THE HIGH COURT OF JUDICATURE AT MADRAS DATE: 05.08.2019 Order Reserved on: Order delivered on: 29.07.2019 05.08.2019 CORAM : HONOURABLE MR.JUSTICE T.S.SIVAGNANAM AND HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN Tax Case Appeal No.415 of 2019 Kumar Rajaram Appellant -vs- Income Tax Officer, International Taxation - 2(1), Chennai - 600 034. ...Respondent PRAYER: Tax Case Appeal filed under Section 260A of Income Tax Act, 1961 against order of Income Tax Appellate Tribunal Chennai 'B' Bench, dated 10.02.2016 in ITA No.1876/Mds/2015 for Assessment year 2012-13. For Appellant : Mr.T.N.Seetharaman Assisted by Mr.R.Kumar For Respondent : Mr.Karthick Ranganathan Senior Standing Counsel & : Mr.S.Rajesh Standing Counsel 1/20 http://www.judis.nic.in T.C.A.No.415 of 2019 JUDGMENT (Judgment was delivered by T.S.Sivagnanam, J.) This appeal filed by assessee under Section 260A of Income Tax Act, 1961 ('the Act' for brevity) is directed against order dated 10.02.2016 passed by Income Tax Appellant Tribunal, 'B' Bench, Chennai (hereinafter referred to as 'the Tribunal') in I.T.A.No.1876/Mds/2015 for assessment year 2012-13. 2.The assessee has raised following substantial questions of law for our consideration: 1. Whether, on facts and in circumstances of case, order of Appellate Tribunal confirming order u/s 263 of Act passed by Commissioner of Income Tax is sustainable in law? 2. Whether, on facts and in circumstances of case, Appellate Tribunal is right in law in holding that exclusion of payment to charities by applying principle of diversion of income by overriding title cannot be allowed? 3. Whether, Appellate Tribunal is right in law in not allowing sum of Rs.8,02,500/- being expenditure incurred in connection with sale alleging that there is no evidence when evidence in support was on record 2/20 http://www.judis.nic.in T.C.A.No.415 of 2019 and expenditure is allowable u/s 48(i) of Act? 4. Whether, order of Appellate Tribunal upholding order of Commissioner u/s 263 passed on incorrect appreciation of facts and understanding of law is perverse and deserves to be quashed? 3.The assessee is non-resident individual and during assessment year under consideration (2012-13) derived income from capital gains and interest income assessed under head 'other sources'. assessee's father owned land and residential house at Bangalore and died on 11.06.2011 leaving his last will and testament dated 30.10.2008. assessee's father appointed executor to execute directions contained in will. In terms of recitals in will, property at Bangalore was sold on 10.11.2011 for gross sale price of Rs.8,80,00,000/-. In will executed by assessee's father, there was direction to executor of will, upon sale of property to pay sum of Rs.10,00,000/- to Sri Sai Spiritual Center Trust, sum of Rs.25,00,000/- to Helpage India, Bangalore, sum of Rs.15,00,000/- to CRY- Child Rights and You, Bangalore and sum of Rs.10,00,000/- to Sri Ramana Ashram, Thrivannamalai. Apart from these payments, there was direction that executor will be entitled to sum of Rs.50,000/-. balance amount was to be paid to assessee and accordingly, assessee received 3/20 http://www.judis.nic.in T.C.A.No.415 of 2019 sum of Rs.8,19,50,000/-. assessee filed his return of income on 13.07.2012 admitting total income of Rs.6,22,63,973/- comprising of Long Term Capital Gains computed as Rs.5,99,21,346/- arising on sale of Bangalore property by adopting sale consideration as Rs.8,19,50,000/- and claiming sum of Rs.7,52,500/- as expenditure incurred in connection with sale. Assessing Officer completed assessment by order dated 25.09.2014 under Section 143(3) of Act considering sale consideration as mentioned by assessee in his return of income, namely, Rs.8,11,97500/- (Rs.8,19,50,000 - Rs.7,52,500/-). Commissioner of Income tax (CIT), International Taxation, Chennai issued show cause notice under Section 263 of Act proposing to disallow sum of Rs.68,02,500/-, being payment made to charitable institutions and claim of expenditure of Rs.8,02,500/-. assessee submitted their objections dated 18.03.2015, firstly on ground that power under Section 263 of Act could not have been invoked as well as on merits. CIT by order dated 02.07.2015 disallowed exclusion of Rs.68,02,500/- and directed Assessing Officer to recompute total income and tax thereon. assessee carried matter by way of appeal to Tribunal which affirmed order of CIT holding that exclusion of payment made by assessee by applying diversion of income by overriding title cannot be allowed and there is no evidence for professional 4/20 http://www.judis.nic.in T.C.A.No.415 of 2019 fee, commission paid, etc. Aggrieved by same, assessee is before us by way of this appeal raising aforementioned substantial questions of law. 4.We have heard Mr.T.N.Seetharaman, learned counsel appearing for appellant/assessee assisted by Mr.R.Kumar, learned counsel and Mr.Karthik Ranganathan, learned Senior Standing Counsel appearing for respondent/revenue. 