2006 (8) TMI 177 - HC - Income Tax

Trust search and seizure - challenge to order passed u/s 132(12) - contention is that they are exempt from provisions of IT Act because of exemption available to trust u/s 10(22) and, hence in appeal u/s 132(12), respondent was duty bound to record a finding about this status of the petitioners and as that has not been recorded, the said order is liable to be quashed - impugned order to the extent it refuses to consider plea of the petitioners for exemption u/s 10(22), is hereby quashed

Summary

Issues:
Challenge to order under section 132(12) of the Income-tax Act, 1961 regarding exemption for public trust under section 10(22).

Detailed Analysis:

Issue 1: Challenge to Order under Section 132(12)
The petitioners, a public trust and its President, challenged the order dated July 29, 1992, passed by the Commissioner of Income-tax under section 132(12) of the Income-tax Act, 1961. They contended that as a public trust, they were exempt from income tax under section 10(22) of the Act. The petitioners sought a finding on their exemption status, which was not recorded by the Commissioner. The High Court had stayed assessment proceedings under section 148 of the Act. The petitioners argued that the Commissioner should have considered their exemption claim before passing the order.

Issue 2: Consideration of Exemption in Section 132(11) Proceedings
The petitioners argued that the Commissioner failed to exercise jurisdiction under section 132(11) by not evaluating their claim for exemption under section 10(22) of the Act. The respondents contended that the issue of exemption cannot be decided in limited jurisdiction under section 132(11) and should be considered in section 148 proceedings. They cited legal precedents to support the separate consideration of exemption for each year and the nature of proceedings under section 132(5).

Issue 3: Judicial Precedents and Interpretation of Provisions
The court referred to legal precedents emphasizing the need for fairness and caution in summary assessment proceedings under section 132(5). It highlighted the provisional nature of orders under section 132(5) and the availability of appeal mechanisms for the assessee. The court noted that the power of search and seizure is extraordinary and must be interpreted liberally in favor of the assessee. It stressed the importance of considering the entitlement to exemption during such proceedings to prevent unnecessary harassment of the assessee.

Judgment:
The High Court found that the Commissioner had failed to consider the petitioners' claim for exemption under section 10(22) of the Act, leading to a premature decision. The court quashed the order dated July 29, 1992, and remanded the matter back to the Commissioner to consider the exemption claim within three months. The findings on exemption would be treated as an order under section 132(12) of the Income-tax Act. The interim orders staying assessment proceedings were to remain in force. The court emphasized the need for the Commissioner to prima facie evaluate the exemption claim to ensure a fair assessment process.