Income Tax Appellate Tribunal - Bangalore
Madhuvana House Building Co-Operative ... vs Asstt Cit on 31 December, 2001
Equivalent citations: (2002)76TTJ(BANG)948
ORDER
I.C. Sudhir, J.M. The assessee, M/s. Madhuvana House Building Corporative Society, Mysore, has impugned the block assessment order dated 31-10-1997, mainly on the following grounds:
(i) The assessment order is barred by limitation as it transgresses the provisions of section 158BE of the Income Tax Act, 1961, and required to be annulled :
(ii) The appellant is a housing building co-operative society and its income is exempt from taxation and whatever income that has been computed as undisclosed income is its regular income and not undisclosed income and such income is also exempt from block assessment;
(iii) No income arose to the assessee from its activity of forming layout and allotting sites to its members as all the projects have not been completed and the amounts paid have been debited to the contractors' account and in view of the accepted method of recognition, income of completion contract method, no income arose to the appellant liable to tax as income in regular assessment much more as undisclosed income in the block inasmuch as the existence of the appellant was known to the department as the appellant has been assessed to tax before the date of search and its activities are also known to the department before the date of search and, therefore, the income from such activities could not be considered as undisclosed income.;
(iv) The disallowance of certain items which are debited to the contractors' accounts and shown in the balance sheet treated as undisclosed income; and
(v) The computation of undisclosed income from out of the seized materials.
2. Brief facts of the case are as under :
The assessee is a co-operative society formed with a view to acquire lands by purchase or otherwise, form residential layouts and allot sites therein to its members with different contractors as under :
S. No. Name of the contractor Project at Amount debited to contractor as advance as on 31-3-96 Rs.
Status of completion as on the date of search
1.
M/s. S.G.R. Enterprises Shri Rampura Layout 2,40,48,120 Not completed
2. M/s. M. Ramchandra Char Sathagalli Layout 3,95,52,065 Do
3. Reghvendra Construction Datagalli III Stage 50,94,500 Do
4. M/s. Sky-Top Builders Boriah Basavaiah lands 9,74,000 Do
5. M/s. Divine Construction Shri Rampura Layout 1,50,000 Do Total 6,95,18,685 With reference to projects at Serial Nos. 2, 4 and 5 above, it was submitted that the contractors have only obtained advances from the society and they have not done any work at all and claimed that they have done the works and refused to return the advances. In respect of M/s. Reghvendra Constructions, the said contractor had even taken a stand (sic) simply signed blank vouchers and did not receive the money at all. These amounts paid to the contractors have not been claimed as items of expenditure at all and are shown as advances to be recoverable from them in the balance sheet. No tangible project work of taking possession of the land and commencing the civil work have been done with reference to the projects undertaken by the contractors at Serial Nos. 2 to 5 as yet. In fact, suits have been filed for recovery of the amounts taken by M/s. Reghvendra Constructions, M/s. Sky-top Builders and M/s. Divine Constructions, which are pending. Insofar as project No. 1 i.e., Shri Rampura Layout is concerned, it was submitted that it was entrusted to one firm called M/s. S.G.R. Enterprises on turn basis and the payments have been made to them from time to time as advances and the amounts paid to them directly are on their account and on their behalf as on 31-3-1996, are as under :
(Rs.) Amount paid till 31-3-1996 2,40,48,120 Less : Amounts to which they are entitled to from contractors quota of allotment of sites which was carried out by Shri D.S. Manjunath, the correct amount being Rs. 48,50,000 as against Rs. 60,70,000 taken by the officer. This sum has not been credited by the society to the account of M/s. S.G.R. Enterprises as these funds were not received by the appellant.
48,50,000 Total 1,91,98,120 In the Shree Rampura layout project although Mysore Urban Development Authority (hereinafter referred to as the 'MUDA') gave possession certificate to the allottees, the project is not complete on the date of search and even has yet MUDA has also not given the completion certificate of the project on this count. There are in total 756 sites allotted to the various members. In this project only a part of the electrification has been done. The underground drainage is not yet completed, road topping (asphalting) has not been done, other civic amenities like development of parks, etc. have not been done. Out of 756 allottees about 70 allottees have constructed houses and are living without these facilities. Therefore, it was submitted that the members formed association called M/s. Madhubana Badavane Keshma Abhivrudi Sangha and have been agitating for completing the project early and in their anger and frustration they went to making wild and reckless allegations against the management and Shri D.T.S. Rao alleging that they have swindled the funds of the society with the contractor, M/s. S.G.R. Enterprises. It was submitted that the society way back in the year 1985 entrusted the formation of the layout to one firm called M/s. S.G.R. Enterprises on turnkey basis which is one among the pioneers and leaders in this field. It was stated that for diverse reasons the project could not be completed by them as the sheet anchor of the firm by the name Shri Ramchandra passed away and his wife, Smt. V. Rukmani, who became the managing partner, was suffering from shock on account of death of her son and husband and also because of injuries she suffered in an accident. It was further stated that the other trustee partners of late Ramchandra have also tried to grab the work from the society and when they did not succeed they joined the agitating site-holders to intensify the agitation against the management and tried to malign the management so that they could come to power and cancel the agreement with S.G.R. Enterprises and make profit for themselves. Smt. Rukmani who succeeded as the managing partner, claimed that she did not receive any assistance financially or otherwise from the other partners who had the control on the funds of the firm at the time of death of her husband. Therefore, M/s. S.G.R. Enterprises could not carry out the project works in the absence of release of funds as advances to them and also because of the ever growing and periodical demands for escalation in the cost of executing the civil works via-a-vis the contractual cost in the year 1985 was not accepted to their satisfaction. It was further submitted that they had also a grievance that the escalation given was inadequate and they should be compensated with higher rates and they have suffered the loss. It was further submitted that while it was true to some extent that the society wanted to grant them escalated rates finally provided the incomplete works were executed by them by putting their money first, the society itself was getting the work done on their account and debiting the expenditure to its account, since the contract had not been terminated at the time of search. The society finally terminated the contract and filed a civil suit for the recovery of damages for the breach of the agreement so that it could carry on the business without being shackled by the contract entered into earlier.
