AO's Power Limited: Can't Change Trust to AOP Status Under Section 143(1)(a) (of Income Tax Act, 1961)

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Case Name:

Commissioner of Income Tax Vs Khalsa Dewan (Regd.) (High Court of Punjab & Haryana)

ITA No.494 of 2007

Date: 29th January 2008

Key Takeaways:

1. The AO's power to make prima facie adjustments under Section 143(1)(a) (of Income Tax Act, 1961) is very limited.

2. Changing an assessee's status from trust to AOP is beyond the scope of Section 143(1)(a) (of Income Tax Act, 1961).

3. The AO can only make adjustments based on information available in the return and accompanying documents.

4. Lack of trust registration doesn't automatically allow the AO to change status under Section 143(1)(a) (of Income Tax Act, 1961).

5. For complex issues like status change, the AO should issue a notice under Section 143(2) (of Income Tax Act, 1961).

Issue: 

Does the Assessing Officer have the power to change the status of an assessee from a trust to an Association of Persons (AOP) while processing the return under Section 143(1)(a) (of Income Tax Act, 1961)?

Facts:

1. The assessee filed an Income Tax return on 27.3.1997, showing income as Nil. 

2. The assessee claimed exemption under Section 12-A (of Income Tax Act, 1961).

3. While processing the return under Section 143(1)(a) (of Income Tax Act, 1961), the AO found that the exemption claim was not allowable due to the absence of a registration certificate.

4. The AO issued a notice on 12.3.1998 asking the assessee to explain why their status shouldn't be treated as an AOP.

5. The assessee didn't respond to the notice.

6. The AO changed the assessee's status from trust to AOP and taxed the income accordingly.

7. The assessee appealed to the CIT(A), who dismissed the appeal.

8. The assessee then appealed to the Income Tax Appellate Tribunal, which allowed the appeal and quashed the AO's intimation.

Arguments:

Revenue's Argument:

- The trust was not registered with the Commissioner of Income Tax under Section 12AA (of Income Tax Act, 1961), making it ineligible for exemption under Section 11 (of Income Tax Act, 1961).

- The assessee failed to respond to the AO's notice.

- The AO was justified in treating the trust as an AOP under Section 143(1)(a) (of Income Tax Act, 1961).

Assessee's Argument (implied):

- The AO doesn't have the power to change the assessee's status from trust to AOP under Section 143(1)(a) (of Income Tax Act, 1961).

- Such a change falls outside the scope of adjustments allowed under Section 143(1)(a) (of Income Tax Act, 1961).

Key Legal Precedents:

1. S.R.F Charitable Trust vs. Union of India and others (1992) 193 ITR 95 (Delhi High Court):

AO can only allow or disallow claims based on returns and accompanying documents. 

2. Samtel Color Ltd. vs. Union of India (2002) 258 ITR 1 (Delhi High Court): Adjustments under Section 143(1)(a) (of Income Tax Act, 1961) can only be made if a claim is inadmissible on the face of the return and accompanying documents. 

3. Commissioner of Income Tax vs. K.V. Mankaram & Co., (2000) 245 ITR 353 (Kerala High Court):

The AO cannot change the status of a firm to AOP under Section 143(1)(a) (of Income Tax Act, 1961), which can only be done under Section 185 (of Income Tax Act, 1961) at the time of assessment. 

Judgement:

The High Court dismissed the revenue's appeal, holding that:

1. The AO's powers for making prima facie adjustments under Section 143(1)(a) (of Income Tax Act, 1961) are very limited.

2. Changing the assessee's status from Trust to AOP is not covered under any proviso to Section 143(1)(a) (of Income Tax Act, 1961).

3. The AO can only make adjustments based on information available in the return and accompanying documents, where a claim is inadmissible on the face of it.

4. Reading more into the AO's power would render the provision arbitrary and unreasonable.

5. No substantial question of law arises for determination. 

FAQs:

Q1: What is the main limitation on the AO's power under Section 143(1)(a) (of Income Tax Act, 1961)?

A1: The AO can only make adjustments based on information available in the return and accompanying documents, where a claim is inadmissible on the face of it.

Q2: Does lack of trust registration automatically allow the AO to change status under Section 143(1)(a) (of Income Tax Act, 1961)?

A2: No, the lack of trust registration doesn't automatically grant the AO power to change status under Section 143(1)(a) (of Income Tax Act, 1961).

Q3: What should the AO do if they want to change an assessee's status?

