Income Tax Appellate Tribunal - Bangalore
S.G.R. Enterprises vs Assistant Commissioner Of Income Tax on 28 June, 2007
Equivalent citations: (2007)112TTJ(BANG)377
ORDER
P. Mohanarajan, J.M.
1. This is an appeal by the assessee, a partnership firm, directed against the order of block assessment passed by the AO under Section 143(3) r/w Section 158BC of the IT Act, 1961 (hereinafter called the Act) dt. 30th Sept., 1997.
2. We have heard both sides and perused the records. The facts as narrated in pp. (2) and (3) of the assessment order reveal that the assessee firm carries on the business of formation of layouts and sites for certain societies on a turnkey basis. A search under Section 132 of the Act was conducted in the case of M/s Madhuvana House Building Co-operative Society, its directors, Sri D.T.S. Rao and family members on 6th Feb., 1996. Along with the said search, the residential premises of the partners of the assessee firm were also covered. Consequent to the search in the case of Madhuvana House Building Cooperative Society and other cases on 6th Feb., 1996, a notice under Section 158BC r/w Section 158BD of the Act was issued and served on the assessee on 26th Sept., 1996 calling for the return of income in Form No. 2B. The assessee filed a return in response to the notice in Form No. 2B on 17th Dec, 1996 admitting total undisclosed income at Rs. 9,80,363. The said return of income was filed by the assessee firm disclosing income on estimate basis at 4 per cent of the receipts from various societies.
3. The AO completed the assessment under Section 143(3) r/w Section 158BC of the Act determining the undisclosed income of the assessee at Rs. 1,57,89,254. While computing the undisclosed income at Rs. 1,57,89,254, the AO bifurcated the receipts from the various societies into two categories viz., civil works and liaison works. In respect of the receipts considered as civil works, the AO determined the income at 10 per cent of the gross receipts on estimate basis. In respect of the receipts considered as liaison works, the AO allowed expenses at 10 per cent of the receipts on estimate basis and determined the income at 90 per cent of the gross receipts. Being aggrieved with the order, the assessee is before us in first appeal. Sri V. Srinivasan, the learned Counsel for the assessee, filed a paper book containing 62 pages and also a copy of the extracts from the appraisal report of the Department that was filed by the Revenue before the Tribunal in the case of D.T.S. Rao. Dr. R.B. Krishna, the learned special counsel for the Revenue, also filed a paper book on behalf of the Revenue containing 32 pages. These are kept on record.
4. The first grievance of the assessee canvassed in ground No. 2 is a legal ground challenging the validity of the assessment. Learned Counsel for the assessee submitted that the order of'block assessment was passed by the AO after invoking the provisions of Section 158BD of the Act. He submitted that for invoking the provisions of Section 158BD of the Act, the AO is required to reach a satisfaction that there is undisclosed income belonging to the assessee that was found in search. He further submitted that such a satisfaction reached by the AO has to be.recorded having regard to the judgment of the Hon'ble Supreme Court in the case of Manish Maheshwari v. Asstt. CIT and Anr. (2007) 208 CTR (SC) 97 : (2007) 289 FTR 341 (SC). At this stage, we enquired from Dr. R.B. Krishna, the learned special counsel appearing for the Revenue, whether the satisfaction was recorded by the AO. He submitted that the AO has recorded his satisfaction and he produced the order-sheet noting made by the AO on 26th Sept., 1996. The following noting has been made in the order-sheet on 26th Sept., 1996:
The assessee is a partnership firm consisting of late Sri Ramachandra, Smt. V. Rukmini, Smt. V. Padma and Smt. V. Rajeshwari. The firm is engaged in formation of layouts. The assessee entered into an agreement with M/s Madhuvana House Building Co-op. Society for formation of layouts on behalf of the society on turnkey basis. The assessee has not filed any return as on date relevant to the search in the premises of M/s Madhuvana House Building Co-op Society. Subsequent to the search in the premises of the said society it has come to the knowledge of the Department that the firm has not filed any return so far, admitting income from execution of the contracts. Therefore, the assessee is liable to block assessment in respect of undisclosed income under Section 158BB by virtue of provisions of Section 158BC r/w Section 158BD. Office to issue notice under Section 158BC.
5. Learned Counsel for the assessee referring to the aforesaid notings made in the order-sheet on 26th Sept., 1996 submitted that the purported satisfaction note recorded by the AO in the order-sheet of the assessee does not reveal any satisfaction reached by the AO having jurisdiction over Madhuvana House Building Co-op. Society that undisclosed income of the assessee was found in course of search in the case of Madhuvana House Building Co-op. Society. He submitted that the satisfaction contemplated under Section 158BD of the Act is the satisfaction to be arrived at by the AO of the person searched and not the satisfaction of the AO having jurisdiction over the person to be proceeded under Section 158BD. He submitted that in terms of Section 158BD of the Act, it is only the AO having jurisdiction over the person searched who has to derive satisfaction that undisclosed income seen from certain material does not relate to the person searched. This is because the satisfaction that the undisclosed income found during course of search does not relate to the person searched cannot be reached by any person other than the AO exercising jurisdiction over the person searched. Therefore, since the AO having jurisdiction over person searched has not reached any satisfaction based on material found in the case of the person searched, the mere noting made in the order-sheet of the assessee by the AO having jurisdiction over the assessee does not amount to recording of satisfaction of the AO having jurisdiction over the person searched.
