Andhra Pradesh H.C : Participation in a chit fund scheme, floated by the chit fund, was in contravention of section 11(5) of the Act

High Court Of Andhra Pradesh

Little Angels Educational Society vs. ITO

Assessment Year : 2004-05 to 2007-08

Section : 10(23C),147

V.V.S. Rao And Ramesh Ranganathan, JJ.

WP Nos. 24241 To 24245 Of 2010

March 1, 2011

JUDGMENT

V.V.S. Rao, J. – These writ petitions are filed challenging the communication dated September 6, 2010 issued by the respondent. By the said communication, the objections raised by the petitioners to the notices dated March 30, 2010, under section 148 of the Income-tax Act, 1961 (the Act), proposing to reassess the income for five assessment years i.e., 2004-05 to 2007-08 were rejected. As all the matters are interconnected, they are being disposed of by this common order.

2. We will notice the factual background from W. P. No. 24241 of 2010. The petitioner is an educational institution registered under section 12A of the Act with effect from March 21, 2003. They were granted exemption under section 10(23C)(vi) of the Act vide orders dated October 28, 2005 passed by the Chief Commissioner of Income-tax, Visakhapatnam for the years 2003-04 to 2005-06. They filed a return of income for the assessment year 2004-05 showing the taxable income as “nil”. The said return was taken up for scrutiny. The respondent issued notice under section 143(2) and 142(1) of the Act. In response the petitioner produced relevant information and records. The scrutiny was completed accepting the taxable income as “nil” as declared by the assessee with the advent of claiming exemption under section 10(23C) of the Act on the excess of income over expenditure. It appears that, during the enquiry, the respondent sought clarification with respect to certain transactions of the petitioner with M/s. Margadarsi Chit Funds (P) Ltd. (hereafter, chit fund). Vide their letter dated March 8, 2006, the petitioner submitted an explanation denying that it is “an investment”. The petitioner took up the plea that it is a long-term liability, and not an investment or a deposit.

3. For the assessment year 2005-06, the return of income, filed by the petitioner declaring taxable income as “nil”, was accepted after scrutiny, and an assessment order was passed under section 156 of the Act on August 28, 2006. For subsequent years 2006-07, 2007-08 as well as for the assessment year 2003-04 also the return of income filed by the petitioner, showing taxable income as “nil”, was accepted and assessment orders were passed. Be it noted that, when the return of income for the assessment years 2003-04, 2005-06 and 2007-08 was scrutinized, the respondent did not raise any queries with respect to investment/deposit by the petitioner in the chit fund.

4. The respondent issued notice dated March 30, 2010 under section 148 of the Act proposing to reassess the income for the respective assessment years. The petitioner was directed to submit a return in the prescribed form. The petitioner sent a reply requesting the respondent to treat the earlier return as the one filed in response to the notice under section 148 of the Act. On the request of the petitioner, by a communication dated July 2, 2010, the respondent furnished the reasons indicating that participation in a chit fund scheme, floated by the chit fund, was in contravention of section 11(5) of the Act, in which case the condition prescribed under section 13(1)(d) of the Act become applicable, and the assessee is not entitled to claim exemption under section 11(1) of the Act. While furnishing reasons, the respondent relied on the judgment of the Kerala High Court, and the decision of the Income-tax Appellate Tribunal in Priyadarshini Educational Academy v. Asst. CIT [2009] 123 TTJ Visakapatnam 195, to the effect that any investment made by an assessee, other than in the modes prescribed under section 11(5) of the Act, disentitled them from claiming under the head “Current liabilities” the benefit of exemption under section 11(1) of the Act. In response to the reasons furnished, the petitioner filed objections on July 20, 2010 explaining that in their balance-sheet for the year ending March 31, 2004, shows the amount due to the chit fund was shown, and that the liability was after various chits were auctioned and funds were realised by the society ; and that the payment to the chit fund was towards reducing the chit liability. The petitioner also pleaded that the decision of the Income-tax Appellate Tribunal in Priyadarshini was wrongly applied. The petitioner also submitted that the Assessing Officer enquired into the matter at the time of original assessment ; a reassessment could not be made on change of opinion ; and, in the garb of pending reassessment, the respondent could not review the earlier assessment order. The petitioner also raised the plea of limitation contending that the notice of reassessment, having been issued beyond the period of four years after the assessment, was unsustainable. In response to the objections filed by the petitioner, the impugned rejection order was passed.

