9911796707
TMI Blog2007 (6) TMI 317X X X X Extracts X X X X X X X X Extracts X X X X ..... 158BD have to be taken to assess the losses in the absence of any material discovered in course of search to show that the assessee has undisclosed income. This is the crucial aspect of the matter i.e., the discovery of undisclosed income in course of search based on material found or seized. The existence of the material showing undisclosed income must be shown and the same cannot be assumed or based on suppositions or hypothesis. In the instant case, there is absolutely no material that has been found and brought to our knowledge from which it could be said that there was undisclosed income belonging to the assessee found in course of the search. Therefore, the proceedings initiated in the instant case cannot stand, as there is no basis for the satisfaction reached and recorded by the Assessing Officer. We are also fortified in this view by the conclusions reached by the Tribunal in the case of M/s. Ramachandran Co. the sister-concern of the assessee, which was also carrying on business from the same premises at Mysore. We have held in that case that in course of the survey conducted in the business premises on 6-2-1996, the Department derived knowledge that the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndisclosed income - Applying the findings and conclusions reached by us in the case of M/s. S. Ramachandran Co. we hold that the Assessing Officer was not justified in splitting up the contract entered into by the assessee with various societies into civil works and liaison works and thereafter proceed to compute the income separately in respect of the two activities. Therefore, the method of determination of income by the Assessing Officer by splitting the contract into two phases is set aside and it is directed that the income from the business has to be computed by taking the contract as a whole. In the result, the appeal by the assessee is partly allowed to the extent indicated and discussed. - P. MOHANARAJAN AND N.L. KALRA, JJ. V. Srinivasan for the Appellant. Dr. R.B. Krishna for the Respondent. ORDER P. Mohanarajan, Judicial Member. - This is an appeal by the assessee, a partnership firm, directed against the order of block assessment passed by the Assessing Officer under section 143(3) read with section 158BC of the Income-tax Act, 1961 (hereinafter called the Act) dated 30-9-1997. 2. We have heard both sides and perused the reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Learned counsel for the assessee submitted that the order of block assessment was passed by the Assessing Officer after invoking the provisions of section 158BD of the Act. He submitted that for invoking the provisions of section 158BD of the Act, the Assessing Officer is required to reach a satisfaction that there is undisclosed income belonging to the assessee that was found in search. He further submitted that such a satisfaction reached by the Assessing Officer has to be recorded having regard to the judgment of the Hon ble Supreme Court in the case of Manish Maheshwari v. Asstt. CIT [2007] 289 ITR 341 (SC). At this stage, we enquire from Dr. R.B. Krishna, the learned special counsel appearing for the Revenue, whether the satisfaction was recorded by the Assessing Officer. He submitted that the Assessing Officer has recorded his satisfaction and he produced the order-sheet noting made by the Assessing Officer on 26-9-1996. The following noting has been made in the order-sheet on 26-9-1996 : The assessee is a partnership firm consisting of late Sri Ramachandra, Smt. V. Rukmini, Smt. V. Padma and Smt. V. Rajeshwari. The firm is engaged in formation of layouts. The assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. Learned counsel further submitted that the Hon ble Supreme Court in the case of Manish Maheshwari ( supra ) has clearly laid down that if the conditions precedent for invoking the provisions of section 158BD of the Act have not been satisfied the order passed is liable to be cancelled. The learned Departmental Representative submitted that the Assessing Officer holding jurisdiction over the case of the assessee and the case of Madhuvana House Building Co-op. Society was the same and that therefore the satisfaction recorded in the order-sheet of the assessee is sufficient compliance with the statutory requirements as held by the Hon ble Supreme Court in the case of Manish Maheshwari ( supra ). 7. Learned counsel for the assessee replied that even if it was to be considered that the recording made by the Assessing Officer who was common is an expression of satisfaction having been reached in course of proceedings in the case of Madhuvana House Building Co-op. Society, a plain reading of the noting made on 26-9-1996 goes to show that the purported satisfaction has been recorded by the Assessing Officer only as the Assessing Officer of the assessee and not as the Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Co., in IT(SS)A. No. 27/Bang./1998, dated 27-1-2005, one of the sister-concerns of the assessee before us, to which one of us is a party. He submitted that in the case of S. Ramachandran Co. ( supra ), the Tribunal has clearly noticed and analysed the entire search proceedings taken against Madhuvana House Building Co-op. Society, the partners of the assessee firm and other concerns of the partners of the assessee firm. He submitted that on 6-2-1996, i.e., the date of search in the case of Madhunava House Building Co-op. Society and the partners of the assessee firm, there was also a survey conducted under section 133A of the Act, in the premises at 13, Upstairs, Landsdown Building, K.R. Circle, Mysore. In this premises, where the Department conducted survey action on 6-2-1996, the assessee firm and M/s. S. Ramachandran Co., were carrying on business. The survey was conducted simultaneously with search operations conducted in the residence of the partners of the assessee firm and the search in the case of Madhuvana House Building Co-op. Society. 10. Learned counsel for the assessee thereafter took us through the paras (8) and (8.1) of the Tribunal s order in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was the contractor carrying on business for the said society, the proceedings initiated against the assessee are valid. He also referred to the Panchanama drawn in the case of the assessee at the premises No. 23, Main, Saraswathipuram, Mysore, on 6-2-1996 and 7-2-1996 and stated that certain books of accounts belonging to the assessee were seized and inventorised. He pleaded that in view of the material found in course of search conducted the proceedings initiated are valid and require to be upheld. 