No Reassessment of Club if all facts disclosed and considered u/s 143(3) : HC

JUDGMENT

Heard Learned Counsel appearing for the parties.

The petitioner has challenged the initiation of impugned reassessment proceeding under section 147 and notices dated 26th March, 2014 under section 148 of the Income-tax Act, 1961 relating to assessment years 2007-08 and 2008-09. The issue required to be adjudicated in this Writ Petition is about legality of the impugned proceeding initiated under section 147 and notices under section 148 of the Income-tax Act issued after expiry of four years from the end of the relevant assessment year on the basis of a subsequent decision of the Hon’ble Supreme Court reversing the legal position existing at the time of passing of the regular assessment under section 143 (3) of the Income-tax Act, 1961, and in absence of specific allegation by the Assessing Officer against the assessee about the failure on the part of the assessee in disclosing fully and truly any material fact necessary for assessment as appears from the recorded reason for reopening of assessment under section 147 of the Income-tax Act, 1961.

Facts in brief on perusal of relevant records available emerge hereunder.

According to the petitioner it is a member’s club and is registered as a company limited under the provisions of Section 25 of the Companies Act, 1956 and its objects are to provide its members all the useful privileges, advantages, conveniences and accommodation of a club and it is the case of the petitioner that no person other than a member or a guest accompanied by the member or his wife can use the facilities of the club and no outsider is permitted to use such facilities of the club. Each member of the club is a member of the company and each of the company is a member of the club and there is complete identity between the members of the club and the members of the company. It is the case of the petitioner that a member’s club (not a proprietor club) was excluded from taxation on the principle of mutuality in the relevant assessment years 2007-08 and 2008-09.

The petitioner contended that it filed its original return on 24th October, 2007 and on 19th September, 2008 for the assessment years 2007-08 and 2008-09 respectively. The petitioner being a member’s club filed revised return in respect of assessment year 2007-08 claiming that interest on fixed deposits with the bank security deposits with CESC Limited aggregating to Rs. 65,17,692/- was outside the purview of taxation on the principle of mutuality.

The Assessing Officer passed the assessment orders under section 143 (3) of the Income-tax Act on December 3, 2009 relating to assessment year 2007-08 and passed the assessment order in respect of assessment year 2008-09 on 30th December, 2010 accepting the petitioner’s claim of interest on fixed deposits and did not subject the interest income of Rs. 1,13,56,044/- to tax.

On March 26, 2014 the Assessing Officer issued notices under section 148 of the Income-tax Act, 1961, relating to assessment years 2007-08 and 2008-09 respectively by saying that he had reason to believe that income chargeable to tax has escaped assessment within the meaning of Section 147 of the Income-tax Act.

The petitioner by a letter dated April 19, 2014 objected to the aforesaid impugned notices under section 148 and requested the respondents for furnishing the copies of the recorded reasons and which were furnished to the petitioner on June 2nd, 2014. It appears from the recorded reasons by the Assessing Officer that the reopening of assessment of the relevant assessment years are based on a subsequent judgment dated 14th January, 2013, of the Hon’ble Supreme Court in the case of M/s Bangalore Club v. Commissioner of Income-tax & Anr. reported in [2013] 350 ITR 509 (SC) holding that income earned by way of interest from corporate members of a club is taxable income and does not come under the ambit of the mutuality principle, therefore, the tax on the said income should be paid and in view of the aforesaid subsequent decision of the Hon’ble Supreme Court interest earned on deposits with Bank which were members of the club was taxable and not covered by the principle of mutuality and for the aforesaid reason the Assessing Officer stated that he had the reason to believe that the assessment was required to be reopened under section 147 of the Income-tax Act, 1961.

Recorded reasons for reopening of assessment in respect of both the relevant assessment years are almost the same and one of which is hereunder:

“In the instant case I.T. Return was originally submitted on 24-10-2007. Subsequently, the assessee company filed a revised return on 07-07-2008 showing total income at Rs. 10,11,926/-. The return was duly processed u/s. 143 (1). Thereafter, order u/s. 143 (3) for A.Y. 2007-08 was passed in this case on 13-12-2009 assessing total income at Rs. 10,11,928/-.

