2006 (2) TMI 509 - AT - Income Tax

Summary

Issues Involved:
1. Validity of notice issued under section 143(2).
2. Validity of notice issued under section 147/148.
3. Allowance of exemption under section 10(22) of the Income-tax Act, 1961.
4. Addition of income after disallowing the claim of exemption under section 10(22).
5. Assessment of bank deposits as the income of the assessee.
6. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Validity of Notice Issued Under Section 143(2):
The primary issue was whether the notice under section 143(2) was served within the statutory period of twelve months from the end of the month in which the return was filed. The Tribunal examined the dates of filing returns, issuance, and service of notices for each assessment year in question.

For the assessment years 1991-92 and 1997-98, it was found that the notices were issued after the stipulated period, rendering the assessments invalid. Specifically, for the assessment year 1991-92, the notice was issued on 30-11-1999 and served on 7-12-1999, which was beyond the statutory period. Similarly, for the assessment year 1997-98, the notice was issued on 30-11-1999, which was also beyond the statutory period. Consequently, the assessments for these years were quashed.

For the other assessment years (1992-93, 1993-94, 1994-95, 1995-96, and 1996-97), the Tribunal found that the notices were served within the statutory period based on the affidavit of the Process Server and other documentary evidence, thus upholding the validity of the notices.

2. Validity of Notice Issued Under Section 147/148:
The ground challenging the validity of notices issued under section 147/148 was not pressed by the assessee during the hearing and was therefore rejected.

3. Allowance of Exemption Under Section 10(22):
The Tribunal examined whether the assessee-society existed solely for educational purposes and not for profit. The assessee-society was running a recognized school and had a memorandum stipulating that its income would be applied solely towards educational purposes. The Tribunal found no evidence that the society's funds were diverted for personal benefit. The Tribunal also considered the findings of the Settlement Commission, which had concluded that the society and its Principal, Shri S.S. Khanna, were separate entities and that the society's income could not be attributed to Shri Khanna.

Based on these findings, the Tribunal held that the assessee-society was entitled to exemption under section 10(22) for all the assessment years in question.

4. Addition of Income After Disallowing the Claim of Exemption Under Section 10(22):
The Tribunal found that the income estimated by the Assessing Officer was based on conjectures and surmises without proper examination of the evidence. The Tribunal noted that the society had maintained books of account, which were destroyed in a flood, and that complete records for subsequent years were available and accepted by the Department. The Tribunal directed that the exemption under section 10(22) be granted, and the additions made to the income were deleted.

5. Assessment of Bank Deposits as the Income of the Assessee:
The Tribunal found that the deposits in the bank accounts of Shri S.S. Khanna and his family members were not substantiated to be from the society's funds. The Settlement Commission had already determined the income of Shri Khanna, and the Tribunal held that the CIT(A) was not justified in ignoring this order. Therefore, the additions made on account of bank deposits were deleted.

6. Initiation of Penalty Proceedings Under Section 271(1)(c):
Given the Tribunal's findings that the assessee-society was entitled to exemption under section 10(22) and that the income could not be assessed as done by the Department, the initiation of penalty proceedings under section 271(1)(c) became irrelevant. The Tribunal disposed of these grounds accordingly.

Conclusion:
The Tribunal allowed the appeals of the assessee, quashing the assessments for the years where notices under section 143(2) were not served within the statutory period and granting exemption under section 10(22) for all the assessment years involved. The additions made to the income and the assessment of bank deposits were deleted, and the initiation of penalty proceedings under section 271(1)(c) was rendered irrelevant.