COMMISSIONER OF INCOME TAX EXEMPTINOS vs. RAJASTHAN HOUSINGH BOARD

JUDGMENT 27/11/2017

explanation (1) to Section 147 of the IT Act, 1961? (ii) Whether, on the facts and in the circumstances of the case and in law, the ld. ITAT was correct in mentioning in respect of confirming disallownace of Rs.93,73,063/- out of CER disallowances that- “This ground is not survived as the AO has already assessed the income at NIL.” inspite of the fact that the ITAT itself not allowed the exemption u/s 10(20) for the year under consideration and appeal of the department is pending before the Hon’ble High Court on the issue of 10(20) for the A.Y. 2005- 06?”

circumstances of the case and in law, the ld.

to Section 2(15)?”

ii)

circumstances of the case and in law, the ld.

to Section 2(15)?”

circumstances of the case and in law, the ld.

to Section 2(15)?”

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the assessee without appreciating the fact that ii)

circumstances of the case and in law, the ld.

to Section 2(15)?”

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 the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure59 on the part of the assessee to make a return under section 139 or in response to a notice issued under subsection (1) of section 142 or section 148 or to disclose fully and truly all material facts59 necessary for his assessment, for that assessment year: [Provided further that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject-matter of any appeal, reference or revision, which is chargeable to tax and has escaped assessment.] Explanation 1.—Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily59 amount to disclosure within the meaning of the foregoing proviso. Explanation 2.—For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :— (a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax ; (b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return ; (c) where an assessment has been made, but— (i) income chargeable to tax has been underassessed ; or (ii) such income has been assessed at too low a rate ; or (iii) such income has been made the subject of excessive relief under this Act ; or (iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed.] [Issue of notice where income has escaped assssment

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and Para 6.3 of the Tribunal which reads as under:-

reopened beyond four years. The AO cannot improve upon the reasons for reopening the assessment or bridge the lacunae later. If the reasons disclosed do not indicate the fulfillment of the jurisdictional requirement, the reopening is invalid. In the present case the reasons as recorded by the AO for reopening the case u/s 148 of the Act reads as under :- "Facts of the case are that the assessee filed the return of income for the A.Y. 2005-06 on 29.10.2005 declaring total income at Rs. 1053790/- and the assessment was completed vide order u/ 143(3) dated 22.10.2007 at income of Rs. 40797633/-. The matter is before High Court on the issue of status. The department treated it as AOP while Tribunal has treated it as Local authority. The case records were examined in connection with assessment proceedings for AY 2009-10. As per the accounting system of the assessee (followed in AY 2005-06) also, income component of the assessee is loaded/added to the cost of land and construction to decide selling price of the property in respect of projects undertaken in a particular year. These income components are in the name of interest, maintenance and repairs of tools and plants and administrative expenses. These are shown in the debit side of the P&L account with negative sign instead of crediting in P & L account directly. Thus profit is included in sales. When properties are handed over these are shown as 'sales written off'. As a matter of fact a sale price is determined on anticipation basis covering the cost of project. Thus the sale price which is accounted for in the P & L /Works account can be called anticipated sale price (ASP). Or in other words anticipated sale price (ASP) .................................... the current year is realized in the current year or subsequent year by way of adjusting of sale price in the work account. The component of income/gross profit in the ales of property effected/accounted during the year along with net revenue surplus including income from other activities is displayed as under - Sale of property effected/accounted for Rs. 1017157933/- Factors loaded in cost Interest Rs. 89862655/- Maintenance and repairs of tools & plant Rs. 4825430/- Administrative expenses Rs. 98005444/- Gross profit comprised in sales Rs. 192693529/- Net revenue surplus for the year Rs. 1863511/-

