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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.11080 OF 2017

(ARISING OUT OF SLP (C) NO. 25257 OF 2015)

COMMISSIONER OF INCOME TAX-III, PUNE .....APPELLANT(S)

VERSUS

SINHGAD TECHNICAL EDUCATION SOCIETY .....RESPONDENT(S)

W I T H

CIVIL APPEAL NO.11081 OF 2017

(ARISING OUT OF SLP (C) NO. 25258 OF 2015)

CIVIL APPEAL NO.11082 OF 2017

(ARISING OUT OF SLP (C) NO. 27323 OF 2015)

CIVIL APPEAL NO. 11083 OF 2017

(ARISING OUT OF SLP (C) NO. 30278 OF 2015)

J U D G M E N T

A.K. SIKRI, J.

Leave granted.

2) All these four appeals are filed by the Commissioner of Income

Tax-III, Pune (hereinafter referred to as the ‘Revenue), wherein the

respondent is also the same (hereinafter referred to as the ‘assessee’).

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Even the issue that arises for consideration is identical in all these

appeals. Reason for filing four appeals is that the dispute pertains to

four Assessment Years, i.e. 2000-01, 2001-02, 2002-03 and 2003-04. In

fact, for this very reason the High Court has decided the issue by

common judgment dated March 25, 2015, the correctness whereof is

challenged by the Revenue in these appeals. Thus, we propose to club

all these appeals and proceed to decide by a singular judgment.

3) The issue pertains to the validity of the proceedings which were

initiated by the Assessing Officer (for short, ‘AO’) under Section 153C of

the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’). It may be

mentioned here itself that the assessee is an educational institution

registered under the Bombay Public Trusts Act, 1950 and the Societies

Registration Act, 1860. It also got itself registered under Section 12AA

of the Act since the Assessment Year 1994-95. Because of the said

registration under Section 12AA of the Act, Sections 11 and 12 of the Act

apply to the assessee as per which income earned by the assessee

from property held for charitable or religious purposes (Section 11) and

income from contributions are exempt from taxation under certain

circumstances.

4) It so happened that a search and seizure operation was carried out

under Section 132 of the Act on one Mr. M.N. Navale, President of the

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assessee Society, and his wife on July 20, 2005 from where certain

documents were seized. On the basis of these documents, which

according to the Revenue contained notings of cash entries pertaining to

capitation fees received by various institutions run by the assessee, a

notice under Section 153C of the Act was issued on April 18, 2007. It is

that notice which is quashed by the Income Tax Appellate Tribunal (ITAT)

and the order of the ITAT has been upheld by the High Court by the

impugned judgment.

5) With the glimpse of the issue involved and the background in which

the same has arisen, we now proceed to state the facts in little detail so

as to get the clarity of the matter.

6) As mentioned above, a search was conducted on Mr. M.N. Navale and

his wife on July 20, 2005. It is not in dispute that he is one of the

trustees of the assessee Society. This search was conducted under

Section 132 of the Act. As per the Revenue, certain incriminating

documents were recovered which showed that the assessee was taking

capitation fee from the students. These documents also allegedly reveal

that the activities of the trust were not genuine and were not being

carried out in accordance with the trust deed. For these reasons, the

assessee was treated as an Association of Person (AOP). Having

regard to the complexity involved in the accounts and the changes to be

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effected on account of the change in the status of the assessee to that

of AOP, a special audit under Section 142(2A) of the Act was conducted.

On the basis of special audit report, taxable incomes for the Assessment

Years 1999-2000 to 2006-07 had been worked out.

7) Since the documents were recovered from Mr. Navale and sought to

be used against the assessee, for undertaking this exercise it is

imperative that a Satisfaction Note is recorded by the AO of the person

searched for use of those documents against the third person (assessee

herein), which is a pre-condition for initiation of proceeding under

Section 153C of the Act. This Satisfaction Note was recorded on April

18, 2007. In this Note, after discussing the documents which were

recovered and seized in the search carried out on Mr. Navale, the AO

recorded his satisfaction to the effect that the assessee trust cannot be

considered as a genuine trust; it was receiving extra money over and

above the fee fixed by the competent authority; it was not adhering to

the object of providing education to the masses and managing trustees

were using the assessee’s trust for their own benefits. Thus, the notice

under Section 153C of the Act was issued for the Assessment Years

2000-01 to 2005-06. Notice was also issued under Section 143(2) for

Assessment Year 2006-07.