A3: For complex issues like status change, the AO should issue a notice under Section 143(2) (of Income Tax Act, 1961).

Q4: Why is it important to limit the AO's power under Section 143(1)(a) (of Income Tax Act, 1961)?

A4: Limiting the AO's power prevents arbitrary decisions and ensures fairness by giving the assessee an opportunity to explain their position.

Q5: What's the difference between an intimation under Section 143(1)(a) (of Income Tax Act, 1961) and an assessment order?

A5: An intimation under Section 143(1)(a) (of Income Tax Act, 1961) is not an assessment order. It's only deemed an order for limited purposes like appeals and rectification.

1. The present appeal has been filed by the revenue against the order dated 18.5.2007 (Annexure A-4) passed by the Income Tax Appellate Tribunal Amritsar Bench, Amritsar in ITA No.2(ASR)/2000 for the assessment year 1995-96 raising the following substantial questions of law:-

“(i) Whether on the facts and circumstances of the case, the appellate tribunal was right in law in allowing the appeal of the assessee and setting aside the order of ld.CIT(A) and quashing the intimation sent by the A.O. U/s 143(1)(a) (of Income Tax Act, 1961) ?

(ii)Whether on the facts and circumstances of the case, the ld.ITAT is right in law in taking a view that the changing of status of firm from Trust to an Association of Persons (AOP) falls outside the purview of see 143 (1)(a) of the Income Tax Act 1961?”

2. The brief facts out of which the present appeal has arisen are as under:-

The asseessee filed Income Tax return in this case on 27.3.1997 showing his income as Nil. While processing the return under Section 143(1)(a) (of Income Tax Act, 1961) (for short the 'Act'), the Assessing Officer found that the claim of the assessee for exemption under Section 12-A (of Income Tax Act, 1961) was not allowable in the absence of registration certificate.

A notice dated 12.3.1998 (Annexure A-1) was issued to the assessee requiring him to explain why the status of the said trust may not be treated as AOP in the absence of the registration certificate. On the required date neither any reply was received nor anybody attended the proceedings before the AO on behalf of the assessee. Hence, the AO proceeded with the computation of total income under Section 143(1)(a) (of Income Tax Act, 1961) and treated the status of the trust as AOP and all the income for the assessment year was treated as AOP and was taxed accordingly. The Assessing Officer changed the status of the assessee from trust (08) claimed in the return to an AOP (07) while processing the return under Section 143(1)(a) (of Income Tax Act, 1961).

Aggrieved with this action of the Assessing Officer, the assessee went in appeal before the CIT (A), who vide his order dated 3.8.1999 in appeal No.221-IT/CIT(A)/BTI/97-98 dismissed the appeal of the assessee observing as under:-

“I have given due consideration to the rival submissions and I hold that there is no force in the arguments advanced by the learned counsel of the appellant. The appellant has claimed the status while filing the return as charitable trust i.e. 08 but the same was not substantiated by enclosing the registration certificate from the competent authority as required under the statute.

The A.O. has therefore intimated the deficiency to the assessee for filing registration certificate u/s 12A (of Income Tax Act, 1961) to which the appellant failed to comply. The appellant failed to furnish the certificate of registration issued by the competent authority under sec. 12A (of Income Tax Act, 1961) even at the appellate stage. On the contrary it is established that the trust of the appellant is not registered by the competent authority i.e. CIT under Section 12-A (of Income Tax Act, 1961), 1961.

I, therefore, hold that the A.O. was right in his action in treating the trust as an A.O.P instead of religious trust in the absence of any proof having the trust been registered by the CIT under Section 12A (of Income Tax Act, 1961). It is more so because the appellant failed to remove the deficiency even when it was intimated by the A.O.

This is the first year of assessment of the trust and therefore, the A.O. had all the power including changing the status to rectify the mistake of prima facie nature including the status after duly intimating the appellant about his intention to do so. In the absence of registration of trust before the competent authority, the status of the trust can only be AOP. The assessment so framed by the A.O. in the status of AOP is legal and in order by virtue of provisions of section 292B (of Income Tax Act, 1961) of the Income- tax Act 1961. Keeping in view all the facts and legal position into consideration I hold that the action of the A.O. in changing the status and disallowing the exemption claimed under sec.11 (of Income Tax Act, 1961) is correct and justified and the same stands upheld.”

