The Commissioner Of Income Tax,Bathinda v. M/S Khalsa Dewan (Regd.), Kikarbazar, Bathinda

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No.494 of 2007Date of decision: 29.1.2008 The Commissioner of Income tax,Bathinda ......Appellant Versus M/s Khalsa Dewan (Regd.), KikarBazar, Bathinda ......Respondent CORAM:-HON'BLE MR.JUSTICE SATISH KUMAR MITTALHON'BLE MR.JUSTICE RAKESH KUMAR GARG * * * Present:Mr. Yogesh Putney, Advocate for the appellant-revenue. * * * Rakesh Kumar Garg, J . 1.The present appeal has been filed by the revenue against theorder dated 18.5.2007 (Annexure A-4) passed by the Income Tax AppellateTribunal Amritsar Bench, Amritsar in ITANo.2(ASR)/2000 for theassessment year 1995-96 raising the following substantial questions oflaw:- “(i) Whether on the facts and circumstances of the case,the appellate tribunal was right in law in allowing theappeal of the assessee and setting aside the order ofld.CIT(A) and quashing the intimation sent by the A.O.U/s 143(1)(a) of the I.T. Act, 1961 ? (ii)Whether on the facts and circumstances of the case, the ld.ITAT is right in law in taking a view that thechanging of status of firm from Trust to an Associationof Persons (AOP) falls outside the purview of see 143(1)(a) of the Income Tax Act 1961?” as under:- The asseessee filed Income Tax return in this case on27.3.1997 showing his income as Nil. While processing the return underSection 143(1)(a) of the Income Tax Act (for short the 'Act'), the AssessingOfficer found that the claim of the assessee for exemption under Section12-A of the Act was not allowable in the absence of registration certificate.A notice dated 12.3.1998 (Annexure A-1) was issued to the assesseerequiring him to explain why the status of the said trust may not be treatedas AOP in the absence of the registration certificate. On the required dateneither any reply was received nor anybody attended the proceedingsbefore the AO on behalf of the assessee. Hence, the AO proceeded withthe computation of total income under Section 143(1)(a) of the Act andtreated the status of the trust as AOP and all the income for theassessment year was treated as AOP and was taxed accordingly. TheAssessing Officer changed the status of the assessee from trust (08)claimed in the return to an AOP (07) while processing the return underSection 143(1)(a). Aggrieved with this action of the Assessing Officer, theassessee went in appeal before the CIT (A), who vide his order dated3.8.1999 in appeal No.221-IT/CIT(A)/BTI/97-98 dismissed the appeal ofthe assessee observing as under:- “I have given due consideration to the rivalsubmissions and I hold that there is no force in thearguments advanced by the learned counsel ofthe appellant. The appellant has claimed thestatus while filing the return as charitable trust i.e.08 but the same was not substantiated byenclosing the registration certificate from thecompetent authority as required under the statute. Aggrieved with this action of the Assessing Officer, theassessee went in appeal before the CIT (A), who vide his order dated3.8.1999 in appeal No.221-IT/CIT(A)/BTI/97-98 dismissed the appeal ofthe assessee observing as under:- “I have given due consideration to the rivalsubmissions and I hold that there is no force in thearguments advanced by the learned counsel ofthe appellant. The appellant has claimed thestatus while filing the return as charitable trust i.e.08 but the same was not substantiated byenclosing the registration certificate from thecompetent authority as required under the statute. The A.O. has therefore intimated the deficiency tothe assessee for filing registration certificate u/s12A to which the appellant failed to comply. Theappellant failed to furnish the certificate ofregistration issued by the competent authorityunder sec. 12A of the Income tax Act 1961 evenat the appellate stage. On the contrary it isestablished that the trust of the appellant is notregistered by the competent authority i.e. CITunder Section 12-A of the Income Tax Act, 1961.I, therefore, hold that the A.O. was right in hisaction in treating the trust as an A.O.P instead ofreligious trust in the absence of any proof havingthe trust been registered by the CIT under Section12A of the Income tax Act 1961. It is more sobecause the appellant failed to remove thedeficiency even when it was intimated by the A.O.This is the first year of assessment of the trust andtherefore, the A.O. had all the power includingchanging the status to rectify the mistake of primafacie nature including the status after dulyintimating the appellant about his intention to doso. In the absence of registration of trust beforethe competent authority, the status of the trust canonly be AOP. The assessment so framed by theA.O. in the status of AOP is legal and in order byvirtue of provisions of section 292B of the Income-tax Act 1961. Keeping in view all the facts andlegal position into consideration I hold that the action of the A.O. in changing the status anddisallowing the exemption claimed under sec.11 iscorrect and justified and the same stands upheld.” 