2013 (10) TMI 706 - AT - Income Tax

Cancellation of registration u/s 12AA(3) of the Income tax act Activities of general public utility u/s 2(15) of the Income Tax Act Held that - Assessee-trust sells off all these plots by organizing a public auction, where through the bidding process and the competition generated in it, the prices of their land keep escalating and finally, the land is sold off to the highest bidder. The surplus income which is generated through the sale of land is again used for buying more land, developing it and selling it the same way, thereby generating more profit. Assessee trust is not merely a mediator in buying and selling of land to the general public. Rather it operates in a business oriented way on the well known principles of profit generation. Therefore, the activities of the assessee trust clearly constitute activities in the nature of trade, commerce or business because no plots are reserved for any socio- economically lower society, there is no element of donation or support to any cause, none of the land is earmarked to be sold at no profit, no loss basis to any person whatsoever, which clearly establish that the element of charity is clearly absent from the activities of the trust, which is contrary to the provisions of section 2(15) of the Act amended w.e.f. 01.04.2009 and the Ld. CIT Bathinda has rightly issued show cause notice to the assessee-trust for canceling the registration already granted to the assessee-trust which the ld. CIT, Bathinda has the power under section 12AA(3) of the Act Decided against the Assessee. Penalty u/s 271(1)(c) of the Income Tax Act Held that - The reasons for levying penalty by the A.O. on account of difference in valuation of closing stock, difference in sale receipts of land sold and other receipts, discrepancies in expenditure account and difference in Bank Balances which could not be explained by the assessee are therefore the concealment of income and therefore, Penalty u/s 271(1)(c) of the Income Tax Act is legal Decided against the Assessee.

Issues Involved:
1. Status of the Assessee as an Association of Persons (AOP) vs. Charitable Trust.
2. Public Welfare Activities vs. Business Activities.
3. Addition on Account of Under-Valuation of Closing Stock.
4. Addition on Account of Understatement of Receipts.
5. Violation of Provisions of Section 40A(3) of the Income Tax Act.
6. Consistency in Method of Accounting.
7. Selection of Case for Compulsory Scrutiny.
8. Imposition of Penalty under Section 271(1)(c) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Status of the Assessee as an Association of Persons (AOP) vs. Charitable Trust:
The assessee contended that it should be considered as a charitable trust under the Punjab Town Improvement Act, 1922, providing public utility services. However, the Income Tax Appellate Tribunal (ITAT) upheld the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)]'s decision, confirming the status of the assessee as an AOP. The ITAT referred to its previous order dated 18.12.2012, which stated that the assessee was involved in business activities rather than charitable activities.

2. Public Welfare Activities vs. Business Activities:
The assessee argued that its activities were for public welfare. However, the ITAT found that the activities were in the nature of trade, commerce, or business. The ITAT cited its earlier decision, noting that the assessee charged fees and fines, earning significant profits, which contradicted the provisions of section 2(15) of the Income Tax Act. The ITAT concluded that the assessee's activities did not advance general public utility.

3. Addition on Account of Under-Valuation of Closing Stock:
The AO added Rs. 3,57,59,054/- to the income on account of under-valuation of closing stock, observing that the assessee did not include development expenses in the valuation. The ITAT upheld this addition, agreeing with the AO and CIT(A) that the development expenses should have been included in the closing stock valuation.

4. Addition on Account of Understatement of Receipts:
The AO made an addition of Rs. 3,91,71,643/- due to a difference between the internal audit report and the audited income and expenditure account. The ITAT upheld this addition, noting that the assessee failed to produce the internal audit report or any supporting evidence to show consistency in its accounting method.

5. Violation of Provisions of Section 40A(3) of the Income Tax Act:
The AO added Rs. 1,64,599/- for violations of section 40A(3), which prohibits cash payments exceeding a certain limit. The ITAT upheld this addition, as the assessee could not provide any exceptional circumstances or evidence to justify the cash payments.

6. Consistency in Method of Accounting:
The assessee argued for consistency in its accounting method. However, the ITAT found no evidence to support this claim and upheld the CIT(A)'s decision, rejecting the assessee's contention.

7. Selection of Case for Compulsory Scrutiny:
The assessee contended that its case was not selected for scrutiny according to the prescribed instructions. The ITAT dismissed this ground, as the assessee failed to provide any evidence of a violation of the selection instructions.

8. Imposition of Penalty under Section 271(1)(c) of the Income Tax Act:
The AO imposed penalties for concealment of income and furnishing inaccurate particulars under section 271(1)(c). The ITAT upheld these penalties, agreeing with the AO and CIT(A) that the assessee's discrepancies in closing stock valuation, understatement of receipts, excess expenditure claims, and unexplained bank balances constituted concealment of income.

Conclusion:
The ITAT dismissed all the appeals filed by the assessee, upholding the AO and CIT(A)'s decisions on all grounds, including the status of the assessee as an AOP, the nature of its activities as business rather than charitable, the additions made for under-valuation of closing stock and understatement of receipts, the penalties imposed under section 271(1)(c), and the selection of the case for scrutiny. The ITAT's decisions were consistent with its previous rulings and the applicable legal provisions.

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