ITAT relief to IMA Kerala in Rs 1.81 crore income tax dispute

Case Background

The appellant, Indian Medical Association Kerala State Branch, is a registered trust under Section 12A of the Income Tax Act. For the Assessment Year (AY) 2018-19, the association filed its return of income on 27.10.2018, declaring nil income after claiming exemption under Section 11.

However, the assessment was later completed by the AO, Income Tax Officer (Exemptions), Thiruvananthapuram, under Sections 143(3), 143(3A), and 143(3B), determining a total income of Rs. 1,81,81,500/-.

Subsequently, the Principal Commissioner of Income Tax (Exemptions) reviewed the assessment record and noted discrepancies in the utilisation of accumulated surplus. Specifically, the Schedule ER showed nil utilisation, and Schedule EC reflected utilisation of only Rs. 7,09,621/- of the funds accumulated in earlier years. The Pr. CIT believed that the remaining surplus had not been utilised within the prescribed time and should have been taxed under Section 11(3).

As a result, he invoked his revisionary jurisdiction under Section 263, stating:

“The assessment order passed by the AO is erroneous and prejudicial to the interests of Revenue.”

AO’s Examination & Assessee's Response

In response to the show cause notice issued on 31.01.2019, the IMA Kerala submitted that the Assessing Officer had already raised specific queries during assessment proceedings regarding the receipts of the trust and utilisation of carry-forward surplus under Section 11(2). The assessee provided detailed replies through letters dated 08.09.2021, 24.02.2021, 16.03.2021, and 29.03.2021.

The Tribunal noted that:

“It is submitted that the AO had examined the issue which is sought to be revised by the Pr. CIT and took a plausible view that no addition is called for. Therefore, the order cannot be said to be erroneous.”

Despite this, the Pr. CIT disregarded the explanation and proceeded to revise the assessment order, directing the AO to conduct a fresh examination after providing an opportunity to the assessee.

Tribunal’s Analysis and Decision

Hearing the appeal on 21.05.2025 and pronouncing its order on 30.05.2025, the ITAT bench comprising Shri Inturi Rama Rao (Accountant Member) and Shri Prakash Chand Yadav (Judicial Member) allowed the appeal filed by IMA Kerala.

Referring to precedents set by the Supreme Court in Malabar Industrial Co. Ltd. v. CIT (243 ITR 83) and CIT v. Max India Ltd. (295 ITR 282), the Tribunal stated:

“In order to invoke the power of revision, the above two conditions are required to be satisfied cumulatively. The error in the assessment order should be one that it is not debatable or plausible view. In a case where the Assessing Officer examined the claim and took one of the plausible views, the assessment order cannot be termed as an ‘erroneous’.”

The Tribunal found that the AO had, in fact, reviewed the issue of surplus utilisation:

“During the course of assessment proceedings, the assessing authority sought clarification on utilisation of accumulated surplus from the past years… The appellant had filed detailed explanation and after considering the explanation, the AO had chosen not to make any addition on these issues.”

“This could clearly demonstrate that the AO took a plausible view after examining the issue in detail… it cannot be held that the assessment order is erroneous and prejudicial to the interests of Revenue.”

Accordingly, the Tribunal concluded:

“The CIT ought not have exercised jurisdiction u/s. 263 of the Act.”

Subsequently, the appeal filed by IMA Kerala was allowed. The ITAT set aside the revisionary order of the CIT, holding that the assessment order was not erroneous, as it was based on proper inquiry and a legitimate view taken by the AO.

“In the result, the appeal filed by the assessee stands allowed.”

The ruling reaffirms the legal standard that Section 263 cannot be invoked merely because the Commissioner disagrees with the AO’s conclusion, provided the AO's view is based on inquiry and is legally sustainable.

To view the original ruling, click on the link below: