2005 (3) TMI 390 - AT - Income Tax

Validity of the reopening proceedings - Assumption Of Jurisdiction u/s 147 - income escaping assessment - Stock exchange - charitable institution - Exemption u/s 11 - non-issue of the notification by the competent authority - payments of the entrance fees towards construction of buildings - nature of income u/s 2(24) - Whether the entrance fees of Rs. 3, 90, 00, 000 would have to be considered as part of the revenue income of the assessee and hence the accumulation clause would apply to this amount also ? HELD THAT - We agree with the argument of the learned Authorised Representative of the assessee that section 2(15) as mentioned in the reasons does not have any part to play as after the order of the learned CIT(A) for assessment year 1992-93 holding the assessee to be falling within the ambit of charitable institution which became final on account of lack of further challenge in appellate proceedings by the Department there cannot be any point in considering section 2(15) to be a relevant issue at all for the purpose of forming a belief as to escapement of income. We further note that the survey conducted by the Investigation Directorate of the IT Department as referred to by the learned CIT(A) did not reveal anything new other than the facts relating to the non-issue of the notification by the competent authority and the claim of exemption u/s 11 which facts were already well-known to the Assessing Officer. Thus the results of the survey cannot lead to the conclusion of escapement of income in anyway. Again no mention seems to have been made of the survey in the reasons recorded for reopening . Hence it is finally concluded that the reasons recorded by the Assessing Officer for formation of belief about escapement of income have no live link with such belief and hence the formation of belief about escapement of income in the instant case cannot be considered to be rational and reasonable. This has got nothing to do with the sufficiency of the reasons but in our view the absence of nexus between the reasons recorded and the belief about escapement of income makes the reasons irrational and untenable. We therefore hold that the entire exercise of assumption of jurisdiction u/s 147 must be considered to be invalid and illegal. In this view alone we have no hesitation in considering the reopening proceedings u/s 147 for the assessment years 1996-97 to 1999-2000 to be invalid and illegal and in cancelling the reassessment order u/s 147. We order accordingly. We are of the opinion that there was no sufficient cause for the department to deny the benefit of exemption u/s 11 to the assessee. We therefore direct that there being no violation of any of the conditionalities as laid down in sections 11 and 13 by the assessee as such its income for all the years under present appeals are to be treated as exempt. We are in perfect agreement with the arguments of the learned AR of the assessee in this regard. On a thorough reading of the relevant legal provisions and a study of the connected case law we are of the opinion that the exemptions provided under the sub-sections (1) and (2) of section 11 are independent of each other and the non-compliance of the requirements of sub-section (2) of section 11 does not disentitle the assessee to the basic exemption in respect of 25 per cent of the net total income. Thus the finding of the Assessing Officer on this issue is being struck down. The resolution as pointed out by the learned AR of the assessee clearly lays down the overriding purpose of the payments of the entrance fees towards construction of buildings etc. In no way was the assessee entitled to utilise the amounts of entrance fees received by it in meeting its regular revenue expenses. They were on the capital field and were burdened with the overriding liability of using them for specific capital purposes hence in our view they cannot be treated as the income of the assessee and hence the clause relating to accumulation would not also apply to them. We order accordingly and reverse the findings of the lower authorities in this regard. Ultimately we allow the appeals filed by the assessee by firstly holding that the reopening proceedings as well as the reassessment orders u/s 147 for the assessment years 1996-97 to 1999-2000 to be invalid and by cancelling the said orders we also direct that the assessee be considered as eligible for exemption u/s 11 for each of the years under appeal. So far as assessment year 1996-97 is concerned we direct that the benefit of accumulation of income be allowed separately under sub-sections (1) and (2) of section 11. We also direct that the entrance fees received in that year be treated as capital receipts not to be included within the income of the assessee. In the result the appeals of the assessee are allowed.

Summary

Issues Involved:
1. Validity of reopening proceedings under section 147.
2. Eligibility for exemption under section 11 of the Income-tax Act.
3. Treatment of entrance fees as capital or revenue receipts.
4. Compliance with conditions under section 11(2) regarding accumulation of income.

Detailed Analysis:

1. Validity of Reopening Proceedings under Section 147:

The assessee challenged the validity of the reopening proceedings under section 147 on the grounds of lack of jurisdiction. The Assessing Officer (AO) issued notices under section 148 for the assessment years 1996-97 to 1999-2000 without initially disclosing the reasons for reopening. Later, the reasons included issues regarding section 10(23C) and section 2(75) of the Income-tax Act. The assessee argued that since it had registration under section 12A, there was no basis for raising a fresh dispute regarding section 2(75). The AO's reasons for reopening, based on a survey report, were deemed insufficient as they did not reveal new facts but reiterated known information about non-issuance of a notification under section 10(23C) and the claim of exemption under section 11. The Tribunal concluded that the reasons recorded did not have a live link with the belief about escapement of income, rendering the reopening proceedings invalid and illegal.

2. Eligibility for Exemption under Section 11:

The assessee, a public limited company working as a recognized stock exchange, claimed exemption under sections 11 and 12, having been granted registration under section 12A. The Department's objection was based on alleged misutilization of funds by some office-bearers. However, the Tribunal found that the misutilization was personal misconduct of certain individuals and not reflective of the institution's activities. The Tribunal emphasized that the assessee's activities were charitable in nature, and there was no violation of sections 11 and 13. Consequently, the assessee was entitled to exemption under section 11 for all the years under appeal.

3. Treatment of Entrance Fees as Capital or Revenue Receipts:

For the assessment year 1996-97, the AO treated entrance fees of Rs. 3,90,00,000 as revenue income, arguing they were adjusted towards membership subscriptions. The assessee contended that the entrance fees were collected for specific capital purposes like building infrastructure, as per a council resolution. The Tribunal accepted the assessee's argument, holding that the entrance fees were capital receipts burdened with an overriding liability for specific capital purposes and not regular revenue income. Thus, these fees were not subject to accumulation clauses under section 11.

4. Compliance with Conditions under Section 11(2) Regarding Accumulation of Income:

The AO concluded that non-compliance with section 11(2) conditions would result in the entire accumulated income being liable to assessment under section 11(3). The Tribunal disagreed, stating that exemptions under sections 11(1) and 11(2) are independent, and non-compliance with section 11(2) does not affect the basic exemption under section 11(1). Therefore, the accumulation conditions under section 11(2) did not disentitle the assessee from the basic exemption.

Conclusion:

The Tribunal allowed the appeals, declaring the reopening proceedings and reassessment orders under section 147 for the assessment years 1996-97 to 1999-2000 invalid. The assessee was deemed eligible for exemption under section 11 for all years under appeal. The Tribunal also directed that the entrance fees received in 1996-97 be treated as capital receipts and not included in the income of the assessee.