Bombay High Court
Shri. Mahila Griha Udyog Lijjat Papad vs Deputy Director Of Income Tax ... on 31 January, 2012
Author: D.Y. Chandrachud
Bench: D.Y. Chandrachud, M.S. Sanklecha
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO.2535 OF 2011
Shri. Mahila Griha Udyog Lijjat Papad. ...Petitioner.
Vs.
Deputy Director of Income tax (Exemption)-1(1) and ors.
...Respondents.
Mr. P. J. Pardiwala, Sr. Advocate with Mr. B.V. Jhaveri for the Petitioner.
Mr. Vimal Gupta for the Respondents.
.....
CORAM : DR. D.Y. CHANDRACHUD &
ig M.S. SANKLECHA, JJ.
31 JANUARY 2012
ORAL JUDGMENT ( PER DR. D.Y. CHANDRACHUD, J.)
Rule; with the consent of Counsel for the parties returnable forthwith. With the consent of Counsel and at their request the Petition is taken up for hearing and final disposal.
2 An assessment for assessment year 2004-05 is sought to be reopened by a notice dated 21 March 2011 issued under the provisions of Section 148 of the Income Tax Act, 1961. The objections filed by the assessee to the reasons disclosed by the Assessing Officer have been disposed of by an order dated 15 December 2011.The assessee is before this Court under Article 226 of the Constitution.
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3 Section 10(23B) of the Income Tax Act, 1961 was
introduced by the Finance Act, 1974 with effect from 1 June 1974.The Petitioner is registered under the Societies Registration Act, 1960 and under the Bombay Public Trust Act, 1950. The Petitioner has been granted an exemption under the provisions of Section 10(23B) onwards from assessment year 1975-76. The Petitioner filed its return of income for assessment year 2004-05 on 17 March 2005. The income and expenditure account which was filed together with the return of income disclosed total sales of Rs.288.47 crores. The excess of income over expenditure was to the extent of Rs.6.54 crores or approximately 2.27% of the total sales. By a letter dated 16 March 2005, the State Director in the office of the Commissioner for Khadi & Village Industries Commission informed the Commissioner of Income Tax that Petitioner No.1 has undertaken the Village Industries Programme approved by the Commissioner for Khadi and Village Industries Commission. It was recommended that instructions may be issued for grant of an exemption under Section 10(23B) of the Income Tax Act, 1961. A letter of approval had earlier been issued to the Petitioner on 11 March 2005.
4 During the course of the assessment proceedings a notice was issued to the Petitioner under Section 143(2) on 30 May 2006. The Petitioner was called upon to disclose inter alia the objects of the trust, activities carried out during the previous year, donations received and the expenses incurred on the objects among other details. By its letter dated 10 June 2006, the Petitioner disclosed that the main object of the Institution is to provide self employment to women with a view to ::: Downloaded on - 09/06/2013 18:07:39 ::: ASN 3 WP-2535.sxw enable them to earn a dignified livelihood. The Petitioner disclosed that it was certified by the Khadi and Village Industries Commission as a Village Industry. The products manufactured were set out. The Assessing Officer was informed that the Institution has 66 branches with 32 divisions in the country, providing self employment to 40,000 women members. Reference was made to the fact that in Mumbai, the Petitioner has manufacturing centres where dough is prepared and distributed to women for rolling into Papad. A disclosure was made of the investment made by the Petitioner in movable and immovable properties and of the donations made . By a further letter dated 16 June 2006, the Petitioner forwarded copies of circulars issued by the Khadi and Village Industries Commission recording that the Institution was approved and recognized since 1969 and is engaged in promoting the village industries programme under the Schedule to the KVIC Act,1956. By a communication dated 13 November 2006, the Petitioner placed on the record of the Assessing Officer a branch wise list of donations made for medical aid to women members and to the staff of the Institution.
Information was also set out in respect of the amounts paid for extending scholarship and for promoting education.
