AO's Jurisdiction Doesn't Change On Mere Surrendering Section 12A Registration: ITAT Upholds Income Tax Reassessment Order Against Young Indian

The appellant, Young Indian (YI), was incorporated and registered as a company on November 23, 2010, when a licence was granted under section 25 of the Companies Act, 1956. As per the Memorandum of Association, it was subscribed by two directors, namely, Suman Dubey, with 550 equity shares, and Satyan Gangaram Pitroda (Sam Pitroda), with 550 equity shares. The appellant company was incorporated with an authorised capital of 5000 shares of Rs.100 each, valued at Rs.5,00,000 and the paid-up capital was 1100 shares of Rs.100 each, valued at Rs.1,10,000.

Immediately after its incorporation, both the directors transferred the shares to Mr. Oscar Fernandes, Mrs. Sonia Gandhi, Shri Rahul Gandhi, and Shri Moti Lal Vohra. Later on, Shri Rahul Gandhi was appointed as Director of Young Indian to acquire 1900 shares. The assessee company disclosed the list of shareholders and directors of Young Indian during the relevant assessment year.

The genesis of the controversy started with the acquisition of shares of Associated Journals Limited (AJL) on February 26, 2011. The AJL was incorporated as a public limited company under the Indian Companies Act, 1913, for the purpose of publishing newspapers in different languages. AJL started publishing newspapers such as National Herald in English, Navjivan in Hindi, and Quami Awaz in Urdu.

From time to time, the All India Congress Committee (AICC), an Apex Body of the Indian National Congress, had advanced loans to AJL from time to time; and as on 31.03.2010, there was an outstanding loan of Rs.88,86,68,976 and a further loan of Rs.1,35,00,000 was received during the period from 1.04.2010 to 16.12.2010, aggregating to Rs.90.21 crores. On December 16, 2010, AICC, who had given the loan to AJL over a period of time, transferred the entire loan of Rs.90.21 crores due from AJL in favour of the appellant company, Young Indian, for a consideration of Rs.50,00,000.

In other words, AICC assigned the loan outstanding in the books of AJL at Rs. 50,00,000 to the appellant. YI purchased assets in the form of a loan of Rs. 90.21 crores from AICC, which was due from AJL to AICC for a paltry sum of Rs. 50 lakhs. The loan assigned to the appellant was converted into shares of AJL and AJL allotted 9,02,16,899 equity shares to Young Indian in lieu of the loan amount and, consequently, the authorised share capital of AJL was increased to Rs. 10 crores from 1 crore. In this manner, almost 99.99% of the shares of AJL were transferred to Young Indian.

The appellant company had filed a return of income for the AY 2011-12, declaring nil income. The Assessing Officer, subsequent to the processing of the return, received information from the Investigation Wing of the Income-tax Department that the assessee had purchased a loan of Rs. 90.21 crores, which was given by AICC to AJL for a paltry sum of Rs. 50,00,000. Immediately after assigning the loan, AJL allotted 9.021 crore shares to the appellant company.

The Assessing Officer, based on the information and material, deduced that the transaction of the purchase of the loan and the transaction of transferring shares from AJL to the appellant, which owned properties, had in fact transferred its properties to the appellant as well as accruals of business assets of AJL. The AO noted that after the receipt of information and examination of copies of the return of income along with the audited income and expenditure account for the year under consideration, enquiries were made from the parties to the transaction under sections 131 and 133 (6) of the Income Tax Act.

The AO opined that income chargeable to tax had escaped assessment during the year under consideration and proceedings under section 147 of the Income Tax Act were initiated by the issuance of a notice of reopening of assessment by recording reasons to believe.

The appellant, while challenging the reassessment order, contended that the appellant had surrendered its registration under s 12A and 12AA of the Income Tax Act. As a consequence, the assessee was no longer a section 11 exempt entity for the purpose of the Income-tax Act w.e.f. 22.03.2016. From AY 2017-18, the appellant has been filing its return with Company Circle, Delhi, and not the AO. Now, despite the change in jurisdiction, the appellant has received notice under section 148 for AY 2011-12 on 10.01.2017 from ACIT (E) who had no jurisdiction over the appellant, though he admitted that CIT (E) had cancelled the registration, which is post issuance of notice under section 148 withdrawing the exemption.

The department argued that the statutory recognition of a company as a charitable institution or its statutory entitlement to exemption under Section 11 of the Income Tax Act is not something which can be obtained or given-up on the whims and fancies of the assessee. The registration was granted as early as in 2011 and since then, the jurisdiction has been with the Deputy Commissioner of Income Tax (A.O.) in the Directorate of Exemption, New Delhi. The appellant also filed its return of income with the Directorate and no challenge to the jurisdiction arose at this stage. It was only at a later stage, when certain enquiries began against the appellant, that it started building up a case to create a defence. The registration was later found to have been obtained by misrepresentation of facts as held by the ITAT in Young Indian v. CIT (Exemption), in which the cancellation was upheld.

The ITAT, while rejecting the contention of the appellant, observed that the jurisdiction over the assessee lay with the AO, Exemption Circle by virtue of provisions contained under section 120 of the Income Tax Act, because it was a case of jurisdiction assumed by the Income Tax Department on the application filed by the assessee, which falls within the definition of "class of assessee and class of cases" as defined under clauses (c) and (d) of sub-section (3) of section 120 of the Income Tax Act. The appellant ostensibly falls into a specific category of cases, and it is not open for the assessee on its own to remove itself from that specific category of cases and then contend that it should have been assessed by a different Assessing Officer. The matter of jurisdiction was not by the choice of the assessee, albeit it depends upon the specific provisions contained in sections 120 and 124 of the Income Tax Act.

"Merely because the assessee had filed a letter on 21.03.2016 surrendering its registration u/s 12A or giving its benefit of section 11, does not mean that from the date of the letter, the jurisdiction of the AO automatically got changed. As stated above, at the time of issuance of notice under section 148, the ACIT or DCIT, Circle Exemption, New Delhi had the valid jurisdiction not only to initiate the proceedings u/s 148 but also pass the assessment order," the ITAT said.

Case Title: Young Indian Vs. ACIT(E)

Citation: ITA No.1251/Del./2019

Dated: 31.03.2022

Counsel For Appellant: Senior Advocate Saurabh Soparkar

Counsel For Respondent: Special Counsel G.C. Srivastava

Click Here To Read/ Download Order