The CIT (Exemptions) has revised my AY 2022-23 assessment under s.263 because the Assessing Officer did not check whether the expenditure funded by the loan had already been claimed as application. Was he obliged to check?
No. For AY 2022-23, Explanation 4(ii) to s.11(1) simply postponed recognition of the application from the year of expenditure to the year of repayment, and imposed no further condition requiring the Assessing Officer to revisit the end use of the borrowing or to verify whether it had already been claimed. The further provisos imposing those conditions were inserted only by the Finance Act 2023 with effect from 1 April 2023, so the s.263 order, which read them into AY 2022-23, was quashed and the assessment restored.
Decided by the ITAT (George George K VP and Padmavathy S AM) on 2026-08-06, reported as ITA No. 1692/CHNY/2026 (ITAT Chennai 'B' Bench). It bears on section 11, section 11(1), section 263 of the Income Tax Act 1961, in Charitable Trusts & Exemption, Revision & Rectification and Capital Gains Exemptions matters.
This is the counterpart of the loan-repayment cases decided on merits, and it is the one to reach for when the attack comes by revision rather than by assessment. Two propositions come out of it and both are useful. The first is the statutory one: as Explanation 4(ii) stood for AY 2022-23 there was no bar on repayment being treated as application by reference to when the borrowed money was spent; the Finance Act 2023 provisos, which among other things withdraw the benefit where the application out of the loan was made on or before 31 March 2021, operate only from AY 2023-24. The second is the revision one: an omission to conduct an enquiry the statute did not mandate cannot make an order erroneous, and where the case was picked for limited scrutiny on the very issue, notices were issued, a detailed reply was filed and the assessment order reproduces it, that is inadequate enquiry at worst and not lack of enquiry. Anyone with a live s.263 notice on loan repayments for AY 2022-23 should have this order.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
Read aloud by your device. Press again to stop.
The assessee is a charitable trust at Salem. For AY 2022-23 it filed a nil return. The case was selected for limited scrutiny specifically to examine its claim that repayment of loan be treated as application of income. The Assessing Officer issued notices calling for particulars and documentary evidence; the assessee filed detailed submissions explaining the claim, the manner in which the borrowed funds had been utilised and the particulars of the repayment. The assessment order reproduced those submissions verbatim, recorded that the explanation was acceptable and allowed the claim. The CIT (Exemptions) then invoked s.263 on two grounds: that the Assessing Officer had failed to verify whether the loan repayment of Rs.1,26,61,141 was a valid application of income given that the expenditure financed by those loans might already have been claimed as application in earlier years, and that he had not verified whether the borrowed funds were utilised for charitable purposes.
The assumption of jurisdiction under s.263 was unsustainable in law; the revisional order was quashed and the assessment order restored (paragraph 9), and the appeal was allowed (paragraph 10). Neither ground stood: the first imported into AY 2022-23 statutory restrictions enacted only by the Finance Act 2023, and the second was contrary to the assessment record, which showed that the necessary enquiries had been made and the explanation accepted after due consideration.
Explanation 4(ii) to s.11(1) as applicable for AY 2022-23 provided that application made out of any loan or borrowing shall not be treated as application of income and that the amount so not treated shall be regarded as application in the previous year in which the loan or borrowing is repaid out of the income of that year; the Legislature thus expressly recognised repayment out of the year's income as application, and prescribed no further condition requiring the Assessing Officer to examine whether the expenditure incurred out of the borrowing had already been treated as application in an earlier year, nor to re-verify the utilisation of the borrowed funds in the year of repayment. The provision merely postponed recognition of the application from the year of expenditure to the year of repayment. It was only by the Finance Act 2023 that Parliament inserted further provisos to Explanation 4(ii), including that the benefit of the first proviso would not apply where the application from the loan or borrowing had been made on or before 31 March 2021, and other qualifying conditions, effective from 1 April 2023. Restrictions introduced prospectively cannot be read into the earlier year; a taxing statute is construed on the language employed and words or conditions cannot be supplied by implication (paragraph 6). It followed that the omission to conduct an enquiry the statute did not mandate could not render the assessment order erroneous, and the Commissioner's reading was at best another possible view founded on later amendments; where two views are reasonably possible and the officer has adopted a legally permissible one, s.263 is not attracted (paragraph 7). On the second ground, the case had been selected for limited scrutiny on this very issue, notices had been issued, the assessee had replied with evidence, and the assessment order reproduced the submissions and accepted them, so this was not a mechanical acceptance; an officer is not expected to record findings on every issue examined, the assessment order is to be read with the assessment record, and the distinction between lack of enquiry and inadequate enquiry — the former alone supporting s.263 — is settled by CIT v Gabriel India Ltd. and CIT v Sunbeam Auto Ltd. (paragraph 8). The twin conditions of s.263, error and prejudice, were therefore not satisfied (paragraph 9).
