Appellant: Sir Dorabji Tata Trust
Respondent: Deputy Commissioner of Income Tax Exemption Circle 2(1), Mumbai
Citation: ITA No. 3909/Mum/2019
Assessment Year: 2014-15
The assessee trust had filed its return of income on 30th September 2014, and its assessment, under section 143(3) of the Act, was completed on 30th December 2016 determining ‘Nil’ taxable income. Subsequently, however, learned Commissioner of Income Tax (Exemptions) [hereinafter referred to as ‘the Commissioner’] issued a show cause notice requiring the assesse to show cause to explain as to why order u/s. 263 of the Act should not be passed enhancing or modifying the assessment or cancelling the assessment in your case. The main contentions of the Commissioner were as follows:
a. One of the trusts reimbursed Rs 2.5 crore against the expenses incurred by Tata Services Ltd., between FY 2011-12 to 2013-14. Out of this, Rs 91 lakh was against the amount paid by the company to one Mr. AN Singh for the services rendered by him as a trustee. Similar reimbursements were also allegedly made against the amounts paid to R Venkataramanan, vice-president at Tata Services.
b. The reimbursements exceeded the limit prescribed in the trust deed which placed a cap of Rs 1,000 on the fees that can be paid to each trustee.
c. The assessing officer also failed to make verify under sections applicability of section 13(1)(c), 13(1)(d) and 13(2)(h) of the Act i.e. whether the trusts had indulged in any prohibited mode of investment in shares, which can result in denial of tax exemption.
d. The Commissioner further contented that the AO did not confronted the assesee regarding the information vide a letter dated 22/12/2016 along with two boxes full of documents from the ex-Director and Chairman of Tata group, Mr. Cyrus Mistry containing various documents in support of his letter mentioning that the Trustees have lot of inference/control over the business.
e. The Commissioner further contented that the principle of Res Judicata does not apply in the cases related to income tax.
The assesse contented the following in its defence:
- The three trusts rebutted the tax department’s allegations arguing that no remuneration was paid to Venkataramanan during AY 2014-15 while the reimbursement against remuneration to Singh was against his services as a managing trustee and his expansive roles and responsibilities.
- The assesse trusts argued that the payments made to the trustees were as per the trust deed and in compliance with the income tax law. As such, a revision will not bring any change in the total assessed income. The assessee further submitted that it is legally settled position that the provisions of section 263 of the Act can be invoked only if both the conditions stipulated are satisfied i.e. the order of the AO is not only erroneous but also prejudicial to the interest of the Revenue.
The Commissioner was not satisfied by the explanations given by the assesse and the learned Commissioner set aside the assessment framed by the AO in favour of the assesse. Aggrieved by the order of the Commissioner, the assesse appalled against the order before ITAT, Mumbai.
- First of all, the Honourable ITAT examined the section 263 of the Income Tax Act under which the show cause notice was served to the assesse. The honourable ITAT examined the explanation 2 to Section 263 which says “when Commissioner is of the view”. The ITAT observed that section 263 confers certain power to the Commissioner but “that does not mean that the view so formed by the Commissioner is not subject to any judicial scrutiny or that such a view being formed is at the unfettered discretion of the Commissioner. The formation of his view has to be in a reasonable manner, it must stand the test of judicial scrutiny, and it must have, at its foundation, the inquiries, and verifications expected, in the ordinary course of performance of duties, of a prudent, judicious and responsible public servant- that an Assessing Officer is expected to be.
The Honourable ITAT further took the help of a precedent to make its position more solid citing the case of L Hirday Naran Vs Income Tax Officer [(1970) 78 ITR 26 (SC)] the ITAT further clarified:
“The legal position is fairly well settled that when a public authority has the power to do something in aid of enforcement of a right of a citizen, it is imperative upon him to exercise such powers when circumstances so justify or warrant. Even if the words used in the statute are prima facie enabling, the courts will readily infer a duty to exercise a power which is invested in aid of enforcement of a right—public or private—of a citizen.”
The ITAT further confronted the question that is what a prudent, judicious, and responsible Assessing Officer is to do in the course of his assessment proceedings. Is he to doubt or test every proposition put forward by the assesse and investigate all the claims made in the income tax return as deep as he can?
To answer this contentious question of law, the ITAT took help of Hon’ble Delhi High Court in the case of Gee Vee Enterprises Vs ACIT [(1195) 99 ITR 375 (Del)] and held:
“It is the duty of the AO to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. Therefore, obvious that when the circumstances are not such as to provoke an inquiry, he need not put every proposition to the test and probe everything stated in the income tax return”
In order to further clarify its stand, the ITAT cited the observations made in the case of Re Kingston Cotton Mills [(1896) 2 Ch 279, 288)] which are as follows:
“AO is not bound to be a detective, or, as was said, to approach his work with suspicion or with a foregone conclusion that there is something wrong. He is a watch-dog, but not a bloodhound.”
- While answering the contention of whether the actions of the AO has caused loss to the department of Income Tax, the ITAT referred to the judgement In the case of Malabar Industrial Co Ltd Vs CIT [(2000) 243 ITR 83 (SC)] in which it was held:
“Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law”
The ITAT after examining the situation in the present case and the precedent held that The test for what is the least expected of a prudent, judicious and responsible Assessing Officer in the normal course of his assessment work, or what constitutes a permissible course of action for the Assessing Officer, is not what he should have done in the ideal circumstances, but what an Assessing Officer, in the course of his performance of his duties as an Assessing Officer should, as a prudent, judicious or reasonable public servant, reasonably do bonafide in a real-life situation.
The ITAT in order to address the question of Res Judicata, cited the landmark judgment in the case of Radhasoami Satsang v. CIT [(1992) 193 ITR 321 (SC)] and held:
“while strictly speaking, res judicata does not apply to income-tax proceedings but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other, and the parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.”
- The ITAT held “The observations so made by the learned Commissioner show that he has not even applied his mind to the undisputed facts of the case. If he had cared to look at paragraph 8 of the subject assessment order, he would have noticed that the Assessing Officer has already included the dividend income of Rs 95,63,30,094 in the available gross receipts of the assessee trust and examined the application of the said income. That is beside the point that such an action was contrary to the claim of the assessee that once this income of Rs 96,63,30,094 is held to be exempt under section 10(34), it cannot be brought to taxation under section 11 of the Act, and the rejection of the said claim is the subject matter of assessee’s appeal before the CIT(A). Clearly, what was being directed by the learned Commissioner was already done by the Assessing Officer, and, therefore, these directions clearly show that there was a clear and glaring non-application of mind to even undisputed material facts of the case. We, therefore, cannot approve justification of the subject assessment order being held to be ‘erroneous and prejudicial to the interests of the revenue’ for this reason as well. No other reason is pointed out to us.”
- The ITAT further reprimanded Mr. Cyrus Mistry and held that the behaviour shown by Mr. Mistry was “unheard in the corporate world” and that Mr. Mistry’s act of supplying material to the Income Tax Department just weeks after his removal as chairman of Tata Sons and without authorisation from the company cannot be said to be influenced by “call of pure conscience and high grounds of morality”. The ITAT further barred Cyrus Mistry for supplying documents to the Tax Department soon after his unceremonious exit.
- The trust’s appeal against this denial is pending before the appeals commissioner. Yet, the commissioner passed an order again directing the assessing officer to examine if the entire income was applied for the purpose of the trust.