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income-tax Officer Vs. Ambalal Sarabhai Trusts (Nos. 2, - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Ahmedabad
Decided On
Judge
Reported in(1982)2ITD158(Ahd.)
Appellantincome-tax Officer
RespondentAmbalal Sarabhai Trusts (Nos. 2,
Excerpt:
.....this point and for assessment year 1976-77. i have already applied these provisions in the other cases of assessments. the view that this constitutes information and reason to believe that income chargeable to tax has escaped assessment/has been under-assessed is supported by the supreme court decision in the cases of kasturbhai lalbhai and kalyanji mavji. 3. please issue notice under section 148 for reopening the assessment under section 147(6) of the income-tax act, 1961.5. after reopening the assessments under section 147(6), the ito issued notices under section 148 of the act. the ito after considering the material on record and the contentions of the assessee-trusts came to the conclusion that in all the cases the provisions of section 13(2)(h) and 9 13(3) were applicable, and he.....
Judgment:
1. All these appeals are by the department pertaining to the assessment years 1975-76 and 1976-77. In all the appeals the point in issue is whether the ITO was justified, or not, in reopening the assessments under Section 147(6) of the Income-tax Act, 1961 ('the Act').

2. The assessee-trusts are charitable trusts. The source of income of the assessee-trusts are, income from interest on securities, dividends, bank interest, interest on other deposits and voluntary contributions.

3. The assessee-trusts, for the years under consideration, have filed returns and along with the returns Enclosure 'B' is attached. It is as under : The funds of the Trust are invested by way of fixed deposit with M/s. Karamchand Premchand (P.) Ltd., According to us, for the purpose of Section 13(2)(A) of the Act, Fixed Deposits are not investments as they are governed by Section 13(2)(a) and none of the companies referred to above, was a concern in which persons referred to in Section 13(3) had a substantial interest.

The ITO, after considering the material and contentions of the assessee-trusts, completed the assessments. In all the years he granted exemption under Section 11 of the Act. All the assessments under Section 143(3) of the Act, were completed in 1978.

4. Subsequently, the ITO on the basis of information in his possession, had reason to believe that in all these years exemption under Section 11 was wrongly granted and he was of the view that in all these years the provisions of Section 13(2)(h) and 13(3) read with the Explanation therein, were applicable. Accordingly, he issued a letter dated 25-9-1978 to the assessee to show cause as to why exemption granted to the assessee under Section 11, at initial stage, may not be withdrawn.

The letter reads as under: On verification of the return of income for the assessment year 1976-77 filed on 26-6-1976, it has been noticed that the trust has derived interest of Rs. 12,326, on the deposits made with Karamchand Premchand (P.) Ltd. Prima facie, it is seen that in the above concern, the author, settlor, contributor, trustees and/or their relatives, members of the Hindu family of late Shri Ambalal Sarabhai, etc., have substantial interest, as already verified and held in the assessment orders for assessment years 1972-73 and 1973-74, and, therefore, provisions of Section 13(2)(h) are applicable in respect of this interest income. Accordingly, it is clear that exemption under Section 11 may not be available in respect of the above interest income.

2. You are, therefore, requested to attend this office on 6-10-1978 and show cause as to why the exemption under Section 11 in respect of the above income should not be disallowed. In this regard, you are also requested to please furnish to this office the necessary documents, accounts and evidence, if any, along with the following details specifically : (1) No. of shares of Karamchand Premchand (P.) Ltd. held by the author/settlor, trustees, contributors and/or their relatives, etc., as on 31-3-1976.

(2) Copy of income and expenditure account and balance sheet of the Estate of Ambalal Sarabhai for the year ending 31-3-1976.

(3) Whether all the persons as above, as referred to in Section 13(3) of the Income-tax Act, 1961, in aggregate, at any time during the previous year ended on 31-3-1976, were entitled to not less than twenty per cent of the profits of this concern individually and/or collectively.