6. Learned Counsel further submitted that the Hon'ble Supreme Court in the case of Manish Maheshwari (supra) has clearly laid down that if the conditions precedent for invoking the provisions of Section 158BD of the Act have not been satisfied the order passed is liable to be cancelled. The learned Departmental Representative submitted that the AO holding jurisdiction over the case of the assessee and the case of Madhuvana House Building Co-op. Society was the same and that therefore the satisfaction recorded in the order-sheet of the assessee is sufficient compliance with the statutory requirements as held by the Hon'ble Supreme Court in the case of Manish Maheshwaii (supra).
7. Learned Counsel for the assessee replied that even if it was to be considered that the recording made by the AO who was common is an expression of satisfaction having been reached in course of proceedings in the case of Madhuvana House Building Co-op. Society, explain reading of the noting made on 26th Sept., 1996 goes to show that the purported satisfaction has been recorded by the AO only as the AO of the assessee and not as the AO exercising jurisdiction over Madhuvana House Building Co-op. Society. He drew our attention to the following portion of the noting made in the order-sheet and submitted that even as per the noting made, there was no material found in course of search in the case of Madhuvana House Building Co-op. Society to assume jurisdiction under Section 158BD of the Act and that, it is only after the search that the proceedings under Section 158BD of the Act have been commenced on the ground that the assessee firm had not filed its returns of income for various years:
Subsequent to the search in the premises of the said society it has come to the knowledge of the Department that the firm has not filed any return so far, admitting income from execution of the contracts.
8. Learned Counsel further submitted that the noting made does not reveal anything about any undisclosed income belonging to the assessee firm having been discovered in course of search in the case of Madhuvana House Building Co-op. Society. He submitted that even the language employed while recording the satisfaction note suggested that the recording has been made by the AO having jurisdiction over the assessee firm and not by the AO exercising jurisdiction over the person searched. Accordingly, he submitted that in the absence of the conditions precedent viz., recording of satisfaction by the AO having jurisdiction over the person searched, the order of assessment is illegal and requires to be annulled.
9. Learned Counsel for the assessee further submitted that there was enough material on record from which it could be gathered that the assessee firm had not filed its returns of income and it was incorrect to suggest that the Department discovered that the assessee had not filed its return of income in course of the search proceedings conducted in the case of Madhuvana House Building Co-op. Society. Learned Counsel relied on the extracts of the appraisal report prepared by the Department that was filed before the Tribunal in the case of Sri D.T.S. Rao. He submitted that in the annexure to the appraisal report the Department had clearly shown that the case of the appellant was covered under a survey conducted under Section 133A of the Act on 6th Feb., 1996. He brought to our notice the decision of this Bench in the case of S. Ramachandmn & Co. in IT(SS)A. No. 27/Bang/1998, dt. 27th Jan., 2005, one of he sister-concerns of, the assessee before us, to which one of us is a party. He submitted that in the case of M/s S. Ramachandran & Co. (supra), the Tribunal has clearly noticed and analysed the entire search proceedings taken against Madhuvana House Building Co-op. Society, the partners of the assessee firm and other concerns of the partners of the assessee firm. He submitted that on 6th Feb., 1996, i.e., the date of search in the case of Madhunava House Building Co-op. Society and the partners of the assessee firm, there was also a survey conducted under Section 133A of the Act, in the premises at #13, Upstairs, Landsdown Building, K.R. Circle, Mysore. In this premises, where the Department conducted survey action on 6th Feb., 1996, the assessee firm and M/s S. Ramachandran & Co., were carrying on business. The survey was conducted simultaneously with search operations conducted in the residence of the partners of the assessee firm and the search in the case of Madhuvana House Building Co-op. Society.
10. Learned Counsel for the assessee thereafter took us through the paras (8) and (8.1) of the Tribunal's order in the case of M/s S. Ramachandran & Co. (supra), and submitted that the facts noticed by the Tribunal in the aforesaid paras were identical to the facts of the case of the assessee. Learned Counsel relied on para (9) of the Tribunal's order containing the findings on the issue and he submitted that the issue is covered by the Tribunal's decision in the case of the assessee's sister-concern that was also carrying on business from the same premises.
