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The Commissioner Of Income Tax-Iii, Pune v. Sinhgad Technical Education Society
Factual and Procedural Background
These appeals were filed by the Revenue challenging orders of the Income Tax Appellate Tribunal (ITAT), Pune Bench, in Income Tax Appeal Nos. 114 to 117 of 2010, which related to the assessment years 2000-01 to 2003-04. The assessee is an educational institution registered under the Bombay Public Trust Act, 1950 and the Societies Registration Act, 1860, and registered under section 12A(a) of the Income Tax Act since assessment year 1994-95. Mr. M.N. Navale is the President of the educational society.
A search and seizure operation was conducted on 20.7.2005. Certain loose papers (including a bundle described as Bundle A-2) were seized from Shri M.N. Navale. On the basis of those papers, the Commissioner of Income Tax issued a show cause notice proposing cancellation of the institution's registration under section 12AA(3). That cancellation order was set aside by the tribunal in earlier proceedings (not the subject of these appeals).
In the assessment proceedings the Assessing Officer (AO) called for a special audit; the Special Auditor completed a computation assessing income at Rs. 2,46,13,935. The AO concluded that the assessee should be treated as an Association of Persons (AOP) and denied exemption under section 11. The assessee appealed to the Commissioner of Income Tax (Appeals), who partly allowed the appeal; the assessee then appealed to the ITAT.
The tribunal permitted the parties to raise and reply to an additional ground concerning the validity of the notice issued under section 153C of the Income Tax Act. The present appeals concern the correctness of the tribunal's view on the legality and validity of that section 153C notice and whether the tribunal's conclusions raise substantial questions of law.
Legal Issues Presented
- Whether the notice issued under section 153C of the Income Tax Act was legally valid, having regard to the requirement that the Assessing Officer's satisfaction under section 153C(1) be linked, document-wise or assessment-year-wise, to the person other than the searched person.
- Whether the tribunal's decision on the validity of the section 153C notice raises any substantial question of law such as to warrant interference by this court.
Arguments of the Parties
Appellant (Revenue) — Summarised Submissions
- Mr. Singh, for the Revenue, submitted that the tribunal's discussion on the additional ground (validity of the section 153C notice) raised substantial questions of law.
- The Revenue relied on the satisfaction note recorded by the Assessing Officer (including paragraph 4 thereof) and argued that the satisfaction recorded was sufficient to issue notices under section 153C for the relevant assessment years.
- The Revenue placed reliance on a Division Bench judgment of the Delhi High Court in Ssp Aviation Ltd. v. Deputy Commissioner of Income Tax (2012) 346 ITR 177, arguing that the provisions of sections 153C read with 153A facilitate inquiry into undisclosed income in the hands of persons other than the searched person and that the Delhi High Court had upheld a satisfaction in comparable circumstances.
Respondent (Assessee) — Summarised Submissions
- The assessee contested the validity of the notice under section 153C, contending (as reflected in the tribunal's findings) that the seized documents did not establish a document-wise or assessment-year-wise correlation showing incriminating material against the assessee for the specific assessment years under challenge.
- The assessee offered explanations for cash and jewellery (that agricultural income was used to acquire jewellery belonging to the President and his family) and disputed that seized papers established unaccounted receipts from student admissions. The tribunal noted that inquiries to verify these explanations were not conducted.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Ssp Aviation Ltd. v. Deputy Commissioner of Income Tax, (2012) 346 ITR 177 (Delhi High Court) | The Delhi High Court considered a case where search in a group of companies led to satisfaction recorded by the AO and issuance of notices under section 153C; the court held that sections 153C read with 153A facilitate inquiry into undisclosed income in the hands of persons other than the searched person and upheld the satisfaction in those peculiar facts. | The court in the present opinion found the Revenue's reliance on this decision misplaced. It held that nothing in the Delhi High Court judgment demonstrated that the tribunal's interpretation and application of section 153C in the present facts was erroneous or amounted to an error apparent on the face of the record. |
Court's Reasoning and Analysis
The court analysed both the tribunal's findings and the Revenue's criticisms. The central legal and factual focus was on the satisfaction required by section 153C(1) and whether the satisfaction recorded by the AO met that statutory threshold.
Key points of the court's analysis, drawn from the tribunal's reasoning, are:
- The statutory requirement in section 153C(1) demands that the Assessing Officer be satisfied that seized or requisitioned "books of account or documents" belong to a person other than the person referred to in section 153A and that those documents contain information relevant to the person to whom they are handed over. The tribunal interpreted this to require a document-wise and assessment-year-specific correlation showing incriminating material pertaining to the assessee for the assessment years sought to be reopened or assessed.
- The tribunal found the incriminating material seized (which the Revenue asserted pertained to six assessment years) did not establish such document-wise correlation with the particular assessment years in question. Some items might pertain to assessment year 2004-05 or thereafter, and it could not be assumed that seized material related to the four assessment years under challenge.
