Fine Arts Society Vs Deputy Director of Income Tax (Exemptions) 1-2 & Ors. (Bombay High Court)
Summary: The Bombay High Court allowed the writ petition filed by The Fine Arts Society, a charitable institution registered under the Bombay Public Trusts Act, 1950 and Section 12AA of the Income Tax Act, 1961, and quashed the reopening notice issued under Section 148 for AY 2007-08. The Assessing Officer had proposed to deny exemption under Section 11 on the ground that receipts of Rs.1,83,99,069/- indicated that the petitioner was engaged in commercial activities. The reopening reasons also relied upon the Supreme Court decision in M/s. Yogiraj Charity Trust Vs Commissioner of Income Tax, New Delhi.
The petitioner challenged the reopening primarily on the ground of non-application of mind. It pointed out that the reasons incorrectly described the judgment in Yogiraj Charity Trust as a decision of the Delhi High Court although it was a Supreme Court judgment. More significantly, the reasons proceeded on the factual premise that the petitioner’s assessment had earlier been completed under Section 143(3), whereas no such assessment order had been passed and the return had only been processed under Section 143(1). The petitioner contended that sanction for reopening had also been sought and granted on this erroneous factual basis.
The High Court held that the reopening could not be sustained. It examined the ruling in Yogiraj Charity Trust and observed that the Supreme Court had dealt with a trust deed containing an object that was not religious or charitable and which gave the trustees uncontrolled discretion to apply trust funds towards such an object. In the petitioner’s case, however, there was not even an allegation or finding that its objects gave uncontrolled discretion or authority to open or maintain a commercial institution. The Court specifically held that merely because the petitioner received certain receipts while conducting its charitable activities, those receipts, irrespective of their quantum, would not automatically become income from commercial activities.
The Court further reiterated that there must be tangible material for the Assessing Officer to conclude that income had escaped assessment before exercising the power to reopen. Where the reasons to believe themselves demonstrate non-application of mind, they cannot sustain reassessment proceedings. In the present case, the reasons incorrectly stated that an assessment under Section 143(3) had been completed when the assessment had only been processed under Section 143(1), and they also incorrectly described a Supreme Court judgment as a Delhi High Court judgment. The Court held that these errors demonstrated that the reasons to believe had been formed mechanically and without application of mind.
Accordingly, the Bombay High Court made the Rule absolute and disposed of the petition in terms of prayer clause (a). It quashed and set aside the notice dated 28 March 2014 issued under Section 148 for reopening the assessment for AY 2007-08, together with the order dated 12 February 2015 disposing of the petitioner’s objections. Thus, the reassessment proceedings founded upon mechanically recorded reasons containing fundamental factual errors were set aside.
Cases Discussed
- M/s. Yogiraj Charity Trust Vs Commissioner of Income Tax, New Delhi, 103 ITR 777 (Supreme Court) —The Supreme Court ruling concerned a trust deed containing non-charitable objects coupled with uncontrolled discretion in the trustees to apply the trust funds towards such objects. The Bombay High Court found no such allegation or finding against The Fine Arts Society. Mere receipts earned while carrying on charitable activities, whatever their quantum, did not by themselves make the receipts commercial income.
- Jainam Investments Vs ACIT & Ors., 2021 (323) CTR Bom 25 (Bombay High Court) — The Court reiterated that an assessment cannot be reopened merely on a change of opinion and that reopening requires tangible material showing escapement of income. Tangible material cannot be illusory, hypothetical or a matter of conjecture.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. Petitioner is a charitable institution registered under the Bombay Public Trusts Act 1950. Petitioner is also registered under Section 12AA of the Income Tax Act, 1961 (the Act) and enjoys exemption under Section 11 of the Act. The matter relates to AY-2007-08. Petitioner is challenging a notice dated 28th March 2014 issued under Section 148 of the Act. The reason for reopening states, (a) that on perusal of return of income, it is noticed that petitioner is engaged in commercial activity having earned income of Rs.1,83,99,069/- from commercial activities; (b) the receipt of this sum indicates that petitioner’s activities are commercial in nature and cannot be considered under the head charitable activities of the trust, and (c) in view of the decision of the Apex Court in M/s. Yogiraj Charity Trust Vs. Commissioner of Income Tax, New Delhi1, wherein it is held that assessee trust being engaged in commercial activity was not eligible for exemption under Section 11 of the Act and the facts in the present case is similar to the case of Yogiraj Charity Trust (Supra), therefore, the claim of petitioner in respect of exemption under Section 11 of the Act amounting to Rs.1,83,99,069/- has to be rejected. It is also recorded in the reasons that sanction under Section 151(1)(2) of the Act is solicited since petitioner’s assessment has been finalized under Section 143(3) of the Act and the period of four years have lapsed from the end of the relevant assessment year.