(4) Whether all these persons, as referred to in Section 13(3) of the Income-tax Act, in aggregate, were holding beneficially the shares of the above company, carrying not less than twenty per cent of voting power at any time during the previous year individually and/or collectively.

3. For failure to comply with as above and by the time as in para 2, the case will be disposed of on merits.

Pursuant to the service of such notice the assessee-trusts filed a detailed reply on 18-10-1978. Inter alia, in reply, the assessee-trusts stated as under : We are enclosing a statement giving the No. of shares of Karamchand Premchand (P.) Ltd. carrying voting power and owned beneficially by various categories of persons. According to this statement, persons referred to in Section 13(3) were holding beneficially, the shares of the company carrying more than 20 per cent of the voting power.

The ITO after considering the reply of the assessee-trusts recorded the reasons for reopening of the assessments under Section 147(6). The reasons recorded are as under : The funds of the assessee-trusts are deposited/invested in Karamchand Premchand (P.) Ltd. and estates, as well as other concerns, of the Ambalal Sarabhai Group. For concerns other than Karamchand Premchand (P.) Ltd., it has been established in this group that profits earned from them are more than 20 per cent of their profits. Moreover, as admitted categorically in writing for the assessment year 1976-77, in the cases of charitable trusts of this group, i.e., Ambalal Sarabhai Group, various categories of persons referred to in Section 13(3) were holding beneficially the shares of the company, viz., Karamchand Premchand (P.) Ltd. [now Shahibaug Entrepreneurs (P.) Ltd.], carrying more than 20 per cent of the voting power. Moreover, for assessment years prior to the assessment year 1975-76 also, the ITO had applied these provisions of Section 13(3). Accordingly the provisions of Section 13(2)(h), 13(3) and Explanations thereunder were/are applied/applicable.

2. This constitutes valid information and reason to believe that the income chargeable to tax has escaped assessment and/or has been under-assessed. Moreover, for income-tax assessments for assessment years 1974-75 and 1975-76 and wealth-tax assessments for assessment years 1973-74 to 1975-76 the Revenue Audit Party has raised objection on this point and for assessment year 1976-77. I have already applied these provisions in the other cases of assessments.

The view that this constitutes information and reason to believe that income chargeable to tax has escaped assessment/has been under-assessed is supported by the Supreme Court decision in the cases of Kasturbhai Lalbhai and Kalyanji Mavji.

3. Please issue notice under Section 148 for reopening the assessment under Section 147(6) of the Income-tax Act, 1961.

5. After reopening the assessments under Section 147(6), the ITO issued notices under Section 148 of the Act. The ITO after considering the material on record and the contentions of the assessee-trusts came to the conclusion that in all the cases the provisions of Section 13(2)(h) and 9 13(3) were applicable, and he assessed the trusts. He also included the amount of donations made to Public Charitable Trusts and assessed the assessee-trusts accordingly.

6. Being aggrieved with the orders of the ITO the assessee-trusts took up the matter in appeal. Before the learned AAC on behalf of the appellants it was submitted that the reopening of the assessments under Section 147(6) was bad in law. In this connection it was contended that the information that the funds of the trusts were invested in Karamchand Premchand (P.) Ltd. and other concerns was available before the ITO at the time of completing the original assessment under Section 143(3). The ITO after considering such material, passed the assessment orders under Section 143(3). According to the learned counsel the reopening of the assessment under Section 147(6) in the present cases was nothing but merely a change of opinion and the same is not permissible under Section 147(6). The learned counsel also contended that the decisions in the cases of Kalyanji Mavji & Co. v. CIT [1976] 102 ITR 287 (SC) and R.K. Malhotra, ITO v. Kasturbhai Lalbhai [1977] 109 ITR 537 (SC) no longer hold the field, in view of the decision in the case of Indian & Eastern Newspaper Society v. CIT [1919] 119 ITR 996 (SC). The learned AAC after considering the contentions of the appellant and the material on record was of the view that the ITO was not justified in applying the provisions of Section 147(6). According to the learned AAC, the information which the ITO now claims to have possessed was available before him when the assessments were originally finalised. According to him the proceedings now initiated were only a change of opinion. He further opined that the note of the audit party cannot be a proper base for reopening the assessments. According to the learned AAC the ITO himself must have reason to believe that the income has escaped assessment. Thus, the learned AAC held that the initiation of proceedings under Section 147(6) were bad in law. Consequently, he annulled all the assessments under consideration.

7. Being aggrieved with the orders of the learned AAC, the department is in appeal before the Tribunal. The learned departmental representative contended that, on the facts and in the circumstances of the cases, the learned AAC was not justified in holding that the initiation of proceedings under Section 147(6) was not valid. According to him the learned AAC acted illegally while annulling the assessments.

The learned departmental representative, with regard to the reasons recorded and other material available before the ITO at the time of initiation of proceedings under Section 147(6), pointed out that the learned AAC was wrong in pointing out that the present material, on the basis of which the proceedings under Section 147(6) were started, was in the possession of the ITO at the time of completing the assessment under Section 143(3).

The information gathered by the ITO was collected by him after the assessments in question were completed. At the time of filing the returns the assessee trusts filed enclosures and inter ulia stated that the funds of the trusts were invested by way of Fixed Deposits with Karamchand Premchand (P.) Ltd. According to the assessee-trusts, for the purpose of Section 13(2)(h), the fixed deposits were not investments as they were governed by Section 13(2)(a) and none of the companies referred to above were concerns, and any person referred to in Section 13(3) had a substantial interest. According to the learned departmental representative, from the reasons recorded, the ITO gathered information that the persons concerned in Section 13(2) had substantial interest in the companies concerned. Even the assessee-trusts admitted this fact in a letter addressed to the ITO.The ITO also made reference of such admission made by the assessee-trusts, in the reasons recorded by him. The ITO also pointed out j that on the basis of such information he had reason to believe that the income chargeable to tax has escaped assessment. He also pointed out that in the assessment years 1974-75 and 1975-76 and in the wealth-tax assessments for the assessment years 1973-74 to 1975-76 the Revenue Audit also raised objection on this point. The ITO further pointed out that for the assessment year 1976-77 he had also applied the provisions of Section 13(2)(h) and 13(3), in such cases. Thus, the ITO reopened the assessments on the basis of the material which was not on record at the time when the original assessments were completed but such reopening was made on the basis of information which came to the notice of the ITO subsequently. The learned departmental representative further contended that in the present cases the ITO did not reopen the assessment simply on the Audit note but he himself had definite information that in the present cases there was escapement of income.

The learned departmental representative further contended that the decision in the case of Indian & Eastern Newspaper Society (supra) is not against the revenue but on the facts of the present case, the said decision is in favour of the department.

8. On behalf of the asessee, it was contended that a similar point was at issue before the Tribunal in the case of ITO v. Sangeet Kendra Charitable Trust, [IT Appeal Nos. 1876 to 1978 (Ahd.) of 1981] in the respect of the assessment years 1975-76 to 1977-78, vide its order dated 11-2-1982, held that the reopening of assessments under Section 147() was bad in law. Thus, it was contended that the learned AAC was quite correct in holding that there was a change of opinion in the present cases and as such the learned AAC was quite justified in annulling the assessments.

9. I have heard the rival submissions and perused the entire material on record.

10. Before discussing the contentions of the parties, I would like to point out that the decision of the Tribunal, relied on by the assessee-trusts in the present cases, will not stand in the way for deciding the present appeals on their merits. Before the Tribunal the department did not submit the reasons recorded in reopening of assessments. Under these circumstances the Tribunal decided the point against the department. In these cases, the Tribunal also decided the appeals on merits. In the present cases, the learned AAC did not decide the appeals on merits and as such the Tribunal will have no jurisdiction, at this stage, to decide these appeals on merits.