The provision merely postponed the recognition of the application from the year of expenditure to the year of repayment.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppNo. For AY 2022-23, Explanation 4(ii) to s.11(1) simply postponed recognition of the application from the year of expenditure to the year of repayment, and imposed no further condition requiring the Assessing Officer to revisit the end use of the borrowing or to verify whether it had already been claimed. The further provisos imposing those conditions were inserted only by the Finance Act 2023 with effect from 1 April 2023, so the s.263 order, which read them into AY 2022-23, was quashed and the assessment restored. This was decided by the ITAT (George George K VP and Padmavathy S AM) and bears on section 11, section 11(1), section 263 of the Income Tax Act 1961. It is reported as ITA No. 1692/CHNY/2026 (ITAT Chennai 'B' Bench). This is the counterpart of the loan-repayment cases decided on merits, and it is the one to reach for when the attack comes by revision rather than by assessment. Two propositions come out of it and both are useful. The first is the statutory one: as Explanation 4(ii) stood for AY 2022-23 there was no bar on repayment being treated as application by reference to when the borrowed money was spent; the Finance Act 2023 provisos, which among other things withdraw the benefit where the application out of the loan was made on or before 31 March 2021, operate only from AY 2023-24. The second is the revision one: an omission to conduct an enquiry the statute did not mandate cannot make an order erroneous, and where the case was picked for limited scrutiny on the very issue, notices were issued, a detailed reply was filed and the assessment order reproduces it, that is inadequate enquiry at worst and not lack of enquiry. Anyone with a live s.263 notice on loan repayments for AY 2022-23 should have this order. If it applies to you, the first step is this: Date the loan application first. If the money borrowed was spent on or before 31 March 2021, the Finance Act 2023 provisos are against you for AY 2023-24 onwards; if the year in dispute is AY 2022-23, say so and keep the argument on the unamended text.
The assessee is a charitable trust at Salem. For AY 2022-23 it filed a nil return. The case was selected for limited scrutiny specifically to examine its claim that repayment of loan be treated as application of income. The Assessing Officer issued notices calling for particulars and documentary evidence; the assessee filed detailed submissions explaining the claim, the manner in which the borrowed funds had been utilised and the particulars of the repayment. The assessment order reproduced those submissions verbatim, recorded that the explanation was acceptable and allowed the claim. The CIT (Exemptions) then invoked s.263 on two grounds: that the Assessing Officer had failed to verify whether the loan repayment of Rs.1,26,61,141 was a valid application of income given that the expenditure financed by those loans might already have been claimed as application in earlier years, and that he had not verified whether the borrowed funds were utilised for charitable purposes. The matter was decided on 2026-08-06 by the ITAT (George George K VP and Padmavathy S AM). On those facts the ITAT held as follows. The assumption of jurisdiction under s.263 was unsustainable in law; the revisional order was quashed and the assessment order restored (paragraph 9), and the appeal was allowed (paragraph 10). Neither ground stood: the first imported into AY 2022-23 statutory restrictions enacted only by the Finance Act 2023, and the second was contrary to the assessment record, which showed that the necessary enquiries had been made and the explanation accepted after due consideration.
Explanation 4(ii) to s.11(1) as applicable for AY 2022-23 provided that application made out of any loan or borrowing shall not be treated as application of income and that the amount so not treated shall be regarded as application in the previous year in which the loan or borrowing is repaid out of the income of that year; the Legislature thus expressly recognised repayment out of the year's income as application, and prescribed no further condition requiring the Assessing Officer to examine whether the expenditure incurred out of the borrowing had already been treated as application in an earlier year, nor to re-verify the utilisation of the borrowed funds in the year of repayment. The provision merely postponed recognition of the application from the year of expenditure to the year of repayment. It was only by the Finance Act 2023 that Parliament inserted further provisos to Explanation 4(ii), including that the benefit of the first proviso would not apply where the application from the loan or borrowing had been made on or before 31 March 2021, and other qualifying conditions, effective from 1 April 2023. Restrictions introduced prospectively cannot be read into the earlier year; a taxing statute is construed on the language employed and words or conditions cannot be supplied by implication (paragraph 6). It followed that the omission to conduct an enquiry the statute did not mandate could not render the assessment order erroneous, and the Commissioner's reading was at best another possible view founded on later amendments; where two views are reasonably possible and the officer has adopted a legally permissible one, s.263 is not attracted (paragraph 7). On the second ground, the case had been selected for limited scrutiny on this very issue, notices had been issued, the assessee had replied with evidence, and the assessment order reproduced the submissions and accepted them, so this was not a mechanical acceptance; an officer is not expected to record findings on every issue examined, the assessment order is to be read with the assessment record, and the distinction between lack of enquiry and inadequate enquiry — the former alone supporting s.263 — is settled by CIT v Gabriel India Ltd. and CIT v Sunbeam Auto Ltd. (paragraph 8). The twin conditions of s.263, error and prejudice, were therefore not satisfied (paragraph 9). In the words reproduced by the source cited on this page: "The provision merely postponed the recognition of the application from the year of expenditure to the year of repayment." The decision followed or applied CIT v. Gabriel India Ltd. (1993) 203 ITR 108 (Bombay) — relied on; CIT v. Sunbeam Auto Ltd. (2011) 332 ITR 167 (Delhi) — relied on.
