Vatavaran Trust vs Joint Director of Income-tax (Exemptions)

1. These are appeals filed by the assessee against the orders, dt. 30th Jan., 2004 of the CIT(A)-VIII, New Delhi, relating to asst. yrs. 1996-97 to 2000-01. In all these appeals the assessee has challenged the order of the CIT(A) confirming the order of the AO imposing penalty on the assessee under Section 272A(2) of the Act. The facts and circumstances under which penalty came to be imposed by the AO and confirmed by the CIT(A) are as follows:

2. The assessee is a registered trust. The assessee was issued a certificate under Section 12A(a) of the Act on 26th March, 1996, to have effect from 15th June, 1995. For the asst. yrs. 1996-97 to 2000-01, the assessee filed a return of income on 20th Aug., 2001. The provisions of Section 139(4A), read as follows:

(4A) Every person in receipt of income derived from property held under trust or other legal obligation wholly for charitable or religious purposes or in part only for such purposes, or of income being voluntary contributions referred to in Sub-clause (iia) of Clause (24) of Section 2, shall, if the total income in respect of which he is assessable as a representative assessee (the total income for this purpose being computed under this Act without giving effect to the provisions of Sections 11 and 12) exceeds the maximum amount which is not chargeable to income-tax, furnish a return of such income of the previous year in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed and all the provisions of this Act shall, so far as may be, apply as if it were a return required to be furnished under Sub-section (1)

2.1 Since the AO was of the view that the assessee was required to file a return of income on or before 31st October of the respective assessment years he issued a notice under Section 272A(2)(e) of the Act calling upon the assessee to show-cause as to why the penalty should not be imposed. It may be mentioned here that under the provisions of Section 272A(2)(e) if there is a failure to furnish return within the time contemplated by Section 139(4A) the assessee has to pay by way of penalty a sum of 100 rupees for every day during which the failure continues. Under the provisions of Section 273B of the Act no penalty under Section 272A(2) is imposable if the assessee proves that the failure referred to in the said provisions has occasioned due to a reasonable cause.

2.2 In response to the show-cause notice the plea of the assessee was that Mrs. Iqbal Malik, one of the trustees of the trust, who was handling administrative affairs of the trust was not keeping good health for the last many days and that she was admitted in Apollo Hospital on 18th July, 1999 to 2nd Aug., 1999 for treatment for severe subarchnoid haemorrhage with CAD. The AO, however, rejected the plea of the assessee of reasonable cause. The AO has observed that the accounts of the trust were duly audited by a chartered accountant for all the assessment years well before the due date. The AO, therefore, found that the trust has been carrying on its normal activity and has duly maintained books of account and duly got them audited. In the circumstances, the plea of illness of Mrs. Iqbal Malik could not be accepted as a reasonable cause for the assessee's failure.

2.3 Aggrieved by the order of the AO, the assessee preferred appeals before the CIT(A). Besides reiterating the plea as was putforth before the AO, the assessee also submitted that its total incomes for the various assessment years were as follows:

Chart showing year-wise receipt amount spent loss, during the year:

Asst. yr. Max. amount Total Amount (Loss) as per not liable to tax Receipt Spent P&L A/c.(A) 1996-97* 40,000 3,52,150 3,78,274 26,124 1997-98* 40,000 5,03,926 5,36,872 32,946 1998-99* 40,000 6,03,175 6,31,242 28,067 1999-2000* 50,000 8,99,855 9,36,385 36,530 2000-2001* 50,000 8,91,479 9,12,334 20,855 No tax demand under Section 143(1).

2.4 Since the total income was a loss as per the P&L a/c, the assessee entertained a bona fide belief that there is no obligation to file return of income. The CIT(A), however, rejected this plea of the assessee for the reasons given in para 6 of his order, which reads as follows:

That if the receipts from property held under trust or voluntary contributions referred to in Section 2(24)(iia) without giving effect to the provisions of Sections 11 and 12 exceed the maximum amount which is not chargeable to income-tax, liability is cast on a trust to furnish a return of income and all the provisions of this Act shall apply as if it were a return required to be filed under Section 139(1). Thus, the moment the receipt of income derived from property held under trust or voluntary contributions exceeds the taxable limit, an assessee is supposed to file the return of income in respect of that assessment year. A perusal of the income and expenditure account and the balance sheet filed by the appellant during the course of appellate proceedings shows that the excess of expenditure over income during the year is Rs. 26,124. However, voluntary contributions (donations) received during the year are Rs. 82,155 which have not been shown in the income and expenditure account and have directly been taken to the balance sheet as corpus fund. As per Section 11, certain incomes of the trust are not to be included in the total income. These incomes are listed in Section 11(1)(a) to 11(1)(d). Since for the purpose of determining an assessee's liability to file return of income under Section 139(4A), no effect is to be given to the provisions of Sections 11 and 12, it means that the incomes not to be included in the total income of the trust as listed in Section 11(1)(a) to 11(1)(d) for the purpose of taxation are to be included for the purpose of determining an assessee's liability to file the return of income. There is a difference between the liability to file the return of income and the liability to pay income-tax on the income of the trust. An assessee may not have any liability to pay income-tax on the trust income but by virtue of the provisions of Section 139(4A), it may still be liable to file its return of income because for the purpose of filing return of income, what is required is that a trust's income without giving effect to the provisions of Sections 11 and 12 should be more than the taxable limit. In the present case, although income from voluntary contributions which form part of the corpus of the trust may be exempt from taxation in view of Section 11(1)(d) which reads as under:

Subject to the provisions of Sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income. Income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution.

