RAJPAL YADAV, J.M. assessee is in appeal before us against order of learned CIT(A), Cen. V, Mumbai, dt. 25th Feb., 2005 passed for asst. yr. 2000-01. grievance o f assessee relates to determination of its income at Rs. 57,66,020 as against returned total income of Rs. 32,660. AO has made addition of Rs. 57,33,558 by estimating income of assessee at 12 per cent of total cost of construction capitalised in books of account. 2 . brief facts of case are that assessee is private limited company incorporated on 2nd Nov., 1 99 3 with main object of construction and development of real estate. In pursuance of its object it has purchased plot of land bearing No. 61, Oberoi Complex, New Link Road, Andheri (W), Mumbai, from Shri Vikas Oberoi in previous year 1 99 5- 9 6 for consideration of Rs. 20 lakhs. Simultaneously, in this very previous year it had purchased TDR from one Shri Sadashiv Dhandu for Rs. 74,37,500. When assessee started its construction activity it estimated cost on construction of project at Rs. 4.75 crores approximately and it was decided that company would construct property out of contribution from shareholders and bank loans. However, after sometime it was felt that sooner or later borrowing from banks would be required to be repaid, therefore, it was decided that such repayment would be made from funds collected from its members and in lieu o f that company would amend its articles of association, thereby authorizing shareholder holding particular number of shares to use premises. In this connection, assessee had amended its articles of association specifically article Nos. 5, 8 and 9 to 16 and Appen. 1 of articles of association. Accordingly, it has allowed shareholders to use premises and filed its return of income for asst. yr. 2000-01 declaring total income at Rs. 32,600 as per audited P&L a/c. Learned AO was not satisfied with result declared by assessee and therefore, he passed assessment order under s. 143(3) r/w s. 144 and assessed income of assessee on notional basis at 12 per cent of total cost of project capitalized in books of account and thereby worked out total addition at Rs. 57,33,358. While doing so, learned AO took aid from decision of Hon ble Supreme Court rendered in case ofMcDowell & Co. Ltd. vs. CTO (1 9 85) 47 CTR (SC) 126 : (1 9 85) 154 ITR 148 (SC). According to AO amendment in articles of association is colourable device. While doing so learned AO, taken into consideration following facts and assigned following reasons which have been summarily noticed by learned CIT(A) as under : "(1) That assessee company was incorporated on 2nd Nov., 1 99 3 as private limited company with subscribed and issued/paid-up capital of Rs. 300 (30 shares of Rs. 10 each). promoters/directors of company were Shri Ranvir V. Oberoi, Smt. Santosh R. Oberoi and Shri Vikas R. Oberoi, all members of Oberoi Group, engaged in business of real estate development and construction. (2) That main objects of assessee company at time of incorporation, which were in force till asst. yr. 2000-01, were "to carry on business of builders, machinery and general construction and contractors and to carry on business of proprietors of lands, flats...........", which showed that main object was related to carrying out business in real estate and it was never object of company to become mutual society for property management for members without any business motive. ancillary clauses were also related to carrying out business activity only. (3) That assessee did not start/carry out its business activities till asst. yr. 1 99 5- 9 6. In asst. yr. 1 99 6- 9 7, assessee filed its return of income on 30th Nov., 1 99 6, declaring its nature of business/profession as "construction". In audit report method of accounting was declared as accrual. director s report during that year declared that construction activity of commercial project was in full swing and as project was not yet completed, there was no operating surplus. basis of accounting followed by company was stated to be project completion method. In that year, company purchased land from one of its directors, Sh. Vikas R. Oberoi, for Rs. 20 lakhs and TDR for starting construction of abovesaid project. During course of assessment proceedings for asst. yr. 1 99 6- 9 7, assessee submitted, vide its letter dt. 25th Feb., 1 999 , that it was engaged in construction and development of real estate and only project carried on by assessee was in respect of aforesaid commercial building at "Oberoi Chambers". It was also stated that assessee had not yet completed project and had not been able to sell single unit therein. (4) That, during assessment proceedings for asst. yr. 1 99 8- 99 also, similar averments were made by assessee. It was also,inter alia,stated that, as on 31st March, 1 99 8, said building was under construction and that assessee had not sold any of units therein. It was further stated that construction of building was completed in financial year 1 999 -2000 at total cost of about Rs. 4.80 crores. (5) That, in return for asst. yr. 1 999 -2000 filed on 31st Dec., 1 999 , it was,inter alia,stated that proceeds from sale of units were shown as advances received from flat holders and that same would be offered on completion of project. In Sch. 6 of balance sheet relating to current liabilities and provisions, amount of Rs. 1 lakh from M/s Jasmina Avlani and advance of Rs. 51 lakhs from Shree Adhikari Brothers Television Network were shown as trade advances. At item No. 10 of assessee s submissions dt. 7th Dec., 2001 for that year, it was stated that assessee company belonged to Oberoi Group of companies