5 An order of assessment was passed on 29 December 2006 under Section 143(3) .The Assessing Officer took note of the details filed with regard to income and expenditure alongwith the amount applied for charitable purposes which was stated to be "examined and discussed". The Assessing officer also took note of the fact that the ::: Downloaded on - 09/06/2013 18:07:39 ::: ASN 4 WP-2535.sxw assessee is recognized by the Khadi & Village Industries Commission. A reference was made in the order to the fact that the assessee had filed a copy of the letter dated 16 March 2005 issued by the State Director for Khadi & Village Industries Commission. The Assessing Officer noted that the assessee is engaged in the village industries programme approved by KVIC and, under Section 10(23B) is exempted from tax.
6 The reasons which have been communicated to the Petitioner on 8 November 2011 for reopening the assessment for assessment year 2004-05 are as follows:
ig "On examination of the assessee's Income and Expenditure Account and Balance Sheet as on 31 March 2004 and 31 March 2005 and notes on account contained in Auditor's Report for the year ended 31 March 2004 and 31 March 2005 keeping in view the conditions for claiming exemption u/s.
10(23B) of the IT Act and the assessee's registration with Charity Commissioner the following is noticed:
i) The assessee Institution is running for the purpose of profit and earned the profit of Rs.654.47 lakhs during the previous year relevant to A.Y. 2004-05. As per IT Act the income of the institution will not form part of income if the Institution carried out the activities not for the purpose of profit.
Therefore, the assessee institution is not entitled for exemption u/s. 10(23B) of the IT Act.
ii) The assessee institution had not incurred any expenditure to achieve the object as approved by the Charity Commissioner i. e. Expenditure on educational activities like giving scholarship to the ::: Downloaded on - 09/06/2013 18:07:39 ::: ASN 5 WP-2535.sxw poor deserving student.
iii) No expenditure for rendering and to provide medical aid, relief to the poor or below poverty line (BPL) had been incurred.
iv) The assessee institution had not raised the standard of living of women specially residing in villages to undertake activities in connection with village industries. The Institution had incurred an expenditure for rolling of papad (vanai) amount to Rs. 47,70,21,414/- (including payment of extra vanai) in financial year 2003-04 relevant to A.Y. 2004-05. The payment of vanai made by the institution is only directly related to women for getting work done by them and no other benefit seems to have been given to them.
v) The assessee institution is having 96 branches in all over India which is mainly in the cities including Metropolitan cities, other cities and towns and few branches have only been established in the villages. The major activities of the assessee institution are carried out in urban area of Maharashtra.
vi) The assessee Institution is engaged in the activities for the production of detergent powder and cake which is not covered under village industries.
The similar view was taken by the other revenue department. In Maharashtra, Sales Tax Department has raised the demand of Rs.49.32 crores including demand of Rs.1.55 crores of other state for the period from the year 1988 to 2005. The Central Excise department had also raised demand of Rs.4.49 crores during the year 1993 to 2005. During the previous year relevant to A.Y. 2004 -05, the sale of detergent powder and cake were shown at Rs.5937.43 lakhs.
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vii) The MRP of main product of institution
of papad (branded as Lijjat Papad) is not less than the MRP of papad manufactured by the other firm M/s.
Ganesh Industries, Kandivali, Mumbai.
viii) The assessee institution has not provided any service for general benefit/public utility but it was commercially dealt with its service for a price depending upon the requirement in open market.
ix) The assessee institution had not applied its income or accumulated for application solely for the development of village industries whereas the surplus money had been invested into the deposit in various banks (Rs.1976.75 lakhs as on 31 March 2004) and earned huge amount of interest of Rs.99.97 lakhs in previous year relevant to A.U. 2004-05."
7 The Assessing Officer has on the basis of these reasons stated that the activities carried on by the assessee do not cover any public charity but are commercial activities for which the Petitioner is not entitled to an exemption under Section 10(23B). The assessment is sought to be reopened beyond a period of four years by a notice dated 21 March 2011.The Assessing Officer has in the following extract from his reasons proceeded to also state that there was a failure on the part of the Petitioner to disclose fully and truly all material facts necessary for the assessment:
"The assessee institution has failed to
provide the information in the return such as
expenditure incurred to achieve the object as
approved by the Charity Commissioner i. e.
