SREE NARAYANA CHANDRIKA TRUST VS COMMISSIONER OF INCOME-TAX (NO.2), 1998 PTD-KERALA-HIGH-COURT-INDIA 1183 (1996)

Income-tax---

----Reassessment---Information that income had escaped assessment-- Charitable trust---Exemption---Trust partner in two firms---Funds of trust continuing to remain with firms in which close relatives of trustees of trust were partners and in which trustees had substantial interest---Closeness of relationship not disclosed in original assessment---Failure of assessee to submit list as stated in return which would have enabled I.T.O. to know about relationship of partners of firm to managing trustees of trust-- Reopening of assessment to withdraw exemption granted---Valid---Indian Income Tax Act, 1961, Ss. 11, 12, 13(1)(c)(ii), (2)(h) & 147.

The original assessment of the assessee-trust for the assessment year 1973-74, was completed by the Income-tax Officer granting exemption to the trust under section 11(2) of the Income Tax Act, 1961. Later, the Income-tax Officer reopened the assessment under section 147 (a) of the Act on the ground of escapement of income on account of the omission or failure on the part of the assessee in not disclosing certain primary facts and that the exemption granted under sections 11 and 12 was in violation of the provisions of sections 13(1)(c)(ii) and 13(2)(h) read with section 13(3) of the Act. The Appellate Assistant Commissioner affirmed the order of the Income-tax Officer. The Tribunal found that the assessee-trust was a partner in two firms, that funds of the trust remained with the firms in which close relatives of the trustees of the assessee-trust were partners and in which the trustees had substantial interest, that this closeness of relationship should have been disclosed during the original assessment proceedings itself, that the assessee failed to submit a list as stated in its return which would have enabled the Income-tax Officer to know about the relationship of the partners of the firm to the managing trustees of the trust and that, therefore, the reopening of the assessment was justified. On a reference:

Held, affirming the decision of the Tribunal, that the reopening of the assessment under section 147(a) was justified.

Chandrikka Educational Trust v. CIT (1997) 224 ITR 453 (Ker.) and CIT v. Chandrika Educational Trust (1997) 224 ITR 449 (Ker.) ref.

C. Kochunni Nair for the Assessee.

P.K.R. Menon, Senior Advocate and N.R.K. Nair for the Commissioner.

JUDGMENT

V.V. KAMAT, J.---At the instance of the assessee, the following three questions expect our answer:

"(1) Was the Appellate Tribunal justified in holding that sections 13(2)(h) and 13(3) of the Act are applicable to the instant case? Is not the decision of this hon'ble Tribunal in I.T.A. No.2 (Coch)/1980 in the case of Sree Narayana Chandrika Trust, Irinjalakuda, in favour of the assessee? Is not the reasoning of the Appellate Tribunal to hold so illegal and unjustified?

(2) Was the Appellate Tribunal justified in holding that the assessee- appellate is not entitled to the exemption under section 11 of the Income Tax Act, 1961, in the instant case?

(3) Was the Appellate Tribunal right in holding that in the case of the assessee a partner in the firm there is investment of funds by the assessee in a concern within the meaning of section- 13(2)(h) and section 13(3) of the Income Tax Act, 1961?"

In fact, the main question is whether reopening under section 147(a) of the Income Tax Act, is justified on the facts and circumstances of the case?

The assessee-Sree Narayana Chandrika Trust, Irinjalakuda---got constituted as a charitable trust in pursuance of the trust deed. DatedMarch 15, 1972. The assessment year is 1973-74. The original assessment in regard thereto had been completed under section 143(3) and therein certain amount of income was excluded from the total income, in view of the application of section 11(2) of the Income Tax Act, 1961.

It was thereafter found out that the exemption granted by resorting to sections 11 and 12 of the Income Tax Act, 1961, was not proper as there was violation of the provisions of sections 13(1)(c)(ii) and 13(2)(h) read with 13(3) of the Income Tax Act, 1961.

Recording such a conclusion as a ground for belief, the Income-tax Officer found escapement of assessment. This was on account of the omission or failure on the part of the assessee in not disclosing certain primary facts. The assessment was reopened.

The Income-tax Officer recorded the conclusion that this is a case where exemption granted under sections 11 and 12 of the Act has to be withdrawn. He also found that the provisions of sections 13(l)(c)(ii) and 13(2)(h) had been violated.

This view was confirmed in appeal by the Appellate Assistant Commissioner and also thereafter by the Appellate Tribunal.

On facts, the Tribunal has taken into consideration the close relationship of the partners of the firm of the managing trustees. The Tribunal has also further found that this closeness of relationship should have been disclosed at the inception itself during the original assessment proceedings. There was, therefore, justification to resort to section 147(a) of the Act.

