Income Tax Appellate Tribunal - Cuttack
Bhubaneswar Stock Exchange vs Assistant Commissioner Of Income Tax on 16 March, 2005
Equivalent citations: [2005]279ITR200(CTK), (2005)95TTJ(CTK)1033
ORDER
K.K. Gupta, A.M.
1. In these appeals for the six successive years filed by the appellant/assessee, more or less common issues are involved. However, so far as the first four years, i.e., asst. yrs. 1996-97 to 1999-2000 are concerned, the assessee has also taken up the preliminary issue of challenging the validity of the reopening proceedings under Section 147 on the ground of lack of jurisdiction. The assessee is a public limited company formed under Section 25 of the Companies Act, 1956, with the object of working as a recognised stock exchange in Orissa and controlling and regulating the operations of transactions and broking activities in stocks and shares. The assessee duly applied for registration as a charitable institution and has also been granted registration under Section 12A of the IT Act, 1961, by the CIT, Bhubaneswar. In asst. yr. 1992-93, the AO had tried to disallow the claim of the assessee towards exemption under Section 11, but in the first appeal, the learned CIT(A) reversed the decision of the AO and allowed the exemption as asked for. It appears that the Department did not prefer any further appeal against the said order of the learned CIT(A).
2. The returns of income for all these four years, viz., asst. yrs. 1996-97 to 1999-2000 were filed declaring nil income as the assessee claimed exemption under Section 11 of the IT Act. All the returns were duly processed under Section 143(1)(a). Later on, all the four assessments were reopened by issue of notices under Section 148, all dt. 3rd Dec, 2001. Although, initially, the AO did not disclose the reasons for reopening the proceedings under Section 147, yet later on, however, the said reasons were made available in the show-cause notice served on the assessee on 10th Jan., 2003, and the learned CIT(A) has discussed the said reasons in detail at para 4 in pp. 8 to 13 of his order. He refers to the show-cause notice and finds that there were two grounds for reopening of the proceedings under Section 147, viz., (a) the issue regarding Section 10(23C) and (b) interpretation of Section 2(15) of the IT Act. It was contended before the learned CIT(A) that since the assessee had already been granted registration under Section 12A of the IT Act, there was no case for raising a fresh dispute regarding applicability of Section 2(15) to the assessee's case. As regards the issue regarding Section 10(23C), it was pointed out that firstly, the assessee had not made any claim for exemption under that section and secondly, as the fact relating to non-issue of a notification by the Central Government under that section was well within the knowledge of the AO and the matter had also been duly disclosed in the returns filed by the assessee, no reopening could be done on the basis of Section 10(23C) also. In that connection, it was also argued that applicability of Section 11 was not considered by the AO as a ground for reopening the assessments under Section 147.
3. The learned CIT(A) referred to a survey conducted by the Investigation Wing of the IT Department in the premises of the assessee. He discussed that it was found in the survey and also mentioned in the survey report that the assessee had claimed exemption under Section 10(23C) though notification in that regard had not been issued by the competent authority. The learned CIT(A) further discussed that the issue of Section 11 was also touched upon in the said survey report. The learned CIT(A) further discussed that in the meantime the assessee had filed returns of income claiming exemption under Section 10(23C) without issue of the required notification and that the returns had also been processed under Section 143(1)(a). The learned CIT(A) held that there was an information in the form of the survey report for the purpose of Section 147 and on that basis, the issue of notice under Section 148 by the AO was valid. The learned CIT(A), thereafter, held that whether Section 11 was a part of the show-cause notice was, therefore, not very material. He also held that even otherwise, after a case has been validly reopened under Section 147, the AO is not precluded from covering areas other than those stated in the satisfaction file. Ultimately, the learned CIT(A) held the reopening of the proceedings to be valid and legal.