11. The learned Departmental Representative, on the other hand, strongly supported the order of assessment. He submitted that there is no requirement of recording satisfaction under Section 158BD of the Act unlike the provisions of Section 148 of the Act. He submitted that there is no proforma for recording the satisfaction. The AO having jurisdiction over the case of M/s Madhuvana House Building Co-op. Society and the assessee before us was common and therefore, the recording of satisfaction by the said AO would go to show that conditions precedent for assuming the jurisdiction under Section 158BD have been complied with. As per the satisfaction recorded in the order-sheet of the assessee it is clear that after the search conducted by the Department, it came to light that the assessee had entered into contracts with certain societies for doing layout works and that the assessee not filed the return of income for various years. Thus, there was undisclosed income by implication since the assessee had not filed its return of income. This undisclosed income was liable to be assessed and the proceedings have been rightly commenced by the AO. Learned Departmental Representative also drew OUP attention to the appraisal report to contend that the assessee had never been assessed to tax previously. On the aspect of the reliance placed by the assessee on the decision of this Tribunal in M/s S. Ramachandran & Co. (supra), the learned Departmental Representative submitted that the Revenue has carried the matter before the Hon'ble High Court and the same has not yet reached finality. He submitted that the facts of the two cases are also distinguishable as M/s Ramachandran & Co., was not arrying on any business with relation to Madhuvana House Building Co-op. Society whereas the" assessed firm was the contractor for the said society that has been searched. Since the assessee was the contractor carrying on business ,for the said society, the proceedings initiated against the assessee are valid. He also referred to the Panchanama drawn in the case of the assessee at the premises No. 23, & Main, Saraswathipuram, Mysore, on 6th Feb., 1996 and 7th Feb., 1996 and stated that certain books of accounts belonging to the assessee were seized and inventorised. He pleaded that in view of the material found in course of search conducted the proceedings initiated are valid and require to be upheld.
12. We have considered the rival submissions and the material on record. Firstly, it has to be seen whether the satisfaction recorded by the AO in the order-sheet of the assessee meets the conditions precedent for invoking the provisions of Section 158BD of the Act. The provisions of Section 158BD are extracted hereunderior the sake of facility:
Section 158BD--ere the AO is satisfied that any undisclosed income belongs to any person, other than the person with respect to whom search was made under Section 132 or whose books of account or other documents or any assets were requisitioned under Section 132A, then, the books of account, other documents or assets seized or requisitioned shall be handed over to the AO having jurisdiction over such other person and that AO shall proceed (under Section 158BCJ against such other person and the provisions of this Chapter shall apply accordingly).
From a close reading of the provisions, it is clear that the satisfaction contemplated under Section 158BD is the satisfaction to be reached by the AO exercising jurisdiction over the person searched. Such a satisfaction is to be recorded by the AO in course of the proceedings taken against the person searched having regard to the judgment of the Hon'ble Supreme Court in the case of Manish Maheshwari (supra) wherein it- has been held as under (Headnotes):
Before the provisions of Section 158BD of the IT Act, 1961, are invoked against a person other than the person whose premises have been searched under Section 132 or documents and other assets have been requisitioned under Section 132A, the conditions precedent have to be satisfied.
Held accordingly, that where the premises of a director of a company and his wife were searched under Section 132 of the IT Act, 1961, and a block assessment had to be done in relation to the company, the AO had to (i) record his satisfaction that any undisclosed income belonged to the company, and (ii) hand over the books of account and other documents and assets seized to the AO having jurisdiction against the company.
13. As rightly argued by the learned Counsel for the assessee, it is only the AO having jurisdiction over the person searched has the custody of the material found and seized. It is only such an AO who can form an opinion as to whether the material found and seized reveals undisclosed income of the person searched or some other person; Therefore, the satisfaction has to be reached by the AO having jurisdiction over the person searched and such a satisfaction has to be recorded in the proceedings/records of the person searched and thereafter the AO has to transmit the material showing the undisclosed income of the other person to the AO having jurisdiction over such other person. The purpose of recording the satisfaction is to ensure that whenever the same is questioned, the AO can demonstrate the same. The Bangalore Special Bench of the Tribunal in the case of Y. Subbamju & Co. and Ors. v. Asstt. CIT (2004) 85 TTJ (Bang)(SB) 670 : (2004) 91 ITD 118 (Bang)(SB) has considered the issue relating to satisfaction for the purposes of Section 158BD of the Act as under (headnotes):
Chapter XIV-B provides for a special procedure for assessment of case in which search is initiated under Section 132 or where books of account, other documents or any assets are requisitioned under Section 132A. If the search action does not disclose undisclosed income, the question of any assessment being framed under that chapter is simply improper and outside the purview of the chapter. Similarly, it is basically the person searched who is subject to assessment under that chapter. The provisions of Section 158BD, however, extend the operation of those provisions to the person who is not searched.
The essential ingredients of Section 158BD are:
(i) the AO of a person searched should be satisfied,
(ii) that undisclosed income belongs to person other than the person in respect of whom search was conducted,
(iii) the books of account or other documents or assets seized shall be handed over to the AO having jurisdiction over that other person,
(iv) the AO shall proceed against such other person under the provisions of this chapter.
