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TMI Blog2005 (3) TMI 390X X X X Extracts X X X X X X X X Extracts X X X X ..... as also been granted registration under section 12A of the Income-tax Act, 1961, by the CIT, Bhubaneswar. In assessment year 1992-93, the Assessing Officer had tried to disallow the claim of the assessee towards exemption under section 11, but in the first appeal, the learned CIT(A) reversed the decision of the Assessing Officer and allowed the exemption as asked for. It appears that the Department did not prefer any further appeal against the said order of the learned CIT(A). 2. The returns of income for all these four years, viz., assessment years 1996-97 to 1999-2000 were filed declaring nil income as the assessee claimed exemption under section 11 of the Income-tax Act. All the returns were duly processed under section 143(1)(a). Later on, all the four assessments were reopened by issue of notices under section 148, all dated 3rd Dec, 2001. Although, initially, the Assessing Officer did not disclose the reasons for reopening the proceedings under section 147, yet later on, however, the said reasons were made available in the show-cause notice served on the assessee on 10th Jan., 2003, and the learned CIT(A) has discussed the said reasons in detail at para 4 in pp. 8 to 13 of h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in the satisfaction file. Ultimately, the learned CIT(A) held the reopening of the proceedings to be valid and legal. 4. The assessee challenges this finding of the learned CIT(A) about the validity of the reopening proceedings before us. It is submitted that assumption of jurisdiction under section 147 is a very important matter and if the Assessing Officer invokes the provisions of this section without proper jurisdictions then the entire proceeding gets vitiated and is liable to be treated as non est and, hence, to be cancelled. It is argued by the Authorised Representative of the assessee that it has been held in umpteen number of cases that unless all the requisite conditions for assumption of jurisdiction under section 147 be satisfied, the assumption of jurisdiction would be invalid and the entire reopening proceeding would become non est. He has relied on the decisions in Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC), Ramnarain Bhoinagarwalla v. ITO [1970] 77 ITR 653 (Cal.), CIT v. Prafulla Kumar Mallick [1976] 103 ITR 418 (Ori.) for this purpose. He has further argued that (for) assumption of jurisdiction under section 148, issuance of a valid notice under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver, addition has been made in the reassessment order for that year on the ground of non-fulfilment of the conditions laid down in sub-section (2) of section 11 regarding accumulation of the income of the assessee. He argues that the reasons recorded by the Assessing Officer about reopening the proceedings seem to be totally silent on this aspect of accumulation of income in excess of the limits provided in sub-section (2) of section 11 for assessment year 1996-97 and about exemptibility under section 11 for the other years. The learned Authorised Representative of the assessee has further argued that section 2(15) as mentioned in the reasons does not have any part to play as after the order of the learned CIT(A) for assessment year 1992-93 holding the assessee to be falling within the ambit of 'charitable institution', which became final on account of lack of further challenge in appellate proceedings by the department, there cannot be any point in considering section 2(15) to be a relevant issue at all for the purpose of forming a belief as to escapement of income. The learned Authorised Representative of the assessee has drawn our attention to the fact that sub-section ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tended that the Assessing Officer does not, therefore, have any jurisdiction to take recourse to reopening proceedings under section 147. The learned Authorised Representative of the assessee has relied upon the following judgments in support of his contentions in this connection: (i) Garden Silk Mills (P.) Ltd. v. Dy. CIT [1999] 237 ITR 668 (Guj.) (ii) Jay Shree Tea & Industries Ltd v. Dy. CIT [2000] 245 ITR 567 (Cal.) (iii) Foramer v. CIT [2001] 247 ITR 436 (All.) (iv) IPCA Laboratories Ltd. v. Gajanand Meena, Dy. CIT [2001] 251 ITR 416 (Bom.) (v) Surat City Gymkhana v. Dy. CIT [2002] 254 ITR 733 (Guj.) (vi) CIT v. Kalvinator of India Ltd. [2002] 256 ITR 1 (Delhi) (vii) Tantia Construction Co. Ltd. v. Dy. CIT [2002] 257 ITR 84 (Cal.) (viii) Mercury Travels Ltd. v. Dy. CIT [2002] 258 ITR 533 (Cal.) (ix) Order of ITAT, "A" Bench, Kolkata, in ITA Nos. 1002 to 1004/Kol./2004, in the case of Chem Crown Exports Ltd.; assessment years 1995-96 to 1997-98." It has furthermore been argued that the Supreme Court has held in the case of Radhasoami Satsang v. CIT [1992] 193 ITR 321 that although, strictly speaking, the principle of res judicata may not be applicable to inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epresentative of the assessee about no change of opinion being permissible in reopening an assessment proceeding under section 147, that since in the instant cases, there were no assessments originally under section 143(3), there was no question of formation of an opinion by the Assessing Officer at the stage of processing the returns under section 143(1)(a) and, hence, there was no case of change of opinion. He also argued that the decisions on the issue of "change of opinion" do not apply to cases where the original assessments/adjustments are under section 143(1)(a) and not under section 143(3). 