High Court upholds ITAT’s order quashing Section 263 revision proceedings against charitable trust

The High Court upheld the order of the Income Tax Appellate Tribunal (ITAT) quashing revisionary proceedings initiated under Section 263 of the Income Tax Act, 1961, holding that revisionary jurisdiction cannot be invoked merely because the Commissioner holds a different opinion on the manner of enquiry conducted by the Assessing Officer (AO). A Division Bench comprising Justice G. S. Kulkarni and Justice Aarti Sathe dismissed the Revenue’s appeal filed against Impact Foundation (India).

The assessee, a charitable institution registered under Sections 12AA and 80G of the Act, had filed its return of income for AY 2017-18 declaring Nil income. During scrutiny assessment proceedings, the AO examined the accumulation and utilisation of funds, particularly the utilisation of Rs. 6 crore out of the accumulated amount of Rs. 14.51 crore brought forward from AY 2016-17.

The AO issued specific notices seeking details regarding the application of accumulated funds. In response, the assessee furnished detailed explanations, including break-up of expenses, board resolutions and Form 10, stating that the funds were utilised towards projects relating to sanitation and strengthening of civil society initiatives. After considering the material placed on record, the AO completed the assessment under Section 143(3) accepting the returned income.

Subsequently, the Commissioner of Income Tax (Exemptions) invoked revisionary powers under Section 263 alleging that the AO failed to conduct proper enquiries, including third-party verifications and examination of whether the expenditure was in accordance with the objects stated in the Memorandum of Association.

The ITAT quashed the revisionary order, holding that the AO had conducted adequate enquiries and adopted a plausible view after considering the documents furnished by the assessee.

Before the High Court, the Revenue contended that the assessment order was erroneous and prejudicial to the interests of the Revenue due to inadequate verification by the AO.

“A difference of opinion between the CIT(E) and the AO regarding the manner of enquiry would not render the assessment order erroneous.”

The High Court observed that the AO had raised specific queries during the assessment proceedings and the assessee had furnished detailed replies explaining the utilisation of the accumulated funds. The Court noted that the Commissioner could not invoke Section 263 merely because deeper or further enquiries were considered necessary.

The Bench further held that before exercising revisionary jurisdiction, the Commissioner was required to independently establish that the view adopted by the AO was unsustainable in law. However, no such independent enquiry had been conducted by the CIT(E).

“For invoking Section 263, the assessment order must be both erroneous and prejudicial to the interests of the Revenue.”

Holding that the AO had adopted a plausible view after due enquiry, the High Court found no infirmity in the ITAT’s decision and dismissed the Revenue’s appeal, observing that no substantial question of law arose for consideration.

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