2016 (11) TMI 1042 - AT - Income Tax

Tribunal Decision: Key Issues Ruled in Favor of Assessee, Emphasizes Importance of Evidence

The Tribunal upheld the validity of the assessment order, denied the exemption under Section 11, and disallowed expenses and depreciation. However, it ... Denial of exemption under section 11 - invocation of section 13(1)(c) read with section 13(3) - reliability of statements recorded under section 131 and right to cross-examination - assessment as business income under provisions of sections 28 to 44 vis-a -vis assessment under sections 11-13 - impounding of central server and expert verification of software installation - requirement of admissible and corroborative evidence before cancelling registration under section 12AADenial of exemption under section 11 - invocation of section 13(1)(c) read with section 13(3) - assessment as business income under provisions of sections 28 to 44 vis-a -vis assessment under sections 11-13 - Whether the Assessing Officer and CIT(A) were justified in denying exemption under section 11 by invoking section 13(1)(c)/13(3) and assessing the society's income as business income under sections 28-44. - HELD THAT: - The Tribunal examined the material relied upon by the revenue and the defences advanced by the assessee. It held that the authorities below erred in upholding denial of exemption because (i) findings adverse to the assessee were based on evidence that was not properly tested, (ii) documentary and testimonial material favourable to the assessee (including statements of the assessee's IT personnel and an independent expert report and the fact of impounding of the central server) were either ignored or not confronted appropriately, and (iii) registration under section 12AA and the statutory requirements of section 11 were not to be treated as a nullity without cogent proof of misapplication of funds. Applying the legal principle that statutory exemption cannot be withdrawn on conjecture and that assessments must be grounded on admissible and corroborated material, the Tribunal concluded that the denial of exemption and consequent taxation as business income was unsustainable. [Paras 96, 98, 100]Assessee's exemption under section 11 restored; the Assessing Officer's disallowance under section 13(1)(c)/13(3) and assessment under sections 28-44 set aside.Reliability of statements recorded under section 131 and right to cross-examination - requirement of admissible and corroborative evidence before cancelling registration under section 12AA - Whether the statements of Shri Sanjay D. Sonawani could be relied upon to deny exemption where the assessee's request to cross-examine the witness before the adjudicating authority was not allowed and where the deponent's statements were internally inconsistent. - HELD THAT: - The Tribunal analysed all four statements of the deponent and found them to be mutually contradictory and the witness to be a 'shifty' one whose testimony lacked creditworthiness. Further, the Tribunal held that the assessee sought cross-examination before the adjudicating Assessing Officer and proffered to meet travel expenses; the authorities' insistence on Pune (where initial statements were recorded) without arranging cross-examination before the adjudicating authority at Jalandhar ran counter to the procedural scheme under section 131/CPC and effectively deprived the assessee of the right to test the evidence. Reliance on such untested and inconsistent statements to deny a statutory exemption offended the audi alteram partem principle and could not sustain the impugned conclusion. [Paras 31, 55, 56]Statements of Shri Sonawani could not be the basis for denying exemption; failure to permit effective cross-examination vitiated reliance on those statements.Impounding of central server and expert verification of software installation - reliability of corroborative digital and expert evidence - Whether the assessee's documentary and expert evidence (impounded server, expert certification and reports/printouts) were sufficient to rebut the revenue's allegation that software purchases were bogus. - HELD THAT: - The Tribunal recorded that the assessee produced statements of its IT personnel asserting the software was installed at the central server which had been impounded during survey; the assessee also furnished an independent expert report certifying installation and functionality of the ERP modules with data from 2004-2011 and noting the vendor's name in the source code. The revenue did not meaningfully confront or test this material nor appoint its own expert despite the assessee's offer. In these circumstances the Tribunal held the authorities impermissibly ignored relevant and corroborative material and could not rely on unsupported inferences to deny exemption or cancel registration. [Paras 76, 78]Expert certification and impounded server evidence