8. We have heard the rival parties' contentions and perused all the judgments cited by both the sides. We find that most of judgments cited by the learned Departmental Representative are not at all on the issue under consideration. These judgments cited by him are mostly on collateral issues like scope of 'income escaping assessment' under the amended provisions, sufficiency of reasons to believe, whether during the period of four years since the end of the assessment year, failure or omission on the part of the assessee is required for reopening, etc. We, however, find that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nably entertain the belief, the inevitable conclusion is that the Assessing Officer could not have reason to believe that any part of the income of the assessee had escaped assessment. The Gujarat High Court has also held in the case of Stock Exchange that the reasons must have a direct and rational connection with the formation of belief. The Gujarat High Court has furthermore held in cases of VXL India Ltd. and Birla VXL Ltd. that the reasons recorded must be having a live link with the formation of belief about escapement of income and that absence of such link would vitiate the entire reopening proceeding. 9. So far as the present case is concerned, when we test the reasons recorded by the Assessing Officer as revealed in the show-cause notice served on the assessee on 10th Jan., 2003, we find that the said reasons do not have any nexus with the formation of belief about escapement of income. The issue relating to section 10(23C) cannot be considered as a reason for coming to the conclusion about escapement of income as the assessee firstly, did not claim exemption under that section and on the top of it, had made it clear that the requisite notification under that section had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation of belief about escapement of income in the instant case, cannot be considered to be rational and reasonable. This has got nothing to do with the sufficiency of the reasons but in our view the absence of nexus between the reasons recorded and the belief about escapement of income makes the reasons irrational and untenable. We, therefore, hold that the entire exercise of assumption of jurisdiction under section 147 must be considered to be invalid and illegal. In this view alone, we have no hesitation in considering the reopening proceedings under section 147 for the assessment years 1996-97 to 1999-2000 to be invalid and illegal and in cancelling the reassessment order under section 147. We order accordingly. 10. Now, we examine the merits of the case for all the six years under consideration. It has been submitted that the income of the assessee-stock exchange is exempt under sections 11 and 12. It is an admitted fact that the assessee has been granted registration under section 12A(a) of the Income-tax Act by the CIT, Bhubaneswar, by his order No. Judl./52/12A/1993-94, dated 28th November, 1994, and also that in the assessment year 1992-93, it enjoyed exemption in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tuality. The claim of the assessee is purely based on exemption available under section 11 of the Income-tax Act. Since the object clauses of the assessee-exchange clearly speak of purposes considered as 'charitable' under the Income-tax Act and which point has also been accepted by the Department firstly, by registering the assessee as a 'charitable institution' under section 12A and secondly, by accepting the learned CIT(A)'s decision for assessment year 1992-93 declaring the income of the assessee for that year to be exempt under section 11, there is no need to have any general consideration about nature of the assessee's activities or whether such activities can be considered on the face of them to be charitable in nature. We find that the Department's main objection to allow the benefit of exemption under section 11 to the assessee arises out of the complaint about misutilisation of the funds of the assessee towards the so-called personal purposes of some of the office-bearers of the assessee-exchange during these years. The facts of the case start with the formation a Members Welfare Trust (MWT) on 23rd Sept., 1996, by the assessee-exchange through ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject