Case Law Details
Shanmukhananda Fine Arts and Sangeetha Sabha Vs Dy. Director of Income Tax (Exemptions) I-2 and 4 Ors. (Bombay High Court)
Bombay High Court Invalidates Reopening of Income Assessment After 4 Years: A Case Analysis
Introduction: The recent judgment by the Bombay High Court in the case of Shanmukhananda Fine Arts and Sangeetha Sabha vs Dy. Director of Income Tax (Exemptions) I-2 and 4 and Others has significant implications for charitable institutions. The court has declared the reopening of income assessment after the expiry of four years from the relevant Assessment Year (AY) as invalid. This article delves into the details of the case and explores the court’s reasoning behind this crucial decision.
Background: The petitioner, Shanmukhananda Fine Arts and Sangeetha Sabha, is a charitable institution registered under the Bombay Public Trust Act, 1950, and enjoys exemptions under Section 11 of the Income Tax Act, 1961. For AY 2007-08, the petitioner filed its return of income, and the assessment was completed on December 11, 2009, with an assessed income of Rs. 63,51,467.
Notice of Reassessment: In March 2014, the petitioner received a notice under Section 148 of the Income Tax Act, stating that the Assessing Officer (AO) believed that the income for AY 2007-08 had escaped assessment. The reasons provided by the AO highlighted the commercial nature of certain receipts, including hall charges, charges from auditorium users, and compensation from the use of premises.
Objections and Disposal: The petitioner filed objections against the reassessment, arguing that the notice was issued four years after the relevant AY, and therefore, the proviso to Section 147 of the Act should apply. The AO’s contention of failure to disclose fully and truly material facts was disputed by the petitioner. The objections were disposed of by an order dated January 4, 2015.
Court’s Analysis and Decision: The petitioner contended that the reopening notice was barred after four years from the expiry of the relevant AY, as per the proviso to Section 147. The court agreed with this argument, emphasizing that the reopening of assessment is permissible only if there was a failure to disclose fully and truly material facts.
The court highlighted that the reasons for reopening indicated that the AO derived the alleged escaped income from the return of income filed by the petitioner. The petitioner had disclosed the income from hall charges, charges from auditorium users, and compensation for the use of premises. Therefore, there was no failure to disclose material facts.
The court dismissed the AO’s presumption that the petitioner was engaged in commercial activities, asserting that regular income does not necessarily equate to commercial activities. Additionally, the court noted that the Income Tax Department’s attempt to withdraw the exemption under Section 11 had been quashed.
In conclusion, the court ruled in favor of the petitioner, declaring the reopening of the assessment as invalid. The judgment underscores the importance of adhering to the statutory limitations on reopening assessments and the necessity of establishing a genuine failure to disclose material facts.
Conclusion: The Bombay High Court’s decision in the Shanmukhananda Fine Arts and Sangeetha Sabha case serves as a precedent for charitable institutions facing reassessment after the expiration of the stipulated time frame. The judgment reinforces the principle that reopening assessments must be based on a valid reason to believe there has been a failure to disclose material facts. This case reiterates the significance of adhering to procedural safeguards to ensure a fair and just income tax assessment process.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. Petitioner is a Society engaged in the promotion of arts and Petitioner is a charitable institution registered under the Bombay Public Trust Act, 1950. Petitioner is also registered under Section 12AA of the Income Tax Act, 1961 (“Act”) and enjoys exemptions under Section 11 of the Act.
2. For Assessment Year (“AY”) 2007-08, Petitioner filed its return of income. The assessment under Section 143(3) of the Act was completed on 11th December 2009 assessing Petitioner’s income at Rs.63,51,467/-.
3. Petitioner thereafter received a notice dated 29th March 2014 issued under Section 148 of the Act stating that the Assessing Officer (“AO”) has reason to believe that Petitioner’s income for AY 2007-08 has escaped assessment within the meaning of Section 147 of the Act. Petitioner was also provided a copy of the reasons for re-opening. Reasons read as under:
“Reasons for reopening the assessment u/s 147 of the I.T. Act, 1961 M/s Sri Shanmukhanand fine Arts & Sangeet Sabha Assessment Year 2007-08
In this case assessment u/s. 143(3) was completed on 11.12.2009 assessing the Income at Rs.63,51,407/-.
