Income Tax Appellate Tribunal - Delhi
Shivalika Co-Operative Group Housing ... vs Income-Tax Officer on 16 June, 2006
Equivalent citations: [2006]101ITD391(DELHI), [2007]289ITR105(DELHI), (2006)104TTJ(DELHI)724
ORDER
S.C. Tiwari, Accountant Member
1. These two appeals have been filed by assessee on 20-2-2006 against the order of the learned CIT(Appeals)-XXVI, New Delhi, dated 8-11-2005 in the case of the assessee in relation to assessment order under Section 143(3) read with Section 147 for assessment years 1997-98 and 1998-99.
2. In these two appeals the assessee has taken identically worded grounds of appeal. Grounds of appeal Nos. 1 and 2 are directed against initiation of proceedings under Section 147. The case of the assessee in this respect is that the view taken by the learned Assessing Officer was contrary to the Judgment of Hon'ble Delhi High Court in DIT v. All India Oriental Bank of Commerce Welfare Society [2003] 184 CTR (Delhi) 274 : 130 Taxman 575 and certain decisions of the Tribunal. Facts of the case leading to these grounds of appeal are that the assessee filed return of income for assessment year 1997-98 on 8-1-1998 and for assessment year 1998-99 on 25-1-1999 declaring nil income. The Assessing Officer issued intimation under Section 143(1)(a) and granted refund as asked for by the assessee. No notice under Section 143(2) was issued nor any assessment order under Section 143(3) was made and, therefore, on the facts of the case provisions of Proviso to Section 147 are not attracted. Subsequently the Assessing Officer found that the assessee had derived interest income on bank deposits which had escaped assessment. The Assessing Officer, therefore, proceeded to initiate assessment proceedings under the provisions of Section 147 after issuing the notice under Section 148. Before issue of notice under Section 148 the learned Assessing Officer recorded the following reasons in writing on 28-11-2003 :-
The return of income was filed by M/s. Shivalika Co-operative Group Housing Society Ltd., a co-operative society, on 7-1-1998 at an income of Rs. ML. This is the case of a Cooperative Group Housing Society, which is engaged in the construction of flats.
The activity of the society is not commercial. It is utilizing mutual funds for construction. The AOP has kept some of the unutilized funds in the bank on which interest is being earned. This is taxable as it is the income earned from outsider. The assessee has shown receipt of interest of Rs. 2,27,809 from bank on FDR, in the P & L Account enclosed with the return.
Thus, Rs. 2,27,809 is the income of the assessee which is to be taxed for this AOP.
As the above income has escaped assessment, permission to issue notice under Section 148 may be granted. The assessee's case has not been scrutinized under Section 143(3) for the Assessment Year 1997-98.
Sd/- 28-11-2003 ITO, Ward 33(4), New Delhi.
For assessment year 1998-99 the Assessing Officer recorded similar reasons to believe that assessee's income chargeable to tax had escaped assessment.
3. During the course of hearing before me the learned Counsel for the assessee argued that reasons as recorded by the Assessing Officer were not tenable. The assessee was a society constituted for mutual benefit of its members. It had been held in certain Tribunal orders as well as court pronouncements that where surplus funds of a mutual society were kept in a bank, interest accruing on such deposits did not fall outside the ambit of principle of mutuality. On consideration I am unable to accept these contentions of the assessee. The requirement for initiation of proceedings under Section 147 is that the Assessing Officer should have reasons to believe that assessee's income chargeable to tax has escaped assessment. Such reasons to be believe should be based on certain information/material that could reasonably give rise to the belief of the Assessing Officer. The courts have held that while existence of reasons to believe and rational nexus of those reasons with formulation of belief that income chargeable to tax has escaped assessment can be examined in appellate proceedings, the adequacy or sufficiency of reasons to believe cannot be called in question. Reference in this respect may be made to the judgments of Hon'ble Supreme Court in the cases of Calcutta Discount Co. Ltd. v. ITO ; S. Narayanappa v. CIT ; ITO v. Lakhmani Mewal Das and Raymond Woollen Mills Ltd. v. ITO . In the instant case the reasons to believe have been based on the fact that the assessee had earned considerable interest income on bank deposits. Correctness of the facts acted upon by the learned Assessing Officer is not in dispute. The learned Assessing Officer perceived that the action of the society of depositing funds in bank and earning interest thereon was not an activity restricted to mutual relationship of the members of the society, as the income was earned from outside. At the stage of initiation of assessment proceedings the question is not of correctness or otherwise of the reasons because that can be decided only after conduct of assessment proceedings and after further examination of the facts of the case and consideration of the contentions of the assessee. As long as the learned Assessing Officer had bona fide reasons to believe that income chargeable to tax had escaped assessment and such belief is based on relevant material, validity of initiation of proceedings under Section 147 cannot be challenged. In the instant case on the reasons recorded it is apparent that the learned Assessing Of ficer entertained an honest belief that assessee's income chargeable to tax had escaped assessment. The belief was based on application of mind on relevant facts. I, therefore, see no merit in grounds of appeal Nos. 1 and 2 taken by the assessee. The same are rejected.
