2012 (11) TMI 346 - AT - Income Tax

Tribunal overturns tax order, trusts' charitable use of surplus income deemed compliant.

The tribunal quashed the DIT(E)'s order under section 263, determining that the AO's computation of capital gains, though erroneous, was not prejudicial ... Revision of orders by CIT(A) - computation of LTCG for claiming exemption u/s 11(1A) - AO's order is prejudicial as the investments had been made in the previous year prior to previous year in which the transfer of the capital asset took place - Held that:- The CIT has proceeded to apply the provisions of Sec.11(1A)(a)(ii) to the present case, thus it is clear that the capital asset is property held under trust wholly for charitable or religious purposes. As decided in CIT Vs. East India Charitable Trust [1992 (1) TMI 21 - CALCUTTA HIGH COURT] capital gain is also income of the trust and Sec.11(1A) is not the only way in which capital gain has to be applied for charitable purposes. It is one of the way of applying capital gain for charitable purpose. If capital gain is applied for charitable purpose of the Assessee not by acquiring a new asset but for other charitable purpose, then there is no reason why it should not be considered as application of income for charitable purpose enabling the Assessee to claim exemption u/s.11(1). In the present case there is no question of application for accumulation of income for being spent for charitable purpose in future because such application is already deemed to have been made in the previous year itself. Admittedly, even as per the order of assessment there was application for charitable purpose, even after disallowance of depreciation made by the AO, of a sum of Rs.1,60,23458 over and above the receipts of the Assessee during the previous year. The capital gain considered as not utilized for charitable purposes u/s.11(1A) is only a sum of Rs.1,21,61,909.33 Ps. The surplus utilization of Rs.1,60,23,458 should be sufficient to set off the capital gain not utilized for charitable purpose u/s.11(1A). Thus the net deficit in this AY to be carried forward for set off in the later years would be Rs.1,60,23,458 - Rs.1,21,61,909.33 Ps. Viz., Rs.38,61,909.67 Ps. Thus it can be fairly concluded that though the order of the AO was erroneous, the same was not prejudicial to the interest of the revenue as no part of the capital gain became taxable because of loss of exemption u/s.11(1A). Since the order sought to revised u/s.263 was erroneous but not prejudicial to the interest of the revenue, jurisdiction u/s.263 could not have been invoked by the CIT - direction to quash the order u/s.263 - in favour of assessee. Issues Involved:1. Validity of the DIT(E)'s exercise of powers under section 263 of the IT Act, 1961.2. Correct computation of capital gains for a charitable trust under section 11(1A) of the IT Act, 1961.3. Appropriateness of the AO's assessment order under section 143(3) read with section 147 of the IT Act, 1961.4. Determination of whether the AO's order was erroneous and prejudicial to the interest of the revenue.Detailed Analysis:1. Validity of the DIT(E)'s exercise of powers under section 263 of the IT Act, 1961:The DIT(E) invoked section 263, arguing that the AO's computation of capital gains was erroneous and prejudicial to the revenue. The DIT(E) issued a show cause notice proposing to recompute the capital gains, asserting that the AO incorrectly accepted the assessee's claim of investments made in earlier years as new capital assets. The assessee contended that the order was neither erroneous nor prejudicial to the revenue, emphasizing that the AO's view was a possible one, supported by judicial precedents.2. Correct computation of capital gains for a charitable trust under section 11(1A) of the IT Act, 1961:The assessee, a charitable trust, sold land and declared taxable long-term capital gains of Rs. 3,41,169/-. The AO, in reassessment, computed the LTCG as Rs. 45,23,430/-, allowing partial exemption under section 11(1A). The DIT(E) argued that the AO's computation was erroneous because only investments made during the year of transfer should be considered for exemption under section 11(1A). The assessee argued that investments made in earlier years should also be considered, citing judicial precedents.3. Appropriateness of the AO's assessment order under section 143(3) read with section 147 of the IT Act, 1961:The AO's reassessment order computed the capital gains considering the indexed cost of acquisition and allowed partial exemption under section 11(1A). The DIT(E) found this computation erroneous, arguing that the entire net consideration should be reinvested in the year of transfer for full exemption. The tribunal reviewed the provisions of section 11(1A) and judicial precedents, concluding that the AO's computation was a possible view.4. Determination of whether the AO's order was erroneous and prejudicial to the interest of the revenue:The tribunal held that while the AO's order was erroneous, it was not prejudicial to the revenue. The tribunal noted that capital gains are also income of the trust and can be applied for charitable purposes under section 11(1). The tribunal found that the assessee had applied surplus income for charitable purposes, offsetting the capital gains not utilized under section 11(1A). Therefore, the tribunal concluded that the AO's order did not result in any taxable income, and the invocation of section 263 by the DIT(E) was unwarranted.Conclusion:The tribunal quashed the order under section 263, holding that the AO's order, though erroneous, was not prejudicial to the interest of the revenue. The appeal by the assessee was allowed.