Gujarat High Court in the case of Kamleshbhai Dharamshibhai Patel v. Commissioner of Income Tax-III, (2013) 31 taxmann.com 50 (Gujarat) has categorically held that it is an essential condition precedent that any money, bullion or jewellery or other valuable articles or thing or books of accounts or documents seized or requisitioned should belong to a person other than the person referred to in Section 153A of the Act. This proposition of law laid down by the High Court is correct, which is stated by the Bombay High Court in the impugned judgment as well
Full Text of the Supreme Court Judgment / Order is as follows:-
2) All these four appeals are filed by the Commissioner of Income Tax-III, Pune (hereinafter referred to as the ‘Revenue), wherein the respondent is also the same (hereinafter referred to as the ‘assessee’). Even the issue that arises for consideration is identical in all these appeals. Reason for filing four appeals is that the dispute pertains to four Assessment Years, i.e. 2000-01, 2001-02, 2002-03 and 2003-04. In fact, for this very reason the High Court has decided the issue by common judgment dated March 25, 2015, the correctness whereof is challenged by the Revenue in these appeals. Thus, we propose to club all these appeals and proceed to decide by a singular judgment.
3) The issue pertains to the validity of the proceedings which were initiated by the Assessing Officer (for short, ‘AO’) under Section 153C of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’). It may be mentioned here itself that the assessee is an educational institution registered under the Bombay Public Trusts Act, 1950 and the Societies Registration Act, 1860. It also got itself registered under Section 12AA of the Act since the Assessment Year 1994-95. Because of the said registration under Section 12AA of the Act, Sections 11 and 12 of the Act apply to the assessee as per which income earned by the assessee from property held for charitable or religious purposes (Section 11) and income from contributions are exempt from taxation under certain circumstances.
4) It so happened that a search and seizure operation was carried out under Section 132 of the Act on one Mr. M.N. Navale, President of the assessee Society, and his wife on July 20, 2005 from where certain documents were seized. On the basis of these documents, which according to the Revenue contained notings of cash entries pertaining to capitation fees received by various institutions run by the assessee, a notice under Section 153C of the Act was issued on April 18, 2007. It is that notice which is quashed by the Income Tax Appellate Tribunal (ITAT) and the order of the ITAT has been upheld by the High Court by the impugned judgment.
5) With the glimpse of the issue involved and the background in which the same has arisen, we now proceed to state the facts in little detail so as to get the clarity of the matter.
6) As mentioned above, a search was conducted on Mr. M.N. Navale and his wife on July 20, 2005. It is not in dispute that he is one of the trustees of the assessee Society. This search was conducted under Section 132 of the Act. As per the Revenue, certain incriminating documents were recovered which showed that the assessee was taking capitation fee from the students. These documents also allegedly reveal that the activities of the trust were not genuine and were not being carried out in accordance with the trust deed. For these reasons, the assessee was treated as an Association of Person (AOP). Having regard to the complexity involved in the accounts and the changes to be effected on account of the change in the status of the assessee to that of AOP, a special audit under Section 142(2A) of the Act was conducted. On the basis of special audit report, taxable incomes for the Assessment Years 1999-2000 to 2006-07 had been worked out.
7) Since the documents were recovered from Mr. Navale and sought to be used against the assessee, for undertaking this exercise it is imperative that a Satisfaction Note is recorded by the AO of the person searched for use of those documents against the third person (assessee herein), which is a pre- condition for initiation of proceeding under Section 153C of the Act. This Satisfaction Note was recorded on April 18, 2007. In this Note, after discussing the documents which were recovered and seized in the search carried out on Mr. Navale, the AO recorded his satisfaction to the effect that the assessee trust cannot be considered as a genuine trust; it was receiving extra money over and above the fee fixed by the competent authority; it was not adhering to the object of providing education to the masses and managing trustees were using the assessee’s trust for their own benefits. Thus, the notice under Section 153C of the Act was issued for the Assessment Years 2000-01 to 2005-06. Notice was also issued under Section 143(2) for Assessment Year 2006-07.
8) On receipt of the said notice, the assessee filed its revised return for the Assessment Year 2006-07 and in respect of other Assessment Years, it stuck to its original returns. Thereafter, registration of the trust was cancelled under Section 12AA(3) of the Act on October 09, 2007 and the assessee was treated as AOP. Special audit was ordered, as mentioned above, and after the receipt of the Special Audit Report, assessment order was passed by the AO on August 07, 2008 for Assessment Years 1999-2000 to 2006-07. Assessment Year 1999-2000 was covered under Section 147 of the Act, Assessment Year 2006-07 was covered under Section 143(3) of the Act and Assessment Years 2000-01 to 2005-06 were covered under Section 153C read with Section 143(3) of the Act. AO assessed the income of the assessee in the sum of Rs. 3,54,46,432/-. The concluding portion of the assessment order reads as follows:
“16. In view of the totality of facts and circumstances, discussed as above, under Part A and Part B of the order, following conclusions are reached.
(i) The assessee STES charged donations while granting admissions.
(ii) As the registration of the Trust is cancelled on the grounds that activities of the Trust are not genuine and also are not being carried out in accordance with the Trust Deed, the assessee STES will have to be assessed as an AOP.
(iii) Regardless of cancellation of registration, the benefits of sections 11 & 12 are denied in view of applicability of section 13(1)(c) on account of cash and jewellery seized, siphoning/diversion of money, creation of assets much more in value than the nominal incomes returned and known sources of income, payment of rent in excess of reasonable rent and other benefits.
(iv) In view of complexity involved in the accounts and the changes to be effected on account of change in the status of the assessee to that of “AOP”, special audit u/s. 142(2A) has been conducted and the net taxable incomes, for A.Yrs. 1999-2000 to 2006-07, have been worked out on the basis of recast accounts and taxed in this order.
(v) There is total failure on the part of the assessee to explain the seized material, evidencing collection of donations/capitation fee.
(vi) The relevance and correctness of the seized material is clearly established.
(vii) The undisclosed income, on account of donations collected, for A.Y. 2006-07, has been worked out and taxed in this order.
(viii) Seized material clearly shows collection of donations/capitation fee on one hand and expenditure/outgoings on the other hand.
(ix) Instances of siphoning and diversion of amounts, out of receipts on account of donations/capitation fee, are evident from the seized material.
(x) Number of assets of the Principal trustee/related persons have been found/seized as against nominal incomes returned and known sources of income. The assets/benefits derived are possible only because of receipts on account of donations/capitation fee.
(xi) The theory of bigger HUF and obtaining of decree from the Court is an effort only to escape the rigors of laws relating to taxation. The said decree of the Hon. Court has been obtained by misrepresentation and suppression of facts. The same is not accepted by the department and appropriate course of action is contemplated.
(xii) Siphoning of money, diversion of amounts, creation of assets, all out of the receipts on account of donations, and payment of rent which is not reasonable attract the provisions of Section 13(1)(c). These are the benefits derived by persons referred to in Section 13(3).
Subject to the above, the total income and tax for A.Y. under consideration is computed, as below:
