TaxTMI 
TaxTMI 
2007 (6) TMI 317
X X X X Extracts X X X X
X X X X Extracts X X X X
....tners of the assessee firm were also covered. Consequent to the search in the case of Madhuvana House Building Co operative Society and other cases on 6-2-1996, a notice under section 158BC raed with section 158BD of the Act was issued and served on the assessee on 26-9-1996 calling for the return of income in Form No. 2B. The assessee filed a return in response to the notice in Form No. 2B on 17-12-1996 admitting total undisclosed income at Rs. 9,80,363. The said return of income was filed by the assessee firm disclosing income on estimate basis at 4 per cent of the receipts from various societies. 3. The Assessing Officer completed the assessment under section 143(3) read with section 158BC of the Act determining the undisclosed income of the assessee at Rs. 1,57,89,254. While computing the undisclosed income at Rs. 1,57,89,254, the Assessing Officer bifurcated the receipts from the various societies into two categories viz., civil works and Liaison works. In respect of the receipts considered as civil works, the Assessing Officer determined the income at 10 per cent of the gross receipts on estimate basis. In respect of the receipts considered as liaison works, the Assessing ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....from execution of the contracts. Therefore, the assessee is liable to block assessment in respect of undisclosed, income under section 158BB by virtue of provisions of section 158BC read with section section 158BD. Office to issue notice under section 158BC." 5. Learned counsel for the assessee referring to the aforesaid nothings made in the order-sheet on 26-9-1996 submitted that the purported satisfaction note recorded by the Assessing Officer in the order-sheet of the assessee does not reveal any satisfaction reached by the Assessing Officer having jurisdiction over Madhuvana House Building Co-op. Society that undisclosed income of the assessee was found in course of search in the case of Madhuvana House Building Co-op. Society. He submitted that the satisfaction contemplated under section 158BD of the Act is the satisfaction to be arrived at by the Assessing Officer of the person searched and not the satisfaction of the Assessing Officer having jurisdiction over the person to be proceeded under section 158BD. He submitted that in terms of section 158BD of the Act, it is only the Assessing Officer having jurisdiction over the person searched who has to derive satisfaction tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....en commenced on the ground that the assessee firm had not filed its returns of income for various years : "Subsequent to the search in the premises of the said society it has come to the knowledge of the Department that the firm has not filed any return so far, admitting income from execution of the contracts." 8. Learned counsel further submitted that the noting made does not reveal anything about any undisclosed income belonging to the assessee-firm having been discovered in course of search in the case of Madhuvana House Building Co-op. Society. He submitted that even the language employed while recording the satisfaction note suggested that the recording has been made by the Assessing Officer having jurisdiction over the assessee firm and not by the Assessing Officer exercising jurisdiction over the person searched. Accordingly, he submitted that in the absence of the conditions precedent viz., recording of satisfaction by the Assessing Officer having jurisdiction over the person searched, the order of assessment is illegal and requires to be annulled. 9. Learned counsel for the assessee further submitted that there was enough material on record from which it could be ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ive, on the other hand, strongly supported the order of assessment. He submitted that there is no requirement of recording satisfaction under section 158BD of the Act unlike the provisions of section 148 of the Act. He submitted that there is no proforma for recording the satisfaction. The Assessing Officer having jurisdiction over the case of M/s. Madhuvana House Building Co-op. Society and the assessee before us was common-arid therefore, the recording of satisfaction by the said Assessing Officer would go to show that conditions precedent for assuming the jurisdiction under section 158BD have been complied with. As per the satisfaction recorded in the order-sheet of the assessee it is clear that after the search conducted by the Department, it came to light that the assessee had entered into contracts with certain societies for doing layout works and that the assessee not filed the return of income for various years. Thus, there was undisclosed income by implication since the assessee had not filed its return of income. This undisclosed income was liable to be assessed and the proceedings have been rightly commenced by the Assessing Officer. Learned Departmental Representative a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed. Such a satisfaction is to be recorded by the Assessing Officer in course of the proceedings taken against the person searched having regard to the judgment of the Hon'ble Supreme Court in the case of Manish Maheshwari (supra) wherein it has been held as under (Headnotes) :- "Before the provisions of section 158BD of the Income-tax Act, 1961, are invoked against a person other than the person whose premises have been searched under section 132 or documents and other assets have been requisitioned under section 132A, the conditions precedent have to be satisfied. Held accordingly, that where the premises of a director of a company and his wife were searched under section 132 of the Income-tax Act, 1961, and a block assessment had to be done in relation to the company, the Assessing Officer had to (i) record his satisfaction that any undisclosed income belonged to the company, and (ii) hand over the books of account and other documents and assets seized to the Assessing Officer having jurisdiction against the company." 