2025 (10) TMI 90 - AT - Income Tax

Reopening under s.148 upheld for survey and no ITR/audit; s.251(2)/s.145(3) presumptive additions deleted and set aside

ITAT held the s.148 reopening by the AO valid-survey and lack of ITR/audit justified notice and s.153C was unnecessary as no incriminating material ... Reopening of assessment u/s 147 - addition beyond the reason recorded - jurisdiction to issue notice - eligibility for claiming exemption u/s 11 to 13 - AO has stated that assessee trust is not eligible for exemption u/s 11 & 12, the income of the trust will be charged at MMR u/s 164(2) as the trust doing business activity As argued 148 notice could have been issued by the ld. ITO, Ward Exemption, Kota where the jurisdiction lies but the same has been issued u/s. 148 was issued by ACIT, Central Circle, Kota who has no jurisdiction. Notice u/s. 153C ought to have been issued instead of notice u/s. 148 - AO has not made additions on the basis of reasons recorded viz-a-viz additions made by him (except minor addition of IT refund interest which was already on record) - HELD THAT:- As per the record since the assessee has not filed the ITR u/s. 139 of the Act reasons were recorded on 31.01.2018 and after taking the appropriate sanction on 21.02.2018, a notice u/s.148 of the Act was issued to the assessee on 28.02.2018. Record reveals that the assessee has not undertaken regular Audit & has not filed the ITR for the year under consideration nor assessment proceedings u/s. 143(3)/144 were carried out earlier. Therefore, ld. AO has after recording appropriate reasons based on the information available has after taking appropriate approval reopened the case of the assessee. It is also evident that the said proceeding were initiated only after the survey action was carried out wherein the ld. AO has valid reason to issue the notice as per provision of section 148 of the Act. AO has valid reason that in absence of ITR & Audit Report, it cannot be assumed that though the trust is registered u/s. 12AA the benefit of section 11 & 12 can be available to the assessee automatically. Record also reveals that the receipts of the assessee without giving benefit of section 11 & 12 exceeds the maximum amount not chargeable to tax and considering the facts of the case the issue of notice u/s. 148 is appropriate action. Whether notice u/s. 153C of the Act is required to be issued in this regard, that contention is not correct because the facts of the case suggest that since revenue did not relied upon any incriminating material issue of notice u/s. 153C of the Act cannot be given. Even in the search or survey proceeding does not reveal any records of having any incriminating in nature and therefore, there is no cause of initiation of proceeding u/s. 153C of the Act. The action initiated by the department is on the basis of survey carried out at the premises of assessee and on the basis of information available on record with the ld. AO. For survey actions, proceedings u/s. 153C cannot be initiated. Further the argument that no addition was made on the reasons recorded could have been considered if the assessee had filed a regular Return & Audit Report, in absence of the same, the assessee cannot plead that no addition were made on the reasons recorded. We are of the considered view that proceedings u/s. 148 were validly initiated by the ld. AO against the assessee. Thus, we do not see any merits in the Ground No. 1 raised by the assessee and thereby the same is dismissed. Cancellation of the registration granted u/s. 12AA w.r.e.f. 01.04.2013 - HELD THAT:- As is evident from the order of the ld. CIT(A) & the ld. AO, wherein they have primarily justified their action in treating the income of the assessee as business income on the ground that audit report & return of income was not filed u/s. 139, hence, benefit u/s. 12AA cannot be granted. It has also been alleged that there was misappropriation of funds as alleged to have taken place. - The issue has also been dealt by the co-ordinate bench of ITAT, Delhi in the case of United Educational Society v. JCIT [2019 (7) TMI 738 - ITAT DELHI] as regards to amendment made by Finance Act, 2017 and that amendment is whether prospective or retrospective. Power of CIT(A) to reject the Books of Accounts and Make additions on presumptive basis - Originally the additions have been made by the ld. Assessing Officer without rejecting the books of accounts - HELD THAT: As is evident from the record that ld. CIT(A) has neither applied % completion method nor project completion method before arriving at profit and simpliciter considered the excess amount collected from the members viz. spent at the year-end has