8)On receipt of the said notice, the assessee filed its revised return for the

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Assessment Year 2006-07 and in respect of other Assessment Years, it

stuck to its original returns. Thereafter, registration of the trust was

cancelled under Section 12AA(3) of the Act on October 09, 2007 and the

assessee was treated as AOP. Special audit was ordered, as mentioned

above, and after the receipt of the Special Audit Report, assessment

order was passed by the AO on August 07, 2008 for Assessment Years

1999-2000 to 2006-07. Assessment Year 1999-2000 was covered under

Section 147 of the Act, Assessment Year 2006-07 was covered under

Section 143(3) of the Act and Assessment Years 2000-01 to 2005-06

were covered under Section 153C read with Section 143(3) of the Act.

AO assessed the income of the assessee in the sum of

Rs.3,54,46,432/-. The concluding portion of the assessment order

reads as follows:

“16. In view of the totality of facts and circumstances,

discussed as above, under Part A and Part B of the order,

following conclusions are reached.

(i)The assessee STES charged donations while granting

admissions.

(ii)As the registration of the Trust is cancelled on the

grounds that activities of the Trust are not genuine and

also are not being carried out in accordance with the

Trust Deed, the assessee STES will have to be

assessed as an AOP.

(iii)Regardless of cancellation of registration, the benefits

of sections 11 & 12 are denied in view of applicability of

section 13(1)(c) on account of cash and jewellery

seized, siphoning/diversion of money, creation of

assets much more in value than the nominal incomes

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returned and known sources of income, payment of

rent in excess of reasonable rent and other benefits.

(iv)In view of complexity involved in the accounts and the

changes to be effected on account of change in the

status of the assessee to that of “AOP”, special audit

u/s. 142(2A) has been conducted and the net taxable

incomes, for A.Yrs. 1999-2000 to 2006-07, have been

worked out on the basis of recast accounts and taxed

in this order.

(v)There is total failure on the part of the assessee to

explain the seized material, evidencing collection of

donations/capitation fee.

(vi)The relevance and correctness of the seized material is

clearly established.

(vii)The undisclosed income, on account of donations

collected, for A.Y. 2006-07, has been worked out and

taxed in this order.

(viii)Seized material clearly shows collection of

donations/capitation fee on one hand and

expenditure/outgoings on the other hand.

(ix)Instances of siphoning and diversion of amounts, out of

receipts on account of donations/capitation fee, are

evident from the seized material.

(x)Number of assets of the Principal trustee/related

persons have been found/seized as against nominal

incomes returned and known sources of income. The

assets/benefits derived are possible only because of

receipts on account of donations/capitation fee.

(xi)The theory of bigger HUF and obtaining of decree from

the Court is an effort only to escape the rigours of laws

relating to taxation. The said decree of the Hon. Court

has been obtained by misrepresentation and

suppression of facts. The same is not accepted by the

department and appropriate course of action is

contemplated.

(xii)Siphoning of money, diversion of amounts, creation of

assets, all out of the receipts on account of donations,

and payment of rent which is not reasonable attract the

provisions of Section 13(1)(c). These are the benefits

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derived by persons referred to in Section 13(3).

