Court’s decision
The Kerala High Court allowed the income tax appeal and set aside the order of the Income Tax Appellate Tribunal insofar as it sustained the exercise of revisional jurisdiction under Section 263 of the Income Tax Act on grounds not forming part of the Commissioner’s revisional order. The Court held that once the Commissioner’s reasons for invoking Section 263 are found to be legally untenable, the revision cannot be salvaged by introducing new grounds at the appellate stage.
The Court categorically held that the Tribunal exceeded its jurisdiction by upholding the revision on an altogether different reasoning, namely, that the donations made by the assessee were not shown to be consistent with the objects of the trust. Such a ground, the Court noted, was never the basis of the Commissioner’s order under Section 263. The High Court therefore concluded that the revisional proceedings were wholly without jurisdiction.
Facts
The appellant was a charitable trust registered under Section 12A of the Income Tax Act and was therefore entitled to claim exemption of its income under Section 11. During the relevant assessment year, the trust received donations from India and abroad and, in turn, donated funds to several other charitable institutions which were also registered under Section 12A.
The Assessing Officer completed the assessment after examining the books of accounts and accepted the return of income. Subsequently, the Commissioner initiated suo motu revision proceedings under Section 263 and set aside the assessment on the reasoning that exemption under Section 11 could be allowed only if donations were made to institutions having similar categorisation under the Foreign Contribution (Regulation) Act.
The assessee challenged the revision before the Tribunal. While the Tribunal agreed that the Commissioner’s reasoning based on the FCRA was legally flawed, it nevertheless sustained the revision on a new ground that the assessment order did not record satisfaction regarding consistency of donations with the objects of the trust.
Issues
Whether the Commissioner was justified in invoking revisional jurisdiction under Section 263 on the basis of FCRA categorisation.
Whether the Tribunal could sustain a Section 263 revision on grounds not forming part of the Commissioner’s order.
Whether the scope of appellate scrutiny under Section 263 is confined to the reasons recorded by the revisional authority.
Whether revision can be upheld when the original basis for invoking Section 263 is found to be unsustainable in law.
Petitioner’s Arguments
The assessee contended that the Commissioner’s sole basis for invoking Section 263 was the alleged incompatibility of donations under the Foreign Contribution (Regulation) Act, which had no nexus with exemption under Section 11 of the Income Tax Act. It was argued that this reasoning was ex facie erroneous and beyond the scope of Section 263.
The assessee further contended that once the Tribunal found the Commissioner’s reasoning to be incorrect, the revisional order ought to have been quashed in its entirety. The Tribunal, it was argued, could not introduce a fresh ground relating to objects of the trust to sustain the revision.
It was submitted that such an approach amounts to enlarging the scope of revisional jurisdiction and violates settled principles governing Section 263 proceedings.
Respondent’s Arguments
The Revenue contended that the revisional order was justified since the assessment order was silent on whether the donations made by the assessee were consistent with its charitable objects. It was argued that lack of enquiry by the Assessing Officer rendered the assessment erroneous and prejudicial to the interests of the Revenue.
The Revenue supported the Tribunal’s reasoning and contended that even if the Commissioner’s specific reasoning was flawed, the revision could still be sustained if the assessment order suffered from any other jurisdictional defect.
It was submitted that Section 263 confers wide powers on the revisional authority and that technicalities should not defeat substantive revenue interests.
Analysis of the law
The High Court examined the statutory framework of Section 263 and reiterated that the revisional jurisdiction is circumscribed by the reasons recorded by the Commissioner. The Court held that the validity of a Section 263 order must be tested strictly on the basis of the grounds invoked by the Commissioner in the revisional order.
The Court emphasised that appellate authorities cannot supplement or substitute reasons to justify a revision. Once the Commissioner’s foundation for revision is found to be legally unsustainable, the entire revisional proceeding collapses.
The Court further clarified that exemption under Section 11 operates independently of the FCRA framework and that compliance with the Foreign Contribution law is not a condition precedent for application of income under the Income Tax Act.
Precedent Analysis
The Court relied on binding Division Bench precedents holding that revisional jurisdiction cannot be expanded by appellate authorities beyond the scope of the Commissioner’s order. It referred to earlier rulings which held that Section 263 cannot be invoked on issues not specifically raised and examined by the Commissioner.
The Court also relied on precedents clarifying that donation of current year income to other charitable trusts constitutes valid application of income under Section 11. These precedents squarely governed the controversy and rendered the revisional order unsustainable.
Court’s Reasoning
The Court found that the Commissioner’s revisional order was exclusively based on an erroneous understanding that exemption under Section 11 depended on FCRA categorisation. Since this premise was legally incorrect, the assumption of jurisdiction under Section 263 itself failed.
The Court further held that the Tribunal committed a jurisdictional error by sustaining the revision on a ground never invoked by the Commissioner. Such an approach, the Court observed, amounts to rewriting the revisional order and is impermissible in law.
Accordingly, the Court concluded that both the Commissioner’s revisional order and the Tribunal’s impugned order could not be sustained.
Conclusion
The Kerala High Court allowed the appeal, set aside the Tribunal’s order, and quashed the revisional proceedings initiated under Section 263. The original assessment order accepting the assessee’s return of income was restored.
Implications
This judgment is a significant reaffirmation of jurisdictional discipline under Section 263. It protects assessees from arbitrary revision by ensuring that revisional powers remain confined to the reasons expressly recorded by the Commissioner.
The ruling is particularly important for charitable trusts, as it clarifies that application of income under Section 11 cannot be questioned by importing extraneous statutory regimes such as the FCRA.
