2012 (10) TMI 11 - HC - Income Tax

Assessment in the hands of Beneficiaries of the trust u/s 166 search reassessment - alleged that assessees were not declaring their beneficial interest received from the Trust - assessing authority added the beneficial interest received by the assessees and recomputed the tax liability while initiating penalty proceedings Held that - Income in question has been included in the returns filed by the trustee under Section 161 of the Act on the one hand and a note to that effect has also been appended along with the returns filed by the assessee under Section 139 of the Act - Escapement is when the income is not disclosed or when the suppressed income is identified etc. - All material particulars have been disclosed by the assessees - There is no concealment. Nor has anything been found during the course of search - in favour of the assessees

Issues Involved:

1. Whether the Tribunal was correct in holding that the Assessing Officer invoking the jurisdiction under Section 166 of the Act cannot pass an order of assessment in the hands of the Assessee's beneficiary as was done by the Assessing Officer and reversed by the Appellate Commissioner?
2. Whether the Tribunal was correct in holding that an order of assessment has been passed in the hands of the assessee, when only a return had been submitted and an intimation had been passed under Section 143(1) of the Act which would not amount to regular assessment?

Issue-wise Detailed Analysis:

Issue 1: Jurisdiction under Section 166 of the Act

The Tribunal dismissed the appeals of the Revenue by following its own judgment in a connected case. The assessees, beneficiaries of a trust, had filed returns under Section 139, while the trustee filed returns under Section 161. The Assessing Officer added the beneficial interest received from the trust to the income of the assessees and initiated penalty proceedings, which were annulled by the Commissioner of Income Tax. The Revenue's appeals to the Tribunal were dismissed, leading to the present appeals.

The Tribunal's decision was based on the principle that once the returns filed by the trustee under Section 161 and the returns filed by the beneficiary under Section 139 were assessed, the Assessing Officer could not re-exercise his option under Section 166 to reassess either the trustee or the beneficiary. The Tribunal noted that the beneficial interest had already been taxed in the trustee's returns, and taxing the same income in the hands of the beneficiary would result in double taxation, which is impermissible.

The Tribunal also relied on a Circular issued by the CBDT, which stated that the Income Tax Officer should choose either the trust or the beneficiary for initial assessment and cannot assess the same income in both hands. The Tribunal concluded that the Assessing Officer's discretion under Section 166 could only be exercised before any assessment and not after both returns had been assessed.

Issue 2: Assessment under Section 143(1) and Reassessment Proceedings

The Tribunal held that the returns filed by the trustee and the beneficiary had been assessed, and the issuance of a notice for reassessment was erroneous. The Tribunal noted that the returns filed by the trustee disclosed the beneficial interest, which was assessed, and the beneficiary's returns included a note stating that the beneficial income was already taxed in the trustee's returns. Therefore, the reassessment notice was opposed to law.

The Tribunal further observed that the Assessing Officer had already formed an opinion in the case of a sister assessee, Smt. Revathi Raju, under Section 143(3), and the facts in all the cases were identical. The Tribunal held that the Assessing Officer could not change his opinion for identical assessees who were beneficiaries of the same trust and had filed identical returns. The Tribunal concluded that the initiation of reassessment proceedings amounted to a change of opinion, which is impermissible.

The Tribunal also noted that the notice under Section 143(2) was issued beyond the period of limitation, rendering the notice invalid. The Tribunal held that the assessments had taken place under Section 143(3) in some cases, and the subsequent notice under Section 148 amounted to a change of opinion, which is not permissible.

Conclusion:

The Tribunal's judgment was based on the principle that once the returns filed by the trustee and the beneficiary were assessed, the Assessing Officer could not re-exercise his option under Section 166 to reassess either the trustee or the beneficiary. The Tribunal also held that the initiation of reassessment proceedings amounted to a change of opinion, which is impermissible. The Tribunal concluded that the substantial questions of law were answered in favor of the assessees and against the Revenue.

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