2017 (3) TMI 79 - AT - Income Tax

Tribunal Invalidates Reassessment, Upholds Exemptions, and Allows Appeals

The Tribunal deemed the reassessment proceedings for A.Y. 1999-2000 invalid due to failure to address the reason for reopening, following precedents. ... Reopening of assessment under section 147 - validity of notice under section 148 - limitation and effect of invalid special audit under section 142(2A) - entitlement to exemption under section 10(23C)(vi) - registration under section 12AA / cancellation and restoration of registration - application of section 11 in charitable trusts - violation of section 13(1)(c) - consequences for exemption under section 11 - allowability of expenditure incurred outside India for objects of a trust - scope of reassessment: assessing 'such income' and other incomes which come to notice'Reopening of assessment under section 147 - validity of notice under section 148 - scope of reassessment: assessing 'such income' and other incomes which come to notice' - Validity of reassessment proceedings for A.Y. 1999-2000 - HELD THAT: - The Tribunal examined the reasons recorded for reopening for A.Y. 1999-2000 and found that the Assessing Officer had recorded reasons to reopen on account of rental income being shown under an incorrect head. No addition was, however, made in the reassessment on that issue; instead other additions were made. Applying the principles in Jet Airways and related authorities, the Tribunal held that where the Assessing Officer, after issuing notice under section 148, accepts the assessee's contention on the matter which formed the basis for reopening and does not assess that income, he cannot independently assess other income without issuing a fresh notice. On the facts, because no addition was made on the ground on which assessment was reopened and other additions only were made, the reassessment for A.Y. 1999-2000 was held invalid. [Paras 110, 111, 112, 113, 114]Reassessment proceedings for A.Y. 1999-2000 are invalid and the appeal for that year is allowed.Limitation and effect of invalid special audit under section 142(2A) - assessment time-barred - Validity of assessment for A.Y. 2000-2001 in view of special audit directions and limitation - HELD THAT: - The Tribunal considered whether the Assessing Officer complied with the proviso to section 142(2A) by affording an opportunity of being heard before directing a special audit. It found that the Assessing Officer had not given the required pre-decisional opportunity and that the CIT alone had given a hearing before approving the reference. Reliance was placed on the Supreme Court and Tribunal precedents holding that failure to give the pre-decisional show-cause notice vitiates the order directing special audit; consequential extensions of limitation based on such order are therefore ineffective. As the assessments for the relevant years were otherwise becoming time-barred and the assessment order for A.Y. 2000-2001 was completed after the limitation date, the Tribunal held the assessment for A.Y. 2000-2001 to be barred by limitation. [Paras 116, 117, 118, 119, 120]Assessment for A.Y. 2000-2001 is time-barred and the appeal for that year is allowed.Entitlement to exemption under section 10(23C)(vi) - registration under section 12AA / cancellation and restoration of registration - Whether the assessee is entitled to exemption under section 10(23C)(vi) and effect of status of approval - HELD THAT: - The Tribunal noted the history: CBDT had initially granted approval for A.Y. 1999-2000 to 2001-02, DGIT (Investigation) withdrew it, the Bombay High Court quashed the withdrawal (28-07-2009) and the Supreme Court dismissed the Department's SLP, but a later CBDT order of 30-01-2012 again withdrew approval and the matter remained subject of further writ proceedings. In the absence of operative approval as on the date of the contested CIT(A) order, the Tribunal found no infirmity in the CIT(A)'s conclusion that the assessee was not then entitled to benefit under section 10(23C)(vi); accordingly the ground challenging denial of 10(23C)(vi) was dismissed for the period when approval was not in force. The Tribunal, however, accepted arguments and authorities emphasizing that restoration of registration under section 12AA (by the ITAT earlier) means the trust can claim exemption under section 11 subject to conditions and verification. [Paras 123, 139]Assessee not entitled to section 10(23C)(vi) relief for years where no operative approval existed; registration issues addressed separately and registration restored by Tribunal entitling assessee to claim section 