3. Against the above order of the CIT(A), Bathinda, the assessee preferred an appeal before the Income Tax Appellate Tribunal, Amritsar who vide its order dated 18.5.2007 (Annexure P-4) in ITA No.2(ASR)/2000 allowed the appeal and set aside the order of the CIT(A) and quashed the intimation sent by the AO under Section 143(1)(a) (of Income Tax Act, 1961) on the ground that the same was illegal and bad in law. While passing the impugned order dated 18.5.2007 the tribunal held that changing the status of the firm/trust to an AOP falls outside the ambit and purview of Section 143(1)(a) (of Income Tax Act, 1961) . Even though the trust was not registered with the CIT the assessment could not be made in the status of an AOP under Section 143(1)(a) (of Income Tax Act, 1961). Moreover, the AO could have done so by issuance of notice under Section 143(2) (of Income Tax Act, 1961).

4. Mr. Yogesh Putney, counsel for the revenue has argued that admittedly the respondent-trust was not registered with the Commissioner of Income Tax under Section 12AA (of Income Tax Act, 1961) therefore, was not entitled to the exemption as claimed under Section 11 (of Income Tax Act, 1961) and further the assessee failed to furnish any explanation/reply to the letter dated 12.3.1998 written by the AO to him allowing him an opportunity to explain why the status of the trust may not be taken as AOP in the absence of registration. Therefore, the trust/assessee was rightly treated as an AOP at the time of processing the return under Section 143(1)(a) (of Income Tax Act, 1961). In support of his argument learned counsel for the revenue has placed heavy reliance upon the proviso (iii) to Section 143(1)(a) (of Income Tax Act, 1961).

5. We have heard learned counsel for the revenue and perused the record.

6. The material question which, in our view, requires to be decided is whether the AO was justified in changing the status of the assessee from a 'Trust to an AOP while processing the return under Section 143(1)(a) (of Income Tax Act, 1961). The scope and ambit of powers vested with the AO for making prima facie adjustments at the relevant time was provided under the proviso to Section 143(1)(a) (of Income Tax Act, 1961) and the same was confined only to such adjustments specifically enumerated in proviso (i), (ii) and (iii) of the Act. In the case of S.R.F Charitable Trust vs. Union of India and others (1992) 193 ITR 95, the Hon'ble Delhi High Court held that as per provisions of Section 143(1)(a) (of Income Tax Act, 1961) the AO could allow or disallow only such claims which were admissible/inadmissible on the basis of returns and documents accompanying the return. It was also held that AO had no power to disallow the claim merely on the ground that no proof was furnished by the assessee. While interpreting Clause (iii) of the first proviso to Section 143(1)(a) (of Income Tax Act, 1961), it was held as under-

“The said clause clearly provides that the Income- tax Officer can make an adjustment to the income or loss declared in the return if, on the basis of the information available in such return, accounts or documents, the deduction allowance or relief claimed is prima facie inadmissible. The conclusion that the claim of the assessee is inadmissible must, in other words, flow from the return as filed. No power is given to the Income- tax Officer to disallow a claim for the reason that there is no proof in support of the claim made by the assessee. In a way, the said clause (iii) of the proviso is analogous to section 154 (of Income Tax Act, 1961).

Where it is evident from the return as filed, along with the documents in support thereof, that a claim of the assessee is inadmissible, only then an adjustment under the said proviso can be made.

If proof in support of the claim is not furnished by an assessee, then for the lack of proof, no disallowance or an adjustment can be made. The only option which is open to the Income -tax Officer, in such a case, is that he can require the assessee to furnish proof in which case he will presumably have to issue notice under section 143(2) (of Income Tax Act, 1961). This is also evident from the fact that, except for the documents specified, the assessee is not required to file the entire books of account or other documents along with the return. The proof in support of the claim may be evidenced from correspondence, from the books of account or other documents and it is not the law, as we understand it, that, in support of a claim made in the return for deduction or non-taxability of a receipt, all the proofs available and original documents must be filed along with the return. It is apparent on a reading of the said provision that adjustment can be made only if there is information available in such return that prima facie a claim or allowance is inadmissible.

7. The same view was taken by the Delhi High Court in the case of Samtel Color Ltd. vs. Union of India (2002) 258 ITR 1 and it was held as under:-

“A bare reading of section 143(1)(a) (of Income Tax Act, 1961), makes it clear that if, on the basis of the return filed by the assessee, any tax or interest is found due after adjustments, as set out in the section, an intimation has to be sent to the assessee specifying the sum so payable.

