ORDER
R.L. Sangani, Judicial Member
1. The assessee was, admittedly, proprietor of M/s. Krupa Corporation and was also partner in two firms viz., (1) M/s. Manish Corporation and (2) M/s. Kruti Corporation. During the year relevant to assessment year 1989-90 the assessee had as proprietor of M/s. Krupa Corporation undertaken the organising work from M/s. Ajanta Apartment Co-operative Housing Society Ltd. The assessee had done construction work of the said society. The assessee was member of a group of assessees who were inter-connected in business activity of construction. The other members of the group were Shri Mahesh G. Vakil, Mrs. R.M. Vakil and Mr. S.A. Manjrekar.
2. In the case of Shri Mahesh G. Vakil search operations under Section 132 of the Income-tax Act, 1961 were carried out on 26-9-1990 at the residential premises. Shri Mahesh G. Vakil was assessee’s mother’s brother. On the date of search Assistant Director of Income-tax, Surat recorded statement of the assessee. He also recorded statements of flat owners of Ajanta Co-op. Housing Society. The persons whose statements were recorded are (1) Girdhar Prasad, (2) Kamal Agrawal, (3) Smt. Chetna Sultania, (4) Manju Pasari, and (5) Raghevendra Hiralal. The first three persons stated that each of them had purchased a flat in said society for Rs. 4,50,000 out of which Rs. 3,75,000 had been paid by cheque while balance amount of Rs. 75,000 had been paid as ‘on-money’ in cash. According to them, the payments had been made to Shri Mahesh G. Vakil who was described by them as builder of the apartments. The fourth person was sister of the owner of flat and her statement was that her brother had informed her that cash of Rs. 81,250 had been paid to Shri Mahesh G. Vakil for booking the flat. The fifth person had stated that he paid Rs. 1,11,000 in cash as ‘on money’. As regards payments of’on money’ statements of the witnesses were that the same had been paid at the time of booking. As regards booking two of these persons had stated that it had taken place in 1987.
3. In the return for assessment year 1989-90 the assessee had shown Rs. 1,86,027 as income from proprietary concern M/s. Krupa Corporation. He had shown income of Rs. 18,335 and Rs. 16,835 from the two firms mentioned above.
4. For determination of income of M/s. Krupa Corporation the assessee had shown the receipt of Rs. 32 per sq. ft. on the basis of total cost of construction of Rs. 75 lakhs for construction of 32500 sq. fts. For the year under consideration the total construction work had not been completed and in respect of the work that had been done the assessee had shown receipt of Rs. 4,50,000.
5. The ITO has made certain contradictory observations in the assessment order. At one place he referred to the answer given by the assessee to the question whether he had any source of income other than the income from M/s. Manish Corporation to which question the assessee had replied that he had no other source of income. The ITO admitted that when the assessee was asked the question as to who was the owner of Krupa Corporation, he had replied that he was owner of Krupa Corporation. However, on the basis of his answer to earlier questions the ITO observed in the assessment order as follows:
Thus in fact he is not the owner of Krupa Corporation, but on books he is shown as owner.
The ITO referred to the statements of the flat owners mentioned above in which those flat owners had stated that they had made payments to Shri Mahesh G. Vakil. He observed as follows:
If the assessee had really done the construction work of this society then payments could not have been made to Shri Maheshbhai Vakil. On the contrary the working of the statement clearly states that Shri Maheshbhai Vakil is the builder and he has collected the payment. Thus, in fact income of Krupa Corporation should be taxed in the case of Shri Maheshbhai Vakil. However, since the assessee himself has shown the income, the same is taxed in this case also.
The ITO then again referred to the statements of flat owners who had stated about the payments of ‘on money’ to the builder and observed that since the assessee was claiming that he had done the construction work the ‘on money’ should be taxed in the assessee’s hands. He also observed that the assessee was supplied copies of statements of flat owners mentioned above and the assessee was asked to give submissions in that regard and that the assessee had stated by letter dated 25-5-1992 that ‘during assessment years 1989-90 & 1990-91 he had not received any on-money from the said persons and therefore, there is no question of having earned any extra income during these years”. The ITO also mentioned that the assessee had further stated that in assessment year 1991-92 he had declared income under Section 132(4) read with Explanation 5 to Section 271(l)(c) of the Income-tax Act, 1961. He did not accept the explanation of the assessee. According to him in this line of business, on money was taken first at the time of booking of the flats and since the year under consideration was shown by the assessee as the first year of the business of Krupa Corporation and since Krupa Corporation alone had done the construction work, the conclusion would be that the assessee had received on money during the year under consideration. He also observed that as per list supplied by the assessee there were 20 flats in said society and hence the assessee should be regarded to have received on money of Rs. 20 lakhs. He, therefore, made addition of Rs. 20 lakhs in the income of the assessee.