11 benefits subject to verification.Allowability of expenditure incurred outside India for objects of a trust - application of section 11 in charitable trusts - Whether expenditure on World Peace Centre (WPC), including foreign seminars and conferences, is expenditure for objects of the trust and allowable under section 11 - HELD THAT: - The Tribunal examined the documentary record filed by the assessee - programme details, UGC/UNESCO links, Government recognition and grant guidelines for human values and human rights education - and concluded that WPC activities form part of the educational objects of the trust. Citing precedents that application of income need be for purposes in India and that expenditure abroad does not ipso facto disqualify deduction under section 11, the Tribunal held that the Assessing Officer and CIT(A) were not justified in denying exemption on this ground. The Tribunal also observed that mere non-intimation of an amendment to the trust deed does not automatically invalidate applicability of section 11 where the activity is otherwise charitable. [Paras 127, 128, 129, 130, 136]Expenditure on World Peace Centre is attributable to the educational objects of the trust and cannot be denied deduction under section 11 on the sole ground that it was incurred abroad or that the trust did not earlier intimate the change in objects.Violation of section 13(1)(c) - consequences for exemption under section 11 - application of section 11 in charitable trusts - Effect of alleged breaches of section 13(1)(c) and whether exemption under section 11 is to be wholly denied - HELD THAT: - The Tribunal considered the Assessing Officer's findings of various benefits to trustees and relatives (foreign travel, credit card reimbursements, concessional admissions, interest free loan) and the CIT(A)'s conclusions. It accepted the legal proposition, supported by Tribunal and High Court authority, that breach of section 13 does not automatically require denial of exemption for the entire income; instead only the income or application of funds that constitute the breach should be brought to tax. The Tribunal therefore rejected wholesale denial of exemption under section 11 and directed that disallowances be confined to amounts genuinely attributable to personal benefit in breach of section 13(1)(c). It provided guidance on certain heads (e.g., depreciation on car to be allowed, 50% of vehicle maintenance and 50% of certain credit-card expenses to be treated as charitable application), held specific foreign-tour items not supported and remitted quantification and verification to the Assessing Officer. [Paras 154, 155, 156, 158, 159]Wholesale denial of section 11 exemption for alleged section 13 breaches is not warranted; only amounts properly attributable to personal benefit must be disallowed - factual quantification and necessary adjustments are remanded to the Assessing Officer.Computation of income of a trust under section 11 - treatment of accounting adjustments, capital/revenue character and prior auditor recast - Various computation and quantification issues (double disallowance, recast surplus figure, income tax debited, excess provision for refund of fees) - HELD THAT: - The Tribunal observed that where the trust is entitled to exemption under section 11, income is to be computed on a commercial basis and certain statutory disallowances under the head wise provisions of the Income-tax Act (e.g., sections 40A/43B) may not apply in the same manner; capital expenditure and debt servicing may be treated as application of income. The Tribunal noted instances where the special auditor's recast had been incorrectly or doubly applied and where the Assessing Officer had adopted an incorrect surplus figure for A.Y. 2004-05; it directed verification and correction by the Assessing Officer. It remitted for enquiry and computation: (a) alleged double disallowance of capitalised expense for A.Y. 2001-02, (b) treatment of income tax/TDS arrears debited to constituent units for A.Y. 2002-03 and A.Y. 2003-04, (c) excess provision for refund of fees for A.Y. 2003-04, and (d) correction of typographical/surplus figure for A.Y. 2004-05. [Paras 168, 171, 172, 173, 174]Computation issues are remitted to the Assessing Officer for verification and correction; where section 11 entitlement applies income should be computed commercially and reconsideration given to auditor recast and alleged double additions.Final Conclusion: The Tribunal allowed the appeals for A.Y. 1999-2000 and 2000-2001 (reopening for 1999 2000 held invalid; assessment for 2000 01 time barred for want of valid