TaxTMI 
TaxTMI 
1989 (8) TMI 380
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....,47,874 (d) Loans not satisfactorily explained Rs. 1,00,000 Total Rs. 7,00,335 In appeal the learned CIT (A) deleted the addition mentioned at (a) above but confirmed the rest three in toto. 3. Addition of Rs. 2,04,628 A search & seizure action under s. 132 of the Act had been taken on 27th and 29th September, 1984 at the residential as well as business premises of the assessee. During the course of the said search, certain books of accounts, registers and other papers, besides gold ornaments weighing 567.600 grams and silver bars weighing 14.753 kg. were found in possession of the assessee. The assessee was also found having opened as many as 64 accounts in various banks in the names of different persons including himself, his wife, children, relatives and friends. 4. The study of the books of the accounts, registers, documents and other papers, seized as a result of search disclosed upon the ITO that the assessee had been actively engaged in the business of organising housing societies and construction housing units since Financial year 1979-80 without returning any income from those, activities. The ITO further noted that the assessee had maint....
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....d estate and construction business and the amount of collection money of Rs. 20,46.288 represented the gross trading receipts in assessee's hands. In the opinion of the ITO net profit rate at 10 % of the total trading receipts, which was quite reasonable and proper in such type of business, was required to be estimated as assessee's income for the year under consideration. The ITO further rejected assessee's another contention that the expenditure of Rs. 3,37,265 incurred on development of lands be allowed in arriving at the gross profits for the purposes of estimating net profits. In this regard the ITO held that books produced by the assessee were not reliable and that net profit rate is generally applied with reference to the gross profits or sales. The ITO thus estimated assessee's income from the land and estate and construction business at Rs. 2,04,628, i.e. 10% of total trading receipts amounting to Rs. Rs. 20,46,288 and added the same to his total income. 8. In appeal the learned CIT (A) considered the various contentions of the assessee at sufficient length and finally came to the conclusion that it was a clear case of colourable....
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.... the assessee amounted to a 'regular business activity with a motive to earn income'. According to Mr. Shah the assessee, either as the holder of power of attorney of some agriculturists or his having entered into agreements under s. 21 of the Urban Land Ceiling Act with them, was simply engaged in an activity as a developer to assist the illiterate agriculturists in urban areas to develop their lands for residential purposes. It was in the direction of implementing such schemes sanctioned by the authorities concerned under s. 21. of the Urban Land Ceiling Act that the assessee had entered into 'construction agreements' and 'development agreement' with M/s. Baghyodaya Builders for and on behalf of the agriculturists as the holder of their powers of attorney. The learned counsel further submitted that M/s. Bhagyodaya Builders was a genuinely constituted construction concern and as per terms of development agreements entered into by the assessee with that firm the assessee was simply to receive his commission at the rate of 1 % of the project cost and that too upon the completion of the scheme, from the said firm, Mr. Shah emphasised that since no scheme was completed in the year und....
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....pn., (1982) 133 ITR 55 (Guj) and wrongly held that income had accrued to the assessee even though no sale of any residential unit had been completed in favour of any of the prospective buyers in the year under consideration. 13. Finally Mr. Shah submitted that in the facts and circumstances of the case there was no scope for the learned CIT (A) to have doubted the genuine character of M/s. Bhagyodaya Builders and to have read a 'device' for evading the payments of legitimate taxes by the assessee on his income with the help of the principle laid down by the Supreme Court in the case of McDowell and Co. Ltd. v. C.T.O. (1985) 154 ITR 148 (SC). 14. On the other hand Mr. B.R. Kaushik, the learned Sr. Departmental Representative argued with the strain, labour and industry that the present case was a glaring instance of a clear device adopted by the assessee by In course to dubious means for avoiding the payment of legitimate taxes on the income earned by him. Supporting the order under appeal in all respects Mr. Kaushik submitted that if the material on record is considered in right perspective then there can hardly be any escapement from the conclusion that the assessee was not a....