- The tribunal closely examined the satisfaction note and found it to be generally worded and silent about which documents or which assessment years contained specific incriminating information. Hence the tribunal concluded that a generalized satisfaction recorded in the note was inadequate to sustain notices under section 153C.
- On factual issues, the tribunal noted insufficiency of inquiry: for example, explanations for cash and jewellery (agricultural income used to buy jewellery) and alleged receipts from students were not properly probed to establish the nature of those receipts (course-wise, fee-structure, whether admissions were merit-based, etc.).
- The tribunal concluded that the Revenue's approach—relying on an overall group-based picture of concealment and general discoveries during searches on Shri Navale—could not substitute for the specific satisfaction required by section 153C in relation to the assessee and the assessment years in question.
- This court accepted the tribunal's reasoning, finding it not perverse. The court rejected the contention that the tribunal's order raised any substantial question of law that warranted interference. The court also found that the Delhi High Court decision relied upon by the Revenue did not demonstrate error in the tribunal's legal interpretation for the facts before it.
Holding and Implications
Holding: The appeals filed by the Revenue were DISMISSED. The court held that none of the appeals raised any substantial question of law and that the tribunal's conclusion on the invalidity of the notice under section 153C could not be termed perverse.
Implications:
- Direct effect on the parties: The tribunal's order (which set aside or did not uphold the notice under section 153C for the assessment years in question) stands, and the Revenue's appeals against that tribunal order were dismissed. The court ordered no costs.
- Broader precedent: The court expressly stated that the Delhi High Court judgment relied upon by the Revenue did not carry the Revenue's case further and did not demonstrate an error in the tribunal's understanding of section 153C. The opinion notes that none of these appeals raises a substantial question of law; therefore, it does not purport to lay down a new or broader legal principle beyond affirming that, on these facts, the tribunal's approach to the statutory satisfaction requirement was correct.
P.C:
1. These appeals by the Revenue challenge the orders passed by the Income Tax Appellate Tribunal, Pune Bench. The tribunal had before it Income Tax Appeal Nos. 114 to 117 of 2010 pertaining to the assessment years 2000-01 to 2003-04.
2. The assessee was in appeal. The assessee raised common grounds in all appeals and it was aggrieved by the orders of the Commissioner of Income Tax (Appeals)-II, Pune. Since common questions pertaining to the same assessee and similar grounds were raised including the additional ground that the tribunal thought it fit to dispose of the appeals by the common order.
3. We are concerned here with the correctness of the tribunal's view and rendered on the legality and validity of the notice under section 153C of the Income Tax Act, 1961.
4. Mr. Singh would submit that the discussion in the tribunal's order on the additional grounds raises substantial question of law. We are unable to agree with him and for the following reasons:
The assessee before the tribunal is an Educational Institution registered under the Bombay Public Trust Act, 1950 and Societies Registration Act, 1860. It was also registered under section 12A(a) of the Income Tax Act, 1961 since the assessment year 1994-95. One Mr. M.N Navale is the President of the assessee Educational Society. The search and seizure operation was carried out on 20.7.2005 and certain loose papers were seized, simultaneously the survey action was conducted on the Institute. However, on the basis of the loose papers Bundle A-2 found with and seized from Shri M.N Navale, the Commissioner of Income Tax issued the show cause notice stating that he had reason to believe that the notings in the said loose papers are in respect of capitation fees and donations and, therefore, he proposed that the registration of the institution should be cancelled. Firstly, because the activities of the trust are not genuine and those are not being carried out in accordance with the object of the trust. It is common ground that the Commissioner of Income Tax cancelled the registration under section 12AA(3) of the Income Tax and this order of the Commissioner was set aside by the tribunal. In the present case we are not concerned with the above proceedings but the question of issuance of notice under section 153C of the Income Tax Act. The assessee may have responded to the notice and the Assessing Officer during the course of assessment proceedings called for special audit. The Special Auditor completed audit and there were objections raised to the manner in which the audit was conducted. The Assessing officer arrived at the conclusion that the assessee must be treated as Association of Persons and it would not be entitled to the claim of exemption under section 11 of the Income Tax Act. The Assessing Officer assessed the income at Rs. 2,46,13,935,/- This was computation made by the Special Auditor.
5. Aggrieved by this order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), who partly allowed it. However, the assessee was not satisfied with the order of the Commissioner and challenged it in further appeal to the tribunal.
