2024 (8) TMI 115 - HC - Income Tax

Reopening of assessment u/s 147 - exemption u/s 11 denied - notice claimed the petitioner was engaged in commercial activities and therefore not eligible for exemption - HELD THAT - The reopening cannot be sustained. This is because in the case of Yogiraj Charity Trust 1976 (3) TMI 5 - SUPREME COURT the Apex Court held that if one of the objects of the trust deed is not of a religious or charitable nature and the trust deed confers full discretion on the trustees to spend the trust funds for an object other than of a religious or charitable nature, the exemption under section 4(3)(i) of the 1922 Act is not available to assessee. If the primary or dominant purpose of a trust is charitable, another object which by itself may not be charitable but which is merely ancillary or incidental to the primary or dominant purpose would not prevent the trust from being a valid charity. The court also held that where in a trust deed providing for many charitable objects, the trustees were authorised to open and maintain commercial institutions where work at living wages could be provided to the poor and to contribute to commercial, technical or industrial concerns, institutions, associations or bodies imparting any type of training or providing employment to persons; and the deed gave uncontrolled discretion to the trustees to spend the whole of the trust fund on any of the non-charitable objects of the trust, then income of the trust was not exempted from tax under the said Act. There is not even an allegation that uncontrolled discretion or authority to open or maintain commercial institution was in the object of petitioner. There is not even a finding to that effect. Just because there are certain receipts received by petitioner while conducting its charitable activities, would not make those receipts whatever may be the quantum, to be income from commercial activities. Therefore, there has to be a tangible material to come to the conclusion that there is an escapement of income from assessment to exercise the power to reopen. But if the reasons to believe indicate non application of mind as submitted by Mr. Singh, with whom we concur, the reasons to believe itself cannot be sustained. The reasons to believe proceeds on the basis that an assessment order u/s 143(3) of the Act has been passed when the assessment has been processed only u/s 143(1) of the Act, and also on the basis of judgment, which according to the AO is of Delhi High court, when in reality is that of the Apex Court. All these indicate that the reasons to believe has been formed mechanically and without application of mind. Decided in favour of assessee.

Summary

Issues:
1. Validity of notice issued under Section 148 of the Income Tax Act for AY-2007-08 to a charitable institution.
2. Grounds for challenging the notice based on non-application of mind in forming reasons for reopening.
3. Disposal of objections raised against the notice and subsequent order by the Assessing Officer.
4. Interpretation of relevant legal precedents regarding the eligibility of a trust for exemption under Section 11 of the Income Tax Act.
5. Assessment of whether there is tangible material to support the conclusion of income escapement for reopening the assessment.

Analysis:

1. The petitioner, a charitable institution registered under the Bombay Public Trusts Act 1950, challenged a notice issued under Section 148 of the Income Tax Act for AY-2007-08. The notice was based on the belief that the petitioner's activities were commercial in nature, citing a Supreme Court judgment regarding exemption eligibility under Section 11 of the Act.

2. The petitioner contended that the notice should be set aside due to non-application of mind in the reasons recorded for reopening. It was argued that errors in citing legal judgments and mentioning the passing of an assessment order under Section 143(3) indicated a lack of proper consideration in forming the reasons to believe.

3. The Assessing Officer's order disposing of objections reiterated the mistake in citing the legal precedent and did not address the objection regarding the absence of an order under Section 143(3). The petitioner highlighted that the Income Tax Appellate Tribunal had previously ruled in their favor for AY-2011-12, supporting their entitlement to Section 11 benefits.

4. The High Court analyzed the legal precedents, emphasizing that for a trust to be considered charitable, its primary or dominant purpose must be charitable, even if it has ancillary commercial activities. The court noted that the absence of uncontrolled discretion to engage in commercial activities in the trust deed was crucial, and mere receipts from charitable activities did not automatically classify as income from commercial activities.

5. The court concluded that there was a lack of tangible material supporting the income escapement for reopening the assessment. Errors in citing legal judgments and misrepresenting the assessment order status indicated a mechanical and non-mindful formation of reasons to believe. Consequently, the court upheld the petitioner's challenge, quashing the notice and related order under Article 226 of the Constitution of India.