ORDER
R. Acharya, A.M.
1. This is an appeal instituted by the assessee against the block assessment order under s. 158BC of IT Act, 1961 passed by the AO for the block period 1985-86 to 1995-96 and from 1st April, 1995, to 6th September, 1995. The assessee is a firm in which Sri Wasudeo Khemchandani and Om Prakash Khemchandani are partners. The assessee is also one of the Khemchandani group of cases who are builder and developer of the properties. A search and seizure operation was conducted under s. 132 at the various business and residential premises of Khemchandani family on 6th September, 1995, and some books of accounts and documents were seized. In response to a notice under s. 158BC, the assessee filed return on 26th August, 1996, and showed therein the undisclosed income at Rs. nil.
2. As against the nil returned income, the AO has determined the undisclosed income, at Rs. 25,76,457. Being aggrieved by the order of the AO, the assessee has preferred this appeal to the Tribunal.
3. First and second grounds of appeal are that the AO erred in making addition of Rs. 8,81,387 which was later on rectified as Rs. 7,17,317 as unexplained cost of construction when there is no difference as the entire amount is duly recorded in the books of accounts which are regularly maintained by the assessee and wherein each and every item of expenses are noted.
4. The AO found that the assessee has constructed a business complex known as ‘Priyadarshani Indira Complex’ at Jaistambh Chowk, Amravati. He has narrated the facts in his order as under :
“As per the lease agreement executed on 28th March, 1990, between the assessee and the Municipal Corporation, Amravati, granted the right of development of site in respect of plot No. 14/2 admeasuring 1,362.5 sq.mtrs. out of sheet No. 56-B, situated at Jaistambh Chowk, Amravati. The assessee agreed to pay a sum of Rs. 35,00,777 in the form of non-refundable premium. The corporation has also agreed to grant leases to the tenants recommended and nominated by the builder @ Rs. 1 sq.ft. of carpet area per month for a period of 25 years. As per the agreement the money derived by way of premium and so also the rent receivable in respect of the said tenements for the period of 3 years, received by the builder from tenants shall be retained by the builder. As per sanctioned plan the assessee constructed multi-storied commercial complex on the said land, known as Priyadarshani Indira Complex in which there are in all 120 shops.”
The AO referred the matter of valuation of the business complex to the Valuation Officer and the valuer has worked out the total cost of the building at Rs. 68,77,600 as against the cost quoted to the valuer by the assessee at Rs. 69,33,933 and as against the cost as per books of accounts at Rs. 66,55,845. He has also given year-wise details of investments as quoted to the valuer, cost estimated by the valuer and cost as per books. The AO issued letters dt. 26th July, 1996, and 23rd August, 1996, asking the assessee to explain the variation and difference and in response to that the assessee has submitted its reply on 8th August, 1996, explaining therein that the assessee has followed the complete contract method as prescribed in A.S. No. 7 issued by the Institute of Chartered Accountants of India and thus, all the receipts are shown separately and hence the P&L a/c was not prepared. On perusal of books of accounts, the AO found that certain expenses are debited to building construction account which do not constitute the part of the construction. These expenses are like dalali, bank commission, dismantaling expenses, insurance and salary, etc., totalling to Rs. 11.96,355. He further observed that the payments made in advance to the labourers and expenses on account of electricity charges and the outstanding bills for goods purchased were not debited to building construction account. Total of such expenses works out to Rs. 8,81,387. He added Rs. 8,81,387 to the book cost shown at Rs. 64,75,261 in order to arrive at the total of Rs. 73,56,648 from which he deducted Rs. 11,96,355 as not constituting the part of cost of construction. Thus, the difference between the cost as shown by assessee and cost as per valuer’s report is (wrongly) mentioned at 8,81,387. He also pointed out that some of the expenses were not transferred to the building account for which details have been filed but books have not been produced. He, therefore, did not give any credit for such expenses. Accordingly, the AO assessed the difference in cost of construction as unexplained investment treating the same as ‘undisclosed income’ for the block period.
5. Being aggrieved by the order of the AO the assessee has preferred this appeal to the Tribunal and has raised the abovementioned ground Nos. 1 and 2. The learned counsel for the assessee submitted that no such addition on facts could have been made by the AO as the actual cost as per the assessee as quoted to the valuer is shown at Rs. 69,33,933 as against actual cost as per valuer shown at Rs. 68,77,610. He further argued that even otherwise there is no substantial difference in the cost as it worked out to 10.43% only. The Department had got no case to refer the matter to the Valuation Cell. He also pointed out that no incriminating documents were found in the course of search to show any unrecorded expenditure on account of cost of construction of the building and, therefore, the addition is not at all sustainable. The learned counsel for the assessee further argued that regular books of accounts are maintained and all the items of costs are recorded and are supported by vouchers which were produced by the assessee, as it is evident from the letter of the assessee placed at pp. 22 and 23 of the paper book and the statement of Sri Lokchand Bargaiya who confirmed the receipt of labour payment, etc. were recorded by the AO. It was further pointed out that the Departmental Valuation Officer (DVO) verified the records and took the figure from them as it is evident from the assessee’s letter dt. 9th September, 1996, placed at pp. 27 and 28 of the paper book. In view of this, he pleaded that the AO has not pointed out any defects in books of account and, therefore, he could not have referred the matter legally to the Valuation Officer. In order to support his arguments and contentions, he relied on the following case law :-
(i) CIT vs. Pratapsingh Amrosingh Rajendra Singh & Deepak Kumar (1993) 200 ITR 788 (Raj);
(ii) Modern Construction Development & Project Promotion vs. Asst. CIT (1997) 63 ITD 235 (Cal); and
(iii) ITO vs. Pitamber Industries (P) Ltd. (1992) 42 ITD 373 (Del).
