* THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN +WRIT PETITION Nos.24241, 24242, 24243, 24244 & 24245 of 2010 % 01.3.2011 # Little Angels Educational Society, Visakhapatnam, Represented by its Secretary, M.Venu Mohan ...Petitioner VERSUS $ The Income Tax Officer, Ward-3(2), Range-3, Ayakar Bhavan, Dabagardens, Visakhapatnam ...Respondent < GIST: > HEAD NOTE: ! Counsel for Petitioners: Sri A.V.Krishna Koundinya ^Counsel for Respondent: Sri S.R.Ashok ? Cases referred 1) 72 ITR 67 (2003) (Kerala) 2) (2009) 123 TTJ (Visakha) 195 3) (1961) 41 ITR 191 (SC) 4) (2002) 256 ITR 1 (Delhi) 5) (2007) 294 ITR 310 (Delhi) 6) (2010) 320 ITR 561 (SC) : (2010) 2 SCC 723 7) (1987) 164 ITR 216 (Calcutta) 8) (1991) 2 SCC 558 9) (2000) 10 SCC 371 10) (1999) 237 ITR 549 (Bom) 11) (2008) 291 ITR 1 (SC) : (2008) 14 SCC 208 12) AIR 1961 SC 609 13) AIR 1957 AP 368 14) (1971) 3 SCC 20 = AIR 1970 SC 645 15) (1959) 35 ITR 1 (SC) : AIR 1959 SC 257 16) (2008) 281 ITR 394 (Del) THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN WRIT PETITION Nos.24241, 24242, 24243, 24244 and 24245 of 2010 March 01, 2011 Between: Little Angels Educational Society, Visakhapatnam, Represented by its Secretary, M.Venu Mohan … Petitioner And The Income Tax Officer, Ward-3(2), Range-3, Ayakar Bhavan, Dabagardens, Visakhapatnam … Respondent THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN WRIT PETITION Nos.24241, 24242, 24243, 24244 and 24245 of 2010 COMMON ORDER: (Per Hon’ble Sri Justice V.V.S.Rao) These writ petitions are filed challenging the communication dated 06.9.2010 issued by the respondent. By the said communication, the objections raised by the petitioners to the notices dated 30.3.2010, under Section 148 of the Income Tax Act, 1961 (the Act), proposing to reassess the income for five assessment years i.e., 2004-05 to 2007-08 were rejected. As all the matters are interconnected, they are being disposed of by this common order. We will notice the factual background from W.P.No.24241 of 2010. The petitioner is an educational institution registered under Section 12A of the Act with effect from 21.3.2003. They were granted exemption under Section 10(23-C)(vi) of the Act vide orders dated 28.10.2005 passed by the Chief Commissioner of Income Tax, Visakhapatnam for the years 2003-04 to 2005-06. They filed a return of income for the assessment year 2004-2005 showing the taxable income as ‘nil’. The said return was taken up for scrutiny. The respondent issued notice under Section 143(2) and 142(1) of the Act. In response the petitioner produced relevant information and records. The scrutiny was completed accepting the taxable income as ‘nil’ as declared by the assessee with the advent of claiming exemption under Section 10(23-C) of the Act on the excess of income over expenditure. It appears that, during the enquiry, the respondent sought clarification with respect to certain transactions of the petitioner with M/s.Margadarsi Chit Funds (P) Ltd., (hereafter, Chit Fund). Vide their letter dated 08.3.2006, the petitioner submitted an explanation denying that it is “an investment”. The petitioner took up the plea that it is a long term liability, and not an investment or a deposit. For the assessment year 2005-2006, the return of income, filed by the petitioner declaring taxable income as ‘nil’, was accepted after scrutiny, and an assessment order was passed under Section 156 of the Act on 28.8.2006. For subsequent years 2006-07, 2007-08 as well as for the assessment year 2003-04 also the return of income filed by the petitioner, showing taxable income as ‘nil’, was accepted and assessment orders were passed. Be it noted that, when the return of income for the assessment years 2003-04, 2005-06 and 2007-08 was scrutinized, the respondent did not raise any queries with respect to investment/ deposit by the petitioner in the Chit fund. The respondent issued notice dated 30.3.2010 under Section 148 of the Act proposing to reassess the income for the respective assessment years. The petitioner was directed to submit a return in the prescribed form. The petitioner sent a reply requesting the respondent to treat the earlier return as the one filed in response to the notice under Section 148 of the Act. On the request of the petitioner, by a communication dated 02.7.2010, the respondent furnished the reasons indicating that participation in a chit fund scheme, floated by the Chit fund, was in contravention of Section 11(5) of the Act, in which case the condition prescribed under Section 13(1)(d) of the Act become applicable, and the assessee is not entitled to claim exemption under Section 11(1) of the Act. While furnishing reasons, the respondent relied on the judgment of the Kerala