been put to tax. The same is without any basis to tax that income. Powers u/s. 251(2) read with rejection of books u/s. 145(3) has wrongly been exercised by the ld. CIT(A), which primary aimed to cover up the lapses on the part of the in the assessment proceeding. Further, addition has been made in the hands of the assessee, without considering the detailed order and reasoning given by the order dated 06.01.2021 passed in assessee’s own case. Self contradictory stand has been adopted by ld. CIT(A) in A.Y. 2017-2018. Consequently, the addition made by the ld. CIT(A), exercising its powers u/s. 251(2) of the Act is bad in law and the same is set aside and the same is deleted. Thus, the Ground No. 2 and Ground No. 3 is decided in favour of the assessee. Whether the construction expenses is part of the business activity carried out by the trust? - A close perusal of additions made by the AO reflects the same is beyond the show cause notice and further no reference to statutory provision under which the addition/disallowance is to be made is silent. Explanatory notes to Finance Act, 2018 also explicitly holds that these amendments take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-20 and subsequent years. The reasons assigned while deciding Ground No. 2, 3 & 4 hereinabove will also apply in these grounds, which for the sake of repetition are not being repeated. Considering the overall discussion so recorded herein above we see no reason to sustained those addition made by the ld. AO and sustained by the ld. CIT(A) for the reasons and discussion made herein above and thereby the same are directed to be deleted. Hence, disallowance made by the AO & sustained by the ld. CIT(A) is deleted and is set aside. ISSUES PRESENTED AND CONSIDERED 1. Whether notice issued under section 148/147 was validly issued by the Assessing Officer in the facts of the case and whether proceedings under section 148 could be initiated instead of proceedings under section 153C where survey/search of related persons had taken place. 2. Whether, after validly reopening under section 147/148, the Assessing Officer could make additions or disallowances beyond the matters recorded in the reasons for reopening - including the effect and scope of Explanation 3 to section 147. 3. Whether denial of exemption under sections 11 and 12 (and consequential taxation under section 164(2)) was justified on the grounds of misuse/diversion of trust funds (section 13(1)(c)/13(2)), non-filing of return and audit report, or other compliance failures. 4. Whether the appellate authority could reject books of account under section 145(3) and enhance income under section 251(2) by treating receipts/advances from members and construction outlays as trust/business receipts - and whether such exercise by the appellate authority was within lawful limits. 5. Whether specific additions/disallowances made by the AO and sustained by the CIT(A) were justified on facts and law: (a) disallowance of sundry/unverifiable creditors as bogus; (b) 15% disallowance of construction and other undocumented payments; (c) disallowance under section 40(a)(ia) for non-deduction of TDS. 6. Whether procedural safeguards and principles of natural justice (opportunity to be heard, scope of show-cause) were observed before making contested additions. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of notice under section 148 v. applicability of section 153C Legal framework: Section 147/148 empower reopening where AO has 'reason to believe' income has escaped; sections 153A-153C prescribe special procedure where search/requisition yields incriminating material belonging to/pertaining to persons other than the searched person, with non-obstante clauses. Precedent treatment: Courts have held Section 153C mandatory where its strict pre-requisites are satisfied; but where seized material does not pertain to the assessee or no incriminating material is used, section 148 may validly be invoked. Clarificatory/amendatory jurisprudence recognises both routes depending on facts. Interpretation and reasoning: The Tribunal found the AO recorded reasons to believe based on survey/AIR/26AS and non-filing of return; no incriminating material was shown to belong to the trust such that section 153C procedure was mandated. Centralisation of cases under proper transfer order supported AO's jurisdiction. Reopening was therefore held validly initiated under section 148. Ratio vs. Obiter: Ratio - reopening under section 148 is permissible where reasons recorded are independent of seized incriminating material and conditions for section 153C are not met. Obiter - procedural distinctions between survey and search as to section 