6. The learned representative of the assessee further contended that the assessee has constructed the building as trading asset and, therefore, cost of the building cannot be suppressed as profit will increase. According to him, the difference cannot be added as it is stock-in-trade. He also submitted that the provisions of s. 69C applies to the expenditure of personal nature, but, if it is applied to trading asset, the result will be nil. According to him, the difference can be added when there is a capital asset and not trading asset. In order to support his contentions and arguments, he placed reliance on the following decisions of Tribunal and contended that no such addition can be made.
(i) ITO vs. S. F. Wadia (1987) 27 TTJ (Ahd) 437 : (1986) 19 ITD 306 (Ahd)
(ii) M. K. Mathivathanan vs. ITO (1989) 31 ITD 114 (Mad); and
(iii) Nishant Housing Development (P) Ltd. vs. Asstt. CIT (1995) 52 ITD 103 (Pat).
On the basis of these submissions, arguments and contentions, he urged that the addition on account of difference in the cost deserves to be deleted.
7. The learned Departmental Representative, on the other hand, submitted that it is not correct to say that the defects in the books of accounts were not pointed out. He invited our attention to p. 3 para A(a) of assessment order and submitted that the AO has pointed out in clear terms that certain items did not constitute cost of construction. He further submitted that the AO has correctly added the difference between the cost shown by the assessee and the cost arrived at by the Valuation Officer. According to him, the AO has correctly applied the provisions of s. 69C and has made the addition on account of unexplained investment and for that he relied on the order of the AO.
8. In reply, the learned counsel for the assessee reiterated that the AO has allowed deduction on account of self-supervision at the rate of 7.5% but, if it is allowed at an higher rate, as in other cases, there cannot be any reference to valuation cell or there cannot be any addition on that count, the difference being negligible.
9. We have carefully considered the rival contentions, relevant facts and materials placed on record and have also gone through the decision on which reliance is placed by the counsel for the assessee. We find that the addition of Rs. 7,17,317 as ‘undisclosed income’ has not been based on any incriminating books of account, documents and materials found and seized by the Department. It is also noticed that the assessee has maintained regular books of accounts for construction of the building, all entries pertaining to the construction are duly recorded and are supported by vouchers. It is also seen that the books of accounts and vouchers are examined by the AO and verified by the DVO as it is evident from the assessment order. In addition to this, the required person Sri Loknath Bargaiyer was produced by the assessee and his statement was recorded by the AO and the witnesses confirmed the entries in the books of accounts and admitted to have received the payments against the labour and to have signed the vouchers, as it is clear from para 7 of the letter of the assessee dt. 3rd September, 1996, placed at p. 22 of the paper book. With regard to the maintenance of books of accounts, it is very pertinent to note this submission of the assessee vide its letter dt. 24th September, 1996, a copy of which is placed at p. 32 of the paper book. The relevant portion is extracted as under :
“For construction, assessee has maintained regular books of accounts. The construction of the building commenced from 1989-90. The construction was carried on under the personal supervision. No contract is given. Regular day-to-day books of accounts were maintained. The details of each and every expense are duly accounted for with the description as to for which the item of construction, the said expenditure is incurred. These expenses are also supported by the vouchers. All the purchases of the building materials are supported by the vouchers. Entire investment over the construction is duly verifiable from the books of accounts which are in the possession of the Department. Assessee is ready to explain the same across the table with reference to the books. As regular books of accounts are maintained wherein all the details of expenditure are mentioned with supporting bill and vouchers including ……………. each pie is mentioned.”
These submissions and contentions of the assessee have not been rebutted and controverted by the Department by producing any evidence or material. This simply means that the Department has accepted the position of books of accounts as it is.
10. It may also be pointed out that in the course of assessment proceedings, the assessee was prepared to give any more clarification, to produce any witness and to submit any other evidence as it is exhibited from paras 10 and 11 of the assessee’s letter dt. 9th September, 1996, placed at p. 31 of the paper book, which are reproduced as under :
“10. If any more clarification is required, assessee be informed accordingly so that same can be complied.
11. Assessee is ready to produce any witness or person and ready to submit any other evidence as may be necessary, and also ready to extend all possible co-operation.”
11. We further notice that the AO has also not pointed out any defects in the books of accounts maintained by the assessee. Instead of finding out and pointing out any specific defects, he has undoubtedly made certain adjustments in the cost of building shown by the assessee in the books of accounts, by deducting cost of certain items not constituting part of the cost according to him and by adding electric charges and outstanding bills not debited to building account. The learned Departmental Representative has termed these adjustments as defects in the books of accounts. In our opinion, these are not defects which may be called sufficient and serious one to reject the method of accounts and result thereof. Rejection of books of accounts by pointing out a specific defects therein means and indicates that the books of accounts are not capable of giving correct picture of income or expenditure or where the method of accounting is such that correct picture of income and expenditure cannot be arrived at. This is not the legal or factual position of books of accounts of the assessee. We find that the AO has not rejected the books of accounts and their results before referring the matter to the DVO. Although it was his legal obligation to verify the books of account, points out a specific defect and reject books of accounts before referring the matter to the Valuation Cell, he has failed to discharge his legal obligation. His order, therefore, on this point cannot be sustained as the reference to the Valuation Cell itself is invalid. Our view gets support from the decisions on which the reliance was placed by the assessee.
12. In the case of ITO vs. Pitamber Industries (P) Ltd. (supra), Tribunal, Delhi Bench held as follows :
“In the present case, the account books were relevant and they were maintained by the assessee in the regular course of construction. The ITO had not found the maintenance of books of account faulty or defective with regard to specific point. Therefore, he could not disregard the valuation shown by the assessee on the maintenance of books of account, day-to-day vouchers, etc. So, the estimate made by the Revenue authorities disregarding the valuation of the assessee was unjustifiable and no addition was called for.”
In the instant case also, the assessee has maintained proper books of accounts in the regular course of construction and the AO has not declared the same to be faulty or defective and, therefore, in our opinion he should not have disregarded the valuation and cost shown by the assessee and should not have replaced the same by estimate made by the DVO. The addition is, therefore, not justified.