On the basis of the search material in the possession of the AO of a person who is searched, he must come to a prima facie view that undisclosed income belongs to other person.
If the satisfaction of the AO that undisclosed income belongs to other person is justifiable the authorities when called in question, cannot escape to demonstrate the material that led to the satisfaction that undisclosed income of other person has been detected by the Department as a result of search. If the Department, for any reason, has no material whatsoever to come to that view, the proceedings under Section 158BD would...have to be dropped because very foundation for the assumption, of jurisdiction becomes non-existent. Although the judicial authorities are not entitled to go into the sufficiency of the reasons, the existence of the reasons for satisfaction can always be gone into by the judicial authorities. In the instant case, there was no iota of material to show that there was undisclosed income. When such was the case, the satisfaction that the undisclosed income belonged to such other person was wanting. When that was the case, the entire proceedings framed with the issuance of notice under Section 158BD would have to go. In other words, if the basis for notice is not there, the notice itself is wrongly issued and making further assessment on such, other person would be wholly outside the purview of the scheme. Thug, issuance of notice by itself is not the display or record of satisfaction which is the basic requirement under Section 158B (paras 7.1, 7.2 and 9).
14. Applying the aforesaid decision of the Special Bench of the Tribunal, we hold that it is only the AO exercising jurisdiction over the person searched who has to reach the required satisfaction that there is undisclosed income that does not belong to the person searched but to some other person. It is this satisfaction that is required to be recorded having regard to the decision of the Hon'ble Supreme Court in the case of Manish Maheshwari (supra). However, we have to still consider the submission of the learned Departmental Representative that where the AO of the person searched and the AO of the other person proceeded against under Section 158BD is one and the same, the satisfaction recorded by such AO could be considered as satisfaction reached in course of proceedings taken against the person searched as such an AO would be in custody of the seized materials and there is no requirement of transmission of the seized material to any other AO. In our considered opinion, the test in such cases would be to see whether the satisfaction recorded by the AO has been reached and recorded as a result of materials found in course of person searched or not and whether the satisfaction so recorded shows that the same has been reached as the AO exercising jurisdiction over the person searched.
15. From a plain reading of the satisfaction note produced by the learned Departmental Representative we have no hesitation in coming to the conclusion that the noting made does not meet the requirements of recording the satisfaction by the AO of the person searched as the noting made merely states that the assessee is a firm and that no returns of income have been filed up to the date of search. The said noting does not even state that any undisclosed income belonging to the assessee has been discovered in course df search in the case of Madhuvana House Building Co-op. Society. Mere nonfiling of a return does not mean that there is undisclosed income. As rightly argued by the learned Counsel for the assessee, in case the assessee had suffered losses and omitted to file returns of income, it cannot be said that proceedings under Section 158BD have to be taken to assess the losses in the absence of any material discovered in course of search to show that the assessee has undisclosed income, This is the crucial aspect of the matter i.e., the discovery of undisclosed income in course of search based on material found or seized. The existence of the material showing undisclosed income must be shown and the same cannot be assumed or based on suppositions or hypothesis. In the instant case, there is absolutely no material that has been found and brought to our knowledge from which it could be said that there was undisclosed income belonging to the assessee found in course of the search. Therefore, the proceedings initiated in the instant case cannot stand, as there is no basis for the satisfaction reached and recorded by the AO.
16. We are also fortified in this view by the conclusions reached by,the Tribunal in the case of M/s Ramachandran & Co., the sister-concern of the assessee, which was also carrying on business from the same premises at Mysore. We have held in that case that in course of the survey conducted in the business premises on 6th Feb., 1996, the Department derived knowledge that the assessee firm was carrying on business of developing layouts and that no returns of income have been filed for certain years. We have also held that there was no statement recorded in course of search from any person to support the conclusion that the Department discovered the omission to file the return in course of search proceedings taken in the case of Madhuvana House Building Co-op. Society or in the course of search/proceedings conducted in the case of the residence of the partners. Rather, there was a statement recorded from one Sri R. Sridhar, partner of the firm, in course of the survey action from which these facts have come to light. Considering the totality of the facts on record, we are of the considered view that the initiation of the proceedings under Section 158BD of the Act, purportedly based on the search conducted in the case of Madhuvana House Building Co-op Society is unjustified and accordingly, the proceedings initiated are bad in law. The order of block assessment so passed is hereby annulled.
17. The next legal ground canvassed by the assessee is that the assessment made on the assessee in the status of individual is opposed to law as the notice has been issued under Section 158BD of the Act in the status of firm. It is seen from the assessment order that the AO has mentioned the status of the assessee as individual in the column against status. However, in the body of the assessment order the AO has mentioned that the assessee is a firm and he has proceeded on that basis. We do not see any merit in the contentions of the assessee, as the wrong mention of status in the assessment order is only a curable error under Section 292B of the Act. Hence this ground is rejected.