Subject to the above, the total income and tax for A.Y.

under consideration is computed, as below:

ATotal Income as returned Rs. Nil

BAdditions

I. Revised Income computed as per

discussion in Paras 7 & 8 Rs.3,54,46,432/-

CTotal Income Assessed Rs.3,54,46,432/-

DTotal Income Assessed Rs.3,54,46,430/-

9) The assessee filed appeal thereagainst, which was partially allowed by

the Commissioner of Income Tax (Appeals) {CIT(A)}. He, however,

upheld the order of the AO, holding that the assessee was not eligible

for exemption under Section 11 of the Act and, therefore, donations

received were rightly treated as income. Against the aforesaid part of

the order, which was against the assessee, it preferred further appeal to

the ITAT. In the appeal before the ITAT, the assessee raised additional

ground questioning the validity of the notice under Section 153C of the

Act on the ground that satisfaction was not properly recorded and also

that the notice under Section 153C was time barred in respect of

Assessment Years 2000-01 to 2003-04. The ITAT allowed the assessee

to raise the additional ground and decided the same in favour of the

assessee thereby quashing the notice in respect of the aforesaid

Assessment Years. Challenging this order, the Revenue filed appeals

before the High Court. However, the High Court has dismissed these

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appeals, as mentioned above.

10) Mr. Ranjit Kumar, learned Solicitor General appearing for the

Revenue, took us through the Satisfaction Note recorded by the AO

discussing the material which had been found against the assessee on

the basis of which the assessee was not found to be a genuine trust and

was indulging in profiteering, benefits whereof were reaped by the

trustees of the assessee. He also referred to the discussion contained

in the order passed by the AO and particularly the conclusions arrived at

by the AO wherein it was inter alia concluded that the assessee charged

donations while granting admissions, which were the reasons for

denying the benefits under Sections 11 and 12 of the Act and that the

assessment was made keeping in view the Special Audit Report.

11) Coming to the issue pertaining to the validity of notice under

Section 153C of the Act, submission of the learned Solicitor General was

that the ITAT committed gross error in allowing this additional ground

ignoring a material fact that the assessee had not objected to the

jurisdiction under Sections 153C or 147 of the Act at any stage in the

course of the assessment proceedings which were duly recorded by the

AO in his order. It was argued that the ITAT did not discuss the merits of

the case at all and quashed the entire proceedings by discussing the

legality and validity of the notice under Section 153C of the Act only. He

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further pointed out that even the High Court dismissed the appeal of the

Revenue on the same very ground.

12) The learned Solicitor General also referred to the judgment dated

March 29, 2012 of the Delhi High Court in the case of SSP Aviation

Limited v. Deputy Commissioner of Income Tax , (2012) 20

taxmann.com 214 (Delhi), as well as the judgment dated December 24,

2012 of the Gujarat High Court in the case of Kamleshbhai

Dharamshibhai Patel v. Commissioner of Income Tax-III, (2013) 31

taxmann.com 50 (Gujarat), wherein a contrary view is taken by these

two High Courts.

13) Mr. Jehangir D. Mistri, learned senior counsel appearing for the

assessee, countered the aforesaid submissions. He argued that the

Tribunal was right in permitting the assessee to raise the issue regarding

validity of notice under Section 153C of the Act when it was ex facie

found that such a notice was time barred and, therefore, it was a

jurisdictional ground which could be raised by the assessee. Coming to

the merits of that ground, learned senior counsel submitted that the

Satisfaction Note dated April 18, 2007 is ex facie recorded/prepared by

the AO in his capacity as the AO of the assessee society and does not

set out the date on which the books of accounts or documents or assets

seized etc. from the person searched were handed over/dealt with in the

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capacity of AO of the assessee society, but this cannot be earlier than

April 18, 2007, i.e. the date when the Satisfaction Note was prepared.

Since the Assessment Order pursuant thereto can be passed under

Section 153A(1) of the Act for a period of six Assessment Years,

immediately preceding the Assessment Year relevant to the Previous

Year in which the books of accounts or documents or assets were

received by the AO of the assessee, he argued that no notice could

have been issued for the Assessment Years prior to 2002-03.

Therefore, notice for the Assessment Years 2000-01 and 2001-02 was

clearly time barred. In respect of Assessment Years 2002-03 and

2003-04, the submission of Mr. Mistri was that one of the jurisdictional

conditions precedent to the issue of a notice under Section 153C is that

‘money, bullion, jewellery or other valuable article or thing’ or any ‘books

of accounts or documents’ must be seized or requisitioned. In the

present case, nothing was seized relating to any of the Assessment

Years in question and hence the notice under Section 153C and the

assessment under Section 153A, read with Section 153C, pursuant

thereto are invalid.