5.Substantial Questions of law 1 and 4 can be bunched together as it pertains to jurisdiction of CIT to invoke Section 263 of Act. For deciding Substantial Question of law No.2, certain factual aspects need to be looked into, more particularly, intention of testator in his will and testament dated 30.10.2008. Substantial Question of law No.3 is with regard to expenses claimed by assessee which was disallowed by Tribunal on ground of lack of proof. As noticed above, assessment was completed by Assessing Officer by order dated 25.09.2014. order was passed under Section 143(3) of Act after assessee's case was selected for scrutiny and notice under Section 143(2) of Act was issued on 23.08.2013. Assessing Officer issued notice to assessee under Section 142(1) of Act along with questionnaire dated 12.05.2014. In response to 5/20 http://www.judis.nic.in T.C.A.No.415 of 2019 said notice, assessee submitted details including last will and testament executed by his father dated 30.10.2008, copy of sale deed dated 10.11.2011, legal opinion obtained from his counsel regarding eligibility for exclusion of payments to charitable institutions and remuneration to executor in computing long term capital gains on sale of Bangalore property. All these documents were forwarded to Assessing Officer through assessee's Chartered Accountant along with their letters dated 28.05.2014 and 14.06.2016. After perusal of all records placed by assessee and after noting submissions of Chartered Accountant/authorized representative of assessee, assessment was completed and stand taken by assessee was accepted by Assessing Officer. However, plea raised by assessee with regard to cost of indexation benefit was not accepted and Assessing Officer held that assessee is allowed cost of indexation benefit only from financial year 2011-12 as per Explanation (iii) in Section 48 of Act. Commissioner had issued show cause notice dated 12.03.2015 under Section 263 of Act. In show cause notice, Commissioner states that figures mentioned by assessee were culled out from records, thus there was no other independent material which formed basis of show cause notice. CIT opined that expenses claimed by assessee towards payment to charitable institutions and 6/20 http://www.judis.nic.in T.C.A.No.415 of 2019 others were not incurred wholly and exclusively in connection with transfer of Bangalore property and same is not allowable. According to CIT, order passed by Assessing Officer under Section 143(3) of Act is erroneous and prejudicial to interest of revenue and therefore, he proposed to revise assessment under Section 263 of Act. power under Section 263 of Act can be invoked in cases where twin conditions stipulated therein are combinedly satisfied, namely, order of Assessing Officer should be erroneous and prejudicial to interest of revenue. Every erroneous order may not be prejudicial to interest of revenue and every order prejudicial to interest of revenue may not be erroneous. CIT while issuing show cause notice points out that expenses claimed by assessee were not incurred wholly and exclusively in connection with transfer of Bangalore property. In preceding paragraphs, we have noted manner in which Assessing Officer proceeded with assessment. To be noted assessment was under Section 143(3) of Act. Assessing Officer issued notice under Section 142(1) of Act along with questionnaire which had been complied with by assessee by submitting necessary particulars along with documents which includes last will and testament of his father dated 30.10.2008. After examining same, Assessing Officer accepted stand taken by assessee towards expenses. 7/20 http://www.judis.nic.in T.C.A.No.415 of 2019 CIT while issuing show cause notice did not rely upon any independent material nor on any interpretation of law but on perusal of records was of view that expenditure cannot be allowed as deduction. Along with filled in questionnaire, assessee had filed copy of last will and testament of his father, sale deed of Bangalore property and legal opinion given by learned counsel for assessee. After perusal of same, Assessing Officer has taken stand and passed order. Therefore, it cannot be stated that Assessing Officer did not apply his mind to issue, after all Assessing Officer cannot be expected to write judgment. Admittedly there was inquiry conducted by Assessing Officer and it is not case of CIT that there was lack of inquiry or inadequate inquiry. 