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Kalinga Institute Of Industrial Technology v. Commissioner Of Income-Tax And Another
Factual and Procedural Background
The petitioner filed a writ petition seeking quashing of a notice dated 24 September 2009 issued under section 12AA(3) of the Income-tax Act, 1961 (the "impugned notice"), addressed to Kalinga Institute of Industrial Technology (KIIT). The impugned notice stated it was issued "in consequence to the order of the learned Income-tax Appellate Tribunal, Cuttack Bench, Cuttack" and fixed a hearing before the Commissioner of Income-tax, Bhubaneswar.
Procedurally, an earlier order dated 15 December 2006, in which the Commissioner of Income-tax had purportedly cancelled the petitioner's registration under section 12AA(3), was challenged by the petitioner before the Income-tax Appellate Tribunal in I.T.A No. 86 CTK/2007. The Tribunal (Full Bench) allowed the petitioner's appeal by order dated 5 October 2007, holding that the Commissioner’s earlier action was premature and emphasizing that the power under section 12AA(3) should be exercised cautiously and only upon clear satisfaction of the circumstances warranting cancellation. The Department had conducted a search and seizure against the petitioner on 9 August 2005 and relied on seized documents in earlier proceedings.
The petitioner also relied on the fact that its original registration under section 12A had been granted by the Commissioner of Income-tax, Orissa, by order dated 7/9 February 1996 effective from 1 April 1995 and remained valid. The impugned notice (24 September 2009) was challenged on jurisdictional grounds, among others, including that it was issued by an Income-tax Officer (Tech.) rather than by the Commissioner.
Legal Issues Presented
- Whether the impugned notice dated 24 September 2009 issued under section 12AA(3) of the Income-tax Act, 1961 was legally valid and within jurisdiction, given the earlier order of the Income-tax Appellate Tribunal in I.T.A No. 86 CTK/2007 which had quashed a previous cancellation order.
- Whether the Commissioner of Income-tax retained or could exercise the power under section 12AA(3) after the Tribunal had quashed the earlier cancellation order, i.e., whether the quashing deprived the Commissioner of authority to initiate fresh proceedings.
- Whether the impugned notice was validly issued when it appeared to have been signed/issued by an Income-tax Officer (Tech.) rather than the Commissioner of Income-tax, given that the statutory power under section 12AA(3) is vested in the Commissioner.
Arguments of the Parties
Petitioner's Arguments
- The impugned notice is wholly without jurisdiction because there is no direction in any order of the Income-tax Appellate Tribunal authorizing the issuance of that notice.
- The Tribunal’s judgment in I.T.A No. 86 CTK/2007 had allowed the petitioner's appeal and quashed the earlier cancellation; the Tribunal held that the earlier action was premature and must be used only on clear-cut satisfaction.
- The petitioner's registration under section 12A had been validly granted (order dated 7/9 February 1996, effective 1 April 1995) and remained subsisting.
- The impugned notice relies on the Tribunal's order as its sole basis ("in consequence to the order of the learned Income-tax Appellate Tribunal"), which the petitioner contends is without foundation.
- Neither the impugned notice nor the counter-affidavit was issued by the Commissioner of Income-tax; both appear to have been issued/filed by an Income-tax Officer (Tech.), yet the statutory power under section 12AA is vested in the Commissioner.
- The earlier cancellation order (15 December 2006) had been quashed by the Tribunal and the Department's appeal against that Tribunal order was pending and not pressed; hence no fresh foundation existed for the impugned notice.
Respondent's (Department's) Arguments
- The Commissioner of Income-tax was not denuded of his authority under section 12AA(3) merely because the Tribunal had quashed an earlier order cancelling registration; the power remains vested in the Commissioner and he could initiate another proceeding under section 12AA(3).