Similarly, if any refund is found due to the assessee on the basis of the said return, it shall be granted. However, the first proviso to the section authorises the Assessing Officer to make certain adjustments while calculating the tax or interest payable or while granting refund. The adjustments permitted to be made are also specified under the proviso. Clause (iii) of the first proviso lays down that unless the return or the accompanying documents or accounts show that the deduction, allowance or relief claimed therein is prima facie inadmissible on the basis of information available in the said documents, such deduction or allowance claimed cannot be disallowed. The phrase “prima facie” is not defined in the Act. In common parlance the phrase “prima facie” means “on the face of it”.

Going by the literal and dictionary meaning of the phrase “prima facie”, for the purposes of adjustments under clause (iii) of the proviso, a deduction claimed must be inadmissible on the face of the return, documents and accounts accompanying it. If the deduction or allowance or relief so claimed is capable of a debate or requires further proof it cannot be made under clause (iii) of the proviso to section 143(1)(a) (of Income Tax Act, 1961). It is not open to the Assessing Officer to make any adjustment in the returned income by disallowing any claim for deduction, allowance or relief, unless he is satisfied on the basis of information available in the return, documents and the accounts accompanying it, that such a claim is inadmissible on the face of it and there is no possibility of any debate thereon. If anything more is read into the power of the Assessing Officer to make unilateral adjustments it would render the provision wholly arbitrary and unreasonable because :

(a) a disallowance is made without giving an opportunity to the assessee to explain his view point in support of the deduction or allowance, and

(b) additional tax on the increased amount is charged from him arbitrarily. This would not only be in total violation of the principles of natural justice, it will also be not in consonance with the spirit of the provision to cause minimum inconvenience to the assessee and at the same time put the assessee on guard against claiming inadmissible deductions and allowances. No prejudice will be caused to the Revenue. In a given case where the Assessing Officer has any doubt about the allowability of deduction or claim made by the assessee, it is open to him to issue a notice under sub-section (2) of section 143 (of Income Tax Act, 1961) and have the evidence in support thereof.

8. The Hon'ble Kerala High Court in the case of Commissioner of Income Tax vs. K.V. Mankaram & Co., (2000) 245 ITR 353 while interpreting the scope of Section 143(1)(a) (of Income Tax Act, 1961) where the status of a firm was changed to an AOP held as under:-

“The proceeding under section 143(1)(a) (of Income Tax Act, 1961) does not result in an order of assessment. The intimation given under section 143(1)(a) (of Income Tax Act, 1961) cannot be treated an order of assessment. It is only to be deemed an order for the limited purpose of sections 154, 246 and 264 of the Act. Under section 143(1)(a) (of Income Tax Act, 1961), the intimation is deemed to be a notice of demand under section 156 (of Income Tax Act, 1961). Except intimation, no other order is contemplated under section 143(1)(a) (of Income Tax Act, 1961). There is a distinction between an order of assessment and a notice of demand.

Under section 246 (of Income Tax Act, 1961) also, a clear distinction is made between an intimation and an order of assessment. The Assessing Officer cannot, under section 143(1)(a) (of Income Tax Act, 1961), change the status of a firm to “association of persons” which can be done under section 185 (of Income Tax Act, 1961), at the time of assessment.”

9. We are in respectful agreement with the judgements in Samtel Color Ltd.'s & K.V. Mankaram & Co.'s cases (supra).

10. The scope and ambit of the powers vested with the AO for making prima facie adjustments at the time of processing the return under Section 143(1)(a) (of Income Tax Act, 1961) are very limited. The change of status of the assessee from Trust to an AOP is not covered in the nature of adjustments mentioned in any of the proviso to Section 143(1)(a) (of Income Tax Act, 1961) muchless under proviso (iii) of the said Section. It is immaterial that the trust was not registered with the CIT and was not eligible for the exemptions under Section 11 (of Income Tax Act, 1961) because there must be power vested with the AO to allow or disallow the claim while processing the return which is not within the scope of Section 143(1)(a) (of Income Tax Act, 1961). It is not open to the Assessing Officer to make any adjustment in the returned income by disallowing any claim for deduction, allowance or relief, unless he is satisfied on the basis of information available in the return, documents and the accounts accompanying it, that such a claim is inadmissible on the face of it and there is no possibility of any debate thereon. If anything more is read into the power of the Assessing Officer to make unilateral adjustments it would render the provision wholly arbitrary and unreasonable.

11. In view of the above, no substantial question of law arises for the determination of this Court and therefore, the present appeal is dismissed.

(RAKESH KUMAR GARG)

JUDGE

(SATISH KUMAR MITTAL)

JUDGE

January 29, 2008