and that Oberoi Consultancy Services (P) Ltd. ( OCSPL ) was providing infrastructural and administrative facilities to assessee, for which amount of Rs. 2, 9 ,000 was paid to OCSPL. (6) return for asst. yr. 2000-01 (under consideration) was filed on 26th July, 2001, as against due date of filing of return upto 30th Nov., 2000. Though audit report was dt. 27th Sept., 2000, same was filed with return of income only. nature of business/ profession was declared as construction and method of account was declared as mercantile. In Sch. 9 of note forming part of accounts, company stated that it followed project completion method of accounting for declaring profits derived from construction business. For first time, it was also stated in notes to accounts for this year that, in terms of articles of association shareholders holding specified number of shares and interest-free construction contribution towards cost of construction of building were entitled to use, sublet, exploit or transfer specified class of premises. In view of above claim of assessee and, being building constructed out of contribution from members, no depreciation was provided on building though company was technical owner of building. For first time, no directors report or auditors report, as required under IT Act, was attached to return of income. During course of assessment proceedings, it was claimed by assessee that building was constructed from construction contributions received from its members, which was in line with articles of association of assessee company, and that rights of usage were accordingly granted to members. said premises (WIP) was capitalized during year under consideration. Thus, it was only during year under consideration, when said project was completed, that assessee changed its stand and method of accounting by not offering profit on project and by transferring property to alleged occupants adopting colourable device. (7) That funds for construction of project had been sourced from original members/promoters/directors of company, namely, Shri Ranvir V. Oberoi, Smt. Santosh R. Oberoi and Sh. Vikas R. Oberoi in form of shareholdings and unsecured loans; secured loans of Rs. 2 crores were also taken from Karnataka Bank Ltd. for construction of project, which nullified contention of assessee that construction costs were met from members contributions, who were occupants of premises, as present occupants never contributed before completion of project and total cost contributed by present occupants was only Rs. 3, 99 ,15,000 as against capitalized value of Rs. 4,77,77, 9 85. (8) That construction of project was started in asst. yr. 1 99 6- 9 7, when land and TDR was purchased. Till end of asst. yr. 1 999 -2000, assessee was claiming that project was not complete. However, details of expenditure incurred on project from year to year indicated that most of project was completed by 31st March, 1 999 and only nominal cost of Rs. 63,10,110 was incurred in asst. yr. 2000-01. In other words, project was more than 86 per cent complete as on 31st March, 1 999 . Though occupation certificate was dt. 8th Oct., 1 999 , construction of building was completed much earlier and from above facts, it could be inferred that was completed much earlier and from above facts, it could be inferred that amendment in articles of association was made only after completion of project with motive of avoiding payment of taxes. ( 9 ) That major occupants of constructed building were not original shareholders of company. original shareholders of company till asst. yr. 1 999 -2000 were Sh. Ranvir Oberoi (holding 3,33,334 shares of Rs. 10 each), Smt. Santosh Oberoi (holding 3,33,333 shares of Rs. 10 each) and Sh. Vikas Oberoi (holding 3,33,333 shares of Rs. 10 each). However, as on 31st March, 2000, i.e.,in asst. yr. 2000-01, shareholders were as under : Sl. No. of shares Name No. held Shree Adhikari Television 1. 3, 9 6,600 Network Ltd. 2. Ranvir Oberoi 71,034 3. Vikas Oberoi 1,63,333 4. Santosh Oberoi 1,65,033 5. Biru Oberoi 1,00,000 6. Freight Lines India Pvt. Ltd. 1,05,000 Total 10,00,000 xx xx xx (14) That conduct of alleged occupants, M/s Shree Adhikari Brothers Television Network and Freight Lines India clearly indicate that they h d purchased premises and had not occupied it as member of assessee company. Both of them had claimed depreciation under IT Act, which was allowable only to assessees who were owners of assets, either wholly or partly, and had used same for purposes of business. other occupant, Ms. Bindu Oberoi, had also shown rental income from said premises as owner of property under s. 22 of Act. (15) That assessee had not charged any compensation for allowing alleged occupation of its premises by abovenamed persons. It was unconscionable to think that any person who was owner of premises and doing business of construction allowed it to be occupied and used by others for their own business purposes, even though they may be shareholders, without taking any compensation, which was declared object of assessee company as per its memorandum of association. assessee company had given away all its rights in premises for exploitation by others in violation of its object clause as declared in memorandum of association. ** ** ** (18) That value paid to shareholders was on account of investments made by them and their beneficial rights in assets of assessee company and they had, in turn, paid taxes on their respective income arising on sale of their assets. (1 9 ) That company is separate and distinct legal entity from its shareholders. Sub-cl. (iii) of s. 2(31) of Act defines, "company" as