By TIOL News Service

KOLKATA, AUG 24, 2016: THE issue before the Tribunal is - Whether when the assessee port has not claimed the status of a local authority to claim exemption u/s 10(20), even then the Explanation inserted w.e.f AY 2003-04 would apply to determine its status for assessment and the tax rate applicable to it. NO is the answer.

Facts of the case

The return of income for the AY 2003-04 was filed disclosing loss and assessment was completed u/s 143(3) of the Act on 10.2.2006 on the assessed income of Rs. 231,51,57,440/-. The case was reopened by the AO on having the reason to believe that the assessee had been assessed considering the status of the assessee as local authority at a low rate instead of treating the status as company, due to failure on the part of the assessee to disclose full and true particulars for the AY 2003-04 within the meaning of explanation 2(c)(ii) of Section 147 of the Act. After obtaining the approval of the CIT, the case was reopened by issuance of notice u/s 148. The assessee filed return in response to notice u/s 148 in the status of local authority. The assessee sought for the reasons recorded by the AO for re-opening the assessment and later objected to the same by stating that no new information was available with the AO to trigger the reassessment proceedings which is admittedly based on change of opinion. The assessee also stated that no exemption u/s 10(20) of the Act was claimed by the assessee and the expression 'local authority' was defined only in section 10(20) of the Act which is relevant only for the purposes of that section. The AO framed the reassessment in the status of a 'company' rejecting the claim of status of 'local authority'. However, the CITA reversed the decision of the AO on merits by holding the assessee trust as a 'local authority' but did not give any finding on the grounds raised on the assumption of jurisdiction u/s 147 of the Act.

Aggrieved, the revenue is in appeal before the Tribunal. Assessee also filed cross objection against the order of CIT(A) in not adjudicating the grounds taken by it in regard to the invalidity of the initiation of reassessment proceedings in the instant case in respect of the AY 2003-04. Assessee has contended that the CIT(A) should have also held that the initiation of the impugned reassessment proceedings by the AO, in the instant case, based upon the reasons recorded, was wholly without jurisdiction, illegal, invalid and void ab-initio; and consequently all proceedings taken in pursuant to the Notice u/s 148/ 147 were illegal, invalid and nullity in law. This was so because the initiation of the Reassessment proceedings was based on a mere change of opinion, on issues already examined in course of the original assessment proceedings for the year under appeal, and hence was wholly impermissible in law; and therefore wholly without jurisdiction, illegal, invalid and void ab-initio.

Having heard the matter, the Tribunal held that –

++ the expression 'local authority' as per section 3(31) of General Clauses Act shall mean a Municipal Committee, District Board, Body of Port Commissioner or other Authority legally entitled to, or entrusted by the Government with control or management of Municipal or Local Fund. Accordingly all major port trusts, therefore, fall within the meaning of the expression 'local authority' under the General Clauses Act;

++ pursuant to the amendment with effect from AY 2003-04 by way of insertion of Explanation in section 10(20) of the Act, the assessee port trust though remains a local authority as per General Clauses Act but its exemption u/s 10(20) of the Act has been withdrawn. However, it is found that the expression 'local authority' has been defined only for the purpose of section 10(20) of the Act and not otherwise. In other words, any person claiming exemption u/s 10(20) of the Act would have to follow the newly inserted explanation for the purpose of ascertaining the eligibility of exemption u/s 10(20) of the Act;

++ In the instant case, the assessee port trust had admittedly not claimed any exemption u/s 10(20) of the Act and hence the newly inserted explanation cannot be made applicable to the assessee port trust. Infact from the returns and the assessments framed in original scrutiny assessment proceedings for the AYs 2003-04, 2004-05 & 2005-06, it is found that the AO had accepted the status of the assessee as a local authority and assessee is paying taxes on its income, if any. From the perusal of the scrutiny assessment orders passed for the AYs 2003-04 to 2005-06 u/s 143(3) of the Act, the assessee had not claimed any exemption u/s 10(20) of the Act so as to warrant the applicability of newly inserted Explanation in section 10(20) of the Act;

++ it was hence held that the meaning of the expression 'local authority' as inserted in the Explanation to section 10(20) of the Act with effect from AY 2003-04 is not applicable for determining the status in which the assessee should be assessed nor it is relevant for deciding the rate of tax applicable. Up to AY 2002-03, KOPT was exempted from payment of tax u/s 10(20) of the Act as it existed up to AY 2002-03. As per section 3(31) of General Clauses Act, Port Trust is a local authority. Local Authority, according to section 3(31) of the General Clauses Act shall mean a municipal committee, District Board, Body of Port Commissioners or other authority legally entitled to, or entrusted by the Government with control or management of municipal or local fund. All Major Port Trusts therefore, fall within the meaning of the expression "local authority" under the General Clauses Act. By the Finance Act 2002 w.e.f. AY 2003-04, exemption u/s 10(20) of the Act has been restricted to few local authorities viz. Panchayat as referred to in clause (d) of Article 243 of the Constitution, Municipal as referred to in Clause (e) of Article 243P of the Constitution, Municipal Committee & District Board and Cantonment Board as defined in Section 3 of the Cantonment's act, 1924. Thus w.e.f. AY 2003-04, only these local authorities continue to claim exemption u/s 10(20). However, it may be noted that the definition of "local authority" as per General Clauses Act has not undergone any change. Therefore, KOPT remains as a local authority as per General Clauses Act, but its exemption u/s 10(20) of the Act has been withdrawn w.e.f. AY 2003-04. In view of that, return has been correctly filed by KOPT in the status of a local authority. KOPT is governed by the Major Port Trusts Act;

++ The AR apart from arguing that the assessee's status should be assessed only as a local authority also objected to the reopening of assessment on the ground that no new information was there on record to justify initiation of the proceeding u/s 147 of the Act. All information required for the purpose of assessment were provided in the course of assessment u/s 143(3) of the Act. Moreover, in course of rectification proceedings u/s 154 of the Act which was sought by the assessee, a specific query was raised as to why KOPT would be assessed as a local authority. The assessee in reply to the query explained why it had filed return of income in the status of a 'local authority'. He argued that the reopening has been made merely on the basis of change of opinion without inging on record any new facts or materials. He further argued that there was no failure on the part of the assessee to make full and true disclosure of income of the assessee or particulars of income of the assessee. This is more relevant as the reopening was made beyond 4 years from the end of the relevant AY. He argued that no material evidence has been ought on record by the AO to prove that there was failure on the part of the assessee from making the full and true disclosure of its income warranting reopening beyond 4 years;

++ the assessments completed u/s 143(3) of the Act for the AYs 2003-04 to 2005-06 were reopened without any tangible material ought on record by the AO. The reassessment is done only due to change of opinion and the facts and various correspondences addressed by the Ministry of Shipping (under which assessee trust is primarily administered and controlled); various correspondences of Ministry of Finance, Income Tax Department, Government of India; from the reasons recorded for re-opening the assessments, it was held that the reassessment made for all the AYs deserves to be quashed and declared void ab initio;

++ Accordingly, the reassessments framed by the AO for the AY 2003-04 is quashed and declared void ab initio. Even on merits, the aforesaid facts and findings would clearly prove beyond doubt that the assessee port trust has to be assessed only as a 'local authority' and not in the status of a 'company'. Accordingly, the grounds raised by the assessee on validity of assumption of jurisdiction u/s 147 of the Act are allowed and grounds raised by the revenue on the status of the assessee port trust are dismissed.

(See 2016-TIOL-1516-ITAT-KOL)