5. The petitioner also stated that on January 19, 2006 they had made an application for renewal of exemption granted under section 80G of the Act; the respondent had directed them to furnish certain information for the purpose of granting renewal of exemption ; in the said communication dated May 1, 2006, additional information was sought with regard to the payments made to the chit fund during the periods ending March 31, 2003, March 31, 2004 and March 31, 2005, and they provided information whereafter exemption under section 80G of the Act was renewed for the period from April 1, 2005 to March 31, 2008. The petitioner, therefore, alleges that all the relevant facts with regard to the payments made to the chit fund were before the Assessing Officer when he passed the original assessment orders and the present proposal for reassessment is, therefore, a result of a change of opinion, which is without jurisdiction.

6. In all the matters, the respondent filed counter-affidavits as well as additional counter-affidavits with the following averments and allegations. The assessee filed income-tax return for the assessment year 2004-05 disclosing an income of Rs. 15,20,085 claiming exemption under section 10(23C) of the Act. The same was processed and the assessment order was passed on August 28, 2006. There is nothing in the assessment file or in the said order to show that the Assessing Officer had considered the issue on the anvil of sections 11(5) and 13(1)(d) of the Act. The order is also silent about the chit fund transactions and there is nothing in the assessment file to indicate that the Assessing Officer had considered the exemption on the ground of alleged investment in a chit fund in contravention of section 11(5) of the Act. There is no basis to allege that reopening of the assessment was on the ground of change of opinion. The Chief Commissioner of Income-tax issued proceedings dated October 28, 2005 under section 10(23C) of the Act. This enured to the benefit of the petitioner for the assessment years 2003-04 to 2005-06. Subsequently, by order dated September 21, 2007, the Chief Commissioner refused to renew the sanction under section 10(23C) of the Act for the assessment year 2006-07 on the ground that the petitioner had violated section 11(5) of the Act, apart from submitting the application belatedly. The order has become final. By proceedings dated December 24, 2010, the Chief Commissioner revoked the approval granted under section 10(23C) of the Act for the assessment years 2003-04 to 2005-06 on the ground that the petitioner had violated section 11(5) of the Act by investing funds in a chit fund.

7. It is further stated by the respondent that there was no occasion for the Assessing Officer to consider the question of denial of exemption under section 13(1)(d) of the Act on the ground of violation of section 11(5) of the Act. Having come to know of the legal position, after the decision of the Income-tax Appellate Tribunal in Priyadarshini, the Assessing Officer had caused reopening of the assessment on March 26, 2010 duly recording reasons and securing the approval of the Commissioner clearly indicating that investment of surplus in a chit fund entailed forfeiture of the benefit of exemption under section 11 of the Act in view of the decision in Priyadarshini.

8. It is further stated that the efforts of the petitioner for obtaining renewal of exemption under section 80G of the Act, and the respondent calling for further information in connection thereto, have no relevance to the validity of reopening the assessment. The respondent asserts that the proposals for considering exemption under section 80G or section 10(23C) of the Act do not form part of the assessment file. The proceedings under the said sections being distinct, the files are maintained independently. The Assessing Officer was not having information furnished by the petitioner under section 80G of the Act and, therefore, the allegation that such information had formed the basis for the change of opinion was not correct. Even if the entire material had come to the knowledge of the Assessing Officer during the course of the proceedings under section 80G of the Act, the same does not prevent reopening of the assessment under sections 147 and 148 of the Act, if such material had not been considered under section 143(3) of the Act on the touchstone of sections 11 and 13 of the Act.

9. Whether subscription made to a chit fund partakes of the character of investment or otherwise depends on the facts and circumstances of the case ? As the issue involves appreciation of facts, it is not open to the petitioner to invoke the jurisdiction of this court under article 226 of the Constitution of India. The petitioner has got an effective remedy by way of appeal to the Commissioner, and a second appeal to the Appellate Tribunal, and a further appeal to the High Court. In view of the availability of effective remedies under the statute, a writ petition would not, ordinarily, be entertained.

10. The counsel for the petitioners, Sri A. V. Krishna Koundinya, submits that the notices under section 148 of the Act are illegal and without jurisdiction as they are the result of change of opinion. When there is no failure on the part of the assessee to make full disclosure of the material facts, on a mere change of opinion the assessment cannot be reopened. The petitioner disclosed all the material when the return of income for the assessment years 2004-05 and 2006-07 were scrutinized. The petitioner had also furnished necessary clarification with regard to the payments made to the chit fund at the time of obtaining renewal of exemption under section 80G of the Act. The respondent, having completed the assessment with all the necessary material before him, cannot reopen the assessment. The exercise of power is arbitrary and illegal. The counsel would then urge that the notices under section 148 of the Act for the assessment years 2003-04, 2004-05 and 2005-06 are time barred under section 147 of the Act as they are issued on March 30, 2010 after expiry of four years from the end of the relevant assessment year. Withdrawal of exemption, under section 10(23C) of the Act, is only an attempt to sustain the reassessment proceedings and is unsustainable. The counsel relied on Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC), CIT v. Kelvinator of India Ltd. [2002] 256 ITR 1  (Delhi) [FB], CIT v. Eicher Ltd. [2007] 294 ITR 310  (Delhi) and CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561 (SC) ; [2010] 2 SCC 723.