separate taxable unit. Income of company is, therefore, required to be computed separately and assessed in hands of company itself. shareholders have no rights in assets of company, except when dividends are declared or when assets of company are distributed on liquidation. Portions of such income, when distributed as, or deemed to be, dividends amongst shareholders are separately liable to be included in total income of recipient, because of separateness in two entities. Thus, income accruing to assessee on completion of project cannot be parted with by company without there being any express provision in law. Reliance has been placed by AO on several judgments mentioned at p. 21 of assessment order. ** ** ** ** ** ** (22) That taxing authorities are not required to put blinkers while looking at documents produced before them and are entitled to look into surrounding circumstances to find out reality of recitals made in those documents. IT authorities are entitled to go behind apparent to find out real and, if transaction appears to be non-genuine, sham or collusive affair intended to evade tax liability, they can ignore transaction. Reliance has been placed by AO on judgments of apex Court in cases ofCIT v s . Durga Prasad Moore 1 9 73 CTR (SC) 500 : (1 9 71) 82 ITR 540 (SC)andSumati Dayal vs. CIT (1 99 5) 125 CTR (SC) 124 : (1 99 5) 214 ITR 801 (SC),and of Tribunal, Mumbai, in case ofKantilal Manilal & Co. vs. Dy. CIT (2002) 77 TTJ (Mumbai) 332 : (2002) 82 ITD 354 (Mumbai). (23) That facts of assessee s case were distinguishable from facts in case ofShree Nirmal Construction(supra)inasmuch as in that case genuineness of benefits of arrangements between that company and lessees was not in dispute and building had been constructed from share capital contribution of shareholders from very start of business. In present case, however, construction had been carried out with unsecured and secured loans and entire transaction, which took place only after completion of project, was collusive one. (24) That any change in method of accounting, which was notbona fidecould not be accepted under s. 145 of Act. (25) That in view of peculiar facts and complications of case and, taking into consideration percentage stipulated under provisions of s. 44AD of Act for estimation of profits in construction activity in cases where turnover does not exceed Rs. 40 lakhs, it would be appropriate to apply rate of 12 per cent on cost of construction (i.e., Rs. 4,77,77, 9 85) for estimating net profits of assessee, which worked out to Rs. 55,33,358." 3 . Dissatisfied with addition, assessee carried matter in appeal before learned CIT(A). It has challenged order of AO on ground that AO has no jurisdiction to frame assessment order under s. 143(3) r/w s. 144 because both these provisions operate in different fields and assessee has duly complied with all notices and submitted all required details, therefore, AO ought not to have framed assessment by applying s. 144 of Act. On merit, it was contended that assessee has amended articles of association within parameter of law provided in Companies Act and AO failed to point out as to how amendment of articles of association is illegal which can indicate that device adopted by assessee is colourable device. Learned first appellate authority has gone through all contentions of assessee and briefly noticed reasons assigned by AO for estimating income of assessee and rejected contentions of assessee. 4 . Dissatisfied with order of learned Revenue authorities below assessee is in appeal before us. 5. Shri P.J. Pardiwala, learned counsel for assessee, while impugning orders of Revenue authorities below submitted that assessee had amended its articles of association within framework of law provided in Companies Act and assessee had introduced three new members only. He invited our attention towards cl. (iii)(b)of s. 27 and contended that assessee s shareholders would be regarded as deemed owners of premises. In this connection, he drew our attention towards cl. (2) of s. 26 9 UA(d).He emphasized on point that if sub-s. (iii)(b)of s. 27 s. 2(47)(vi) are read together then it will indicate that rights which accrued to shareholder would be regarded as ownership of property. On strength of these provisions, according to him property can be held through company and shareholders can be regarded as owner, to extent shares representing t h e property. Elaborating his arguments, he pointed out that whenever shareholders would sell their shares capital gain tax would be taxable, thus, capital gain tax otherwise taxable in hands of shareholders how it can be taxed in hands of assessee as business gain. He emphasized on point that when shares are transferred to new shareholders, capital gain tax has been offered for tax by original shareholders and this fact has not been disputed by Revenue. Otherwise, company is owner of property. Contribution from shareholders is shown as loan. Work-in-progress is shown in current account and since asst. yr. 2000-01, property was occupied by shareholders, therefore, no depreciation was claimed by assessee on building. It has not shown rental income, not claimed any depreciation. Only maintenance charges it has received and those have been depreciation. Only maintenance charges it has received and those have been shown in books of account. Under Company Law, no doubt, assessee company is owner of property but IT Act recognizes shareholders occupying property as deemed owners. 