6.In case of Commissioner of Income Tax vs. Gabriel India Ltd. [(1993) 203 ITR 108 (Bom)], it was held that suo motu revision under Section 263 of Act can be exercised only if on examination of records of any proceedings under Act, Commissioner considers that order passed by Income Tax Officer is erroneous in so far as it is prejudicial to interest of revenue. It was further held that this power is not arbitrary or uncharted power, it can be exercised only on fulfilment of requirements laid down in Sub-section (1), that order is erroneous in so far as it is prejudicial to 8/20 http://www.judis.nic.in T.C.A.No.415 of 2019 interests of revenue, must be based on materials on record of proceedings called for by Commissioner and if there are no materials on record, basis on which it can be said that Commissioner acting in reasonable manner could have come to such conclusion, very initiation of proceedings will be illegal and without jurisdiction. It was further held that Commissioner cannot initiate proceedings with view to start fishing and roving enquiries into matters or orders which are already concluded as such action will be against well accepted policy of law that there must be point of finality in all illegal proceedings, stale issues should not be reactivated beyond particular stage. Section 263 of Act does not visualize case of substitution of judgment of Commissioner for that of Income Tax Officer, who passed order unless decision is held to be erroneous. Merely because Commissioner is not fully satisfied with conclusion of Income Tax Officer, order cannot be turned to be erroneous. On reading of order dated 01.07.2015/22.07.2015 passed under Section 263 of Act one can easily form opinion that order is based upon interpretation which CIT has given to terms and conditions of last will and testament of assessee's father dated 30.10.2008. Thus, it is evident that CIT has made roving enquiry and substituted his view to that of view taken by Assessing Officer who had 9/20 http://www.judis.nic.in T.C.A.No.415 of 2019 done so after conducting enquiry into matter and after calling for all documents from assessee, one of which is last will and testament executed by assessee's father. Therefore, we are of clear view that this is not case where Commissioner could have invoked power under Section 263 of Act. For all above reasons, Substantial Questions of Law 1 and 4 are answered in favour of assessee. 7.It is argument of Mr.Karthik Ranganathan, learned Senior Standing Counsel for revenue that will dated 30.10.2008 clearly states that assessee's father has bequeathed entire sale consideration received from sale of Bangalore property to assessee, second son born to his first wife. It is submission that sale consideration has been received by assessee from and out of which payments were effected to charitable institutions, etc and therefore payments can neither to be considered as diversion by overriding title nor expenditure incurred wholly and exclusively in connection with transfer. In this regard, learned counsel has drawn attention of this Court to findings of Tribunal, wherein Tribunal referred to decision of Hon'ble Apex Court in case of Commissioner of Income Tax, Bombay City II vs. Sitaldas Tirathdas [(1961) 41 ITR 367 (SC)]. 10/20 http://www.judis.nic.in T.C.A.No.415 of 2019 8.We have gone through last will and testament of assessee's father dated 30.10.2008. He had appointed Mr.M.S.Narayan, Advocate as executor to give effect to terms and conditions of will and dispose of his properties as stated by him in will. executor was entitled to sum of Rs.50,000/- as professional fee and all expenses for due execution of will from and out of estate of deceased testator. After setting out details of his family and property possessed by him, testator states that he bequeaths sale consideration received from sale of immovable property absolutely to assessee, his second son. Then testator proceeds to state that executor of will shall arrange to sell property after period of one year from date of his demise so as to accommodate his wife for her stay and after she vacates property, executor shall sell property as already mentioned and distribute sale proceeds by effecting payments in favour of four charitable institutions specifying amount to be paid to each of them and defray necessary expenses towards stamp duty, etc., fees to executor and remaining sale consideration be paid to assessee who shall repatriate said amount so received for education of his children as per RBI rules. To gather intention of testator will has to be read in its entirety and not in bits 11/20 http://www.judis.nic.in T.C.A.No.415 of 2019 and pieces as done by revenue. word 'absolutely' in second line of paragraph 7 of will is heavily relied on by Mr.Karthik Ranganathan to state that entire sale consideration has been bequeathed to assessee absolutely and payments to charitable institutions is from and out of said amount and therefore it is only application of said sale consideration and not diversion of income by creating overriding title. What has been lost sight of by revenue is that usage of expression 'absolutely' occurring in second line in paragraph 7 of will dated 30.10.2008 is to disinherit testator's third wife from being entitled to any portion of funds and all that testator stated was not to sell property for one year till his wife