TMI Blog2001 (12) TMI 194X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant liable to tax as income in regular assessment much more as undisclosed income in the block inasmuch as the existence of the appellant was known to the Department as the appellant has been assessed to tax before the date of search and its activities are also known to the Department before the date of search and, therefore, the income from such activities could not be considered as undisclosed income; (iv) The disallowance of certain items which are debited to the contractors' accounts and shown in the balance sheet treated as undisclosed income; and (v) The computation of undisclosed income from out of the seized materials. 2. Brief facts of the case are as under: The assessee is a co-operative society formed with a view to acquire lands by purchase or otherwise, form residential layouts and allot sites therein to its members with different contractors as under: S. No. Name of the contractor Project at Amount debited to contractor as advance as on 31-3-96 Status of completion as on the date of search Rs. 1. M/s S.G.R. Enterprises Shri Rampura Layout 2,40,48,120 Not c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... date of search and even has yet MUDA has also not given the completion certificate of the project on this count. There are in total 756 sites allotted to the various members. In this project only a part of the electrification has been done. The underground drainage is not yet completed, road topping (asphalting) has not been done, other civic amenities like development of parks, etc. have not been done. Out of 756 allottees about 70 allottees have constructed houses and are living without these facilities. Therefore, it was submitted that the members formed association called M/s Madhubana Badavane Keshma Abhivrudi Sangha and have been agitating for completing the project early and in their anger and frustration they went to making wild and reckless allegations against the management and Shri D.T.S. Rao alleging that they have swindled the funds of the society with the contractor, M/s S.G.R. Enterprises. It was submitted that the society way back in the year 1985 entrusted the formation of the layout to one firm called M/s S.G.R. Enterprises on turnkey basis which is one among the pioneers and leaders in this field. It was stated that for diverse reasons the project could not be co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en to M/s S.G.R. Enterprise are debited to their accounts and are not even claimed as an item of expenditure. The amount paid by the members of the society towards the sites is not taken as income in the accounts and that, therefore, no profit arose for the years ended on 31st March, 1994, 31st March, 1995, and 31st March, 1996, being the three previous years forming part of the block period in view of the search on 6th Feb., 1996. 4. Insofar as the project at Satgalli layout is concerned, it was submitted that the amounts were being paid to one contractor, Shri Ramchandra Char, and these were debited to the accounts and shown in the balance sheet. Insofar as M/s Raghvendra Constructions, M/s Sky Top Builders and M/s Divine Constructions are concerned, the amounts incurred on these projects were debited to the contractors' accounts and they were not claimed as an item of expenditure. It was also stated that the civil suits have been filed by the appellant's society against M/s Raghvendra Constructions, M/s Sky Top Builders and M/s Divine Constructions for the recovery of the advances obtained by them from the assessee-society and they were given to understand that these suits we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f authorisation was executed on 6th Feb., 1996, when search officials entered the premises, made a thorough search thereafter they retired from the premises and thus the search became an accomplished fact factually and there was nothing further for the officials to search the entire or any part of the premises which have already been searched. The subsequent visits are in pursuant to the executed warrant and not by issuance of a fresh warrant and it is necessary to have a fresh warrant to search the premises under the normal laws. What the Department did was to visit the premises purport to search on the basis of the executed warrant which is impermissible and therefore, the search in this case was concluded on 6th Feb., 1996, itself, and, therefore, the last date for completion of the assessment must be reckoned to be 28th Feb., 1997, only. Accordingly, it is contended that the block assessment order is time-barred. In support, Sri Venkatesan, places reliance on the decisions of the Bangalore Bench in the cases of Kirloskar Investments Finance Ltd. vs. Asstt. CIT (1998) 67 ITD 504 (Bang) and Microland Ltd. vs. Asstt. CIT (1999) 63 TTJ (Bang) 701 : (1998) 67 ITD 446 (Bang). 8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Feb., 1996, confirms the continuity of the search, we have to negative the arguments of Shri Venkatesan on this count. 