1999 (1) TMI 65 - AT - Income Tax

Summary

Issues Involved:
1. Imaginary addition of Rs. 5,46,370 and Rs. 10,48,700 as undisclosed income.
2. Application of Section 45(4) of the Income-tax Act.
3. Applicability of Section 28(iv) of the Income-tax Act.
4. Validity of the transactions as bona fide or sham.
5. Assessment of notional income on hypothetical basis.
6. Admissibility of evidence and materials in completed assessments.

Issue-wise Detailed Analysis:

1. Imaginary Addition of Rs. 5,46,370 and Rs. 10,48,700 as Undisclosed Income:
The Assessing Officer (AO) found that the assessee allotted tenements to partners without charging any premium, calculating the market value at Rs. 13,54,600 and Rs. 26 lakhs respectively, and assessed the profits of Rs. 5,46,370 and Rs. 10,48,700 as undisclosed income. The AO's calculation was based on the selling price and cost on a prorata basis. The assessee argued that no premium was charged due to the partners' contributions in funds, labour, and supervision, and that the income shown was already disclosed in previous assessments.

2. Application of Section 45(4) of the Income-tax Act:
The AO attempted to assess the profit under Section 45(4), which pertains to capital gains on the transfer of capital assets. However, the Tribunal held that the tenements were trading assets, not capital assets, and thus Section 45(4) was not applicable. The Tribunal emphasized that the assessee was not the owner of the land and building, as per the agreement with the Municipal Corporation, which stated that the property belonged to the Corporation.

3. Applicability of Section 28(iv) of the Income-tax Act:
The Departmental Representative argued that the profit should be assessed under Section 28(iv), which deals with the value of any benefit or perquisite arising from business. The Tribunal found that the AO ignored the explanations provided by the assessee regarding the partners' contributions and the encumbrances on the property. The Tribunal concluded that there was no benefit arising from the business transactions, as the assessee had suffered a loss due to encroachments and other factors.

4. Validity of the Transactions as Bona Fide or Sham:
The Department contended that the transactions were sham and colorable devices to evade tax. The Tribunal rejected this argument, stating that the transactions were bona fide and supported by facts and materials. The Tribunal noted that the onus to prove sham transactions was on the Department, which it failed to discharge. The Tribunal also pointed out that the transactions were accepted by the Department in the partners' cases in previous and subsequent assessments.

5. Assessment of Notional Income on Hypothetical Basis:
The Tribunal held that notional income could not be assessed on a hypothetical basis. It emphasized that the AO's estimate of profit was based on unrealistic and illusory figures, without considering the actual facts and circumstances. The Tribunal cited various legal precedents to support its view that hypothetical income, which does not materialize, cannot be taxed.

6. Admissibility of Evidence and Materials in Completed Assessments:
The Tribunal referred to the ITAT Mumbai Bench's decision in Sunder Agencies, which held that Section 158BA does not allow for roving enquiries into completed assessments unless direct evidence of undisclosed income is found during a search. The Tribunal found that the assessments in the partners' cases were completed and accepted, and no direct evidence of undisclosed income was found. Therefore, the notional income could not be assessed under Section 158BC.

Conclusion:
The Tribunal concluded that the AO was not justified in assessing the profits of Rs. 5,46,370 and Rs. 10,48,700 as undisclosed income. The Tribunal emphasized that the transactions were bona fide, the notional income was based on hypothetical figures, and the assessments in the partners' cases were already accepted by the Department. Consequently, the additions made by the AO were deleted, and the appeal was allowed.