- A search and seizure had been conducted on 9 August 2005 and documents/information recovered during that operation formed the factual basis for the earlier cancellation order; the Commissioner was entitled to act on information obtained from such operations.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Income-tax Appellate Tribunal, Cuttack Bench (Full Bench), I.T.A No. 86 CTK/2007, order dated 5 October 2007 |
- Held that both cancellation and continuance of registration affect assessment proceedings. - Held that the power under section 12AA(3) is an unbridled power vested in the Commissioner but must be exercised only upon clear-cut satisfaction and with caution; such power should not be utilized without recording satisfaction. - Quashed the Commissioner’s earlier order dated 15 December 2006 as premature while noting the order did not affect conclusions in search and seizure assessment proceedings. |
The High Court relied on the Tribunal's characterization that the power under section 12AA(3) must be exercised cautiously and only on clear satisfaction. The Tribunal's reasoning was applied to find the impugned notice deficient and to justify its quashing; the Court directed that the Commissioner must record the satisfaction and the basis for initiation of proceedings when exercising section 12AA(3). |
Court's Reasoning and Analysis
The court first reviewed the impugned notice and the Tribunal's Full Bench order (I.T.A No. 86 CTK/2007). It noted the Tribunal's ruling that, although section 12AA(3) vests power in the Commissioner to safeguard Revenue interests, that power is "unbridled" in statutory formulation and therefore must be exercised only after the Commissioner is clearly satisfied of the circumstances warranting cancellation; exercised "quite cautiously and consciously."
The court analyzed the circumstances surrounding the impugned notice and the parties' submissions and observed:
- The impugned notice's only stated basis was that it was issued "in consequence to the order of the learned Income-tax Appellate Tribunal, Cuttack Bench, Cuttack." The court treated this as an inadequate foundation because the Tribunal had quashed the earlier cancellation order and had emphasized that the Commissioner must record clear satisfaction before exercising section 12AA(3).
- The court considered the Department's contention that the Commissioner retained power despite the Tribunal's quashing of the earlier order, and that search-and-seizure material furnished factual grounds. The petitioner, however, asserted that the subsequent assessment proceedings had been completed without any adverse finding that would justify fresh initiation under section 12AA(3).
- The court also took note of the procedural point that the impugned notice and the counter-affidavit were issued/filed by an Income-tax Officer (Tech.) rather than by the Commissioner, whereas the statutory power under section 12AA is vested in the Commissioner.
On that basis, the court concluded that the impugned notice failed to show that the Commissioner had recorded the requisite satisfaction and had set out a factual basis for initiating proceedings under section 12AA(3). Relying on the Tribunal's emphasis on cautious and conscious exercise of the power, the court found the impugned notice to be legally defective and liable to be quashed.
Holding and Implications
Holding: The writ petition was allowed and the court ordered quashing of the impugned notice dated 24 September 2009 issued under section 12AA(3) of the Income-tax Act, 1961 (the court's core ruling: Writ petition allowed; impugned notice quashed).
Implications and practical consequences:
- The immediate effect is that the specific notice dated 24 September 2009 stands quashed and the petitioner succeeds in its challenge to that notice.
- The court clarified the manner in which the Commissioner may exercise the power under section 12AA(3): such power "may be exercisable by the Commissioner only on recording his satisfaction of the circumstances that may warrant the exercise of such power" and the Commissioner should record in the notice the basis, if any, for initiation of such proceedings. This places an obligation on the Commissioner to record and state the satisfaction and factual basis when invoking section 12AA(3).
- The court's decision addressed the legality of the particular impugned notice and directed procedural safeguards (recording of satisfaction and basis). The order does not purport to decide or set aside any assessment conclusions arising from search-and-seizure proceedings; it follows the Tribunal's observation that the order quashing the earlier cancellation did not affect findings in the search-and-seizure assessment proceedings.
V. Gopala Gowda, C.J:— In this writ petition the petitioner has sought for quashing of purported notice issued under section 12AA(3) of the Income-tax Act, 1961, annexed as annexure 1 to the writ application, which is extracted hereinbelow;
“Government of India
Office of the Commissioner of Income-tax,
Aayakar Bhawan, 2nd Floor,
Rajaswa Vihar, Bhubaneswar-751007.
No. Tech./12A-81/95-96/2009-10/4015
Dated, Bhubaneswar the 24th September, 2009.
