CIT V. LATA JAIN

ITA/1807/2010

AI Insights

The case revolves around a series of appeals by the Commissioner of Income-tax against Dinesh Jain HUF concerning alleged unexplained investments in properties, which were assessed under section 69B of the Income Tax Act, 1961. The primary legal question was whether the Income Tax Appellate Tribunal erred in deleting the additions made by the Assessing Officer, who had applied the provisions of Rule 3 of Part B of the 3rd Schedule to the Wealth Tax Act to estimate the fair market value of the properties. The Tribunal's decision was based on precedents that required direct evidence of understatement of consideration, which was lacking in this case. The High Court, referencing various Supreme Court and High Court judgments, affirmed the Tribunal's decision, emphasizing that mere suspicion or inference of understatement without concrete evidence does not suffice to invoke section 69B.

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 720335 (HC-DELHI)
• Appeal Type: Others
• Pronouncement Date: 28-09-2012
• Assessment Year: misc
• Other Referred Cases: K.P. Varghese vs ITO, CIT vs Shivakami Company (P) Ltd., CIT vs Shakuntala Devi, CIT vs Ashok Khetrapal, CIT vs Manoj Jain, Lalchand Bhagat Ambica Ram Vs. Commissioner of Income Tax, Bihar and Orissa
• Laws Referred To: Income Tax Act, 1961, Wealth Tax Act, 1957, Evidence Act, Stamp Act
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: AJAY VOHRA; KAVITA JHA; VAIBHAV KULKARNI
• Assessee Lawyers: SANJEEV SABHARWAL; PUNEET GUPTA; GAYATRI VERMA
• Keywords: Assessment; Market value; Rent yielding property; Understatement of consideration; Unexplained investment; Valuation
• Section: 132; 69B; 260A; 7(1); 75; 57