3. It was submitted that since the project was not completed and civil works had to be carried out and since M/s. S.G.R. Enterprises which had taken advances had not given the final bill, no income or loss arose to the society during the previous years 31-3-1994, 31-3-1995 and 31-3-1996, although MUDA registered sites in the allottee's names. The amounts given to M/s. S.G.R. Enterprise are debited to their accounts and are not even claimed as an item of expenditure. The amount paid by the members of the society towards the sites is not taken as income in the accounts and that, therefore, no profit arose for the years ended on 31-3-1994, 31-3-1995, and 31-3-1996, being the three previous years forming part of the block period in view of the search on 6-2-1996.
4. Insofar as the project at Satgalli layout is concerned, it was submitted that the amounts were being paid to one contractor, Shri Ramchandra Char, and these were debited to the accounts and shown in the balance sheet. Insofar as M/s. Raghvendra Constructions, M/s. Sky Top Builders and M/s. Divine Constructions are concerned, the amounts incurred on these projects were debited to, the contractors' accounts and they were not claimed as an item of expenditure. It was also stated that the civil suits have been filed by the appellant's society against M/s. Raghvendra Constructions, M/s. Sky Top Builders and M/s. Divine Constructions for the recovery of the advances obtained by them from the assessee-society and they were given to understand that these suits were pending disposal. M/s. Raghvendra Construction, M/s. Sky Top Builders and M/s. Divine Constructions appeared to have stated before the Income Tax Authorities that they had signed blank vouchers and they had not obtained any advances and in some cases wherever they had received advances, they had performed the work and, therefore, nothing was due by them to the society. It was submitted by the learned authorised representative for the assessee Shri Venkatesan, that the statements made by them at the back of the appellant were false and motivated to deny the appellant-society the amounts the society was entitled to recover from them and they were merely self-serving statements and defence to defeat the rights of the society to obtain refunds from them in the pending suits.
5. There was a search on 6-2-1996, followed by the visits of the assessing officer on several dates thereafter in the premises of the assessee-society as well as that of its directors and certain books of accounts and other documents were also seized in the search. The assessing officer issued notice under section 158BC of the Act and the assessee filed a 'Nil' return of undisclosed income. The assessing officer had passed the order impugned before us, wherein several additions have been made from treating the surplus of the society as computed by the assessing officer rejecting the method of accounting of completed contract method as taxable income which the assessee claims, cannot be computed due to the method of accounting, is further exempt by virtue of the principle of mutuality.
6. We have heard the learned representative for the appellant, Shri S. Venkatesan, chartered accountant, and Shri K. Ramesh, the learned Departmental Representative. We have also gone through the paper-books filed by either side and written submissions filed on behalf of the revenue as well as the elaborate statement of facts filed by the appellant. The rival contentions have been examined.
7. The first grievance of the assessee is on the legality of the assessment. Shri Venkatesan contended that the order of block assessment is barred by them. As per the provisions of section 158BE(1) of the Act, the order of block assessment should be passed within one year from the date on which the last of the warrants of authorisation have been executed. According to Shri Venkatesan, there was only one warrant of authorisation and not many. The warrant of authorisation was executed on 6-2-1996, when search officials entered the premises, made a thorough search thereafter they retired from the premises and thus the search became an accomplished fact factually and there was nothing further for the officials to search the entire or any part of the premises which have already been searched. The subsequent visits are in pursuant to the executed warrant and not by issuance of a fresh warrant and it is necessary to have a fresh warrant to search the premises under the normal laws. What the department did was to visit the premises purport to search on the basis of the executed warrant which is impermissible and therefore, the search in this case was concluded on 6-2-1996, itself, and, therefore, the last date for completion of the assessment must be reckoned to be 28-2-1997, only. Accordingly, it is contended that the block assessment order is time-barred. In support, Sri Venkatesan, places reliance on the decisions of the Bangalore Bench in the cases of Kirloskar Investments & Finance Ltd. v. Asstt. CIT (1998) 67 ITD 504 (Bang) and Microland Ltd. v. Asstt. CIT (1998) 67 ITD 446 (Bang).