The Secretary,
Kalinga Institute of Industrial Technology (KIIT),
Patia, Bhubaneswar.
Madam/Sir,
Sub.: Proceedings under section 12AA(3) of the Income-tax Act—Matter regarding.
In consequence to the order of the learned Income-tax Appellate Tribunal, Cuttack Bench, Cuttack your case is fixed for hearing before the Commissioner of Income-tax, Bhubaneswar, under section 12AA(3) of the Income-tax Act on October 22, 2009 at 11 am.
You are requested to appear on that date before the Commissioner for hearing.
Yours faithfully,
(Sd.)………………………
M.R Rath,
Income-tax Officer (Tech.),
Bhubaneswar.”
2. Mr. R.K Rath, learned senior counsel appearing for the petitioner submits that, the impugned notice is wholly without jurisdiction, inasmuch as, there is no direction in any order of the Income-tax Appellate Tribunal, Cuttack Bench, Cuttack, authorizing the issue of the impugned notice. The only relevant judgment of the Income-tax Appellate Tribunal, in I.T.A No. 86.CTK 2007 has been appended as annexure 6, in which the Tribunal while allowing the petitioner's appeal held as follows:
“13. In our considered opinion both the cancellation as well as continuance of registration will have an effect and a bearing on the assessment proceeding. It does not mean that the assessment proceeding being a quasi-judicial proceeding should be interfered like the present one. Rather in all fairness the Commissioner of Income-tax should have taken precaution to complete the assessment expeditiously and then should have arrived at the conclusion of proposed cancellation of registration. The present act of the Commissioner of Income-tax amounts to interruption in the assessment proceeding. The power under section 12AA(3) has been enunciated under the Act is an unbridled power in the hands of the Commissioner of Income-tax to safeguard the interests of the Revenue as and when he is satisfied to do so. It does not mean that this unbridled power given by the Act after much deliberation in Parliament should be utilized without clear cut satisfaction. As per strict judicial discipline we consider that power of punishment is a unbridled power like the present power of cancellation envisaged under section 12AA(3). But such unbridled power should be utilized quite cautiously and consciously. With the aforesaid findings we are of the considered opinion that the order of the Commissioner of Income-tax is a premature one which has been utilized at a prematured stage in haste. Accordingly, the assessee succeeds in its appeal regarding continuance of registration. Before parting with our order it will not be out of place to mention here that our order has nothing to do with the search and seizure assessment proceedings. The concluding finding in the search and seizure assessment proceeding may be utilized by the Revenue or by the assessee in their respective favour accordingly. Again, we reiterate that this order is given considering the present facts and circumstances of the case in cancellation of registration only and it has got no bearing to any other activity arising out of the said proceedings.”
(emphasis1 supplied)
3. Learned counsel for the petitioner asserts that there is no direction given by the Income-tax Appellate Tribunal which can form the foundation for issue of notice dated September 24, 2009, impugned under annexure 1 to the present writ application. He further submits that the petitioner's application for grant of registration under section 12A of the Income-tax Act, 1961, was allowed by the Commissioner of Income-tax, Orissa, vide his order dated February 7/9, 1996, granting registration to the petitioner-institution with effect from April 1, 1995, and the same remains valid and subsisting as on date. From annexure 5, it appears that an earlier attempt made by the Commissioner of Income-tax, Bhubaneswar, vide its order dated December 15, 2006, passed under section 12AA(3) of the Income-tax Act, 1961, which was challenged by the petitioner before the Income-tax Appellate Tribunal in I.T.A No. 86 CTK 2007. The said appeal came to be allowed by the Full Bench of the Tribunal, vide order dated October 5, 2007, and the conclusion of which has been quoted hereinabove. Therefore, it is submitted that the Tribunal has not only quashed the earlier attempt at cancelling the registration of the petitioner-institute under section 12A of the Income-tax Act, 1961, yet, the self-same order appears to be relied upon and/or referred to in the impugned notice under annexure 1. It is further submitted that the Income-tax Department has also sought to challenge this order of the Tribunal before the High Court but is yet to press the said application, for which reason the same remains pending, as on date. Mr. Mohapatra, learned additional standing counsel appearing for the Income-tax Department, on the other hand, sought to try and justify the impugned notice by stating that, the Commissioner of Income-tax was not denuded of his authority under section 12AA(3) of the Income-tax Act even though the Tribunal had quashed an earlier order dated December 15, 2006 passed by the Commissioner cancelling the registration of the petitioner-institute.