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Expenditure on educational activities like giving scholarship to the poor deserving student, expenditure for rendering and to provide medical aid, relief to the poor of below poverty line (BPL) had been incurred, expenditure for raising the standard of living of women specially residing in villages to undertake activities in connection with village industries, expenditure for providing services for general /public utility. Therefore, the cause of escapement of income within the meaning of section 147 of Income Tax Act, 1961 is failure on the part of the assessee to make full and true disclosure of the material facts as far as the above issues are concerned."
8The Petitioner submitted its objections on 18 November 2011. In those objections, it has been stated that the assessee had filed its return of income upto 2011-12 after receiving approval from the Khadi and Village Industries Commission for claiming exemption under Section 10(23B). Assessments for assessment years 2004-05 to 2008-09 were completed under Section 143(3) and in each of the assessment years the assessee trust has been granted an exemption under Section 10(23B). The assessee noted that KVIC has granted its approval even as late as 20 October 2011 for assessment year 2011-12 and the approval has not been withdrawn till date. The assessee recorded that during the year ending 31 March 2004, it had provided donations aggregating to Rs.18,98,522/-, scholarships of Rs.6,65,775/- and had invested an amount of Rs.9,21,54,138/- in purchasing immovable properties for setting up new branches and divisions for village industries. Thus, it was stated that the assessee made investments for ::: Downloaded on - 09/06/2013 18:07:39 ::: ASN 8 WP-2535.sxw development of its objects which was more than the net profit of Rs.6.54 crores as on 31 March 2004. In the course of the reply, the Petitioner dealt with each of the reasons which were furnished for reopening the assessment. As regards the first reason, the Petitioner submitted that it has 93 branches and divisions giving employment to more than 40,000 women to whom Papad rolling charges of Rs..47/- crores were paid. The net profit of Rs.6.54 crores on the total net sales of Rs.288.47 crores worked out to 2.27% of the turnover. As against the margin of Rs.6.54 crores, the trust had invested Rs.9.21 crores for setting up new branches and divisions. The trust had loans aggregating to Rs.12.87 crores and was therefore, required to generate income from which it can repay the loan liability. As regards the second reason, it was stated that during the previous assessment year 2004-05 the assessee had given scholarships aggregating to Rs.6.65 lacs. As regards the third reason, it was stated that the trust was providing medical aid to all its members from time to time, the details of which were set out. As regards the fourth reason, it was pointed out that the payments which were made to the members which stood at Rs.30.94 crores for financial year 2000-01, increased to Rs.88.66 crores for 2010-11. The most important aspect which was emphasised is that the assessee provides employment to women who cannot go to offices for earning their livelihood. As a result of the activities, 40,000 women are provided self employment resulting in improvement of their standard of living. As regards the fifth reason, it has been stated that the trust had set up branches in villages where they were initially opened. Subsequently, as the villages were converted into towns and cities, branches located in the villages were converted into ::: Downloaded on - 09/06/2013 18:07:40 ::: ASN 9 WP-2535.sxw urban locations. However, the Director of Legal Affairs of the KVIC had in his communication informed the Deputy Director of Income Tax that under Section 2(i) of the KVIC Act any industry recognized as a village industry located in an area other than a rural area at any time before the commencement of the KVIC (Amendment ) Act, 1987 shall continue to be a village industry under the Act. Since the units of the Petitioner were established prior to 1987 in areas which are now termed as urban areas, they were required to be treated as village industries. Moreover, it was stated that the Schedule to the Khadi and Village Industries Commission Act, 1956 furnishes a list of village industries one of which is the Cottage soap industry. As regards the seventh reason, it was stated that since the assessee provides quality products to consumers, raw material used is under strict control and supervision and therefore, the cost of production of the assessee may be more than the cost of production of other commercial organizations. As regards the eighth reason, it was stated that the main object of the assessee is to provide self employment to needy women, which is followed by the trust. Similarly, as regards the ninth reason, it was submitted that out of the total assets of Rs.68.94 crores for the year ending 2004, about Rs.
