2005 (10) TMI 237 - AT - Income Tax

Block Assessment in search case - Search And Seizure - No books of account maintained - Addition on land transactions - Unexplained investment in purchase of agricultural land - Investment in Benami plots - HELD THAT - In the instant case, no proper books of account were maintained by the society We agree with the submissions made by learned Departmental Representative that for formation of valid society there must be some original members. For them land will be acquired and colony will be developed at one place. As soon as this exercise is complete then this society is ceased. But in the instant case, society is continuing to develop 16 colonies at 16 places without having the original members. Therefore, we agree that the assessee is a colonizer and doctrine of mutuality is not applicable in the instant case due to peculiar facts. Whatever the activity was there, that was for the personal gain of Shri Khan, secretary and Shri Bhanwai Lal Vijay, president who are having the share of profit @ 51 per cent and 49 per cent, respectively. The said profit was earned in the name of M/s B.R. Properties and later it was converted under the garb of society. M/s B.R. Properties which is a partnership firm as per the partnership deed dt. 3rd Feb., 1990, has never filed its return. It means it was not doing any business and its business was doing under the garb of said society. Therefore, we are of the view that so-called society is not entitled for the benefit of mutuality specially when the accounts of the society were never audited. Thus, we are of the view that the society was not working for the welfare of its original members. In fact, there were no original members. It was working for the profit and personal gain of Shri iqbal Ali Khan and Shri Bhanwari lal vijay, so-called secretary and president. In the absence of books of account, the AO applied s. 145 and estimated the net profit rate at 10 per cent. We uphold the application of s. 145 for the reasons mentioned in the AO's order. However, .the addition is looking on higher side due to the peculiar facts and circumstances of the case. Therefore, we modify both the orders of lower authorities and restricted the addition by keeping in mind the doctrine of equity, justice and good conscious. Thus, the assessee will get ad hoc relief from the order of AO. Thus, ground Nos. 1 and 2 are partly allowed in favour of the Department. 26. Ground NO.3 is related to deletion of addition made on account of unexplained investment in Benami plot. It appears that the facts mentioned in the orders of the lower authorities are contradictory and needs fresh adjudication. Therefore, we set aside both the orders of the lower authorities and restore the matter pertaining to the addition to the AO to examine it in depth afresh as per law but by providing reasonable opportunity to the assessee. Thus, this ground is allowed for statistical purposes. The incriminating material were found during the course of survey so it was rightly converted into search operation as per theory of merger. Therefore, we find no merit in the cross-objection taken by the assessee. So all the cross-objections are dismissed alongwith the technical grounds. In the result, all the appeals filed by the Department in the cases of individuals are partly allowed. Appeals filed by the Department in the case of so-called society for the block return period as well as regular return are dismissed. The cross-objections filed by the assessees are dismissed as stated above.

Issues Involved:
1. Validity of the search operation.
2. Application of the doctrine of mutuality.
3. Maintenance and reliability of books of account.
4. Estimation of concealed income and additions made by the AO.
5. Unexplained investment in benami plots.
6. Unexplained investment in the purchase of agricultural land.
7. Allocation of additions in the hands of individuals vs. the society.

Detailed Analysis:

1. Validity of the Search Operation:
The Tribunal upheld the validity of the search operation, citing the case of *C. Ramaiah Reddy vs. Asstt. CIT*, which states that the Tribunal need not question the validity of the search. The search was justified as incriminating material was found during the survey, leading to its conversion into a search operation.

2. Application of the Doctrine of Mutuality:
The Tribunal rejected the assessee's claim of mutuality, stating that the society was not functioning for the welfare of its original members but for the personal gain of the secretary and president. The society was deemed a colonizer, and the doctrine of mutuality was not applicable due to the peculiar facts of the case.

3. Maintenance and Reliability of Books of Account:
The Tribunal found that no proper books of account were maintained by the society. The books were prepared later under expert advice, and the accounts were never audited by the Registrar of Co-operative Societies. This lack of proper accounting led to the application of Section 145 by the AO.

4. Estimation of Concealed Income and Additions Made by the AO:
The AO estimated the concealed income and made an addition of Rs. 72,07,770, which was partly upheld by the Tribunal. The Tribunal modified the addition to Rs. 60 lakhs, considering the doctrine of equity, justice, and good conscience. The addition was justified as the society was involved in unaccounted transactions and trading of plots for profit.

5. Unexplained Investment in Benami Plots:
The AO made an addition of Rs. 2,50,480 for unexplained investment in benami plots, which was deleted by the CIT(A). The Tribunal set aside both orders and restored the matter to the AO for fresh adjudication, providing reasonable opportunity to the assessee.

6. Unexplained Investment in the Purchase of Agricultural Land:
The AO made an addition of Rs. 5,35,200 for unexplained investment in the purchase of agricultural land, which was deleted by the CIT(A). The Tribunal found the facts contradictory and restored the issue to the AO for de novo examination, ensuring reasonable opportunity for the assessee.

7. Allocation of Additions in the Hands of Individuals vs. the Society:
The Tribunal concluded that the addition of Rs. 60 lakhs should be made in the hands of the secretary and president individually, at the ratio of 51% and 49% respectively, as per the partnership deed. The total income assessed in the hands of the society was deleted, and the issues restored to the AO were to be reconsidered in the hands of the individuals.

Conclusion:
The Tribunal partially allowed the appeals filed by the Department in the cases of individuals and dismissed the appeals in the case of the society. The cross-objections filed by the assessees were dismissed, upholding the validity of the search operation and rejecting the doctrine of mutuality. The Tribunal emphasized the lack of proper accounting and the personal gain derived by the secretary and president, leading to the justified application of Section 145 and the allocation of additions in the hands of the individuals.

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