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.... receipts in the hands of the assessee as they had been received by him in the course of carrying on his business activities as a builder and had direct nexus with such activities. Under these circumstances, urged Mr. Kaushik, the authorities below had rightly adopted net profits at 10% of gross trading receipts as making the income of the assessee for the year under consideration. 16. In the end Mr. Kaushik submitted that even if M/s. Bhagyodaya Builders is considered to be a separate assessable entity, a treatment which that concern certainly does not deserve to be given in the facts and circumstances of the case, then the assessee cannot escape from his own liability for taxation. It was submitted that the assessee was canying on comprehensive activities as an organizer of housing societies, developer of land, consultant and builder of residential units and his activities were not limited simply to rendering services to Bhagyodaya Builders. The learned dept. representative further submitted that in appreciating the true facts of the instant case it shall have to be kept in mind that the business activities of the assessee, wherefrom he was declaring no income, were known as r....
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....f agricultural land for NA purposes, permission from Town Planner and permission for conversion of land from the Collector, Baroda were obtained. These permissions were given to the landlords to carry out the scheme sanctioned by the authorities under s. 21 of the Urban Land Ceiling Act and specific conditions were attached to the permissions accorded. In the permission granted by the Addl. Collector Baroda dated 4th May, 1983 it was clearly mentioned that the landlords shall get, if necessary, co-operative housing society registered for the purpose of carrying out the scheme or such a society would be got registered under the Gujarat Ownership Flats Act, 1973 and that progress reports shall have to be submitted to the specified authority on 1st & 15th of every month. The rates of the residential units, at which they could be sold to the prospective buyers/members were also specified by the authorities concerned. It is clear from the permission accorded and the conditions attached thereto that the landlords were to carry out all the activities in the direction of constructing residential units either by themselves or through others. In case they opted to accomplish the said work th....
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....ect of the concerned land and to answer all questions and to execute all documents and to enroll members and receive moneys from them and issue receipts for the same; to sell plots and housing units according to the Scheme and to execute documents for the same and receive moneys and issue receipts for the same; to obtain all necessary permissions for executing Sale Deeds etc. and to register and to give possession thereof and to obtain all necessary permissions from Addl. Collector and to file Applications/Suits before Revenue Collector and other Courts if necessary for obtaining such permissions and to appear before authorities/Courts and to file replies and to settle such suits by negotiations and to do all acts as we would, normally do ourselves in that respect. The said attorney shall also do such construction on the said land as may be permitted and all acts done by him in that respect shall be binding on us. The said attorney shall also have the right to raise loans from any Bank or Financial Institution or Gujarat Housing Finance Co-Op. Society Ltd. and to execute all necessary agreements and documents in respect thereof and to do all acts pertaining theret....
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....d under s. 21 of the Urban Land Ceiling Act, 1976 yet the responsibility of repaying loans, to be received from banks or financial institutions, was undertaken by the assessee himself. Even the landlords were specifically prohibited not to attend to or reply any correspondence received from Government or semi-Government bodies in connection with the execution of the scheme without the consent of the assessee. The powers conferred upon the assessee were to be irrevocable in nature and binding upon the heirs and successors of the landlords. Another specific feature of the Power of Attorney was that it did not oblige the assessee to render any accounts to the landlords or in any way to be accountable to them either for the money received from members or expenditure incurred in connection with the activities undertaken. 21. Power, of Attorney is a subject relating to Law of Agency. Sec, 1A of the Powers of Attorney Act, 1982, as amended by s. 2 of the Powers of Attorney (Amendment) Act. 1982 gives an inclusive definition of the term. According to the definition 'Power of Attorney' includes any instrument empowering a specified person to act for and in the name of person executing it....