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Claim of Contingency & Equalization Reserve (CER) However, it was found that the assessee has been claiming Contingency & Equalization Reserve (CER) in works account. In this year also the assessee has debited Rs. 52766150/- as CER in works account. CER Fund is created by the assessee by charging certain percentage on development/construction of works properties as per costing principles of RHB. The liability so created is utilized to compensate for various loses on account of unforeseen circumstances, on account of freezing of cost of property which may be necessitated in some cases, awards to be paid as result of litigation etc in property disposal, to compensate loses on account of sick contracts, if required. Thus this CER is not ascertained liability. It is contingent liability which I not allowable. Thus apparently income to the extent of Rs. 52766150/- has escaped assessment. This escapement was on account of failure of the assessee to disclose the accounts in proper Income from auction of plots- Besides this it is also seen that the assessee does not show profit from auction of plots. It is seen that substantial part of sale is from auction of properties. In auction, properties fetch more price than the normal price. As stated above, a sale price is determined by the Board on anticipation basis covering the cost of project. This sale price which is accounted for in the P&L/Works account can be called anticipated sale price (ASP). Or in other words ASP is the price realized on sale which includes profit. This profit on property constructed in the current year is realized in the current year or in subsequent year by way of adjusting of sale price in the works account. But in case of auction the profit is more which is not accounted for in P&L. Before auction properties, Reserve price is based on ASP which in normal circumstances would be more than ASP. In case of auction, the property will fetch much more price than the ASP as reserve price is fixed on considering the market value. During assessment proceedings for AY 2009-10 the assessee explained that the difference of reserve price and auction price of plots/shops is already considered/booked on market value under the head "sales written off" and accordingly net properties are shown in balance sheet. As long as sales are effected on ASP these contentions of the assessee is required to be accepted. However, if the auction is done assessee would be getting much more than the reserve price. As mentioned above reserve price itself would be more than ASP. Excess profit realized over ASP which is adjusted

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as sales written off does not go to P&L but it reduces the closing works valuation. As per details filed/available in records the asseee earned sale proceeds from auctioned properties as under - Auction of plots Rs. 84612516/- Auction of shops Rs. 22440687/- Rs.10,70,53,203/- Since complete details are not available it would be reasonable to estimate that the assessee earned 30% on sale price in respect of auctioned property which is not accounted for in the P&L account. Thus there was suppression of income to the extent of R. 3,21,15,960/-. This escapement was on account of assesee's failure to present account in transparent manner. The accounts submitted are prepared in convoluted manner and actual realization and costing involved are not reflected in normal style. In view of above, I have reason to believe that income to the extent of Rs. 8,48,82,110/- (Rs. 52766150/- + 3,21,15,960/-) has escaped assessment on account of failure on the part of the assessee to present its accounts in transparent manner." We find that the reasons are contrary to the records. The assessee has, during the course of original assessment furnished all its accounts, Balance Sheets and the Revenue account before the AO. Therefore, there is no material suggesting that the assessee has not disclosed the material facts fully and truly for his assessment. Therefore, respectfully following the judgment of the Hon'ble Bombay High Court rendered in the case of Dynacraft Air Controls vs. Sneha Joshi & Others, 355 ITR 102 (Bom.), 832, wherein it has been observed as under:-

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“11. The cases of underassessment or excessive relief which are deemed cases of escapement of income leave no scope for an argument that they are not the cases of income having escaped assessment. If the AO prima facie finds or discovers that the case falls in any of the clauses of Expln. 2, then those cases will be of deemed cases of income that has escaped assessment and without anything more beyond such find or discovery, he can initiate the proceedings under s. 147 of the Act. On a proper interpretation of s. 147 of the Act, it would appear that the power to make assessment or reassessment within four years of the end of the relevant assessment year would be attracted even in cases where there has been a complete disclosure of all relevant facts upon which a correct assessment might have been based in the first instance, and whether it is an error of fact or law that has been discovered or found out justifying the belief required to initiate the proceedings. In our view, the words "escaped assessment" where the return is filed, are apt to cover the case of a discovery of a mistake in the assessment caused by either an erroneous construction of the transaction or due to its non-consideration, or, caused by a mistake of law applicable to such transfer or transaction even where there has been a complete disclosure of all relevant facts upon which a correct assessment could have been based.