vacates same. Tribunal found fault with assessee for having sold property much earlier. sale deed dated 10.11.2011 clearly records that step mother of assessee had in unequivocal terms agreed for sale and she vacated from property and also granted No objection for transfer of Katha of Bangalore property. Therefore, interpretation given by Tribunal is wholly erroneous. In paragraph 21 of impugned order passed by Tribunal, it has been stated that "the entire sale consideration received from sale of immovable property absolutely to his second son i.e. Kumar Rajaram and thereafter he said he has to distribute sale proceeds after paying property taxes if 12/20 http://www.judis.nic.in T.C.A.No.415 of 2019 found due and shall make payment out of sale consideration and also said how to distribute sale consideration". We find that word 'thereafter' used in paragraph 21 of order of Tribunal nowhere occurs in paragraph 7 of will dated 30.10.2008. However, testator's direction to sell property was to executor of will and there was specific direction to executor to pay specific sums of money to charitable institutions, clear property tax arrears, claim his professional fee, meet stamp duty expenses and remaining amount shall be paid to assesee. Therefore, misinterpretation of intention of testator in his will dated 30.10.2008 has resulted in erroneous order passed by CIT dated 01.07.2015 which order was erroneously confirmed by Tribunal by impugned order. 9.Mr.Karthik Rangathan, learned Senior Standing Counsel placed reliance on decision of Hon'ble Supreme Court in case of R.M.Arunachalam vs. Commissioner of Income Tax [(1997) 93 Taxman 423 (SC)]. In said case, question was whether estate duty paid in respect of estate of one 'R' and estate of one 'V' to extent of such duty related to assets in question, could be claimed as deduction as cost of acquisition or as cost of improvement. question was answered against assessee as capital 13/20 http://www.judis.nic.in T.C.A.No.415 of 2019 asset became properties of assessee under will executed by 'U' i.e. under clause (ii) of sub-section (1) of Section 49; capital assets became property of 'U' under sub-clause (a) of clause (iii) of sub-section (1) of section 49 by succession after death of her husband 'R' and by virtue of explanation in sub-section (1) of Section 49 'R' had been treated as previous owner of assets by ITO. On facts, it was found that assessee admittedly became full owner of assets even before payment of estate duty and on payment of same, he had not acquired new right, tangible or intangible, in assets and therefore amount proportionate to estate duty paid by assessee on properties that were transferred should be treated as cost of acquisition of assets under Sections 48 and 49 read with section 55(2) cannot be accepted since title of assessee to immovable properties acquired was not incomplete and imperfect in any way and as result of payment of estate duty by assessee there was improvement in title of assessee and said payment could be regarded as cost of improvement under Section 55(1)(b) of Act. 10.In our considered view said decision can have no application to facts of present case as at no point of time assessee raised any dispute with regard to cost of acquisition of asset. That apart, 14/20 http://www.judis.nic.in T.C.A.No.415 of 2019 case on hand requires to be interpreted based on intention of testator for which purpose we have read will dated 30.10.2008 as whole to gather intention of testator which is clear and lucid. testator bequeathed only portion of sale consideration left over after effecting payments directed to be made by him. If executor failed to honour commitments then sale itself would be invalid. Furthermore, in recitals in sale deed dated 10.11.2011, it has been clearly mentioned about payments effected to all charitable organisations which are all through bankers cheques drawn in name of concerned organisations by purchaser. 11.The Hon'ble Supreme in case of Provat Kumar Mitter vs. Commissioner of Income Tax [(1961) 41 ITR 624(SC)] held that fundamental principle is that application of income is allocation of one's own income after it accrues or has arisen, although such application may be under contract or obligation, whereas diversion of income is that which diverts away or deflects before it accrues to or reaches assessee, and it is received by him only for benefit of person who is entitled to income under overriding charge or title. This position was explained by Hon'ble Supreme Court in case of Motilal Chhadami Lal Jain vs. 15/20 http://www.judis.nic.in T.C.A.No.415 of 2019 Commissioner of Income Tax [(1991) 190 ITR 1 (SC)] stating that what has to be seen is nature of obligation by reason of which income becomes payable to person other than one receiving it; where obligation flows out of antecedent and independent title it effectively slices away part of corpus of right to receive entire income and thus it would be case of diversion. In case of Commissioner of Income Tax vs. Imperial Chemical Industries (India) (P.) LTd. [(1969) 74 ITR 17], it was held that where there is obligation to apply income in particular way before it is received by assessee or before it has accrued or arisen to assessee, it is case of diversion of income. In case of Sitaldas Tirathdas which decision was referred to by Tribunal, it was held that where by obligation income is diverted before it reaches assessee, it is deductible; but where income is required to be applied to discharge obligation after such income reaches assessee, same consequence, in law, does not follow. 