The Society Of The Brothers Of St. Patrick u.p V. The Commissioner Of Income Tax, Dehradun AND ANOTHER

WPMS/2985/2013

AI Insights

The Society of the Brothers of St. Patrick, a registered society running a charitable educational institution, challenged the reassessment proceedings for the assessment year 2006-07 initiated by the Income Tax authorities. The society had previously declared 'NIL' income, which was accepted after initial scrutiny. However, reassessment notices were issued years later, questioning the exemption claimed under Section 11 of the Income Tax Act due to benefits provided to a trustee. The society argued that the reassessment was based on a mere change of opinion and was initiated beyond the statutory limit without any failure on their part to disclose material facts.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 751056 (HC-UTTARAKHAND)
• Appeal Type: Others
• Pronouncement Date: 03-03-2014
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax v. Kelvinator of India Ltd., National Dairy Development Board v. DCIT, B.J. Services Company Middle East Ltd. v. Deputy Director of Income Tax, International Taxation, Dehradun & others
• Laws Referred To: Income Tax Act, 1961, Societies Registration Act, 1860
• Result in Favour of: Applicant
• Court: HIGH COURT
• Department Lawyers: H M BHATIA
• Assessee Lawyers: P R MULLICK
• Keywords: Audit report; Charitable purpose; Income escaping assessment; Reassessment proceedings; Trustee benefits
• Section: 147; 148; 142(2); 13(1)(c); 11(1)(a); 12A(b); 13(3)(cc)