12. We have considered the rival submissions and the material on record. Firstly, it has to be seen whether the satisfaction recorded by the Assessing Officer in the order-sheet of the assessee meets the conditions precedent for invoking the provisions of section 158BD of the Act. The provisions of section 158BD are extracted hereunder for the sake of facility : Section 158BD. Where the Assessing Officer is satisfied that any undisclosed income belongs to any person, other than the person with respect to whom search was made under section 132 or whose books of account or other documents or any assets were requisitioned under section 132A, then, the books of account, other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stioned, the Assessing Officer can demonstrate the same. The Bangalore Special Bench of the Tribunal in the case of Y. Subbaraju Co. v. Asstt. CIT [2004] 91 ITD 118 (Bang.) (SB) has considered the issue relating to satisfaction for the purposes of section 158BD of the Act as under (headnotes) : Chapter XIV-B provides for a special procedure for assessment of case in which search is initiated under section 132 or where books of account, other documents or any assets are requisitioned under section 132A. If the search action does not disclose undisclosed income, the question of any assessment being framed under that chapter is simply improper and outside the purview of the chapter. Similarly, it is basically the person searched who is subject to assessment under that chapter. The provisions of s, 158BD, however, extend the operation of those provisions to the person who is not searched. The essential ingredients of section 158BD are : ( i )the Assessing Officer of a person searched should be satisfied, ( ii )that undisclosed income belongs to person other than the person in respect of whom search was conducted, ( iii )the books of account or other documents or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that where the Assessing Officer of the person searched and the Assessing Officer of the other person proceeded against under section 158BD is one and the same, the satisfaction recorded by such Assessing Officer could be considered as satisfaction reached in course of proceedings taken against the person searched as such an Assessing Officer would be in custody of the seized materials and there is no requirement of transmission of the seized material to any other Assessing Officer. In our considered opinion, the test in such cases would be to see whether the satisfaction recorded by the Assessing Officer has been reached and recorded as a result of materials found in course of person searched or not and whether the satisfaction so recorded shows that the same has been reached as the Assessing Officer exercising jurisdiction over the person searched. 15. From a plain reading of the satisfaction note produced by the learned Departmental Representative we have no hesitation in coming to the conclusion that the noting made does not meet the requirements of recording the satisfaction by the Assessing Officer of the person searched as the noting made merely states that the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otality of the facts on record, we are of the considered view that the initiation of the proceedings under section 158BD of the Act, purportedly based on the search conducted in the case of Madhuvana House Building Co-op Society is unjustified and accordingly, the proceedings initiated are bad in law. The order of block assessment so passed is hereby annulled. 17. The next legal ground canvassed by the assessee is that the assessment made on the assessee in the status of individual is opposed to law as the notice has been issued under section 158BD of the Act in the status of firm. It is seen from the assessment order that the Assessing Officer has mentioned the status of the assessee as individual in the column against status. However, in the body of the assessment order the Assessing Officer has mentioned that the assessee is a firm and he has proceeded on that basis. We do not see any merit in the contentions of the assessee, as the wrong mention of status in the assessment order is only a curable error under section 292B of the Act. Hence this ground is rejected. 18. The next legal ground canvassed by the assessee is that the CIT had not given an opportunity of hearin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings the assessee had not advanced the contention that the firm stood dissolved on 18-9-1993 itself, but the fact remains that this is purely a legal ground and can be raised at any time as held by the Hon ble Supreme Court in the case of National Thermal Power Corpn. Ltd. v. CIT [1999] 229 ITR 383 (SC). However, since the assessee had not raised this plea before the Assessing Officer it would be in the fitness of things that the matter be remanded to the Assessing Officer to consider the issue in accordance with law having regard to the decisions relied upon by the assessee. If the Assessing Officer finds that the assessee firm stood dissolved on 18-9-1993 itself by virtue of section 42 of the Indian Partnership Act, 1932 then, the income after the date of dissolution cannot be assessed in the hands of the assessee firm and the same shall be excluded. 22. On merits, the assessee has taken ground Nos. 6 to 10 against the determination of a sum of Rs. 1,57,89,254 as undisclosed income. The assessee firm carries on the business of forming layouts for various societies on a turnkey basis. The business activities performed by the assessee as stated in the assessment ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brought to the notice of the Assessing Officer that the various societies who had paid the advances to the assessee firm had also shown the amounts paid as advances in their balance sheets and that the auditor of the Co-op. Societies Department had also accepted the said position. However, the Assessing Officer did not accept the claim of the assessee that the amounts received from various societies were in the nature of advances only and that no income accrued to the assessee firm at this stage. He accordingly computed the income from business of forming layout in the following manner by considering a part of the advances received as towards liaison works carried on by the assessee and the balance as towards civil works : (1) ( a ) Madhuvana House Building Co-op. Society Amount received towards liaison work as discussed in para 17 30,96,066 Less : Estimated expenses 3,09,606 Income 27,86.460 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be split up into the different phases. He relied on the decision of the Tribunal in the case of S. Ramachandran Co., ( supra ) and submitted that we have clearly held in the case of M/s S. Ramachandran Co., that the agreement cannot be split up into civil and liaison works. 