11. The controversy before the Tribunal in these appeals is whether the initiation of proceedings under Section 147(6) is valid or not. I may point out that the validity of the notice under Section 147(6)/148 must be determined with reference to the information in possession of the ITO at the time when the proceedings were initiated. It is not inconceivable that upon a given set of facts coming into the knowledge or possession of the officer, he obtained necessary sanction and initiated reassessment proceedings and during reassessment proceedings, he comes to know of other facts. It is only the former set of facts and not the latter which are relevant in the consideration about the validity of initiation. In the decision in the case of Sidh Gopal Gajanand v. ITO [1969] 73 ITR 226, the Hon'ble Allahabad High Court ruled that at the point when the respective notices were issued under Section 34 of the Indian Income-tax Act, 1922 ('the 1922 Act') or under Section 148 of the 1961 Act, there was material in the possession of the ITO upon which he had reason to believe that income had escaped assessment. The Hon'ble High Court further held that the validity of a notice for reopening of assessment must be examined with reference to the information in the possession of the ITO, when he issued notice.

The discovery of fresh facts during the course of subsequent investigation will not invalidate the notice which when issued was a good notice. A similar view was taken by the Hon'ble Calcutta High Court in the case of Ballarpur Paper & Straw Board Mills Lid. v. CIT [l975] 101 ITR 55.

12. In the reasons recorded the ITO pointed out that the funds of the assessee-trusts were deposited/invested in Karamchand Premchand (P.) Ltd. as well as other concerns of the Ambalal Sarabhai Group. For concerns other than Karamchand Premchand (P.) Ltd., it has been established in this group that the profits earned from them are more than 20 per cent of their profits. Moreover, as admitted categorically in writing for the assessment year 1976-77, in the case of charitable trusts of this group, i.e., Ambalal Sarabhai Group various categories of persons referred to in Section 13(3) were holding beceficially the shares of the company, viz., Karamchand Premchand (P.) Ltd. (now Shahibaug Entrepreneurs), carrying more than 20 per cent of the voting power. Such an admission was made on 18-10-1978. A copy of the letter dated 18-10-1978, in which the said admission was made, is in the Paper Book. The original assessment orders in these years were completed before this date. Under the circumstances, the reply, dated 18-10-1978, which includes the admission could not be available to the ITO when he completed the original assessments in these years. The learned AAC, without pointing out any material, came to the conclusion that at the time of reopening of the assessment under Section 147(6) all such material was before the ITO. So the factual finding given by the AAC is without any base. On the other hand, from the aforesaid discussion and the material on record, it is quite clear that the material, on the basis of which the ITO reopened the assessments under Section 147(6), came in his possession only subsequently.

13. It is practically a settled law by now that two conditions must be satisfied before the ITO can act under Section 147(6) or Section 148.

The first condition is that he must have information which comes into his possession subsequent to the making of the original assessment order and secondly, that the information led to his belief that income chargeable to tax has escaped assessment, or has been under-assessed, or assessed at too lower rate or has been made the subject of excessive relief. Reference may be made to the ratio of the decision in the case of Maharaj Kumar Kamal Singh v. CIT [1959] 35 ITR 1 (SC). A similar ruling was issued by the Supreme Court in the case of CIT v. A Raman & Co. [1968] 67 ITR 11. Their Lordships, clearly laid down that the jurisdiction of the ITO to reassess the income arises if he has, in consequence of information in his possession, reason to believe that income chargeable to tax has escaped assessment. That information must, it is true, have come into the possession of the ITO for the previous assessment. In the said decision, the Supreme Court further made it clear that the expression 'information', in the context of Section 147(6), must mean instruction or knowledge derived from an external source, concerning facts or particulars, or as to the law relating to matters bearing on the assessment. The expression 'information' is understood in the sense of instruction or knowledge derived from an external source concerning facts or particulars or as to law relating to the matter bearing on the assessment. Reference may be made to the ratio of decision in the case of ACED v. Nawab Sir Mir Osman Ali Khan Bahadur [1969] 72 ITR 376 (SO). The same view was expressed by the Supreme Court in the decision, in the case of Indian & Eastern Newspaper Society (supra).