8. An Explanation has been introduced to section 158BE of the Act with retrospective effect from 1-7-1995, after the decision of this Bench in the case of Kirloskar Investments & Finance Ltd. (supra). The Explanation provides for reckoning the period of limitation on the basis of the recording of the last Panchnama pursuant to the warrant of search. Shri Venkatesan, submitted that after the amendment, the Bangalore Bench of the Tribunal in the cases of M/s. Esanda Finance & Leasing Ltd. in IT (SS) No. 136/Bang/1997, M/s. Ballaire Apartments in IT (SS) No. 141/Bang/1997 and Sri T.S. Chandrashekar v. Asstt. CIT (2000) 66 TTJ (Bang) 360, has held that even after the insertion of the Explanation the last Panchnama to be reckoned is with reference to a valid Panchnama only and in cases where the search proceedings have been continued without any purpose by putting P.O. under section 132(3) on any part of the premises or on any almirah in such premises, the Explanation inserted cannot come to the rescue of the department. We have considered the submissions and we have perused the decisions cited by the learned authorised representative. In the case of Sri T.S. Chandrashekhar (supra) the Tribunal has held that if a search has got to be considered as being continued in a valid manner, then it should be done in a manner without offending the provisions of section 132(1) and 132(3) of the Act.
9. In the instant case, there was a search on 6-2-1996, on which date certain seizure of books, etc. has been made. Shri Venkatesan, drew our attention to point No. 8 in the Panchnama where the search proceedings have been stated to have been finally closed. Further, Shri Venkatesan submits that no order under section 132(3) has also been passed on this day as is evident from col. (9) of the Panchnama dated 6-2-1996. Therefore, he pleads that the search must be considered to have been completed on 6-2-1996, itself. We have perused the Panchnama which is placed at pp. 1 and 2 in the assessee's paper book. However, there was also another search on 22-2-1996, which is stated to be in continuation of the proceedings dated 6-2-1996. Here, however, an order under section 132(3) of the Act has been passed on a portion of the premises. It is quite possible that while preparing the Panchnama on 6-2-1996, there was some oversight in filling up the form. Since the subsequent Panchnama dated 22-2-1996, confirms the continuity of the search, we have to negative the arguments of Shri Venkatesan on this count.
10. The search on 22-2-1996, was continued on the next day i.e., 23-2-1996, which is recorded in the Panchnama drawn up on 23-2-1996, placed at pp. 15 and 16 of the assessee's paper book. Further, the search on 23-3-1996, has resulted in certain seizures which are inventorised in the Panchnama dated 23-2-1996. Here, the order under section 132(3) of the Act passed earlier on 22-2-1996, has also been continued. Finally, on 25-4-1996, a Panchnama has been drawn up wherein the said order under section 132(3) is stated to be revoked and on this day, there was no search or seizure of any valuables and other assets that were kept in the P.O. The search proceedings are stated to have been closed. The Panchnama dated 25-4-1996, is placed at pp. 21 and 22 of the assessee's paper book.
11. Shri Venkatesan contends that the Panchnama drawn on 25-4-1996, is not a Panchnama of the search but it is merely a record of the visit by the ADI to the assessee's premises. Further, according to Shri Venkatesan, the sole purpose of the visit on 25-4-1996, was to lift the prohibitory order passed under section 132(3) of the Act which cannot be equated to a valid search for the purpose of reckoning the last Panchnama for section 158BE(I) of the Act. The learned Departmental Representative, on the other hand, points out that the order passed under section 132(3) of the Act was operational and that the search proceedings were yet to be completed. He contends that there were voluminous material found/seized and that the officer of the department were pre-occupied with several cases, and therefore, an order under section 132(3) was passed to hold up the search and resume it at a later date. He submitted that the same was legally possible and permissible. In reply Shri Venkatesan submits that an order under section 132(3) of the Act can be passed only where there is a practical difficulty in effecting a seizure and not otherwise. He placed reliance on the decisions of Delhi High Court in the case of B.N. Nowlakha v. Union of India & Ors. (1992) 192 ITR 436 (Del) and that of Allahabad High Court in the case of Sriram Jaiswal v. Union of India & Ors. (1988) 176 ITR 261 (All) to the effect that the order under section 132(3) of the Act can be passed only where there was some practical difficulty in seizing certain assets or materials and not where the authorised officer is in doubt whether the seizure is to be effected or not. It was contended that in the instant case, if the authorised officer wanted to seize anything, she could have done it on 6-2-1996, or 22-2-1996, or for that matter on 23-2-1996, itself and the final Panchnama drawn on 25-4-1996, was only with a view to prolong the period of limitation. He, therefore, urged that at the search must be reckoned to have been completed on 23-2-1996, but certainly not on 25-4-1996, as per the Panchnama prepared as there was nothing to search or seize.
12. We have considered the rival submissions. We find sufficient force in the arguments of the learned counsel for the assessee that there was no practical difficulty in seizing any materials on 6-2-1996, 22-2-1996, or 23-2-1996, itself. In fact, on these days, the authorised officer has in fact effected certain seizures. When a portion of the material found is seized, it is quite unreasonable to infer that there was a practical difficulty in seizing certain other material, which are continued in the P.O. and not seized at all later. Besides, the department has also not brought any material to show that there was some difficulty in seizing any material and, therefore, the order under section 132(3) passed was valid. Further, we also find that on 25-4-1996, also there was no search; the material, other documents of other valuables that were kept in the P.O. have not have seized. Hence, after 23-2-1996, till 25-4-1996, the department has not done anything tangible to consider that the search was still in progress. Therefore, we are of the considered opinion that the search must be considered to have been completed at best on 23-2-1996, itself if not on 6-2-1996, but certainly not on 25-4-1996, which is the date of the last Panchnama where there was no search or seizure. From this point of view the assessment made is barred by limitation. We are supported in our view by the following decisions of the Bangalore Bench (1) Kirloskar Investment & Finance Ltd. (supra) (2) Microloand; (supra);
(3) Sri T.S. Chandrashekhar (supra) (4) Esanda Finance & Leasing Ltd. in IT (SS) No. 1136/B/97 (supra); and (5) Bellaire Apartments in IT (SS) No. 141/Bang/97 (supra).