High Court[1], and the decision of the Income Tax Appellate Tribunal in M/s.Priyadarshini Educational Academy v ACIT[2], to the effect that any investment made by an assessee, other than in the modes prescribed under Section 11(5) of the Act, disentitled them from claiming under the head ‘current liabilities’ the benefit of exemption under Section 11(1) of the Act. In response to the reasons furnished, the petitioner filed objections on 20.7.2010 explaining that in their balance sheet for the year ending 31.3.2004, shows the amount due to the Chit fund was shown, and that the liability was after various chits were auctioned and funds were realised by the society; and that payment to the Chit fund was towards reducing the chit liability. The petitioner also pleaded that the decision of the I.T.A.T. in Priyadarshini was wrongly applied. The petitioner also submitted that the assessing officer enquired into the matter at the time of original assessment; a reassessment could not be made on change of opinion; and, in the garb of pending reassessment, the respondent could not review the earlier assessment order. The petitioner also raised the plea of limitation contending that the notice of reassessment, having been issued beyond the period of four years after the assessment, was unsustainable. In response to the objections filed by the petitioner , the impugned rejection order was passed. The petitioner also stated that on 19.1.2006 they had made an application for renewal of exemption granted under Section 80G of the Act; the respondent had directed them to furnish certain information for the purpose of granting renewal of exemption; in the said communication dated 01.5.2006, additional information was sought with regard to the payments made to the Chit fund during the periods ending 31.3.2003, 31.3.2004 and 31.3.2005, and they provided information whereafter exemption under Section 80G of the Act was renewed for the period from 01.4.2005 to 31.3.2008. The petitioner, therefore, alleges that all the relevant facts with regard to the payments made to the Chit fund were before the assessing officer when he passed the original assessment orders and the present proposal for reassessment is, therefore, a result of a change of opinion, which is without jurisdiction. In all the matters, the respondent filed counter-affidavits as well as additional counter affidavits with the following averments and allegations. The assessee filed income tax return for the assessment year 2004-05 disclosing an income of Rs.15,20,085/- claiming exemption under Section 10(23-C) of the Act. The same was processed and the assessment order was passed on 28.8.2006. There is nothing in the assessment file or in the said order to show that the assessing officer had considered the issue on the anvil of Sections 11(5) and 13(1)(d) of the Act. The order is also silent about the Chit fund transactions and there is nothing in the assessment file to indicate that the assessing officer had considered the exemption on the ground of alleged investment in a Chit fund in contravention of Section 11(5) of the Act. There is no basis to allege that reopening of the assessment was on the ground of change of opinion. The Chief Commissioner of Income Tax issued proceedings dated 28.10.2005 under Section 10(23-C) of the Act. This enured to the benefit of the petitioner for the assessment years 2003-04 to 2005-06. Subsequently, by order dated 21.9.2007, the Chief Commissioner refused to renew the sanction under Section 10(23-C) of the Act for the assessment year 2006-07 on the ground that the petitioner had violated Section 11(5) of the Act, apart from submitting the application belatedly. The order has become final. By proceedings dated 24.12.2010, the Chief Commissioner revoked the approval granted under Section 10(23-C) of the Act for the assessment years 2003-04 to 2005-06 on the ground that the petitioner had violated Section 11(5) of the Act by investing funds in a Chit fund. It is further stated by the respondent that there was no occasion for the assessing officer to consider the question of denial of exemption under Section 13(1)(d) of the Act on the ground of violation of Section 11(5) of the Act. Having come to know of the legal position, after the decision of the I.T.A.T. in Priyadarshini, the assessing officer had caused reopening of the assessment on 26.3.2010 duly recording reasons and securing the approval of the Commissioner clearly indicating that investment of surplus in a Chit fund entailed forfeiture of the benefit of exemption under Section 11 of the Act in view of the decision in Priyadarshini. It is further stated that the efforts of the petitioner for obtaining renewal of