6. The assessee filed appeal before the CIT(A) and objected to the observations of the Assessing Officer. It was submitted that the Assessing Officer should not have relied on the statements of purchasers of the flats and should not have made addition of Rs. 20 lakhs on the basis of those statements. It was also submitted that the assessee had disclosed Rs. 23 lakhs under Section 132(4) for assessment year 1991-92 and had filed the return declaring income of Rs. 3,46,250 for that year which was arrived at after making adjustment for loss and depreciation for the newly started business of texturising and that the said income declared by the assessee had been arrived at after making adjustment for the income of Rs. 23 lakhs disclosed under Section 132(4) and hence no addition of Rs. 20 lakhs could be made for assessment year 1989-90.
7. The CIT(A) relied on the reasons given by the Assessing Officer. He observed that the purchasers had stated to have paid ‘on money’ ranging Rs. 75,000 to Rs. 1,11,000 and hence the estimate of Rs. 1 lakh per flat made by the ITO for 20 flats was proper. He also emphasised the fact that on money had been paid at the time of booking of the flats and since the accounting year in question was the first accounting year of the business of the assessee (Krupa Corporation), the amount was liable to be assessed in that year. He accordingly confirmed the addition made by the ITO. The assessee is now in further appeal before the Tribunal.
8. The learned Counsel for the assessee emphasised the fact that there were contradictions in several observations of the ITO in the assessment order and hence the addition could not be sustained. In particular he referred to the observation to the effect that the assessee was in fact not the owner of Krupa Corporation but in the books he was shown as owner and also to the observation to the effect that in fact all activities regarding Krupa Corporation were done by Shri Mahesh G. Vakil and that Shri Mahesh G. Vakil was builder and he had collected the payments and that the income of Krupa Corporation should be taxed in the case of Mahesh G. Vakil. It was submitted that in view of these observations no addition should have been made. It was also submitted that there was no evidence that the assessee had received on money in question. As regards the statements made by the flat owners, it was submitted that all of them have stated that the payments had been made to Shri Mahesh G. Vakil and none of them had stated that the payments had been made to the assessee and further some of them had stated that the payments had been made in 1987 which was not relevant year for assessment year under consideration. It was also submitted that these statements could not be made the basis for addition particularly when the assessee has not been given an opportunity to cross examine these persons. He referred to the fact that in the application made by the assessee on 22-11-1990 addressed to the Assessment Director (Investigation) the assessee had declared Rs. 23 lakhs as undisclosed income and that in addition, income of Rs. 37 lakhs was declared by the three members of the group viz., Shri Mahesh G. Vakil, Mrs. R.M. Vakil and Shri S.A. Manjrekar for assessment year 1991-92 and that the same income could not be taxed twice in two assessment years.
9. The learned D.R. submitted that the fact that ITO has not been able to express himself in proper language would not vitiate the entire assessment order. He referred to the observations of the ITO to the effect that since the assessee himself had shown the income of Krupa Corporation, the income pertaining to ‘on money’ was assessable in the hands of the assessee. He also referred to that part of the assessment order where the Assessing Officer has observed that the assessee had received on money while booking the flats and that the assessee in his reply had not specifically denied having received on money but had simply stated that the money had not been received in the year under consideration. It was submitted that this finding of the Assessing Officer should be accepted and the addition should be confirmed. It was also submitted that the assessee never requested the Assessing Officer for opportunity to cross examine the flat owners whose statements had been recorded and hence the assessee had no right to make grievance on that score. It was also submitted that Shri Mahesh G. Vakil was maternal uncle of the assessee and was associated with the assessee in the business and hence it should be assumed that Shri Mahesh G. Vakil received the amount on behalf of the assessee. It was also submitted that mere declaration of income in assessment year 1991-92 did not disentitle the ITO to assess the amount in the year under consideration when the amount had been received in that year.
10. In reply, the learned Counsel for the assessee referred to the decision of Gujarat High Court in the case of CITv. Ashaland Corpn. [1982] 133 ITR 55 in which it was mentioned that the amounts received towards purchase price did not represent income in the year in which they are received and that they assume character of income in the year in which a transfer of flats take place. He also relied on the decision in the case of Hirji Nagji & Co. v. CIT [1976] 105 ITR 286 (Ori.) and also the decision in the case of Union of India v. T.R. Varma AIR 1957 SC 882 in support of his submission that it was not for the assessee to demand cross examination but it was for the Assessing Officer to grant cross examination if the statements of the witnesses were to be made the basis for addition. He emphasised the fact that the statements had been recorded in search proceedings which had been directed against Shri Mahesh G. Vakil and not against the assessee.
11. We have considered the rival submissions and facts on record. We have also perused the paper book filed by the assessee. We find that the order of the Assessing Officer is not worded happily. However, for that reason alone the entire assessment order would not be vitiated. All parts of assessment order would be required to be harmonized. It is true that the earlier part of the assessment order there is observation to the effect that the assessee was not in fact owner of the Krupa Corporation but on books he was shown as owner. However, this observation is only a reaction of certain answers given by the assessee to ADI in which the assessee had not in the earlier part stated that he was owner of Krupa Corporation and was deriving income as proprietor of Krupa Corporation. The assessee has filed return as owner of Krupa Corporation. The assessee has admitted at all stages of assessment proceedings including the stage of the appeal that he was the owner of Krupa Corporation. Consequently the income of Krupa Corporation was liable to be assessed in the assessee’s hands. In another part of the assessment order the ITO has mentioned that the income of Krupa Corporation should be taxed in the hands of Shri Mahesh G. Vakil. However, he has also mentioned that since the assessee himself had shown the income of Krupa Corporation as his income, the same should be taxed in his hands. In substance the Assessing Officer has assessed the income of Krupa Corporation in the hands of the assessee inspite of the above observations. It is to be noted that the Assessing Officer has not taxed the income pn protective basis. He has taxed the income on substantive basis. It means his final conclusion was that the income was liable to be taxed on substantive basis in the hands of the assessee.