13. Further, in this case there was an audit conducted under section 142(2A) of the Income Tax Act, 1961. The period taken by the auditor to render his report under section 142(2A) is required to be excluded while computing the period of limitation under section 158BE.of the Act. In the instant case, the audit was ordered on 7-2-1997, by order under section 142(2A) of the Act. Sri P.R. Hariharan and Sri H. Ramachandra of M/s. Hariharan & Co., Chartered Accountants, Mysore, were appointed as the auditors. The period fixed for completion of the audit was three months. On 12-5-1997, i.e., after the expiry of the three months time, M/s. Hariharan & Co. made an application to the assessing officer for extension of time by a further period of 3 months. The assessing officer granted the extension on 26-5-1997 (page No. 26 of the assessee's paper book). It was contended by Shri Venkatesan that the auditors appointed under section 142(2A) were Sri Hariharan and Shri H. Ramachandran of M/s. Hariharan & Co. and that the application for extension was made by M/s. Hariharan & Co. which had no locus standi in the matter. Pains were taken to show that M/s. Hariharan & Co. is not the appointed auditor. We find that the order under section 142(2A) is very clear that Sri Hariharan and Sri Ramachandra of M/s. Hariharan & Co. have been appointed whereas the partners of M/s. Hariharan & Co. i.e., Sri P.R. Hariharan, Shri K. Nagarajan and Shri H. Ramachandra have made the application on 12-5-1997. This is evident from the letter seeking extension of time which is placed at page No. 25 of the assessee's paper book. However, the contentions are hypertechnical. We find against the assessee on this point.
14. Shri Venkatesan, raised one other argument that the application for extension of time under section 142(2A) is required to be made by the assessee and not by the auditor who is so appointed. The provisions of sections 142(2A), 142(2B) and 142(2C) of the Act and the proviso which are material are reproduced below for a ready reference :
"Section 142(2A) : If, at any stage of the proceedings before him, the assessing officer, having regard to the nature and complexity of the accounts of the assessee and the interests of the revenue, is of the opinion that it is necessary so to do, he may with the previous approval of the (Chief Commissioner or Commissioner), direct the assessee to get the accounts audited by an accountant, as defined in the explanation below sub-section (2) of section 288, nominated by the (Chief Commissioner or Commissioner) in this behalf and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed and such other particulars as the assessing officer may require.
Section 142(2B) : The provisions of sub-section (2A) shall have effect not withstanding that the accounts of the assessee have been audited under any other law for the time being in force or otherwise.
Section 142(2C) : Every report under sub-section (2A) shall be furnished by the assessee to the assessing officer within such period as may be specified by the assessing officer :
Provided that the assessing officer may, on an application made in this behalf by the assessee and for any good and sufficient reason, extend the said period by such further period or periods as he thinks fit; so, however, that the aggregate of the period originally fixed and the period or periods so extended shall not, in any case, exceed one hundred and eighty days from the date on which the direction under sub-section (2A) is received by the assessee. "
15. Shi S. Venkatesan, the learned counsel for the assessee, contends that in terms of the proviso to section 142(2A), the application for extension is required to be made by the assessee and the assessee alone. The learned Departmental Representative on the other hand, submits that the application may be made by the assessee or the assessing officer can himself for good reason extend the period of audit. He has relied on the decision of Jagjit Sugar Mills & Co. v. CIT (1994) 210 ITR 468 (P&H) to the effect that, "either" on an application by the assessee "and/or" for any good and sufficient reason, the assessing officer may extend the time. In reply, Shri S. Venkatesan contends that the decision of the High Court (supra) has virtually repeated the contents of the section 142(2A) and the proviso in the order but their Lordships have inserted the word "or" after "and" or read "and/or" in the relevant portion of the order. However, the expression "and/or" does not appear in the proviso to section 142(2A) of the Act. It is also contended that the said judgment is on a writ petition by the assessee assailing the order under section 142(2A) of the Act directing a special audit. The Hon'ble High Court rejected the assessee's petition. He submits that on the point of extension of time for the audit, the Hon'ble High Court simply has repeated the contents of the proviso in the judgment where the words "and/or" are appearing. No reasons have been set out in the order in support thereof. In fact, according to Mr. Venkatesan, there is no discussion on this point at all. Therefore, Shri Venkatesan submits that the order of the High Court is per incuriam. Accordingly, he urged that the Tribunal should not follow the judgment of the Hon'ble High Court. He referred to the decision of the Jurisdictional High Court in the case of Patil Vijay Kumar & Ors. v. Union of India & Anr. (1985) 151 ITR 48 (Karn) in support.