153C application. Conclusion: Notice under section 148 was valid in the case facts; requirement to proceed under section 153C did not arise. Issue 2 - Scope of reassessment and Explanation 3 to section 147 Legal framework: Substantive part of section 147 directs assessment of 'such income' believed to have escaped; Explanation 3 clarifies AO may examine, assess or reassess any issue relevant to income which comes to his notice in course of proceedings notwithstanding that reason for that issue was not recorded initially. Precedent treatment: Courts differ but several High Courts and the CBDT have held Explanation 3 clarificatory - AO may assess other incomes discovered in reassessment, subject to initial notice validity; some decisions qualify that if original reason is found baseless, AO cannot thereafter independently assess unrelated income without fresh notice. Interpretation and reasoning: Tribunal applied settled principle that once notice under section 148 is validly issued on reasonable belief, AO may assess other escaped income coming to light during reassessment. However Tribunal did not permit unbounded exercise: where appellate authority (CIT(A)) used section 251(2) to enhance via rejection of books and to treat member advances as trust income, Tribunal scrutinised limits of appellate enhancement (see Issue 4). Ratio vs. Obiter: Ratio - Explanation 3 permits AO to assess additional escaped income discovered during reassessment if reopening is valid. Obiter - limits where initial reason is shown to be unfounded and AO relies solely on unrelated additions may require fresh notice. Conclusion: AO may make additions beyond recorded reasons if reopening is valid; such power is subject to safeguards and linkage to material discovered during proceedings. Issue 3 - Denial of exemption under sections 11/12 due to misuse, non-filing and audit defaults (section 13(1)(c), section 12A/12AA) Legal framework: Sections 11-13 condition tax exemption on application of income to charitable purposes and disqualify exemption where trust income/property is applied for benefit of specified persons (section 13); section 12A(1)(b) prescribes audit/report compliance prerequisites (with later amendments clarifying time-limits from specified dates). Precedent treatment: Authorities and tribunals hold that procedural non-compliance (late filing of audit report/return) can often be curable if report/return produced before completion of assessment; denial under section 13(1)(c) requires demonstration that income/property was applied for benefit of specified persons - mere allegations or misappropriation by office-bearers require supporting evidence, and removal of registration retrospectively is narrowly construed. Interpretation and reasoning: Tribunal noted factual findings of misused funds and auditor's observations but also recorded that co-ordinate ITAT earlier quashed cancellation of registration and several precedents treat filing of Form 10/Form 10B during reassessment as capable of curing defaults. Tribunal found that denial of exemption and taxation at MMR was not sustainable across the years challenged where prior ITAT findings, lack of conclusive proof and remedial filings applied. Ratio vs. Obiter: Ratio - denial of exemption requires clear proof of application/ diversion to specified persons; procedural defaults may be cured if documentary compliance is made within assessment proceedings. Obiter - retrospective cancellation of registration is disfavoured absent statutory mandate. Conclusion: Denial of exemption on grounds of non-filing/audit and alleged diversion was not sustained for the years under appeal where compliance was subsequently filed and prior appellate findings were adverse to cancellation; taxation at MMR was set aside on those bases. Issue 4 - Rejection of books under section 145(3) and enhancement under section 251(2) by appellate authority Legal framework: Section 145(3) permits rejection of accounts that are not maintained as per law; section 251(2) grants appellate authority power to enhance, reduce or annul assessment in appeals within limits of issues arising out of assessment. Precedent treatment: Appellate authority has wide powers but may not travel outside record/order under appeal to invent new sources of income - enhancement must be based on matters on record and not on issues outside AO's consideration; several tribunals emphasise limits on appellate authority creating fresh grounds. Interpretation and reasoning: Tribunal held that the CIT(A) erred in invoking section 145(3) and enhancing income under section 251(2) by treating member advances and construction outlays as trust turnover where AO