special audit direction), held that the assessee was not entitled to section 10(23C)(vi) relief where no operative approval existed but that registration under section 12AA had been restored so section 11 claims required fresh consideration; it allowed the World Peace Centre expenditure as educational and charitable, rejected wholesale denial of section 11 on account of alleged section 13 breaches and confined taxability to amounts genuinely constituting personal benefit, and remitted several quantification and computation matters to the Assessing Officer for verification and adjustment. Issues Involved:1. Validity of reassessment proceedings.2. Validity of special audit orders under section 142(2A).3. Denial of exemption under section 10(23C)(vi).4. Denial of exemption under section 11 due to alleged commercial activity and violation of section 13(1)(c).5. Disallowance of expenses on World Peace Centre.6. Disallowance under sections 40A(3), 40A(7), and 43B.7. Additions on account of unexplained credits and capital expenses.8. Enhancements made by CIT(A).Detailed Analysis:1. Validity of Reassessment Proceedings:The Tribunal found that the reassessment proceedings for A.Y. 1999-2000 were invalid. The reason for reopening the assessment was rental income, but no addition was made on this ground. Citing the decisions of Hon’ble Bombay High Court in Jet Airways India Ltd. and Hon’ble Delhi High Court in Ranbaxy Laboratories Ltd., the Tribunal held that if the reason for reopening is not addressed, other additions cannot be made. Therefore, the reassessment proceedings were deemed invalid.2. Validity of Special Audit Orders under Section 142(2A):The Tribunal held that the special audit orders were invalid as the Assessing Officer did not provide an opportunity of being heard to the assessee before recommending the special audit. This was in violation of the principles established by the Hon’ble Supreme Court in Rajesh Kumar and others vs. DCIT and the Hon’ble Bombay High Court in Nikunj Eximp Enterprises Pvt. Ltd. Consequently, the assessments for A.Y. 1999-2000 and 2000-01 were barred by limitation.3. Denial of Exemption under Section 10(23C)(vi):The Tribunal upheld the CIT(A)’s decision to deny exemption under section 10(23C)(vi) as the assessee did not have the necessary approval for the relevant assessment years. Despite the High Court quashing the DGIT’s withdrawal of exemption, the CBDT subsequently withdrew the exemption, and the writ petition challenging this was still pending.4. Denial of Exemption under Section 11 due to Alleged Commercial Activity and Violation of Section 13(1)(c):The Tribunal found that the assessee trust was entitled to exemption under section 11, despite allegations of commercial activity and violations of section 13(1)(c). The Tribunal noted that the trust’s activities were educational and charitable. It emphasized that violations of section 13(1)(c) should not lead to wholesale denial of exemption; only the income subject to violation should be taxed. The Tribunal directed the Assessing Officer to compute the disallowance accordingly.5. Disallowance of Expenses on World Peace Centre:The Tribunal allowed the expenses on World Peace Centre, holding that these activities were educational in nature. It rejected the objections regarding non-intimation of amendments to the trust deed and expenditure incurred abroad, citing that such expenses were for the objects of the trust.6. Disallowance under Sections 40A(3), 40A(7), and 43B:The Tribunal held that the income of the assessee trust should be computed in a commercial manner under section 11, and disallowances under sections 40A(3), 40A(7), and 43B were not applicable.7. Additions on Account of Unexplained Credits and Capital Expenses:For A.Y. 2001-02, the Tribunal found that the CIT(A) did not address the issue of double disallowance of capital expenses and directed the Assessing Officer to verify and correct this. For A.Y. 2002-03 and 2003-04, the Tribunal directed the Assessing Officer to verify whether the application of income was more than the receipts and adjust the taxable income accordingly.8. Enhancements Made by CIT(A):The Tribunal held that the CIT(A) was not justified in enhancing the income by disallowing various expenses, as these were for the objects of the trust. It directed the Assessing Officer to restrict disallowances to the extent of violations under section 13(1)(c).Conclusion:The Tribunal allowed the appeals for A.Y. 1999-2000 and 2000-01, and partly allowed the appeals for other years, directing necessary adjustments and verifications by the Assessing Officer.