9911796707
TMI Blog2001 (12) TMI 194X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the appellant liable to tax as income in regular assessment much more as undisclosed income in the block inasmuch as the existence of the appellant was known to the Department as the appellant has been assessed to tax before the date of search and its activities are also known to the Department before the date of search and, therefore, the income from such activities could not be considered as undisclosed income; (iv) The disallowance of certain items which are debited to the contractors' accounts and shown in the balance sheet treated as undisclosed income; and (v) The computation of undisclosed income from out of the seized materials. 2. Brief facts of the case are as under: The assessee is a co-operative society formed with a view to acquire lands by purchase or otherwise, form residential layouts and allot sites therein to its members with different contractors as under: S. No. Name of the contractor Project at Amount debited to contractor as advance as on 31-3-96 Status of completion as on the date of search Rs. 1. M/s S.G.R. Enterprises Shri Rampura Layout 2,40,48,120 Not completed 2. M/s M. Ramchandra Char Sathagalli Layout 3,95,52,065 -Do- 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not yet completed, road topping (asphalting) has not been done, other civic amenities like development of parks, etc. have not been done. Out of 756 allottees about 70 allottees have constructed houses and are living without these facilities. Therefore, it was submitted that the members formed association called M/s Madhubana Badavane Keshma Abhivrudi Sangha and have been agitating for completing the project early and in their anger and frustration they went to making wild and reckless allegations against the management and Shri D.T.S. Rao alleging that they have swindled the funds of the society with the contractor, M/s S.G.R. Enterprises. It was submitted that the society way back in the year 1985 entrusted the formation of the layout to one firm called M/s S.G.R. Enterprises on turnkey basis which is one among the pioneers and leaders in this field. It was stated that for diverse reasons the project could not be completed by them as the sheet anchor of the firm by the name Shri Ramchandra passed away and his wife, Smt. V. Rukmani, who became the managing partner, was suffering from shock on account of death of her son and husband and also because of injuries she suffered in an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on 31st March, 1994, 31st March, 1995, and 31st March, 1996, being the three previous years forming part of the block period in view of the search on 6th Feb., 1996. 4. Insofar as the project at Satgalli layout is concerned, it was submitted that the amounts were being paid to one contractor, Shri Ramchandra Char, and these were debited to the accounts and shown in the balance sheet. Insofar as M/s Raghvendra Constructions, M/s Sky Top Builders and M/s Divine Constructions are concerned, the amounts incurred on these projects were debited to the contractors' accounts and they were not claimed as an item of expenditure. It was also stated that the civil suits have been filed by the appellant's society against M/s Raghvendra Constructions, M/s Sky Top Builders and M/s Divine Constructions for the recovery of the advances obtained by them from the assessee-society and they were given to understand that these suits were pending disposal. M/s Raghvendra Construction, M/s Sky Top Builders and M/s Divine Constructions appeared to have stated before the IT authorities that they had signed blank vouchers and they had not obtained any advances and in some cases wherever they had received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the entire or any part of the premises which have already been searched. The subsequent visits are in pursuant to the executed warrant and not by issuance of a fresh warrant and it is necessary to have a fresh warrant to search the premises under the normal laws. What the Department did was to visit the premises purport to search on the basis of the executed warrant which is impermissible and therefore, the search in this case was concluded on 6th Feb., 1996, itself, and, therefore, the last date for completion of the assessment must be reckoned to be 28th Feb., 1997, only. Accordingly, it is contended that the block assessment order is time-barred. In support, Sri Venkatesan, places reliance on the decisions of the Bangalore Bench in the cases of Kirloskar Investments & Finance Ltd. vs. Asstt. CIT (1998) 67 ITD 504 (Bang) and Microland Ltd. vs. Asstt. CIT (1999) 63 TTJ (Bang) 701 : (1998) 67 ITD 446 (Bang). 8. An Explanation has been introduced to s. 158BE of the Act with retrospective effect from 1st July,1995, after the decision of this Bench in the case of Kirloskar Investments & Finance Ltd. The Explanation provides for reckoning the period of limitation on the basis of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aced at pp. 15 and 16 of the assessee's paper book. Further, the search on 23rd Feb., 1996, has resulted in certain seizures which are inventorised in the Panchnama dt. 23rd Feb., 1996. Here, the order under s. 132(3) of the Act passed earlier on 22nd Feb., 1996, has also been continued. Finally, on 25th April, 1996, a Panchnama has been drawn up wherein the said order under s. 132(3) is stated to be revoked and on this day, there was no search or seizure of any valuables and other assets that were kept in the P.O. The search proceedings are stated to have been closed. The Panchnama dt. 25th April, 1996, is placed at pp. 21 and 22 of the assessee's paper book. 11. Shri Venkatesan contends that the Panchnama drawn on 25th April, 1996, is not a Panchnama of the search