2022 (10) TMI 789 - AT - Income Tax

Reopening of assessment u/s 147 - Eligible 'reason to believe' - assessee society had not applied 85% of its gross income as required under the Income-tax Act, therefore, it was not entitled for claiming exemption u/s.10(23C)(iiiad) - HELD THAT - We are unable to comprehend the very basis for the AO to take recourse to proceedings u/s.147 of the Act. As application of 85% of gross income is by no means a requisite condition for claim of exemption under Sec. 10(23C)(iiiad) of the Act, therefore, in our considered view the A.O had grossly misconceived; or in fact misunderstood the settled position of law, and thus, had wrongly taken recourse to proceedings u/s.147. There is no obligation cast upon an assessee to apply 85% of its gross income to claim exemption under the aforesaid statutory provision. Ostensibly, the AO had wrongly read in the statutory requirement contemplated in the 3rd proviso to Sec. 10(23C), which we are afraid is only applicable to institutions/trusts/funds referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of Sec. 10(23C) of the Act. Be that as it may, as there is no obligation cast upon an assessee to apply 85% of its gross income for claiming exemption u/s 10(23C)(iiiad) of the Act, therefore, the very basis for reopening of the assessee s case by the AO is incorrect and misconceived on the said count. Assessee society had filed an application for registration u/s.12A on 28.11.2007, which was granted on 11.04.2008 i.e. w.e.f. 01.04.2007 from A.Y.2008-09 onwards, therefore, its income for the year under consideration i.e. A.Y.2007-08 would not be exempted and would be exigible to tax - On a perusal of the return of income filed by the assessee although the assessee in its return of income had in substance claimed exemption of its income u/s.10(23C)(iiiad) but had also referred to claim for exemption u/s.11(1)(a) of the Act of Rs. Nil. As the assessee had not claimed any part of its income as exempt under Sec. 11(1)(a) of the Act, therefore, there could have been no basis for the AO to arrive at a bonafide belief that the income of the assessee chargeable to tax had escaped assessment on the said count i.e wrong claim of exemption u/s 11(1)(a) of the Act. On the basis of our aforesaid observation, we are of the considered view that as the reasons to believe forming the very basis for taking recourse to proceedings u/s.147 of the Act in the case of the assessee are absolutely misconceived and incorrect, therefore, the very assumption of jurisdiction on the part of the A.O cannot be sustained and is liable to be struck down. Consequent to want of valid assumption of jurisdiction by the AO the assessment framed by him u/s.147 of the Act, dated 28.03.2014 cannot be sustained and is hereby quashed in terms of our aforesaid observations. Assessment framed by the A.O u/s.147 quashe for want of valid assumption of jurisdiction - Decided in favour of assessee.

Summary

Issues:
1. Validity of the jurisdiction assumed by the Assessing Officer under Section 147 of the Income-tax Act, 1961.
2. Reopening of the case based on the failure to apply 85% of gross income and the grant of registration under Section 12A of the Act.

Issue 1: Validity of Jurisdiction Assumed by AO under Section 147:
The appeal challenged the initiation of reassessment proceedings without tangible material for 'reason to believe' for alleged income escapement. The AO reopened the case citing non-application of 85% gross income for exemption under Section 10(23C)(iiiad) and registration under Section 12A. The AO's reasons were contested as misconceived, as there is no obligation to apply 85% of gross income for exemption under Section 10(23C)(iiiad). The Tribunal found the AO's basis for reopening incorrect and lacking legal mandate, thus invalidating the jurisdiction assumed under Section 147.

Issue 2: Reopening Based on Failure to Apply 85% of Gross Income and Registration under Section 12A:
The AO reopened the case due to the assessee's alleged failure to apply 85% of gross income and the grant of registration under Section 12A. The Tribunal noted that the AO's understanding was flawed as there is no requirement to apply 85% of gross income for exemption under Section 10(23C)(iiiad). Additionally, the claim that registration under Section 12A affected exemption during the relevant assessment year was found to be incorrect. The Tribunal quashed the assessment due to the AO's incorrect assumptions, rendering the reopening and subsequent assessment unsustainable.

In conclusion, the Tribunal allowed the appeal, finding the AO's basis for reopening the case and subsequent assessment to be legally incorrect. The jurisdiction assumed under Section 147 was invalidated, leading to the quashing of the assessment. The Tribunal refrained from delving into other case merits due to the lack of valid jurisdiction.