13. In the case of Modern Construction Development and Promotion vs. Asstt. CIT (supra), Tribunal, Calcutta Bench held that for the purpose of making an addition towards unexplained investment, the AO was under legal obligation to verify the books and vouchers maintained by the assessee in support of cost of construction shown by him and points out a specific defects and upon rejection of books or pointing out defects, the AO would acquire the right to refer the matter to the Valuation Officer. It was further held that it is settled that when the assessee maintains accounts regularly, addition cannot be made on the basis of the report of the DVO without pointing out any defects in the books. This is what exactly has happened in the case of the instant assessee and the AO has made the addition on the basis of the valuation report without pointing out any specific defects in the books or without rejecting the books of account maintained by the assessee.
14. In the case of CIT vs. Pratapsingh Amrosingh Rajendra Singh and Deepak Kumar (supra), the Rajasthan High Court held as under :
“that there was no dispute that the assessee maintained proper books of account and the same had been accepted in the past and no defects were pointed out in the books. The expenses were fully supported by vouchers. Full details were also mentioned in respect of each item in the books. Simply because the valuation report was of a higher amount, the books could not be said to be unreliable. The Tribunal was, therefore, justified in deleting the addition of Rs. 55,780.”
The assessee’s case is squarely covered by this decision as in the instant case although proper books of accounts and vouchers are maintained and full details were mentioned in respect of each item in the books of accounts, the AO referred the matter to the Valuation Cell and made the addition on the basis of difference in valuation which in our opinion is not justified.
15. We also observe that one of the contentions of the assessee is that the building is constructed as trading or business asset and, therefore, the cost cannot be suppressed, as profit will increase i.e., the difference in cost cannot be added as it is stock-in-trade. It is also contended that debit and credit of the such addition will neutralize the effect. This contention raised by the assessee’s counsel has not been reverted and controverted by the Department by producing any evidence or material. In our opinion, therefore, this contention of the assessee also holds good and is tenable. The contention of the assessee is duly supported by the following three Tribunal decisions :
(i) In the case of S. F. Wadia vs. ITO (supra) the Tribunal, Ahmedabad Bench while dealing with the unexplained expenditure under s. 69C has held as under :
“Therefore, even if addition sought to be made for unexplained expenditure on the basis that the same is not recorded in the books of account, then the whole amount in respect of the business expenditure not recorded in the books is required to be deducted while computing the profits under the head ‘Business’. In the result, the figure required to be added will be nil.”
(ii) In the case of M. K. Mathivathanan vs. ITO (supra), Tribunal, Madras Bench held that where unexplained expenditure was actually incurred for business purposes and not recorded in books, such expenditure would have to be allowed separately as a deduction.
(iii) In the case of Nishant Housing Development (P) Ltd. vs. Asstt. CIT (supra), Tribunal, Patna Bench held as under :
“Sec. 69 of the IT Act, 1961 – Unexplained investments – Asst. yrs. 1986-87 to 1988-89. Whether since assessee was carrying on construction in course of business and building was not constructed as capital investment, expenses would be debited in P&L a/c and as such even if assessee incurred expenditure in excess of amounts recorded in books and such excess expenditure was treated as assessee’s income under s. 69C, same amount would have to be debited in P&L a/c and addition under s. 69C would be neutralised and net result would be ‘nil’ addition.”
The assessee’s case is entirely covered by Patna Bench Tribunal in the case of Nishant Housing Development (P) Ltd. (supra). In view of this factual and legal position as well as for the reasons mentioned above, we respectfully follow the above decision, and we hold that the AO was not justified in making the addition of Rs. 8,81,387 on account of difference in valuation and in assessing the same as ‘undisclosed income’. The addition of Rs. 8.81.387 Rs. 7,17,317 is deleted.
16. Ground No. 3 relates to the addition of Rs. 1 lakh as ‘undisclosed income’ on account of credit in the name of Mohd. Salim. On perusal of ledger for financial year 1990-91, the AO found that two amounts of Rs. 50,000 each have been credited to the account of Mohd. Ali & Co. – on 25th May, 1990, and on 6th December, 1990. It was also seen that a sum of Rs. 50,000 was debited to his account showing the credit balance of Rs. 50,000 in the account of Mohd. Ali & Co. From the books of the accounts of subsequent year, the AO detected that the balance is not carried forward in the account of Mohd. Ali & Co., but, the same has been taken to the account of Shri Pradip Deshpande. The assessee admitted that it has received two amounts of Rs. 50,000 each by cheque from Mohd. Ali & Co. but, the balance amount of Rs. 50,000 was wrongly posted in the account of Sri Pradeep Deshpande at the time of carry forward. According to the assessee, the transactions are genuine. A cheque book in the name of Mohd. Ali & Co. was found in the residential premises of Sri Sudhir Shah and the counterfoils show payments to the various persons including the assessee. On equity, the AO found that the introducer denied to have introduced the said person. On further enquiry through Inspector, it was found that there was no such person at the given address. Since the assessee failed to produce the person, the AO treated the account as fake and credit as not genuine. He, therefore, made substantive assessment in the case of Sri Sudhir Shah and the additions are made on protective basis in the hands of the assessee.
17. The learned counsel for the assessee submitted that the amount is received by way of account payee cheque and no incriminating documents or materials were found in the course of the search and, therefore, such addition cannot be sustained in the hands of the assessee. He submitted that the transactions are genuine as there are no credits in the name of Sri Pradip Deshpande, but, it is because of wrong posting of entries in that account. The learned counsel for the assessee invited our attention to the explanation of the assessee placed at pp. 24, 35, 36, 37 and 38 of the paper book and submitted that in support of the contention, the assessee has submitted letters from Subash Rathi, Ismailbhai and Sarkar identifying the signatures of Sri M. Salim while introducing Sri Salim to the banker. It was further submitted that Mohd. Salim was also registered under Professional Tax Act, as it is evident from a certificate placed at p. 36 of the paper book. In a letter dt. 23rd September, 1996, the assessee informed the AO that M. Salim died and, therefore, he cannot be produced. In view of this, he urged that the addition which is on protective basis should be deleted.
