Th Floor, Piramal Chambers,Lalbaug, Mumbai - 400 012 v. Slum Rehabilitation Authority

IN THE HIGH COURT OF JUDICATURE AT BOMBAYO.O.C.J. INCOME TAX APPEAL NO. 1359 OF 2016 The Commissioner of Income Tax (Exemption) 6th Floor, Piramal Chambers,Lalbaug, Mumbai - 400 012. .. Appellant Versus Slum Rehabilitation Authority 5th Floor, Griha Nirman Bhavan,Kala Nagar, Bandra (E),Mumbai - 400 051. .. Respondent ................... Mr. Suresh Kumar for the Appellant Mr. Suresh Kumar for the Appellant Mr. S.E. Dastur, Senior Counsel a/w Mr. Nishant Thakkar and Ms.Jasmin Amalsadvala i/by Mint & Conferers for the RespondentMr. S.E. Dastur, Senior Counsel a/w Mr. Nishant Thakkar and Ms.Jasmin Amalsadvala i/by Mint & Conferers for the Respondent ................... CORAM : AKIL KURESHI & SARANG V. KOTWAL, JJ. DATE : MARCH 26, 2019. ORAL JUDGMENT(Per Akil Kureshi, J.) 1.This appeal is filed by the Revenue to challenge the judgment of the Income Tax Appellate Tribunal (“theTribunal” for short). Following questions are presented forour consideration:- “(i) Whether on the facts and in the circumstances of the caseand in law, the Tribunal was right in holding that orderpassed by DIT(E) is beyond the scope of Sec. 263 of theI.T. Act when the subject matter of revision is applicabilityand in law, the Tribunal was right in holding that orderpassed by DIT(E) is beyond the scope of Sec. 263 of theI.T. Act when the subject matter of revision is applicability of proviso to Sec. 2(15) and not denial of exemption u/S.11? (ii) Whether on the facts and in the circumstances of the caseand in law, the Tribunal was right in holding that ordersought to be revised is not prejudicial to the interest of therevenue, even though the order sought to be revised waspassed without making verification which should havebeen made, deemed to be erroneous in so far as it isprejudicial to the interest of the revenue in view of theExplanation 2 to Sec. 263?"and in law, the Tribunal was right in holding that ordersought to be revised is not prejudicial to the interest of therevenue, even though the order sought to be revised waspassed without making verification which should havebeen made, deemed to be erroneous in so far as it isprejudicial to the interest of the revenue in view of theExplanation 2 to Sec. 263?" 2.Brief facts are as under:- Respondent assessee, the Slum Rehabilitation Authority had filed return of income for the assessment year 2009-10and claimed benefit under Section 11 of the Income Tax Act,1961 (“the Act” for short) in relation to its income claimingitself to be engaged in charitable activity. The AssessingOfÏcer passed an order of assessment under Section 143(3)of the Act on 22.12.2011 in which this claim was examined.He held that the assessee was not a Local Authority withinthe meaning of Section 10(20) of the Act. He further heldthat in view of the nature and activities carried out by theassessee and its legal status, the assessee’s claim forexemption under Section 11 of the Act cannot beentertained. 3.The assessee carried the matter in appeal. TheAppellate Commissioner allowed the appeal and granted thebenefit of exemption. The Commissioner of Income Tax tookthe order of assessment in suo motu revision in exercise ofpowers under Section 263 of the Act on the ground that byvirtue of Section 2(15) of the Act which defines the term“charitable purpose”, the activities of the assessee cannot beconsidered as charitable in nature. He passed order underSection 263 of the Act on 28.3.2014 holding that the order ofassessment passed by the Assessing OfÏcer was erroneousand prejudicial to the interest of the Revenue. He set asidethe order and directed the assessment to be made afreshafter considering the proviso to Section 2(15) of the Act. 3.The assessee carried the matter in appeal. TheAppellate Commissioner allowed the appeal and granted thebenefit of exemption. The Commissioner of Income Tax tookthe order of assessment in suo motu revision in exercise ofpowers under Section 263 of the Act on the ground that byvirtue of Section 2(15) of the Act which defines the term“charitable purpose”, the activities of the assessee cannot beconsidered as charitable in nature. He passed order underSection 263 of the Act on 28.3.2014 holding that the order ofassessment passed by the Assessing OfÏcer was erroneousand prejudicial to the interest of the Revenue. He set asidethe order and directed the assessment to be made afreshafter considering the proviso to Section 2(15) of the Act. 4.The assessee challenged this revisional order of theCommissioner before the Tribunal. The Tribunal by theimpugned order, allowed such appeal on the ground ofmerger as well as on the ground that the order ofassessment cannot be stated to be prejudicial to the interestof the Revenue since in any case, the Assessing OfÏcer had rejected the assessee’s claim of exemption under Section 11of the Act, may not be with reference to Section 2(15) of theAct. This order, the Revenue has challenged in the presentappeal. 