12. The addition in question has been made solely on the basis of the statements of five witnesses recorded by ADI in the course of search proceedings against Shri Mahesh G. Vakil. It is true that the copies of statements of these witnesses had been given to the assessee and he was given opportunity to indicate as to what he had to state regarding those statements. The assessee stated that he had not received on money in the year under consideration. Those witnesses had stated that on money had been paid to the builder and according to them, Shri Mahesh G. Vakil was builder. It is now an admitted fact that the builder was M/s. Krupa Corporation of which the assessee was the owner. If the Assessing Officer wanted to rely solely on the statements of these flat owners, he should have examined those flat owners afresh and should have ascertained from them all relevant facts and then should have given opportunity to the assessee to cross examine those flat owners. It is only in this manner that the evidence of flat owners could have been used against the assessee. Short statements recorded in the search proceedings against Shri Mahesh G. Vakil could not form basis for making addition in the hands of the assessee. The ITO was under mis-apprehension that those statements could be used as evidence against the assessee. In fact in those statements none of them had named the assessee and hence those statements by themselves could not form basis for addition against the assessee. The proper course therefore was, as already stated above, to examine those persons and to ascertain the connection of the assessee with the ‘on money’ said to have been paid to Mahesh G. Vakil and allow the assessee opportunity to cross examine those persons. The decision of Supreme Court relied on by the learned Counsel for the assessee is relevant in this connection. It is the evidence tested by cross examination which could form basis for addition. It is true that if the assessee expressly waives his right to cross examine the matter would be different. In the present case the assessee could not be said to have waived the right of cross examination. None of the flat owners had named him as a person to whom on money had been given. Consequently the assessee would not have thought it necessary to cross examine those persons. However, the Assessing Officer has used the statements against the assessee on the assumption that although these flat owners stated that the on money had been paid to Mahesh G. Vakil, the same should be regarded to have been paid to the assessee who was the builder. Such an inference should have been drawn only after examining those persons afresh and after giving opportunity to cross examine, to the assessee. Consequently the grievance of the learned Counsel for the assessee to the effect that the right of cross examination had been wrongly denied to the assessee, was justified.
13. Besides all relevant facts in the present case do not appear to have been brought on record of this assessment. Search proceedings had been conducted against Shri Mahesh G. Vakil. It is true that Shri Mahesh G. Vakil is business associate of assessee and is member of the group of which the assessee is also a member. However, whatever is on the record of the assessment of Shri Mahesh G. Vakil, cannot be said to be part of the assessment of the assessee. It was the duty of the Assessing Officer to examine Shri Mahesh G. Vakil in the assessment proceedings of the assessee in order to ascertain as to in what circumstances and on what basis he had collected purchase amount from the flat owners. The Assessing Officer was required to give opportunity to the assessee to cross examine Shri Mahesh G. Vakil. The Assessing Officer was also required to consider the effect of the offering by the assessee of an amount of Rs. 23 lakhs as income for assessment year 1991-92. The Assessing Officer was also required to consider as to at what point of time the income could be said to have accrued in respect of alleged on money if really the assessee is proved to have received the same. Mere receipt of an amount when construction had not started does not mean receipt of income. It has been held in the case of Ashaland Corpn. (supra) by Gujarat/High Court that in the case of a person who was dealer in immovable property, the business transaction would be complete when the purchase or sale transaction was complete. It was held that it was at the time of completion of the transaction that the receipt would assume the character of income. At the earlier stage it would represent advance or, as the case may be part payment of the price. This aspect is also required to be considered by the ITO. The ITO is required to consider as to in which year the income in respect of on money would accrue if really the assessee is found to have received the on money. For that purpose the method of accounting followed by the assessee as well as the dates on which different transactions with different flat owners were completed, would be required to be taken into account.
14. Besides, in the present case only five flat owners were examined by the ADI of which at least one had no personal knowledge. When there are 20 flat owners, majority of them, if not all, should have been examined in order to ascertain as to what price they paid for the flat in question and to whom and in which year the price was paid. The investigation could be complete and it is only in respect of the amount which is proved to have been received by the assessee as a result of investigation that the addition could be made. It is true that resort to certain presumptions could be taken from certain proved facts but for that purpose all surrounding circumstances are to be taken into account.
15. Considering the entire circumstances we set aside the assessment order with direction to the ITO to make fresh assessment in accordance with law after bringing relevant materials on record and after giving reasonable opportunity to the assessee of being heard and also bringing materials in rebuttal on record.
16. The appeal shall be treated as allowed for statistical purposes.