In the meantime the Hon’ble Supreme Court of India has opined in its order in Civil No. 124 of 2007 (M/s. Bangalore Club v. Commissioner of Income Tax), dated 14 January 2013 that income earned by way of interest from corporate members of a Club is taxable income and does not come under the ambit of the mutuality principle and therefore income tax should be paid.

In the instant case, scrutiny assessment for the assessment year 2007-08 was completed u/s. 143 (3) of the Act on 03-12-2009. From the record it is seen that the assessee has filed a submission dated 25-11-2009 where by the assessee has disclosed interest income of Rs. 65,17,692/- and at the same time has considered as exempt income on the basis of Principles of Mutuality concept. The assessee has enclosed the various judicial pronouncements to back his claim. These are (i) Chelmsford Club v. CIT, Reported in 243 ITR page 89(SC), (ii) CIT v. Beniapukur Club Ltd reported in 226 ITR page 97(SC), (iii) The Full Bench decision of Patna High Court in the case of CIT v. Ranchi Club reported in 196 ITR page 137. The assessee has stated that the Hon’ble Supreme Court has approved the same in 226 ITR at page 97, (iv) ITAT, Rajkot Bench v. Kahiwar Gymkhana & Community Hall reported in 78 ITD 130 (Rajkot), where the Hon’ble Tribunal has considered the judgment of the Ranchi Club Ltd. (supra). Jamshedpur Co-operative Stores Ltd v. CIT (Patna High Court) reported in 157 ITR page 127, where the Hon’ble Patna High Court has considered the judgment of the Hon’ble Supreme Court (supra).

The computation sheet contains a note stating “that the return is being revised considering the judgments of the various H.C. and ITAT where it has been held that interest income of Club from deposits of Surplus Funds is exempt on the Principle of Mutuality. Accordingly the Bank FD interest and security deposit with CESC totalling to Rs. 65,17,692/-has been claimed as exempt income and shown in Schedule EI of ITS 6 at page 25. The……..”

Therefore, in view of the order passed by Hon’ble Supreme Court, it is held that the income of assessee has escaped assessment to the tune of Rs. 65,17,692/- while passing order u/s. 143 (3) dt. 13-12-2009. Considering the above facts, I have reasons to believe that the case is required to be reopened u/s 147 of the I.T Act 1961.)”

Factual and legal position as appears on perusal of relevant records including recorded reason and various judicial precedents relied upon by the petitioner which were existing at the time of passing the assessment order under section 143 (3) of the Income-tax Act are as follows:

Learned Counsel appearing for the petitioner challenging the initiation of impugned proceedings under section 147 and notices under section 148 of the Income-tax Act, 1961, contends hereunder.

Admittedly the notices under section 148 of the Act for both the assessment years were issued after the expiry of four years from the end of the relevant assessment year and there is no specific allegation in the reasons recorded reason that there was any failure on the part of the petitioner to disclose fully and truly any material fact necessary for its assessment.

He contended that in order to reopen an assessment made under section 143 (3) of the Act after the expiry of four years from the end of the relevant assessment year, the reasons recorded must allege that there was any failure on the part of the assessee to disclose fully and truly material facts necessary for its assessment. Such allegation is necessary since it is a condition precedent to the assumption of jurisdiction. In the absence of such allegation, the reassessment proceedings have to be held as without jurisdiction. In support of his contention, has relied on the following judgments:

He further contended that at the time when the petitioner’s assessment was completed, the law as declared by this Hon’ble Court and some other High Courts was that such interest income was to be excluded from taxation. Even in December 2010 (the same month in which the petitioner’s assessment for the assessment year 2008-09 was completed), the Hon’ble Delhi High Court in CIT v. Delhi Gymkhana Club Ltd., [2011] 339 ITR 525 (Del) took the same view. Such view was squarely reversed by the judgment of the Hon’ble Supreme Court in Bangalore Club’s case (supra). He submitted that the subsequent reversal of the legal position by the judgment of the Hon’ble Supreme Court does not authorise the Department to reopen the assessment, which stood closed on the basis of the law as it stood at the relevant time. In such case, there cannot even be an allegation of failure to disclose fully and truly any material fact necessary for assessment and in support of his contention has relied upon the judgment of the Hon’ble Supreme Court in the case of Deputy Commissioner of Income-tax v. Simplex Concrete Piles (India) Ltd., [2013] 358 ITR 129 (SC).