14. In the present cases it is noteworthy that the ITO did not only rely on the audit note but he had himself applied his mind and had reason to believe that, in pursuance of the information in his possession, there was escapement of income or excessive relief was granted to the assessee at the time of original assessments. The present cases are not hit by the ratio of the decision of the Supreme Court in the case of Indian & Eastern Newspaper Society (supra). In the present cases the error was not discovered by the ITO on a reconsideration of the same material. In the said decision of the Supreme Court, the Supreme Court made it clear that an error discovered on a reconsideration of the same material (and no more), does not give the ITO the power to reopen the assessment under Section 147(6).

15. At this stage I would like to point out that in the case of Indian & Eastern Newspaper Society (supra), the Supreme Court made it clear that although an audit party does not possess the power to pronounce on the law it nevertheless, may draw the attention of the ITO to it. Law is one thing and its communication another. In the present cases reopening of the assessment was not made merely on the objection made by the Internal Audit Party. In the reasons recorded, the ITO at first, on the basis of fresh information in his possession, had reason to believe that there was escapement of income in the present cases. After applying his mind, the ITO came to the prima facie conclusion that in the present cases the provisions of Section 13(3) and 13(2)(h) are attracted and exemption under Section 11 was wrongly granted at the time of the original assessments. After stating and such facts the ITO also pointed out that in the assessment years 1974-75 and 1975-76 and in wealth-tax assessments for the assessment years 1973-74 to 1975-76 the revenue audit raised objection on this point. If we read the entire reasons recorded by the ITO it would be abundantly clear that the ITO has independently applied his mind and after considering the definite information which came to his possession, subsequent to the original assessment orders, has reason to believe that there was escapement of income in the present cases. Thus, it is clear that, it is not a case of change of opinion. The question of change of opinion can arise only where in regard to the same assessee the same facts were once decided and are then reopened in the form of reassessment. Reference may be made to the ratio of decision in the case of Raj Bahadur Bhatnagar v.CIT [1975] 98 ITR 382 (All.).

16. It is obvious that, where the ITO gets no subsequent information but merely proceeds to reopen the original assessment without any fresh facts or material, or without any inquiry into the material which forms part of the original assessment, Section 147 (b) would have no application. This conclusion is fully supported by the ratio of decision in the case of Indian & Eastern Newspaper Society (supra).

17. From the aforesaid discussion it is clear that in the present cases the ITO, at the time of initiating proceedings under Section 147(6), had definite information in his possession and as a result of it, he has reason to believe that there was escapement of income in the years of account. So initiation of proceedings under Section 147(6) is perfectly valid.

18. On behalf of the respondents it was pointed out that in similar cases the Tribunal has held that the assessee is entitled to exemption under Section 11. Thus, it was contended that there could be no escapement of income in the present cases.

19. On behalf of the revenue, it was pointed out that against the order of the AAC the department went in appeal before the Tribunal, and the ground of appeal before the Tribunal was that the learned AAC has erred in coming to the conclusion that the ITO was not justified in applying the provisions of Section 147(6). It was also stated that the learned AAC thus erred in annulling the assessment. According to the revenue the learned AAC did not decide the matter on merit. Under the circumstances, the jurisdiction of the Tribunal in the present cases was only with regard to the finding of the learned AAC, whether the initiation of proceedings under Section 147(6) was valid or not. So according to the revenue the jurisdiction of the Tribunal is limited only to the subject-matter of the appeal. Thus it was contended that the Tribunal has no jurisdiction to decide the matter on merit.