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....the discussion to follow the assessee in this case did neither ever intend to act nor did he in fact act for and on behalf of and for the benefit of the agriculturists under the authority of the instrument called Power of Attorney in this case. 23. After having obtained the powers of Attorney from the agriculturists for executing the scheme sanctioned under s. 21 of the Urban Land Ceiling Act, 1976 the assessee is found to have been collecting moneys from prospective buyers of flats or dwelling units and to be carrying on certain activities like advancing huge sums to architects, brokers, supply of building materials etc. Anyway, on or about 19th Nov., 1983 the assessee, in his capacity as the Attorney of one of the agriculturists with Shri Mukundbhai D. Patel and others of Nagarwada, Baroda, entered in to a construction agreement to get the residential units, as sanctioned by the Govt., constructed. It would be worthwhile to reproduce the English version of the said construction agreement here in extenso: "This construction agreement made on 19th Nov., 1983 at Baroda between: (i) Messrs. Bhagyodaya Builders, being Registered Partnership through its Partner Shr....
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..... (7) The first party shall be entitled to recover interest from the members on delayed payments. (8) The second party shall execute any paper that may be required for acquiring controlled material like steel, cement, etc. The second party will, however, not be responsible for any payment in respect thereof. (9) If required, the second party shall sign all papers necessary for procuring water, electricity etc., for purpose of construction of residential units. (10) The first party shall carry out all work as per this agreement. (11) The second party shall not be entitled to cancel this agreement except upon default or breach by the first party. (Emphasis supplied) 24. It may be noted that by Condition No. 2 of the above agreement the construction firm, M/s. Bhagyodaya Builders, was given absolute authority to recover from the prospective buyers the price of the to be constructed flats at the rate fixed by the PWD or as increased from time to time. The said construction firm was further authorised to collect money from the members in their own names and also to collect additional amount for extra items from the members by separ....
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....authorities and also Municipal Corporation at the cost of considerable time and efforts and he has also to carry out all necessary work hereafter to ensure that the project will be completed according to the scheme and proper allotment and registration of the residential units to the enrolled members. (4) As compensation/or the efforts and time spent by the first party for the said scheme, the second party agrees to pay the said first party 1 % of the project cost, for which purpose second party shall, in each year, render necessary accounts, to the said first party in respect of the cost of the project. (5) This agreement shall not be terminated by either party except on serious default of the other party. THIS AGREEMENT has been made by both the parties after due deliberation's which is binding on both of the parties. (Emphasis supplied) It may be noted that by cl. (3) of the above agreement the services tendered by the assessee prior to the commencement of the project for construction of residential units in the direction of getting the scheme under s. 21 of the Urban Land Ceiling Act, 1976 sanctioned from the Government and obtaining r....
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.... Shri Punjabhai P. Patel having 25 % share of profit. Smt. Chhaya K. Amin contributed Rs. 20,000 on 10th July, 1984 and Shri Navin N. Amin contributed Rs. 5,000 in all from 1st Oct., 1984 to 8th Oct., 1984 as their capital. Shri Punjabbhai P. Patel did not contribute any capital to the partnership firm. It is not known who this Punjabbhai P. Patel was whether he was relative or an employee of the appellant or whether an outsider admitted to partnership just to give the firm an appearance of an independent entity. It is pertinent to point out here that the amounts of capital contribution to the partnership firm by Smt. Chhaya K. Amin, wife of the appellant, and Shri Navin N. Amin, brother of the appellant, were from the cash given to them by the appellant himself, because the account of the appellant in the freshly written books after the search has debit entries of cash of Rs. 14,830 in the name of Smt. Chhaya K. Amin and cash Rs. 30,500 in the name of Shri Navin N. Amin. This firm is alleged to have carried the business of construction given by the appellant only. This partnership firm with the capital of Rs. 30,000 contributed by the above named two partn....
