TMI Blog1999 (1) TMI 65X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 encrochment. 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 Assessing Officer that the provisions of section 45(4) of Income-tax 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 Assessing Officer rejected the explanations and replies of the partners as not satisfactory. The Assessing Officer observed that the assessee-firm has 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 partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Assessing Officer in his order. In order to support his arguments and contentions, he placed reliance on the following decisions :--- (i) K.P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13 (SC), (ii) CIT v. Shoorji Vallabhdas Co. [1962] 46 ITR 144 (SC), (iii) CIT v. Motor Credit Co. (P.) Ltd. [1981] 127 ITR 572/6 Taxman 63 (Mad.), Departmental SLP was dismissed (iv) CIT v. Calcutta Discount Co. Ltd. [1973] 91 ITR 8 (SC) and (v) ITO v. Baijnath Sheo Kumar 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 assessment year 1993-94 passed under section 143(3) in the case of Wasudeo Khemchandani placed at page 46 of the paper book and in the computation of the incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 DR 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 section 45 of Income-tax Act. He relied on the decision of Supreme Court in the case of Kartikeya V. Sarabhai v. CIT [1997] 228 ITR 163/94 Taxman 164. Placing reliance on another Supreme Court's decision in the case of McDowell Co. Ltd. v. CTO [1985] 154 ITR 148/22 Taxman (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o not fall within the scheme of capital gain under section 45 of Income-tax Act. As provisions of section 45 are applicable only to capital asset, but, in the instant case, it is trading asset, and not the capital asset. Capital gain is 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 clause (9) of the agreement between Associate Builders and the Municipal Corporation of Amravathi, dated 28-3-1990 which runs as under : "The land described in Schedule '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 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 dee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer, the assessee has not charged premium. The Assessing Officer 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 through 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 dated 9-9-1996 page 29). It has admitted and mentioned by the Assessing Officer in para 10 of his assessment order. (iii) that "the total contribution of such funds is in the house of Rs. 70 lakhs, as can be seen from balance-sheet. In view of all these, no premium is taken from Om Prakash Khemchandani and Sri Wasudeo Khemchandani as they have provided huge interest free f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partment by bringing evidence and materials on record, the benefit from business cannot be assessed on presumptions and surmises. 31. In view of this, it cannot be said that benefit has arisen to the assessee from business transactions. Therefore, the provisions of section 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. 32. 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 5-9-1996 as per the assessee's letter dated 5-9-1996 placed at page 42 of the paper book. Thus, what emerges from the above facts is that after transfer of 60 percent 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 dated 27-8-1996 placed at pages 37 to 39 of the paper book, the assessee has already explain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial facts have not been controverted by the Assessing Officer by bringing any evidence on record. The Assessing Officer 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. 36. Coming to the practical aspect of the matter, we find from the assessee's letter dated 5-9-1996 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 dated 5-9-1996 placed at page 41 of the paper book. We further observe and find from para 6 of the assessee's letter dated 9-9-1996 placed at page 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 as against the cost of 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 witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Calcutta Discount Co. Ltd. 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 Assessing Officer has no right to dictate the terms to the assessee or estimate the income in the cases of firm and the partners. 39. In the case of Shoorji Vallabhdas Co., 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 Assessing Officer does not materialise and ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtment 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. 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 instant case of firm and partners, neither colourable devices nor dubious methods, if any adopted by the assessees are proved by bringing on record necessary evidences or materials. In view of this, such contentions cannot be entertained. 42. The next contention of the learned DR 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 Assessing Officer has not proved the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... books of account of the partners. It is also noticed that the department has also accepted the same position for assessment year 1994-95 under section 143(1) before search and for assessment year 1995-96 after the date of search, as it is exhibited by the computation of income and intimation placed at pages 51 and 52 and 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 the 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. 45. The department cannot blow hot and cold in the same breath as no incriminating documents and materials are found are seized. As no evidence or materials are collected on enquiry by the Assessing Officer to corroborate, the change of stand on surmises and hypothetical and imaginary basis to assess the notional income, is not justified. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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