4. The assessee challenges this finding of the learned CIT(A) about the validity of the reopening proceedings before us. It is submitted that assumption of jurisdiction under Section 147 is a very important matter and if the AO invokes the provisions of this section without proper jurisdiction, then the entire proceeding gets vitiated and is liable to be treated as non est and hence, to be cancelled. It is argued by the Authorised Representative of the assessee that it has been held in umpteen number of cases, that unless all the requisite conditions for assumption of jurisdiction under Section 147 be satisfied, the assumption of jurisdiction would be invalid and the entire reopening proceeding would become non est. He has relied on the decisions in Calcutta Discount Co. Ltd. v. ITO and Anr. , Ramnarain Bhojnagarwalla v. ITO and Anr. , CIT v. Prafulla Kumar Mallick (1976) 103 ITR 418 (Ori) for this purpose. He has further argued that (for) assumption of jurisdiction under Section 148, issuance of a valid notice under Section 148 is a must which again prerequisites recording of reasons for formation of belief by the AO about escapement of income from assessment. He argues that it has been held that validity or otherwise of the initiation of the proceeding under Section 147 is to be tested on the reasons recorded without taking help from further reasons supplied later on in support of which he relies on Sarabhai M. Lakhani v. ITO , N. Subhakran v. CIT and Chunilal Onkarmal (P) Ltd. v. CIT . He points out that it has also been held that the reasons recorded must be having a live link with the formation of belief about escapement of income and that absence of such link would vitiate the entire reopening proceeding. In support of this, he refers to the decisions in VXL India Ltd. v. Asstt. CIT and Birla VXL Ltd. v. Asstt. CIT . He has also drawn our attention to a recent judgment in the case of Amrinder Singh Dhiman v. ITO , in which the Punjab and Haryana High Court has held that in reassessment under Section 147, general enquiry is not permitted and that enquiry is required to be confirmed to reasons recorded for issuing notice under Section 148.
5. The learned Authorised Representative of the assessee has, thereafter, argued that if the present reasons recorded by the AO as revealed in the show-cause notice served on the assessee on 10th Jan., 2003, be tested in the above light, it will be seen that the said reasons do not have any legs to stand. He has continued to argue that the issue relating to Section 10(23C) cannot be considered as a reason for coming to the conclusion about escapement of income as the assessee had made it clear that the requisite notification under that section had not actually been issued by the competent authority. The claim of exemption was, therefore, under Section 11. He continues that there is no reference to this section in the show-cause notice and hence, it has got to be presumed that no reasons were recorded on the basis of the applicability or otherwise of Section 11. He points out that even in the reassessment order for asst. yr. 1996-97, the AO has accepted the position that the assessee is entitled to exemption under Section 11, though, however, addition has been made in the reassessment order for that year on the ground of non-fulfilment of the conditions laid down in Sub-section (2) of Section 11 regarding accumulation of the income of the assessee. He argues that the reasons recorded by the AO about reopening the proceedings seem to be totally silent on this aspect of accumulation of income in excess of the limits provided in Sub-section (2) of Section 11 for asst. yr. 1996-97 and about exemptibility under Section 11 for the other years. The learned Authorised Representative of the assessee has further argued that Section 2(15) as mentioned in the reasons does not have any part to play as after the order of the learned CIT(A) for asst. yr. 1992-93 holding the assessee to be falling within the ambit of 'charitable institution', which became final on account of lack of further challenge in appellate proceedings by the Department, there cannot be any point in considering Section 2(15) to be a relevant issue at all for the purpose of forming a belief as to escapement of income. The learned Authorised Representative of the assessee has drawn our attention to the fact that Sub-section (3) of Section 12AA allowing the CIT/Chief CIT the power to withdraw registration already granted under Section 12A/12AA has been brought to statute book w.e.f. 1st Oct., 2004, only, thus not affecting the years under present appeals. The learned Authorised Representative of the assessee further argued that the survey conducted by the Investigation Directorate of the IT Department as referred to by the learned CIT(A), cannot be considered as an 'information' as it did not reveal anything new other than the facts relating to the non-issue of the notification by the competent authority and the claim of exemption under Section 11, which facts were already well known to the AO. Thus, according to him, the results of the survey cannot lead to the belief about escapement of income in any way. The learned Authorised Representative of the assessee has also pointed out that in any case, no mention seems to have been made of the 'survey' in the 'reasons recorded for reopening'. Hence, it is finally contended that the reasons recorded by the AO for formation of belief about escapement of income having no live link with such belief, the entire exercise of assumption of jurisdiction under Section 147 must be considered to be invalid and illegal. He has finally argued that the reopening proceedings for all the years are, therefore, liable to be treated as invalid and void ab initio and hence, are required to be cancelled.