But since no effect is to be given to the provisions of Sections 11 and 12 for the purpose of determining an assessee's liability to file return of income, the voluntary contributions even if they form a part of the corpus of the trust will have to be taken into account to find out whether a trust is liable to file its return of income or not. In the present case, the voluntary contributions even though taken to be the corpus fund by the appellant have to be considered in order to determine appellant's liability to file its return of income. Since in the present case, voluntary contributions are Rs. 82,155 which is more than the maximum amount which is not liable to tax, the provisions of Section 139(4A) are attracted in the appellant's case and the appellant is supposed to file its return of income for the impugned assessment year. Therefore, I am of the view that the appellant-trust was liable to file its return of income as per the provisions of Section 139(4A). Since the return was filed beyond the due date, the appellant-trust was liable for penalty under Section 272A(2)(e).

2.5 The CIT(A) also held that the illness of Mrs. Iqbal Malik had not been established. Thus, the CIT(A) confirmed the order of the AO giving rise to the present appeals by the assessee.

2.6 We have heard the submissions of the learned Departmental Representative and the learned Counsel for the assessee. The learned Counsel for the assessee reiterated the contentions as were putforth before the Revenue authorities. The learned Departmental Representative relied on the orders of the Revenue authorities. It was submitted by him that the plea of reasonable cause had to be established by the assessee by letting in evidence. He pointed out that no evidence had been filed by the assessee to prove the illness of Mrs. Iqbal Malik. It was pointed out by him that the plea of the assessee having incurred loss was raised for the first time before the CIT(A). On the interpretation of the provisions of Section 139(4A) he relied on the reasoning of the CIT(A). We have considered the rival submissions. As far as the plea of illness of Mrs. Iqbal Malik is concerned, we find that no evidence whatsoever had. been let in by the assessee before the AO. Though we find that the AO had not rejected the explanation on this basis, the conclusion of the AO that there was no reasonable cause only goes to show that this plea raised by the assessee has not been substantiated.

2.7 With regard to the plea of bona fide belief that the assessee was not under an obligation to file a return of income as the total income was below the taxable limit, we find some substance in the plea raised by the assessee in this regard. It is seen that there was an excess of expenditure over income in all the five assessment years. The complaint of the CIT(A) appears to be that there was some voluntary contributions received during the year which were not reflected in the income and expenditure account, but had been directly taken to the balance sheet as corpus fund. It is no doubt true that even in respect of contributions received as one towards corpus fund, the same will not be included in the total income only by virtue of the provisions of Section 11(1)(d) of the Act. It is also true that while computing the total income for the purpose of liability of an assessee to file a return of income in terms of Section 139(4A), no effect should be given to the provisions of Sections 11 and 12 of the Act, but going by the loss reflected in the P&L a/c, one is bound to conclude that there was no obligation to file the return of income even as per the provisions of Section 139(4A) of the Act. This bona fide belief is further corroborated by the fact that the assessee has got his books of account duly audited well before the due date. The fact that the assessee filed the return of income for all the assessment years voluntarily would also go to show that the plea of bona fide belief entertained by the assessee had to be accepted. It is the plea of the assessee that the returns were filed voluntarily on the advice of a new chartered accountant, who had enlightened the assessee on the correct legal position. In the circumstances, we feel that the plea of bona fide belief raised by the assessee deserves to be accepted. It has been held by the Hon'ble Delhi High Court in the case of Woodward Governor India (P) Ltd. v. CIT (2001) 168 CTR (Del) 394 : (2002) 263 ITR 745 (Del) that the word "reasonable cause" as applied to human action, is that which would constrain a person of average intelligence and ordinary prudence. It means an honest belief founded upon reasonable grounds, of the existence of a state of circumstances, which assuming them to be true, would reasonably lead an ordinary, prudent and cautious man, placed in the position of the person concerned, to come to the conclusion that the same was the right thing to do. A claim should not be rejected unless it is frivolous. Hon'ble Bombay High Court in the case of CIT v. Schell International held that ignorance of law is no excuse, but there is no presumption that everyone knows the law. The Bombay High Court in the context of penalty provisions accepted the plea of an assessee of ignorance. Considering the facts and circumstances of the present case and the law laid down in the decisions referred to above, we are of the view that the plea of reasonable cause has to be accepted. The penalties imposed are directed to be deleted. All the appeals by the assessee are allowed.

3. In the result, the appeals of the assessee are allowed.