Ajit K.Sengupta, J. - (1.) In this reference under Section 256(1) of the Income-tax Act, 1961, for the assessment year 1970-71, the following question of law has been referred to this court: "Whether, on the facts and in the circumstances of the case, the proceedings under Section 147 of the Income-tax Act, 1961 are valid in law ?"
(2.) Shortly stated, the facts are that the Income-tax Officer found that a "nil" return was filed originally but a claim for refund of Rs. 3,300 was made of tax deducted at source from interest earned by the trust. The Income-tax Officer had accepted the claim and allowed the refund of Rs. 3,300. Subsequently, a supplementary claim for refund of Rs. 755 being tax deducted at source from dividend was also allowed by the Income-tax Officer, The dividend and interest income had been claimed as exempt under Section 11 of the Income-tax Act. Subsequently, the Income-tax Officer found that the trustees of Birla Jan Kalyan Trust had received certain assets (shares) from the trustees of Raja Baldeodas Birla Santotikosh Trust in March, 1964, as a gift. According to the Income-tax Officer, the trustees of Raja Baldeodas Birla Santotikosh Trust had no power to alienate any of the movable properties which came into their possession by virtue of the original deed dated May 20, 1943, because the Raja Baldeodas Birla Santotikosh Trust was a family trust and the assets belonging to it were not to be given in charity for charitable purposes, The gift of shares, according to the Income-tax Officer, was ab initio void and the assessee was not the rightful owner of the said shares during the previous year under consideration. As the shares did not, according to the Income-tax Officer, belong to the assessee, the income arising therefrom did not belong to it and it was not entitled to the refund of Rs. 4,055 granted to it by the Income-tax Officer in the original assessment. In the light of this information, the Income-tax Officer initiated action under Section 147(b)/148 to make a reassessment and withdrew the refund of Rs. 4,055. The assessee again had shown-"nil" income in the return filed in response to the notice under Section 148 and a claim was made that the income earned by it during the year was exempt under Section 11 of the Income-tax Act. It was also contended that "there was full and true disclosure of all material and primary facts and evidence" at the time of the original assessment and, as such, proceedings under Section 147 should be dropped. The Income-tax Officer did not accept the contention of the assessee and completed the reassessment under Section 147(b). By his order under Section 147(b), the Income-tax Officer withdrew the refund of Rs. 4,055 on the footing that the assessee was not entitled to the credit for the tax deducted at source. The Income-tax Officer also held that the entire income of Rs. 6,42,783 was not exempt under Section 11 inasmuch as the trustees of Birla Jan Kalyan Trust had not complied with the terms and conditions prescribed in Section 11(2) in respect of the entire balance of Rs. 2,57,547 left after spending Rs. 3,85,236 on charity. The Income-tax Officer's argument was that the aggregate income of the assessee-trust was Rs. 6,42,783 and Rs. 3,85,236 was spent on charities and, as such, this amount was exempt under Section 11(1)(a). The balance left was Rs. 2,57,547 which was more than 25% of the income. But the assessee satisfied the conditions of Section 11(2) in respect of only Rs. 1,00,000 and not in respect of the entire accumulation of Rs. 2,57,547. According to the Income-tax Officer, the assessee-trust was not entitled to the benefit of exemption allowable under Section 11(2) in respect of the entire accumulation. The Income-tax Officer held that the benefit of accumulation would be available only in respect of 25% of the income, i.e., Rs. 1,60,696. Thus, the Income-tax Officer added back Rs. 96,851--Rs. 2,57,547 less Rs. 1,60,696.
(3.) Aggrieved, the assessee went up in appeal before the Appellate Assistant Commissioner of Income-tax. The Appellate Assistant Commissioner held that the assessee is the rightful owner of the shares of Raja Baldeodas Birla Santotikosh Trust and directed the Income-tax Officer to treat the entire income as exempt and cancel his order of withdrawal of refund of the amount of Rs. 4,055.;