11. The senior counsel for Income-tax, Mr. S. R. Ashok, made the following submissions : (i) In view of the proviso to section 147(1) read with section 149 of the Act, the reassessment proceedings are not barred by limitation ; (ii) the previous scrutiny of the tax returns under sections 143(1) and (3) of the Act, for the assessment years 2004-05 and 2006-07, does not amount to a change of opinion. Mere acceptance of the return of income, after scrutiny under section 143(2) and 142(1) of the Act, is no indication that the Assessing Officer had applied his mind to the material disclosed by the assessee. At no point of time was the issue of contravention of section 11(5) of the Act, by making payments to a chit fund, considered by the Assessing Officer and, therefore, the condition precedent for exercising jurisdiction under section 147 of the Act very much exists in the case ; (iii)as on August 28, 2006, when the assessment orders were passed for the assessment years 2004-05 and 2005-06, the exemption under section 10(23C) of the Act was holding the field, and the Assessing Officer could not have gone into the question of investments at that point of time ; (iv)the subsequent decision of the Tribunal or the court itself can be a ground for reassessment under section 147 of the Act ; (v) the process of granting/renewing exemption under section 10(23C), and renewing exemption under section 80G of the Act, by the Commissioner are dealt with separately in separate files ; they do not form part of assessment files and, therefore, it cannot be said that the Assessing Officer had knowledge of the alleged disclosure ; and (vi) for the assessment year 2006-07 the Chief Commissioner had refused to grant renewal of exemption under section 10(23C) of the Act, vide order dated September 21, 2007, in view of the contravention of section 11(5) of the Act. Subsequently, by order dated December 24, 2010, the Commissioner had revoked the exemption order dated October 28, 2005 for 2003-04, 2004-05 and 2005-06 and, therefore, reassessment proceedings are justified. The senior counsel relied on the decisions in Mrs. Leela Nath v. CIT [1987] 164 ITR 216  (Cal), A. L. A. Firm v. CIT [1991] 189 ITR 285 (SC) ; [1991] 2 SCC 558, ITO v. Saradbhai M. Lakhani [2000] 243 ITR 1 (SC) ; [2000] 10 SCC 371, CIT v. Miss Esther P. Carvalho [1999] 237 ITR 549  (Bom) and Asst. CIT v. Rajesh Jhaveri Stock Brokers P. Ltd. [2007] 291 ITR 500 (SC) ; [2008] 14 SCC 208.

Maintainability of writ petitions

12. The question of maintainability of writ petition is intricately connected with the question of lack of jurisdiction under section 147 of the Act for reassessment, and the consequential impugned communication of reasons on the request of the petitioner. Therefore both the issues need to be considered together. Of course if, on a prima facie consideration, this court comes to the conclusion that the impugned action for reassessment of income is outside the scope of section 147 of the Act, any attempt of the respondent would suffer from inherent lack of jurisdiction or a jurisdictional error, as the case may be. If, prima facie, it is demonstrable that initiation of reassessment proceedings satisfies the jurisdictional issues, a deeper probe is not called for. In such an event, the petitioner can avail of the remedy of an appeal under section 246(1)(b) of the Act, and thereafter, remedy of an appeal under section 253(1) of the Act against which an appeal, on question of law, would lie to the High Court under section 260A of the Act. Of course against the notice of reassessment under section 148 of the Act, and the communication of reasons therefor, no appeal would lie. Therefore, to the limited extent of scrutinizing jurisdictional errors, a writ petition may lie. We may however hasten to add that this cannot be a rigid norm. As rightly pointed out by the senior counsel for the Revenue, the issue whether or not income chargeable to tax escaped assessment generally or as contemplated under Explanation 2 to section 147 of the Act is a question of fact which would depend on the peculiarities of each case. If such an eventuality arises, the High Court may refuse even to review the jurisdictional questions, relegating the petitioner to the remedy of an appeal under the Act.