the standards of proof required for coming to a final decision. A belief though justified for the purpose of initiation of the proceedings under s. 147, may ultimately stand altered after the hearing and while reaching the final conclusion on the basis of the intervening enquiry. At the stage where he finds a cause or justification to believe that such income has escaped assessment, the AO is not required to base his belief on any final adjudication of the matter. In the present case, from the first assessment it appeared to the AO, while making an order in respect of the asst. yr. 1993-94, that the amount of taxable income in the form of capital gains in respect of the transfer of the land which was treated as stock-in-trade on 19th September, 1990, in favour of the firm and the tax payable thereon not being ascertained, there was escapement of income. Since the AO at the first assessment in the year 1991-92 never really formed an opinion on the question whether there was a transfer on 19th September, 1990, of the land in question to the firm and that the amounts credited to the accounts of the partners who had contributed the lands to the firm, were meant to be the price of the land which was to be actually paid from the collections received by the firm from membership fees as soon as received, as was envisaged admittedly in para. 11 of the partnership deed, there was no question of any change of opinion when on the relevant facts being found the AO, while protectively assessing the petitioner-assessee for the year 1993-94, noted that this was a case for issuance of a notice under s. 148, which came to be issued thereafter. When the amount of taxable income and of the tax payable thereon were not ascertained at all by the AO in respect of the transfer made by the assessee in favour of the firm on 19th September, 1990, there obviously was no opinion formed in that regard and consequently, there would not arise any question of a mere change of opinion. In cases where the AO had overlooked something at the first assessment, there can, in our opinion, be no question of any change of opinion when the income which was chargeable to tax is actually taxed as it ought to have been under the law but was not, due to an error committed at the first assessment.

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AO never enquired into the matter at all or that he never honestly believed that a mistake has been made, the result of his investigation and initiation of the proceedings under s. 147 of the Act cannot be challenged on the ground of want of jurisdiction. The AO has to determine the facts and the law in order to give him jurisdiction to proceed and if in the determination of this he goes wrong, the proper remedy for the assessee would be to go up in appeal and to have the case referred to the High Court under the provisions of the Act. A writ of prohibition under Art. 226 cannot be issued against the AO in such cases.” in another case, Dr. Amin’s Pathology Laboratory vs. P.N. Prasad, Joint Commissioner of Income Tax and Ors. (No.1), 2001 (252) ITR 673, wherein it has been observed as under:-

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case, no such reason has been assigned in the order sheet. That the Assessing Officer does not allege escapement of income for failure to disclose full facts. In this connection, reliance was placed on the judgment of the Bombay High Court in the case of N. D. Bhatt, I. A. C. of I. T. v. I. B. M. World Trade Corporation [1995]216 ITR 811(Bom) . The judgment of the Bombay High Court has no application to the facts of the present case. In that matter, the appeals pertain to the assessment year 1959-60 to the assessment year 1973-74. It was a decision rendered by the Bombay High Court in the context of pre-amended law whereas, after the introduction of changes with effect from April 1,1989, the scope of reassessment has been widened. After the amendment, the only restriction put in the Section is "reason to believe". That reason has to be a reason of a prudent person. That reason should be fair and not necessarily due to failure of the asses-see to disclose fully or partially some material facts relevant for assessment. That, if any item has escaped from assessment which was otherwise includible within the assessment and the Assessing Officer notices it subsequently by his own investigation or by reason of some information received by him, one cannot say that it constitutes change of opinion : see Praful Chunilal

Patel

v.

M.J.

Makwana [1999]236ITR832(Guj) . However, in the present case, the period of four years has since elapsed. Therefore, the proviso to Section 147 comes into the picture. Under the said proviso, no action can be taken after four years unless any income chargeable to tax has escaped assessment by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. Therefore, it was contended on behalf of the assessee that, in the present case, there is no allegation of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. In the present matter, as stated above, the assessee has been following the mercantile system of accounting for all items of expenditure and income except for all collections which are under cash basis. A reading of the assessment order clearly shows that the Assessing Officer failed to notice an important item, viz., an amount of Rs. 6,70,758 which represented unpaid purchases. The (16 of 23) [ITA-193/2017]

assessee-firm had claimed expenses in respect of all purchases. However, an amount of Rs. 6,70,758 represented unpaid purchases. It is for this reason that the Assessing Officer has come to the conclusion for issuance of notice under Section 148 that the assessee-firm had suppressed an income to the extent of Rs. 6,70,758. Under Explanation 1 to the proviso, mere production of account books from which material evidence could have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the proviso. Therefore, mere production of the balance- sheet, profit and loss account or account books will not necessarily amount to disclosure within the meaning of the proviso. In the present case, the facts show that the Assessing Officer overlooked the aforestated item. That, he noticed it subsequently. That, at the time of passing the original order of assessment, he could not be said to have opined on the above item. Therefore, there was no change of opinion. Therefore, in the present case, the impugned notice is sustained.

of opinion; (2) Reassessment proceedings will be invalid in case the assessment order itself records that the issue was raised and is decided in favour of the assessee. Reassessment proceedings in the said cases will be hit by principle of "change of opinion".