6. The learned Authorised Representative of the assessee has further contended that in the assessment for asst. yr. 1992-93 itself, the learned CIT(A) had held that the assessee is a 'charitable institution' and is also entitled to exemption under Sections 11 and 12. He argued that since the learned CIT(A)'s order became final on the issue, the AO's order got merged in it and it has got to be considered that the Department had ultimately come to the conclusion that the assessee was entitled to exemption under Sections 11 and 12. No new facts have come to light since then to suggest non-exemptibility of the income of the assessee under Sections 11 and 12 and hence, according to him, the reopening is totally based on change of opinion of the AO without any fresh material. The learned Authorised Representative of the assessee has contended that the AO does not, therefore, have any jurisdiction to take recourse to reopening proceedings under Section 147. The learned Authorised Representative of the assessee has relied upon the following judgments in support of his contentions in this connection :
(i) Garden Silk Mills (P) Ltd. v. Dy. CLT
(ii) Jay Shree Tea & Industries Ltd. v. Dy. CIT
(iii) Foramer v. CIT
(iv) IPCA Laboratories Ltd. v. Gajanand Meena, Dy. CIT (2001) 251 ITR 416 (Bom)
(v) Surat City Gymkhana v. Dy. CIT
(vi) CIT v. Kalvinator of India Ltd. (2002) 256 ITR 1 (Del)
(vii) Tantia Construction Co. Ltd. v. Dy. CLT
(viii) Mercury Travels Ltd. v. Dy. CLT
(ix) Order of Tribunal, "A" Bench, Kolkata, in ITA Nos. 1002 to 1004/Kol/2004, in the case of Chem Crown Exports Ltd.; asst. yrs. 1995-96 to 1997-98 [reported at (2005) 93 TTJ (Cal) 710--Ed. ].
It has furthermore been argued that the Supreme Court has held in the case of Radhasoami Satsang v. CIT that although strictly speaking, the principle of res judicata may not be applicable to income-tax matters, yet when a settled position has been arrived at after consideration of all the relevant materials, such position should not be disturbed in future years unless compelling circumstances exist for doing so. The learned Authorised Representative of the assessee has submitted that there are no compelling circumstances in the present case which may justify the AO's action in taking a completely different stand of refusing to allow full exemption to the assessee's income under Sections 11 and 12.
7. On the other hand, the senior counsel for the Department has strongly supported the validity of the reopening proceedings. He has argued that for all the years under consideration, there had not been any assessments under Section 143(3) and that the returns had merely been processed under Section 143(1)(a). He has argued that in such circumstances, income chargeable to tax will be deemed to have escaped assessment in terms of Clause (b) of Expln. 2 to Section 147 and the AO would have ample powers to reopen the proceedings under Section 147. He has argued that in view of the said provisions of law, formation of belief about escapement of income in the wake of mere processing under Section 143(1)(a) becomes automatic. In support of his contentions in this regard, he has relied on a large number of judgments as listed below :
(i) CIT v. Purshottamdas Bangui
(ii) CWT v. D.R. Vadera L/H of Hansraj Vadera
(iii) Asstt. CIT v. Stock Exchange, Ahmedabad
(iv) Praful Chunilal Patel v. M.J. Makwana, Asstt. CIT
(v) Raymond Woollen Mills Ltd. v. ITO and Ors.
(vi) Rattan Gupta v. Union of India and Ors.
(vii) Trivandrum Club v. Asstt. Director of Income-tax (2002) 256 ITR 61 (Ker)
(viii) Vishnu Borewell v. ITO and Anr. (2002) 257 ITR 512 (Ori)
(ix) Rakesh Agarwal v. Asstt. CIT
(x) Deepak Kumar Poddar v. Union of India and Ors. (1997) 224 ITR 95 (Pat)
(xi) Sreeharayana Chandrika Trust v. CIT
(xii) J.K. Charitable Trust v. WTO and Ors.
(xiii) CIT v. P.V.S. Beedies (P) Ltd.