exemption under Section 80G of the Act, and the respondent calling for further information in connection thereto, have no relevance to the validity of reopening the assessment. The respondent asserts that the proposals for considering exemption under Section 80G or Section 10(23-C) of the Act do not form part of the assessment file. The proceedings under the said Sections being distinct, the files are maintained independently. The assessing officer was not having information furnished by the petitioner under Section 80G of the Act and, therefore, the allegation that such information had formed the basis for the change of opinion was not correct. Even if the entire material had come to the knowledge of the assessing officer during the course of the proceedings under Section 80G of the Act, the same does not prevent reopening of the assessment under Sections 147 and 148 of the Act, if such material had not been considered under Section 143(3) of the Act on the touchstone of Sections 11 and 13 of the Act. Whether subscription made to a Chit fund partakes the character of investment or otherwise depends on the facts and circumstances of the case? As the issue involves appreciation of facts, it is not open to the petitioner to invoke the jurisdiction of this Court under Article 226 of the Constitution of India. The petitioner has got an effective remedy by way of appeal to the Commissioner, and a second appeal to the Appellate Tribunal, and a further appeal to the High Court. In view of the availability of effective remedies under the Statute, a writ petition would not, ordinarily, be entertained. The Counsel for the petitioners, Sri A.V.Krishna Koundinya, submits that the notices under Section 148 of the Act are illegal and without jurisdiction as they are the result of change of opinion. When there is no failure on the part of the assessee to make full disclosure of the material facts, on a mere change of opinion the assessment cannot be reopened. The petitioner disclosed all the material when the return of income for the assessment years 2004-05 and 2006-07 were scrutinized. The petitioner had also furnished necessary clarification with regard to the payments made to Chit fund at the time of obtaining renewal of exemption under Section 80G of the Act. The respondent, having completed assessment with all the necessary material before him, cannot reopen the assessment. The exercise of power is arbitrary and illegal. The Counsel would then urge that the notices under Section 148 of the Act for the assessment years 2003-04, 2004-05 and 2005-06 are time barred under Section 147 of the Act as they are issued on 30.3.2010 after expiry of four years from the end of relevant assessment year. Withdrawal of exemption, under Section 10(23-C) of the Act, is only an attempt to sustain the reassessment proceedings and is unsustainable. The Counsel relied on Calcutta Discount Co. Ltd., v Income Tax Officer[3], CIT v Kelvinator of India Ltd[4] (Kelvinator-I), CIT v Eicher Ltd[5] and CIT v Kelvinator of India Ltd[6] (Kelvinator-II). The Senior Counsel for Income Tax, Mr.S.R.Ashok, made the following submissions: (i) In view of the proviso to Section 147(1) read with Section 149 of the Act, the reassessment proceedings are not barred by limitation; (ii) the previous scrutiny of the tax returns under Sections 143(1) and (3) of the Act, for the assessment years 2004-05 and 2006-07, does not amount to a change of opinion. Mere acceptance of the return of income, after scrutiny under Section 143(2) and 142(1) of the Act, is no indication that the assessing officer had applied his mind to the material disclosed by the assessee. At no point of time was the issue of contravention of Section 11(5) of the Act, by making payments to a Chit fund, considered by the assessing officer and, therefore, the condition precedent for exercising jurisdiction under Section 147 of the Act very much exists in the case; (iii) As on 28.8.2006, when the assessment orders were passed for the assessment years 2004-05 and 2005-06, the exemption under Section 10(23-C) of the Act was holding the field, and the assessing officer could not have gone into the question of investments at that point of time; (iv) the subsequent decision of the Tribunal or the Court itself can be a ground for reassessment under Section 147 of the Act; (v) the process of granting/renewing exemption under Section 10(23-C), and renewing exemption under Section 80G of the Act, by the Commissioner are dealt with separately in separate files; they do not form part of assessment files and, therefore, it cannot be said that the assessing officer had knowledge of the alleged disclosure; and (vi) For the assessment year 2006-07 the Chief Commissioner had refused to grant renewal of exemption under Section 10(23-C) of the Act, vide order dated 21.9.2007, in view of the contravention of Section 11(5) of the Act. Subsequently, by order dated 24.12.2010, the Commissioner had revoked the exemption order dated 28.10.2005 for 2003-04, 2004-05 and 2005-06 and, therefore, reassessment proceedings are justified. The Senior Counsel relied on the decisions in Mrs.Leela Nath v CIT[7], A.L.A. Firm v CIT[8], ITO v Saradbhai M.Lakhani[9], CIT v Miss Esther P.Carvalho[10], CIT v Rajesh Jhaveri Stock Brokers (P) Ltd.