13. It is settled law that the writ jurisdiction, especially in tax matters, is not, ordinarily, exercised in view of elaborate appeal system provided by the statute itself. The authorities in this regard are galore. We would refer to two of them. In C. A. Abraham v. ITO [1961] 41 ITR 425 (SC) ; AIR 1961 SC 609, a Division Bench of the Supreme Court considered this aspect. The case arose out of a show-cause notice issued by the Assessing Officer for imposing penalty under section 28 of the Indian Income-tax Act, 1922 (1922 Act). The show-cause notice was followed by an order imposing penalty against which an appeal was unsuccessfully filed. When certiorari proceedings were initiated in the Kerala High Court, following the decision of this court in Mareddi Krishna Reddy v. ITO [1957] 31 ITR 678 (AP), the Kerala High Court refused certiorari. Before the Supreme Court, two questions arose : whether the High Court could entertain a writ petition ignoring the alternative remedy provided by the Act, and whether penalty proceedings can be interpreted pointing out deficiencies. The apex court held that, “the assessee cannot abandon to resort to machinery provided under the Act and directly invoke remedy under article 226 of the Constitution of India”. The relevant observations are as below (page 428) :

“In our view, the petition filed by the appellant should not have been entertained. The Income-tax Act provides a complete machinery for assessment of tax and imposition of penalty and for obtaining relief in respect of any improper orders passed by the income-tax authorities, and the appellant could not be permitted to abandon resort to that machinery and to invoke the jurisdiction of the High Court under article 226 of the Constitution when he had adequate remedy open to him by an appeal to the Tribunal.”

14. In Champalal Binani v. CIT [1970] 76 ITR 692 (SC) ; AIR 1970 SC 645 ; [1971] 3 SCC 20, the Commissioner of Income-tax had issued a notice to the appellant under section 33B of the Indian Income-tax Act, 1922 to show cause as to why the orders of assessment for the assessment years 1953-54 to 1960-61 should not be revised. Copies of the notices were sent to the addresses disclosed in the income-tax returns. On the date of hearing, none appeared for the assessee. The Commissioner set aside the orders and directed the Income-tax Officer to make fresh assessment after enquiry and investigation. Against the said order, the appellant moved the High Court of Calcutta by filing a writ petition. Holding that the notice under section 33B was not served on the assessee, the learned single judge set aside the order of the Commissioner. The Division Bench reversed the holding that notice was served. The Supreme Court dismissed the appeal and reiterated that when the Income-tax Act provides complete and self-contained machinery for redressal of grievances, no party can be allowed to invoke the extraordinary remedy under article 226 of the Constitution. The relevant observations are as follows (page 695).

“. . . we deem it necessary once more to emphasize that the Income-tax Act provides a complete and self-contained machinery for obtaining relief against improper action taken by the Departmental authorities, and normally the party feeling himself aggrieved by such action cannot be permitted to refuse to have recourse to that machinery and to approach the High Court directly against the action . . . A writ of certiorari is discretionary ; it is not issued merely because it is lawful to do so. Where the party feeling aggrieved by an order of an authority under the Income-tax Act has an adequate alternative remedy which he may resort to against the improper action of the authority and he does not avail of himself of that remedy the High Court will require a strong case to be made out for entertaining a petition for a writ. Where the aggrieved party has an alternative remedy the High Court would be slow to entertain a petition challenging an order of a taxing authority, which is ex facie with jurisdiction. A petition for a writ of certiorari may lie to the High Court, where the order is on the face of it erroneous or raises question of jurisdiction or of infringement of fundamental rights of the petitioner.” (emphasis supplied)

15. In view of the settled legal position, except considering the question of jurisdiction, we are not inclined to go into various other aspects of the matter although both the counsel made elaborate submissions. We may remind that proceedings under section 147 of the Act are at the initial stage. The respondent is required to complete the exercise of reassessment following the procedure contemplated under the Act and the Income-tax Rules. After affording an opportunity of hearing to the petitioner, the respondent might well drop the reassessment proceedings or may pass an order against which there are adequate remedies up to the High Court in the appeal system prescribed under the statute.

Provisions and precedents

16. Section 34 of the 1922 Act dealt with the procedure in case of, “income escaping assessment” The Constitution Bench of the Supreme Court in Calcutta Discount Co. Ltd. [1961] 41 ITR 191  (SC) by a majority of 3 : 2, held that (headnote) “to confer jurisdiction under section 34 two conditions have to be satisfied. The first is that the Income-tax Officer must have reason to believe that income, profits or gains chargeable to income-tax have been under assessed. The second is that he must have also reason to believe that such ‘under assessment’ has occurred by reason of either (i)omission or failure on the part of an assessee to make a return of his income, or (ii) omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for that year”. The court also ruled that if there are some reasonable grounds for thinking that there had been any non-disclosure that could have a material bearing on the question of underassessment and would be sufficient to give jurisdiction to the Assessing Officer to issue notice of assessment. Whether such grounds and reasons are adequate or not for arriving at the conclusion that there was a non-disclosure of material facts would not be open for the court’s investigation. In other words, to give special jurisdiction to the Income-tax Officer there should exist prima facie grounds for thinking that there had been some non-disclosure of material facts.