The learned Departmental Representative further argued with regard to the point raised by the learned Authorised Representative of the assessee about no change of opinion being permissible in reopening an assessment proceeding under Section 147, that since in the instant cases, there were no assessments originally under Section 143(3), there was no question of formation of an opinion by the AO at the stage of processing the returns under Section 143(1)(a) and hence, there was no case of change of opinion. He also argued that the decisions on the issue of "change of opinion" do not apply to cases where the original assessments/adjustments are under Section 143(1)(a) and not under Section 143(3). 8. We have heard the rival parties' contentions and perused all the judgments cited by both the sides. We find that most of judgments cited by the learned Departmental Representative are not at all on the issue under consideration. These judgments cited by him are mostly on collateral issues like scope of 'income escaping assessment' under the amended provisions, sufficiency of reasons to believe, whether during the period of four years since the end of the assessment year, failure or omission on the part of the assessee is required for reopening, etc. We, however, find that the issue raised on behalf of the assessee in the instant case is a completely different one, although the same is well connected with the matter of formation of belief about escapement of income. The learned Departmental Representative has heavily relied on the judgment of Gujarat High Court in the case of Praful Chunilal Patel (supra). But in that case only what constitutes a 'reason to believe' has been discussed. Nowhere does that judgment say that the reasons are not required to be recorded or that the reasons actually recorded need not have a live link with formation of belief. We are of the considered opinion that after the total substitution of Section 147 w.e.f. 1st April, 1989, the scope of 'income escaping assessment' has considerably been enlarged and expanded. We fully agree with the contention of the learned senior Department counsel that now it is much easier to reopen the proceedings under Section 147, especially when assessment under Section 143(3) has not been done. This is so possible by virtue of the different clauses of the Expln. 2 to the newly introduced Section 147. We, however, note that the conditions relating to formation of a reasonable belief about escapement of income and also the requirement of recording the said reasons remain intact even in the substituted provisions of Sections 147, 148, etc. It has been decided by the Supreme Court in the case of GKN Driveshaft (I) Ltd. v. ITO and Ors. (2003) 259 ITR 19 (SC), that although the assessee cannot ask for the copy of the reasons recorded by the AO at the stage of filing the return in response to the notice under Section 148, yet copy of the said reasons is liable to be supplied to the assessee at a later stage. It has been held by the Orissa High Court in the case of Vishnu Borewell (supra) that so far as the expression "reason to believe" in Section 147 is concerned, the belief must be based on reasons which are relevant and material and that the Court can examine whether the reasons are relevant and have a bearing on the matters with regard to which the AO is required to entertain the belief before he can issue notice under Section 148. The Orissa High Court further held in that case that if there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on facts and law, could reasonably entertain the belief, the inevitable conclusion is that the AO could not have reason to believe that any part of the income of the assessee had escaped assessment. The Gujarat High Court has also held in the case of Stock Exchange, Ahmedabad (supra) that the reasons must have a direct and rational connection with the formation of belief. The Gujarat High Court has furthermore held in VXL India Ltd. (supra) and Birla VXL Ltd. (supra) that the reasons recorded must be having a live link with the formation of belief about escapement of income and that absence of such link would vitiate the entire reopening proceeding.
9. So far as the present case is concerned, when we test the reasons recorded by the AO as revealed in the show-cause notice served on the assessee on 10th Jan., 2003, we find that the said reasons do not have any nexus with the formation of belief about escapement of income. The issue relating to Section 10(23C) cannot be considered as a reason for coming to the conclusion about escapement of income as the assessee firstly, did not claim exemption under that section and on the top of it, had made it clear that the requisite notification under that section had not actually been issued by the competent authority. The claim of exemption was actually under Section 11. The learned CIT(A) himself has discussed that there is no reference to this section in the show-cause notice and hence, it has got to be presumed that no reasons were recorded on the basis of the applicability or otherwise of Section 11. We also find that even in the reassessment order for asst. yr. 1996-97, the AO accepted the position that the assessee is entitled to exemption under Section 11, though, however, addition has been made in the reassessment order for that year on the ground of non-fulfilment of the conditions laid down in Sub-section (2) of Section 11 regarding accumulation of the income of the assessee. We also note that the reasons recorded by the AO about reopening the proceedings seem to be totally silent on this aspect of accumulation of income in excess of the limits provided in Sub-section (2) of Section 11 for asst. yr. 1996-97 and about exemptibility under Section 11 for the other years. We agree with the argument of the learned Authorised Representative of the assessee that Section 2(15) as mentioned in the reasons does not have any part to play as after the order of the learned CIT(A) for asst. yr. 1992-93 holding the assessee to be falling within the ambit of "charitable institution", which became final on account of lack of further challenge in appellate proceedings by the Department, there cannot be any point in considering Section 2(15) to be a relevant issue at all for the purpose of forming a belief as to escapement of income. We further note that the survey conducted by the Investigation Directorate of the IT Department as referred to by the learned CIT(A), did not reveal anything new other than the facts relating to the non-issue of the notification by the competent authority and the claim of exemption under Section 11, which facts were already well known to the AO. Thus, the results of the survey cannot lead to the conclusion of escapement of income in anyway. Again, no mention seems to have been made of the 'survey' in the 'reasons recorded for reopening'. Hence, it is finally concluded that the reasons recorded by the AO for formation of belief about escapement of income have no live link with such belief and hence, the formation of belief about escapement of income in the instant case, cannot be considered to be rational and reasonable. This has got nothing to do with the sufficiency of the reasons but in our view the absence of nexus between the reasons recorded and the belief about escapement of income makes the reasons irrational and untenable. We, therefore, hold that the entire exercise of assumption of jurisdiction under Section 147 must be considered to be invalid and illegal. In this view alone, we have no hesitation in considering the reopening proceedings under Section 147 for the asst. yrs. 1996-97 to 1999-2000 to be invalid and illegal and in cancelling the reassessment order under Section 147. We order accordingly.