18. The next legal ground canvassed by the assessee is that the CIT had not given an opportunity of hearing to the assessee before granting approval to the block assessment order. We find that this issue is covered by a number of decisions of the Bangalore Benches of the Tribunal, which have taken a consistent view that there is no need to give any opportunity to the assessee before the grant of approval. Hence this ground is also rejected.
19. The last legal contention advanced by the assessee in ground No. 5 is that the assessment order passed on the dissolved firm is contrary to law and the assessment of any income after the period of dissolution requires to be cancelled, learned Counsel for the assessee submitted that the assessee firm was constituted under a deed of partnership dt. 20th July, 1985. The partners of the assessee firm were (1) Sri. S. Ramachandran, (2) Smt. V. Rukmini, (3) Smt. V. Padma and (4) V. Rajeshwari. Sri S. Ramachandran was the managing partner of the assessee firm and he died on 18th Sept., 1993. Learned Counsel for the assessee submitted that upon the death of late S. Ramachandran on 18th Sept., 1993, the assessee firm stood dissolved by operation of Section 42 of the Indian Partnership Act, 1932. He submitted that in terms of Section 42, the firm is dissolved by death of one of the partners unless the deed of partnership provides that no dissolution of the firm takes place on the death of one of the partners. He filed the copy of the partnership deed before us and contented that there is no provision made in the partnership deed to the effect that the provisions of Section 42 of the Indian Partnership Act, 1932 do not apply to the assessee firm. He relied on the following decision of the Hon'ble Supreme Court in the case of Wazid Ali Abid Ali v. CIT .
20. The learned Departmental Representative, on the other hand, submitted that the assessee firm is raising this issue for the first time before us. He submitted that the issue relating to the dissolution of the firm and the fact that there was no firm in existence after 18th Sept., 1993 was not brought to the notice of the AO in course of assessment proceedings and there was no contention advanced that income after 18th Sept., 1993 cannot be taxed in the hands of the assessee firm. He accordingly pleaded that the assessee should not be permitted to raise this issue now.
21. We have considered the rival submissions. It is true that in course of the assessment proceedings the assessee had not advanced the contention that the firm stood dissolved on 18th Sept., 1993 itself, but the fact remains that this is purely a legal ground and can be raised at any time as held by the Hon'ble Supreme Court in the case of National Thermal Power Corporation Ltd. v. CIT . However, since the assessee had not raised this plea before the AO it would be in the fitness of things that the matter be remanded to the AO to consider the issue in accordance with law having regard to the decisions relied upon by the assessee. If the AO finds that the assessee firm stood dissolved on 18th Sept., 1993 itself by virtue of Section 42 of the Indian Partnership Act, 1932, then, the income after the date of dissolution cannot be assessed in the hands of the assessee firm and the same shall be excluded.
22. On merits, the assessee has taken ground Nos. 6 to 10 against the determination of a sum of Rs. 1,57,89,254 as undisclosed income. The assessee firm carries on the business of forming layouts for various societies on a turnkey basis. The business activities performed by the assessee as stated in the assessment order are as under:
(1) Securing from Government permission and approval for acquisition of land in favour of the society.
(2) Processing matters with Government, CITB and other statutory bodies for acquisition of lands and securing possession of land in favour of the society.
(3) Approval of layout plan and sanction of layout by the concerned authority/CITB/ or MUDA, Mysore.
(4) To carry out civil portion of the layout work on permission being granted.
(5) Getting the work relating to laying of lines with regard to water supply, distribution (PVC), underground drainage, street lights and asphalting etc.; after completion of the civil work.