18. The learned Departmental Representative, on the other hand, supported the assessment order and contended that the addition is made as a result of search and seizure and on the basis of cheque book found and, therefore, the same should be sustained.
19. We have carefully considered rival contentions, relevant facts and materials placed on record. In this matter, a detailed discussion has been made in the case of Sudhir Shah in ITA No. 780/Nag/1996 wherein the substantive assessment on account of this addition was made and wherein we have upheld the decision of the AO that Sri M. Salim is benamidar of Sri Sudhir Shah. We find that it is not denied that both the amounts of Rs. 50,000 each were received by the assessee by way of cheque and both of them were credited to M. Salim’s account and later on one of them was debited leaving the balance at Rs. 50,000 to be carried forward. The only fault of the assessee is that the assessee has not carried forward the balance in correct name. The assessee has explained that there is no credit in the name of Sri Pradip Deshpande, but, it is only because of wrong posting. It is not the case of the Department that Sri Pradip Deshpande had ever advanced Rs. 50,000 to the assessee and, therefore, there is credit in his name. We have also seen in the case of Sri Sudhir Shah that the identity of Sri M. Salim has been established on the basis of documentary evidence and testimonies of witnesses which had not been controverted by the Department. This means he was a person in existence and, therefore, the credits are genuine. In view of this and as well as for the reasons recorded in the case of Sri Sudhir Shah, we hold that the addition of Rs. 1 lakh and that too on protective measure is not justified. Accordingly, the protective assessment is vacated and the addition of Rs. 1 lakh is ordered to be deleted.
20. Ground No. 4 is that the imaginary addition of Rs. 5,46,370 and Rs. 10,48,700 is improper, unjust and deserves to be deleted. The AO found that the assessee has allotted two portions of the building constructed to the partners i.e., 10 tenements to Wasudeo Khemchandani and 20 tenements to Om Prakash Khemchandani without charging any premium from them. He, therefore, asked the partners to explain as to why the gain/profit arising due to the allotment of tenements to them without any consideration, should not be taxed as undisclosed income for the block period. In response to that Sri Wasudeo Khemchandani explained that he has provided huge funds to the partnership firm and has done labour work and is also paying rent of Rs. 1 per sq.ft. as per the lease agreement executed directly by the Corporation in favour of him. According to the partner, there is no provision in the agreement for paying any premium. It was further explained that he has taken risk in carrying on business in these premises as the frontage of the same is covered and blocked by encroachment. The partner also explained that he is charging Rs. 5 per sq.ft. as rent per month and this income is shown in the return of income. He did not agree with the AO that the provisions of s. 45(4) of IT Act are applicable to the facts of the case and that there is no question of deemed gift. The partner denied to have received any benefit and, therefore, he strongly objected to any arbitrary assessment.
21. The AO rejected the explanations and replies of the partners as not satisfactory. The AO observed that the assessee-firm had not charged any premium while granting the tenements to the partners, although it has charged lease premium @ Rs. 650 per sq.ft. from every other person and, therefore, he calculated the market value of both the portions allotted to partners at Rs. 13,54,600 and Rs. 26 lakhs, respectively, and came to the conclusion that the partners have gained Rs. 13,54,600 and Rs. 26 lakhs, respectively, from the firm without any consideration. The AO also observed that the provisions of s. 10(2A) shall not be applicable because the firm has not so far been assessed to tax. The AO, therefore, calculated the market value of the said portion at the selling price and calculated the cost of the portions allotted to the partners on pro rata basis to find out profit/gain details of which are given as under :
Name of partner Area allotted Selling price Cost Profit/gain
Sq.ft.
1 2 3 4 5
----------------------------------------------------------------------
Rs. Rs. Rs. Rs.
----------------------------------------------------------------------
Wasudeo 2,084 13,54,600 - 8,08,230 - 5,46,370
Khemchandani
Om Prakash 4000 26,00,000 - 15,51,300 10,48,700
Khemchandani
----------------------------------------------------------------------
The AO held that the profits of Rs. 5,46,370 and Rs. 10,48,700, respectively, have arisen in the hands of the firm from the allotment of premises to both the partners. He has, therefore, assessed the same in the hands of the firm on substantive basis. The AO also held that both the partners have gained Rs. 13,54,600 and Rs. 26,00,000, respectively. He, therefore, assessed the profits of Rs. 5,46,370 and Rs. 10,48,700, respectively, in the hands of the partners on protective basis and the costs of Rs. 8,08,230 and Rs. 15,51,300, respectively, in the hands of the partners on substantive basis on account of retention of 10 and 20 shops, respectively, without any consideration.
22. The learned counsel for the assessee reiterated that since the partners have supplied huge funds and has put in labour and supervision in construction of the building, the AO was wrong in saying that there was no payment of premium. According to him, the partners are paying lease rent at Rs. 1 per sq.ft. per month to the assessee and have earned rent of Rs. 5 and, therefore, the difference of Rs. 4 is shown as the income of the partners. He also pointed out that legally deemed income and notional income cannot be assessed as undisclosed income as the income has neither accrued nor has been received by the assessee as alleged by the AO in his order. In order to support his arguments and contentions, he placed reliance on the following decisions :
(i) K. P. Varghese vs. ITO (1981) 131 ITR 597 (SC);
(ii) CIT vs. Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC);
(iii) CIT vs. Motor Credit Co. (P) Ltd. (1981) 127 ITR 572 (Mad);
(iv) Departmental SLP was dismissed (1984) 149 ITR (St) 92;
(v) CIT vs. Calcutta Discount Co. Ltd. (1973) 91 ITR 8 (SC); and
(vi) ITO vs. Baij Nath Sheokumar Rusera 1977 Taxation 49 (6) 50.
