the claim of such expenditure incurred for the objects of the society on the basis of the evidence in the shape of vouchers produced before him. Looking into the magnitude of the receipts vis-a-vis the payment for services taken, the view taken by the AO upon examination of accounts and facts did not lead to a view that there was a diversion of funds for personal benefit of Parashar family. The view entertained by the AO to accept the claim of the assessee was thus a reasonable and possible view. The learned CIT did not show as to what different view was possible on the basis of glaring facts brought on record by the AO.Whatever may be the facts but one thing is certain that neither the survey team nor the CIT was able to bring anything on record to show that there was a diversion of income of society for the benefit of its members or the persons related thereto. In any event, the AO paid due regard to the decision of jurisdictional High Court in Dy. CIT v.Cosmopolitan Education Society (2000) 244 TTR 494 (Raj), for the proposition that for any misappropriation of funds by the members of society, action lies in their individual hands and the exemption under Section 10(22} cannot be denied to the society. The AO, therefore, did not commit any wrong by following the decision which was binding on him.
17. The last allegation of the learned CIT is regarding cross-examination of the witnesses. This may cause prejudice to the appellant but Revenue cannot have any grievance if the AO does not permit cross-examination. He himself is not expected to cross-examine any witness after his/her statement is recorded. As regards the issue of examination of two employees namely Sandhaya Parashar and Shalini Parashar, the assessee's paper book at p. 28 reveals its explanation before the AO that the member of Parashar family are competent, qualified and appointed through a resolution passed by the governing body. Remuneration of both these ladies were stated to be much below the remuneration given in the Government Department at clerical level.
Records were before the AO and payments made Were for work done by them. In case the AO found such payments-genuine, the examination of these two ladies was not necessary. The learned CIT did not find any wrong in such facts on record. As regards cash credits, these were the temporary funds raised during the period when construction of the building for the society was under full swing. The assessee at its paper book p. 28 has clarified this position. It was also stated that the loans were raised through the personal goodwill of a social worker Smt. Manakdevi and the present address at the relevant time was not available. The income of assessee was exempt. The credits were in respect of receipts and did not show payment or diversion of any amount to the members of Parashar family. The funds were utilised for erecting infrastructure/building for the society for achieving its main objects.
In case the AO could make addition in respect of such cash credits, still the income was to be held as exempt and would not cause any prejudice to Revenue. The learned CIT was unable to show as to how this leads to the Order of the AO as erroneous and prejudicial to the interest of Revenue which are to be read in conjunction. The allegation that there is also a failure on the part of AO for making a reference to valuation officer for elucidation- of cost, we find that the learned CIT after examination of books of account, survey material and other record was not able to bring even a single instance to show that there has been any inflation of expenditure incurred towards cost of construction or that these are not supported by genuine vouchers. In fact the assessee himself requested the AO to take an opinion from an independent valuer before taking any adverse view against the appellant. On appreciation of facts if the AO was satisfied about the correctness and completeness of the claim and did not find any power vested in him for elucidation of cost by making reference to DVO, no error can be said to have .been committed by him. The learned CIT herself did not refer to any of the provisions where the AO had powers to make any reference. for elucidation of cost of construction. The very purpose that would have been attained by making reference or a reference was necessary has also not been stated by the learned CIT. In fact the apex Court in the case of Smt. Amiya Bala Paul v. CIT (2003) 262 ITR 407 (SC) has settled the controversy by holding that the AO has no powers under the IT Act to take opinion for the purpose of ascertaining cost of construction of a building, On this count also the allegation of the learned CIT. is vague, irrelevant and unwarranted to facts on record and cannot be held a valid ground for terming the orders of assessment as erroneous.
18. The overall appraisal of facts and material on record reveals that the Order of learned CIT is replete with conjecture and surmises and without pointing out any specific deficiency or error in the Order of assessment. Learned CIT is not empowered to proceed under Section 263 of the Act on the basis of mere suspicion. The jurisdictional High Court in CUT v. Trustees of Anupam Charitable Trust (1987) 167 ITR 129 (Raj) has upheld this view. The apex Court has already upheld in Malabar Industrial Co. Ltd. (supra) that in Order to assume jurisdiction under Section 263 of the Act, conditions of an Order being erroneous and secondly that the same is prejudicial to interest of Revenue have to be satisfied. Not only that the first condition but the second condition also was not satisfied inasmuch as the learned CIT has not been able to make out a case and point out in her Order the amount of loss to Revenue due to any of the alleged errors. Once it has been found and held that the appellant is engaged in the education activity and entitled for exemption under Section 10(22) of the Act, all other allegations take a back seat leaving no room for action under Section 263 of the Act. Under such circumstances and the findings as set out herein before, the Order of learned CIT in all the four years for identical reasons cannot be sustained, which we hereby quash.