16. We have considered the rival submissions. Normally, the Tribunal is bound by the orders of the High Court and must follow the same. But, in the instant case, the judgment of the High Court relied upon by the Departmental Representative to draw support for his contentions that the assessing officer can unilaterally extend the period of audit without there being an application by the assessee appears to be misplaced. In that case, the assessee primarily challenged the assessing officer's power to direct a special audit. The High Court rejected the arguments and observed that the assessing officer has a power to extend the period of audit in accordance with the proviso. Therefore, in our view the said judgment is not applicable to the facts of the assessee's case. Here the assessee's challenge is the very approval for extension granted by the assessing officer without the assessee making an application for the extension of time. A plain reading of the proviso makes it clear that the application for extension of time can be made on an application by the assessee. In the instant case, there is no such application that has been made by the assessee. Therefore, we have to hold that the extension granted by the assessing officer on the application of the auditor, dated 12-5-1997, is illegal and, therefore, bad in law and not in conformity with the provisions of section 142(2A) of the Act. Hence, the period available for the assessing officer for exclusion under section 158BE must be considered as 3 months only.
17. The impugned order of assessment is completed on 31-10-1997, which ought to have been completed on or before 31-5-1997, after excluding the period of 3 months commencing from 7-2-1997, to 6-5-1997, on account of the special audit. We have already held that the closure of search must be reckoned to have been completed on 23-2-1996, and, therefore, the assessment ought to have been completed before 23-2-1997, which is extended to 31-5-1997, on account of the audit under section 142(2A) of the Act. Even assuming the period of 6 months is taken as the time to be excluded on account of the audit, the order of assessment ought to have been passed on or before 31-8-1997, and the impugned assessment order dated 31-10-1997, is still beyond the time permissible under section 158BE of the Act and is bad in law.
18. Therefore, as the block assessment order dated 31-10-1997, is beyond that time permitted by the provisions of sub-section (1) of section 158BE of the Act and the same requires to be quashed. Accordingly, we do so.
19. Although we have quashed the block assessment as a whole as invalid and bad in law on account of time limitation, yet looking to the possibility of the validity of the assessment being reversed by higher forums in further appeal, we would like to adjudicate on the other contentions raised in appeal to avoid multiplicity of the proceedings.
20. So far merits of the case are concerned, the first submission of the assessee is with reference to the claim for exemption of its income on the ground of mutuality. According to Shri Venkatesan, the assessee is a co-operative society, which is formed solely with the objective of providing housing sites to its members. The assessee society engages contractors who identify and secure the lands in favour of the society, develop layouts by performing civil works, etc. The contractors are paid advances by the society for carrying out the contract which is mostly on turnkey basis. All the projects undertaken by the assessee-society are not yet complete and the monies collected by the assessee-society from its members are shown only as a liability in the balance sheet. Further, it was submitted that the accounts of the society are regularly being audited by statutory auditors appointed under the Co-operative Society Act. Further, the entire income of the society by way of allotment of sites is derived only from its members. The sites formed on the layout are also allotted only to members of the society. Therefore, according to Shri Venkatesan, there is a complete identity between the contributors and the participants of the mutual benefits society and there are no outsiders, who have participated in the mutual benefit society. Therefore, according to the learned authorised representative the case of the assessee squarely falls within the ratio of the decisions of the Hon'ble Supreme Court in Chelmsford Club v. CIT (2000) 243 ITR 89 (SC) and CIT v. Bankipur Club Ltd. (1997) 226 ITR 97 (SC), the income of the assessee housing society is exempt on the principle of mutuality for which proposition he also relies on the following decisions tendered in the case of similar societies :
(i) CIT v. Adarsh Co-op. Housing Society (1995) 213 ITR 677 (Guj);
(ii) CIT v. Apsara Co-op. Housing Society (1994) 204 ITR 662 (Cal); and
(iii) Ludhiana Agarwal Co-op. Housing Society v. ITO (1995) 55 423 (Chd).
21. Shri Venkatesan then took us through the audit report of the statutory auditor appointed under section 142(2A) of the Act, wherein at p. 13 the auditors appointed under section 142(2A) have categorically stated that the income of the society cannot be computed as the projects are still in various stages of pendency. He pleaded that in the event mutuality is denied then as the assessee-society is following the completed contract method of accounting, the income/loss can only be computed on the completion of the projects undertaken. As all the projects undertaken by the assessee are still pending and not complete, there is no question of assessing any income or loss at this stage. In support, reliance was placed on the unreported decision of the Hon'ble High Court of Karnataka in the case of Khoday Distilleries' in ITRC Nos. 19, 20 & 21/1993, dated 12-8-1995, a copy of which has been furnished to us.
22. The learned Departmental Representative, on the other hand, supported the order of the assessing officer and submitted that the society was floated by Shri D.T.S. Rao, along with various family members solely for deriving advantage for themselves. He contended that the principles of mutuality are not applicable to the facts of the assessee-society case. He took us through the search proceedings which according to the learned Departmental Representative revealed materials to indicate that the funds of the society were indirectly used for benefit of the family members of Shri D.T.S. Rao. The Departmental Representative also placed reliance on the report of the Assistant Director, Registrar of Co-operative Societies, Mysore District, who audited the accounts for the period 1994-95. Further, the Departmental Representative submitted that the search revealed that Shri D.T.S. Rao and his family members were drawing monies from the society and obtaining blank vouchers from the contractors for the same. He submitted that the statement recorded from all the contractors has confirmed beyond doubt that the contractors were signing blank vouchers. He submits that the contractors have not received the entire monies which are shown as advances to them and a portion of the advances shown against each contractor actually represent the monies drawn by the directors and used for their benefit.
