Income Tax Act, 1961

--Revision under section 263--Erroneous and prejudicial orderAllowability of exemption under section 11--Assessee was set up with the object of providing habitat related activities to various institutions. During the year under consideration, assessee filed its return of income and claimed exemption under section 11. AO, in the first instance processed the return under section 143(1)(a). Subsequently, he issued notice under section 148 and asked assessee to explain the nature of charitable activities undertaken and the nature of contributions made by institutional members qua the construction of super structure on the demised land, received by it from Government and the space in such superstructure allotted to institutional members and whether these members were covered under section 13(1) read with section 13(3). After detailed examination, AO passed assessement order allowing the benefit of exemption under section 11. Thereafter, CIT invoked section 263 concluding that assessement order was erroneous and prejudicial to the interest of revenue for the following reasons. (i) the institutional members fell within the category of substantial contributors in terms of section 13(3) of the Income Tax Act and since space in the super.structure had been allotted to the organizations below market price, provisions of section 13(1)(c) read with section 13(3)(b) were attracted and therefore, was not entitled to exemption under section 11 (ii) the assessee had earned interest on the funds furnished by such institutional members and that the income earned by way of interest by the assessee had been passed on to the institutional members in the form of subsidised costs in respect of space allotted to them resulting in undue benefit to such institutional members was violative of section 13(1)(c) of the Income Tax Act and (iii) the activities of the assessee did not fall within the provisions of section 2(15) of the Income Tax Act, as after certain years from the year in dispute assessee had started functioning as a club Held The revision order passed under section 263 was not justified since it was not an erroneous and prejudicial order for the following reasons. (i) The funds received from the institutional members were shown in the balance sheet of the assessee as liabilities and not contributions towards the 'corpus', therefore, CIT, had wrongly categorised the institutional members who had been allotted space in the superstructure as substantial contributors in terms of section 13(3) of the Income Tax Act. The allotment of space was subject to the approval of Government of India and was based on a self financing model, therefore, there could be no question of the assessee allotting space to the institutional members for a sum which was less than cost price both, with respect to the demised land as well as the common facilities. (ii) The total cost in terms of the model evolved by the assessee had to be shared amongst various institutional members on a pro-rata basis. Therefore, there was no violation of the provisions of section 13(1)(c) of the Income Tax Act as the interest earned on the funds received from institutional members would only reduce the cost which in turn would get proportionately divided amongst the institutional members. (iii) The assessee had not deviated from its object of habital related activities in the assessment year in dispute, therefore, activities of assessee were well covered in section 2(15) for relevant year.