10. Now, we examine the merits of the case for all the six years under consideration. It has been submitted that the income of the assessee-stock exchange is exempt under Sections 11 and 12. It is an admitted fact that the assessee has been granted registration under Section 12A(a) of the IT Act by the CIT, Bhubaneswar, by his order No. Judl./52/12A/1993-94, dt. 28th Nov., 1994, and also that in the asst. yr. 1992-93, it enjoyed exemption in respect of its income under Section 11 by the order of the learned CIT(A), dt. 16th July, 1996. In the said order, the learned CIT(A) discussed :
"Considering the objects of the appellant for which it had been promoted as a company, the appellant has to be treated as an institution established for charitable purposes within the meaning of 'general public utility'. Amongst several judicial pronouncements cited before me to claim that the appellant is an institution established for charitable purposes, I like to mention the decision of the Andhra Pradesh High Court in Hyderabad Stock Exchange v. CIT (1967) 66 ITR 195 (AP) because the decision is about a stock exchange which resembles the appellant. The Hyderabad Stock Exchange Ltd. having the same objects as the appellant, was found to be an institution established for charitable purposes following the decision of the Supreme Court in CIT v. Andhra Chambers of Commerce . The appellant's income for the year relevant to asst. yr. 1992-93 had been Rs. 19,98,038. It had applied income of Rs. 10,20,199 for charitable purposes. Exemption under Section 11 will be available to the appellant for the income of Rs. 10,20,199."
11. So far as asst. yr. 1996-97 is concerned, the AO has accepted in principle that the assessee is a charitable institution within the meaning of Section 11 and has proceeded to calculate the taxable income of the assessee by taking into consideration the total income of the appellant, the extent of application thereof for charitable purposes and the question of "accumulation" out of the income in terms of Sections 11(1) and 14(2) of the IT Act.
12. For the other years, however, the AO has considered that the assessee should not be considered as eligible for exemption under Section 11 and the learned CIT(A) has upheld this finding. It is the Departmental contention that every year's matter is required to be examined separately on the basis of the peculiar facts for that year, a view with which we are in perfect agreement. Although the learned Authorised Representative of the assessee has argued a lot before us about the difference between mutuality and exemption towards charitable purpose, we do not find much relevance of the said arguments with the present case as the assessee has not claimed exemption on the ground of mutuality. The claim of the assessee is purely based on exemption available under Section 11 of the IT Act. Since the object clauses of the assessee-exchange clearly speak of purposes considered as 'charitable' under the IT Act and which point has also been accepted by the Department firstly, by registering the assessee as a 'charitable institution' under Section 12A and secondly, by accepting the learned CIT(A)'s decision for asst. yr. 1992-93 declaring the income of the assessee for that year to be exempt under Section 11, there is no need to have any general consideration about nature of the assessee's activities or whether such activities can be considered on the face of them to be charitable in nature. We find that the Department's main objection to allow the benefit of exemption under Section 11 to the assessee arises out of the complaint about misutilisation of the funds of the assessee towards the so-called personal purposes of some of the office-bearers of the assessee-exchange during these years. The facts of the case start with the formation a Members Welfare Trust (MWT) on 23rd Sept., 1996, by the assessee-exchange through which moneys belonging to the assessee are stated to have been diverted for the personal purposes of the office-bearers of the assessee-exchange by way of loans routed through MWT. References have also been made in the orders of the lower authorities to the adverse comments cast on some of the office-bearers on this issue in the report of the investigation committee set up by SEBI. Both the AO as well as the learned CIT(A) have been of the view that the diversion of funds as highlighted in the report of SEBI takes the case of the assessee-exchange out of the ambit of "charitable trust" for the purpose of exemption under Section 11.
