Whether when certain income of an 'intimately connected' assessee is held to be taxable in hand of another assessee, reassessment beyond six years cannot be initiated without affording an opportunity to the another assessee - YES: Delhi HC

THE issues before the Bench are - Whether when certain income of an 'intimately connected' assessee is held to be taxable in the hand of another assessee, reassessment beyond six years cannot be initiated without affording an opportunity to the petitioner; Whether a finding in respect of a different year can also be used for the purposes of invoking the provisions of Section 150; Whether when opportunity of being heard is not provided to an assessee in case of reopening, the assessment of any other person can be reopened u/s 150, on such basis and Whether in such case, deeming fiction would remain unaffected and assessment can be reopened beyond time limit of six years also. And the verdict goes in favour of the assessee.

Facts of the case

Assessee, a public financial institution, is engaged in the business of providing finance for rural electrifications. Its assessment was reopened u/s 147, on the basis that it had advanced a loan to M/s. The Cooperative Electrical Supply Society Ltd., Siricilla. This Society had created a corpus of special fund amounting to Rs.10 crores. The society had earned interest on this special fund but had not disclosed it in its return for the reason that the money belonged to M/s. REC i.e. Assessee Company and any income earned was also on behalf of Assessee Company. It was observed by the ITAT, Hyderabad that this income was not taxable in the hands of the society but ought to be taxed in the hands of the assessee company. The ACIT, Karimnagar had forwarded the details or such income at Rs.73,50,000/- on account of interest on REC Bonds & Rs.9,80,877/- on account of interest from commercial banks for the relevant AY. As the objections filed by the assessee against the reasons for reopening, were dismissed by the AO, it had filed the present writ petition. At the initial stage, HC directed that the proceedings may go on pertaining to the said notices u/s 148 and orders may also be passed but the same shall not be given effect to. Subsequently, the AO had passed assessment orders in respect of each of the years. Although those orders were served on the petitioner, it had, by virtue of an HC order, been indicated that those orders would be of no effect. It was noted from the purported reasons that the petitioner had advanced loans to the said Co-operative Electrical Supply Society Ltd. which had created a special corpus fund. The said society earned interest on the special fund but had not disclosed it in its ROI on the ground that the money, as mentioned in the purported reasons, actually belonged to the petitioner and that any income earned thereon was on behalf of the petitioner. The Tribunal agreed with the submissions of the said Co-operative Electrical Supply Society Ltd. and held that the said interest income was not taxable in the hands of the society but ought to be taxed in the hands of the petitioner.

Before HC, the assessee’s counsel had pointed out that though the Tribunal had returned a finding that the said interest income was not taxable in the hands of the said society, there was no specific or clear finding that the same should be taxed in the hands of the petitioner. It was held by the Tribunal that there is no diversion of income by overriding title by M/s. REC in favour of the assessee-society. The income by way of interest, etc. has accrued to M/s. REC in its own right. The amount so collected was retained by M/s. REC and was available with it for use and application as per its directions. The income in this case never reached the assessee by Virtue of any overriding title. A reading of various clauses of the Revised Rules on the Constitution and Administration of Special Fund makes it clear that the first charge on the Special Fund Account shall be of M/s. REC and that it shall be the outstanding loan against the assessee and the assessee is merely a custodian of the amount in the Special Fund created as per instructions and rules framed by M/s. REC. Thus, it was held that there was no diversion of income at source by overriding title by M/s. REC in favour of the assessee society and the ownership of the special fund remains with M/s REC and therefore, the income from the special fund amount does not accrue to the assessee. Thus, Tribunal held that the interest accrued on the special fund amount including the FDs made there from does not accrue to the assessee society and the assessee was accordingly not liable to pay tax thereon. Accordingly, the grounds of appeal taken by the assessee in its appeals were allowed. It was, therefore, apparent that the Tribunal had come to the clear conclusion that the interest income was not to be taxed in the hands of the said society but was taxable in the hands of the petitioner.  It was on this basis that the AO had issued the impugned notices u/s 148 seeking to reopen the assessments for the AYs 1999-2000 to 2002-2003. It was further submitted that all the notices u/s 148 had been issued beyond the period of six years stipulated in Section 149. It was also submitted that the bar of limitation prescribed in Section 149 would be applicable unless the revenue was able to establish that the present cases fell within Section 150 read with Explanation 3 to Section 153. It submitted that Section 150 could be invoked only if the reassessment was sought to be done as a consequence of or to give effect to any finding or direction contained in an order passed by any authority in any proceeding under the said Act by way of appeal, reference or revision or by a Court in any proceeding under any other law.