Judgement Text

"IN THE HIGH COURT OF UTTARAKHAND AT NAINITAL WRIT PETITION NO.2985 (M/S) OF 2013 The Society of the Brothers of St. Patrick (Utter Pradesh) ………..Petitioner Versus The Commissioner of Income Tax and another …….Respondents Present: Mr. P.R. Mullick, Advocate, present for the petitioner. Mr. H.M. Bhatia, Advocate, present for the respondents. Hon’ble Sudhanshu Dhulia, J (Oral) This writ petition has been filed by the petitioner challenging the reassessment proceedings for the assessment year 2006-07, which has been done vide notice dated 15.03.2013, under Section 147/148 of the Income Tax Act, 1961 and the subsequent notice dated 21.05.2013. 2. The petitioner is a registered Society under the Societies Registration Act, 1860. The sole purpose of the Society is to impart education, without any profit motive, as it states. The petitioner runs a private unaided School in the name of St. Joseph’s Academy at 12, Rajpur Road, Dehradun. At present the School is providing education to approximately 3500 students who come from all kind of stratum of society irrespective of their caste, creed or religion. The above educational institute is also affiliated to the Council for the Indian School Certificate Examinations, New Delhi. The petitioner further states that activities of the petitioner’s Society are covered under Section 2(15) of 2 the Income Tax Act, 1961 which is for charitable purpose. The Section 2 (15) reads as under:- “Charitable purpose includes relief of the poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility.” 3. The petitioner further contends that the accounts of the petitioner’s Society are audited every year by a reputed firm of Chartered Accountants and the petitioner is assessed to income tax in Circle-2, Dehradun. The petitioner’s Society files its income tax return every year and submits a copy of the Statutory Auditors report and audited Balance Sheet and income and expenditure account, in compliance of the provisions of the Income Tax Act, 1961. 4. In respect to the Assessment Year 2006-07, the petitioner filed its Income Tax return on 06.10.2006 declaring “NIL” income. 5. Vide notice under Section 142 (2) of the Income Tax Act, 1961 dated 06.10.2007 the case of the petitioner was taken up, under the compulsory selective scrutiny, as per the CBDT Guidelines. The petitioner was served with a questionnaire dated 21.03.2007 by respondent no. 2 i.e. the Assistant Commissioner of Income Tax, Circle -2, Dehradun requiring the petitioner to furnish the information as per the questioner. 6. As per para 9 of the said questioner the petitioner was specifically required to furnish the following informations: “Whether any member/Board of Trustee drawing any benefit/salary/remuneration from the 3 society, if yes, state what services are rendered by them? 7. To this query, the reply given was that the petitioner’s Society has incurred expenditure of Rs.2,19,606/- on providing food and meeting other expenditure on the Brothers. It was also placed on record that the Brothers are the Trustee of the Society. These facts were disclosed by the Statutory Auditors in their audit report dated 22.09.2006. 8. After considering the reply and explanations of the authorized representative of the petitioner and the auditors report, the Income tax authorities passed an order accepting the petitioner’s income as “NIL”. This order was passed on 15.05.2008. Thereafter, reassessment proceedings were initiated vide notice dated 15.03.2013 and subsequent notice dated 21.05.2013. The petitioner made his objection to the reassessment and sought reasons from the Income Tax authorities for opening the reassessment proceedings. The reasons were, subsequently, provided by the respondents vide order dated 06.05.2013, which read as under:- “As per the Income and Expenditure A/c filed by the assessee alongwith the audited report in Form No. 10B u/s 12A(b) of the I.T. Act, total receipt of the society during the year was Rs.4,19,49,545/-. Out of which the assessee has actually applied Rs.3,56,57,113/-, including capital expenditure of Rs.57,30,403/- and has also set apart Rs.8,86,742/- and leaving balance Rs.62,92,432/- claimed exempt u/s 11 (1)(a) of the I.T. Act, 1961. As per Para II attached with audit report, under the head “Application or use of income or property for the benefit of persons referred to in section 13(3), in point no 3” the auditor have mentioned that a sum of Rs.2,19,602/- was incurred on account of food and other expenses of Brother J.C. Carroll. The amount of 4 Rs.2,19,602/- is debited in the Schedule of expenditure for the year 31.03.2006 as under : Brother’s food expenses : Rs.1,66,103.12 Brother’s other expenses: Rs. 53,498.40 Rs.2,19,60,1.52 or Rs.2,19602/- As per Memorandum of Association Brother Carroll is first member of Governing Body of the Society. Further as per Clause 4 of Rules & Regulation of the Society the Member of Society shall be only trustee & not owners. Thus Brother Carroll is a trustee of the Society & is a person covered u/s 13 (3) (cc) of the Income Tax Act, 1961. Therefore payments made for the benefit to Brother Carroll are hit by provision of section 13 (1) (c) of the I.T. Act, 1961 and are liable to be excluded from the exemption u/s 11 of the I.T. Act. As the Brother J.C. Carroll is Member of the Society and taking benefit from the society. As the assessee society has violated u/s 13 (1) (c) of the I.T. Act, 1961. In view of the facts narrated above, I have reasons to believe that income of Rs.2,19,602/- has escaped assessment within the meaning of section 147 of the I.T. Act, 1961.” 9. It is this order and the previous notices which are presently under challenge before this Court. 10. The Section 147 and 148 of the Income Tax Act, 1961, which are relevant for our purpose, reads as under:- 147. Income escaping assessment.- If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in section 148 to 153 referred to as the relevant assessment year: 5 Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year: Provided further that nothing contained in the first proviso shall apply in a case where any income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment for any assessment year: Provided also that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment. Explanation 1.- Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso. Explanation 2- For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:- (a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax; (b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return; 6 (ba) where the assessee has failed to furnish a report in respect of any international transaction which he was so required under section 92E; (c) where an assessment has been made, but – (i) income chargeable to tax has been underassessed; or (ii) such income has been assessed at too low a rate; or (iii) such income has been made the subject of excessive relief under this Act; or (iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed; (d) where a person is found to have any asset (including financial interest in any entity) located outside India. Explanation 3.- For the purpose of assessment or reassessment under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub- section (2) of Section 148. Explanation 4.