23. While taking up the factual aspect of the matter, the learned counsel for the assessee submitted that before the date of the search, the income was disclosed by the partners and examined by the Department, as it is evident from the assessment order for the asst. yr. 1993-94 passed under s. 143(3) in the case of Wasudeo Khemchandani placed at p. 46 of the paper book and in the computation of the income placed at p. 48 of the paper book, such income is shown by the partner. He also invited our attention to the assessment order under s. 143(1) for the asst. yr. 1994-95 placed at p. 52 of the paper book wherein the similar income had been shown by the partner as it is evident from the computation of income placed at p. 50 of the paper book. He further submitted that the assessment for asst. yr. 1995-96 is accepted by the Department even after search as exhibited by the order placed at p. 94 and computation of income at p. 56 of the paper book. The representative of the assessee also relied on decision of Tribunal in the case of Sunder Agencies vs. Dy. CIT (1997) 59 TTJ (Mumbai) 610 : (1997) 63 ITD 245 (Mumbai) and pleaded that no enquiry can be made in completed assessments. According to him, as there is no direct evidence or material seized in the course of the search and since all the facts were before the AO, the AO could not have assessed the notional income on hypothetical basis. He also argued that the provisions of s. 158BC are not applicable to disclosed transactions. In order to support his arguments and contentions, he relied on the following decisions :
(i) Sunder Agencies vs. Dy. CIT (supra), and
(ii) N. R. Paper and Board Ltd. & Ors. vs. Dy. CIT (supra).
On the basis of the contention on legal aspect and factual aspect of the matter, he urged that the AO was not justified in assessing the notional income in the hands of the partners as well as firm.
23.1. The learned Departmental Representative, on the other hand, invited our attention to the copy of the agreement between the assessee-firm and Municipal Corporation placed at p. 63 and submitted that the assessee has right to recommend the names and has recommended the names of the partners for allotment of tenements, but, has not charged any premium from them. He further pointed out that the assessee is paying 35 lakhs as premium to the Municipal Corporation but is receiving nothing from the partners and, therefore, it was a sham transaction. He also pointed out that although the assessee had charged such premium from other tenants, no such premium is charged from the partners. He relied on the order of the AO particularly para 10 at p. 10 and submitted that the reason given by the assessee that huge funds and labour are supplied by them and, therefore, no premium is charged, is not satisfactory as labour or fund is not a premium. He, therefore, contended that as no payment has been made by both the partners, they have reduced the profit of the firm and they have not reduced the cost of tenements allotted to two partners. The learned Departmental Representative further contended that since the assessee has not exercised his right to receive premium from two partners in lieu of transfer of tenements to them, the assessee has extinguished its right and, therefore, it can be taxed under s. 45 of IT Act. He relied on the decision of Supreme Court in the case of Kartikeya V. Sarabhai vs. CIT (1997) 228 ITR 163 (SC). Placing reliance on another Supreme Court’s decision in the case of Mcdowell & Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC) the learned Departmental Representative pleaded that it is a sham transaction and the assessee has adopted colourable devise to evade tax in both the hands i.e., in the case of ‘firm’ and in the case of partners. As regarding acceptance of the assessment, it was submitted that only partners’ cases were before the Department and, therefore, they were accepted before the search and seizure operations, but, in the case of the firm, it is not so. On the basis of these arguments and contentions, he urged that the addition made by the AO should be upheld.
24. In reply, the learned counsel for the assessee argued that the Supreme Court’s decision in the case of Mcdowell & Co. Ltd. vs. CTO (supra), is not applicable as no colourable device had been adopted by the assessee and everything is disclosed and accepted by the Department. According to him, it is not a sham transaction as sham transaction is no transaction. He further argued that for declaring the transaction as sham or benami, the onus is on Revenue to prove. According to him, since it is not a capital asset, capital gains is not assessable and even if it is assessable, where full consideration is understated and the burden is on Revenue as per the then s. 52(2) to prove as it was decided by Hon’ble Supreme Court in the case of K. P. Varghese vs. ITO & Anr. (supra) at p. 603.
25. We have carefully considered the rival contentions, relevant facts and materials placed on record and we have also gone through the case-law and pronouncements on which the reliance is placed by both the parties. On scrutiny and perusal of assessment order, show-cause letter dt. 29th September, 1996, issued to the assessee and show-cause notice dt. 29th September, 1996, issued to the partner Sri Wasudeo Khemchandani placed at (p. 53) of the paper book, we find that the AO has used words and phrases like “tenements so given to”, without any consideration, gain arisen, gain under s. 45(4), cost on pro rata basis, price, cost and profit element”. This indicates that he had intention to assess the profit or gain under s. 45 of IT Act on allotment of these tenements to the partners and has actually assessed the same as such. Although in show-cause notice, he proposed to assess the same under GT Act, it appears that he dropped the idea later on as it does not find place anywhere in the order. From assessment orders of the firm and partners, it is also clear that the AO has assessed profit or gain substantially in the hands of the assessee-firm and protectively in the hands of the partners but, insofar as the cost of tenements allotted to partners is concerned, it is assessed in the hands of the partners on substantive basis. In our opinion, the transactions do not fall within the scheme of capital gain under s. 45 of IT Act. As provisions of s. 45 are applicable only to capital asset, but, in the instant case, it is trading asset and not the capital asset. Capital gain in applicable to the owner of the capital asset, but, in the instant case, the assessee is not the owner of the land and building as it is evident from cl. (9) of the agreement between M/s. Associate Builders and the Municipal Corporation of Amravathi dt. 28th March, 1990, which runs as under :
“The land described in Sch. “A” and entire building to be constructed thereon along with the fittings, fixtures, electric connections, water tap connections, fire-fighting equipments and extinguishers shall be the property of the Corporation and the builder shall have no right, title or interest in the said building or any portion thereof in any manner whatsoever.”
In this view of the matter, the tenements allotted to the partners cannot be called as capital asset and cannot be assessed in the hands of the assessee-firm as the assessee is not the owner of them. It is also seen that the asset has been transferred by the owner to the transferee vide separate lease deed in which there is no provision for charging any premium. In view of this, it is out of the purview of s. 45 to assess the notional income as capital gain in the hands of the assessee as three main ingredients of s. 45 and fundamental and primary conditions with regard to the ownership, capital asset and transfer have not been fulfilled.