He submitted that for this reason also, the claim of exemption on the principles of mutuality has been rightly denied by the assessing officer. He pleaded that the order of the assessing officer must be confirmed.
23. The learned Departmental Representative relied on the following decisions in support of his claim that the assessee-society is not entitled to claim mutuality in respect of its income :
(1) The English & Scottish Joint Co-op. Wholesale Society Ltd. v. Commr. of Agrl. IT (1945) 13 ITR 295 (Cal);
(2) Association of Planters of Kerala v. CIT (1990) 188 ITR 192 (Ker);
(3) Mohan Meakin Breweries Ltd. v. CIT (1979) 117 ITR 504 (Guj);
(4) CIT v. ITI Employees Death and Superannuation Benefit Relief Fund (1999) 234 ITR 308 (Karn);
(5) CIT v. Delhi Stock Exchange Association Ltd. (1957) 32 ITR 3 (Del);
(6) Truck Operators' Union v. CIT (1981) 132 ITR 62 (Del);
(7) Jamshedpur Co-op. Stores Ltd. v. CIT (1985) 157 ITR 127 (Pat);
(8) Bihar Rajya Sikshak Sahyog Sangh Ltd. v. CIT (1987) 165 ITR 681 (Pat);
(9) Sports Club of Gujarat Ltd. v. CIT (1988) 171 ITR 504 (Guj);
(10) Cochin Cottage Ind. Co-op. Mktg. Society Ltd. v. CIT (1956) 30 ITR 356 (Ker);
(11) Bellary Distt. Mine Owners Ltd. v. CIT (1964) 53 ITR 632 (Mys);
(12) Hatkesh Co-op. Housing Society Ltd. v. ITO (1996) 60 ITD 662 (Mumbai).
We have gone through the decisions cited by the learned Departmental Representative and the submissions of Shri Venkatesan distinguishing the same. We find that the decisions relied upon by the Departmental Representative are all distinguishable on facts. The assessee claims that there is no outsider involved either as a contributor or as a participant. This is the crucial test to bring out mutuality. The case laws relied upon by the learned Departmental Representative are all where outsider along with members were involved. In all those cases mutuality has been rightly denied. Therefore, so far as this issue is concerned, we have to find in favour of the assessee.
24. Further, in his reply to alleged diversion of funds, Shri Venkatesan, submitted that the allegations of the assessing officer contained in the assessment order as well as the submissions of the Departmental Representative are bald and baseless. He further submitted that the report of the Asstt. Director which is initially relied upon by the assessing officer to frame the order and now relied upon by the learned Departmental Representative was precisely the reasons for which a search was conducted in the case of the assessee-society. He submitted that after the search, the assessee made an application to the Government of Karnataka and an enquiry under section 64 of the Cooperative Societies Act was ordered to bring out the truth behind the audit report of the co-operative auditors. The Enquiry Officer Shri C. Yarakegowda, on completion of the enquiry has tendered a report to Government of Karnataka. The Government of Karnataka thereafter passed an order under section 68 accepting the enquiry report. The order under section 68 is placed at p. Nos. 79 to 96 of the paper book filed on behalf of the assessee-society. According to Shri Venkatesan, the Government of Karnataka after considering the enquiry report has passed the said order accepting the enquiry report of the Enquiry Officer and directing the registrar to accept the balance sheets prepared by the assessee-society, which the Asstt. Registrar, Co-operative audit, has found to be defective and indicating of diversion of funds. Further, the Government of Karnataka has also ordered action to be taken against the Asstt. Director of Co-operative Audit, who tendered a wild and baseless audit report which is found to be malicious and false in the enquiry report. Therefore, he submitted that co-operative audit report relied upon by the assessing officer to frame the order of block assessment is erroneous and not justified.
25. On the point of amounts drawn by directors, Shri Venkatesan, submitted that many of the contractors also appeared before the assessing officer and in fact they have confirmed the receipt of the advance. He submitted that Shri R. Sridhar of M/s. S.G.R. Enterprises has also filed an affidavit clarifying the position. Similarly, he submitted that Sri Ramachandrachar, one other contractor had also confirmed the receipt of the advances. He submitted that these two are the major contractors and after the initial fear and shock during the search the said contractors have verified the factual position and made a conscious statement accepting the advances received. The other contractor, viz. M/s. Raghavendra Constructions, who have denied receiving the money, have also done so to deny the society refund of the advances given to them. He submitted that in many such cases, suits have been instituted by the society for recovery of the money as the projects are yet to take off. Therefore, the denial of these contractors is understandable and he pleaded that no adverse inference on this score should be drawn. Further, Shri Venkatesan, effectively distinguished the case law relied upon by the learned Departmental Representative on the point of mutuality and pleaded that the decision of the Hon'ble Supreme Court in Chelmsford Club (supra) shall be applied to the facts of the assessee's case. The relevant extract of the case as held by the Hon'ble Supreme Court in the case of Chelmsford Club are reproduced below for the sake of facility.