Learned Advocate for the petitioner contends that reliance of the revenue on the judgments of the Hon’ble Supreme Court in A.L.A. Firm v. CIT, [1991] 189 ITR 285 (SC), Income-tax Officer v. Saradbhai M. Lakhani, [2000] 243 ITR 1 (SC) and Maharaj Kumar Kamal Singh v. CIT, [1959] 35 ITR 1 (SC) and of the Hon’ble Andhra Pradesh High Court in Little Angels Educational Society v. Income-tax Officer [2011] 336 ITR 413 (AP) are misplaced. All the three decisions of the Hon’ble Supreme Court relate to reopening of assessment within a period of four years on the basis of information, being a decision which came to the notice of the Assessing Officer subsequent to the assessment. The decision of the Hon’ble Andhra Pradesh High Court has also been relied upon for the same proposition. He submitted that the said principle will not apply where the assessment is sought to be reopened after the expiry of four years from the end of the relevant assessment year on the basis of a subsequent judgment of the Hon’ble Supreme Court reversing the legal position and in such case the Assessing Officer will have to establish failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment. No such allegation can be made where the original assessment is made upon due consideration of the facts and the law on the issues he wants to reopen the assessment by simply on the ground that there is subsequent reversal of the legal position by the Court. That is why the Hon’ble Supreme Court in Simplex Concrete’s case (supra) held that the reassessment proceedings initiated after the expiry of four years were without jurisdiction. He submits that there is no conflict between the judgments of the Hon’ble Supreme Court relied upon on behalf of the revenue and the decision in Simplex Concrete’s case (supra).

Judgments relied upon by the Learned Counsel appearing for the assessee/petitioner in support of the aforesaid proposition of law are briefly referred hereunder.

Relevant portion of the judgment in the case of Commissioner of Income-tax v. Delhi Gymkhana Club Ltd. reported in [2011] 339 ITR 525 (Delhi) which quoted hereunder.

“Admitted facts are that the assessee company is running a recreation club for its members. It has been claiming exemption of income earned from their members on the basis of doctrine of mutuality and by accepting this doctrine, the assessee has been given exemption from paying income tax on the income from their members. In the assessment year which is in question, i.e., 2003- 04, a question arose as to whether the assessee would be entitled to claim exemption even in respect of income generated by investing the surplus funds. The case of the assessee was that the income from FDRs in bank, dividend income, income from Government securities and profit on sale of invest, etc. would also attract the “doctrine of mutuality” and therefore, no tax was payable thereupon. The Assessing Officer (AO) as well as Commissioner of Income-tax (Appeals) did not accept this submission of the assessee. However, the assessee succeeded before the Income-tax Appellate Tribunal (hereinafter referred to as “the Tribunal”), as by the impugned order dated 30-09-2009, the Tribunal has allowed the appeal of the assessee holding that the “doctrine of mutuality” shall apply even on the aforesaid income.

After hearing the learned counsel for both the parties at length, we are of the opinion that the aforesaid finding of the Tribunal is correct on facts and in law, which does not call for any interference.”……….

Relevant portion of the judgment in the case of Tantia Construction Co. Ltd. v. Deputy Commissioner of Income-tax & Ors reported in [2002] 257 ITR 84 (Cal) which quoted hereunder.

“But, in the present case, the reasons disclosed with the affidavit-in-opposition admittedly only show escapement of assessment and that too according to the explanation of the law by the apex court subsequent to the assessment. There is no material that the second requirement of failure on the part of the petitioner to disclose fully and truly any material fact, has even been alleged. Learned counsel for the respondents relied on the law as decided by the apex court in the case of Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 for showing that this court, at this stage of issuance of notice, is not to assess the correctness or sufficiency of materials. But this contention cannot be accepted as at this stage not the correctness or sufficiency of the materials but the very existence of the allegation is being considered and that is within the power of the court when the notice is challenged.”