12.In preceding paragraphs, we have set down factual position which clearly shows that amounts were specifically earmarked by testator to charitable institutions and other expenses. sum of monies so allocated were to reach respective charitable institutions/entity before 16/20 http://www.judis.nic.in T.C.A.No.415 of 2019 reminder of sale consideration reaches assessee. In other words, assessee at no point of time was entitled to receive entire sale consideration. sale was to be executed by executor of will who was directed to distribute money to respective organisations, defray expenses, pay property tax, deduct his professional fee and remaining amount was directed to be paid to assessee. Therefore, to interpret will in any other fashion would be doing injustice to intention of testator and interpretation given by CIT is wholly erroneous as CIT appears to have done same "cherry picking" in last will and testament which is not manner in which will needs to be interpreted. intention of testator was very clear as assessee was not entitled to entire sale consideration. In fact if interpretation of CIT and Tribunal were to be accepted, we would be rewriting last will and testament. testator did not bequeath Bangalore property but bequeathed part of sale consideration which was left behind after meeting commitments mentioned in will to be truly and faithfully performed by executor of will. Thus, we can safely conclude that major portion of sale consideration on being received from purchase of property stood diverted before it reached assessee and under will there was no obligation cast upon assessee to receive sale consideration and 17/20 http://www.judis.nic.in T.C.A.No.415 of 2019 distribute same in manner desired by testator. For above reasons, we answer Substantial Question of law No.2 in favour of assessee. 13.The Substantial Question of law No.3 is with regard to expenditure claimed by assessee. assessee had produced documents before Assessing Officer who had scrutinized same and accepted genuinity of claim and granted benefit. CIT disallowed expenses on ground that Assessing Officer did not make indepth inquiry. similar finding was tested for its correctness by High Court of Delhi in case of Commissioner of Income vs. Sunbeam Auto Ltd. [(2011) 332 ITR 167 (Delhi)] and it was held that one has to keep in mind distinction between "lack of inquiry" and "inadequate inquiry". If there was inquiry, even adequate that would not by itself give occasion to Commissioner to pass orders under Section 263 of Act merely because he has different opinion in matter and it is only in cases of lack of inquiry that such course of action would be open. As mentioned by us in preceding paragraphs, assessee has responded to notice issued under Section 142 of Act and produced documents and records including their statement of total income wherein they had given entire details including 18/20 http://www.judis.nic.in T.C.A.No.415 of 2019 receipts issued by respective persons to whom payments were effected, all of which were through banking channels. Therefore, in our considered view finding rendered by CIT was perverse which ought not to have been affirmed by Tribunal more so for reason that there was no evidence with regard to expenses like professional fee, etc. Tribunal failed to note that assessee had produced copies of receipts signed by respective party before Assessing Officer who was satisfied with same and in absence of any fraud being alleged with regard to authenticity of those documents, CIT could not have revised assessment by invoking Section 263 of Act. For above reasons, Substantial Question of law No.3 is answered in favour of assessee. 14.In result, appeal filed by assessee is allowed and Substantial Questions of law are answered in favour of assessee. No costs. (T.S.S.,J.) (V.B.S.,J.) 05.08.2019 cse Index: Yes/No Internet: Yes/No Speaking Order/Non-speaking Order 19/20 T.C.A.No.415 of 2019 T.S.SIVAGNANAM, J. AND V.BHAVANI SUBBAROYAN, J. cse To 1.The Income Tax Officer, International Taxation - 2(1), Chennai - 600 034. 2.The Income-tax Appellate Tribunal, B Bench, Chennai. Pre-delivery judgment made in T.C.A.No.415 of 2019 05.08.2019 20/20 Kumar Rajaram v. Income-tax Officer, International Taxation-2(1), Chennai