Words and Phrase-Meaning of "Mutual concern" and "Principle of mutuality"
"Under the Income Tax Act, 1961, what is taxed is the 'income, profits or gains' earned or 'arising', 'accruing' to a 'person'. Where a number of persons combine together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. There must be complete identity between the contributors and the participators. If these requirements are fulfilled, it is immaterial what particular form the association takes. Trading between persons associating together in this way does not give rise to profits which are chargeable to tax. Where the trade or activity is mutual, the fact that as regards certain activities, certain members only of the association, take advantage of the facilities which it offers, does not affect the mutuality of the enterprise. The law recognises the principle of mutuality excluding the levy of income-tax from the income of such business to which the above principle is applicable. A perusal of section 2(24) of the Income Tax Act, 1961, shows that the Act recognises the principle of mutuality and has excluded all business involving such principle from the purview of the Act, except those mentioned in clause (vii) of that section. The three conditions, the existence of which establishes the doctrine of mutuality are (1) the identity of the contributors to fund and the recipients from the fund, (2) the treatment of the company, though incorporated as a mere entity for the convenience of the members, in other words as an instrument obedient to their mandate, and (3) the impossibility that contributors should derived profits from contributions made by themselves to a fund which could only be expended or returned to themselves.
Under the Act, be it the 1922 Act or the 1961 Act, the same does not permit the levy of tax on anything other than "income". The legislative competence to levy income-tax is traceable to entry 82 of List I of Sch. VII to the Constitution which reads : "Taxes on income other than agricultural income". Therefore, any law made under this legislative entry can impose a tax only on income and not under any other head. The Income Tax Act is a law made under this entry. Hence, it is futile to contend that the levy of tax under section 22 of the Act is a tax levied on property and not on income from property. This view finds support from a reading of section 4 of the Act which is the charging section. This section unequivocally shows that the levy is on income. A conjoint reading of sections 2(24), 14, 22 and 23 of the Act also makes it abundently clear that what is being taxed under section 22 is the "deemed income" of an assessee from the property owned by him.
The assessee, a members club, provided recreational and refreshment facilities exclusively to its members and their guests. Its facilities were not available to non-members. The club was run on 'no profit no loss' basis that the members paid for all their expenses and were not entitled to any share in the profits. Surplus, if any, was used for maintenance and development of the club. The club house was owned by the assessee. The assessee claimed that it was a mutual concern and so the annual letting value of the club house was not assessable. The claim was rejected by the High Court. On appeal to the Supreme Court :
Held, reversing the decisions of the High Court, that the assessee's business was governed by the doctrine of mutuality. It was an admitted fact that the business of the assessee did not come within the scope of business referred to in section 2(24)(vii).
It was not only the surplus from the activities of the business of the club that was excluded from the levy of income-tax, even the annual value of the club house, as contemplated in section 22 of the Act, would be outside the purview of the of the levy of income-tax."
26. We have considered the rival submissions. The report of the Asstt. Director of Co-operative Audit, which forms the basis for the assessing officer to frame the block assessment has subsequently been found to be baseless by an enquiry conducted. In fact, the assessing officer at p. 8 of the assessment order has listed the allegations of the Asstt. Director of Co-op. Audit. Since the Audit Report of the Asstt. Director itself is held to be mala fide and the Government of Karnataka has even ordered for taking disciplinary action against the Asstt. Director at pp. 88 to 90 of its report, we feel that the reliance placed by the assessing officer on the said report is clearly misplaced. On the point of the monies drawn by the directors also, there appears to be some dispute. The contractors initially during the course of search denied a portion of advances. Later, during the course of assessment proceedings, it appears they have accepted the same, barring one contractor. The assessing officer has taken pains to establish that there was a collusion between the contractors and society to draw the funds of the society for their personal purpose. However, there is absolutely no material brought on record by assessing officer to come to such a conclusion. Further, as pointed by the learned authorised representative these and other observations of the auditors of the Co-operative societies have been reversed by the Government of Karnataka. The recommendation for recovery of the amount alleged to have been illegally drawn by the directors is cancelled by the Government of Karnataka. The managing committee members have been exonerated of all charges made in the audit report of the co-operative auditor.
27. In light of the above, the amounts supposed to have drawn by the directors cannot be considered as diversion of the funds of the society but on the contrary as brought out by the enquiry conducted, these monies which are drawn in the names of members of managing committee are nothing but the expenditure on the project of the assessee which was incurred at the instance of the contractors. Thus, on this count also the denial of exemption by the assessing officer on the principle of mutuality is not justified. Accordingly, we hold that the assessee-society is entitled to exemption of its income on the ground of mutuality. We are supported in arriving at this conclusion by the ratio of the following decisions which were cited by Shri Venkatesan during the course of hearing :
(i) Chelmsford Club v. CIT (supra);
(ii) CIT v. Bankipur Club v. ITO (supra);
(iii) Adarsh Co-op. Housing Society (supra);
(iv) Apsara Co-op. Housing Society (supra); and
(v) Ludhiana Agarwal Co-op. Housing Society (supra).