It was decided by the ITAT on 2026-08-06 and is reported as ITA No. 1692/CHNY/2026 (ITAT Chennai 'B' Bench). Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 11, section 11(1), section 263, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The assumption of jurisdiction under s.263 was unsustainable in law; the revisional order was quashed and the assessment order restored (paragraph 9), and the appeal was allowed (paragraph 10). Neither ground stood: the first imported into AY 2022-23 statutory restrictions enacted only by the Finance Act 2023, and the second was contrary to the assessment record, which showed that the necessary enquiries had been made and the explanation accepted after due consideration. It arises in Charitable Trusts & Exemption, Revision & Rectification and Capital Gains Exemptions matters, on section 11, section 11(1), section 263 of the Income Tax Act 1961, and was decided by George George K VP and Padmavathy S AM. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Against a s.263 notice, set out what the statute as it then stood actually required of the Assessing Officer, and show that the enquiry the Commissioner says was missing was not one the provision called for. Put the limited-scrutiny reason on record with the notices issued, the replies filed and the passage of the assessment order that reproduces them; the Tribunal read the assessment order together with the assessment record. Argue the two-views point squarely — that the Commissioner's reading rests on amendments brought into force later and is at best another possible view — and cite CIT v Gabriel India Ltd. and CIT v Sunbeam Auto Ltd. on the lack-of-enquiry versus inadequate-enquiry distinction. Do not concede that the twin conditions in s.263 are made out simply because the assessment order records no discussion; the Tribunal held that an officer is not expected to record findings on every issue examined.
Searched for later treatment; none was found. That is not the same as a source affirming it. A `citedby:` citator search on this order's Indian Kanoon id returns no later decision citing it. A second, differently worded probe - the assessee's name restricted to documents from 6 August 2026 onward, across all courts including the High Courts and the Supreme Court - turned up no judicial treatment either. In particular no appeal under section 260A, and so no High Court reversal, could be traced, and no later Bench was found taking the opposite view. This is a August 2026 order, so the silence reflects its age rather than any doubt about it: a practitioner may cite it as the only direct authority on the point but should not expect it to be treated as settled. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The order runs to ten numbered paragraphs. Paragraphs 6 to 10 have been read in full, and the sentence quoted from paragraph 6 is secure. Paragraphs 1 to 5 have not been read; the facts below are taken from paragraphs 6 to 9 and from a summary of the earlier part, so the procedural history — the date of the assessment order, the date of the s.263 order and the assessment year of the revisional notice — is thinner than usual, and only AY 2022-23 and the repayment figure of Rs.1,26,61,141 rest on that summary. The order describes the Finance Act 2023 provisos in general terms, naming only the 31 March 2021 cut-off; the remaining qualifying conditions are not enumerated in the text and are not stated here. Three things about how far the order goes. It decides a year before the Finance Act 2023 provisos applied, and it decides it on the short ground that those provisos were not in the statute for that year. That is a dating point, not a construction of the provisos, and the order is no authority on how they work once they do apply. The vehicle was a revision under s.263, so what the Tribunal set aside was the Commissioner's direction and not an assessment. The consequence is that the assessment as originally made stands; nothing was remitted for a fresh view, and the order does not decide whether the trust's application of income under s.11(1) was correctly computed on the merits. And the repayment figure is stated from a summary rather than from the paragraphs read in full. Anyone using the figure should take it from the order itself, and anyone using the case for the dating point should cite paragraph 6, which is the paragraph that carries it. The wider question — what a trust may treat as application where borrowed money is repaid — is governed for later years by the provisions the order says were absent for this one, and this entry does not answer it. What can be said is that the cut-off is a hard one: a repayment made after 31 March 2021 falls to be tested under the provisos, and the reasoning of this order gives no help with that, because the order's whole point is that it was dealing with a year to which they did not extend. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The assumption of jurisdiction under s.263 was unsustainable in law; the revisional order was quashed and the assessment order restored (paragraph 9), and the appeal was allowed (paragraph 10). Neither ground stood: the first imported into AY 2022-23 statutory restrictions enacted only by the Finance Act 2023, and the second was contrary to the assessment record, which showed that the necessary enquiries had been made and the explanation accepted after due consideration.
TaxSphere, “Thailammal Charitable Trust v Exemption Ward, Salem”, https://taxnotice.vittsphere.com/caselaw/case/thailammal-charitable-trust-explanation-4-fa-2023-provisos-not-in-ay-2022-23/ (validity last checked 2026-09-08)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
My trust never filed the accumulation notice for the year. Can I file it now, after the assessment was completed, and still get the exemption?
My trust filed Form 10 only after the scrutiny notice came — 338 days after the due date. The Commissioner refused to condone under s.119(2)(b). Is that the end of the accumulation claim?
The Commissioner rejected my condonation application for late Form 9A for an old year. Was Form 9A even required then?
The CIT(E) refused my Form 10AB because the memorandum says the objects may be carried out in India 'and elsewhere'. Is a possible application of funds outside India a ground to refuse registration?