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(3) Reassessment proceedings will be invalid in 973/2011 decided on 29th November, 2011 and 6884/2010 decided on 1st December, 2011. In the last decision it has been observed:

conclusion and income chargeable to tax has escaped assessment, resort to Section 263 of the Act is available and should be resorted to. But initiation of reassessment proceedings will be invalid on the ground of change of opinion.” and decision of Gujarat High Court in Praful Somabhai Patel (HUF) vs. Income Tax Officer, [2016] 73 taxmann.com 184 (Gujarat), wherein it has been observed as under:-

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the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word "reason" in the phrase "reason to believe" would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. ITO MANU/SC/0103/1992 : [1991] 191 ITR 662, for initiation of action under section 147(a) (as the provision stood at the relevant time) fulfilment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is "reason to believe", but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction. Merely an audit report, in our opinion, would not authorize the Assessing Officer to reopen the assessment even within the period of 4 years from the end of the relevant assessment year, when the said material was already before him when the original assessment was made. Any such attempt on his part would be based on mere change of opinion. To reiterate when a claim was processed at length and after calling for detailed explanation from the assessee, the same was accepted, merely because a certain element or angle was not in the mind of the Assessing Officer while accepting such a claim, cannot be a ground for issuing notice for reassessment. Therefore, in our view, the Assessing Officer cannot change his opinion, which he has already accepted in his assessment order. We are of the opinion that the Tribunal has committed an error

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in reversing the finding of CIT (A). Accordingly, we answer the question posed for our consideration in favour of the assessee and against the revenue and the Tribunal has committed an error in holding that the reopening proceedings are valid, legal and within the jurisdiction of the Respondent. Even otherwise, the method of valuation is in order and since the valuations are made under two different Acts, they cannot be made basis for reopening of valuation. Accordingly, all these appeals are allowed.

“27. In the backdrop of settled position of law discussed hereinabove, adverting to the facts of the present case, indubitably, JDA is a statutory body constituted and established under the provisions of Section 3 of JDA Act with a main object to secure the integrated development of Jodhpur Region and for that purpose to discharge inter alia the functions of Urban Planning including preparation of Master Development Plan and Zonal Development Plans; formulation and sanction of the projects and schemes for the development of Jodhpur Region or any part thereof; execution of (20 of 23) [ITA-193/2017]

the project and schemes directly by itself or through a local authority or other agency; coordinating execution of projects or schemes for the development of Jodhpur Region supervision or otherwise ensuring adequate supervision over the planning and execution of any project or scheme the expenses of which in whole or in part are to be met from Jodhpur Region Development Funds; preparing schemes and advising the concerned authorities, department and agencies in formulating and undertaking schemes for development of agriculture horticulture, forestry, dairy development, transport, communication, schooling, cultural activities, sports, medicine, tourism and similar other activities; to prepare Master Plan for traffic control and management; devise policy and programmes of action for smooth flow of traffic and matters connected therewith; undertaking housing activity in Jodhpur Region etc., are essentially the functions, which promote the welfare of the general public. Of course, (3 of 6) [ITA-568/2009] while discharging the said functions, the JDA also discharges function to acquire, hold, manage and dispose of property movable or immovable as may be deemed necessary and also enters into contract, agreements or arrangements with any person or organization may deem necessary for performing its function and in this process, it might be earning income but the primary object of the JDA certainly does not involve any profit motive whatsoever. It is pertinent to note that as per the provisions of Section 51 of the JDA Act, for the purpose of discharging the statutory functions, "The Jodhpur Region Development Fund" is created to which all money received by the authority is credited including amount of contribution to be made by the State Government, such other money as may be paid to the authority by the State Government, Central Government or any other authority or agency by way of grant, loans advances or otherwise, income derived from premium on second and subsequent sale of vacant land, income from levy on vacant land, all fees, costs and charges received by the JDA under the JDA Act or any other law for time being in force, all money received by the JDA from the disposal of land buildings and other property movable and immovable and other transactions including lease money, urban assessment development charges and other similar charges and all money received by way of rents and profits or in any other manner or from any other source. A fortiori, as per the mandate of Section 54 of the JDA Act, all property funds and other assets vesting in the JDA shall be held and applied by it for the purposes and subject to the provisions of the Act. Suffice it to say that the entire funds of the JDA is mandatorily required to be utilized for discharging the functions to achieve the object of integrated development of Jodhpur Region. Thus, predominant object of the JDA being to secure the integrated development of (21 of 23) [ITA-193/2017]

