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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:

A Total Income as returned Rs. Nil B Additions  

I.  Revised  Income computed  as  per discussion in Paras 7 & 8 Rs.3,54,46,432/-

C Total Income Assessed Rs.3,54,46,432/- D Total 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.