26. The AO has also tried to assess the notional income under s. 45(4) as it is evident from the show-cause notice. In our opinion, it cannot be assessed under s. 45(4) too for the reasons mentioned in aforesaid paragraphs. In addition to that, the show-cause notice itself is illegal and there is no dissolution of firm and there is no profit on distribution of capital asset. In view of this, therefore, there is no question of assessing the same under s. 45(4) of the Act.
27. The Department has also placed reliance on s. 2(47) and has contended that by not claiming premium on transfer of tenements to the partners, the assessee has extinguished its right in asset and, therefore, it can be taxed under s. 45 r/w s. 2(47) of the Act. We find that this contention of the Revenue is also not correct and the assessee does not have any right in the asset, but, has only right to recommend allotment of tenements and charge premium. The right to recommend allotment and charge premium does not amount to right in asset, and, therefore, when there is no right in asset, the question of extinguishment thereof does not arise at all, as we have already seen as per cl. (9) of the deed between the assessee and Municipal Corporation. In that clause, it has very clearly been laid down that the builder will have no right, title or interest in the said building or any portion thereof. Therefore, the stand taken by the Revenue does not hold good as it does not stand the test of the provisions of law.
28. In Partners’ cases, the learned Departmental Representative, has also argued that the provisions of s. 28(iv) is applicable and the profit is assessed under s. 28(iv) of the Act. We have to examine as to whether any benefit has arisen from business to the assessee-firm or to its partners. As in other transactions, in these transactions also, the assessee was undoubtedly entitled to charge premium from the partners for recommending allotment of the tenements, but, according to the AO, the assessee has not charged premium. The AO was not correct as he has completely ignored the explanations advanced by the assessee and the partners and has rejected the same as not satisfactory. He has thus reached the conclusion without appreciating the explanation and materials placed on record. The explanations and reasons advanced by the assessee need though consideration to bring all the facts on record. The important and relevant explanations are as under :
(i) That Sri Wasudeo Khemchandani and Sri Om Prakash Khemchandani had paid rent at the rate of Rs. 1 per sq.ft. per month to the assessee upto three years and it is an admitted fact.
(ii) That because of partners’ personal exertions, initiative and labour, the building is constructed (assessee’s letter dt. 9th September, 1996 p. 29). It has admitted and mentioned by the AO in para 10 of his assessment order.
(iii) That “the total contribution of such funds is in the house of Rs. 70 lacs, as can be seem from balance sheet. In view of all these, no premium is taken from Omprakash Khemchandani and Sri Wasudeo Khemchandani as they have provided huge interest-free funds to the firm for erecting the complex” (the assessee’s letter dt. 9th September, 1996 at pp. 29 and 30 of the paper book).
(iv)(a) That the frontage of this plot is occupied by some other shopkeepers as encroachers and trespassers, therefore, the tenements of this building could not be sold easily, that the partners of the assessee have occupied about 6,000 sq.ft. area with a view that other persons come ahead to occupy the same.
(b) “Unfortunately as encroachment could not be removed because of political interference (situation), assessee has been put to great loss. Assessee is producing herewith a site plan of the map to explain as to how frontage side of the building is under the encroachment. Even on today it could not be removed. Your goodness may take personal inspection of the same so that factual position and situation can be verified.
(c) “Assessee has been put to great loss in this adventure.”
(Assessee’s letter dt. 5th September, 1996 at pp. 41 and 42 of the paper book).
29. Now it is to be considered that interest on huge fund supplied by the partners, cost of labour and supervision put in by the partners an rent at the rate of Rs. 1 per sq.ft. per month on plus side and disadvantage of frontage of shops being blocked by encroachments on minus side were sufficient or equal to premium or were less than that. The AO has not taken pain to do this exercise of calculating rent, interest and converting labour and encumbrances into money. If all these taken together is less than the premium and it is, as it is apparent from the facts and figures that the assessee-firm has suffered loss in these transactions and, therefore, there is no question of any benefit arising from these items of business or from transactions with the partners. The assessee has already advanced this explanation to the AO that due to encroachments, the assessee had been put to great loss in this adventure (as it is evident from the explanation of the assessee quoted above in assessee’s letter dt. 5th September, 1996, at pp. 41 and 42 of the paper book. We find that it is also not a case of Revenue that disadvantage of encroachments is neutralised by extra facilities and that the rent, interest and labour converted into money, taken together exceeds the amount of premium and thereby benefit from the business has arisen. Since this has not been proved by the Department by bringing evidence and materials on record, the benefit from business cannot be assessed on presumptions and surmises.
30. In view of this, it cannot be said that benefit has arisen to the assessee from business transactions. Therefore, the provisions of s. 28(iv) cannot be applied to loss arisen from business transactions or claimed by the assessee unless and until it is proved otherwise. In such cases, the onus is always on the Department, but, we find that this onus has not been discharged and, therefore, the notional income cannot be assessed on estimate basis.
31. Apart from this so far the assessee-firm had not been assessed to tax and only 40 per cent tenements are sold and 60 per cent of the building was vacant as on 5th September, 1996, as per the assessee’s letter dt. 5th September, 1996, placed at p. 42 of the paper book. Thus, what emerges from the above facts is that after transfer of 60 per cent vacant tenements only total and final picture of income or loss will result in the case of the firm. Before that, it cannot be assessed on estimate basis on imaginary figures. In a letter dt. 27th August, 1996, placed at p. 37 to 39 of the paper book, the assessee has already explained and contended that the premium received by the assessee is not taxable unless the total premium received by it exceeds the cost of the building which is spent by the assessee, as the system of accounting is on par with the system of completed contract as already explained and accepted by the Department. In this view of the matter, therefore, it cannot be said that the assessee was having any income not disclosed or that would not have been disclosed so as to hold that the assessee had any undisclosed income.
