2007 (3) TMI 657 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of the addition of Rs. 38,06,400 representing profit from the Pattangere project.
2. Assessment of profit earned from the Pattangere project in the status of an association of persons (AOP) versus individual hands.
3. Existence and recognition of an association of persons (AOP) for tax purposes.
4. Profit-sharing ratio among the involved parties.
5. Jurisdiction of the Commissioner of Income-tax (Appeals) in directing the assessment in the hands of the AOP.
6. Inclusion of 5% net profit as undisclosed income.
7. Levy of surcharge on the assessment.

Detailed Analysis:

1. Deletion of the Addition of Rs. 38,06,400:
The Department challenged the deletion of Rs. 38,06,400 by the Commissioner of Income-tax (Appeals), arguing that this amount represented the profit earned by the assessee from the Pattangere project. The Commissioner observed that the profit should be assessed in the hands of an association of persons (AOP) rather than in the individual hands of the members involved.

2. Assessment of Profit in the Status of AOP:
The Commissioner of Income-tax (Appeals) held that the profit earned from the Pattangere project should be assessed in the status of an AOP comprising the assessee and two other individuals. The Department argued that the land was owned by one individual, who had the sole authority to operate the bank account and transfer plots, thus questioning the existence of an AOP.

3. Existence and Recognition of an AOP:
The Commissioner of Income-tax (Appeals) referred to several Supreme Court decisions, including Meera and Co. v. CIT and CIT v. Raja Ratan Gopal, which defined an AOP as an association formed by individuals for the purpose of generating income. The Commissioner concluded that the three individuals had joined hands to execute the project, thereby forming an AOP. The Assessing Officer's observations and seized documents supported this conclusion, showing that the three persons had contributed capital and shared profits.

4. Profit-Sharing Ratio:
The Assessing Officer determined the profit-sharing ratio among the three individuals as 65% for K. S. Sathyanarayana, 20% for N. A. Nagaraja Setty, and 15% for N. Venkatesh. This was based on seized documents and statements made by the individuals. The Commissioner of Income-tax (Appeals) upheld this ratio.

5. Jurisdiction of the Commissioner of Income-tax (Appeals):
The assessee argued that the Commissioner of Income-tax (Appeals) exceeded his jurisdiction by directing the assessment to be made in the hands of the AOP. However, the Tribunal found this argument unjustified, noting that the Commissioner rightly concluded that the income should be assessed in the hands of the AOP, given the joint nature of the project.

6. Inclusion of 5% Net Profit as Undisclosed Income:
The assessee claimed that he only received 5% of the net profit, amounting to Rs. 3,23,680, which was disclosed in his return. The Tribunal held that this amount should not be included as undisclosed income, as it was relevant for profit distribution but not for computing the total income of the AOP.

7. Levy of Surcharge:
The assessee argued that surcharge was not leviable as the search was conducted before June 1, 2002. The Tribunal upheld this claim, referencing the Special Bench decision in Merit Enterprises v. Deputy CIT, which held that surcharge is not applicable for searches conducted prior to June 1, 2002.

Conclusion:
The Tribunal upheld the order of the Commissioner of Income-tax (Appeals) to assess the income from the Pattangere project in the hands of the AOP. The appeal by the Department was dismissed, and the appeal by the assessee was allowed, excluding the 5% net profit from undisclosed income and ruling out the levy of surcharge.