23. In response to the notice issued under Section 158BD of the Act, the assessee firm filed a return of income admitting an income of Rs. 9,80,363 as income from carrying out the works on turnkey basis. Learned Counsel for the assessee submitted that the aforesaid return of income came to be filed by the partners of the assessee firm after the search operations based on the assurances given by AO that income of the assessee would be assessed at 4 per cent of the net receipts from the societies. Late S. Ramachandran, the erstwhile managing partner "was handling the affairs of the assessee firm and the other partners being ladies were not aware of the business operations or the provisions of the Act. After the demise of late S. Ramachandran on 18th Sept., 1993, search action was conducted on 6th Feb., 1996 on the family members of late S. Ramachandran, viz,, his wife, Smt. V. Rukmini and son Sri. R. Sridhar had just completed his studies in the year 1993. Both Smt. V. Rukmini and Sri. R. Sridhar were just getting acquainted with the business being carried by late S. Ramachandran and after the search and seizure operations, they were not aware of the method of determination of income being followed by the assessee firm. Accordingly, they offered undisclosed income in the return filed by them in response to the notice issued by estimating income at 4 per cent. However, after realising the correct position, the said persons filed a revised return of income in Form No. 2B on 26th Sept., 1997 before the completion of the assessment showing nil income as the assessee firm was following the completed contract method of accounting and the various works being executed by the assessee firm were still incomplete. It was also brought to the notice of the AO that the various societies who had paid the advances to the assessee firm had also shown the amounts paid as advances in their balance sheets and that the auditor of the Co-op. Societies Department had also accepted the said position. However, the AO did not accept the claim of the assessee that the amounts received from various societies were in the nature of advances only and that no income accrued to the assessee firm at this stage. He accordingly computed the income from business of forming layout in the following manner by considering a part of the advances received as towards liaison works carried on by the assessee and the balance as towards civil works:
(1) (a) Madhuvana House Building Co-op. Society Amount received towards liaison/work as discussed in para 17 30,96,066 Less : Estimated expenses 3,09,606 __________ Income 27,86,460
(b) Receipts from civil work income estimated at 10 % in 1,55,30,369 the absence of details 15,53,036 Income included protectively 44,80,000 (2) Karnataka Gr. D Employees House Buld. Society 1st phase 38,27,630 Less lumpsum disallowance 3,00,000 __________ 35,27,630 IInd Phase 52,51,166 Income estimated at 10 % 5,25,116 (3) Bank Employees Society 3,01,110 HPO and RMS Society 11,23,000 Health Dept. Society 18,90,760 _________ 33,14,860 Less : expenses estimated 3,30,000 29,84,860 ___________ Total income including undisclosed income 1,58,57,102 Less : Income declared for the asst. yr. 1986-87 67,848 ___________ Total undisclosed income 1,57,89,254
24. Learned Counsel for the assessee submitted that the AO in the block assessment proceedings considered the agreement for developing the layouts on turnkey basis entered into between the assessee and the societies as comprising of two separate and independent phases viz., liaison works and civil works. After splitting the single contract into two different parts, the AO computed the income therefrom separately. He submitted that the agreement between the assessee and the society was a single indivisible contract and the same cannot be split up into the different phases. He relied on the decision of the Tribunal in the case of M/s S. Ramachandmn & Co., (supra) and submitted that we have clearly held in the case of M/s S. Ramachandran & Co., that the agreement cannot be split up into civil and liaison works.
25. The learned Departmental Representative, on the other hand, relied on the order of the assessment. He submitted that the Revenue has not accepted the decision of the Tribunal in the case of M/s Ramachandran & Co. (supra), and had taken the matter before the Hon'ble High Court and therefore, the matter has not yet reached finality.
26. We have considered the rival submissions and we find that the issue is covered by the decision of the Tribunal in the case of M/s S. Ramachandran & Co., (supra) and the relevant portion of the order is reproduced hereunder:
4. We have heard the rival submissions and perused the records. It is an admitted fact that completed contract method of contract is recognized method for determining income. On a perusal of agreements and nature of activities undertaken by the assessee under the aforesaid contracts, the dominant object is the development and promotion of layout. For achieving this turnkey layout development, the societies agreed to pay the assessee at an agreed rate on the basis of actual sital area finally obtained on conclusion of the contract and in the meanwhile advance would be given on a rough and ready method for calculating the amount payable. As rightly contended by the learned Counsel for assessee, amount paid by the society during the implementation of the turnkey contract is in the nature of advances only as the total consideration can be determined only at the end of the project and not at any stage before the conclusion and obtaining the final sital area. Therefore, in our view, splitting up turnkey contract into two activities viz. (i) liaison activity and (ii) civil works is not justified.
4.1 The AO assessed the income from liaison work at 85 per cent of the amounts considered to have been received for liaison activity. For the civil portion, the AO estimated the income at 8 per cent. Looking to the total facts and circumstances of the case and also taking into consideration various contracts, we are of the view that there is no basis for splitting up the amount received by the assessee as appertaining to liaison work and civil work. The entire contract is single contract and there can be no division as between civil works and liaison works. In the decision relied on by the assessee in the case of Dealim Industries (supra), it was concluded that a works contract on turnkey basis cannot be vivisected and part of it subjected to service tax, The CESAT has applied the ratio of the decision of the Hon'ble Supreme Court in the case of State of Punjab v. Associated Hotels (I 8CC 472) where the apex Court held that, the primary object of the contract would determine the issue. The various components of the contract cannot be taken as separate transaction and subjected to tax. The decision of the service-tax Tribunal in Dealim Industries (supra) has since been affirmed by the Hon'ble Supreme Court by dismissing the petition for Special Leave to Appeal (Civil) No. 24294 of 2003 of the Revenue . Therefore, computation of income by splitting up the contract is not in accordance with law on the facts and circumstances of the case.
Applying the aforesaid findings and conclusions reached by us in the case of M/s S. Ramachandran & Co., we hold that the AO was not justified, in splitting up the contract entered into by the assessee with various societies into civil works and liaison works and thereafter proceed to compute the income separately in respect of the two activities. Therefore, the method of determination of income by the AO by splitting the contract into two phases is set aside and it is directed that the income from the business has to be computed by taking the contract as a whole.