10. The search on 22nd Feb., 1996, was continued on the next day i.e., 23rd Feb, 1996, which is recorded in the Panchnama drawn up on 23rd Feb., 1996, placed at pp. 15 and 16 of the assessee's paper book. Further, the search on 23rd Feb., 1996, has resulted in certain seizures which are inventorised in the Panchnama dt. 23rd Feb., 1996. Here, the order under s. 132(3) of the Act passed earlier on 22nd Feb., 1996, has also been continued. Finally, on 25th April, 1996, a Panchnama has been drawn up wherein the said order under s. 132(3) is stated to be revoked and on this day, there was no search or seizure of any valuables and other assets that were kept in the P.O. The search proceedings are stated to have been closed. The Panchnama dt. 25th April, 1996, is placed at pp. 21 and 22 of the assessee's paper book. 11. Shri Venkatesan contends that the Panchnama drawn on 25th April, 1996, is not a Panchnama of the search but it is merely a record of the visit by the ADI to the assessee's premises. Further, according to Shri Venkatesan, the sole purpose of the visi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... practical difficulty in seizing certain other material, which are continued in the P.O. and not seized at all later. Besides, the Department has also not brought any material to show that there was some difficulty in seizing any material and, therefore, the order under s. 132(3) passed was valid. Further, we also find that on 25th April, 1996, also there was no search; the material, other documents or other valuables that were kept in the P.O. have not have seized. Hence, after 23rd Feb., 1996, till 25th April, 1996, the Department has not done anything tangible to consider that the search was still in progress. Therefore, we are of the considered opinion that the search must be considered to have been completed at best on 23rd Feb., 1996, itself if not on 6th Feb., 1996, but certainly not on 25th April, 1996, which is the date of the last Panchnama where there was no search or seizure. From this point of view the assessment made is barred by limitation. We are supported in our view by the following decisions of the Bangalore Bench: (1) Kirloskar Investment Finance Ltd.; (2) Microloand; (3) Sri T.S. Chandrashekar (4) Esanda Finance Leasing Ltd. in IT (SS) No. 1136/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on below sub-s. (2) of s. 288, nominated by the (Chief CIT or CIT) in this behalf and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed and such other particulars as the AO may require. Sec. 142(2B): The provisions of sub-s. (2A) shall have effect not withstanding that the accounts of the assessee have been audited under any other law for the time being in force or otherwise. Sec. 142(2C): Every report under sub-s. (2A) shall be furnished by the assessee to the AO within such period as may be specified by the AO: Provided that the AO may, on an application made in this behalf by the assessee and for any good and sufficient reason, extend the said period by such further period or periods as he thinks fit; so, however, that the aggregate of the period originally fixed and the period or periods so extended shall not, in any case, exceed one hundred and eighty days from the date on which the direction under sub-s. (2A) is received by the assessee." 15. Shi S. Venkatesan, the learned counsel for the assessee, contends that in terms of the proviso to s. 142(2A), the appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the proviso. Therefore, in our view the said judgment is not applicable to the facts of the assessee's case. Here the assessee's challenge is the very approval for extension granted by the AO without the assessee making an application for the extension of time. A plain reading of the proviso makes it clear that the application for extension of time can be made on an application by the assessee. In the instant case, there is no such application that has been made by the assessee. Therefore, we have to hold that the extension granted by the AO on the application of the auditor, dt. 12th May, 1997, is illegal and, therefore, bad in law and not in conformity with the provisions of s. 142(2A) of the Act. Hence, the period available for the AO for exclusion under s. 158BE must be considered as 3 months only. 17. The impugned order of assessment is completed on 31st Oct., 1997, which ought to have been completed on or before 31st May, 1997, after excluding the period of 3 months commencing from 7th Feb., 1997, to 6th May, 1997, on account of the special audit. We have already held that the closure of search must be reckoned to have been completed on 23rd Feb., 1996, and, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rding to the learned authorised representative the case of the assessee squarely falls within the ratio of the decisions of the Hon'ble Supreme Court in Chelmsford Club vs. CIT (2000) 159 CTR (SC) 235 : (2000) 243 ITR 89 (SC) and CIT vs. Bankipur Club Ltd. (1997) 140 CTR (SC) 1 : (1997) 226 ITR 97 (SC), the income of the assessee housing society is exempt on the principle of mutuality for which proposition he also relies on the following decisions tendered in the case of similar societies: (i) CIT vs. Adarsh Co-op. Housing Society (1995) 123 CTR (Guj) 425 : (1995) 213 ITR 677 (Guj); (ii) CIT vs. Apsara Co-op. Housing Society (1994) 204 ITR 662 (Cal) and (iii) Ludhiana Agarwal Co-op. Housing Society vs. ITO (1995) 55 ITD 423 (Chd). 21. Shri Venkatesan then took us through the audit report of the statutory auditor appointed under s. 142(2A) of the Act, wherein at p. 13 the auditors appointed under s. 142(2A) have categorically stated that the income of the society cannot be computed as the projects are still in various stages of pendency. He pleaded that in the event mutuality is denied then as the assessee-society is following the completed contract method of accounting, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 CTR (Ker) 103 : (1990) 188 ITR 192 (Ker); (3) Mohan Meakin Breweries Ltd. vs. CIT (1979) 117 ITR 504 (Guj); (4) CIT vs. ITI Employees Death and Superannuation Benefit Relief Fund (1999) 153 CTR (Kar) 530 : (1999) 234 ITR 308 (Kar); (5) CIT vs. Delhi Stock Exchange Association Ltd. (1957) 32 ITR 3 (Del); (6) Truck Operators' Union vs. CIT (1981) 22 CTR (Del) 137 : (1981) 132 ITR 62 (Del); (7) Jamshedpur Co-op. Stores Ltd. vs. CIT (1985) 49 CTR (Pat) 134 : (1985) 157 ITR 127 (Pat); (8) Bihar Rajya Sikshak Sahyog Sangh Ltd. vs. CIT (1987) 62 CTR (Pat) 108 : (1987) 165 ITR 681 (Pat); (9) Sports Club of Gujarat Ltd. (1988) 67 CTR (Guj) 233 : (1988) 171 ITR 504 (Guj); (10) Cochin Cottage Ind. Co-op. Mktg. Society Ltd. vs. CIT (1956) 30 ITR 356 (Ker); (11) Bellary Distt. Mine Owners Ltd. vs. CIT (1964) 53 ITR 632 (Mys); (12) Hatkesh Co-op. Housing Society Ltd. vs. ITO (1996) 60 ITD 662 (Mumbai). We have gone through the decisions cited by the learned Departmental Representative and the submissions of Shri Venkatesan distinguishing the same. We find that the decisions relied upon by the Departmental Representative are all distinguishable on facts. The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in fact they have confirmed the receipt of the advance. He submitted that Shri R. Sridhar of M/s S.G.R. Enterprises has also filed an affidavit clarifying the position. Similarly, he submitted that Sri Ramachandrachar, one other contractor had also confirmed the receipt of the advances. He submitted that these two are the major contractors and after the initial fear and shock during the search the said contractors have verified the factual position and made a conscious statement accepting the advances received. The other contractor, viz. M/s Raghavendra Constructions, who have denied receiving the money, have also done so to deny the society refund of the advances given to them. He submitted that in many such cases, suits have been instituted by the society for recovery of the money as the projects are yet to take off. Therefore, the denial of these contractors is understandable and he pleaded that no adverse inference on this score should be drawn. Further, Shri Venkatesan, effectively distinguished the case law relied upon by the learned Departmental Representative on the point of mutuality and pleaded that the decision of the Hon'ble Supreme Court in Chelmsford Club shall be ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y law made under this legislative entry can impose a tax only on income and not under any other head. The IT Act is a law made under this entry. Hence, it is futile to contend that the levy of tax under s. 22 of the Act is a tax levied on property and not on income from property. This view finds support from a reading of s. 4 of the Act which is the charging section. This section unequivocally shows that the levy is on income. A conjoint reading of ss. 2(24), 14, 22 and 23 of the Act also makes it abundently clear that what is being taxed under s. 22 is the "deemed income" of an assessee from the property owned by him. The assessee, a members club, provided recreational and refreshment facilities exclusively to its members and their guests. Its facilities were not available to non-members. The club was run on 'no profit no loss' basis that the members paid for all their expenses and were not entitled to any share in the profits. Surplus, if any, was used for maintenance and development of the club. The club house was owned by the assessee. The assessee claimed that it was a mutual concern and so the annual letting value of the club house was not assessable. The claim was rejecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out by the enquiry conducted, these monies which are drawn in the names of members of managing committee are nothing but the expenditure on the project of the assessee which was incurred at the instance of the contractors. Thus, on this count also the denial of exemption by the AO on the principle of mutuality is not justified. Accordingly, we hold that the assessee-society is entitled to exemption of its income on the ground of mutuality. We are supported in arriving at this conclusion by the ratio of the following decisions which were cited by Shri Venkatesan during the course of hearing: (i) Chelmsford Club vs. CIT; (ii) CIT vs. Bankipur Club vs. ITO; (iii) Adarsh Co-op. Housing Society; (iv) Apsara Co-op. Housing Society; and (v) Ludhiana Agarwal Co-op. Housing Society. 28. The next contention of the assessee was with reference to the completed contract method of accounting. The AO himself in the order has not disputed that the projects undertaken by the assessee-company is still incomplete. In accordance with the provisions of s. 145 of the Act, the choice of the method of accounting to be employed is with the assessee. The assessee is entitled to adopt such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent order. It is true that for the sake of convenience and as a measure of control, the payments made to contractors are monitored by keeping watch on the end use of the funds. In some cases payments are also made by staff to the societies itself under the instruction from the contractor. In this case, some expenditure that have been incurred on the project cost which no doubt has to be incurred by the contractor was paid by the society itself by drawing money from its bank account. The society debited the contractor in respect of the payments made. The contractor have also confirmed having incurred these expenditure on behalf of the society. Thus, there is no room to doubt as to whether these monies were drawn by the directors and utilised for their personal use. Further, the search in the residence of the directors also has not revealed any undisclosed assets in the possession of the directors. Therefore, it is unreasonable to hold that funds of the society were drawn by the director and diverted for their personal purposes. We have already held that the income of the society which has been denied exemption on the principle of mutuality, on this ground is not justified. According ..... X X X X Extracts X X X X X X X X Extracts X X X X
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