20.11 crores were invested in immovable property and the balance is invested in movable properties, closing stock, loans, advances, deposits to members, staff and others and fixed deposits. The Petitioner submitted that no case was made out for reopening the assessment under Section 148 of the Income Tax Act, 1961.
The objections of the Petitioner have been disposed of by ::: Downloaded on - 09/06/2013 18:07:40 ::: ASN 10 WP-2535.sxw the Assessing Officer on 15 December 2011 by holding that while recording the reasons for reopening, "detailed discussions were made"
and the primary conditions for issuing a notice under Section 148 have been fulfilled.
Counsel appearing on behalf of the Petitioner submitted that
(i) During the course of the assessment proceeding a detailed enquiry was followed by the Assessing Officer in the course of which the Petitioner made a disclosure by its communications dated 10 June 2006, 16 June 2006 and 30 November 2006; (ii) Ex-facie, the reasons disclosed for reopening the assessment are based on material which was disclosed to the Assessing Officer in the Income and Expenditure Account and in the balance sheet as of 30 March 2004 and 30 March 2005; (iii) There was no failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment for assessment year 2004-05; (iv) None of the reasons which have been disclosed by the Assessing Officer have a bearing on/or relevance to the entitlement of the assessee to claim the benefit for an exemption under Section 10(23B) ; (v) Even after the assessee received a notice under Section 148 for reopening the assessment for 2004-05, the Assessing Officer in his order of assessment dated 23 December 2011 for assessment year 2009-10 has accepted the entitlement of the assessee to an exemption under Section 10(23B) and has assessed the assessee under Section 143(3) to a Nil return of income.
9 On the other hand, Counsel appearing on behalf of the ::: Downloaded on - 09/06/2013 18:07:40 ::: ASN 11 WP-2535.sxw Revenue submitted that the primary requirements of Section 10(23B) are i) Approval of the Khadi and Village Industries Commission; ii) Existence of the Institution solely for the development of Khadi and Village Industries: Counsel urged that (a) in the order of assessment that was passed by the Assessing Officer under Section 143(3), no enquiry was made as to whether the assessee has fulfilled the conditions requisite for the grant of exemption under Section 10(23B); (b) No disclosure was made by the assessee fully and truly of all material facts to show that the assessee exists solely for development of khadi and village industries; (c) Whereas, the objects of the assessee would show that the assessee was set up for carrying out educational activities, rendering medical aid and for upgrading the standard of women, none of those objects were found to be fulfilled in the course of the disclosure made by the assessee. In these circumstances, it was submitted that, it is clear that the requirement for invoking the powers to re open the assessment even beyond a period of four years has been fulfilled.
10 Under Section 10(23B), an exemption has been provided to the income of an Institution constituted as a pubic charitable trust or registered under the Societies Registration Act, 1860 or under any law corresponding to that Act in force in India. The conditions prescribed by Parliament in order to enable an assessee to avail of the exemption is that the Institution must exist solely for the development of khadi and village industries or both and not for the purpose of profit. The exemption is available to the extent to which such income is attributable to the business of production, sale or marketing of khadi or products of ::: Downloaded on - 09/06/2013 18:07:40 ::: ASN 12 WP-2535.sxw village industries. Under the first proviso to Section 10(23B), it has been prescribed that the institution must apply its income or accumulate it for application solely for the development of khadi or village industries or both and the institution must be approved for the purpose by the Khadi and Village Industries Commission. Under the third proviso to Section 10(23B), the Commission is empowered to withdraw the approval granted to an institution and to forward a copy of the order of withdrawal to the Assessing Officer if he is satisfied that the institution has not applied or accumulated its income in accordance with the provisions of the first proviso or the activities of the Institution are not being carried out in accordance with all or any of the conditions subject to which this Institution was approved. It is not in dispute before the Court that the Petitioner continues to have the approval of the Khadi and Village Industries Commission. The approval has not been revoked.