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.... on reading the happenings of the things and the conduct of the assessee in chronological order we come to this. In the year 1979-80 he, his brother N.N. Amin and one another, had conceived the idea of entering into the construction business. It was in the direction of achieving that object that in the first instance the assessee had approached the agriculturists to purchase their agricultural lands. Banakhats were got executed. The restrictive provisions of ss. 43 and 63 of the Bombay Tenancy Act, 1948 came in his way. The same objective was sought to be achieved by obtaining the Powers of Attorney from the agriculturists. Scheme under s. 21 of the Urban Land Ceiling Act, 1976 was got sanctioned in the name of agriculturists and necessary permissions of the authorities concerned were subsequently obtained. All these acts were done in the name of the agriculturists, the assessee acting as the holder of their Powers, of Attorney. Here it must be observed that where a scheme under s. 21 of the Urban Land Ceiling Act, 1976 has been sanctioned by the Govt. for the purposes of constructing dwelling units for weaker section of society, such scheme is required to be carried out in true le....
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....ulturists in that behalf in any way. The agriculturists were even debarred from attending to or replying any correspondence received from the Govt. or Semi-Govt. bodies in connection with the implementation of the scheme. In entering into the construction agreement with the firm, M/s. Bhagyodaya Builders the assessee clearly went beyond his powers as the holder of Powers of Attorney of the agriculturists and also flouted the conditions imposed by the authorities while sanctioning the scheme under s. 21 of the Urban Land Ceiling Act, inasmuch as he authorised the construction firm to have direct dealings with the prospective buyers or the members. That was clearly in violation of the terms and conditions imposed by the authorities concerned, particularly the provisions of Gujarat Ownership Flats Act, 1973, as has been pointed out by us above. Then again by entering into yet another agreement called the 'Development Agreement' with M/s Bhagyodaya Builders the assessee got for himself a benefit out of the property of the agriculturists. In doing that obviously he had not acted for and on behalf of and for the benefit of the agriculturists for whom he is stated to be acting as the hold....
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.... as a genuine firm and was treated as such by the ITO by making assessment on it and according registration to it. In this behalf reference was made to the assessment order of the firm dated 29th March, 1988 for asst. yr. 1985-86 and order under s. 184(7) dated 28th March, 1989 for asst. yr. 1986-87. It was submitted that once the said M/s Bhagyodaya Builders has been treated as a separate and independent assessable entity by the ITO the Tribunal should not disturb that position. 32. The Tribunal under the Act is a final fact finding body. Finality to the findings of fact recorded by it is attached; Such finding, lay down the foundation for enunciation of certain legal principles by higher authorities. In view of that importance of the findings of fact of the Tribunal it becomes all the more necessary for it to find out the correct facts in a given case. This jurisdiction of the Tribunal cannot be curtailed or ousted by pointing out at certain events which happen after the controversy, which is sought to be settled by the Tribunal, had arisen. In finding out the true facts in a given case of device, the Tribunal would necessarily be required to consider the very character of one....
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....eedings under s. 34 the ITO found, while proceeding under s. 23(5)(a) of the said Act, that the assessee's son was a mere name lender and that the entire profits representing the share of 10 anas and 8 paise actually belonged to the assessee. The Appellate Tribunal agreed with the findings of the ITO. When the matter came up before the Bombay High Court their Lordships referred to the following observations of Mr. Justice Weston in the case of Kripaldas Motin Dass v. CIT, (1942) 10 ITR 505 (Bom) with approval:. "We have been shown no section in the Income Tax Act which lays down that the registration of a firm operates to estop the income-tax authorities from taxing assessee's who actually received the profits of that firm, and although a question of estoppel may be said to be a point of law, yet, when, as in this case, it is a point of law to which the answer appears so evident, we think we should properly exercise the discretion granted to us under s. 66(3) of the IT Act, and decline to direct the Commissioner to make to us a reference on this point." (Emphasis supplied) The Bombay High Court, therefore, ruled that the ITO was not by reason of the registration ....