[11]. Maintainability of writ petitions The question of maintainability of writ petition is intricately connected with the question of lack of jurisdiction under Section 147 of the Act for reassessment, and the consequential impugned communication of reasons on the request of the petitioner. Therefore both the issues need to be considered together. Of course if, on a prima facie consideration, this Court comes to the conclusion that the impugned action for reassessment of income is outside the scope of Section 147 of the Act, any attempt of the respondent would suffer from inherent lack of jurisdiction or a jurisdictional error as the case may be. If, prima facie, it is demonstrable that initiation of reassessment proceedings satisfies the jurisdictional issues, a deeper probe is not called for. In such an event, the petitioner can avail the remedy of an appeal under Section 246(1)(b) of the Act, and thereafter, remedy of an appeal under Section 253(1) of the Act against which an appeal, on question of law, would lie to the High Court under Section 260-A of the Act. Of course against the notice of reassessment under Section 148 of the Act, and the communication of reasons therefor, no appeal would lie. Therefore, to the limited extent of scrutinizing jurisdictional errors, a writ petition may lie. We may however hasten to add that this cannot be a rigid norm. As rightly pointed out by the Senior Counsel for Revenue, the issue whether or not income chargeable to tax escaped assessment generally or as contemplated under Explanation II to Section 147(1) of the Act is a question of fact which would depend on the peculiarities of each case. If such an eventuality arises, the High Court may refuse even to review the jurisdictional questions, relegating the petitioner to the remedy of an appeal under the Act. It is settled law that the writ jurisdiction, especially in tax matters, is not, ordinarily, exercised in view of elaborate appeal system provided by the Statute itself. The authorities in this regard are galore. We would refer to two of them. In C.A.Abraham v ITO, Kottayam[12], a Division Bench of the Supreme Court considered this aspect. The case arose out of a show cause notice issued by the assessing officer for imposing penalty under Section 28 of the Income Tax Act, 1922 (1922 Act). The show cause notice was followed by an order imposing penalty against which an appeal was unsuccessfully filed. When certiorari proceedings were initiated in the Kerala High Court, following the decision of this Court in Mareddi Krishna Reddy v ITO, Tenali[13], the Kerala High Court refused certiorari. Before the Supreme Court, two questions arose: whether the High Court could entertain a writ petition ignoring the alternative remedy provided by the Act, and whether penalty proceedings can be interpreted pointing out deficiencies. The Apex Court held that, “the assessee cannot abandon to resort to machinery provided under the Act and directly invoke remedy under Article 226 of the Constitution of India”. The relevant observations are as below. In our view, the petition filed by the appellant should not have been entertained. The Income Tax Act provides a complete machinery for assessment of tax and imposition of penalty and for obtaining relief in respect of any improper orders passed by the Income Tax authorities, and the appellant could not be permitted to abandon resort to that machinery and to invoke the jurisdiction of the High Court under Article 226 of the Constitution when he had adequate remedy open to him by an appeal to the Tribunal. In Champalal Binani v The Commissioner of Income Tax, West Bengal[14] the Commissioner of Income Tax had issued a notice to the appellant under Section 33-B of the Income Tax Act, 1922 to show cause as to why the orders of assessment for AYs 1953-1954 to 1960-1961 should not be revised. Copies of the notices were sent to the addresses disclosed in the IT Returns. On the date of hearing, none appeared for the assessee. The Commissioner set aside the orders and directed the ITO to make fresh assessment after enquiry and investigation. Against the said order, the