2. According to petitioner, this notice is required to be set aside primarily on the ground of non application of mind in the reasons recorded for reopening. Petitioner brought to the notice of the AO that judgment in which he has relied upon, was that of the Supreme Court of India and not the Delhi High Court, which indicated non application of mind while forming the reasons to believe. It was also submitted that no assessment order under Section 143(3) of the Act has been passed and having stated in the reasons that such an order has been passed, further indicates non application of mind. It was also submitted that seeking sanction on the basis of the assessment order having been passed under Section 143(3) of the Act and the sanction being accorded relying on that statement, also indicates non application of mind by the sanctioning authority as well. These points also have been raised in the objections filed. It will be apposite to refer to paragraph 13 of the judgment of this court in Jainam Investments Vs. ACIT & Ors.2
13. It is also trite that the Assessing Officer cannot reopen an assessment even within a period of four years merely on the basis of a change of opinion. The Assessing Officer has no power to review an assessment which has been concluded. Certainly where he has tangible material to come to the conclusion that there is an escapement of income from assessment, the power to reopen can be exercised. What is tangible is something which is not illusory, hypothetical or a matter of conjecture. In Export Credit Guarantee Corporation of India Ltd. (Supra), the Court held that even a single ground on the basis of which the assessment is sought to be reopened is valid and within jurisdiction, the notice for reopening of the assessment would have to be upheld. That is once a tangible basis has been disclosed for reopening the assessment. But in the reasons to believe in the present case apart from there being non application of mind as submitted by Mr. Agrawal, with whom we concur, we find not even a single ground is mentioned on the basis of which the assessment is sought to be reopened with regard to the five entities. There is no tangible basis that has been disclosed for reopening the assessment. The Assessing Officer simply states as quoted above “in addition to the above loans, there are certain other loans taken by M/s. Jainam Investment from the concerns owned by Shri Rajesh Jain and Shri Manish Jain (the sons of Shri Bhanwarlal Jain) which are controlled directly or indirectly by Shri Bhanwarlal Jain”. This was always available with the Assessing Officer when the earlier assessment order was passed. Infact as noted earlier, in response to the annual returns, in reply to the notice issued under Sub-Section 1 of Section 142 of the Act, all details of the 58 entities including these five have been provided. Even in the statement of the representative of petitioner recorded on 18th October 2014 under Section 131 of the Act, the representative has disclosed about the unsecured loans taken by petitioner from Shri Rajesh Jain and Shri Manish Jain (the sons of Shri Bhanwarlal Jain).
3. In the order disposing the objections passed on 12th February 2015, which is also impugned in this petition, the AO repeats the mistake that the order in Yogiraj Charity Trust (supra) was passed by the Delhi High Court and not the Apex Court. In the affidavit in reply, of course, it is stated that Yogiraj Charity Trust (supra) relied upon, was passed by the Apex Court. The AO also does not deal with the objections raised by petitioner on the ground of no order having been passed under Section 143(3) of the Act. The AO had come to the conclusion that in view of the commercial activities of petitioner, petitioner was not entitled to exemption under Section 11 of the Act. Mr. Singh submits that the matter was finally decided by the ITAT by its order pronounced on 4th July 2018 holding that petitioner was entitled to the benefit of Section 11 for AY-2011-12.
We have heard the counsel and in our view, the reopening cannot be sustained. This is because in the case of Yogiraj Charity Trust (supra) the Apex Court held that if one of the objects of the trust deed is not of a religious or charitable nature and the trust deed confers full discretion on the trustees to spend the trust funds for an object other than of a religious or charitable nature, the exemption under section 4(3)(i) of the 1922 Act is not available to assessee. If the primary or dominant purpose of a trust is charitable, another object which by itself may not be charitable but which is merely ancillary or incidental to the primary or dominant purpose would not prevent the trust from being a valid charity. The court also held that where in a trust deed providing for many charitable objects, the trustees were authorised to open and maintain commercial institutions where work at living wages could be provided to the poor and to contribute to commercial, technical or industrial concerns, institutions, associations or bodies imparting any type of training or providing employment to persons; and the deed gave uncontrolled discretion to the trustees to spend the whole of the trust fund on any of the non-charitable objects of the trust, then income of the trust was not exempted from tax under the said Act.
There is not even an allegation that uncontrolled discretion or authority to open or maintain commercial institution was in the object of petitioner. There is not even a finding to that effect. Just because there are certain receipts received by petitioner while conducting its charitable activities, would not make those receipts whatever may be the quantum, to be income from commercial activities.
4. Therefore, there has to be a tangible material to come to the conclusion that there is an escapement of income from assessment to exercise the power to reopen. But if the reasons to believe indicate non application of mind as submitted by Mr. Singh, with whom we concur, the reasons to believe itself cannot be sustained. The reasons to believe proceeds on the basis that an assessment order under Section 143(3) of the Act has been passed when the assessment has been processed only under Section 143(1) of the Act, and also on the basis of judgment, which according to the AO is of Delhi High court, when in reality is that of the Apex Court. All these indicate that the reasons to believe has been formed mechanically and without application of mind.
5. In the circumstances, the Rule granted on 27th March 2015 has to be made absolute. Petition disposed in terms of prayer (a), which reads as under:
“(a) This Hon’ble Court may be pleased to issue a writ of certiorari or a writ in the nature of certiorari or any other appropriate writ, order or direction under Article 226 of the Constitution of India calling for the records of the petitioner’s case and after examining the legality and validity thereof quash and set aside the notice dated 28th March 2014 issued by Respondent no.1 under Section 148 of the Act to reopen the assessment for the assessment year 2007-2008 together with the order dated 12th February 2015 passed by Respondent No.2 dealing with the petitioner’s objections.”
Notes:
1 103 ITR 777
2 2021 (323) CTR Bom-25