-For the removal of doubts, it is hereby clarified that the provisions of this section, as amended by the Finance Act, 2012, shall also be applicable for any assessment year beginning on or before the 1st day of April, 2012. 148. Issue of notice where income has escaped assessment.- (1) Before making the assessment, reassessment or recomputation under Section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139: 7 Provided that in a case – (a) where a return has been furnished during the period commencing on the 1st day of October, 1991 and ending on the 30th day of September, 2005 in response to a notice served under this section, and (b) subsequently a notice has been served under sub-section (2) of section 143 after the expiry of twelve months specified in the proviso to sub-section (2) of section 143, as it stood immediately before the amendment of said sub-section by the Finance Act, 2002 (20 of 2002) but before the expiry of the time limit for making the assessment, reassessment or recomputation as specified in sub-section (2) of section 153, every such notice referred to in this clause shall be deemed to be a valid notice: Provided further that in a case- (a) where a return has been furnished during the period commencing on the 1st day of October, 1991 and ending on the 30th day of September, 2005, in response to a notice served under this Section, and (b) subsequently a notice has been served under clause (ii) of sub-section (2) of section 143 after the expiry of twelve months specified in the proviso to clause (ii) of sub-section (2) of section 143, but before the expiry of the time limit for making the assessment, reassessment or recomputation as specified in sub-section (2) of section 153, every such notice referred to in this clause shall be deemed to be a valid notice. Explanation.- For the removal of doubts, it is hereby declared that nothing contained in the first proviso or the second proviso shall apply to any return which has been furnished on or after the 1st day of October, 2005 in response to a notice served under this section. (2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so.” 11. In the present writ petition, the petitioner has submitted that the Assessment Year in question is Year 8 2006-07 in which the assessment order was passed as far back on 15.05.2008. The notice which is under challenge has been passed well beyond four years, and therefore, it is barred by the first proviso to Section 147 of the Income Tax Act. Therefore, the concerned authority had no jurisdiction to initiate such a proceeding beyond four years, even if it is assumed for the sake of argument that an income has escaped assessment. It has been argued that the proceedings under Section 147/148 of the Income Tax Act can only be initiated beyond a period of four years, if in the earlier assessment years, there was no failure on the part of the assessee either by not making a return or by not disclosing “fully and truly all material facts necessary for the assessment”. This, however, is not the case of the respondents. It merely appears to be a change of opinion. It actually does not have “any reason to believe”, that the assessee has escaped assessment.” 12. The only reason assigned for the reassessment is that the income of Rs.2,19,602/- has been escaped assessment as Brother J.C. Carroll is member of the Society and the Trusty and such a benefit to Brother Carroll is hit by provision of Section 13 (1) (c) of the Income Tax Act and is liable to be excluded from the exemption under Section 11 of the Income Tax Act. However, the earlier opinion formed by the Income Tax authorities for treating the income as ‘NIL” was based on the same material which was furnished by the petitioner’s Society at the time of assessment. Petitioner’s Society did not hide or withheld any material from the income tax authorities. Therefore, the reassessment proceedings are bad. 13. The Hon’ble Apex Court in Commissioner of Income Tax v. Kelvinator of India Ltd. reported in [2010] 320 9 ITR 561 (SC) has held that after 1989 amendment in Section 147 of the Act although the powers for reassessment are wide, yet there can be no arbitrariness and, therefore, the Revenue Authorities before initiating proceedings for reassessment must have “reason to believe” that the income has escaped assessment and this reason to believe cannot be a mere “change of opinion”. 14. A Full Bench of Delhi High Court in Commissioner of Income-Tax v. Kelvinator of India Ltd. reported in [2002] 256 ITR 1 (Delhi) had earlier held that reassessment proceedings cannot be arbitrarily initiated and the concerned authorities must have relevant materials and reason to believe before they initiate such a proceedings. Same is a position held by the Gujrat High Court in National Dairy Development Board v. DCIT (2011) 54 DTR 217 (Guj.). Moreover, in the case of present petitioner before this Court, a learned Single Judge has no previous occasion set aside the reassessment proceedings on same ground, vide its order dated 31.10.2011 in Writ Petition (M/S) No.2084 of 2010. The said order dated 31.10.2011 is though based on a detail order of the same learned Single Judge passed in B.J. Services Company Middle East Ltd. v. Deputy Director of Income Tax, International Taxation, Dehradun & others reported in 2011 (2) U.D., 382, where the learned Single Judge of this Court under identical facts as present in this case, after considering the entire law on the subject has held that the reassessment proceedings were bad in the eyes of law, as the revenue had “no reason to believe” that income has actually escaped assessment. Moreover if such proceedings for reassessment are being initiated after a period of four years then in addition to “the reason to believe” the revenue must have a 10 case where such income has escaped assessment due to a failure on the part of the assessee, as given in the first proviso to Section 147. 15. We presently have a case before us where admittedly reassessment proceedings have been initiated after a period of four years from the end of the relevant assessment year and the revenue authorities have not been able to show either in the “reason” supplied by it to the assessee or even before this Court that the income has escaped assessment due to the failure on the part of the assessee to “disclose fully and truly all material facts”, this Court is of considered view that the proceedings initiated against the petitioner under Section 147/148 of the Income Tax Act are wholly without jurisdiction and so are the orders passed therein. 16. In view of the aforesaid, the Court is of the considered view that the Assessing Officer committed an error in reopening the assessment proceedings under Section 148 read with Section 147 of the Income Tax Act, 1961. The Notice dated 15.03.2013 (Annexure No.1) under Section 148 of the Income Tax Act and notice dated 21.05.2013 (Annexure No.1) under Section 142 (1) of the Income Tax Act being in violation of proviso to Section 147 of the Income Tax Act are liable to be quashed and are hereby quashed. The writ petition is accordingly allowed. 17. No order as to costs. (Sudhanshu dhulia, J.) ML 03.03.2014 "