It was contended on behalf of the assessee that this was within the knowledge of the Income-tax Officer during the original assessment proceeding itself. Factually, the assessee-trust had contributed Rs.5,00C towards the capital of the firm, Beena Enterprises. The said firm had a total investment of Rs.30,000. Therefore, the contribution was more than 16 per cent. of the total investment.

The Tribunal further found that alone with the return from document (Annexure "H" thereto) the assessee had stated that with reference thereto that "list will be furnished". Such a list was not submitted. The Tribunal found that if only a list had been furnished, the Income-tax Officer would have come to know about the relationship of the partners to the managing trustees and that would have given him an occasion to know whether any of the provisions of section 13 were infringed. The Tribunal has also particularised the contents of Annexure "H", which are as follows:

"Name(s) of relative(s), author(s), founder(s), trustee(s), manager(s) and substantial contributor (s) and where any such author, founder, trustee, manager or substantial contributor is a Hindu undivided family, also the names of the members of the family and their relatives."

It is on the basis of the above factual situation, the Tribunal recorded that the assessee had no justification to withhold the information, viz., the relationship of the partners to the managing trustees. It is in this situation, the Tribunal justified resort to section 147(a) of the Income Tax Act, 1961. Before the Tribunal, the assessee had contended that in the matter of the sister trust in the name and style Chandrika Educational Trust at Irinjalakuda with regard to the contribution of Rs.100 in a firm far less than 5 per cent. of the total capital, a letter, dated November 4, 1970, was addressed to the Commissioner of Income-tax sending his opinion whether the said contribution of share capital would amount to "investment" and also in reply thereto, dated December 22, 1970, of the Commissioner of Income tax that it would not be so. The Tribunal, in this context, emphasized the factual peculiarity that the contribution towards the Chandrika Educational Trust (Rs.160) was far below 5 per cent. of the total capital contribution. The contribution of Rs.5,000 by the assessee-trust in the firm of Beena Enterprises exceeded the required five percentage as the said contribution was more than 16 per cent.

Thus, on the factual matrix, the reasoning of the Tribunal will have to be justified under the above situation.

Apart there from, in I.T.R. Nos.31 of 1990 and 145 of 1994, decided on July 4, 1996 (Chandrika Educational Trust v. CIT (1997) 224 ITR 453) this Court (of which one of us myself was a partner dictating the judgment), with regard to the situation in the matter of the said Chandrika Educational Trust, Irinjalakuda, for the very same assessment year 1973-74, had an occasion to consider the similar situation. In the said judgment, this Court had an occasion to rely on its still earlier decision in I. T. R. No. 161 of 1991, decided on May 29, 1996 (CIT v. Chandrika Educational Trust (1997) 224 ITR 449), also with regard to the assessee---Chandrika Educational Trust-with reference to the subsequent assessment year 1974-75, dealing with the situation of reopening and consequent reassessment. We find from the said judgment that still for the assessment years 1975-76 and 1976-77, this Court also did not extend the benefit of exemption under section 11 of the Act to the assessee because the contribution of the trust in question exceeded 5 per cent. in relation to the capital of the firm where the money was allowed to remain.

The provisions of section 11(1-A) of the Act as also of section 13(1)(c)(ii) together with sections 13(2) and 13(3) of the Act have been considered. Pinpointedly, section 13(2)(h) is brought into focus with reference to the situation that if any funds of the trust or institution are, or continue to remain, invested for any period during the previous year in any concern in which any person referred to in subsection (3) has a substantial interest. This provision is considered with reference to the question of grant of benefit under section 11 of the Act to rule that it will not be available in the context of the relationship brought on record.

In our judgment, the legal position that is discussed by this Court in I.T.R. Nos.31 of 1990 and 145 of 1994 (Chandrika Educational Trust v. CIT (1997) 224 ITR 453), which is also identical in character in subsequent assessment years such as 1974-75, 1975-76 and 1976-77 in the matter of Chandrika Educational Trust is not at all different. It is to be emphasized that Sree Narayana Chandrika Trust, Irrinjalakuda, is also of a cognate nature with Chandrika Educational Trust. In fact, it is seen from the judgment referred to above that the Tribunal had considered the position of law even with reference to the present assessee-trust with regard to the same situation. In our judgment, apart from the factual position discussed hereinbefore, the question is also covered by the above decision of this Court.

For all the above reasons, all the above three questions are answered in the affirmative, in favour of the Revenue and against the assessee.

A copy of this judgment, under the seal of this Court and the signature of the Registrar, shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench, as required by law.

M.B.A./1433/FC Question answered in affirmative.