The Ahmedabad Bench of Income Tax Appellate Tribunal (ITAT) has upheld the revision challenging income tax exemption on the grounds that the Assessing Officer (AO) has failed to investigate instances of funds misappropriation.
The bench of Suchitra Kamble (Judicial Member) and Makarand V. Mahadeokar (Accountant Member) has observed that despite the gravity of the survey findings, the AO did not scrutinise or apply the provisions of Section 13 of the Income Tax Act appropriately. The AO did not investigate the extent and nature of unaccounted income, the fraudulent salary debits, or their utilisation, nor did he verify whether such funds were diverted for personal benefits of the trustees. The AO accepted the assessee’s assertion that the unaccounted incomes and the amounts fraudulently debited as salaries pertained to the trustees in their individual capacities without cross-examining the impounded documents or assessing the implications under Section 13 of the Income Tax Act.
The appellant/assessee is a trust registered under the Bombay Public Trust Act, 1950, and also registered under Section 12A of the Income Tax Act, 1961, filed its Return of Income (ROI). The return declared a total income of Rs.NIL claiming exemption under Sections 11 and 12 of the Income Tax Act.
The assessee-trust is engaged in the education activities by way of Homoeopathic Colleges at Vadodara and Godhara and Physiotherapy College at Godhra and Homoeopathic Hospital and providing the Accommodation facility to the needy students.
The survey was carried out in the office premises and colleges run by the assessee on 23-12-2016 by Dy. Director of Income Tax (Inv.) (DDIT) and a survey report incorporating findings on the basis of discrepancies found during the course of the survey was prepared.
The case of the assessee was selected for the scrutiny and notices under sections 143(2) and 142(1) were issued. The AO issued notice. The AO completed the scrutiny by accepting the returned income.
The PCIT initiated revisionary proceedings under Section 263 of the Income Tax Act, by issuing notice on 22/02/2022. The PCIT issued a show-cause notice to the assessee, offering them an opportunity to explain why the assessment should not be revised. The notice clearly outlined the discrepancies, the amount of unaccounted income and the bogus salary that were not accounted for by the AO during the assessment process.
The PCIT passed the order and determined that the AO’s order under Section 143(3) of the Act was erroneous and prejudicial to the interests of the Revenue because the AO did not consider the materials and findings from the survey during the scrutiny assessment. The discrepancies and unaccounted income were ignored while accepting the return at NIL income.
The PCIT also concluded that the AO failed to add the AO did not disallow the claim for exemptions despite evidence that the trustees had misused the trust’s funds for personal gains. The AO’s failure to consider the findings from the survey, which uncovered unaccounted income and misuse of funds by the trustees, led to an erroneous and prejudicial order.
The assessee contended that the trustees of the trust have admitted unaccounted income and disclosed under Pradhan Mantri Garib Kalyan Yojana (PMGKY) and the PCIT himself noted in the order passed that the unaccounted income in question was pocketed by trustees and used for their own benefits. The assessee stated that since the trustees have made sufficient disclosure in relation to income emanating from records and discrepancies found during survey and declared it in returns of income for AY 2017-18, no prejudice has been caused to the Revenue.
The department contended that the AO has not referred to any documents investigated and impounded during the course of the survey and has not considered the findings of the DDIT. Therefore, the PCIT has rightly invoked his power of revision. The case is of inadequate enquiry by the AO and, therefore, the order is prejudicial to the interests of the Revenue.
Section 263 of the Income Tax Act empowers the PCIT to revise any assessment order if it is erroneous and prejudicial to the interests of the Revenue. Explanation 2(a) clarifies that an order shall be deemed erroneous if it is passed without making inquiries or verification that should have been made. The substantial material was available from the survey conducted under Section 133A indicating unaccounted income, misappropriation of trust funds by trustees, and fraudulent activities such as the debiting of bogus salary expenses.
The ITAT held that the AO, however, did not conduct adequate inquiries into these findings and accepted the assessee’s submissions without proper verification. The survey revealed multiple instances where the trustees allegedly diverted and misappropriated funds of the trust for personal benefit.
The tribunal, while dismissing the appeal of the assessee, upheld the revision order passed by the PCIT under Section 263.
Case Title: Shri Shamlaji Aarogya Seva Trust v/s The Pr.CIT (Central)
Case No.: ITA No.138/Ahd/2022
Date: 04 /09/2024
Counsel For Appellant: Shri Tushar Hemani, Sr.Advocate & Shri Parimalsinh B. Parmar, AR
Counsel For Respondent: Shri H. Phani Raju, CIT-DR