25. The learned Departmental Representative, on the other hand, relied on the order of the assessment. He submitted that the Revenue has not accepted the decision of the Tribunal in the case of M/s. Ramachandran Co. ( supra ), and had taken the matter before the Hon ble High Court and therefore, the matter has not yet reached finality. 26. We have considered the rival submissions and we find that the issue is covered by the decision of the Tribunal in the case of M/s. S. Ramachandran Co., ( supra ) and the relevant portion of the order is reproduced hereunder : 4. We have heard the rival submissions and perused the records. It is an admitted fact that completed contract method of contract is recognized method for determining income. On a perusal of agreements and nature of activities undertaken by the assessee under the aforesaid contracts, the dominant object is the development and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amachandran Co. we hold that the Assessing Officer was not justified in splitting up the contract entered into by the assessee with various societies into civil works and liaison works and thereafter proceed to compute the income separately in respect of the two activities. Therefore, the method of determination of income by the Assessing Officer by splitting the contract into two phases is set aside and it is directed that the income from the business has to be computed by taking the contract as a whole. 28. The next issue that arises for consideration is whether the income from formation of layouts on turnkey basis for various societies can be considered as undisclosed income in the block assessment. The learned counsel for the assessee submitted that the advances paid by the various societies are covered by TDS and therefore the same cannot be considered as undisclosed income. He submitted that a consistent view has been taken that receipts covered by TDS cannot be considered as undisclosed income in the block assessment. The learned Departmental Representative relied on the assessment order. After considering the rival submissions, we are opinion that the receipts covere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he works contract, tax has to be deducted as and when advance is given. Therefore, it cannot be said that once tax has been deducted income has accrued. 6. We have considered the matter, we find that in the paper book No. III of page Nos. 37 to 40, the orders passed by the Assessing Officer giving credit for the tax deducted at source by the societies towards taxes demanded in block assessment. This credit has been given consistent with the stand of the Department that the income has to be assessed in the block assessment. We have earlier accepted the assessee s contention regarding adoption of the completed contract method of determination of income, as the Assessing Officer himself accepted the claim in the assessment order for the assessment year 2001-02 in the light of the decision of the Karnataka High Court in the case of Khodays Distilleries in ITRC Nos. 19 to 21 of 1993, dated 12-9-1995. Since, no income can be computed in the block assessment, it follows that the receipts subjected to TDS also do not constitute undisclosed income. Applying the aforesaid conclusions reached by us in the case of M/s. S. Ramachandran Co., we hold that the receipts of advance from vari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30. With regard to the income of Rs. 44,80,000 assessed protectively, it is seen that the sum of Rs. 44,80,000 represents expenditure incurred by Madhuvana House Building Co-op. Society from the period 28-10-1992 to 18-11-1995 on the project directly. The Assessing Officer included the said amount as income of the assessee firm as the partners of the assessee firm had given vouchers for the expenses incurred directly by M/s. Madhuvana House Building Co-op. Society and later on denied the receipt of these monies. The Assessing Officer has assessed the said receipts on a protective measure as the Assessing Officer has already assessed the same in the hands of M/s. Madhuvana House Building Co-op. Society. We find that the assessee firm had explained that after the demise of late S. Ramachandran, M/s. Madhuvana House Building Co-op. Society was doing certain portion of the layout works directly and debiting the same to the contractor s account as the expenses were a part of the project cost. The partners of the assessee firm denied having received the money but admitted having signed the vouchers for the expenses. It is seen that the addition has been made only protectively in the h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of development of the layout by the assessee on a turnkey basis there are several uncertainties and that there would be lengthy delays that would affect the determination of income as it would be improper to determine income year after year based on the extent of advances received as the correct income cannot be arrived at on that basis considering the uncertainties. Applying the decision so reached by us, we hold that the income of the assessee is entitled to adopt the completed contract method of accounting. 33. Before parting with the issue, it is necessary to dispose of one of the contentions raised by the learned Departmental Representative. He submitted that the assessee is not entitled to adopt the completed contract method of accounting as no details of expenses were produced before the Assessing Officer. He submitted that the extent of income to be determined be fixed based on ground realities. We may also observe here that the mode in which the Assessing Officer has computed the income is highly arbitrary, as the Assessing Officer has allowed only 10 per cent of the income as expenses in respect of liaison work and thereafter estimated income from civil works at 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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