Appeal dismissed, CIT(E) order upheld. AO erred, failed to apply Section 40A(3) provisions.

The appeal was dismissed, upholding the Commissioner of Income Tax (Exemptions) [CIT(E)]'s order. The Tribunal agreed that the Assessing Officer (AO) failed to apply Section 40A(3) provisions and adequately verify expenses, leading to an erroneous and prejudicial assessment. The CIT(E)'s invocation of Section 263 was justified, directing a fresh examination by the AO with proper adherence to the law and providing the assessee a reasonable opportunity.

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Issues Involved:
1. Jurisdiction of CIT under Section 263 of the Income Tax Act.
2. Erroneous and prejudicial nature of the original assessment order.
3. Applicability of Section 40A(3) of the Income Tax Act to the assessee's expenses.
4. Adequacy of the Assessing Officer's (AO) enquiries and verification during the original assessment.

Issue-wise Detailed Analysis:

1. Jurisdiction of CIT under Section 263 of the Income Tax Act:
The primary issue is whether the Commissioner of Income Tax (Exemptions) [CIT(E)] exceeded his legislative jurisdiction under Section 263 of the Income Tax Act. The CIT(E) invoked Section 263, arguing that the original assessment order was erroneous and prejudicial to the interests of the revenue due to the AO's failure to make necessary enquiries and verifications. The CIT(E) held that the AO's order was passed without proper application of mind, thus satisfying the conditions for invoking Section 263 as established in the case of Malabar Industrial Co. Ltd. v. CIT.

2. Erroneous and Prejudicial Nature of the Original Assessment Order:
The CIT(E) found that the AO's order was erroneous and prejudicial to the interests of the revenue. The AO had failed to consider the applicability of Section 40A(3) of the Income Tax Act, which mandates disallowance of expenses paid in cash exceeding Rs. 20,000 per day. The CIT(E) noted that the AO did not verify whether the expenses incurred by the assessee's society were genuine and whether they complied with the provisions of Section 40A(3). The CIT(E) concluded that the AO's failure to apply the correct law led to an under-assessment of income, thus making the order prejudicial to the interests of the revenue.

3. Applicability of Section 40A(3) of the Income Tax Act to the Assessee's Expenses:
The CIT(E) held that Section 40A(3) was applicable to the assessee's expenses, which included fuel, vehicle running, and kitchen expenses, totaling Rs. 22,48,374/-, out of which Rs. 11,70,515/- was paid in cash exceeding Rs. 20,000 per day. The CIT(E) emphasized that the AO should have examined these expenses under the provisions of Section 40A(3) and its exceptions under Rule 6DD. The CIT(E) also noted that the Finance Act, 2018, extended the applicability of Section 40A(3) to charitable activities, effective from AY 2019-20, but the principle of curbing black money and ensuring genuine transactions was always inherent in the law.

4. Adequacy of the AO's Enquiries and Verification During the Original Assessment:
The CIT(E) found that the AO did not conduct adequate enquiries and verification during the original assessment. The AO had disallowed certain expenses based on self-made vouchers but did not specifically examine the cash payments exceeding Rs. 20,000 per day. The CIT(E) noted that the AO's assessment was completed in undue haste without proper verification of the bills and vouchers submitted by the assessee. The CIT(E) concluded that the AO's failure to make necessary enquiries and apply the relevant provisions of the law rendered the assessment order erroneous and prejudicial to the interests of the revenue.

Conclusion:
The appeal filed by the assessee was dismissed, and the order of the CIT(E) was upheld. The Tribunal agreed with the CIT(E) that the AO had failed to apply the provisions of Section 40A(3) and conduct necessary verification of the expenses. The Tribunal found that the AO's order was erroneous and prejudicial to the interests of the revenue, justifying the invocation of Section 263 by the CIT(E). The AO was directed to re-examine the matter afresh in accordance with the law, providing reasonable opportunity to the assessee.

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