Validity of Reassessment u/s 148 if AO failed to pass any speaking order in disposing of assessees objections

short overview : Where AO did not pass any speaking order in disposing of assessee|s objections against notice under section 148, the assessment order passed subsequent to such notice, would be considered as bad in law and hence, the same was liable to be quashed.

AO issued notice under section 148 for re-opening of assessment. He straightway proceeded to finalise the assessment without disposing of the objections of assessee to the notice under section 148 by passing a speaking order.

it is held that Since AO did not pass any speaking order in disposing of assessee’s objections against notice under section 148, the assessment order passed subsequent to such notice, would be considered as bad in law and hence, the same was liable to be quashed.

Decision: In assessee’s favour.

Referred: GKN Driveshafts (India) Ltd. v. ITO & Ors. (2003) 259 ITR 19 (SC): 2003 TaxPub (DT) 0734 (SC), Calcutta Discount Company Ltd. v. ITO & Anr. (1961) 41 ITR 191 (SC): 1961 TaxPub (DT) 0130 (SC), M/s. Home Finders Housing Ltd. v. ITO (2018) 404 ITR 611 (Mad): 2018 TaxPub (DT) 2534 (Mad-HC), M/s. Home Finders Housing Ltd. v. ITO 2017 TaxPub (DT) 1730 (Mad-HC), Arvind Mills Ltd. v. Asstt. CWT (No. 2) (2004) 270 TIR 469 (Guj): 2004 TaxPub (DT) 1854 (Guj-HC), Delhi Tourism and Transport Development Corporation Ltd. v. Asstt. CIT & Ors. (2004) 141 Taxman 361 (Delhi): 2006 TaxPub (DT) 0035 (Del-HC), Garden Finance Ltd. v. Asstt. CIT (2000) 268 ITR 48 (Guj): 2004 TaxPub (DT) 1423 (Guj-HC), and M/s. Home Finders Housing Ltd. v. ITO 2018 TaxPub (DT) 3182 (SC).

IN THE ITAT, DELHI BENCH

BHAVNESH SAINI, J.M. & N.K. BILLAIYA, A.M.

ITO v. ICFAI University

ITA No. 3657/Del/2015

23 May, 2019

Appellant by: Ashima Neb, Sr. DR

Respondent by: None

N.K. Billaiya, A.M.

This appeal by the revenue is preferred against the order of the Commissioner (Appeals), Dehradun, dated 13-3-2015 pertaining to assessment year 2008-09.

2. The grievance of the revenue read as under :–

1. The learned Commissioner (Appeals) has erred in law and on the facts of the case by observing that failure to address the objections of the assessee by passing a speaking order has vitiated the proceedings and rendered it liable to be quashed since the reasons for re-opening the case under section 148 were based on proper reasoning and adequate facts.

2. The learned Commissioner (Appeals) has erred in law and on the facts by deleting the disallowance of Rs. 718.49 Lakhs by observing that “The sponsor society is also a society registered under section 12 AA of the Income Tax Act, 1961. Donations by one society to another having similar objects are considered a legitimate application of income by a charitable society. Even if we view the sponsor society, especially in view of the facts that is has an objective of imparting higher education and is creating infrastructural facilities for the same for use of the University”.

3. Facts relating to ground No. 1 show that the assessment has been reopened on the instructions from C&AG. C & AG in the course of audit of accounts has objected to the treating the sum of Rs. 71848612 as application of income which was the payment made to the sponsor society. The assessee was asked to explain the same.

4. In its reply the assessee explained that the sum of Rs. 71848612 can only be treated as application of income and the C& AG proceeded only on partial information. The assessee explained the entire factual position leading to the impugned payment made to the sponsor society.

5. The assessing officer did not accept the contention of the assessee and proceeded to complete the reassessment proceedings.

6. Before Commissioner (Appeals) the assessee strongly contended that the assessing officer has not dispose of the objection to the notice under section 148 by passing a speaking order but instead straightway proceeded to finalise the assessment. Strong reliance was placed on the judgment of the Hon’ble Supreme Court in the case of GKN Drivesharfts India Limited (2002) 125 Taxman 963 (SC) : 2003 TaxPub(DT) 0734 (SC).