17. After repeal of the 1922 Act, section 34 was enacted as section 147 of the 1961 Act. There was no difference in the scope and purport of the provision to the extent of conferring jurisdiction on the Income-tax Officer or the method and manner of assessment/reassessment thereunder. Section 147 of the Act was amended by the Direct Tax Laws (Amendment) Act 1987 with effect from April 1, 1989. After such amendment, the relevant sections read 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 sections 148 to 153 referred to as the relevant assessment year) :

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 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 ;

(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.

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.

149. Time limit for notice.-(1) No notice under section 148 shall be issued for the relevant assessment year-

(a)if four years have elapsed from the end of the relevant assessment year, unless the case falls under clause (b) ;

(b)If four years, but not more than six years, have elapsed from the end of the relevant assessment year unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to one lakh rupees or more for that year.

Explanation.-In determining income chargeable to tax which has escaped assessment for the purposes of this sub-section, the provisions of Explanation 2 of section 147 shall apply as they apply for the purposes of that section.

(2) The provisions of sub-section (1) as to the issue of notice shall be subject to the provisions of section 151.

(3) If the person on whom a notice under section 148 is to be served is a person treated as the agent of a non-resident under section 163 and the assessment, reassessment or re-computation to be made in pursuance of the notice is to be made on him as the agent of such non-resident, the notice shall not be issued after the expiry of a period of two years from the end of the relevant assessment year.”

18. The scope of section 147 of the Act was considered by the Supreme Court in Rajesh Jhaveri [2007] 291 ITR 500  (SC). Therein the assessee had filed the return which was processed under section 143(1) of the Act accepting the loss returned by the assessee. The Assessing Officer issued notice under section 148 of the Act on the ground that the claim of bad debts, as explained was not acceptable. Objections were raised while filing the earlier return again. On a request made, the reasons recorded for reassessment were furnished. Objections were disposed of holding that intimation of reassessment under section 148 of the Act was valid, and the plea of lack of jurisdiction was negatived. In the challenge before the High Court of Gujarat the assessee was successful, and the notice under section was set aside. In the appeal before the Supreme Court, inter alia, it was contended that the Assessing Officer had reopened the assessment by issuing notice in terms of section 148 of the Act on the ground that it has reason to believe that income assessable to tax had escaped assessment within the meaning of section 147 of the Act, and the return having been processed under section 143(1) of the Act does not bar reopening of the assessment. The Supreme Court accepted the plea holding that, “the intimation under section 143(1)(a) cannot be treated to be an order of assessment . . . and there being no assessment the question of change of opinion does not arise. It was also observed that the intimation under section 143(1)(a) of the Act is deemed to be a demand notice under section 156 of the Act for the apparent purpose of making machinery proceedings relating to recovery of tax applicable. After noticing section 147 of the Act, as amended with effect from April 1, 1989, it was laid down that the Assessing Officer could have jurisdiction to issue notice under section 148 read with section 147(a) when he has reason to believe that the income has escaped assessment. The relevant observations are as follows (pages 511-12) :

“The scope and effect of section 147 as substituted with effect from April 1, 1989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under section 147(a) two conditions were required to be satisfied, firstly, the Assessing Officer must have reason to believe that income, profits or gains chargeable to income-tax have escaped assessment, and, secondly, he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under section 148 read with section 147(a) but under the substituted section 147 existence of only the first condition suffices. In other words if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is, however, to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to section 147. The case at hand is covered by the main provision and not the proviso.” (emphasis supplied)

19. In CIT  v. Kelvinator of India Ltd. [2010] 320 ITR 561 (SC) the Supreme Court took the same view while holding thus (page 564) :

“On going through the changes, quoted above, made to section 147 of the Act, we find that, prior to the Direct Tax Laws (Amendment) Act, 1987, reopening could be done under the above two conditions and fulfilment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act (with effect from April 1, 1989), they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post-1-4-1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words ‘reason to believe’ failing which, we are afraid, section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of ‘mere change of opinion’, which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review ; he has the power to reassess. But reassessment has to be based on fulfilment of certain precondition and if the concept of ‘change of opinion’ is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of ‘change of opinion’ as an in-built test to check abuse of power by the Assessing Officer. Hence, after April 1, 1989, the Assessing Officer has power to reopen, provided there is ‘tangible material’ to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words ‘reason to believe’ but also inserted the word ‘opinion’ in section 147 of the Act. However, on receipt of representations from the companies against omission of the words ‘reason to believe’, Parliament reintroduced the said expression and deleted the word ‘opinion’ on the ground that it would vest arbitrary powers in the Assessing Officer.” (emphasis supplied)