14) We have bestowed our due consideration to the respective

submissions of the counsel for the parties.

15) At the outset, it needs to be highlighted that the assessment order

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passed by the AO on August 7, 2008 covered eight Assessment Years

i.e. Assessment Year 1999-2000 to Assessment Year 2006-07. As noted

above, insofar as Assessment Year 1999-2000 is concerned, same was

covered under Section 147 of the Act which means in respect of that

year, there were re-assessment proceedings. Insofar as Assessment

Year 2006-07 is concerned, it was fresh assessment under Section

143(3) of the Act. Thus, insofar as assessment under Section 153C

read with Section 143(3) of the Act is concerned, it was in respect of

Assessment Years 2000-01 to 2005-06. Out of that, present appeals

relate to four Assessment Years, namely, 2000-01 to 2003-04 covered

by notice under Section 153C of the Act. There is a specific purpose in

taking note of this aspect which would be stated by us in the concluding

paragraphs of the judgment.

16) In these appeals, qua the aforesaid four Assessment Years, the

assessment is quashed by the ITAT (which order is upheld by the High

Court) on the sole ground that notice under Section 153C of the Act was

legally unsustainable. The events recorded above further disclose that

the issue pertaining to validity of notice under Section 153C of the Act

was raised for the first time before the Tribunal and the Tribunal

permitted the assessee to raise this additional ground and while dealing

with the same on merits, accepted the contention of the assessee.

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17) First objection of the learned Solicitor General was that it was

improper on the part of the ITAT to allow this ground to be raised, when

the assessee had not objected to the jurisdiction under Section 153C of

the Act before the AO. Therefore, in the first instance, it needs to be

determined as to whether ITAT was right in permitting the assessee to

raise this ground for the first time before it, as an additional ground.

18) The ITAT permitted this additional ground by giving a reason that it

was a jurisdictional issue taken up on the basis of facts already on the

record and, therefore, could be raised. In this behalf, it was noted by the

ITAT that as per the provisions of Section 153C of the Act, incriminating

material which was seized had to pertain to the Assessment Years in

question and it is an undisputed fact that the documents which were

seized did not establish any co-relation, document-wise, with these four

Assessment Years. Since this requirement under Section 153C of the

Act is essential for assessment under that provision, it becomes a

jurisdictional fact. We find this reasoning to be logical and valid, having

regard to the provisions of Section 153C of the Act. Para 9 of the order

of the ITAT reveals that the ITAT had scanned through the Satisfaction

Note and the material which was disclosed therein was culled out and it

showed that the same belongs to Assessment Year 2004-05 or

thereafter. After taking note of the material in para 9 of the order, the

position that emerges therefrom is discussed in para 10. It was

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specifically recorded that the counsel for the Department could not point

out to the contrary. It is for this reason the High Court has also given its

imprimatur to the aforesaid approach of the Tribunal. That apart,

learned senior counsel appearing for the respondent, argued that notice

in respect of Assessment Years 2000-01 and 2001-02 was even time

barred.

19) We, thus, find that the ITAT rightly permitted this additional ground

to be raised and correctly dealt with the same ground on merits as well.

Order of the High Court affirming this view of the Tribunal is, therefore,

without any blemish. Before us, it was argued by the respondent that

notice in respect of the Assessment Years 2000-01 and 2001-02 was

time barred. However, in view of our aforementioned findings, it is not

necessary to enter into this controversy.

20) Insofar as the judgment of the Gujarat High Court relied upon by

the learned Solicitor General is concerned, we find that the High Court in

that case has categorically held that it is an essential condition

precedent that any money, bullion or jewellery or other valuable articles

or thing or books of accounts or documents seized or requisitioned

should belong to a person other than the person referred to in Section

153A of the Act. This proposition of law laid down by the High Court is

correct, which is stated by the Bombay High Court in the impugned

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judgment as well. The judgment of the Gujarat High Court in the said

case went in favour of the Revenue when it was found on facts that the

documents seized, in fact, pertain to third party, i.e. the assessee, and,

therefore, the said condition precedent for taking action under Section

153C of the Act had been satisfied.