5.Appearing for the Revenue, learned counsel Mr. SureshKumar contended that the assessee was hit by the proviso toSection 2(15) of the Act and therefore, its activities were notcharitable in nature. Automatically, therefore, the assessee’sclaim for exemption under Section 11 of the Act would notsurvive. The Assessing OfÏcer had not examined thisimportant aspect and passed the order of assessment whichwas thus, erroneous and prejudicial to the interest of theRevenue. The Commissioner, therefore, correctly exercisedhis revisional powers under Section 263 of the Act. Learnedcounsel placed heavy reliance on clause (c) of explanation(1) below sub-section 1 to Section 263 of the Act to contendthat since this issue was never the subject matter before theAppellate Commissioner in appeal filed by the assessee, theprinciple of merger would not be applicable. 6.On the other hand, learned counsel Mr. Dastur for therespondent assessee opposed the appeal raising following grounds:- (i) ___________ (a) The Commissioner (Appeals) had set aside the entireorder of assessment. The order of Commissioner(Appeals) was confirmed by the Tribunal. When theCommissioner, therefore, exercised his revisionalpowers, the assessment order itself did not exist. Therewas no order which the Commissioner, therefore, couldhave taken in revision. order of assessment. The order of Commissioner(Appeals) was confirmed by the Tribunal. When theCommissioner, therefore, exercised his revisionalpowers, the assessment order itself did not exist. Therewas no order which the Commissioner, therefore, couldhave taken in revision. (b) Another facet of this argument was that the assessee’sclaim of exemption under Section 11 of the Act havingbeen rejected by the Assessing Officer, was subjectmatter of appeal before the Appellate Commissioner.The Appellate Commissioner having allowed theappeal, on the principle of merger, it was thereafter nolonger open for the Commissioner to exercise hisjurisdictional powers. In this context learned counselrelied on following decisions:-claim of exemption under Section 11 of the Act havingbeen rejected by the Assessing Officer, was subjectmatter of appeal before the Appellate Commissioner.The Appellate Commissioner having allowed theappeal, on the principle of merger, it was thereafter nolonger open for the Commissioner to exercise hisjurisdictional powers. In this context learned counselrelied on following decisions:- (1) CIT Vs. Smt. A.S. Narendrakumari[1]; (2) CIT Vs. Nirma Chemicals Works P Ltd[2]; (3) Haryana Paper Distributors (P) Ltd Vs. Pr. CIT.[3] (1) CIT Vs. Smt. A.S. Narendrakumari[1]; (2) CIT Vs. Nirma Chemicals Works P Ltd[2]; (3) Haryana Paper Distributors (P) Ltd Vs. Pr. CIT.[3] (ii) The Assessing Officer having rejected the entire claim of theassessee, the order of assessment cannot be said to beprejudicial to the interest of the revenue.assessee, the order of assessment cannot be said to beprejudicial to the interest of the revenue. 1[1988] 176 ITR 515 (Bombay) 2[2009] 309 ITR 67 (Guj) 3[2018] 95 taxmann.com 152 (Gujarat) (iii) Learned counsel contended that the Commissioner hadproceeded on factually erroneous grounds. Our attention wasinvited to the revisional order passed by the Commissioner tocontend that the Commissioner erroneously records that theAssessing Officer had not examined the applicability of Section2(15) of the Act. Learned counsel drew our attention to thedocuments on record before the Assessing Officer to point outthat during the assessment proceedings, the Assessing Officerhad raised queries with respect to the applicability of theproviso to Section 2(15) of the Act. The assessee had repliedto such queries upon which the Assessing Officer did notinvoke the