had not rejected books or framed assessment on that basis; appellate authority cannot, in guise of enhancement, introduce new substantive adjustments beyond assessment record without proper basis. The Tribunal set aside the enhancement and rejection exercised by CIT(A) in that manner. Ratio vs. Obiter: Ratio - appellate authority cannot, by invoking section 251(2), exceed the scope of assessment record to create new taxable sources or substitute AO's exercise unless based on matters arising from the assessment; rejection and enhancement must respect statutory confines. Obiter - application of accounting methods (% completion) when recasting accounts. Conclusion: Rejection of books and consequential enhancement by the appellate authority in the circumstances was held to be beyond permissible appellate enhancement and was set aside; assessment authority should address such matters by proper procedure if warranted. Issue 5 - Additions: bogus creditors, 15% disallowance of undocumented payments, and section 40(a)(ia) TDS disallowance Legal framework: Additions under sections like 68/69/41(1), disallowances of unverifiable expenditure are fact-sensitive; taxing authorities may disallow undocumented expenditures and treat unverifiable creditors as bogus; section 40(a)(ia) disallows certain expenses where TDS obligations are not complied with (application to trusts clarified by later amendments/Explanation 3). Precedent treatment: Courts permit adjustments where auditor and records point to unsupported entries and assessee fails to produce invoices/confirmations; percentage disallowances (like 15%) have been applied as reasonable estimate where vouchers absent; applicability of section 40(a)(ia) to trusts historically depended on whether activity was business-like and whether explanatory amendments apply to year under consideration. Interpretation and reasoning: Tribunal found that AO made several additions without adequate prior show-cause on some heads; where AO relied on auditor's observations and assessee failed to produce supporting vouchers or confirmations, additions for unverifiable creditors and partial disallowance of undocumented payments were sustainable in principle but had to be assessed consistently with limits on AO/CIT(A) powers. Concerning section 40(a)(ia), Tribunal recognised that applicability turns on whether activity is business-like and on the year-specific statutory position; where appellate findings treated the activity as charitable for other years or where Explanation 3 did not retrospectively apply, disallowance under section 40(a)(ia) was not sustained for the years in question. Ratio vs. Obiter: Ratio - unverifiable creditors and undocumented payments may be added or partially disallowed where assessee fails to substantiate and auditor flags deficiencies; section 40(a)(ia) disallowance requires (year-wise) careful application and cannot be mechanically applied where charitable exemption continues or where amendment timing matters. Obiter - quantum of percentage disallowance as reasonable estimate. Conclusion: Additions for unverifiable creditors and partial disallowance of undocumented payments were not uniformly upheld given procedural defects and appellate overreach; disallowance under section 40(a)(ia) was not sustained where the trust's status and timing of statutory amendments did not support its application. Issue 6 - Procedural fairness and requirement of show-cause Legal framework: Natural justice requires opportunity to be heard; SCNs or notices must fairly inform the assessee of proposed additions/grounds so denial of rights is avoided. Interpretation and reasoning: Tribunal emphasised that several additions complained of were not the subject of specific show-cause in the assessment stage and that opportunity to meet precise allegations was not afforded; where procedural lapses occurred, Tribunal scrutinised whether additions could be sustained and set aside those effected without adequate notice or reliance on new grounds introduced at appellate stage. Ratio vs. Obiter: Ratio - additions or disallowances should be founded on matters put to the assessee with reasonable notice; failure to confront assessee with specific allegations weakens validity of additions. Obiter - remedying procedural defects by accepting additional evidence in appeals is a judicial discretion subject to rule compliance. Conclusion: Procedural defects in making certain additions (lack of specific show-cause on those items) rendered them vulnerable; Tribunal set aside additions/enhancements premised on such defects while upholding adjustments where record and notice were adequate or the assessee failed to substantiate.