28. The next issue that arises for consideration is whether the income from formation of layouts on turnkey basis for various societies can be considered as undisclosed income in the block assessment. The learned Counsel for the assessee submitted that the advances paid by the various societies are covered by TDS and therefore the same cannot be considered as undisclosed income. He submitted that a consistent view has been taken that receipts covered by TDS cannot be considered as undisclosed income in the block assessment. The learned Departmental Representative relied on the assessment order. After considering the rival submissions, we are opinion that the receipts covered by TDS cannot be considered as undisclosed income. In the case of M/s S. Ramachandran & Co., we have held as under:
5. Vide ground Nos. 14 and 15 it is contended that, the advances received by the assessee which are considered as contract receipts on which income is estimated, cannot be considered as undisclosed income. This is because the societies who have given the advances have deducted tax at source (TDS) on the advances given to the assessee. Once tax has been deducted at source, the deductor files return to the IT Department furnishing the particulars of payment made and the taxes deducted thereon. Thus, the Department derives the knowledge of the payments made by the tax deductor and to whom the payments have been made and this cannot be said to represent undisclosed income. For this proposition that income subjected to TDS cannot be considered as undisclosed income, reliance has been placed on the following decisions:
(i) Sedvi Divakar Shankar v. Asstt. CIT (2000) 66 TTJ (Pune) 698 : (2000) 72 ITD 552(Pune);
(ii) P.R. Patel v. Dy. CIT (2001) 73 TTJ (Mumbai) 262 : (2001) 78 ITD 51 (Mumbai); and
(iii) CIT v. Ashok Taksali .
5.1 Furthermore, a decision of the Gauhati High Court in the case of Dr. (Mis.) Alaka Goswami v. CIT was also cited. In this judgment it was held that, advance-tax cannot be treated as undisclosed income. The ratio being that, once tax has been paid or deducted and there is no intention to conceal, the income cannot be considered as undisclosed income. It was therefore submitted that, since the societies have deducted tax, and as the assessee had filed its return of income for the asst. yr. 1993-94 onwards after the search/survey but before the notice under Section 158BD was issued and the proceedings have been initiated only on the basis of the regular returns of income so filed and on record of the Department, the advances received cannot be considered as undisclosed income.
5.2 The learned Departmental Representative, on the other hand, stated that the very fact that tax was deducted at source means that income has accrued. In reply it was clarified by the learned Counsel for assessee that TDS was deducted by the society because of the circular issued by CBDT, which was placed at page Nos. 31 and 32 of the paper book No. 11. In terms of the said circular even when the advances are given for the works contract, tax has to be deducted as and when advance is given. Therefore, it cannot be said that once tax has been deducted income has accrued.
6. We have considered the matter, we find that in the paper book No. HI of page Nos. 37 to 40, the orders passed by the AO giving credit for the tax deducted at source by the societies' towards taxes demanded in block assessment. This credit has been given consistent with the stand of the Department that the income has to be assessed in the block assessment. We have earlier accepted the assessee's contention regarding adoption of the completed contract method of determination of income, as the AO himself accepted the claim in the assessment order for the asst. yr. 2001-02 in the light of the decision of the Karnataka High Court in the case of Khodays Distilleries in ITRC Nos. 19 to 21 of 1993, dt. 12th Sept., 4995. Since, no income can be computed in the block assessment, it follows that the receipts subjected to TDS also do not constitute undisclosed income.
Applying "the aforesaid conclusions reached by us in the case of M/s S. Ramachandran' & Co., we hold that the receipts of advance from various societies where TDS has been made does not constitute undisclosed income. We have perused the order passed under Section 154 of the Act dt. 5th Aug., 2002 in which the AO has given credit for the tax deducted at source on the payments made by the societies to the assessee firm. Thus, the receipts of Rs. 1,35,87,186 from Madhuvana House Building Co-op. Society, Rs. 84,55,200 from Karnataka Gr. D Employees Housing Building Society are to be excluded as TDS had been made thereon and the income assessed in respect of these receipts is hereby deleted.