It is noticed the return of income filed for the A.Y. 2007-08 that that assessee trust is engaged in commercial activity and is in receipt of income from the said commercial activities as enumerated under:
|
(I) |
Hall charges | Rs. 2,29,49,250/- |
| (ii) | Other charges received from Auditorium users | Rs. 8,17,216/- |
| (iii) | Compensation received from use of premises | Rs. 46,52,573/- |
It is noticed that the above receipts are commercial in nature and cannot be considered under the head charitable activities of the trust. In view of the decision of Hon’ble Delhi High Court in the case of M/s Yogiraj Charity Trust Vs. Commissioner of Income Tax New Delhi (103 (AIR 777)) wherein it has been held that the assessee trust is engaged in the commercial, activity and therefore not eligible for exemption u/s 11 of the I.T. Act, 1961. Therefore the income of the assessee assessed treating the status of the assessee as ACF.
The facts of the case in the case of M/s Yogiraj Charity Trust are similar in the case of the assessee, and are squarely applicable in the assessee’s case. Considering the facts and circumstances of the case, the claim of the assessee in respect of exemption u/s. 11 amounting to Rs.2, 84,19,039/- has to be rejected and income to that extent to be assessed accordingly.
In view of the above it is clear that the assessee has failed to disclose fully and truly material facts for the assessment as far as the aforesaid issue is concerned, which has entitled into escapement of income to that extent.
In view of the above facts and circumstances of the case, I have reasons to believe that income to the tune of Rs.2,84,19,039/- has escaped within the meaning of Section 147 of the I.T. Act, 1961 in this case and accordingly the case needs to be reopened u/s 147 of the I.T. Act, 1961.”
4. Petitioner filed objections and the objections came to be disposed by an order dated 4th January 2015.
5. Agrawal for Petitioner submitted that re-opening notice having been issued four years after expiry of the relevant Assessment Year, proviso to Section 147 of the Act shall be applicable particularly in view of the fact that assessment under Section 143(3) of the Act has been completed. Mr. Agrawal submitted that there is a bar to reopen after the expiry of four years unless there has been failure on the part of Assessee to truly and fully disclose material facts for completion of assessment. Mr. Agrawal submitted that the reason for re-opening itself indicates that there has been no failure to disclose even though a bald statement has been made that Assessee has failed to truly and fully disclose material facts. Mr. Agrawal submitted reasons provide “it is noticed from the return of income filed ”. Therefore, material, i.e., hall charges, other charges received from the auditorium users and compensation received from use of premises have been picked up from the return of income filed and, therefore, there cannot be any failure to disclose. Mr. Agrawal submitted reasons mention about rejection of exemption under Section 11 of the Act. Even assuming that the Department wished to withdraw the exemption granted under Section 11 of the Act, certainly that cannot be done under the provisions of Section 147 of the Act and those are independent provisions under which the AO may take such steps as advised.
6. Suresh Kumar submitted that from the hall charges, other charges and compensation indicated in the return of income, it was obvious that assessee was engaged in commercial activities in-as-much as it was earning income regularly and without any break and these were not brought to the notice during the assessment proceedings. The fact that assessee was carrying on commercial activity came to light later and hence, the AO was justified in invoking provisions of Section 147 of the Act. These submissions have to be rejected.
7. We would agree with Mr. Agrawal on the aspect of commercial activities alleged by the AO that AO has presupposed that assessee is indulged in commercial activity. Just because assessee has been earning a regular income from letting out its auditorium does not mean Petitioner was indulging in commercial activities. Mr. Agrawal submitted that the Income Tax Department initiated proceedings under Section 12AA(3) of the Act to withdraw the exemption granted to Petitioner under Section 11 of the Act which proceedings have been quashed and set aside.
8. Be that as it may, in view of the proviso to Section 147 of the Act, which squarely applies to the case at hand, re-opening of the assessment is permissible only if there was failure to disclose fully and truly material facts. Reason to believe itself indicates that amount of Rs.2,84,19,039/- which the AO claims to have escaped assessment has been obtained from the return of income filed by Return of income, copy whereof is annexed to the Petition, itself indicates that income from hall charges is Rs.2,29,49,250/-, other charges recovered from auditorium users is Rs.8,17,216/- and compensation received for use of premises Rs.46,52,573/-. Therefore, by no stretch of imagination being a failure to truly and fully disclose. When Petitioner’s case is they are not carrying out any commercial activity, Petitioner cannot be accused of not disclosing that they were carrying out commercial activity.
9. In the circumstances, in our view, relief as prayed for in the Petition has to be granted. Rule issued on 27th March 2015 is made
10. Petition disposed.
WRIT PETITION NO.2689 OF 2015
11. At the request of Mr. Suresh Kumar, stand over to 5th January 2024.