appellant moved the High Court of Calcutta by filing a writ petition. Holding that the notice under Section 33-B was not served on the assessee, the learned single Judge set aside the order of the Commissioner. The Division Bench reversed holding that notice was served. The Supreme Court dismissed the appeal and reiterated that when Income Tax Act provides complete and self-contained machinery for redressal of grievances, no party can be allowed to invoke the extraordinary remedy under Article 226 of the Constitution. The relevant observations are as follows (para 5). We deem it necessary once more to emphasize that the Income Tax Act provides a complete and self-contained machinery for obtaining relief against improper action taken by the departmental authorities, and normally the party feeling himself aggrieved by such action cannot be permitted to refuse to have recourse to that machinery and to approach the High Court directly against the action. … A writ of certiorari is discretionary; it is not issued merely because it is lawful to do so. Where the party feeling aggrieved by an order of an Authority under the Income Tax Act has an adequate alternative remedy which he may resort to against the improper action of the authority and he does not avail himself of that remedy the High Court will require a strong case to be made out for entertaining a petition for a writ. Where the aggrieved party has an alternative remedy the High Court would be slow to entertain a petition challenging an order of a taxing authority, which is ex facie with jurisdiction. A petition for a writ of certiorari may lie to the High Court, where the order is on the face of it erroneous or raises question of jurisdiction or of infringement of fundamental rights of the petitioner. (emphasis supplied) In view of the settled legal position, except considering the question of jurisdiction, we are not inclined to go into various other aspects of the matter although both the Counsel made elaborate submissions. We may remind that proceedings under Section 147 of the Act are at the initial stage. The respondent is required to complete the exercise of reassessment following the procedure contemplated under the Act and the Income Tax Rules. After affording an opportunity of hearing to the petitioner, the respondent might as well drop the reassessment proceedings or may pass an order against which there are adequate remedies upto the High Court in the appeal system prescribed under the Statute. Provisions and Precedents Section 34 of the 1922 Act dealt with the procedure in case of, “income escaping assessment.” The Constitution Bench of the Supreme Court in Calcutta Discount Company by a majority of 3 : 2, held that, “to confer jurisdiction under Section 34 two conditions have to be satisfied. The first is that Income Tax Officer must have reason to believe that income, profits or gains chargeable to income tax have been under assessed. The second is that he must have also reason to believe that such “under assessment” has occurred by reason of either (i) omission or failure on the part of an assessee to make a return of his income, or (ii) omission or failure on the part of assessee to disclose fully and truly all material facts necessary for his assessment for that year.” The Court also ruled that if there are some reasonable grounds for thinking that there had been any non-disclosure that could have a material bearing on the question of under assessment and would be sufficient to give jurisdiction to the assessing officer to issue notice of assessment. Whether such grounds and reasons are adequate or not for arriving at the conclusion that there was a non-disclosure of material facts would not be open for the Court’s investigation. In other words to give special jurisdiction to the Income Tax Officer there should exist prima facie grounds for thinking that there had been some non-disclosure of material facts. After repeal of the 1922 Act, Section 34 was enacted as Section 147 of the 1961 Act. There was no difference in the scope and purports of the provision to the extent of conferring jurisdiction on the Income Tax Officer or the method and manner of assessment/ reassessment thereunder. Section 147 of the Act was amended by the Direct Tax Laws (Amendment) Act 1987 with effect from 01.4.1989. After such amendment, the relevant Sections read as under. 147. Income escaping assessment. 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 sections 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, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year Provided 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 relevant assessment year, unless any income chargeable to tax