said provision. Learned counsel contended thatmerely because in the order of assessment, the AssessingOfficer did not give reasons for accepting the assessee’sexplanation, would not imply that no inquiry was carried out.The Commissioner, thus proceeded entirely on erroneousfooting that the Assessing Officer had not examined theapplicability of the proviso to Section 2(15) of the Act.proceeded on factually erroneous grounds. Our attention wasinvited to the revisional order passed by the Commissioner tocontend that the Commissioner erroneously records that theAssessing Officer had not examined the applicability of Section2(15) of the Act. Learned counsel drew our attention to thedocuments on record before the Assessing Officer to point outthat during the assessment proceedings, the Assessing Officerhad raised queries with respect to the applicability of theproviso to Section 2(15) of the Act. The assessee had repliedto such queries upon which the Assessing Officer did notinvoke the said provision. Learned counsel contended thatmerely because in the order of assessment, the AssessingOfficer did not give reasons for accepting the assessee’sexplanation, would not imply that no inquiry was carried out.The Commissioner, thus proceeded entirely on erroneousfooting that the Assessing Officer had not examined theapplicability of the proviso to Section 2(15) of the Act. 7.Section 2(15) of the Act as is well known defines theterm “charitable purpose”. This includes range of activitiessuch as relief for poor, education, medical relief etc and “theadvancement of any other object of general public utility”.The proviso to Section 2(15) of the Act as it stood at therelevant time reads as under:- Provided that the advancement of any other object of general publicutility shall not be a charitable purpose, if it involves the carrying onof any activity in the nature of trade, commerce or business, or anyactivity of rendering any service in relation to any trade, commerce orbusiness, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from suchactivity: Provided further that the first proviso shall not apply if the aggregatevalue of the receipts from the activities referred to therein is twenty-five lakh rupees or less in the previous year" Provided that the advancement of any other object of general publicutility shall not be a charitable purpose, if it involves the carrying onof any activity in the nature of trade, commerce or business, or anyactivity of rendering any service in relation to any trade, commerce orbusiness, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from suchactivity: Provided further that the first proviso shall not apply if the aggregatevalue of the receipts from the activities referred to therein is twenty-five lakh rupees or less in the previous year" 8.According to the Revenue, since the receipts of theassessee from the activities referred to in the first proviso farexceeds 25 lakh Rupees in the previous year, by virtue offirst proviso, the activities of the assessee would beexcluded from the expression “charitable purpose”. In thepresent appeal, we are not required to examine thecorrectness of this contention. We have referred to thisproviso only in order to get better clarity on the issue athand. The question to be decided by us is whether theTribunal was correct in holding that the Commissionercommitted an error in exercising his revisional powers. Inthis context, we may recall, the Assessing OfÏcer hadrejected the assessee’s entire claim of exemption underSection 11 of the Act, not with the aid of the proviso toSection 2(15) of the Act but on entirely different ground. Bethat as it may, the assessee’s claim stood rejected uponwhich the assessee had filed appeal before the Appellate Commissioner and the Appellate Commissioner allowed theappeal which was also confirmed by the Tribunal. Underthese circumstances, in our opinion, the Tribunal was correctin drawing a conclusion that on the principle of merger, itwas not open for the Commissioner to take the order ofassessment in revision. Once the entire claim of theassessee for exemption under Section 11 of the Act was atlarge before the Appellate Commissioner, the Commissioner(Appeals) had wide powers and jurisdiction to examine allaspects of the such a claim. It is well settled that theCommissioner (Appeals) has even the power of enhancementof