20. The condition precedent for exercising jurisdiction under section 147 of the Act is “the reason to believe that income chargeable to tax had escaped assessment”. When is income said to have escaped assessment ? In Maharaj Kumar Kamal Singh v. CIT [1959] 35 ITR 1 (SC) ; AIR 1959 SC 257, the Supreme Court held that one cannot put “a very narrow and artificial limitation on the meaning of the word ‘escape’”. If the Assessing Officer comes to know subsequently about such “escape”, subject to sections 148 to 153 of the Act, proceedings can be initiated for reassessment. Explanation 2 to section 147 of the Act enumerates the illustrative cases where income chargeable to tax had escaped assessment. These are : (i) when no return of income has been furnished by the assessee though his income during the previous year is assessable to tax ; (ii) where return of income has been furnished but assessment has not been made and it is noticed that the assessee claimed excessive loss, deduction, allowance or relief in the return ; and (iii) where an assessment has been made, but income has been underassessed, or at too low a rate, or the income has been made the subject of excessive relief, or excessive loss or depreciation allowance has been computed.

21. The intention of the Legislature is very clear. Any instance where the income has escaped assessment under the Act either by reason of not filing return or filing return claiming excessive loss, deduction, allowance or relief, it can be reassessed. The power to reassess is now very wide, subject, however, to the time limit for issuing notice of reassessment as well as the time limit for passing the reassessment order after issue of notice. Thus, in appropriate petitions for judicial review the impugned orders and the notices under section 148 of the Act have to be subjected to scrutiny with reference to the condition precedent required for reopening the assessment, i.e., whether the respondent has reason to believe that income returned by the petitioner had escaped assessment.

22. Here, we may mention that though in the affidavit accompanying the writ petition, the petitioner has not raised the plea of limitation. It has been raised during the course of the submissions but not seriously pursued. Under section 149(1)(b) of the Act, no notice under section 148 of the Act shall be issued for the relevant assessment years if four years, but not more than six years, have elapsed from the end of the relevant assessment year unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to one lakh rupees or more for that year. The notices under section 148 of the Act were issued on March 29, 2010 well within the time prescribed under section 149 of the Act and on that ground the petitioner may not succeed.

23. Reverting to the issue of inherent lack of jurisdiction, we may notice the admitted facts. The petitioner is an educational society constituted under the memorandum of association dated April 25, 1984. They obtained registration under section 12A of the Act with effect from March 21, 2003. The petitioner obtained necessary exemption by order dated May 30, 2003 entitling the petitioner to qualify for exemption under section 80G(5)(vi) of the Act for the period from March 21, 2003 to March 31, 2005. The petitioner then applied for approval for the purpose of section 10(23C)(vi) of the Act, which was granted vide order dated October 28, 2005 passed by the Chief Commissioner of Income-tax, Visakhapatnam. The petitioner filed “nil” return for the assessment years 2003-04 to 2007-08 claiming deduction under section 10(23C)(vi) of the Act. During the scrutiny of the returns for the assessment years 2004-05 and 2006-07 under section 143(1) of the Act, the Assessing Officer sought clarification with regard to the current liability, schedule showing the chit liability to chit fund. Denying that it was an investment made, the petitioner submitted that the payments made to the chit fund are towards reducing the chit liability. The Assessing Officer passed orders for the assessment years 2004-05 and 2005-06 on August 28, 2006. The assessment order for the assessment year 2006-2007 was passed on May 6, 2008. These three assessment orders were passed under section 143(3) of the Act accepting the deduction claimed by the petitioner presumably in view of the sanction/approval under section 10(23C)(vi) of the Act, which was effective at that time. Further, in relation to the return of income for the assessment years 2003-04 and 2007-08, intimation under section 143(1) of the Act was sent on March 9, 2004 and April 13, 2008 respectively. Be it also noted that it is only in relation to the assessment years 2004-05 and 2006-07 that the Assessing Officer raised objection with regard to the deduction claimed under section 10(23C) of the Act in view of the petitioner’s transactions with the chit fund. The question of change of opinion does not arise when there is no assessment (Rajesh Jhaveri [2007] 291 ITR 500  (SC)). There is indeed assessment for the years 2004-05 to 2006-07 under section 143(3) of the Act. The point, as urged, is that as there is already assessment after considering the primary facts, the Assessing Officer cannot assume jurisdiction based on the change of opinion. We are afraid we cannot accept the submission for reasons more than one.

