2024 (7) TMI 350 - HC - Income Tax

Reopening of assessment u/s 147 - amount of fees which was left undeclared in the ITR - ITAT has invalidated the reassessment proceedings on the basis of difference in quantum of capitation fee collected by the assessee - HELD THAT - AO had sufficient cogent reasons to initiate reassessment proceedings and the ITAT has erred in holding that the said proceedings were bad in law. It cannot be gainsaid that the difference in the quantum of capitation fee could not be a valid reason for setting aside the reassessment proceedings at the juncture of issuance of notice under Section 148 of the Act. Undeniably, the material seized by the Revenue and the admission made by P. Mahalingam, as already noted above, would constitute fresh tangible material which would warrant reassessment of the income of the assessee. Thus, the reopening of assessment ought not to have been interdicted by the ITAT vide the impugned order. Exemption u/s 11 - A salient aspect which emanates from Section 11 of the Act is that the usage of the phrase wholly relates to the purposes and not to the property of the trust. The word wholly is strikingly different from the word mainly . Rather, the former should be understood to be closely akin to the phrase solely . Put otherwise, there is no scope for the purposes being partially public or religious in nature. It would not be sufficient if some of the objects are charitable or religious in nature. In the present case undisputedly, the assessee has engaged itself in charging capitation fee which is dehors the objective of the charitable trust. Therefore, the claim of the assessee for exemption as per Section 11 and 12 of the Act does not hold any water. In view of the aforenoted pronouncements of law, the ITAT has wrongly sustained the exemption claimed by the assessee. Lastly, it is seen that the ITAT has placed reliance on the decision of the ITSC in the assessee s own case for the other AYs for computing the excess of income over the expenditure. It is however trite that the order of the ITSC is final and conclusive for a particular AY for which the application has been filed. Accordingly, in view of the aforesaid, the impugned order passed by the ITAT is hereby set aside. The substantial questions of law raised in the instant appeal are answered in favour of the Revenue.

Summary

Issues Involved:
1. Validity of reassessment proceedings under Section 148 of the Income Tax Act, 1961.
2. Entitlement to exemption under Sections 11 and 12 of the Income Tax Act for a charitable trust engaged in commercial activities.
3. Application of the Income Tax Settlement Commission's (ITSC) decision for other assessment years.

Detailed Analysis:

1. Validity of Reassessment Proceedings under Section 148:
The Revenue challenged the ITAT's decision to invalidate reassessment proceedings for AY 2007-08. The ITAT had quashed the notice under Section 148, citing non-application of mind by the AO due to differences in the quantum of income escapement. The Court emphasized that at the stage of issuing a notice under Section 148, the AO only needs to form a prima facie view that income has escaped assessment. The sufficiency or correctness of the material is not to be considered at this stage. The Court cited Supreme Court rulings in *Sri Krishna Pvt. Ltd.* and *Raymond Woollen Mills Ltd.* to support this view. The AO had sufficient reasons based on seized documents and admissions to initiate reassessment. Thus, the ITAT erred in invalidating the reassessment proceedings.

2. Entitlement to Exemption under Sections 11 and 12:
The ITAT upheld the exemption under Section 11 for the assessee, a charitable trust registered under Section 12A and Section 10 (23C) (iv). However, the Court noted that the trust was engaged in charging capitation fees, which is contrary to the charitable purpose of education. The Court referenced Supreme Court decisions in *TMA Pai Foundation* and *P.A. Inamdar*, which held that charging capitation fees is not a charitable activity. The High Court of Madras in *Mac Public Charitable Trust* also ruled that such activities render the trust's objectives non-genuine, disqualifying it from exemptions under Sections 11 and 12. Consequently, the ITAT wrongly sustained the exemption claimed by the assessee.

3. Application of ITSC's Decision for Other Assessment Years:
The ITAT relied on the ITSC's decision for AYs 2008-09 and 2009-10 to compute the excess of income over expenditure for AY 2007-08. The Court clarified that the ITSC's order is final and conclusive only for the specific assessment year for which the settlement application was filed. This principle was reinforced in the Court's recent decision in *Orchid Infrastructure Developers (P.) Ltd. v. PCIT*. The ITAT's reliance on the ITSC's decision for subsequent years was incorrect and liable to be quashed.

Conclusion:
The Court set aside the ITAT's order, ruling in favor of the Revenue on all substantial questions of law. The reassessment proceedings under Section 148 were deemed valid, the exemption under Sections 11 and 12 was denied due to the trust's engagement in non-charitable activities, and the ITAT's reliance on the ITSC's decision for other assessment years was quashed. The appeal was allowed, and the case was disposed of along with any pending applications.