13. As rightly argued by the learned counsel for the assessee, it is only the Assessing Officer having jurisdiction over the person searched has the custod....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the authorities when called in question, cannot escape to demonstrate the material that led to the satisfaction that undisclosed income of other person has been detected by the Department as a result of search. If the Department, for any reason, has no material whatsoever to come to that view, the proceedings under section 158BD would have to be dropped because very foundation for the assumption, of jurisdiction becomes non-existent. Although the judicial authorities are not entitled to go into the sufficiency of the reasons, the existence of the reasons for satisfaction can always be gone into by the judicial authorities. In the instant case, there was no iota of material to show that there was undisclosed income. When such was the case, the satisfaction that the undisclosed income belonged to such other person was wanting. When that was the case, the entire proceedings framed with the issuance of notice under section 158BD would have to go. In other words, if the basis for notice is not there, the notice itself is wrongly issued and making further assessment on such other person would be wholly outside the purview of the scheme. Thus, issuance of notice by itself is not the displ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion 158BD have to be taken to assess the losses in the absence of any material discovered in course of search to show that the assessee has undisclosed income. This is the crucial aspect of the matter i.e., the discovery of undisclosed income in course of search based on material found or seized. The existence of the material showing undisclosed income must be shown and the same cannot be assumed or based on suppositions or hypothesis. In the instant case, there is absolutely no material that has been found and brought to our knowledge from which it could be said that there was undisclosed income belonging to the assessee found in course of the search. Therefore, the proceedings initiated in the instant case cannot stand, as there is no basis for the satisfaction reached and recorded by the Assessing Officer. 16. We are also fortified in this view by the conclusions reached by the Tribunal in the case of M/s. Ramachandran & Co. the sister-concern of the assessee, which was also carrying on business from the same premises at Mysore. We have held in that case that in course of the survey conducted in the business premises on 6-2-1996, the Department derived knowledge that the asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d of dissolution requires to be cancelled, learned counsel for the assessee submitted that the assessee firm was constituted under a deed of partnership dated 20-7-1985. The partners of the assessee firm were (1) Sri. S. Ramachandran, (2) Smt. V. Rukmini, (3) Smt. V. Padma and (4) V. Rajeshwari. Sri S. Ramachandran was the managing partner of the assessee firm and he died on 18-9-1993. Learned counsel for the assessee submitted that upon the death of late S. Ramachandran on 18-9-1993, the assessee firm stood dissolved by operation of section 42 of the Indian Partnership Act, 1932. He submitted that in terms of section 42, the firm is dissolved by death of one of the partners unless the deed of partnership provides that no dissolution of the firm takes place on the death of one of the partners. He filed the copy of the partnership deed before us and contented that there is no provision made in the partnership deed to the effect that the provisions of section 42 of the Indian Partnership Act, 1932 do not apply to the assessee firm. He relied on the following decision of the Hon'ble Supreme Court in the case of Wazid Ali Abid Ali v. CIT [1988] 169 ITR 761 (SC). 20. The learned Depa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on (PVC), underground drainage, street lights and asphalting etc., after completion of the civil work. 23. In response to the notice issued under section 158BD of the Act, the assessee firm filed a return of income admitting an income of Rs. 9,80,363 as income from carrying out the works on turnkey basis. Learned counsel for the assessee submitted that the aforesaid return of income came to be filed by the partners of the assessee firm after the search operations based on the assurances given by Assessing Officer that income of the assessee would be assessed at 4 per cent of the net receipts from the societies. Late S. Ramachandran, the erstwhile managing partner was handling the affairs of the assessee firm and the other partners being ladies were not aware of the business operations or the provisions of the Act. After the demise of late S. Ramachandran on 18-9-1993, search action was conducted on 6-2-1996 on the family members of late S. Ramachandran, viz., his wife, Smt. V. Rukmini and son Sri. R. Sridhar had just completed his studies in the year 1993. Both Smt. V. Rukmini and Sri. R. Sridhar were just getting acquainted with the business being carried by late S. Ramachandra....