3.Against the above order of the CIT(A), Bathinda, the assesseepreferred an appeal before the Income Tax Appellate Tribunal, Amritsarwho vide its order dated 18.5.2007 (Annexure P-4) in ITA No.2(ASR)/2000allowed the appeal and set aside the order of the CIT(A) and quashed theintimation sent by the AO under Section 143(1)(a) on the ground that thesame was illegal and bad in law. While passing the impugned order dated18.5.2007 the tribunal held that changing the status of the firm/trust to anAOP falls outside the ambit and purview of Section 143(1)(a) . Even thoughthe trust was not registered with the CIT the assessment could not bemade in the status of an AOP under Section 143(1)(a). Moreover, the AOcould have done so by issuance of notice under Section 143(2) of the Act. 4.Mr. Yogesh Putney, counsel for the revenue has argued thatadmittedly the respondent-trust was not registered with the Commissionerof Income Tax under Section 12AA of the Income Tax Act therefore, wasnot entitled to the exemption as claimed under Section 11 of the Act andfurther the assessee failed to furnish any explanation/reply to the letterdated 12.3.1998 written by the AO to him allowing him an opportunity toexplain why the status of the trust may not be taken as AOP in theabsence of registration. Therefore, the trust/assessee was rightly treatedas an AOP at the time of processing the return under Section 143(1)(a) ofthe Act. In support of his argument learned counsel for the revenue hasplaced heavy reliance upon the proviso (iii) to Section 143(1)(a) of theIncome Tax Act. 5.We have heard learned counsel for the revenue and perusedthe record. 5.We have heard learned counsel for the revenue and perusedthe record. decided is whether the AO was justified in changing the status of theassessee from a 'Trust to an AOP while processing the return underSection 143(1)(a) of the Act. The scope and ambit of powers vested withthe AO for making prima facie adjustments at the relevant time wasprovided under the proviso to Section 143(1)(a) of the Act and the samewas confined only to such adjustments specifically enumerated in proviso(i), (ii) and (iii) of the Act. In the case ofS.R.F Charitable Trust vs. Unionof India and others (1992) 193 ITR 95, the Hon'ble Delhi High Court heldthat as per provisions of Section 143(1)(a) of the Act the AO could allow ordisallow only such claims which were admissible/inadmissible on the basisof returns and documents accompanying the return. It was also held thatAO had no power to disallow the claim merely on the ground that no proofwas furnished by the assessee. While interpreting Clause (iii) of the firstproviso to Section 143(1)(a) of the Income Tax Act, 1961, it was held asunder- “The said clause clearly provides that the Income-tax Officer can make an adjustment to the incomeor loss declared in the return if, on the basis of theinformation available in such return, accounts ordocuments, the deduction allowance or reliefclaimed is prima facie inadmissible. Theconclusion that the claim of the assessee isinadmissible must, in other words, flow from thereturn as filed. No power is given to the Income-tax Officer to disallow a claim for the reason thatthere is no proof in support of the claim made bythe assessee. In a way, the said clause (iii) of theproviso is analogous to section 154 of the Act.Where it is evident from the return as filed, along with the documents in support thereof, that a claimof the assessee is inadmissible, only then anadjustment under the said proviso can be made.If proof in support of the claim is not furnished byan assessee, then for the lack of proof, nodisallowance or an adjustment can be made. Theonly option which is open to the Income -taxOfficer, in such a case, is that he can require theassessee to furnish proof in which case he willpresumably have to issue notice under section143(2). This is also evident from the fact that,except for the documents specified, the assesseeis not required to file the entire books of accountor other documents along with the return. Theproof in support of the claim may be evidencedfrom correspondence, from the books of accountor other documents and it is not the law, as weunderstand it, that, in support of a claim made inthe return for deduction or non-taxability of areceipt, all the proofs available and originaldocuments must be filed along with the return. Itis apparent on a reading of the said provision thatadjustment can be made only if there isinformation available in such return that primafacie a claim or allowance is inadmissible. 