20. In my opinion the contention of the assessee could hardly be accepted. Section 254(1) of the Act provides that the Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon, as it thinks fit. Section 255 of the Act, deals with the procedure to be followed in appeal before the Tribunal. Sub-section (6) of the said section provides inter alia that the Tribunal shall, for the purpose of discharging its function, have all the powers which are vested in the income-tax authorities referred to in Section 131, which are as regards, discovery, production of evidence, etc. Rule 11 of the Tribunal rules provides that the appellant shall not, except by leave of the Tribunal, urge or be heard in support of any ground not set forth in memorandum of appeal, but the Tribunal, in deciding the appeal, shall not be confined to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal under this rule. It reads as under : Provided the Tribunal shall not rest its decision on any other ground, unless the party who may be affected thereby has had a sufficient opportunity of being heard on that ground." The said Section 254(1) quoted above, shows that the powers of the Tribunal in an appeal before it extends to passing such an order thereon, i.e., the appeal before it. The powers of the Tribunal, in dealing with appeals, are expressed in Section 254(2) of the Act in the widest possible terms. The word 'thereon' in Section 254, restricts the jurisdiction of the Tribunal to the subject-matter of the appeal. The words 'pass such order as the Tribunal thinks fit' include all the powers (except possibly the powers of enhancement), which are conferred on the AAC by Section 251. If, therefore, the use of the word 'thereon' in Section 254(1) resticts the jurisdiction of the Tribunal to the subject-matter of appeal, then the powers of the Tribunal, vast as they may be, on the same lines as those of the AAC, were to be exercised by the Tribunal within the four corners of such jurisdiction. Recently the Hon'ble Gujarat High Court in the case of CIT v. Steel Cast Corporation [1977] 107 ITR 683, has explained the powers of the Tribunal as under: Accordingly, it must be found out what is the subject-matter of appeal and that can be determined only by finding out what the AAC expressly, or impliedly decided. What is meant by implied decision is that though a point might have been raised before the AAC in his final order the AAC might not have dealt with that point and thereby impliedly rejected it. A party may be aggrieved by an express decision of the AAC or by an implied decision of the AAC. The subject-matter or appeal before the Tribunal can only be the decision, express or implied, of the AAC and the jurisdiction of the Tribunal is restricted to the subject-matter of the appeal. Once the subject-matter of the appeal is determined, the Tribunal has very wide powers to deal with all questions of fact and law, pertaining to that subject-matter of appeal, and it can allow a new question of law to be raised in support of the same claim for relief.

Thus, it is clear that the jurisdiction of the Tribunal which is restricted to the subject-matter of the appeal must not be confused with the powers of the Tribunal to deal with an appeal within the four corners of its jurisdiction. The Tribunal cannot transgress the limits of that jurisdiction, even though in the exercise of that jurisdiction its powers are plenary and very wide. A similar view was taken by the Hon'ble Andhra Pradesh High Court in the case of CIT v. Krishna Mining Co. [1977] 107 ITR 702.

21. In view of the aforesaid discussion, and the law laid down on the subject, it is clear that the jurisdiction of the Tribunal in deciding the appeal is restricted only to the subject-matter of the appeal. In the present cases the subject-matter of appeal is whether the learned AAC was right or wrong, in holding that the initiation of proceedings under Section 147(6) was bad in law. The Tribunal will decide this controversy only while hearing the appeal. Since the learned AAC did not decide the appeal on merits, as such, the Tribunal will have no jurisdiction to decide any controversy which may relate to the merits of the case.

22. For the reasons discussed above, in my opinion the finding of the AAC is not correct. He was wrong in holding that the initiation of proceedings under Section 147(6), by the ITO, was bad in law. Since the learned AAC did not decide the appeals on merits, the matter shall go back to him for deciding all the appeals on merits.


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