13. The learned CIT(A) has discussed the contention of the assessee that upto asst. yr. 1999-2000 no advances were made by the assessee to MWT. Hence, the so-called diversion of funds did not assume any serious proportion till the asst. yr. 1999-2000, but according to the lower authorities, in asst. yrs. 2000-01 and 2001-02 only, the gross diversion of funds could be noted for which the SEBI came up with strong adverse criticism. We also find that upto asst. yr. 1999-2000, the total moneys handed over by the assessee-exchange to MWT were well within the permissible limit of 5 per cent of the capital of MWT as prescribed under Section 13(4) of IT Act and, in any case, the assessee had not exactly invested the monies in MWT, but had actually provided for welfare of its employees by handing over the monies to MWT. Hence, atleast so far as asst. yrs. 1997-98, 1998-99 and 1999-2000 are concerned, there is no reason for denying exemption under Section 11 to the assessee-exchange on account of handing over of monies to MWT. In general again, the assessee argues that formation of a Members Welfare Trust for the purpose of granting loans to members for medical treatment of their family members is within the four corners of law and the permission of SEBI was not required for that purpose. It is pointed out that an application was also made by MWT before the CIT for registration of the trust under Section 12A, therefore, it is argued that the actions of the assessee-exchange in forming the trust or even that of the trust per se could not be stated to be questionable. It is argued in this connection that the assessee is a charitable body working for the general good of the people as per its object clauses and that it itself cannot be held responsible for the misdeeds, if any, of some of its office-bearers. It has further been mentioned that after SEBI found the conduct of some of the office-bearers to be questionable, those office-bearers were promptly removed on the basis of the SEBI report and new persons have been put in their places. In support of his contention, a host of documents have been placed on our record by the learned Authorised Representative of the assessee, which are as follows :
(i) Suit filed on 29th Aug., 2001, for recovery of Rs. 4,85,124 from Sri Anjani Kumar Singh.
(ii) Suit filed on 29th Aug., 2001, for recovery of Rs. 1,30,25,308 from Sri Babulal Sharma.
(iii) Decision of the council dt. 22nd Sept., 2001, to refer the matter of Members Welfare Trust to SEBI and relevant letter dt. 24th Sept., 2001, to SEBI by the assessee-stock exchange.
(iv) Report on SEBI inquiry conducted during 1st Oct., 2001.
(v) Order of injunction by the Court dt. 14th Feb., 2002, against property accepted as security against loan.
(vi) FIR dt. 26th March, 2002, lodged by Sri Ajit Tripathy, IAS, council member and SP, CIT forwarded the letter to PS vide letter dt. 31st May, 2002.
(vii) Sri Babulal Sharma expelled vide notice dt. 20th July, 2002.
(viii) Investigation Officer, CID, CB filed charge-sheet dt. 3rd Jan., 2003.
