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Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • R. Balia
  • A.R Dave, JJ.
Acts
  • provisions of s. 34 of the Indian IT Act, 1922
  • s. 12 r/w s. 2(24)(iia) of the IT Act
  • s. 11(2) of the IT Act, 1961 ('the Act').
  • sub-s. (3) of s. 143 or this section
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • R. Balia
  • A.R Dave, JJ.
Acts
  • provisions of s. 34 of the Indian IT Act, 1922
  • s. 12 r/w s. 2(24)(iia) of the IT Act
  • s. 11(2) of the IT Act, 1961 ('the Act').
  • sub-s. (3) of s. 143 or this section
See more information ...
Smart Summary

Summary of the Legal Opinion

Factual and Procedural Background

The petitioner is a trust assessed to income-tax in the status of an AOP which filed a return for the assessment year 1985-86. The return declared a gross total income of Rs. 2,52,826, deducted Rs. 1,50,785 as expenses (including capital nature), and from the remaining Rs. 1,02,041 transferred Rs. 90,000 to an earmarked Upashraya Bhavan Fund Account, claiming that sum as exempt under s. 11(2) of the Income-tax Act, 1961; that claim was allowed at the assessment stage.

An audit objection was subsequently raised asserting that the trust had not obtained the Assessing Officer's (AO's) permission under s. 11(3A) and that exemption under s. 12 should not have been allowed. Because the period for remedial action under s. 263 had expired and no action under s. 154 was suggested by the concerned officers, the Dy. CIT (Audit) suggested recourse to s. 147. In consequence, a notice under s. 148 was issued on 2 January 1991 initiating reassessment proceedings.

The petitioner challenged the 2 January 1991 notice by Special Civil Application No. 1228 of 1991. During that proceeding the 2 January notice was withdrawn; the Court's order dated 11 March 1991 recorded that the impugned notice was intended to be withdrawn with liberty to issue a fresh notice in accordance with law. The petitioner reserved the right to take appropriate action in respect of any proposed fresh notice.

A fresh notice under s. 148 was issued on 29 July 1991. The reasons supplied for assuming jurisdiction under s. 147 stated that the trust had transferred Rs. 3,23,817 from a specific fund (Rajendra Suri Sevadhyay Mandir Makan Fund) to the corpus fund; that this amount represented a surplus of donations for construction of Rajendra Suri Mandir; that no donor directions for diversion were on record and no permission under s. 11(3A) had been obtained; and therefore the sum was required to be taxed as income of the trust, with the AO stating he had reason to believe income to that extent had escaped assessment within s. 147.

Legal Issues Presented

  1. Whether the notice under s. 148 dated 29 July 1991 validly initiated reassessment proceedings under s. 147 when issued after the four-year period from the end of the relevant assessment year (1985-86), absent any failure by the assessee to disclose fully and truly all material facts necessary for assessment.
  2. Whether the AO's recorded reasons (and the AO's stated satisfaction) for initiating reassessment were bona fide and independent of the audit objection such that recourse to ss. 147/148 was justified despite lapse of the four-year period.

Arguments of the Parties

Petitioner's Arguments

  • The impugned notice dated 29 July 1991 was issued after expiry of four years from the end of the relevant assessment year (the assessment year 1985-86 ended 31 March 1986), and therefore outside the permissible limitation period under the proviso to s. 147.
  • The case did not involve any failure on the part of the assessee to disclose truly and fully all material facts necessary for assessment; accordingly the AO could not, after four years, assume jurisdiction to initiate reassessment under ss. 147/148.

Respondent's Arguments

  • No reply was filed in writing, but counsel for the respondents relied on the reasons recorded: that the AO's satisfaction of escapement of income was bona fide and reached on the basis of material before him, independent of the audit objection, thereby justifying initiation of reassessment.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Calcutta Discount Co. Ltd. vs. ITO, (1961) 41 ITR 191 (SC) (TC 51R.779) The duty of the assessee is to disclose all primary facts relevant to the decision of the assessing authority; the duty does not extend to stating what inferences (of fact or law) should be drawn from those facts—once primary facts are disclosed the AO must draw necessary inferences. The Court relied on this principle to conclude that primary and material facts about the transfer (completion of construction, surplus amount, transfer to corpus and claim of exemption under s. 12 r/w s. 2(24)(iia)) had been disclosed to the AO during assessment; thus the case did not involve non-disclosure of primary facts that would permit invoking s. 147 beyond the four-year period.

Court's Reasoning and Analysis

The Court began by identifying the statutory limitation in the proviso to s. 147: where an assessment under sub-s. (3) of s. 143 or under s. 147 has been made, no action can be taken under s. 147 after expiry of four years from the end of the relevant assessment year unless income has escaped assessment by reason of the assessee's failure to make a return or to disclose fully and truly all material facts necessary for assessment.

The Court then examined the scope of the assessee's duty to disclose, relying on the Supreme Court's statement in Calcutta Discount Co. Ltd. that the duty is to disclose primary facts; the duty does not extend to advising the assessing authority on the inferences to be drawn from those facts. The assessing officer must himself draw legal inferences once the primary facts are before him.