Held that,

++ an illustration of such a category of ‘intimately connected’ persons, the SC referred to a partner or partners of a firm and a member of a HUF. The SC had observed that in such cases though the persons may not have been parties by name to the appeal, their assessments would depend on the assessments of the partnership firm or the Hindu Undivided Family. It is obvious that it would not include the assessment of any other person who was not intimately connected with the person in whose case the order had been passed. The SC also held that the said proviso to Section 34(3) of the 1922 Act would not save the time limit prescribed under Section 34(1) of the 1922 Act in respect of an escaped assessment of a year other than that which was the subject-matter of the appeal or the revision, as the case may be;

++ in other words, a finding in respect of a different year can also be used for the purposes of invoking the provisions of Section 150 of the said Act, by virtue of the deeming provision contained in Explanation 2 in Section 153 of the said Act. This would otherwise not have been available in view of the decision of the Supreme Court in Murlidhar Bhagwan Das. Similarly, Explanation 3 stipulates that where, by an order inter-alia passed by the Tribunal in an appeal, any income is excluded from the total income of one person and held to be the income of another person, then, assessment of such income on such other person shall, for the purposes of Section 150 as also Section 153, be deemed to be one made in consequence of or to give effect to any finding or direction contained in the said order. However, this deeming provision is subject to a proviso that such other person ought to be given an opportunity of being heard before such an order is passed;

++ before a notice u/s 148 can be issued beyond the time limits prescribed u/s 149, the ingredients of Explanation 3 to Section 153 have to be satisfied. Those ingredients require that there must be a finding that income which is excluded from the total income of one person must be held to be income of another person. The second ingredient being that before such a finding is recorded, such other person should be given an opportunity of being heard. In the context of the present case, when the Tribunal held in favour of the said society by concluding that the interest income was not taxable in its hands and held against the petitioner by concluding that the said interest income ought to have been taxed in the hands of the petitioner, an opportunity of hearing ought to have been given to the petitioner. The fact that such an opportunity was not given, has been recognized by the Revenue in the order disposing of the objections dated 20.10.2011, where it has been observed that there was no need to have afforded an opportunity to the petitioner. Even in the counter affidavit, the Revenue has taken the stand that it was not at all necessary for the Tribunal to have allowed an opportunity of hearing to the petitioner because that was in respect of the assessment proceedings pertaining to the said society. From the above, it is clear that no opportunity of hearing was given to the petitioner prior to the passing of the order dated 13.01.2010 by the Tribunal, Hyderabad in the cases of the said society. As such, one essential ingredient of Explanation 3 was missing and, therefore, the deeming clause would not get triggered. That being the position, Section 150 would not apply and, therefore, the bar of limitation prescribed by Section 149 is not lifted;

++ the counsel for the revenue submitted that an opportunity of hearing could not be given to the petitioner because at the stage when the Tribunal at Hyderabad was hearing the appeal pertaining to the said society, there was no way to ascertain as to whether the decision would go in favour of the said society or not. In particular, the counsel for the revenue submitted that the question as to whether the interest income could be taxed at the hands of the petitioner would only come to be decided after the Tribunal came to the conclusion that it was not to be taxed in the hands of the society and, till that stage, there was no question of granting any opportunity of hearing to the petitioner. Be that as it may, the specific condition for attracting the deeming provision of Explanation 3 to Section 153 requires that the person ought to be given an opportunity of being heard before an order is passed where under any income is excluded from the total income of one person and held to be the income of another person. It is not as if the revenue is being faulted or the Tribunal is being faulted for not granting an opportunity of hearing to the petitioner. The placing of a blame is not the issue. What is relevant is whether the petitioner had been given an opportunity of hearing before the Tribunal concluded that the interest income was taxable in its hands and not in the hands of the society. It is obvious that this flows from the general principle that no prejudice should be caused to anybody without that person having been heard;

++ in view of the fact that the deeming provision provided in Explanation 3 to Section 153 does not get attracted in the present case because an opportunity of hearing had not been given to the petitioner, the provisions of Section 150 would also not be attracted. In such a situation, the normal provisions of limitation prescribed u/s 149 of the said Act would apply. Those provisions restrict the time period for reopening to a maximum of six years from the end of the relevant assessment year. In the present writ petitions, the notices u/s 148 have all been issued beyond the said period of six years. Therefore, we are of the view that the said notices are time barred. Consequently, the writ petitions are allowed. The impugned notices u/s 148 of the said Act are set aside and so, too, are all the proceedings pursuant thereto, including the assessment orders that have been passed. There shall be no order as to costs.