It has thus been argued by the learned Authorised Representative of the assessee that the so-called misfeasance and misutilisation of funds were the personal aberrations of some of the office-bearers of the assessee for which all possible corrective as well as punitive measures against the culprits have been taken and a freshly constituted body has since been appointed by the Government and, therefore, the personal faults of some of the office-bearers cannot be considered as a disqualifying point for the assessee-stock exchange as a whole, whose overall objects and also activities are beyond any doubt. It has, thus, been submitted that the affairs of the assessee are required to be looked into de hors the acts of default on the part of the office-bearers and the assessee should not be punished for their misdeeds. It has been argued that the assessee-exchange cannot be considered to be acting for profits in any way and hence, there is no point in denying the basic charitable character of the assessee-exchange. Reliance has been placed in this connection on the judgment of the Andhra Pradesh High Court in the case of Governing Body of Rangaraya Medical College v. ITO , holding that while interpreting the phrase, "for the purpose of profit", it cannot be said that an institution was run for the purposes of profit so long as no person or individual was entitled to any portion of profit of the institution and the profit was utilised for the purpose and promotion of the objects of the institution. Here, there is allegation merely of diversion of funds of the assessee-exchange by way of loans to the family members of its office-bearers. As per its constitution, no member of the assessee is entitled to any profit or gain out of the funds of the assessee. The learned Authorised Representative of the assessee has further argued that it has been held that even in the worst case of misappropriation of funds of the charitable trust by trustees, merely the trustees would be at fault and would be liable for making good the relevant amounts, if any. The trust cannot be faulted for such act. Reference has been made in this connection to the judgment of Rajasthan High Court in the case of Dy. CIT v. Cosmopolitan Education Society . In that case, the learned CIT(A) had observed that if there was any misutilisation or mismanagement, action could be taken against the members of the society, but from the records and facts, it was not possible to say that any amount of funds of the society was not utilised for educational purposes. The Tribunal concurred with this finding of fact and the High Court also accepted the findings of the Tribunal. In this particular case, the learned Authorised Representative of the assessee has relied strongly on this judgment in support of his contention that the misconduct of the office-bearers of the assessee-exchange, if any, cannot render the activities of the business as non-charitable and the assessee cannot be made to lose its benefit of exemption under Section 11 on that account.
14. The learned Departmental Representative has argued in this connection that the defaulting office-bearers all fall within the category of persons referred to in Section 13(3) and hence, the disqualifying clauses of Section 13(1)(c) read with Section 13(2) of the IT Act. On the other hand, the learned Authorised Representative of the assessee has argued that the defaulting office-bearers were merely of the nature of employees of the assessee-exchange and that they were neither author of the trust nor founder of the institution, nor even the trustees or managers of the institution or any relatives of such persons. It has been pointed out by him that those office-bearers did not have the substantial power of management of the assessee-exchange and that all their powers and activities were subject to the direction, superintendence and control of the council. We find much strength in the arguments of the learned Authorised Representative of the assessee. We find on facts that the defaulting office-bearers were not at all the founders of the assessee-exchange or their relatives. They also cannot be considered its having the real managerial powers. Hence, we are of the view that these persons cannot be considered to be falling within the ambit of Section 13(3) and the assessee will also not be hit by the provisions of Section 43(1)(c) read with Section 13(3).
15. So far as the overall exemptibility of the assessee-stock exchange is concerned, we find sufficient force in the contentions of the learned Authorised Representative of the assessee. On a close study of all the relevant facts and also the connected papers, we come to the conclusion that the assessee-exchange, as such, cannot be faulted for any misutilisation or diversion of its funds. Some of the office-bearers did default in their personal capacities for which the assessee as a whole cannot be blamed or penalised. We also find that the case law as relied upon by the learned Authorised Representative of the assessee are much relevant to the point at issue and are in favour of the assessee. In view of all these matters, we are of the opinion that there was no sufficient cause for the Department to deny the benefit of exemption under Section 11 to the assessee. We, therefore, direct that there being no violation of any of the conditionalities as laid down in Sections 11 and 13 by the assessee, as such, its income for all the years under present appeals are to be treated as exempt.
16. Now, we come to the point of some of the specific objections taken by the AO in his assessment order for asst. yr. 1996-97 which have been upheld by the learned CIT(A). The AO has concluded that if a trust/institution does not comply with the conditions laid down in Section 11(2), the amount which becomes liable to assessment under Section 11(3) is the entire income accumulated and not merely the income accumulated in excess of the limits specified in Section 11(1). The AO has relied on the decision in the case of Director of Income-tax v. Girdharilal Shewarian Tantia Trust in support of this proposition. The learned Authorised Representative of the assessee has submitted that this particular judgment related to the question of allowability of deduction under Section 80T in case of capital gains arising to that assessee-trust and does not give any authority in the matter of the question considered herein by the AO. On the other hand, he has argued that it has been held in the following judgments that Section 11(2) lays down the condition, the compliance of which is necessary to avail of the exemption, but they are merely for the purpose of availing of the further exemption and not for depriving or taking away the exemption granted under Clause (a) or (b) of Section 11(1) :
(i) CIT v. Shri Kishan Chand Charitable Trust
(ii) A.L.N. Rao Charitable Trust v. Addl. CIT
(iii) Mohanlal Hargovinddas Public Charitable Trust v. CIT
(iv) C1T v. Shri Cutch Gurjar Khatriya Samaj Sewa Trust .