the Jodhpur Region which is undoubtedly falls within the expression 'advancement of any other objects of general public utility' within the definition of Section 2(15) of the Act of 1961 and therefore, on account of profit being earned by it through some of the activities, undertaken by it, which are ancillary or incidental to the main object of general public utility, it does not cease to be charitable in character so as to render it ineligible to claim registration under Section 12A read with Section 12AA of the Act of 1961. As a matter of fact, it is not even the case of the Revenue that the object of general public utility sought to be achieved by constitution and establishment of the JDA as such, involve carrying on of any activity for profit (4 of 6) [ITA-568/2009] and therefore, it is immaterial if some income is earned by ancillary and incidental activities, which as per the mandate of the relevant statute, is used for achieving or implementing such object. The genuineness of the activities of the JDA, which are regulated by the provisions of the JDA Act and the Rules made thereunder, cannot be doubted. Thus, the order passed by the ITAT holding the JDA, Jodhpur entitled for registration under Section 12A read with Section 12AA of the Act of 1961, does not suffer from any infirmity or illegality.

a view to improvement of the area comprised in scheme or the general efficiency thereof etc.. Undoubtedly, the aforesaid statutory functions which are being discharged by the UIT, are the activities undertaken for welfare of the public at large and certainly, fall within the expression of 'any other object of general public utility', as used in Section 2(15) of the Act of 1961. It is true that while discharging aforesaid functions to achieve its predominant object of (5 of 6) [ITA-568/2009] improvement of the urban area specified, the UIT, Sri Ganganagar is also engaged in sale, letting or exchange of any property or land comprised in the scheme and it is also empowered to levy betterment charges in terms of Section 62 of the UIT Act, but then, such activities undertaken by the UIT are apparently incidental and ancillary to its main object of improvement of specified urban area. It is pertinent to note that as per the mandate of Section 61 of the UIT Act, the UIT is under an obligation to constitute a fund to be called 'Improvement Fund' and as per the mandate of sub-section (2) (iii) and (v), all rents, profits and sale proceeds of lands, buildings and other property vested or vesting in or acquired by the trust under the said Act and all fees and charges payable to or received by the trust under the said Act are credited to the said Fund, which is utilised for the achievement of the predominant object of improvement of the urban area. Thus, for the parity of the reasons indicated above, while arriving at the conclusion regarding the entitlement of JDA, Jodhpur for registration under Section 12A read with Section 12AA of the Act of 1961, the order passed by the ITAT, holding the UIT, Sri Ganganagar entitled for registration under Section 12A read with Section 12AA of the Act of 1961, also cannot be faulted with.”

“29. For the applicability of proviso to Section 2(15), the activities of the trust should be carried out on commercial lines with intention to make profit. Where the trust is carrying out its activities on noncommercial lines with no motive to earn

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profits, for fulfillment of its aims and objectives, which are charitable in nature and in the process (6 of 6) [ITA-568/2009] earn some profits, the same would not be hit by proviso to section 2(15). The aims and objects of the Mere selling some product at a profit will not ipso facto hit assessee by applying proviso to Section 2(15) and deny exemption available under Section 11. The intention of the trustees and the manner in which the activities of the charitable trust institution are undertaken are highly relevant to decide the issue of applicability of proviso to Section 2(15)”.