21) Likewise, the Delhi High Court also decided the case on altogether

different facts which will have no bearing once the matter is examined in

the aforesaid hue on the facts of this case. The Bombay High Court has

rightly distinguished the said judgment as not applicable giving the

following reasons:

“8. Reliance on the judgment of the Division Bench of the

High Court of Delhi reported in case of SSP Aviation Ltd. Vs.

Deputy Commissioner of Income Tax (2012) 346 ITR 177 is

misplaced. There, search was carried out in the case of “P”

group of companies. It was found that the assessee before

the Hon’ble Delhi High Court had acquired certain

development rights from “P” group of companies. Based

thereon, the satisfaction was recorded by the Assessing

Officer and he issued notice in terms of Section 153C.

Thereupon the proceedings were initiated under section 153A

and the assessee was directed to file returns for the six

assessment years commencing from 2003-04 onwards. The

assessees filed returns for those years but disclosed Nil

taxable income. These returns were accepted by the

Assessing Officer, however, in respect of the assessment

year 2007-08 there was a significant difference in the pattern

of assessment for this year also, the return was filed for Nil

income but there were certain documents and which showed

that there were transactions of sale of development rights and

from which profits were generated and taxable for the

assessment year 2007-08. Thus, the receipt of Rs.44 crores

as deposit in the previous year relevant to the assessment

year 2008-09 and later on became subject matter of the writ

petition before the Delhi High Court. That was challenging

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the validity of notice under section 153C read with section

153A. In dealing with such situation and the peculiar facts

that the Delhi High Court upheld the satisfaction and the Delhi

High Court found that the machinery provided under section

153C read with section 153A equally facilitates inquiry

regarding existence of undisclosed income in the hands of a

person other than searched person. The provisions have

been referred to in details in dealing with a challenge to the

legality and validity of the seizure and action founded thereon.

We do not find anything in this judgment which would enable

us to hold that the tribunal’s understanding of the said legal

provision suffers from any error apparent on the face of the

record. The Delhi High Court judgment, therefore, will not

carry the case of the revenue any further.”

We, thus, do not find any merit in these appeals.

22) We now advert to the implication of the fact which has been

emphasised in para 15. As pointed out in the said para, the assessment

order passed by the AO covers eight Assessment Years. Assessment

done in six Assessment Years is under Section 153C of the Act.

Assessment order is set aside only in respect of four such Assessment

Years that too on the technical ground, noted above. This objection

pertaining to the four Assessment Years in question does not relate to

the other two Assessment Years, namely, 2004-05 and 2005-06.

Likewise, this decision has no bearing in respect of assessment done

qua Assessment Year 1999-2000 as well as Assessment Year 2006-07.

The necessary consequence would be that insofar as the conclusions of

the AO in his assessment order regarding the activities of the trust not

being genuine and not carried out in accordance with the trust deed or

cancellation of registration, denial of benefits of Sections 11 and 12 etc.

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are concerned, the same would not be affected by this judgment. It is,

thus, clarified that this Court has not dealt with the matter on merits

insofar as incriminating material found against the assessee or Mr.

Navale is concerned. Pithily put, this Court has not given any clean chit

to the assessee insofar as the finding of the AO to the effect that the

assessee had been indulging in profiteering and collecting capitation fee

is concerned. Whatever other repercussions are there, based on these

findings, they can follow. This Court was not informed and, therefore,

unaware of any challenge to the assessment order in respect of other

four Assessment Years and outcome thereof. Wherever any such

proceedings are pending, same would be considered without being

affected by the outcome of these proceedings.

23) The appeals are dismissed with the aforesaid observations.

.............................................J.

(A.K. SIKRI)

.............................................J.

(ASHOK BHUSHAN)

NEW DELHI;

AUGUST 29, 2017.