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mated 3,30,000 29,84,860 Total income including undisclosed income 1,58,57,102 Less : Income declared for the asst. yr. 1986-87 67,848 Total undisclosed income 1,57,89,254 24. Learned counsel for the assessee submitted that the Assessing Officer in the block assessment proceedings considered the agreement for developing the layouts on turnkey basis entered into between the assessee and the societies as comprising of two separate and independent phases viz., liaison works and civil works. After splitting the single contract into two different parts, the Assessing Officer computed the income therefrom separately. He submitted that the agreement between the assessee and the society was a single indivisible contract and the same cannot be split up into the different phases. He relied on the decision of the Tribunal in the case of S. Ramachandran & Co., (supra) and submitted that we have clearly held in the case of M/s S. Ramachandran & Co., that the agreement cannot be split up into civil and liaison works. 25. The learned Departmental Representative, on the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of it subjected to service tax, The CESAT has applied the ratio of the decision of the Hon'ble Supreme Court in the case of State of Punjab v. Associated Hotels (I 8CC 472) where the apex Court held that, the primary object of the contract would determine the issue. The various components of the contract cannot be taken as separate transaction and subjected to tax. The decision of the service-tax Tribunal in Dealim Industries ( supra) has since been affirmed by the Hon'ble Supreme Court by dismissing the petition for Special Leave to Appeal (Civil) No. 24294 of 2003 of the Revenue-(2004) 170 ELT A181. Therefore, computation of income by splitting up the contract is not in accordance with law on the facts and circumstances of the case." Applying the aforesaid findings and conclusions reached by us in the case of M/s. S. Ramachandran & Co. we hold that the Assessing Officer was not justified in splitting up the contract entered into by the assessee with various societies into civil works and liaison works and thereafter proceed to compute the income separately in respect of the two activities. Therefore, the method of determination of income by the Assessing Officer by splitting t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....have deducted tax, and as the assessee had filed its return of income for the asst. yr. 1993-94 onwards after the search/survey but before the notice under section 158BD was issued and the proceedings have been initiated only on the basis of the regular returns of income so filed and on record of the Department, the advances received cannot be considered as undisclosed income. 5.2 The learned Departmental Representative, on the other hand, stated that the very fact that tax was deducted at source means that income has accrued. In reply it was clarified by the learned counsel for assessee that TDS was deducted by the society because of the circular issued by CBDT, which was placed at page Nos. 31 and 32 of the paper book No. 11. In terms of the said circular even when the advances are given for the works contract, tax has to be deducted as and when advance is given. Therefore, it cannot be said that once tax has been deducted income has accrued. 6. We have considered the matter, we find that in the paper book No. III of page Nos. 37 to 40, the orders passed by the Assessing Officer giving credit for the tax deducted at source by the societies towards taxes demanded in block as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ificates was Rs. 84,55,200, whereas the total receipts computed by the Assessing Officer were Rs. 90,78,780. Here again, the assesses has explained that the difference represents payments made by the said society directly to statutory authorities and debited to the assessee's account. We find that this aspect of the matter has not been properly considered and verified by the Assessing Officer. Hence, we are remanding this issue to file of the Assessing Officer to consider the assessee's explanation for the difference in receipts in the case of the two societies in accordance with law. If the Assessing Officer finds that the difference is on account of payments made directly by the society, as explained by the appellant, the same shall not be included while computing the income of the assessee. 30. With regard to the income of Rs. 44,80,000 assessed protectively, it is seen that the sum of Rs. 44,80,000 represents expenditure incurred by Madhuvana House Building Co-op. Society from the period 28-10-1992 to 18-11-1995 on the project directly. The Assessing Officer included the said amount as income of the assessee firm as the partners of the assessee firm had given vouchers for th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....usiness. The assessee has claimed that it was following the completed contract method of accounting and that no income could be computed, as the projects were not yet complete. The Assessing Officer has not accepted the claim of the assessee in the assessment order. In the case of the assessee's sister-concern, M/s. S. Ramachandran & Co., we have upheld the claim that the income of the assessee is to be computed after the completion of the project. We have reached the aforesaid conclusions based on the examination of the contract entered into by the assessee and in light of the fact that, under the contract, the exact sital area on which the assessee is entitled to receive the development charges can be ascertained only upon completion of the project. We have also noticed that in the matter of development of the layout by the assessee on a turnkey basis there are several uncertainties and that there would be lengthy delays that would affect the determination of income as it would be improper to determine income year after year based on the extent of advances received as the correct income cannot be arrived at on that basis considering the uncertainties. Applying the decision so rea....