32. As regarding chargeability of premium, one relevant and important question arises as to whether the assessee is under any compulsion or it is mandatory on the part of the assessee to charge same premium from all or is to free to vary or deviate the amount of premium. In this respect, the relevant portion of cl. 8 of the agreement, dt. 28th March, 1990, between the assessee and Municipal Corporation placed at pp. 63 to 79 is quoted as under :
“It shall be lawful for the builder to charge such premium from prospective tenants to be nominated by the builder as the builder may deem fit without the Corporation having any say in the matter and it shall be competent for the builder to receive such premium from such persons and the Corporation will not be concerned with the same.”
It is crystal clear from the agreement that the builder can charge such premium as deemed fit. The assessee-firm had, therefore, right to collect premium but it was obligatory on its part to collect the same in full or in part as deemed fit. In view of this, the estimate of cost and profit made by the AO on the presumptions and surmises that other things remain the same in the cases of partners also, is not justified at all.
33. In our opinion, inadequacy of price or consideration cannot be challenged by the AO without valid evidence or solid material as the assessee is the best judge of its affairs and the AO cannot lay down the code for running the business.
34. From the above discussions, what emerges is that the partners have paid the price for allotment of tenements in the shape of rent, interest-free loan and labour i.e. in the shape of rent, interest and labour to be converted into money and that because of encumbrances on properties due to frontage being blocked by encroachments, the assessee had suffered loss. These material facts have not been controverted by the AO by bringing any evidence on record. The AO has completely ignored these relevant and important facts and materials and has made addition on account of costs and profit in the case of firm and partners respectively on estimate basis which cannot be sustained in the eyes of law.
35. Coming to the practical aspect of the matter, we find from the assessee’s letter dt. 5th September, 1996, that the assessee has incurred total cost of construction of the building at Rs. 69 lakhs and over and above that the assessee has also made the payment of Rs. 35 lakhs to Municipal Corporation and Rs. 7 lakhs towards interest (assessee’s letter dt. 5th September, 1996, placed at p. 27 of the paper book that the partners have advanced interest-free loan of Rs. 70 lakhs to the assessee-firm for construction of the building shown at Rs. 69 lakhs only. This means and proves that the entire cost of construction is covered by the loans and huge fund supplied by the partners without charging any interest. This fact is also borne by the balance sheet placed at p. 80 of the paper book wherein on 31st March, 1995, loans and advances from the partners’ family members are still shown at Rs. 59,06,333. These facts have also not been challenged and controverted by the Department. In view of these facts and figures coupled with rent, labour and supervision and encumbrances on property, it cannot be said that the tenements were transferred to the partners without any premium.
36. Onus to prove inadequacy of consideration is on the Department, but the AO has completely failed to discharge the same. He also failed to prove the profit element as well by adducing any evidence and by bringing any material and by proving that the assessee has actually earned profit by way of saving, interest and payment for labour and supervision. In other words, the AO has not proved that the premium received by the assessee has exceeded the cost and any benefit from the business as such has arisen. In view of these facts, figures and reasons, the Department had no right and no jurisdiction to assess the profit and cost in the hands of the assessee-firm and its partners and that too on estimate basis. Such assessments cannot be legally approved and sustained, as they are based on hypothetical, illusory and unrealistic estimate of income which has not accrued or arisen at all to the assessee as well as to the partners. Our view based on above facts and circumstances of the case, is not only supported by the provisions of law, as we have seen in foregoing paragraphs, but also is supported by legal pronouncements. In the case of CIT vs. Motor Credit Co. (P) Ltd. (supra) where principal money advanced by the assessee was not capable of realisation, the Madras High Court held as under :
“that the Tribunal was correct in its conclusion that though the assessee had adopted the mercantile system of accounting, no interest income could be assessed in its hands on accrual basis as it would be very unrealistic on the part of the assessee to take credit for a highly illusory interest.”
The Supreme Court dismissed the SLP by the Department against the judgment of Madras High Court [149 ITR 93 (St)]. Applying this ratio to the instant case, we find that here also the AO has adopted unrealistic estimate to assess the profit or cost of the building.
37. In the case of CIT vs. Calcutta Discount Co. Ltd. (supra), the Hon’ble Supreme Court held as under :
“Where a trader transfers his goods to another trader at a price less than the market price, and the transaction is a bona fide one, the taxing authority cannot take into account the market price of those goods, ignoring the real price fetched, to ascertain the profit from the transaction.”
In the instant case also, the Revenue has been unable to prove that the transactions were not genuine and not bona fide as they have accepted the facts in the case of the partner. Since according to the pronouncements of the apex Court, the assessee can arrange its affairs in such a way as to minimise its tax burden, the AO has no right to dictate the terms to the assessee or estimate the income in the cases of the firm and the partners.
38. In the case of CIT vs. Shoorji Vallabhdas & Co. (supra), it was held by the apex Court that if the income does not result at all, there cannot be a tax, even though in book-keeping an entry is made about a “hypothetical income”, which does not materialise. In the instant case also, we find that hypothetical income estimated by the AO does not materialise and, therefore, cannot be assessed as such.
39. In the case of ITO vs. Baijnath Sheo Kumar, Rusera (supra) where one of the debtors of the assessee had all along a debit balance in the books of the assessee and where the assessee has not charged interest and hypothetical interest was assessed by the AO, the Tribunal, Patna Bench held that it was entirely for an assessee to decide whether or not he should charge interest from a particular party and he could not be forced by anybody to resort to a different course of action and the ITO could bring to tax only such income which had accrued to the assessee and not that income which might have, but not actually accrued to him. In the instant case also, hypothetical and notional income has been assessed by the AO although it has not actually accrued.