adequately rebutted the revenue's prima facie case; such corroborative material was to be given weight and the adverse findings set aside.Final Conclusion: The Tribunal found that the Assessing Officer and the Commissioner (Appeals) erred in denying exemption under section 11 by relying on unsatisfactory and untested witness statements and by disregarding the assessee's corroborative evidence (including impounded server and an independent expert report). The impugned assessments treating the societies as taxable under sections 28-44 were reversed and all the appeals allowed for the stated assessment years. Issues Involved:1. Validity of the assessment order.2. Denial of exemption under Section 11 of the Income-tax Act.3. Application of Section 13(1)(c) of the Income-tax Act.4. Classification of income as business income instead of under Sections 11 to 13.5. Disallowance of depreciation on computer software.6. Disallowance of expenses and assessment of income at an exorbitant figure.7. Charging of interest under Sections 234A, 234B, 234C, and 234D.Issue-wise Detailed Analysis:1. Validity of the Assessment Order:The assessee contended that the assessment order was bad in law, without jurisdiction, and barred by time limitation. However, the Assessing Officer (AO) conducted the assessment under Section 143(3) and issued notices under Sections 143(2) and 142(1) within the stipulated time frame. The Tribunal upheld the validity of the assessment order, finding no jurisdictional or procedural errors.2. Denial of Exemption under Section 11:The AO denied the exemption under Section 11, alleging that the assessee violated the provisions of Section 13(1)(c) by engaging in bogus transactions with M/s. Washington Software Ltd. (WSL). The AO's conclusion was based on statements from Sh. Sanjay D. Sonawani, who admitted providing accommodation entries. The Tribunal found that Sh. Sonawani's statements were inconsistent and unreliable. The Tribunal emphasized that the assessee provided evidence of software installation and offered to allow an independent expert to verify the software. The Tribunal concluded that the denial of exemption under Section 11 was unjustified.3. Application of Section 13(1)(c):The AO invoked Section 13(1)(c), alleging that the assessee's income was used for the benefit of a related person, Sh. Vijay Berlia. The Tribunal noted that there was no concrete evidence of any benefit accruing to Sh. Berlia or any other related person. The Tribunal highlighted that the AO failed to establish a direct nexus between the alleged bogus transactions and any benefit to the related person. Consequently, the Tribunal held that the application of Section 13(1)(c) was unwarranted.4. Classification of Income as Business Income:The AO assessed the income as business income instead of under Sections 11 to 13, arguing that the assessee engaged in commercial activities. The Tribunal found that the assessee was a registered charitable trust engaged in running educational institutions, and its activities were in line with its charitable objectives. The Tribunal ruled that the income should be assessed under Sections 11 to 13, not as business income.5. Disallowance of Depreciation on Computer Software:The AO disallowed depreciation on computer software, claiming that the software purchases from WSL were bogus. The Tribunal noted that the assessee provided evidence of software installation and offered to allow an independent expert to verify the software. The Tribunal found the AO's disallowance of depreciation to be unjustified, as the assessee demonstrated the genuineness of the software purchases.6. Disallowance of Expenses and Assessment of Income at an Exorbitant Figure:The AO disallowed various expenses and assessed the income at a highly exorbitant figure. The Tribunal observed that the AO's disallowances were based on the assumption of bogus transactions without concrete evidence. The Tribunal found that the assessee provided sufficient evidence to support its claims and that the AO's assessment was excessive and unjustified.7. Charging of Interest under Sections 234A, 234B, 234C, and 234D:The AO charged interest under Sections 234A, 234B, 234C, and 234D. The Tribunal held that the charging of interest was consequential and dependent on the final assessment of income. Since the Tribunal ruled in favor of the assessee on the substantive issues, the interest charged was also deemed incorrect and was to be recalculated based on the revised assessment.Conclusion:The Tribunal allowed the assessee's appeals, ruling that the denial of exemption under Section 11, the application of Section 13(1)(c), the classification of income as business income, the disallowance of depreciation, and the disallowance of expenses were all unjustified. The Tribunal emphasized the importance of concrete evidence and proper verification in making such determinations.