2018 (5) TMI 440 - HC - Income Tax

Exemption of State Bar Council of Madhya Pradesh under Section 10(23A) - applicability to State Bar Council of Chhattisgarh - Held that - The notification dated 9-8-1966 is a law within the meaning of Section 2(f) of the Act of 2000 which was in existence in the erstwhile State of M.P. exempting the State Bar Council of Madhya Pradesh under Section 10(23A) of the IT Act and would also be applicable to the State Bar Council of Chhattisgarh till it is modified or altered by the competent authority by virtue of the provisions contained in Sections 78 and 79 of the Act of 2000. In present case, it is quite vivid that the notification dated 9-8-1966 issued by the Central Government exempting the State Bar Council of M.P. from taxation of income other than those specifically excluded under Section 10(23A) of the IT Act, was applicable and was in force in the new State of Chhattisgarh with effect from 1-11-2000 and would fall within the meaning of law under Section 2(f) of the Act of 2000 and by virtue of that, the State Bar Council of Chhattisgarh was entitled to have exemption under Section 10(23A) of the IT Act from the operation of IT Act, but that was not understood properly by the Income Tax Authorities and holding that the petitioner Council is not entitled for the said exemption, the petitioner Council was assessed to income tax imposing tax liability to the extent indicated herein-above ignoring the law in force at the time of assessment and the order of recovery was passed. Petitioner Council was entitled and eligible to be exempted by virtue of the notification dated 9-8-1966 read with Sections 2(f), 78 and 79 of the Act of 2000 with effect from 1-11-2000, as it was not modified or altered by the Central Government upon reorganisation of the State of Chhattisgarh with effect from 1-11-2000 by the Act of 2000 and therefore the assessing authority has committed grave jurisdictional error in not holding so and proceeded to assess the tax liability of the petitioner Council under the IT Act

Summary

Issues Involved:
1. Applicability of the 1966 Income Tax exemption notification to the newly formed State Bar Council of Chhattisgarh.
2. Jurisdiction and authority of the Income Tax Department's assessment orders.
3. Retrospective application of the exemption from the date of the formation of the State Bar Council of Chhattisgarh.

Issue-wise Detailed Analysis:

1. Applicability of the 1966 Income Tax exemption notification to the newly formed State Bar Council of Chhattisgarh:
The State Bar Council of Chhattisgarh was constituted under Section 3 of the Advocates Act, 1961, and Section 24(2) of the Madhya Pradesh Reorganisation Act, 2000. The undivided Bar Council of Madhya Pradesh had an exemption from taxation granted by the Central Government on 9-8-1966 under Section 10(23A) of the Income Tax Act, 1961. The petitioner argued that this exemption should apply to the State Bar Council of Chhattisgarh by virtue of Sections 2(f), 78, and 79 of the Act of 2000, which state that laws in force in the undivided state continue to apply to the new states until modified or repealed. The court held that the notification dated 9-8-1966 is a "law" within the meaning of Section 2(f) of the Act of 2000 and thus applies to the State Bar Council of Chhattisgarh until modified or amended by the competent authority.

2. Jurisdiction and authority of the Income Tax Department's assessment orders:
The petitioner challenged the assessment orders for the years 2004-05 and 2005-06, arguing that the exemption granted to the Bar Council of Madhya Pradesh should automatically apply to the Bar Council of Chhattisgarh. The court found that the assessing officer erred in not recognizing the applicability of the 1966 exemption notification to the newly formed Bar Council of Chhattisgarh. The court declared the assessment orders imposing tax liabilities of ?26,34,770/- and ?40,98,770/- for the respective years as without jurisdiction and authority of law, and thus quashed them.

3. Retrospective application of the exemption from the date of the formation of the State Bar Council of Chhattisgarh:
The petitioner applied for a fresh exemption on 4-8-2005, and the Central Government granted the exemption from the assessment year 2006-07 onwards. The petitioner argued that the exemption should have been granted retrospectively from 1-11-2000, the date of the formation of the State Bar Council of Chhattisgarh. The court noted that the Central Government did not provide any reason for not granting the exemption retrospectively and found that the petitioner was entitled to the exemption from 1-11-2000. The court modified the Central Government's order dated 10-5-2007 to grant the exemption from the date of formation of the State Bar Council of Chhattisgarh.

Conclusion:
The court quashed the impugned assessment orders and the penalty proceedings, restraining the Income Tax Authorities from recovering the assessed tax from the petitioner. The court emphasized the duty of the State Bar Council to ensure quality legal services, promote legal literacy, law reforms, and provide legal assistance to the poor and downtrodden. The writ petitions were allowed to the extent outlined, with each party bearing its own costs.