40. The contention of the learned Departmental Representative that the assessee has entered into sham transaction with the partners and has adopted colourable device and for which he has placed reliance on Supreme Court’s decision in the case of Mcdowell & Co. Ltd., (supra) is based on his argument that the assessee is paying premium of Rs. 35 lakhs to Municipal Corporation and is receiving nothing from partners while the assessee is receiving such premium from other persons. In our opinion, while pleading so, the learned Departmental Representative is fully governed by the assessment order and is misguided by the assessment order and just like the AO he has also completely missed and ignored the explanations advanced by the assessee and the partners that the tenements are allotted to the partners for paying rent for providing huge funds without charging any interest and for putting labour and supervision and also for taking incumbersome property, frontage of which is blocked by trespassers. On one hand, he pleads that profit has arisen from business of the assessee and on the other hand, he argues that no premium is received and, therefore, the transaction is sham. In our opinion, the onus to prove that the transactions are sham, is not discharged by the Department. Therefore, in our opinion, as the sale consideration or price is very much there against the allotment of tenements as discussed in foregoing paras, the transactions cannot be said to be sham. Therefore, since the transactions are bona fide and are borne by facts and materials and are accepted by the Department in the cases of the partners, it cannot be said that the assessee had adopted any colourable device to evade the tax. In view of this, the ratio of Hon’ble Supreme Court’s decision in the case of Mcdowell Co. Ltd. (supra) is not applicable as the facts are different and as the onus to prove the transactions are sham is not discharged. In the case of Mcdowell & Co. Ltd., it was held that colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. In the instance case of firm and partners, neither colourable devices nor dubious methods, if any adopted by the assessee are proved by bringing on record necessary evidence or materials. In view of this, such contentions cannot be entertained.
41. The next contention of the learned Departmental Representative is that by taking tenements without paying any premium, partners have reduced the profit of the firm but have not reduced the cost of the firm. This contention also does not hold good and is not tenable as the AO have not proved the same by calculating rent, and interest and by converting labour into money and also by deducting encumbrances on the property. The other arguments of the learned Departmental Representative that supply of labour and huge fund is not premium, is also not tenable and cannot be accepted for the same and similar reasons as discussed above. The learned Departmental Representative has argued that the profit is taxable under s. 28(iv) of the Act which itself permits the value of any benefit or perquisite convertible into money.
42. The learned Departmental Representative also relied on the decision of Supreme Court in the case of Kartikeya V. Sarabhai vs. CIT (supra) and has argued that the transaction is taxable under s. 45 r/w s. 2(47) of the Act. Detailed discussions have already been made in one of the foregoing paragraphs. In the case of Kartikeya V. Sarabhai (supra), the Hon’ble apex Court held that the extinguishment of any right in capital asset can also be considered as a transfer and any profit or gain which arises from transfer of capital asset is liable to be taxed. It was further clarified that such reduction of right in the capital asset would clearly amount to a transfer within the meaning of that expenditure in s. 2(47) of IT Act. In the instant case as the asset involved is not capital asset, but, it is a business asset, the question of reduction of right does not arise at all. If there is any reduction of the right in asset, it is not in capital asset but, in business asset which cannot amount to a transfer and, therefore, cannot be assessed as capital gain. This contention of the Revenue is also rejected.
43. It is very pertinent to take note of factual aspect emphasised and stressed upon by the learned counsel for the assessee. We find that before search and seizure, the assessee has disclosed all the facts about these transactions in the cases of the partners and they have been examined and assessed by the Department as it is evident from the assessment order dt. 27th September, 1994 for the asst. yr. 1993-94 and from the computation of income in the case of Sri Wasudeo Khemchandani, copies of which are placed at pp. 47 and 48 of the paper book respectively. Wherein rent received from Raj Sarees (P) Ltd. at Rs. 62,610 and lease amount of Rs. 12,504 paid to Associate Builders is accepted by the Department under s. 143(3) of the Act, after scrutinising the books of account of the partners. It is also noticed that the Department has also accepted the same position for asst. yr. 1994-95 under s. 143(1) before search and for asst. yr. 1995-96 after the date of search, as it is exhibited by the computation of income and intimation placed at pp. 51, 52, 53 and 54, respectively. Thus, it is crystal clear that all the facts and materials were placed on record of the Department and the position regarding allotment of tenements to the partners and payment of rent and lease money made by Sri Wasudeo Khemchandani to M/s. Associate Builders is accepted by the Revenue in the past years as well as in the subsequent years i.e. before and after the search and seizure operations. Therefore, there is no question of going back and deviating from the stand already taken by the Department.
44. The Department cannot blow hot and cold in the same breathe as no incriminating documents and materials are found and seized. As no evidence or materials are collected on enquiry by the AO to corroborate, the change of stand on surmises and hypothetical and imaginary basis to assess the notional income, is not justified.
45. In the case of Sunder Agencies vs. Dy. CIT (supra), Tribunal, Mumbai Bench held that s. 158BA does not provide a licence to Revenue for making roving enquiries connected with completed assessment and is beyond power of AO to review assessments completed unless some direct evidence comes to the knowledge of Department as a result of search which indicates clearly factum of undisclosed income. In the instant case, as assessments are completed and accepted in the partners’ cases and no direct evidence has been found and seized, notional income cannot be assessed as undisclosed income. In the case of N.R. Paper and Board Ltd. & Ors. vs. Dy. CIT (1998) 234 ITR 733 (Guj), Gujarat High Court held that as a regular assessment is permissible only undisclosed income is to be assessed under s. 158BC of the Act. In the instant case, since the regular assessment has been completed and accepted in the partners’ cases no undisclosed income can be assessed under s. 158BC of the Act. Thus, having looked into deeply and having examined thoroughly, legal aspects and factual aspects of the subject-matter of appeal, we have come to the conclusion that both the legal and factual positions are in favour of the assessee and they tilt the balance and turn the scale in favour of and on the side of the assessee and its partners. Considering all the facts and the circumstances of the case and for the reasons mentioned in foregoing paragraphs, we hold that the AO was not justified in assessing profit of Rs. 5,46,370 on estimate basis for allotment of 10 tenements to Sri Wasudeo Khemchandani and profit of Rs. 10,48,700 on estimate basis for allotment of 20 tenements to Sri Om Prakash Khemchandani as undisclosed income for the block period. Accordingly, the same are deleted.
46. In the result, the appeal is allowed.