2006 (3) TMI 559 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction of the Assessing Officer under sections 143(3) and 144.
2. Legality of the amendment to the Articles of Association.
3. Determination of the income of the assessee.
4. Application of the concept of deemed ownership under Section 27(iii)(b) of the Income-tax Act.
5. Allegation of the use of a colourable device to avoid tax.
6. Legitimacy of the method of accounting and estimation of profits.

Detailed Analysis:

1. Jurisdiction of the Assessing Officer under sections 143(3) and 144:
The assessee contended that the Assessing Officer (AO) had no jurisdiction to frame the assessment order under section 143(3) read with section 144, as both provisions operate in different fields. The assessee argued that it had complied with all notices and submitted all required details, thus the AO should not have framed the assessment by applying section 144 of the Act.

2. Legality of the amendment to the Articles of Association:
The assessee amended its Articles of Association to allow shareholders to use the premises. The AO deemed this amendment as a colourable device to avoid tax, referencing the case of McDowell & Co. Ltd. v. CTO. However, the assessee argued that the amendments were within the legal framework provided in the Companies Act, and the AO failed to demonstrate how the amendments were illegal.

3. Determination of the income of the assessee:
The AO estimated the income of the assessee at 12% of the total cost of construction capitalized in the books, resulting in an addition of Rs. 57,33,558. The AO's reasoning included that the construction was funded by loans and contributions from original members, and the project was largely complete by 31-3-1999. The AO argued that the amendment in the Articles of Association post-completion was to avoid tax.

4. Application of the concept of deemed ownership under Section 27(iii)(b) of the Income-tax Act:
The assessee argued that under Section 27(iii)(b), shareholders would be regarded as deemed owners of the premises. They contended that the rights accruing to a shareholder should be regarded as ownership of the property, and thus, the property could be held through the company with shareholders deemed as owners to the extent of their shares. The assessee emphasized that capital gains tax would be applicable when shares are transferred, which was not disputed by the revenue.

5. Allegation of the use of a colourable device to avoid tax:
The AO alleged that the amendment to the Articles of Association was a colourable device to avoid tax, as the construction project was initially shown as a business activity. The AO argued that the company's last-minute change to allot properties to members was to evade tax. The assessee countered that it had the freedom to arrange its affairs to derive maximum benefit and that the change was within the legal framework.

6. Legitimacy of the method of accounting and estimation of profits:
The AO applied a 12% rate on the cost of construction to estimate the net profits, suggesting that the change in the method of accounting was not bona fide. The assessee argued that the project completion method was consistently followed and that the change in strategy was lawful and beneficial under the prevailing circumstances.

Conclusion:
The Tribunal found that the assessee's actions were within the legal framework and that the amendment to the Articles of Association was lawful. The Tribunal recognized the dual ownership concept under Section 27(iii) and deemed the shareholders as de facto owners. The Tribunal concluded that the company did not earn any income by transferring the right to use the property to its members and thus deleted the estimated addition of Rs. 57,33,358. The appeal of the assessee was allowed.