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....rder to partake the character of income, as held by the Gujarat High Court in the case of Asha Land Corpn.,-0, receipt must be a part of the profits earned by the assessee. The receipt must assume the character of income before it becomes assessable to income-tax. But these principles do not change the position in the instant case. Herein we clearly find that the assessee: had been engaged in land and estate and construction business since Financial year 1979-80. He declared no income from that source. He had collected the money from the members in the course of such business activities. He was spending the same towards purchasing building material, making payments to architects and brokers. The balance sheet of the landlord account, as maintained by the assessee, even goes to show that he was advancing money out of such receipts to himself and others as well including his wife and brother, who were later on made partners in M/s Bhagyodaya Builders. The landlords were also shown to have been paid huge amounts. If the assessee would have been working as an agent for the landlords and had been appointed so by them to carry out the scheme under s. 21 of the Act, he was not expected, i....
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....was not at all applicable to the peculiar facts and circumstances of the instant case. The learned CIT (A) has rightly distinguished them on facts and we agree with his views on that point. 37. Once it is found to be a case of device wherein the purpose of project behind the formation of M/s Bhagyodaya Builders was simply to serve as a tool in the scheme of the assessee for evading taxes there could be no good reasons for estimating the income of the assessee as per provisions contained in the development agreements entered into by the assessee with M/s Bhagyodaya Builders. On the material placed before us we find that even in the assessment of that firm the I.TO rejected the book results and estimated the net profits of the firm at the rate of 10% of the gross trading receipts. In our opinion the rate for estimating the income of the assessee in the instant case was quite proper and reasonable looking to the nature of the activities carried on by the assessee. 38. To sum up we dismiss ground Nos. I(1), I(2), I(3), II(1), II(2) and II(3), III(1), III(2), III(3), III(4) and III(5) and uphold the findings of the learned CIT(A) on the points covered by those grounds. 39.....
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....ny of the exceptional circumstances nor it was proved that the payments were made in cash our of some commercial expediency. Therefore, he did not find the ratio in the decision of the Gujarat High Court in the case of Hasartand Pinjomal v. CIT, 1977 CTR (Guj) 486 : (1978) 112 ITR 134 (Guj) applicable to the instant case. He thus confirmed the addition of Rs. 3,47,874 made under s. 40A(3) to the total income of the assessee. Mr. Shah has vehemently urged that the learned CIT (A) over looked the fact that cash payment was made to M/s Bhagyodaya Builders and such payments were of the nature of loans or debts. With regard to other expenditure items Mr. Shah urged that the learned CIT (A) has not read the provisions of cl. (j) of r. 6DD of the IT Rules and the Board's circular No. 220 dated 31st May, 1977 in right perspective. It was emphasised that once the identity of the payee and the genuineness of transaction was established by the assessee, as has been done in the instant case according to Mr. Shah, addition under s. 40A(3) could not be made to the income of an assessee. On the other hand Mr. Kaushik supported the order under appeal on the point. 41. We have f....
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....e. The ITO called all the three persons, as mentioned above and examined them. They stated that the amounts in question were given to them by the assesses for the purpose of doing their business. But since the business plan did not materials the money had to be returned to the assessee on 29th Sept., 1.984. The assessee admitted the fact of having made the above loans to the said persons. 45. Though by his affidavit dated 1st Oct., 1.984 the assessee tried to satisfy the ITO that the loan amounting to Rs. 1,00,000, as detailed above, was advanced by him: to his brother and his friends out of the collection money received from the members. However, the ITO noted that in his statement recorded on 29th Sept., 1984 in reply to question No. 26 the assessee had stated that the aforesaid loans represented his cash savings over a period of time. The ITO found the version given by the assessee in his said statement on oath recorded on 29th Sept., 1984 quite believable and acceptable in preference to the later one in the affidavit. He therefore added the amounts of two loans aggregating Rs. 1,00,000 as assessee's income for the year of account under consideration from u....