The recorded reasons for invoking s. 147 in this matter related to the transfer of Rs. 3,23,817 from a specific fund to the corpus fund and the denial of permission under s. 11(3A) for diversion. The Court noted that Annexure-C (ITO's letter dated 28 March 1990) expressly stated that the construction work had been completed, that there was a surplus of Rs. 3,23,817 which was transferred to corpus and claimed exempt under s. 12 r/w s. 2(24)(iia), and that the amount had been allowed treating it as corpus.

On that basis the Court held that the primary and material facts necessary for dealing with the transfer were disclosed to the AO during the assessment for the relevant year. Because the primary facts were disclosed, the issue required the AO to draw the appropriate legal inferences (and, if necessary, collect subsidiary material), rather than being a case of omission or failure by the assessee to disclose material facts that would justify invoking the proviso to s. 147 beyond the four-year period.

The Court therefore concluded that initiation of reassessment by notice dated 29 July 1991 was beyond the statutory four-year limitation (the relevant four-year period expired on 31 March 1990) and so the notice was invalid.

Holding and Implications

The impugned notice under s. 148 dated 29 July 1991 is quashed; the petition is allowed and the Rule is made absolute.

Implications:

  • Direct effect: The reassessment proceedings initiated by the notice dated 29 July 1991 are nullified and the petitioner is relieved of that notice. There is no order as to costs.
  • Broader implications: The opinion reasons that where primary facts relevant to a transfer or claim have been disclosed to the AO, the proviso to s. 147 cannot be invoked after four years merely on a subsequent change of view by the AO; the Court did not purport to lay down a new precedent beyond applying the existing principle from Calcutta Discount Co. Ltd. The opinion itself does not assert any additional or novel wider legal principle beyond this application.
Show full summary ...

    Shree Tharad Jain Yuvak Mandal v. Income Tax Officer

    1. Heard the learned counsel for the parties.

    2. The petitioner is a trust assessed to income-tax in the status of an AOP. The petitioner filed return of income for the asst. yr. 1985-86, declaring gross total income of Rs. 2,52,826 and deducting therefrom a sum of Rs. 1,50,785 being a expenses incurred on the objects of the trust as well as of capital nature. Out of remaining balance of Rs. 1,02,041, the petitioner had transferred an amount of Rs. 90,000 to Upashraya Bhavan Fund Account which was an earmarked fund and claimed the said amount as exempt from income-tax under s. 11(2) of the IT Act, 1961 ('the Act'). The claim of the assessee was allowed. It appears that thereafter objection was raised by the audit informing the Department that the trust has not obtained permission of the AO under s. 11(3A) of the Act and as such, exemption under s. 12 should not have been allowed. The period for taking remedial action, on receiving audit objection, under s. 263, had expired and the concerned ITO and Dy. CIT, having not suggested action under s. 154, recourse to s. 147 was suggested by the Dy. CIT (Audit). That is apparent from Annexure I appended to the petition which is a letter of the audit officer and Annexure-J which are the contents of the letter of the Dy. CIT (Audit), Ahmedabad. In pursuance thereof, notice under s. 148 was issued initiating proceedings for reassessment on 2nd January, 1991. The petitioner challenged that notice by Special Civil Appln. No. 1228 of 1991. During the pendency of that proceeding, notice dt. 2nd January, 1991 was withdrawn and the Court recorded in its order dt. 11th March, 1991, while disposing of SCA No. 1228 of 1991, that the impugned notice is intended to be withdrawn with liberty to issue a fresh notice in accordance with law. In view of the fact that the impugned notice is intended to be withdrawn, the petitioner does not intend to press the present application by reserving right to take appropriate action if needed against the proposed notice.

    3. Thereafter, the impugned notice was issued on 29th July, 1991 under s. 148 of the Act. On demand, reasons that have been recorded for assuming jurisdiction to initiate proceedings under s. 147 were supplied to the petitioner, which reads as under :

    "During the previous year relevant to the asst. yr. 1985-86, the assessee-trust has transferred the amount of Rs. 3,23,817 from the specific fund account known as Rajendra Suri Sevadhyay Mandir Makan Fund to the corpus fund of the trust. This amount was surplus of donations received for the purpose of construction of Rajendra Suri Mandi and the assessee claimed exemption under s. 122 r/w s. 2(24)(iia). The specific case for which the amount transferred to corpus is not on record. No directions from the donors for the diversion of funds were obtained. The permission of ITO for diversion of donation from the one fund to another as required under s. 11(3A) also not obtained. The amount of Rs. 3,23,817 is, therefore, required to be taxed as the income of the trust. In the circumstances, the assessee has been allowed an excessive relief to the extent of Rs. 3,23,817. I have, therefore, reason to believe that the income to the extent of Rs. 3,23,817 has escaped assessment within the meaning of s. 147 of the Act."