6. While controverting contention of Authorised Representative, learned Departmental Representative relied upon order of AO, particularly reasons extracted above. He emphasized on point that it is commercial project started in 1 99 3 with share capital of Rs. 300. Only three persons were in company. From very start of business till completion of project, assessee has been showing project completion method as its accounting policy for declaring profit and, therefore, till 1 99 8- 99 it has not declared any income. If for moment we ignore amendment of articles of association then it would indicate that it was commercial project which would have resulted income to assessee and by amending articles of association it has diverted its income, thus it is colourable device to avoid tax and AO has rightly taxed income. 7 . We heard both sides in detail and considered issue. There is no prohibition in IT Act for company permitting its members on conditions and considerations agreed upon to exercise right ofde factoownership of property legally owned by company. common medium of ownership of residential apartments is co-operative societies. But, there is no hitch if same activity is carried out by company either. Sec. 27(iii)provides that member of co-operative society, company or other AOP to whom building or part thereof is allotted or leased under house building scheme of society, company or association, as case may be, shall be deemed to be owner of that building or part thereof. IT law itself has recognized thelocus standi ofa company through above provisions to legally hold properties and at same time allot thede factoownership to its members. When members hold such property or part thereof by way of right conferred upon them through allotment made by company, members shall be treated as thede factoowners of property and rental income, if any, arising to them shall be assessed as rental income in their hands and not in hands of company. dual ownership of property that is legally owned by company andde factoby members is accepted position in IT law. 8. concepts of ownership and earning income therefrom are different from similar corresponding concepts embodied in provisions of general law like Transfer of Properties Act, Indian Registration Act, etc. law has recognized different types of mediums through which persons could accomplish their activities of owning properties and like that. In present case, company has amended its articles of association so as to enable it to allot its members right of occupation and enjoyment of flats. This is perfectly within law. main objection of Revenue is that assessee company was contemplating construction activities as business proposition and for intervening assessment years in past, company has stated before authorities that profit on construction and sale of building would be disclosed and offered for taxation when project would be completed. It is in last moment, when project was completed that company has made somersault and allotted properties to its members claiming that company has not sold any flats to its members. This last minute change over to new scheme was to evade payment of tax and this is nothing but colourable device. 9 . assessee is at his own freedom to arrange his matters in such way that he derives maximum benefit out of venture. It might have been initial object of company to construct buildings and sell them and earn profit therefrom. Thereafter, company might have analysed existing market conditions and other financial parameters and found that it would be more appropriate and beneficial for promoters and members of company to retain legal ownership of building with company and allot right to use to members. It might have been again true that by this scheme, company and its members might have managed their financial affairs as well as tax obligations in more fruitful manner. But, nobody can stop company from changing strategies from time to time because it is its own domain to decide how it should proceed with project. In present case, change over made by assessee company was strictly in accordance with law of land. assessee company has amended its articles of association enabling it to change over within enabling provisions of Companies Act. members of over within enabling provisions of Companies Act. members of company, who have let out their allotted flats have offered rental income in their hands. Whenever they sell those properties in future those allottee members are liable for capital gains, if any. assessee company has paid off bank loans from contributions received from members. After allotting flats to members, only activity carried on by assessee company is to maintain property and for that matter, collect subscriptions from members and incur necessary expenditure. company has withdrawn itself from active role ofde factoownership of property and same has been conferred upon allottee members. Therefore, any liability that may arise out of sale or transfer of property will be considered in hands of respective allottee members. 10. In facts and circumstances of case, we are of considered view that there is nothing improper or unlawful in present case where company has allotted property of building to its members with right to use and enjoy property perpetually. Therefore, we find that there was no sale or deemed sale by company of property to its members and company has not earned any income by way of transfer of right to use property to its allottee members. Therefore, there is no reason to make estimated addition of Rs. 57,33,358 towards profit from business of assessee company. It is, therefore, deleted. 11. In result, appeal of assessee is allowed. *** WESTWIND REALTORS (P) LTD. v. DEPUTY COMMISSIONER OF INCOME TAX