ITAT Can’t Invent New Reasons to Justify Revision: Kerala High Court Sets Aside Tribunal’s Overreach in Income Tax Case

“When the Commissioner gives only one reason under Section 263, the Tribunal cannot uphold the order on a completely different ground” –  In a key decision reinforcing appellate discipline, the Kerala High Court on November 5, 2025, allowed the appeal filed by a registered charitable trust — Save A Family Plan (India) — against an order of the Income Tax Appellate Tribunal (ITAT), holding that the Tribunal had exceeded its jurisdiction by sustaining a revisionary order on grounds never relied upon by the Commissioner. The Court ruled that once the Tribunal rejected the sole ground taken by the Commissioner under Section 263 of the Income Tax Act, it had no authority to introduce new reasoning to keep the revision alive.

The Division Bench comprising Justice A. Muhamed Mustaque and Justice Harisankar V. Menon declared the Tribunal’s approach unsustainable in law, answering all questions in favour of the assessee.

“Tribunal has no appellate power to invent or supply fresh grounds to uphold revisional orders – It must confine itself to what the Commissioner actually decided”

This case arose from a revisional order issued by the Commissioner of Income Tax (Exemptions) under Section 263 of the Income Tax Act, 1961, which sought to nullify an earlier assessment in favour of Save A Family Plan (India), a registered charitable trust under Section 12A. The Commissioner claimed that the assessee’s donations to other charitable institutions were ineligible for exemption under Section 11, solely on the ground that those institutions did not share similar FCRA categorization.

Though the ITAT rightly rejected this reasoning, it chose to uphold the revision order anyway — but on an entirely different ground: that the assessee had not proved the donee trusts had identical charitable objects.

The High Court found this to be a clear breach of jurisdiction, stating that:

“The Tribunal was not expected to go out of the scope of consideration in the appeal and issue further findings so as to sustain the revision order.”

Save A Family Plan (India) is a charitable organization registered under Section 12A of the Income Tax Act and receives donations from both domestic and foreign sources. For the assessment year 2014-15, it donated funds to 72 other charitable institutions, all registered under Section 12A, treating the payments as application of income for charitable purposes under Section 11.

The Assessing Officer accepted this claim and passed the assessment order accordingly. However, the Commissioner invoked revisional jurisdiction under Section 263, stating that only donations made to institutions with similar FCRA registration (under the Foreign Contribution (Regulation) Act, 2010) would qualify as valid charitable expenditure.

On appeal, the ITAT Cochin Bench accepted that this FCRA-based ground was legally untenable, but nonetheless upheld the Commissioner’s order, stating that the assessment was flawed because the donee trusts did not have identical charitable objectives — a new ground never taken by the Commissioner.

Can the Tribunal Sustain a Section 263 Order on a Ground Not Taken by the Commissioner?

The High Court answered this with a resounding “No”, holding that the Tribunal’s role in such cases is limited to testing the validity of the actual reasons invoked by the Commissioner.

Justice Harisankar V. Menon, writing for the Bench, observed:

“The Tribunal has found in favour of the appellant–assessee. When that be so, there was no requirement for the Tribunal to have proceeded out of the scope of consideration and held that the revision order requires to be sustained for a reason not taken by the Commissioner.”

The Court emphasized that Section 263 proceedings must stand or fall on the grounds stated in the revision order itself. The Tribunal has no appellate liberty to go beyond those reasons.

To support its conclusion, the Court relied on the binding precedent in Commissioner of Income Tax v. Chandrika Educational Trust [(1994) 207 ITR 108], where the Kerala High Court had already laid down the principle that:

“When the Commissioner has chosen to set aside the order of the Income-tax Officer only on a particular ground, the Tribunal is not entitled to go beyond and sustain the order... on grounds different from that relied on by the Commissioner himself.”

This precedent was squarely applicable since the Commissioner’s order in the present case rested solely on the FCRA-related objection, and the Tribunal itself agreed that such a ground was baseless.

Yet, the Tribunal erred in proceeding to re-evaluate the assessment based on a completely new factual matrix — i.e., the alleged failure to prove alignment of charitable objectives with recipient institutions.

The High Court categorically rejected this approach:

“The Tribunal should have stopped there rather than making further observations as regards the sustainability or otherwise of the extension of the benefits under Section 11 of the Act.”

Charitable Donations Are Valid If Made to Registered Institutions – No FCRA Parity Required

The Court further reaffirmed the principle that donations made by one Section 12A-registered trust to another similar registered institution — using the income of the relevant year — is a valid application of income for charitable purposes, and does not require any parity in FCRA registration status.

Justice Menon clarified:

“The benefits under Section 11 of the Act are not in relation to the provisions of the FCRA Act. Therefore, the Commissioner was not justified in exercising the suo motu revisional power under Section 263 of the Act, as rightly found by the Tribunal.”

This clear disassociation between FCRA compliance and Income Tax Act exemptions provides welcome clarity to the functioning of charitable institutions receiving foreign contributions.

The High Court concluded that the Tribunal’s finding was jurisdictionally flawed, and the revisional order under Section 263 was liable to be set aside in its entirety. It allowed the appeal and answered both substantial questions of law in favour of the assessee.

“In the result, we are of the opinion that the appellant is entitled to succeed. Hence, this appeal would stand allowed, with the questions raised being answered in favour of the assessee and against the Revenue.”

This ruling reinforces crucial judicial discipline in tax administration and protects charitable trusts from arbitrary revisional powers exercised on unsustainable grounds. Importantly, it warns appellate authorities not to assume the role of the assessing or revising officer, and restrict themselves strictly to reviewing the actual grounds raised by the revenue authorities.

Date of Decision: 05.11.2025