“……………. But in the present case the respondents have failed to show that the second condition was satisfied at all. Therefore, in such circumstances, I am of the opinion that in the absence of satisfaction of one of the statutory requirements as contained in Section 147, the notices impugned under section 148 cannot be held to be valid as they were issued after the expiry of four years from the last date of the concerned assessment year and there was an assessment under section 143(3) in respect of the assessee.”…………………….

Relevant portion of the judgment in the case of Titanor Components Ltd. v. Assisstant Commissioner of Income Tax, reported in [2012] 343 ITR 183 (Bom) which quoted hereunder.

“…………..Nowhere has the Assessing Officer stated that there is any failure on the part of the assessee to disclosed fully and truly all material facts necessary for assessment. Having regard to the purpose of the section, we are of the view that the power conferred by Section 147 does not provide a fresh opportunity to the Assessing Officer to correct an incorrect assessment made earlier unless the mistake in the assessment so made is the result of a failure of the assessee to fully and truly disclose all material facts necessary for assessment. Indeed, where the assessee has fully disclosed all material facts, it is open for the Assessing Officer to reopen the assessment on the ground that there is a mistake in assessment. Moreover, it is necessary for the Assessing Officer to first observe whether there is a failure to disclose fully and truly all material facts necessary for assessment and having observed that there is such a failure to proceed under section 147. It must follow that where the Assessing Officer does not record such a failure he would not be entitled to proceed under section 147. As observed earlier, the Assessing Officer has not recorded the failure on the part of the petitioner to fully and truly disclose all material facts necessary for assessment year 1997-98. What is recorded is that the petitioner has wrongly claimed certain deductions which he was not entitled to. There is a well known difference between a wrong claim made by an assessee after disclosing all the true material facts and a wrong claim made by the assessee by withholding the material facts fully and truly. It is only in the latter case that the Assessing Officer would be entitled to proceed under section 147. We are supported in this view by a decision of a Division Bench of this Court in Hindustan Lever Ltd. v. R.B. Wadkar, Asst. CIT (No. 1) [2004] 268 ITR 332 (Bom) where in a similar case the Division Bench held that reason that there was a failure to disclose fully and truly that all material facts must be read as recorded by the Assessing Officer and it would not be permissible to delete or add to those reasons and that the Assessing Officer must be able to justify the same based on material record. The Division Bench observed as follows:

“He must disclose in the reason as to which fact or material was not disclosed by the assessee fully and truly necessary for assessment of that assessment year, so as to establish the vital link between the reasons and evidence.”

We find in the circumstances that the impugned notice is not sustainable and is liable to be quashed and set aside. Accordingly, the writ petition is allowed in terms of prayer clauses (a) and (c).”

Relevant portion of the judgment in the case of Simplex Concrete Piles (India) Ltd. v. Deputy Commissioner of Income-tax & Ors reported in [2013] 358 ITR 129 (SC) which quoted hereunder.

“We see no error in the observation made by the Division Bench of the High Court in the impugned period of four years provided under section 147/149 (1A) of the Income-tax Act, 1961, (for short, “the Act”) expires then the question of reopening by the Department does not arise. In any event, at the relevant time, when the assessment order got completed, the law as declared by the jurisdictional High Court, was that the civil construction work carried out by the assessee would be entitled to the benefit of Section 80HH of the Act, which view was squarely reversed in the case of CIT v. N.C. Budharaja and Co. reported in [1993] 204 ITR 412. The subsequent reversal of the legal position by the judgment of the Supreme Court does not authorise the Department to reopen the assessment, which stood closed on the basis of the law, as it stood at the relevant time.”