7. After considering the facts and the submissions the Commissioner (Appeals) observed as under :–

“A perusal of the assessment order does not reveal that the assessing officer issued any such speaking order but simply proceeded to reiterate the reasons for initiating the proceedings under section 148 and made this the basis of the addition against the assessee society.”

8. After observing as mentioned above the Commissioner (Appeals) held as under :–

“19. In view of the aforesaid decisions of the Hon’ble Court, and the self evident fact of the assessing officer not passing any speaking order in disposing the assessee’s objections against the notice under section 148, it is held that the subsequent assessment order is bad in law and deserving of being quashed.”

9. Before us the D.R. strongly supported the findings of the assessing officer and placed reliance on the decision of the Hon’ble High Court of Madras in Writ Petition No. 1019 of 2017. It is the say of the D.R. that the SLP filed by the assessee in this case has been dismissed by the Hon’ble Supreme Court. The D.R. supplied the copies of the order.

10. We have carefully considered the orders of the authorities below. There is no dispute that the assessing officer has not dismissed the objections of the assesssee by any speaking order. This is clearly in violation of the ratio laid down by the Hon’ble Supreme Court in the case of M/s. GKN Drivesharfts (supra) wherein the Hon’ble Supreme Court clearly laid down that where the notice under section 148 was issued and the assessee filed objections. The assessing officer was bound to dispose of the same by a speaking order.

11. This was subsequently followed by the Hon’ble Gujarat High Court in the case of Garden Finance Limited reported in 268 ITR 48 where by a majority opinion it was laid down by the Hon’ble High Court :–

“What the Supreme Court has now done in the GKN Driveshafts (India) Ltd.’s case (2003) 259 ITR 19 (SC) : 2003 TaxPub(DT) 0734 (SC) is not to whittle down the principle laid down by the Constitution Bench of the Apex Court in Calcutta Discount Co. Ltd. (1961) 41 ITR 191 (SC) : 1961 TaxPub(DT) 0130 (SC) but to require the assessee first to lodge preliminary objection before the assessing officer who is bound to decide the preliminary objections to issuance of the reassessment notice by passing a speaking order and, therefore, if such order on the preliminary objections is still against the assessee, the assessee will get an opportunity to challenge the same by filing a writ petition so that he does not have to wait till completion of the reassessment proceedings which would have entailed the liability to pay tax and interest on reassessment and also to go through the gamut of appeal, the second appeal before Income Tax Appellate Tribunal and then reference/tax appeal to the High Court.

Viewed in this light, it appears to me that the rigour of availing of the alternative remedy before the assessing officer for objecting to the reassessment notice under section 148 has been considerably softened by the apex court in GKN Driveshafts (India) Ltd.’s case (2003) 259 ITR 19 (SC) : 2003 TaxPub(DT) 0734 (SC)in the year 2003. In my view, therefore, the GKN Drivesharfts (India) Ltd. ‘s case (2003) 259 ITR 19 (SC) : 2003 TaxPub(DT) 0734 (SC) does not run counter to the Calcutta Discount Co. Ltd. case (1961) 41 ITR 191 (SC) : 1961 TaxPub(DT) 0130 (SC) but it merely provides for challenge to the reassessment notice in two stages, that is, —

(i) Raising preliminary objections before the assessing officer and in case of failure before the assessing officer;

(ii) Challenging the speaking order of the assessing officer under section 148 of the Act.”

12. In a subsequent judgment the Hon’ble Gujarat High court in the case of Arvind Mills Limited (2004) 270 TIR 469 (Guj) : 2004 TaxPub(DT) 1854 (Guj-HC)following the aforesaid decision concluded as under :–

“That once the Supreme Court stated that the assessing officer was bound to dispose of the objections by passing a speaking order, it was not open to the authorities to contend that in the absence of any provision in the Act, the authorities could not have passed a speaking order. Hon’ble Delhi High Court in the case of Delhi Tourism & Transport Development Corporation Ltd. v. ACIT (2004) 141 Taxman 361 (Delhi) : 2006 TaxPub(DT) 0035 (Del-HC), while relying upon the aforesaid decision of the Hon’ble Apex Court in GKN Drivesharfts (India) Ltd. (supra) directed to follow the procedure laid down by the Hon’ble Apex Court and pass a speaking order before passing the assessment order.”