assessment once an appeal is filed by the assessee. Thepresent case was not even one of the enhancement ofassessment, it was a case where the claim of the assesseewas rejected by the Assessing OfÏcer on one ground. If theRevenue was of the opinion that such order could have beensustained not on the ground on which the Assessing OfÏcerhad rejected it, but on some other legal ground, it was openfor the Revenue to argue the same before the AppellateCommissioner. Nothing prevented the Revenue frompersuading the Appellate Commissioner to reject the claim of the assessee on such legal ground. At any rate, theCommissioner in exercise of the revisional powers cannotinitiate fresh inquiry about the same claim on the groundthat one of the aspects of such a claim was not consideredby the Assessing OfÏcer. 9.This Court in case of Narendrakumari (supra)considered the principle of merger of the order ofassessment into that of the order of the AppellateCommissioner. It was held that when the order ofassessment merges with the order of the AppellateCommissioner in its entirety, the Commissioner would haveno jurisdiction to revise such order of assessment. It washeld that the order of Assessing OfÏcer was no longerrevisable. 10. In case of Nirma Chemicals Works P Ltd (supra), theDivision Bench of Gujarat High Court dealt at some length onthe principle of merger. It was a case in which the assesseehad claimed deduction under Section 80I of the Act which theAssessing OfÏcer allowed partially. The assessee filed an 9.This Court in case of Narendrakumari (supra)considered the principle of merger of the order ofassessment into that of the order of the AppellateCommissioner. It was held that when the order ofassessment merges with the order of the AppellateCommissioner in its entirety, the Commissioner would haveno jurisdiction to revise such order of assessment. It washeld that the order of Assessing OfÏcer was no longerrevisable. 10. In case of Nirma Chemicals Works P Ltd (supra), theDivision Bench of Gujarat High Court dealt at some length onthe principle of merger. It was a case in which the assesseehad claimed deduction under Section 80I of the Act which theAssessing OfÏcer allowed partially. The assessee filed an appeal against the disallowance. The Commissioner(Appeals) allowed the appeal. Subsequently, theCommissioner in exercise of powers under Section 263 of theAct, disallowed the claim under Section 80I of the Act on theground that the assets used by the assessee in newindustrial undertaking had formed part of old plant andmachinery and the new industrial undertaking was formed byreconstruction or restructuring or splitting up of the oldbusiness. In such background, the Court held that therequirement of fulfillment of the conditions stipulated undersub-section (2) of Section 80I of the Act were very muchsubject matter of the appeal in relation to the income whichwas disallowed by the Assessing OfÏcer. On the ground ofmerger, the Court held that the Commissioner could nothave exercised the revisional powers. 11. The Gujarat High Court in case of Haryana PaperDistributors P Ltd (supra) was concerned with a notice issuedby the Commissioner for exercising revisional powers underSection 263 of the Act. It was a case in which the AssessingOfÏcer had doubted the genuineness of the purchases shown by the assessee. The assessee contended that thepurchases were genuine and in any case if such purchasesare not believed to be genuine, the profit from such dealingshould be calculated at the rate of 4% of the turnover. TheAssessing OfÏcer accepted the assessee’s later contention,made additions at 4% of the GP on the purchases andgranted adjustment of the already offered GP @ 1.79% andmade limited additions. The assessee had carried the matterin appeal before the Commissioner (Appeals) and arguedthat the entire addition should be deleted. When suchappeal was pending, the Commissioner issued a notice forrevision of the order of assessment on the ground that theAssessing OfÏcer having held that the entire purchases werebogus, he erred in limiting the addition only to a smallportion of the same on gross profit rate. When this showcause notice was pending, the Appellate Commissionerdecided the assessee’s appeal against the order ofassessment and held that the Assessing OfÏcer could nothave made the addition of Rs. 9.57 lacs on GP