but it is merely a record of the visit by the ADI to the assessee's premises. Further, according to Shri Venkatesan, the sole purpose of the visit on 25th April, 1996, was to lift the prohibitory order passed under s. 132(3) of the Act which cannot be equated to a valid search for the purpose of reckoning the last Panchnama for s. 158BE(1) of the Act. The learned Departmental Representative, on the other hand, points ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) passed was valid. Further, we also find that on 25th April, 1996, also there was no search; the material, other documents or other valuables that were kept in the P.O. have not have seized. Hence, after 23rd Feb., 1996, till 25th April, 1996, the Department has not done anything tangible to consider that the search was still in progress. Therefore, we are of the considered opinion that the search must be considered to have been completed at best on 23rd Feb., 1996, itself if not on 6th Feb., 1996, but certainly not on 25th April, 1996, which is the date of the last Panchnama where there was no search or seizure. From this point of view the assessment made is barred by limitation. We are supported in our view by the following decisions of the Bangalore Bench: (1) Kirloskar Investment & Finance Ltd.; (2) Microloand; (3) Sri T.S. Chandrashekar (4) Esanda Finance & Leasing Ltd. in IT (SS) No. 1136/B/97; and (5) Bellaire Apartments in IT (SS) No. 141/Bang/97. 13. Further, in this case there was an audit conducted under s. 142(2A) of the IT Act, 1961. The period taken by the auditor to render his report under s. 142(2A) is required to be excluded while computing the perio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equire. Sec. 142(2B): The provisions of sub-s. (2A) shall have effect not withstanding that the accounts of the assessee have been audited under any other law for the time being in force or otherwise. Sec. 142(2C): Every report under sub-s. (2A) shall be furnished by the assessee to the AO within such period as may be specified by the AO: Provided that the AO may, on an application made in this behalf by the assessee and for any good and sufficient reason, extend the said period by such further period or periods as he thinks fit; so, however, that the aggregate of the period originally fixed and the period or periods so extended shall not, in any case, exceed one hundred and eighty days from the date on which the direction under sub-s. (2A) is received by the assessee." 15. Shi S. Venkatesan, the learned counsel for the assessee, contends that in terms of the proviso to s. 142(2A), the application for extension is required to be made by the assessee and the assessee alone. The learned Departmental Representative on the other hand, submits that the application may be made by the assessee or the AO can himself for good reason extend the period of audit. He has relied on the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oviso makes it clear that the application for extension of time can be made on an application by the assessee. In the instant case, there is no such application that has been made by the assessee. Therefore, we have to hold that the extension granted by the AO on the application of the auditor, dt. 12th May, 1997, is illegal and, therefore, bad in law and not in conformity with the provisions of s. 142(2A) of the Act. Hence, the period available for the AO for exclusion under s. 158BE must be considered as 3 months only. 17. The impugned order of assessment is completed on 31st Oct., 1997, which ought to have been completed on or before 31st May, 1997, after excluding the period of 3 months commencing from 7th Feb., 1997, to 6th May, 1997, on account of the special audit. We have already held that the closure of search must be reckoned to have been completed on 23rd Feb., 1996, and, therefore, the assessment ought to have been completed before 23rd Feb., 1997, which is extended to 31st May, 1997, on account of the audit under s. 142(2A) of the Act. Even assuming the period of 6 months is taken as the time to be excluded on account of the audit, the order of assessment ought to ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 97 (SC), the income of the assessee housing society is exempt on the principle of mutuality for which proposition he also relies on the following decisions tendered in the case of similar societies: (i) CIT vs. Adarsh Co-op. Housing Society (1995) 123 CTR (Guj) 425 : (1995) 213 ITR 677 (Guj); (ii) CIT vs. Apsara Co-op. Housing Society (1994) 204 ITR 662 (Cal) and (iii) Ludhiana Agarwal Co-op. Housing Society vs. ITO (1995) 55 ITD 423 (Chd). 21. Shri Venkatesan then took us through the audit report of the statutory auditor appointed under s. 142(2A) of the Act, wherein at p. 13 the auditors appointed under s. 142(2A) have categorically stated that the income of the society cannot be computed as the projects are still in various stages of pendency. He pleaded that in the event mutuality is denied then as the assessee-society is following the completed contract method of accounting, the income/loss can only be computed on the completion of the projects undertaken. As all the projects undertaken by the assessee are still pending and not complete, there is no question of assessing any income or loss at this stage. In support, reliance was placed on the unreported decision of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 3 (Del); (6) Truck Operators' Union vs. CIT (1981) 22 CTR (Del) 137 : (1981) 132 ITR 62 (Del); (7) Jamshedpur Co-op. Stores Ltd. vs. CIT (1985) 49 CTR (Pat) 134 : (1985) 157 ITR 127 (Pat); (8) Bihar Rajya Sikshak Sahyog Sangh Ltd. vs. CIT (1987) 62 CTR (Pat) 108 : (1987) 165 ITR 681 (Pat); (9) Sports Club of Gujarat Ltd. (1988) 67 CTR (Guj) 233 : (1988) 171 ITR 504 (Guj); (10) Cochin