6. The tribunal allowed parties to raise an additional ground and reply to it, namely, about validity of notice under section 153C of the Act. After referring to the language of notice under section 153C as it stood then, the tribunal found that the satisfaction of the Assessing Officer ought to be in terms of this provision and particularly sub-section (1) thereof, therefore, should be satisfied that any money, bullion, jewellery or other valuable articles or thing or books of account or documents seized or requisitioned belong or belongs to person other than the person referred to in section 153A of the Act and that is how he can handover the same or seized documents to the Assessing Officer having jurisdiction. The tribunal has found that incriminating material seized and stated to be pertaining to all six assessment years did not establish any co-relation document-wise with the assessment year in question. In other words, the tribunal concluded that the present matter indicates that the issue of notice could be on the basis that there is specific incriminating information in possession of the Assessing Officer. It is in these circumstances that the tribunal found and as indicated in paragraph 8 of the impugned order that the revenue's assertion that the Assessing Officer is empowered under the statute to assess or reassess the total income of six assessment years immediately preceding the assessment year relevant to the previous year in which such search is conducted and therefore the satisfaction which is recorded in the satisfaction note is enough, is erroneous. Therefore, the notice cannot be upheld and such stand of the revenue cannot be accepted. The reasons, therefor are to be found in paragraph 9 and 10 of the impugned order. If certain items pertain to assessment year 2004-05 or thereafter then it cannot be assumed, that the documents seized or incriminating material giving information are specific and to all assessment years. The tribunal has found that they were concluded assessments. They could not have been disturbed. The documents in question are neither incriminating ones nor unaccounted transactions of the assessee. They also did not relate to the four assessment years. It is in these circumstances that the tribunal found that it will not be possible to uphold the stand of the revenue that overall approach in matters of concealment by the group assessee and all the discoveries of the search on Shri Navale and it concerns, will have to be taken into account while forming the satisfaction. The satisfaction note was very closely examined and the reasons assigned by the Assessing Officer were found to be silent about the assessment year in which specific incriminating information or unaccounted or undisclosed hidden information was discovered or seized by the revenue from the assessee. In the circumstances, the general satisfaction and as recorded in the note is not enough. The tribunal has found that with regard to cash and jewellery, the explanation of the assessee was that he had agricultural properties and derived agricultural income. That income was utilised to acquire jewellery that was belonging to him and his family. With regard to cash and stated to be recovered from the students for granting admissions, we do not find that any inquiries were made. There is absolutely nothing to indicate as to in which educational courses, the education is imparted and institution-wise. Whether the admissions are granted to the technical courses merit-wise or on the basis of marks obtained in XIIth standard HSC exam. If any fee structure is approved and cash component is therefore collected over and above the sanctioned fees are matters which ought to have been gone into and there cannot be a general or vague satisfaction as is relied upon.
7. It is in these circumstances that though Mr. Singh strenuously wanted to rely on the satisfaction note and particularly paragraph 4 thereof, we do not find that reading thereof can carry the case of the revenue any further. Rather it would contradict completely, the stand taken by the authorities. Mr. Navale HUF and Mr. Navale individually as the President of the assessee institute cannot be confused. If Mr. Navale has invested money in the Real Estate and which is not accounted that is his return of income which is reflected in the satisfaction note. If there is reference made to some loose papers found and seized from his residence indicating some “on money” receipt during the admission process then above co-relation and assessment year wise ought to have been established. In the circumstances we do not think that the tribunal's order raises any substantial question of law.
8. Reliance on the judgment of the Division Bench of the High Court of Delhi reported in case of Ssp Aviation Ltd…. v. Deputy Commissioner Of Income Tax (2012) 346 ITR 177 is misplaced. There, search was carried out in the case of “P” group of companies. It was found that the assessee before the Hon'ble Delhi High court had acquired certain development rights from “P” group of companies. Based thereon, the satisfaction was recorded by the Assessing Officer and he issued notice in terms of Section 153C. Thereupon the proceedings were initiated under section 153A and the assessee was directed to file returns for the six assessment years commencing from 2003-04 onwards. The assessee filed returns for those years but disclosed Nil taxable income. These returns were accepted by the Assessing Officer, however, in respect of the assessment year 2007-08 there was a significant difference in the pattern of assessment for this year also, the return was filed for Nil income but there were certain documents and which showed that there were transactions of sale of development rights and from which profits were generated and taxable for the assessment year 2007-08. Thus, the receipt of Rs. 44 crores as deposit in the previous year relevant to the assessment year 2008-09 and later on became subject matter of the writ petition before the Delhi High Court. That was challenging the validity of notice under section 153C read with section 153A. In dealing with such situation and the peculiar facts that the Delhi High Court upheld the satisfaction and the Delhi High Court found that the machinery provided under section 153C read with section 153A equally facilitates inquiry regarding existence of undisclosed income in the hands of a person other than searched person. The provisions have been referred to in details in dealing with a challenge to the legality and validity of the seizure and action founded thereon. We do not find anything in this judgment which would enable us to hold that the tribunal's understanding of the said legal provision suffers from any error apparent on the face of the record. The Delhi High Court judgment, therefore, will not carry the case of the revenue any further.
9. We are of the opinion that the tribunal's conclusion cannot be termed as perverse and given the abovenoted factual background. None of these appeals raises any substantial question of law. They are accordingly dismissed. No costs.
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