11 During the course of the assessment proceedings under Section 143(3), the Assessing Officer, followed a line of enquiry consequent upon which a notice was issued to the Petitioner under Section 143(2). The Petitioner had responded to the queries of the Assessing Officer by its replies dated 10 June 2006, 16 June 2006 and 30 June 2006. The Assessing Officer had gone through the balance sheet and the income and expenditure statements that were filed together with the return of income. The details of the expenses incurred by the trust, of the investments made in movable and immovable properties and in regard to the funds expended inter alia for making donations, for providing medical aid for scholarships were also disclosed. The ::: Downloaded on - 09/06/2013 18:07:40 ::: ASN 13 WP-2535.sxw Assessing Officer accepted the claim of the assessee to the benefit of the exemption under Section 10(23B) after being duly satisfied that the assessee has fulfilled the requisite conditions.
Now the reasons for reopening the assessment need to be considered in this background. The entire basis for reopening the assessment, set out in the reasons communicated to the assessee is the income and expenditure account and the balance sheet of the assessee. The inferences which the Assessing Officer has drawn are based on the material filed with the return of income. That being the position, there is merit in the submission made on behalf of the assessee that the primary requirement, which is of a jurisdictional nature, for reopening of an assessment beyond a period of four years has not been fulfilled. Beyond a period of four years, the Assessing Officer before proceeding to reopen an assessment must be satisfied that is there is a failure on the part of the assessee to disclose truly and fully all material facts necessary for assessment for the assessment year. The requirement of the proviso to Section 147 has evidently not been fulfilled in the present case. The Assessing Officer sought to draw an inference that the assessee has failed to provide in the return details such as the expenditure incurred to achieve the objects as approved by the Charity Commissioner, of the expenditure on educational activities like giving scholarships to poor and the deserving students, on providing medical aid and relief to below the poverty line persons and the expenditure incurred in raising the standard of living of women. The line of enquiry which the Assessing Officer seeks to pursue in regard to the expenditure ::: Downloaded on - 09/06/2013 18:07:40 ::: ASN 14 WP-2535.sxw incurred by the assessee on furnishing scholarships or providing medical aid or relief to the poor is extraneous to the purpose of Section 10(23B).
The requirement of Section 10(23B) is that the institution must exist solely for the purpose of developing Khadi or village industries, or both.
That is the only relevant and germane consideration. Evidently, the inferences which the Assessing Officer sought to draw are based entirely on the material produced by the assessee when the order of assessment was passed. There is, in these circumstances, absolutely no basis in the submission to the effect that there was a failure on the part of the assessee to disclose material facts fully and truly. Apart from this, the assessee had while filing objections to the reopening of the assessment furnished under a letter dated 18 November 2011, a detailed response to each of the grounds on which the assessment was sought to be reopened.
The Assessing Officer has manifestly failed to consider or deal with the grounds of objection submitted by the assessee. What the Assessing Officer has recorded is that when the reasons were recorded for reopening the assessment, these were based on a detailed discussion of the issues. Hence, the primary condition for issuance of the notice under Section 148 was stated to be fulfilled. The Assessing Officer has completely ignored the objections which were filed by the assessee. If the Assessing Officer had applied its mind, he would have held that there was no basis for reopening the assessment beyond a period of four years in this case. Having considered the submissions and the reasons, we are of the view that the reopening of the assessment is based purely on a change of opinion by the Assessing Officer and cannot be permitted in law.
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12 For these reasons, we allow the petition by quashing and
setting aside the notice dated 21 March 2011 issued under Section 148 of the Income Tax Act, 1961.
13 Rule is accordingly made absolute.
15 There shall be no order as to costs.
ig ( DR.D.Y. CHANDRACHUD, J )
( M.S. SANKLECHA, J. )
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