2024 (12) TMI 552 - AT - Income Tax

Pr.CIT's Section 263 order quashed as AO's assessment error wasn't prejudicial to revenue interest

Paradip Port Authority Versus DCIT, Circle-1 (1), Cuttack

Paradip Port Authority Versus DCIT, Circle-1 (1), Cuttack - [2024] 116 ITR (Trib) 1 (ITAT [Ctk]) Issues Involved:1. Legality of the order passed under Section 263 of the Income Tax Act.2. Eligibility for statutory deduction under Section 11(1)(a) of the Income Tax Act.3. Application of funds and eligibility for exemption under Section 11.4. Compliance with procedural requirements and the role of Assessing Officer in conducting inquiries.Detailed Analysis:1. Legality of the Order Passed under Section 263:The primary issue was whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking Section 263 of the Income Tax Act, which allows revision of orders that are erroneous and prejudicial to the interest of the revenue. The assessee argued that the order passed by the Assessing Officer (AO) was neither erroneous nor prejudicial to the revenue since the assessee had applied its income for charitable purposes and was granted registration under Section 12A. The Tribunal noted that for Section 263 to be invoked, both conditions-erroneous and prejudicial-must be satisfied. The PCIT himself acknowledged that the assessment order was not prejudicial to the revenue, as the shortfall in application of funds in one year was offset by excess application in previous years. Hence, the Tribunal held that the twin conditions of Section 263 were not met, rendering the PCIT's order unsustainable.2. Eligibility for Statutory Deduction under Section 11(1)(a):The assessee contended that it was eligible for a statutory deduction of 15% on gross receipts under Section 11(1)(a), despite initially computing the exemption on net surplus. The Tribunal referenced the Supreme Court decision in CIT vs. Programme for Community Organisation, which clarified that the accumulation should be computed on gross receipts. The Tribunal affirmed the assessee's eligibility for this deduction, emphasizing that the exemption is unfettered and not subject to conditions.3. Application of Funds and Eligibility for Exemption under Section 11:The Tribunal examined whether the assessee properly applied its funds for charitable purposes, which is a prerequisite for claiming exemption under Section 11. The assessee demonstrated that the application of funds exceeded the required threshold in the relevant assessment years, and any shortfall in one year was offset by excess application in others. Citing the Supreme Court's decision in CIT vs. Subros Educational Society, the Tribunal held that excess application in earlier years could be set off against shortfalls in subsequent years, thus supporting the assessee's claim for exemption.4. Compliance with Procedural Requirements and Role of AO:The PCIT argued that the AO failed to conduct adequate inquiries into the assessee's claims, rendering the assessment order erroneous. However, the Tribunal noted that the AO's acceptance of the revised return, following the High Court's directive to condone delay, was procedurally sound. The Tribunal reiterated that an AO's order cannot be deemed erroneous merely due to a lack of extensive inquiry if the order aligns with permissible legal interpretations. The Tribunal emphasized that the AO's role includes both adjudication and investigation, but failure to conduct exhaustive inquiries does not automatically render an order erroneous if the overall assessment is justified.Conclusion:The Tribunal concluded that the PCIT's invocation of Section 263 was unwarranted as the assessment order was neither erroneous nor prejudicial to the revenue. The assessee's eligibility for exemption under Section 11 was upheld, and the procedural actions of the AO were deemed appropriate. Consequently, the Tribunal quashed the PCIT's order and allowed the appeals in favor of the assessee.