28. The next contention of the assessee was with reference to the completed contract method of accounting. The assessing officer himself in the order has not disputed that the projects undertaken by the assessee-company is still incomplete. In accordance with the provisions of section 145 of the Act, the choice of the method of accounting to be employed is with the assessee. The assessee is entitled to adopt such method of accounting as would give complete picture of the true income of the assessee provided the same is regularly employed. In the line civil construction and construction contracts where the duration of the project is spread over several years, the completed contract method of accounting preferable as unforeseen expenditure on account of escalation in prices, etc. may arise during the later stages of the project. Therefore, during the pendency of the works, the income or loss cannot be ascertained. Shri Venkatesan, placed reliance on the decision of this Tribunal in the case of T.S. Chandrashekhar reported (supra) to the effect that the completed contract method of accounting is a recognised method of accounting. Following the said view and respectfully following the decision of the High Court of Karnataka in the case of Khoday Distilleries (supra) we hold that the assessee is entitled to adopt the completed contract method of accounting for recognising income from the project activity.
29. The next addition made in the block assessment is on account of the amounts alleged to have been drawn by the directors which are considered as not for the business of the assessee-society. It is submitted by Shri Venkatesan that the amount drawn by the director is on behalf of the contractors and for works done by the society. The learned Departmental Representative on the other hand, contends that the contractors have stated that the amount drawn by the directors was never drawn by them but on the contrary the same was utilised by Shri D.T.S. Rao and the members of the family. Shri Venkatesan submits that the statements made by the contractors before the wing have subsequently been clarified by the said contractors before the assessing officer where they have categorically stated that the amounts drawn by the directors were on their account and the same was drawn to facilitate the payments to be made for the project. However, the assessing officer did not accept the same and he proceeded to old that even it were to be held that it was so, the payments were still disallowable since they are in the nature of bribes to politicians and officials and, therefore, the same is illegal. He further observed that at any rate, the same was disallowable under section 40A(3) of the Income Tax Act, 1961.
30. We have gone through the statements of various contractors which are placed in Annexure-I to Annexure IX to the assessment order. It is true that for the sake of convenience and as a measure of control, the payments made to contractors are monitored by keeping watch on the end use of the funds. In some cases payments are also made by staff to the societies itself under the instruction from the contractor. In this case, some expenditure that have been incurred on the project cost which no doubt has to be incurred by the contractor was paid by the society itself by drawing money from its bank account. The society debited the contractor in respect of the payments made. The contractor have also confirmed having incurred these expenditure on behalf of the society. Thus, there is no room to doubt as to whether these monies were drawn by the directors and utilised for their personal use. Further, the search in the residence of the directors also has not revealed any undisclosed assets in the possession of the directors. Therefore, it is unreasonable to hold that funds of the society were drawn by the director and diverted for their personal purposes. We have already held that the income of the society which has been denied exemption on the principle of mutuality, on this ground is not justified. Accordingly, for reasons mentioned herein, we have no hesitation in deleting the additions made in the block assessment insofar as they relate to the amounts drawn by the directors but debited to the contractors are concerned.
31. The other issue on merits is the disallowances made under section 40A(3) of the Income Tax Act, 1961. Shri Venkatesan, has relied on the Third Member decisions of he Tribunal, Pune Bench, in the case of Khopade Kisanrao Manikrao v. Asstt. CIT (2000) 74 ITR 25 (Pune) (TM) to the effect that disallowance under section 40A(3) of the Act cannot be made in a block assessment. Respectfully following the decision of the Tribunal, Pune Bench, we hold that the disallowance under section 40A(3) of the Act made by the assessing officer is not justified and the same is hereby deleted. Further, the learned authorised representative also submitted that no disallowance under section 40A(3) or for that matter the amount drawn by the director could be made in the assessment as the same was not claimed as an item of expenditure in computing the profits. It is true that a disallowance can be made only where there is a claim for allowance. As the assessee is following the completed contract method of accounting, it has not denied any expenditure on this account. Therefore, from this angle also, the disallowance made requires to be deleted.
32. The assessing officer added a sum of Rs. 60,70,400 as the amounts realised by the sale of sites in the society by Sri D.S. Manjunath, as undisclosed income of the appellant. It is submitted in terms of the turnkey contract M/s. S.G.R. Enterprises was entitled for allotting certain sites forming part of its contractor's quota in terms of the agreement and realise the entire proceeds by itself. Shri Manjunath, one of the directors of the appellant-society, did the allotment on behalf of the contractor during the period of stalemate when the contractor was not pro-active and the society itself was doing the work on behalf of the turnkey contractor. In the process Sri Manjunath realised a sum of Rs. 48,50,000 whereas according to the department it is Rs. 60,70,400 on behalf of the turnkey contractor M/s. S.G. Enterprises and not on behalf of the society. Be it what it may, this said-sum so realised belongs to the turnkey contractor M/s. S.G.R. Enterprises and not to the society. The entitlement to the contractor quota is also embodied in the agreement. The money was not found with the society but was found with Mr. Manjunath, who was the director of the society, who did the work on behalf of the contractor and is accountable to the contractor. Thus, there is no case for making any addition as undisclosed income in the hands of the assessee-society.
33. Therefore, the additions and disallowances made in the block assessment cannot be treated as undisclosed income and we are of the considered view, they are required to be deleted.
34. In view of the above, in the result, the appeal of the assessee is treated as allowed to the extent mentioned above.