Learned Counsel appearing for the revenue opposing the Writ Petition has defended and justified the impugned action of reopening of assessment under section 147 and issuance of notices under section 147 of the Income-tax Act, 1961. In its affidavit-in-opposition to the Writ Petition the respondents/revenue has simply denied the allegations made in the Writ Petition and could not substantiate the same with any material and it appears that there are bare denial of the allegations made by the petitioner in the Writ Petition and have no answer to the legal issues as well as admitted facts raised by the petitioner in the Writ Petition. The respondents could not establish that the alleged escaped income in question was not disclosed during the course of original assessment proceeding or that it was not taken into consideration by the Assessing Officer at the time of passing of the assessment order under section 143 (3) of the Act or that the proceeding for reassessment under section 147 of the Act was initiated within four years or that the recorded reason has specifically stated that there was any omission or failure on the part of the assessee to disclose fully and truly all the material facts necessary for assessment in the relevant assessment year. He also could not satisfy me by any provisions of law or any decisions that the impugned proceeding of reopening of assessment under section 147 of the Income-tax Act, 1961 could be initiated beyond four years from the end of the relevant assessment year even in a case where there is no omission or failure on the part of the assessee to disclose fully and truly all the material facts necessary for the relevant assessment years or that the alleged escaped income was detected subsequent to the assessment order and the same was not within the knowledge of the Assessing Officer at the time of regular assessment. The Learned Counsel appearing for the respondent also could not satisfy as to how a subsequent decision of the Hon’ble Supreme Court reversing the legal position existing at the time of passing of the assessment order can be called an omission or failure on the part of the assessee to disclose fully and truly the material fact necessary for the relevant assessment and particularly in a case where four years have expired from the end of the relevant assessment year. Learned Counsel for the revenue simply defended and justified initiation of reassessment proceeding under section 147 of the Act and issuance of the impugned notices under section 148 of the Act by reiterating the recorded reasons for reopening of the assessment by the Assessing Officer.

Before coming to the conclusion on the legal issues involved in the Writ Petition I would like to discuss the following provisions of law which are relevant for adjudication for the same:

Section 149 (1) (b) of the I.T. Act 1961 prescribes the time limit for issue of notice. This section states that no notice under section 148 shall be issued for the relevant assessment year –

Explanation to Section 149 (1) of the I.T. Act 1961 provides that, “In determining income chargeable to tax which has escaped assessment for the purpose of this sub-section, the provision of Explanation 2 of section 147 shall apply as they apply for the purpose of that section.”

Sub-section (2) of section 149 provides that, “that provision of subsection (1) as to the issue of notice shall be subject to the provision of section 151 of the Income-tax Act, 1961.

Considering the relevant provisions of the I.T. Act 1961 as stated hereinabove, and as reference has been made to other provisions of the act, it is pertinent to mention those sections, which are under:-

In Explanation to section 149 (1) of the Act, reference has been made to the Explanation 2 to section 147 and the applicability of the same to the said section.

Before coming to the Explanation to section 2 to section 147, the provision of Section 147 with regard to the income escaping assessment needs to be referred to.

Section 147 provides that, “if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Section 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section.”

The first proviso to section 147 states that, where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 on in response to a notice issue under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year.

Considering the submission of the parties, relevant records, Provisions of law and the decisions relied upon by the parties, in my considered view the impugned notices under section 148 of the Income-tax Act, 1961 and the proceedings under section 147 of the Act are not sustainable in law and should be quashed for the reason that admittedly impugned proceeding initiated under section 147 and notices issued under section 148 of the Income-tax Act, 1961, which were issued after the expiry of four years from the end of the relevant assessment year and in view of the fact that there is no whispering in the recorded reason that there was any omission or failure on the part of the assessee in disclosing fully and truly material facts for assessment and in view of the fact that the Assessing Officer could not establish that the information of alleged escaped income was not within his knowledge and was not considered at the time of passing of the assessment order under section 143 (3) of the Income-tax Act, 1961 and it came to his knowledge subsequent to the assessment order passed under section 143 (3) of the Income-tax Act, 1961 and that subsequent decision of the Hon’ble Supreme Court reversing the legal position prevailing at the time of regular assessment cannot be called an omission or failure on the part of the assessee in disclosing fully and truly the material facts necessary for relevant assessment.

In view of the discussion made above this Writ Petition is allowed and the impugned proceeding under section 147 and notices dated March 26, 2014 under section 148 of the Income-tax Act, 1961 are quashed.

Accordingly this Writ Petition W.P. No. 719 of 2014 is allowed and there will be no order as to costs.

Urgent certified photocopy of this judgment, if applied for, be supplied to the parties upon compliance with all requisite formalities.