7.The same view was taken by the Delhi High Court in the caseofSamtel Color Ltd. vs. Union of India (2002) 258 ITR 1 and it was heldas under:- 7.The same view was taken by the Delhi High Court in the caseofSamtel Color Ltd. vs. Union of India (2002) 258 ITR 1 and it was heldas under:- “A bare reading of section 143(1)(a) of theIncome-tax Act, 1961, makes it clear that if, on thebasis of the return filed by the assessee, any taxor interest is found due after adjustments, as setout in the section, an intimation has to be sent tothe assessee specifying the sum so payable.Similarly, if any refund is found due to theassessee on the basis of the said return, it shallbe granted. However, the first proviso to thesection authorises the Assessing Officer to makecertain adjustments while calculating the tax orinterest payable or while granting refund. Theadjustments permitted to be made are alsospecified under the proviso. Clause (iii) of the firstproviso lays down that unless the return or theaccompanying documents or accounts show thatthe deduction, allowance or relief claimed thereinis prima facie inadmissible on the basis ofinformation available in the said documents, suchdeduction or allowance claimed cannot bedisallowed. The phrase “prima facie” is notdefined in the Act. In common parlance thephrase “prima facie” means “on the face of it”.Going by the literal and dictionary meaning of thephrase “prima facie”, for the purposes ofadjustments under clause (iii) of the proviso, adeduction claimed must be inadmissible on theface of the return, documents and accountsaccompanying it. If the deduction or allowance or relief so claimed is capable of a debate or requiresfurther proof it cannot be made under clause (iii) ofthe proviso to section 143(1)(a) of the Act. It is notopen to the Assessing Officer to make anyadjustment in the returned income by disallowingany claim for deduction, allowance or relief, unlesshe is satisfied on the basis of information availablein the return, documents and the accountsaccompanying it, that such a claim is inadmissibleon the face of it and there is no possibility of anydebate thereon. If anything more is read into thepower of the Assessing Officer to make unilateraladjustments it would render the provision whollyarbitrary and unreasonable because : (a) a disallowance is made without giving anopportunity to the assessee to explain his viewpoint in support of the deduction or allowance, and(b) additional tax on the increased amount ischarged from him arbitrarily. This would not onlybe in total violation of the principles of naturaljustice, it will also be not in consonance with thespirit of the provision to cause minimuminconvenience to the assessee and at the sametime put the assessee on guard against claiminginadmissible deductions and allowances. Noprejudice will be caused to the Revenue. In agiven case where the Assessing Officer has anydoubt about the allowability of deduction or claimmade by the assessee, it is open to him to issue a notice under sub-section (2) of section 143 andhave the evidence in support thereof. 8.The Hon'ble Kerala High Court in the case of Commissionerof Income Tax vs. K.V. Mankaram & Co., (2000) 245 ITR 353 whileinterpreting the scope of Section 143(1)(a) of the Act where the status of afirm was changed to an AOP held as under:- notice under sub-section (2) of section 143 andhave the evidence in support thereof. 8.The Hon'ble Kerala High Court in the case of Commissionerof Income Tax vs. K.V. Mankaram & Co., (2000) 245 ITR 353 whileinterpreting the scope of Section 143(1)(a) of the Act where the status of afirm was changed to an AOP held as under:- “The proceeding under section 143(1)(a) does notresult in an order of assessment. The intimationgiven under section 143(1)(a) cannot be treatedan order of assessment. It is only to be deemedan order for the limited purpose of sections 154,246 and 264 of the Act. Under section 143(1)(a)of the Act, the intimation is deemed to be a noticeof demand under section 156 of the Act. Exceptintimation, no other order is contemplated undersection 143(1)(a). There is a distinction betweenan order of assessment and a notice of demand.Under section 246 also, a clear distinction is madebetween an intimation and an order ofassessment. The Assessing Officer cannot, undersection 143(1)(a), change the status of a firm to“association of persons” which can be done undersection 185 of the Act, at the time of assessment.” 9.We are in respectful agreement with the judgements inSamtelColor Ltd.'s & K.V. Mankaram & Co.'s cases (supra). 10.The scope and ambit of the powers vested with the AO formaking prima facie adjustments at the time of processing the return under Section 143(1)(a) are very limited. The change of status of the assesseefrom Trust to an AOP is not covered in the nature of adjustmentsmentioned in any of the proviso to Section 143(1)(a) muchless underproviso (iii) of the said Section. It is immaterial that the trust was notregistered with the CIT and was not eligible for the exemptions underSection 11 of the Act because there must be power vested with the AO toallow or disallow the claim while processing the return which is not withinthe scope of Section 143(1)(a) of the Act. It is not open to the AssessingOfficer to make any adjustment in the returned income by disallowing anyclaim for deduction, allowance or relief, unless he is satisfied on the basisof information available in the return, documents and the accountsaccompanying it, that such a claim is inadmissible on the face of it andthere is no possibility of any debate thereon. If anything more is read intothe power of the Assessing Officer to make unilateral adjustments it wouldrender the provision wholly arbitrary and unreasonable. 11.In view of the above, no substantial question of law arises forthe determination of this Court and therefore, the present appeal isdismissed. (RAKESH KUMAR GARG) JUDGE January 29, 2008ps (SATISH KUMAR MITTAL) JUDGE