Cottage Ind. Co-op. Mktg. Society Ltd. vs. CIT (1956) 30 ITR 356 (Ker); (11) Bellary Distt. Mine Owners Ltd. vs. CIT (1964) 53 ITR 632 (Mys); (12) Hatkesh Co-op. Housing Society Ltd. vs. ITO (1996) 60 ITD 662 (Mumbai). We have gone through the decisions cited by the learned Departmental Representative and the submissions of Shri Venkatesan distinguishing the same. We find that the decisions relied upon by the Departmental Representative are all distinguishable on facts. The assessee claims that there is no outsider involved either as a contributor or as a participant. This is the crucial test to bring out mutuality. The case laws relied upon by the learned Departmental Representative are all where outsider along with members were involved. In all those cases mutuality has been rightly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o are the major contractors and after the initial fear and shock during the search the said contractors have verified the factual position and made a conscious statement accepting the advances received. The other contractor, viz. M/s Raghavendra Constructions, who have denied receiving the money, have also done so to deny the society refund of the advances given to them. He submitted that in many such cases, suits have been instituted by the society for recovery of the money as the projects are yet to take off. Therefore, the denial of these contractors is understandable and he pleaded that no adverse inference on this score should be drawn. Further, Shri Venkatesan, effectively distinguished the case law relied upon by the learned Departmental Representative on the point of mutuality and pleaded that the decision of the Hon'ble Supreme Court in Chelmsford Club shall be applied to the facts of the assessee's case. The relevant extract of the case as held by the Hon'ble Supreme Court in the case of Chelmsford Club are reproduced below for the sake of facility. Words and Phrase—Meaning of "Mutual concern" and "principle of mutuality" "Under the IT Act, 1961, what is taxed is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of s. 4 of the Act which is the charging section. This section unequivocally shows that the levy is on income. A conjoint reading of ss. 2(24), 14, 22 and 23 of the Act also makes it abundently clear that what is being taxed under s. 22 is the "deemed income" of an assessee from the property owned by him. The assessee, a members club, provided recreational and refreshment facilities exclusively to its members and their guests. Its facilities were not available to non-members. The club was run on 'no profit no loss' basis that the members paid for all their expenses and were not entitled to any share in the profits. Surplus, if any, was used for maintenance and development of the club. The club house was owned by the assessee. The assessee claimed that it was a mutual concern and so the annual letting value of the club house was not assessable. The claim was rejected by the High Court. On appeal to the Supreme Court: Held, reversing the decisions of the High Court, that the assessee's business was governed by the doctrine of mutuality. It was an admitted fact that the business of the assessee did not come within the scope of business referred to in s. 2(24)(vii). It was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified. Accordingly, we hold that the assessee-society is entitled to exemption of its income on the ground of mutuality. We are supported in arriving at this conclusion by the ratio of the following decisions which were cited by Shri Venkatesan during the course of hearing: (i) Chelmsford Club vs. CIT; (ii) CIT vs. Bankipur Club vs. ITO; (iii) Adarsh Co-op. Housing Society; (iv) Apsara Co-op. Housing Society; and (v) Ludhiana Agarwal Co-op. Housing Society. 28. The next contention of the assessee was with reference to the completed contract method of accounting. The AO himself in the order has not disputed that the projects undertaken by the assessee-company is still incomplete. In accordance with the provisions of s. 145 of the Act, the choice of the method of accounting to be employed is with the assessee. The assessee is entitled to adopt such method of accounting as would give complete picture of the true income of the assessee provided the same is regularly employed. In the line of civil construction and construction contracts where the duration of the project is spread over several years, the completed contract method of accounting is preferable as unforeseen expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been incurred on the project cost which no doubt has to be incurred by the contractor was paid by the society itself by drawing money from its bank account. The society debited the contractor in respect of the payments made. The contractor have also confirmed having incurred these expenditure on behalf of the society. Thus, there is no room to doubt as to whether these monies were drawn by the directors and utilised for their personal use. Further, the search in the residence of the directors also has not revealed any undisclosed assets in the possession of the directors. Therefore, it is unreasonable to hold that funds of the society were drawn by the director and diverted for their personal purposes. We have already held that the income of the society which has been denied exemption on the principle of mutuality, on this ground is not justified. Accordingly, for reasons mentioned herein, we have no hesitation in deleting the additions made in the block assessment insofar as they relate to the amounts drawn by the directors but debited to the contractors are concerned. 31. The other issue on merits is the disallowances made under s. 40A(3) of the IT Act, 1961. Shri Venkatesan, h ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