4. Learned counsel for the Department further submits that a search and seizure had been conducted against the petitioner-institute on August 9, 2005, and based on documents seized and information recovered in the course of such search and seizure without awaiting for the conclusion of the congenital assessment proceeding, the earlier order dated December 15, 2006 had been passed by the Commissioner of Income-tax under section 12AA(3) of the Income-tax Act, 1961, directing cancellation of the registration of the petitioner-institution. This order had came to be quashed by the Income-tax Appellate Tribunal vide judgment dated October 5, 2007, in I.T.A No. 86.CTK/2007 on the ground that such notice was premature. Accordingly, he submits that the power under section 12AA(3) of the Income-tax Act continues to be vested in the Commissioner of Income-tax and merely because an earlier order under section 12AA of the Income-tax Act had been quashed by the Income-tax Appellate Tribunal, it did not mean that the Income-tax Commissioner was denuded of his authority, to initiate another proceeding under section 12AA(3) of the Income-tax Act.
5. In response to the contention made by the learned counsel for the Department, learned counsel for the petitioner-institute submits that, while there had been a search and seizure operation carried out against the petitioner-institute on August 9, 2005, an assessment proceeding followed the same and was completed and no adverse finding had been recorded against the petitioner-institution to form any fresh ground for issue of notice.
6. Learned counsel for the petitioner further asserts that in the impugned notice, there is no reference to any subsequent fact, event, information or order to form the foundation of the notice under section 12AA(3) of the Income-tax Act and impugned as annexure 1 herein. The only basis referred in the impugned notice was, “in consequence to the order of the learned Income-tax Appellate Tribunal, Cuttack Bench, Cuttack”. This reason was wholly without any foundation and, therefore, the impugned notice ought to be quashed.
7. Learned counsel lor the petitioner also asserts that although the impugned notice claims to be a notice under section 12AA of the Income-tax Act, the same has been issued by the Income-tax Officer (Tech), Bhubaneswar and the counter-affidavit in the present case has also been filed by the self-same Income-tax Officer (Tech.). In other words, neither the impugned notice nor the counter-affidavit has in fact been issued by the Commissioner of Income-tax.
8. Learned counsel for the petitioner, therefore, prays for quashing of annexure 1 since the same has not been issued by the Commissioner of Income-tax as well as for rejection of the counter-affidavit, since the power and authority under section 12AA of the Act is only vested with the Commissioner of Income-tax Act and not with any Income-tax Officer (Tech.), who had issued such notice.
9. On a consideration of the submissions of the learned counsel for the parties as noted hereinabove and on a perusal of the impugned notice under annexure 1 as well as the order of the Income-tax Appellate Tribunal under annexure 6, it is clear therefrom that the Tribunal has held that though power has been vested under section 12AA(3) of the Income-tax Act in the Commissioner of Income-tax to safeguard the interests of the Revenue, but such power vested in him can only to be exercised by him on a clear-cut satisfaction of the circumstances for exercise of such power. Although, the Tribunal's order quashed an earlier order of the Commissioner dated December 15, 2006, under section 12AA(3) of the Act, the same order also clarified that such power “should be utilized quite cautiously and consciously”. Therefore, we have no hesitation to direct quashing of the impugned notice dated September 24, 2009 issued under section 12AA(3) of the Income-tax Act, vide annexure 1 to the writ petition and we order accordingly. We make it clear that the power under section 12AA(3) of the Income-tax Act may be exercisable by the Commissioner only on recording his satisfaction of the circumstances that may warrant the exercise of such power and to record in the notice and the basis, if at all for the initiation of such proceeding.
10. Accordingly, the writ application is allowed in terms of the directions as noted hereinabove. Writ petition allowed.
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