4. Ground of appeal No. 3 is that the learned Assessing Officer erred in proceeding to complete assessment under Section 147 without disposal of preliminary objection against initiation of proceedings under Section 147. During the course of hearing before me the learned AR of the assessee explained that after receipt of notice under Section 148 the assessee furnished return of income in response thereto and requested the Assessing Officer for supply of reasons that the Assessing Officer did. On receipt of reasons as recorded by the learned Assessing Officer the assessee addressed a letter to the Assessing Officer dated 8-1-2004 wherein initiation of proceedings under Section 147 was objected to on the ground that there was no escapement of income chargeable to tax and that there was no material to support the Assessing Officer's view. The learned Assessing Officer, however, did not pass any specific order on the preliminary objections of the assessee thus raised. He proceeded to complete the assessment order without disposal of assessee's preliminary objection. Relying upon the judgment of Hon'ble Supreme Court in the case of GKN Driveshafts (India) Ltd. v. CIT [2003] 259 ITR 19 : [2002] 125 Taxman 963 and the judgment of Hon'ble Gujarat High Court in the case of Arvind Mills Ltd. v. Asstt. CWT , the learned AR of the assessee argued that the assessment order was bad in law and liable to be quashed for this reason alone.
5. It is seen that in the case of GKN Driveshafts (India) Ltd. (supra) the assessee filed writ petition against issue of notice under Section 148 for various assessment years. The Hon'ble High Court dismissed the writ petition and thereupon the assessee filed an appeal against the judgment of Hon'ble Delhi High Court. After hearing the parties the Hon'ble Supreme Court pronounced judgment in the following words:-
We see no justifiable reason to interfere with the order under challenge. However we clarify that when a notice under Section 148 of the Income-tax is issued, the proper course of action for the notice is to file a return and if he so desires, seek reasons for issuing notices. The Assessing Officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the assessee is entitled to file objections to issuance of notice and the Assessing Officer is bound to dispose of the same by passing a speaking order. In the instant case, as the reasons have been disclosed in the proceedings, the Assessing Officer has to dispose of the objections, if filed, by passing a speaking order, before proceeding with the assessment in respect of the abovesaid five assessment years.
6. In the case of Arvind Mills Ltd. (supra), the assessce challenged issue of notice under Section 17 of Wealth-tax Act for assessment year 1997-98. Following the judgment of Hon'ble Supreme Court in the case of GKN Driveshafts (India) Ltd. (supra), Hon'ble Gujarat High Court delivered the judgment as follows:-
The Assessing Officer is accordingly required to decide the preliminary objections lodged by the petitioner to the notice for reassessment and pass a speaking order. Until such speaking order is passed, obviously the Assessing Officer cannot undertake reassessment. Hence, it is only after the Assessing Officer passes a speaking order deciding the petitioner's preliminary objections against the notice for reassessment that any cause of action would arise for the petitioner.
In view of the above observations, this petition is rejected as premature with the observation that if at all the respondent-Assessing Officer decides to reject the petitioner's preliminary objections, the respondent shall pass a speaking order and it will be open to the petitioner to challenge such order.
7. On consideration of both the judgments relied upon by the learned A.R. of the assessee, I am unable to persuade myself that proceedings initiated by the Assessing Officer under Section 147 should be rendered void or invalid for the reasons only that the Assessing Officer had proceeded to complete the assessment without earlier having passed a speaking order dealing with the preliminary objections of the assessee against issue of notice under Section 148. As far as the provisions of Income-tax Act are concerned, there is no express provision for an interim order on assessee's objections to initiation of proceedings under Section 147 before completion of assessment order under Section 143(3) read with Section 147. Hon'ble Apex Court have held that in a case where initiation of proceedings is objected to by an assessee, the Assessing Officer must dispose of the same by passing a speaking order. It, therefore, follows that in a case where this course is not adopted by the Assessing Officer, the Assessing Officer is required to be directed to decide the preliminary objections of the assessee to the notice under Section 147 and pass a speaking order, as done by Hon'ble Gujarat High Court in the case of Arvind Mill Ltd. (supra). It is pertinent to note here that there is a marked distinction in law between want of inherent jurisdiction and irregular exercise or assumption of jurisdiction. As the infirmity pointed out in the instant case falls in the later category the assessee can, at best, claim that his preliminary objection should be disposed off first and the Assessing Officer should thereafter proceed to complete assessment order only if the assessee's objections are not accepted. I, however, do not consider it necessary to restore the matter to the Assessing Officer for disposal of the assessee's preliminary objection to initiation of proceedings under Section 148. In the appeals before me the dispute relates to the assessment of a sum of Rs. 2,69,591 for assessment year 1997-98 and Rs. 2,01,409 for assessment year 1998-99 assessed by the Assessing Officer on account of interest income of the assessee on fixed deposits with the bank. It is seen that interest income earned by an assessee on surplus funds of a mutual society deposited with a banking institution are covered by the principle of mutuality, as held by Hon'ble Delhi High Court in their judgment in the case of DIT v. All India Oriental Bank of Commerce Welfare Society [2003] 184 CTR (Delhi) 274 : 130 Taxman 575. In my opinion the authorities below have erred in distinguishing the aforesaid judgment of Hon'ble Delhi High Court on the ground that the assessee is a co-operative housing society whose income was not exempt under Section 11. Hence, respectfully following the judgment of Hon'ble Delhi High Court above mentioned, I direct deletion of the additions made in orders under Section 147 read with Section 143(3) for both assessment years 1997-98 and 1998-99.
8. In the result, these two appeals are partly allowed.