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TMI Blog1995 (8) TMI 80X X X X Extracts X X X X X X X X Extracts X X X X ..... h Shri V.H. Mehta is the President. Advertisements were floated and a scheme was sponsored in which plots measuring 1,000 sq. yards were offered for sale to the first 100 members who had to pay Rs. 16,551 and further contribute Rs. 20,000 each by way of "Parton Membership Amount" which was a non-refundable amount to be spent on developmental activities in the complex styled as "Treasure Chest". On behalf of the said SFA it was stated before the ITO that the assessee-company was assisting the said SFA in enrolling new members and collection of application money, enrolment amount and development contribution from the said members. It was further stated that the said amounts were being utilised on behalf of the SFA for the acquisition of land, promotion of the project, enrolment of members and carrying on development of land including provision for infrastructure facilities like water supply, electric supply, construction of roads, sports complex, etc. It was further stated that the idle surplus amount received and lying on behalf of the SFA for a period when such surplus funds were not immediately required for the business of SFA were invested with a view to bring down the cost of SF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ITO took note of the entries originally passed by the Accountant in the books and the subsequent reversal of the entries as well as of the fact that the letter dated 11-11-1981 from SFA to the assessee-company, on which strong reliance has been placed on behalf of the assessee-company during the course of assessment proceedings, did not constitute a valid agreement between the two parties, viz., the assessee-company and the said SFA. According to the ITO the terms and conditions of the said letter did not appear to have been accepted by the assessee-company nor was any agreement executed as per clause 10 of the said letter. The ITO also observed that the facts of the case are such that the ratio of the decision of the Supreme Court in the case of McDowell Co. Ltd. v. CTO [1985] 154 ITR 148 (SC) was squarely applicable to the case. He accordingly treated the amounts of Rs. 2,01,178 and Rs. 61,053 as income of the assessee-company for the two asstt. years under appeal. 2.2 On appeal, the CIT(A) held that the findings of the ITO were not sustainable. He held that the relation between the assessee-company and the SFA was that of an agent and a principal and the entries in the boo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... take by the Accountant of the assessee-company which indicated that the interest income belonged to the assessee-company were not relevant because on detection of the mistake these entries were reversed and this was evident from the said books of account which were seized during the course of search under section 132 which was carried out at the premises of Shri V.H. Mehta, Managing Director of the company. 2.5 We have considered the rival submissions and perused the facts on record. From the facts of the case as reproduced supra it is evident that the Strong Foundation Association (SFA) is a creation of Shri V.H. Mehta. It is a "non-trading association" of some prospective buyers, i.e., some would be members. It has no existence of its own and has no locus standi. It was created as a smoke-screen by Shri V.H. Mehta as its President who is also the Managing Director of the assessee-company. It is well-settled that Taxing Authorities are entitled to took into surrounding circumstances to find out the reality of the transaction. CIT v. Durga Prasad More [1971] 82 ITR 540 (SC). In Sumati Dayal v. CIT [1995] 125 CTR 124 (SC), the Hon'ble Supreme Court has held that considering surrou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f at 16% to which the workmen would otherwise have been entitled. Subsequently, in 1971, Aril was wound up and amalgamated with the respondent-company. The workmen raised an industrial dispute claiming bonus at 16% for 1969. The Industrial Tribunal and the High Court on a writ petition rejected the claim on the ground that the respondent and Aril were two independent companies with separate legal existence and the profit made by Aril could not be treated as the profit of the respondent-company. On appeal, the Hon'ble Supreme Court reversing the decision of the High Court held that a new company was created wholly owned by the principal company, with no assets of its own except those transferred to it by the principal company, with no business or income of its own except receiving dividends from shares transferred to it by the principal company and serving no purpose whatsoever except to reduce the gross profits of the principal company. The facts spoke for themselves. There could not be direct evidence that the second company was formed as a device to reduce the gross profits of the principal company for whatever purpose. An obvious purpose that was served and which stared one in t ..... 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