1993 (7) TMI 105 - AT - Income Tax

Summary

Issues Involved:
1. Ownership of Krupa Corporation.
2. Assessment of 'on money' received during the construction of flats.
3. Reliance on statements of flat owners.
4. Opportunity for cross-examination.
5. Timing of income accrual.
6. Proper procedure for assessment and investigation.

Detailed Analysis:

1. Ownership of Krupa Corporation:
The issue revolves around whether the assessee was the actual owner of Krupa Corporation. Despite contradictory observations in the assessment order, the assessee consistently admitted ownership of Krupa Corporation at all stages of the assessment proceedings. The final conclusion was that the income of Krupa Corporation was liable to be assessed in the hands of the assessee, confirming substantive taxation.

2. Assessment of 'On Money' Received:
The ITO made an addition of Rs. 20 lakhs to the assessee's income based on statements from flat owners that 'on money' was paid to Shri Mahesh G. Vakil, who was described as the builder. The CIT(A) upheld this addition, estimating Rs. 1 lakh per flat for 20 flats. The Tribunal found that the ITO's assessment was based on a misapprehension and lacked proper investigation and cross-examination of witnesses.

3. Reliance on Statements of Flat Owners:
The Tribunal noted that the addition was made solely on the basis of statements recorded during search operations against Shri Mahesh G. Vakil. These statements indicated payments to Vakil, not the assessee, and were not sufficient evidence to substantiate the addition without further examination and cross-examination.

4. Opportunity for Cross-Examination:
The Tribunal emphasized the importance of cross-examination, citing the Supreme Court's decision in Union of India v. T.R. Varma. The assessee was not given a proper opportunity to cross-examine the flat owners, which was necessary to validate the evidence used against him. The Tribunal found that the right to cross-examine was wrongly denied.

5. Timing of Income Accrual:
The Tribunal referred to the Gujarat High Court's decision in CIT v. Ashaland Corpn., which held that amounts received towards the purchase price do not represent income in the year received but assume the character of income in the year the transaction is completed. The ITO was required to consider the timing of income accrual, taking into account the method of accounting and the completion dates of transactions.

6. Proper Procedure for Assessment and Investigation:
The Tribunal found that the ITO failed to conduct a thorough investigation and bring all relevant facts on record. The ITO should have examined more flat owners, including Shri Mahesh G. Vakil, and provided the assessee an opportunity to cross-examine them. The Tribunal set aside the assessment order and directed the ITO to make a fresh assessment in accordance with the law, ensuring all relevant materials are brought on record and the assessee is given a reasonable opportunity to be heard.

Conclusion:
The appeal was allowed for statistical purposes, with the Tribunal directing a fresh assessment to be conducted, ensuring proper investigation, cross-examination, and consideration of all relevant facts and legal principles.