13. After the aforesaid decisions by the Hon’ble Supreme Court and the Hon’ble Gujarat High court are read alognwith decision of the Hon’ble Madras High Court relied upon by the DR, we find that the decision of the Hon’ble Madras High Court is by a single Judge and that to in writ petition whereas the decision of Hon’ble Supreme Court and the Hon’ble Gujarat High Court are in civil appeals by division bench. Moreover there being no direct judgment of the jurisdictional High Court of Delhi we are inclined to follow the decision of Hon’ble Supreme Court and Hon’ble Gujarat High Court as discussed here in above.

14. We find that the Commissioner (Appeals) has rightly considered the decision of Hon’ble Supreme Court and the Hon’ble High Court Gujarat, therefore, no interference is called for. Ground No. 1 is accordingly dismissed.

15. Coming to ground No. 2, facts on record show that the facts of the case are that the Uttaranchal legislature passed an Act called the ICFAI University Act, 2003, permitting ICFAI to set up a University in Uttaranchal. As per this act all the movable, and immovable properties acquired, created, arranged or built by the University for the purpose of the University in the state of Uttaranchal would vest in the University and would not be used for any other purpose other than the purpose for which it was acquired. Due to the difficulty in raising finance by a University which was a new startup venture, the ICFAI society took up the task of raising finance for creating the infrastructure of the University and providing assistance to it till such time as it became self sufficient. On the basis of its resolution, it acquired land from the Govt, of Uttaranchal out of its own resources. It also approached a commercial bank for loan for constructing the infrastructure of the University. The bank sanctioned the loan subject to ICFAI entering into a MoU with the University. Accordingly, an MoU was concluded that committed ICFAI to raising funds on behalf of the University and making payment of all loans etc. until such time as the loans and other funds provided by ICFAI could be repaid by the University out of its own resources. Accordingly, both the parties agreed that upon clearing of such liability, the title to the property and infrastructure of the University would pass to the University. However, the de facto ownership of the property would remain with the University. In accordance with the same, the society has taken loan from Oriental Bank of Commerce and also contributed from its own resources for setting up the University. The property acquired and the infrastructure created is being used by the University, entirely for its objects as laid down in the ICFAI University Act of 2003. On account of this property, the ICFAI society has paid back to the bank an installment of Rs. 201,57,750 and this expenditure has been reimbursed to the society by the University out of its development fund. Furthermore, as the society had invested a sum of Rs. 5.17 crores out of its own funds in the setting up of the University upto 31-3-2008, this entire amount has been refunded to the society by the University during the course of the year. The University had held that this repayment to the society is solely on account of the properties which are in its de facto control/ownership and de jure title of which would pass to the society as per the MoU, on payment of the remaining outstanding liability.

16. The bone of contention is that the claim of the payment of Rs. 71848612 transferred to the ICFAI University, Hyderabad by the assessee and claimed as application of income. The assessing officer was of the considered view that this repayment cannot be considered as application of income since the cost of infrastructure is not reflected in the balance sheet of the assessee nor the liabilities are shown in the balance sheet.

17. If the objections of the assessee are considered in the light of the factual matrix in their true perspective there remains no doubt that the payment being made to the sponsor society is on account of the MOU entered into between the sponsor society and the university with regard to the creation of infrastructure for the university and its ultimate transfer to the university after clearing of all liabilities in this regard. Therefore, it can be safely concluded that the assessee is right when it says that that all the money expenditure is applied for creation that infrastructure facilities of the university.

18. Moreover the sponsor society is also registered under section 12AA of the Act which means that contributions by the one society to another having similar objects have to be considered a legitimate application of income by a charitable society.

19. Considering the totality of the facts from all possible angles, we do not find any error or infirmity in the findings of the Commissioner (Appeals). Ground No. 2 is dismissed.

20. In the result, the appeal filed by the revenue is dismissed.