    4. The learned counsel, amongst other grounds, urged that the impugned notice has been issued on 29th July, 1991 after the expiry of 4 years from the end of the relevant asst. yr. 1985-86. This being not a case where the reassessment is sought on the basis of failure on the part of the assessee to disclose truly and fully all material facts necessary for the assessment, the assumption of jurisdiction is beyond a period of limitation and, therefore, cannot be sustained.

    5. No reply has been filed. The learned counsel for the respondents has relied upon the reasons recorded in furtherance of his submission that satisfaction as to escapement of income from assessment has been bona fide reached on the basis of material before it, independent of the audit objection, by the AO and, therefore, initiation of reassessment was justified.

    6. We have given our anxious consideration to the contentions raised before us. It is undoubtedly true that where there is no failure on the part of the assessee to disclose truly and fully all material facts which are necessary for assessment, the AO cannot assume jurisdiction to initiate proceedings for assessment/reassessment of income for any assessment year beyond a period of four years from the end of the relevant assessment year in respect of which recourse to ss. 147 and 148 is taken.

    7. Section 147, which provides for assessment or reassessment of income or recomputation of the loss or depreciation allowance, as the case may be, for any assessment year subject to the provisions of ss. 148 to 153 to the extent relevant for present purposes reads as under :

    "147. Income escaping assessment. - If the AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of ss. 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(...):

    Provided that where an assessment under sub-s. (3) of s. 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 s. 139 or in response to a notice issued under sub-s. (1) of s. 142 or s. 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year."

    8. A perusal of the aforesaid provision goes to show that under the proviso to s. 147, the foundation of conferring jurisdiction on the AO to assess or reassess the income for any assessment year beyond the end of four years from the end of relevant assessment year must be omission or failure on the part of an assessee to make a return under s. 139 for any assessment year or to disclose fully and truly all material facts necessary for his assessment for that year and that the ITO has reason to believe that the income chargeable to tax has escaped assessment for that year. In the absence of any such omission or failure on the part of the assessee, taking action for assessment or reassessment is not permissible for any year after the expiry of four years from the relevant assessment year.

    9. The scope of the assessee's duty to disclose fully and truly all material facts necessary for assessment in the context of the provisions of s. 34 of the Indian IT Act, 1922 has been succinctly stated by the Supreme Court by their Lordships in Calcutta Discount Co. Ltd. vs. ITO (1961) 41 ITR 191 (SC) : TC 51R.779. The Court observed :

    "There can be no doubt that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on the assessee ......"

    10. The Court further said, -

    "Does the duty, however, extend beyond the full and truthful disclosure of all primary facts ? In our opinion, the answer to this question must be in the negative. Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else-far less the assessee-to tell the assessing authority what inferences, whether of facts or law, should be drawn ...."

    11. Considering this, we find that the reasons which are required to be recorded in writing before issuance of notice and provide an opening to the window to the process of reasoning with which the AO comes to hold belief about the escapement of assessment of income and the reasons therefor are concerning transfer of an amount of Rs. 3,23,817 from a specific fund account known as Rajendra Suri Sevadhyay Mandir Makan Fund to the corpus fund of the trust. The claim of the assessee to exemption was under s. 12, r/w s. 2(24)(iia) of the Act. Specific purpose for which the amount was transferred to corpus is not on record. Proposed disallowance of the assessee's claim to exemption is stated to be for the reason that permission of the ITO for diversion of donation from one fund to another as required under s. 11(3A) has not been obtained. From the document, Annexure-C, which is the letter dt. 28th March, 1990 written by the ITO to the CIT states, while narrating the gist of audit objection, the following excerpt is noticeable :

    "On verification of the record attached with the return of income revealed that the construction work of the Rajendra Suri Mandir has been completed and the surplus amount of Rs. 3,23,817 was transferred to the corpus fund of the trust and claimed exemption under s. 12 r/w s. 2(24)(iia) of the IT Act and was allowed treating the aforesaid amount as the corpus of the trust."

    12. This clearly gives out that primary and material facts necessary for dealing with the said transfer of funds from one fund to another were disclosed to the AO during the course of assessment for the asst. yr. 1985-86. Exemption was claimed on that basis and exemption has been granted with reference to s. 12, r/w s. 2(24)(iia). Thus, it was clearly a case where on primary facts having been disclosed, the AO has failed to draw legal inferences or to gather subsidiary material, if at all, required for the purpose of applying law and was a case falling within the province of the proviso to s. 147. That being so, the conclusion is inescapable that the notice issued on 29th July, 1991 was beyond the expiry of four years from the end of the relevant asst. yr. 1985-86 which would end on 31st March, 1986. The period for initiating proceedings under s. 147 would expire on 31st March, 1990.

    13. Accordingly, the impugned notice is quashed. The petition is allowed. Rule is made absolute.

    14. There shall be no order as to costs.

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    Comments

    Shree Tharad Jain Yuvak Mandal v. Income Tax Officer
    (Apr 8, 1999)