2022 (5) TMI 1159 - HC - Income Tax

Reopening notice issued u/s.148 in the name of the Polytechnic - Whether no valid proceeding u/s.148 can be initiated by issuing a notice on a person who is not assessable as a distinct person under the Income Tax Act ? - writ-applicant is a Trust running various educational institutions which include N.G. Patel Polytechnic - HELD THAT - As the basic fallacy cum incongruity arising in the stand of the Department is that, for the AY 2016-17 to 2018-19 (wherein assessment orders have been passed u/s.143(3) after filing of this petition), the Department is treating the Polytechnic as a part of the writ-applicant Society while for the Assessment Years 2009-10, 2011-12 and 2012-13, the Department wants to treat the Polytechnic as a separate assessable entity. This basic contradiction in the stand of the Department itself is sufficient to hold that the notice issued u/s.148 on the Polytechnic by treating it as a separate assessable entity, is patently illegal. Conclusions - (i) From the inception of the writ-applicant Society and the Polytechnic, the writ-applicant Society appears to be an assessable entity. The Polytechnic is an entity which is run and managed by the writ-applicant Society, and hence, it is a part of the writ-applicant Society and cannot be considered as a separate assessable entity in the eyes of law under the Income Tax Act. (ii) The writ-applicant Society i.e. Sardar Vallabhbhai Patel Education Society has included all the transactions carried out by the Polytechnic including the transactions carried out with the Bank of Baroda. (iii) The writ-applicant Society for the relevant assessment years has included the above transactions in its return of income. (iv) The allegation of the respondent that the Polytechnic has filed its return of income for the Assessment Years 2005-06 to 2007-08 has been denied in clear terms and the said denial is also supported by the documentary evidences showing that even in the Assessment Years 2005-06 to 2007-08, that the writ-applicant Society i.e. Sardar Vallabhbhai Patel Education Society has included the income of the Polytechnic in its return of income, and therefore, the question of filing a separate return in the name of the Polytechnic does not arise. (v) Even after the filing of this petition, the Department, in the assessment order passed u/s.143(3) for the Assessment Years 2016-17 to 2018-19, has considered the Polytechnic as a part of writ-applicant Society, and hence, the stand of the respondent that the Polytechnic is a separate assessable entity is erroneous in law as well as on facts. (vi) The basic requirement that there has to be income which has escaped the assessment is completely missing as the Department itself has assessed the income of the Polytechnic and other institutes run by the Society as the income of the Society and in fact even in the later assessment years i.e. for the Assessment Years 2016-17 to 2018-19 in scrutiny assessment in 143(3) assessed the income so offered as the income of the writ-applicant Society itself.

Summary

Issues Involved:
1. Whether N.G. Patel Polytechnic is a separate assessable entity under the Income Tax Act.
2. Validity of the reopening notice issued under Section 148 of the Income Tax Act.
3. Compliance with the Court's directions in the first round of litigation.
4. Treatment of income and transactions of N.G. Patel Polytechnic by the Sardar Vallabhbhai Patel Education Society.

Issue-wise Detailed Analysis:

1. Separate Assessable Entity:
The primary issue was whether N.G. Patel Polytechnic, run by the Sardar Vallabhbhai Patel Education Society (the writ-applicant), is a separate assessable entity under the Income Tax Act. The court found that from the inception, the Polytechnic has been managed and run by the writ-applicant Society and is not a separate assessable entity. The Polytechnic's transactions, including those with the Bank of Baroda, were included in the Society's books of accounts and income tax returns. The Income Tax Department had accepted this treatment in past assessment years, including scrutiny assessments under Section 143(3). Therefore, the Polytechnic cannot be considered a separate assessable entity.

2. Validity of Reopening Notice:
The reopening notice under Section 148 was issued on the basis that the Polytechnic had not filed its return of income despite depositing a sizable cash amount in its bank account. However, the court held that the Polytechnic is not a separate assessable entity and its transactions were already included in the Society's returns. The Department's stance was contradictory as it treated the Polytechnic as part of the Society in some years and as a separate entity in others. The court concluded that the reopening notice was invalid because the fundamental requirement of income escaping assessment was not met.

3. Compliance with Court's Directions:
In the first round of litigation, the court had directed the Assessing Officer to reexamine the objections raised by the writ-applicant. The court found that the Assessing Officer did not follow these directions in true letter and spirit and failed to objectively dispose of the objections. The respondent's assertion that the matter would be examined during reassessment proceedings was contrary to the court's directions. The court emphasized that the respondent needed to establish that the Polytechnic was a separate assessable entity, which it failed to do.

4. Treatment of Income and Transactions:
The court noted that the Society had consistently included the Polytechnic's transactions in its income tax returns, which were accepted by the Department. The respondent did not deny that the Society included all transactions carried out by the Polytechnic in its books of accounts. The court highlighted the inconsistency in the Department's treatment of the Polytechnic for different assessment years. The court concluded that the Department's stance was erroneous both in law and on facts, as the Polytechnic was not a separate assessable entity.

Conclusion:
The court summarized its conclusions as follows:
(i) The writ-applicant Society is the assessable entity, and the Polytechnic is part of it.
(ii) The Society included all transactions of the Polytechnic in its books of accounts.
(iii) The Society's returns for the relevant years included the Polytechnic's transactions.
(iv) The allegation that the Polytechnic filed separate returns for certain years was denied and unsupported by evidence.
(v) The Department's treatment of the Polytechnic as part of the Society in later years contradicted its stance for the contested years.
(vi) The requirement of income escaping assessment was not met as the Society's income included the Polytechnic's transactions.

In view of these findings, the court allowed the writ applications and quashed the impugned notices issued under Section 148 of the Income Tax Act.