29. One more issue which was argued before us relates to the extent of receipts to be adopted for computation of income in the case of M/s Madhuvana House Bldg. Co op. Society and Karnataka D Group Employees Housing Society. As per the TDS certificates, the assessee received a sum of Rs, 1,35,87,186 from M/s Madhuvana House Building Co. op. Society, whereas as per the seized material found in the case of Madhuvana House Building Coop. Society, the amount debited to the assessee's account was Rs. 1,86,26,435. It was explained that the difference between the amounts shown in the TDS certificate and the amount debited to the assessee's account represents the payments made by M/s Madhuvana House Bldg. Co-op. Society directly to statutory authorities and that the same never reached the assessee. The details of such payments were also filed before the AO and before us. Similarly with regard to Karnataka D Group Employees Housing' Society, the amount received by the assessee as per the TDS certificates was Rs. 84,55,200, whereas the total receipts computed by the AO were Rs. 90,78,780. Here again, the assessee has explained that the difference represents payments made by the said society directly to statutory authorities and debited to the assessee's account. We find that this aspect of the matter has not been properly considered and verified by the AO. Hence, we are remanding this issue to file of the AO to consider the assessee's explanation for the difference in receipts in the case of the two societies in accordance with law. If the AO finds that the difference is on account of payments made directly by the society, as explained by the appellant, the same shall not be included while computing the income of the assessee.
30. With regard to the income of Rs. 44,80,000 assessed protectively, it is seen that the sum of Rs. 44,80,000 represents expenditure incurred by Madhuvana House Building Co-op. Society from the period 28th Oct., 1992 to 18th Nov., 1995 on the project directly. The AO included the said amount as income of the assessee firm as the partners of the assessee firm had given vouchers for the expenses incurred directly by M/s Madhuvana House Building Co-op. Society and later on denied the receipt of these monies. The AO has assessed the said receipts on a protective measure as the AO Mas already assessed the same in the hands of M/s Madhuvana House Building Co-op. Society. We find that the assessee firm had explained that after the demise of late S. Ramachandran, M/s Madhuvana House Building Co-op. Society was doing certain portion of the layout works directly and debiting the same to the contractor's account as the expenses were a part of the project cost. The partners of the assessee firm denied having received the money but admitted having signed the vouchers for the expenses. It is seen that the addition has been made only protectively in the hands of the assessee. From the facts narrated before us, it is clear that the assessee did not receive this money of Rs. 44,80,000. Thus, the same does not form part of the receipts of the assessee firm. The protective addition made is hereby deleted.
31. With regard to the receipts from Mysore HPO & RMS Employees Housing Co-op. Society, Bank Employees House Building Society and Health Department Society, there are no details forthcoming from the assessment order. It is not known whether any TDS has been made on these amounts paid by the societies to the assessee. The assessee has explained that in respect of the contract entered into with these societies, there were disputes between the assessee and the respective societies. The societies had filed civil suits cancelling the contract and seeking refund of the advances paid to the assessee. From the perusal of the assessment order, It appears that the AO has not properly considered the contentions advanced by the assessee. Ultimately, if the assessee had to repay these advances and has repaid the same, it cannot be income of the assessee. The issue is therefore remanded to the AO to decide the issue afresh. The AO will also ascertain as to whether any TDS was made by the societies while making payments to the assessee. If TDS has been made then, the AO will exclude the same from the ambit of undisclosed income following our conclusions in the earlier part of this order.
32. The last issue to be considered is the extent of income to be computed from the business. The assessee has claimed that it was following the completed contract method of acpounting and that no income could be computed, as the projects were not yet complete. The AO has not accepted the claim of the assessee in the assessment order. In the case of the assessee's sister-concern, M/s S. Ramachandran & Co., we have upheld the claim that the income of the assessee is to be computed after the completion of the project. We have reached the aforesaid conclusions based on the examination of the contract entered into by the assessee and in light of the fact that, under the contract, the exact sital area on which the assessee is entitled to receive the development charges can be ascertained only upon completion of the project. We have also noticed that in the matter of development of the layout by the assessee on a turnkey basis there are several uncertainties and that there would be lengthy delays that would affect the determination of income as it would be improper to determine income year after year based on the extent of advances received as the correct income cannot be arrived at on that basis considering the uncertainties. Applying the decision so reached by us, we hold that the income of the assessee is entitled to adopt the completed contract method of.accounting.
33. Before parting with the issue, it is necessary to dispose of one of the contentions raised by the learned Departmental Representative. He submitted that the assessee is not entitled to adopt the completed contract method of accounting as no details of expenses were produced before the AO. He submitted that the extent of income to be determined be fixed based on ground realities. We may also observe here that the mode in which the AO has computed the income is highly arbitrary, as the AO has allowed only 10 per cent of the income as expenses in respect of liaison work and thereafter estimated income from civil works at 10 per cent despite the fact that in the case of the assessee's sister-concern, 8 per cent was adopted. Further, the extent of income determined by the AO at Rs. 1,57,89,254 on the total amount of Rs. 2,56,79,742 received from all the societies amounts to 61.32 per cent for which there is neither any support nor discovery of any unaccounted assets after search operations. It is therefore sufficient to observe here that the income determined is highly unrealistic and divorced of ground realities and these aspects of the matter have to be borne in mind by the authorities below while computing the income. Considering these factors, we do not wish to comment on the extent of income to be computed as we have upheld the claim of the assessee that it is entitled to follow the completed contract method of accounting.
34. In the result, the appeal by the assessee is partly allowed to the extent indicated and discussed above.