clauses and that it itself cannot be held responsible for the misdeeds, if any, of some of its office-bearers. It has further been mentioned that after SEBI found the conduct of some of the office-bearers to be questionable, those office-bearers were promptly removed on the basis of the SEBI report and new persons have been put in their places. In support of his contention, a host of documents have been placed on our record by the learned Authorised Representative of the assessee, which are as follows: (i) Suit filed on 29th August, 2001, for recovery of Rs. 4,85,124 from Sri Anjani Kumar Singh. (ii) Suit filed on 29th August, 2001, for recovery of Rs. 1,30,25,308 from Sri Babulal Sharma. (iii) Decision of the council dated 22nd September, 2001, to refer the matter of Members Welfare Trust to SEBI and relevant letter dated 24th September, 2001, to SEBI by the assessee-stock exchange. (iv) Report on SEBI inquiry conducted during 1st October, 2001. (v) Order of injunction by the Court dated 14th February, 2002, against property accepted as security against loan. (vi) FIR dated 26th March, 2002, lodged by Sri Ajit Tripathy, IAS, council member and SP, CIT forwarded th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rajasthan High Court in the case of Dy. CIT v. Cosmopolitan Education Society [2000] 244 ITR 494. In that case, the learned CIT(A) had observed that if there was any misutilisation or mismanagement, action could be taken against the members of the society, but from the records and facts, it was not possible to say that any amount of funds of the society was not utilised for educational purposes. The Tribunal concurred with this finding of fact and the High Court also accepted the findings of the Tribunal. In this particular case, the learned Authorised Representative of the assessee has relied strongly on this judgment in support of his contention that the misconduct of the office-bearers of the assessee-exchange, if any, cannot render the activities of the business as non-charitable and the assessee cannot be made to lose its benefit of exemption under section 11 on that account. 14. The learned Departmental Representative has argued in this connection that the defaulting office-bearers all fall within the category of persons referred to in section 13(3) and, hence, the disqualifying clauses of section 13(1)(c) read with section 13(2) of the Income-tax Act. On the other hand, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concluded that if a trust/institution does not comply with the conditions laid down in section 11(2), the amount which becomes liable to assessment under section 11(3) is the entire income accumulated and not merely the income accumulated in excess of the limits specified in section 11(1). The Assessing Officer has relied on the decision in the case of Director of Income-tax v. Girdharilal Shewarian Tantia Trust [1993] 199 ITR 215 (Cal.) in support of this proposition. The learned Authorised Representative of the assessee has submitted that this particular judgment related to the question of allowability of deduction under section 80T in case of capital gains arising to that assessee-trust and does not give any authority in the matter of the question considered herein by the Assessing Officer. On the other hand, he has argued that it has been held in the following judgments that section 11(2) lays down the condition, the compliance of which is necessary to avail of the exemption, but they are merely for the purpose of availing of the further exemption and not for depriving of taking away the exemption granted under clause (a) or (b) section 11(1): (i) CIT v. Shri Kishan Chand Cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 8th Feb., 1994, the membership strength of the assessee was increased for the specific purpose of collection of entrance fees required to be utilised for a building, infrastructure facilities and computers of the assessee-exchange. A copy of the said council resolution along with copies of letters forwarding the resolution and also for approval of entrance fees structure sent to SEBI on 10th Feb., 1994, and 4th June, 1994, respectively, have been placed in the paper book submitted before us. Copies of further letters addressed to SEBI asking for granting approval of the entrance fees structure have also been placed on record. The learned Authorised Representative of the assessee has argued in this connection that the entrance fees were received by the assessee-exchange not as its income but for a specific capital purpose of augmenting its capital structure like building, infrastructures, computers, etc. This was by way of an overriding liability towards the capital purpose attached to the receipts. Hence, the receipts must be held to be capital receipts and not ordinary income of the assessee. He has relied strongly on the judgment of the Calcutta High Court in the case of CIT v ..... X X X X Extracts X X X X X X X X Extracts X X X X
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