24. First, clause (b) of Explanation 2 to section 147 of the Act, in case no assessment is made but the Assessing Officer notices that the assessee claimed excessive deduction/allowance/relief in the return, it certainly amounts to “income escaping assessment”. Similarly, under clause (c)(iii) of Explanation 2 to section 147 of the Act, if the assessment is made but the income has been made subject to excessive relief under the Act even then it amounts to the income escaping assessment. The embargo in initiating the proceedings for reassessment is contained in the first proviso to section 147 of the Act which corresponds to clause (c) to Explanation 2. In plain terms if an assessment was made under section 143(3) of the Act for the relevant assessment year, no action shall be taken under section 147 of the Act after expiry of four years from the end of the relevant assessment year. The second part of the proviso, however, dilutes this ; if the escapement was occasioned due to failure on the part of the assessee to file a return or due to failure of the assessee to disclose fully and truly all material facts necessary for the assessment pursuant to a notice under section 142(1) or section 148 of the Act. Whether there is a failure on the part of the assessee to disclose fully and truly all material facts for the purpose of assessment for the relevant assessment year is an altogether different aspect from initiating reassessment proceedings under section 147 of the Act. In response to a notice under section 148 of the Act, for the purpose of reassessment under section 147 of the Act, an assessee may have an objection on such a ground. It is, however, always a question of fact whether such disclosure was reason enough to bar reassessment. Initial plea that an assessee disclosed fully and truly all material facts cannot, by itself, be a ground to deny jurisdiction to the Assessing Officer under section 147 of the Act.

25. Secondly, the exemption under section 11(1) of the Act is subject, inter alia, to the condition that a charitable institution/trust shall invest or deposit only in the forms and modes as mandated by section 11(5) of the Act. The contravention thereof would attract section 13(1)(d) of the Act and a trust or a charitable institution either investing or depositing the funds otherwise than in any one of the forms or modes specified in section 11(5) of the Act shall not be entitled to claim exemption under section 11(1) of the Act. Any institution, which obtains sanction under section 10(23C)(vi) of the Act as an institution established for charitable purposes, is also required to comply with section 11(5) of the Act as per the third proviso to section 10(23C) of the Act. Thus, so as to avail of the benefit of exemption or deduction of the specified income, the petitioner was required to deposit or invest the funds only in the forms and modes specified under section 11(5) of the Act. Admittedly, the petitioner made payments to the chit fund. It is curious to notice that in the return for the assessment year 2004-05 though in schedule 3, the petitioner did show payments to the chit fund as current liabilities, in schedule 15 an amount of 40,000 credited to the chit fund is shown as current assets. Be that as it is, for the assessment years 2003-04, 2004-05 and 2005-06, the petitioner claimed deduction under section 10(23C) of the Act and filed “nil” return. In so far as assessment years 2006-07 and 2007-08 are concerned, the petitioner claimed deduction under section 11 of the Act. If the petitioner had no sanction under section 10(23C) of the Act or if the Assessing Officer had considered the payments made to the chit fund in the light of sections 11(1) and (5) read with section 13(1)(d) of the Act, the petitioner would not have been entitled to claim deduction. Though for the assessment years 2004-05 to 2006-07, assessment orders were passed under section 143(3) of the Act, prima facie it appears the issue was never considered by the Assessing Officer. Further, as held by the Delhi High Court in Consolidated Photo and Finvest Ltd. v. Asst. CIT [2006] 281 ITR 394 (Delhi), acceptance of the return, after scrutiny and notice under section 143(2) or section 142(1) of the Act, does not amount to passing assessment order.

26. Thirdly, when the assessment orders were passed, the approval under section 10(23C) of the Act granted on October 28, 2005 for the years 2003-04, 2004-05 and 2005-06 corresponding to three assessment years, in which orders under section 143(3) of the Act were passed, was operative. Therefore, the respondent was disabled forbidden from asking any questions. For the assessment years 2006-07 and 2007-08, by order dated September 21, 2007, the Commissioner refused approval under section 10(23C) of the Act on the ground that the petitioner made investments in contravention of section 11(5) of the Act. Presumably for this reason, for the two assessment years, i.e., 2006-07 and 2007-08, the petitioner claimed deduction under section 11 of the Act which could not have been allowed if only it was considered by the Assessing Officer regarding the nature of investments/deposits made by the petitioner with the chit fund. Furthermore, it is now on record that, by proceedings dated December 24, 2010, the Chief Commissioner has withdrawn the approval granted to the petitioner earlier on October 28, 1995. In so far as the two assessment years 2006-07 and 2007-08 are concerned, intimation under section 143(1) of the Act was sent and, as held by the Supreme Court in Rajesh Jhaveri [2007] 291 ITR 500  (SC), it is no assessment at all and the question of change of opinion does not arise.

27. Fourthly, the exercise for reassessment is also based on the decision of the Tribunal in Priyadarshini wherein it was held that contribution to a chit scheme is not in accordance with section 11(5) of the Act and, therefore, section 13(1)(d) of the Act bars the assessee from claiming any exemption. Whether a decision having effect on the assessment which is subsequent to the assessment order under section 143(3) of the Act or a decision which was not within the knowledge of the Assessing Officer can itself a ground for issuing a notice under section 148 of the Act for the purpose of reassessment ? This is no more res integra. In A. L. A. Firm [1991] 189 ITR 285  (SC) it was held that the law laid down in a decision of the court missed at the time of original assessment but came to the knowledge of the Assessing Officer subsequently constitutes “information” for reopening the original assessment and that, if such decision had not been considered by the Assessing Officer, it would be enough on the basis of which reassessment proceedings can be initiated. To the same effect is the decision of the Supreme Court in ITO v. Saradbhai M. Lakhani [2000] 243 ITR 1  (SC), wherein it was held as follows (page 2) :

“It is evident that the aforesaid view of the High Court is not correct. This court has held that on the basis of the information which is received by the Income-tax Officer, reassessment proceedings can be initiated. The information which was received by the Income-tax Officer was the decision of the Gujarat High Court in Banyan and Berry v. CIT [1996] 222 ITR 831 (Guj). When the Income-tax Officer became aware of this decision, he could initiate the proceedings under section 147(b) as has been held by this court in A. L. A. Firm v. CIT [1991] 189 ITR 285 (SC).”

28. Lastly, the processing of the petitioner’s application for renewal of exemption under section 80G of the Act, and seeking clarification with regard to the payments made to the chit fund, does not by itself, amount to disclosure for the purpose of assessment under section 143(1) or 143(3) of the Act. Indisputably the assessment file and the file relating to renewal of exemption under section 80G of the Act are two different filed. Even if the respondent processed the application for exemption and asked for clarification pursuant to the instructions of the higher authority, the same does not bar the proceedings under section 147 of the Act. In Miss Esther P. Carvalho [1999] 237 ITR 549 (Bom) the Bombay High Court held that (page 555) : “it is immaterial whether the Income-tax Officer at the time of making the original assessment could or could not have found out the facts himself. If on the basis of the subsequent information, the Income-tax Officer arrives at a conclusion after satisfying the twin conditions prescribed under section 147(a) of the Act that the assessees had not made the full and true disclosure of the material facts at the time of the original assessment and therefore income chargeable to tax had escaped assessment, it would be open to him to initiate proceedings for reassessment under section 147(a) of the Act . . . The fact that the Assessing Officer could have found out the correct position by further probing the matter does not exonerate the assessee from his duty to make a full and true disclosure of the material facts. Explanation 2 to section 147 of the Income-tax Act, 1961, makes the position abundantly clear”.

29. Further, after amendment of section 147 of the Act with effect from April 1, 1989, the disclosure or non-disclosure of facts is neither material nor a condition precedent for exercising jurisdiction under section 147 of the Act. It is only relevant when the question of limitation arises as per the proviso to section 147 of the Act. If the Income-tax Officer has reason to believe that income had escaped assessment, as clarified in Explanation 2 to section 147 of the Act, proceedings can be initiated for reassessment. We have already noticed that claim of excess deduction/allowance in a case of non-assessment, or excessive relief having been granted where assessment has been made also amounts to escapement.

30. The scope of the judicial review, when a notice under section 148 of the Act is challenged, is limited. As the counsel for rival parties elaborately argued the matter, we have adverted to all the aspects argued. The observations or inferences in this order are intended only for the purpose of disposing of these matters and they shall not be construed as a decision on the merits of the case. As we have observed supra the petitioner has effective remedies under the Act. Even after the reassessment order is passed by the respondent, it is for the appellate authorities, as the case may be, to consider all the aspects on the merits. In so far as the initiation of reassessment proceedings are concerned we are, prima facie, convinced that the respondent is well within the jurisdiction in issuing the notices. It shall be open to the petitioner to raise all the pleas before the respondent pursuant to the notices issued under section 143(2) of the Act. In such an event, it is needless to observe that the respondent shall consider all the matters before passing reassessment orders.

31. The writ petitions, subject to the above observations, are, accordingly, dismissed, without any order as to costs.

[Citation : 336 ITR 413]

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