basis. In suchbackground, the assessee had challenged the notice ofrevision issued by the Commissioner of Income Tax. The Court while quashing the notice observed as under:- Court while quashing the notice observed as under:- "12.Equally importantly, the issue itself had travelled before theAppellate Commissioner at the hands of the assessee. To the extent,the Assessing Officer rejected the assessee's request for making noadditions, the assessee carried the matter in appeal. AppellateCommissioner deleted even the limited additions made by theAssessing Officer. The limited additions made by the AssessingOfficer and the larger additions proposed by the Commissioner in theimpugned notice are inextricably inter linked. The Commissionerargues that the entire purchases were bogus. The Assessing Officeraccepted the purchases as genuine but added certain amount on thepremise that the assesse's profit from such dealings would havebeen higher than disclosed. The entire issue was at large before theAppellate Commissioner. It is well known that the Commissioner(Appeals) while hearing the assessee's appeal has powers to evenenhance the assessment. If he was of the opinion that not onlylimited additions made by the Assessing Officer but much largeradditions were justified, he could have certainly exercised suchpowers, of course after putting the assessee to notice. In thiscontext, we may refer to clause (c) of Explanation 1 to sub-section (1)of section 263 of the Act. As is well known sub-section (1) of section263 of the Act empowers the Principal Commissioner or theCommissioner to call for and examine the record of any proceedingand revise the same if he considers that the order passed therein bythe Assessing Officer was erroneous insofar as it is prejudicial to theinterest of the Revenue. Clause (c) of Explanation 1 of sub- section(1) provides that for removal of doubts it is hereby declared that, forthe purpose of the said sub-section,- "(c) where any order referred to in this sub-section and passedby the Assessing Officer had been the subject matter of anyappeal [filed on or before or after the 1st day of June, 1988],the powers of the [Principal Commissioner or] Commissioner under this sub-section shall extend [and shall be deemedalways to have extended] to such matters as had not beenconsidered and decided in such appeal.]" 13. Clause (c) of Explanation 1 may be worded in a manner assuggesting the extent of the powers of the Commissioner for takingan order in revision, its effect is of circumscribing such powers incases where the order passed by the Assessing Officer has beensubject matter of any appeal and such subject matter has beenconsidered and decided in such appeal. This provisions thusstatutorily recognizes the principle of merger and avoids any conflictof opinion between two quasi judicial authorities of the same rank.This issue has been considered at length by Division Bench of thisCourt in case of CIT V. Nirma Chemicals Works (P) Ltd. [2009] 182taxmann.com 183/309 ITR 67 (Guj). It was held as under: "20. The stand of the revenue that the assessment order wassilent as regards eligibility or otherwise of section 80-I of the Actcannot thus be accepted. As noted hereinbefore the entiresection lays down a complete codified scheme in itself fordeciding not only the eligibility but also for the computation ofthe relief to which the assessee is entitled. When the sectiontalks of profits and gains derived from an industrialundertaking the requirement is in relation to the industrialundertaking to which the section applies and which fulfills allthe conditions laid down in sub-section (2) of section 80-I of theAct. It is not possible to read the provisions in any othermanner whatsoever. Hence, the contention that the eligibilityor otherwise u/s.80-I of the Act was never the subject matter ofAppeal requires to be rejected. The Tribunal thus committedan error in law in coming to the conclusion that the prohibitionimposed by Explanation (c) to section 263 of the Act wouldnot be applicable." 12. Under these circumstances, we do not find that theTribunal has committed any error. In view of this conclusion,it is not necessary to examine the correctness of theremaining submissions of the learned counsel of theassessee. No question of law arises. The Income Tax Appealis dismissed. [ SARANG V. KOTWAL, J. ] [ AKIL KURESHI, J ]