17. We are in perfect agreement with the arguments of the learned Authorised Representative of the assessee in this regard. On a thorough reading of the relevant legal provisions and a study of the connected case law, we are of the opinion that the exemptions provided under the Sub-sections (1) and (2) of Section 11 are independent of each other and the non-compliance of the requirements of Sub-section (2) of Section 11, does not disentitle the assessee to the basic exemption in respect of 25 per cent of the net total income. Thus, the finding of the AO on this issue is being struck down.
18. In asst. yr. 1996-97, the AO raised an additional issue regarding whether the entrance fees of Rs. 3,00,00,000 would have to be considered as part of the revenue income of the assessee and hence, the accumulation clause would apply to this amount also. The AO referred to the Clause 13(d)(ii) of the memorandum of association of the assessee according to which, if the applicant is elected for membership then the sum shall be adjusted towards the membership subscription. Accordingly, he holds that since membership subscriptions are of revenue nature, the entrance fees will have to be considered as regular revenue income of the assessee. During the course of the hearing before us, the learned Departmental Representative has argued that the receipt cannot be treated as voluntary contribution since the prospective members were required to pay the amount of entrance fees and that there was no element of voluntariness in the payments. He has further argued that the receipts cannot again be considered to be for any specific purpose or towards the corpus of the assessee-exchange as there is no mention in that regard either in the admission forms or even in the receipts issued by the assessee to the payers. He thus, argued that the entrance fees would be of the nature of income under Section 2(24) and chargeable to tax. On the other hand, the learned Authorised Representative of the assessee has argued that by a resolution of the council, dt. 8th Feb., 1994, the membership strength of the assessee was increased for the specific purpose of collection of entrance fees required to be utilised for a building, infrastructure facilities and computers of the assessee-exchange. A copy of the said council resolution along with copies of letters forwarding the resolution and also for approval of entrance fees structure sent to SEBI on 10th Feb., 1994, and 4th June, 1994, respectively, have been placed in the paper book submitted before us. Copies of further letters addressed to SEBI asking for granting approval of the entrance fees structure have also been placed on record. The learned Authorised Representative of the assessee has argued in this connection that the entrance fees were received by the assessee-exchange not as its income but for a specific capital purpose of augmenting its capital structure like building, infrastructures, computers, etc. This was by way of an overriding liability towards the capital purpose attached to the receipts. Hence, the receipts must be held to be capital receipts and not ordinary income of the assessee. He has relied strongly on the judgment of the Calcutta High Court in the case of CIT v. Tollygunge Club Ltd. as approved by the Supreme Court in the case of CIT v. Tollygunge Club Ltd. . The learned Authorised Representative of the assessee also relied on the judgment of the Bombay High Court in the case of CIT v. Diners Business Services (P) Ltd. (2003) 263 ITR 1 (Bom) holding that one-time payments made by the members constitute capital receipts in the hands of the organisation and so receipts of such one-time payment would not be taxable.
19. We find the contentions of the learned Authorised Representative of the assessee to be acceptable. The resolution as pointed out by the learned Authorised Representative of the assessee clearly lays down the overriding purpose of the payments of the entrance fees towards construction of buildings, etc. In no way was the assessee entitled to utilise the amounts of entrance fees received by it in meeting its regular revenue expenses. They were on the capital field and were burdened with the overriding liability of using them for specific capital purposes, hence, in our view, they cannot be treated as the income of the assessee and hence, the clause relating to accumulation would not also apply to them. We order accordingly and reverse the findings of the lower authorities in this regard.
20. Ultimately, we allow the appeals filed by the assessee by firstly, holding that the reopening proceedings as well as the reassessment orders under Section 147 for the asst. yrs. 1996-97 to 1999-2000 to be invalid and by cancelling the said orders, we also direct that the assessee be considered as eligible for exemption under Section 11 for each of the years under appeal. So far as asst. yr. 1996-97 is concerned, we direct that the benefit of accumulation of income be allowed separately under the Sub-sections (1) and (2) of Section 11. We also direct that the entrance fees received in that year be treated as capital receipts not to be included within the income of the assessee.
21. In the result, the appeals of the assessee are allowed.