2017 (11) TMI 1695 - HC - Income Tax

Reassessment - interpretation of explanation (1) to Section 147 - exception u/s 11 - charitable activity - whether the assessee as local authority instead of AOP - Held that - The reasons recorded for reopening are contrary to the records. The assessee has, during the course of original assessment furnished all its accounts, Balance Sheets and the Revenue account before the AO. Therefore, there is no material suggesting that the assessee has not disclosed the material facts fully and truly for his assessment. - Reassessment proceedings are invalid - Decided in favor of assessee. Regarding charitable activity and exemption u/s 11 - Following the decision in the case of CIT vs. Raj Housing Board Jaipur 2017 (5) TMI 1607 - RAJASTHAN HIGH COURT , Decided against the revenue.

Issues Involved:
1. Legality of quashing the assessment completed under Sections 147/143(3) of the IT Act, 1961.
2. Confirmation of disallowance of ?93,73,063/- out of CER disallowances.
3. Allowing exemption under Section 11 of the IT Act, 1961.
4. Interpretation of explanation (1) to Section 147 of the IT Act, 1961.
5. Treatment of the assessee as a local authority instead of an AOP.

Detailed Analysis:

1. Legality of Quashing the Assessment Completed under Sections 147/143(3) of the IT Act, 1961:
The court examined the reopening of the assessment under Section 147, emphasizing that the Assessing Officer (AO) must demonstrate that the assessee failed to disclose fully and truly all material facts necessary for the assessment. The court noted that the balance sheets and revenue accounts were presented during the original assessment. Citing judgments from the Bombay High Court, it was established that the reopening of an assessment beyond four years requires a clear indication that the assessee failed to disclose material facts. The court concluded that since the assessee had disclosed all necessary material facts, the reopening of the assessment was invalid.

2. Confirmation of Disallowance of ?93,73,063/- out of CER Disallowances:
The court reviewed the Tribunal's decision, which stated, "This ground is not survived as the AO has already assessed the income at NIL." The court found this statement consistent with the Tribunal's earlier findings and dismissed the department’s appeal on this ground.

3. Allowing Exemption under Section 11 of the IT Act, 1961:
The court addressed multiple appeals concerning the exemption under Section 11. The AO had denied the benefit of Section 11, arguing that the assessee's activities were not charitable under the amended provisions of Section 2(15). However, the court referred to its previous decisions, including the case of CIT vs. Jodhpur Development Authority, which established that activities promoting public welfare, even if generating some income, do not lose their charitable character. The court reiterated that the primary objective must not involve profit motive and upheld the Tribunal’s decision to allow the exemption under Section 11.

4. Interpretation of Explanation (1) to Section 147 of the IT Act, 1961:
The court discussed the provisions of Section 147, highlighting that the AO must have "reason to believe" that income has escaped assessment. This belief must be based on the failure of the assessee to disclose fully and truly all material facts. The court emphasized that mere production of account books does not amount to full disclosure if material evidence could have been discovered with due diligence. The court concluded that the AO's reasons for reopening were contrary to the records, as the assessee had disclosed all necessary facts during the original assessment.

5. Treatment of the Assessee as a Local Authority Instead of an AOP:
The court examined whether the assessee should be treated as a local authority or an Association of Persons (AOP). The Tribunal had treated the assessee as a local authority, which was consistent with previous rulings. The court upheld this treatment, noting that the primary objective of the assessee was the integrated development of the region, which falls under the definition of "advancement of any other objects of general public utility" as per Section 2(15).

Conclusion:
The court dismissed the department's appeals, upholding the Tribunal's decisions to quash the assessment under Sections 147/143(3), allow the exemption under Section 11, and treat the assessee as a local authority. The court emphasized the necessity of full disclosure of material facts by the assessee and reiterated that activities promoting public welfare retain their charitable character even if they generate some income.

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