Judgement Text

"IN THE HIGH COURT OF DELHI AT NEW DELHI Reserved on : 26ft September.20l2. Date of Decision : 28ft September. 2012. + + ITAt667/2010 ITA 85/2011 CIT + + + + -r + + + + -r versus DINESH JAIN HUF rrA 1800/2010 rrA 1803/2010 rrA 1805/2010 ITA 1807 /2010 ITA r809/20r0 ITA l81l/2010 rrA'18 r2l20r0 ITA 1813/2010 rrL 1967/2010 rTAt972/20r0 CIT LATA JAIN ITA 1815/2010 rrA 1816 12010 ITA 18r712010 ITA 181 812010 rrA 181912010 ITA 1968/2010 ITA 196912010 ..... Appellant ..... Respondent ..... Appellant ..;.. Respondent + + -r + + -r + ITA No. 1667/2010 & conn. Page I of2 Signing Date:07.09.2024 17:11:16 Certify that the digital and physical file have been compared and the digital data is as per the physical file and no page is missing. Signature Not Verified + ITA + ITA CIT 1970/2010 t97U2010 versus DINESH JAIN Presence : Mr. Sanjeev Sabharwal, sr. standing counsel with Mr. Puneet Gupta, jr. standing counsel and Ms. Gayatri Verma, Adv. for revenue. Mr. Ajriy Vohra, Ms. Kavita Jha and Mr. Vaibhav Kulkarni, Advs. for respondent. CORAM: MR. JUSTICE S. RAVINDRA BHAT MR. JUSTICE R.V. EASWAR 1 . Whether Reporters of local papers may be allowed to see the judgment? 2. To be referred to the Reporters or not? 3. Whether the judgment should be reported in the Digest? R.V. EASWAR, J.: For order, see ITA No. 18 1412010. t{..,-,,-r. (R.V.EASWAR) JUDGE ..... Appellant ..... Respondent (s. RA rINDRA BHAT) JUDGE SEPTEMBER 28,2012 vld ITA No. 1667/2010 & conn. Page2 of2 IN THE HIGH COURT OF'DELIII AT NEW DELHI /) / t ./ r / ,1 / ,/ i i Reserved on : 26il'septernber. 2012. Date of Decision : 28tn Sbptember.2012. + + rTA 166712010 ITA 85/2011 CIT I versus DINESH JAIN HUF ITA 1800/2010 rrA 1803/2010 ITA 180s/20r0 ITA 180712010 rTA 1809/2010 ITA 181 r/20r0 ITA 1812/20t0 ITA 1813/2010 rTA1967l20l0 TTA T972I2OTO CIT ..... Appellant ..... Respondent ..... Appellant ..... Respondent Page I ofl0 + + + + + + + + + + vetsus + + + + + + + LATA JAIN ITA 18T4/2OTO rTA 1815?010 ITA 1816/2010 ITA 1817/2010 ITA 1818/2010 ITA 1819/2010 ITA 196812010 ITA No.l 8 l4l2010 & conn. + + + IT1^.1969/2010 ITA 1970/2010 ITAr9Tt/20t0 CIT versus DINESH JAIN I j G/ ..... Appellant ..... Respondent Presence : Mr. Sanjeev Sabharwal, sr. standing counsel with Mr. Puneet Gupta, jr. standing counsel and Ms. Gayatri Venna, Adv. for revenue. Mr.Ajay Vohra, Ms. Kavita Jha and Mr. Vaibhav Kulkarni, Advs. for respondent CORAM: MR. JUSTICE S. RAVIIYDRA BHA]I MRJ JUSTICE R..V. EASWAR 1. Wrether Reporters of local papers may be allowed to see the judgrnent? 2.Tobe referred to the Reporters or not? Y 3. Whether the judgment should be reported in the Digest? y R.V. EASW.dR, J.: These are appeals filed by the Cornmissioner of Income-tax under section 260A of the Income Tax Act, 1961 (\"Act\") against the orders of the Income Tax Appellate Tribunal (\"Tribunal\"). The following common substantial questions of law were framed by the court on3-2-20II: \"Whether learned ITAT erred in deleting the additton ntade by the Assessing Officer on account of unexplained investment tn rent yielding property by applying the provisions of Rule j of Par B of 3'o Schedule to the Wealth Tax Act? \" . ITA No. I E l4l2010 & conn. Page 2 of 10 1.. l., 2. ITA No.18l4/20t0 has by consent of the parties been taken as the lead riatter. The facts necessary for our purpose in brief are that there was a search operation under sec.132 of the Act in the residential and business premises of the assessee Dinesh Jain on 9-12-2003. The materials seized during the search revealed, inter alia, investment in various properties by the assessee. One such property was Flat No.306, Palm Court, Sukharali Chowk, Gurgaon, which was purchased for Rs.17,55,000. The Assessing Officer noticed that this was a commercial properfy which was fetching a rent of Rs.7.02 lakhs per annum. He was of the view that a properly which was fetching such a substantial rental incorne.could not have been acquired for Rs.17.55 laktrs. Ahnost 40o/o of the investment was being got back by the assessee by way of rent every year, which was disproportionally high in comparison with the amount invested. According to him, returns on investment were in the range of l0% per annuln. He therefore took the view that the assessee must have invested more than what was disblosed in the sale document r,vhich attracted the provisions of Section 698 of the Act. He called upon the assessee to explain the position. The assessee denied investing anything over and above the amount declared in the document. The Assessing Officer however concluded that the fair market value of the properfy should be estimated in accordance with Rule 3 of the Schedule III to the Wealth Tax Act, 1957. He accordingly calculated the \"net annua$sed maintainable rent\" of the properfy at Rs.6,63,000 and multiplying the sarne.by 12.5 as provided in the Rule cited above, arrived at the value of the properfy at Rs.82,87,500. and held that \"that is the valuation or the amount which the assessee rnust have paid\". The difference between value of the properfy calculated in accordance with the Rule and the amount shown in the sale document came to Rs.65,32,500 which was assessed as unexplained investment ,ntd\"t sec.69B. 3. Similar addition was made in respect of another property (Flat No.6 in the same building) acquired by the assessee and the total addition rnade under sec.69B was Rs.1,38,26,450. , 4. The assessee filed an appeal against the assessment and questioned, inter alia, the\"addition made under section 698. Besides challenging the adoption of ITANo.l814/2010 & conn. Page 3 of 10 the value of the. properties calculated on the basis of Rule 3 of Schedule III to the Wealth Tax Act for purposes of comparison and for ascertaining the alleged unexplained portion of the purchase consideration, the assessee also adduced evidence in the form of comparable properties in the same building, such as Flat No.511 and several other instances to demonstrate that the price shown to have been paid by the assessee, as per the sale document, represented the real and actual consideration for the properties and nothing was paid as on-lnonies over and above the stated consideration. , 5. The CIT(A) obtained a remand report from the Assessing Officer. The assessee filed rejoinder to the same. On a consideration of all the facts and the evidence, the CIT(A), following his decision taken in the earlier year, held that 'the amount declared by the assessee ab purchase price cannot be taken as sacrosanct and that the Assessing Officer can go behind it and find out the \"correct and fair valuations of the imrnovable properties due to the fact that no direct evidences in these transactions can be gathered\". In this view of the matter, he upheld the view taken by the Assessing Officer in principle. However, he reduced the additions to Rs.27,98,269 for Flat No.6 and Rs.22,57,975 for Flat No.306. 6. There were cross-appeals by the assessee and the revenue before the Tribunal. The Tribunal, following its earlier order dated 30-9-2009 in the assessee's case for some earlier years, deleted the entire addition made under sec.69B, following the judgments of the Supreme Court in K.P. Varghese vs ITo (198L) 131 ITR 597 and cITvs shivakami Company (p) Ltd. (t996) 159 ITR 71 and the judgments of this court in CIT vs Shakuntala Devi in ITA No.345/2007, CIT vs Ashok Khetrapal Q007) 294 ITR 143 and CIT vs Manoj Jain (2006) 287 ITR 285. 7 . We should have thought that the question is concluded by the judgrnents cited above, both of the Supreme Court and of this court, but the contention of Mr. Sabharwal for the revenue is that where the facts and circumstances pennit an inference of understatement of consideration, it is not necessary to look for direct evidence of understatement which, in the very nature of things, is ITA No. I 8 l4l201 0 & conn. Page 4 ofl0 :l rl Gv irnpossible to obtain. He points out to what he describes as \"disproportionately high refurns for the investment\" in the properties - the rental income is 40o/o of the investment in the firsi year, and that would not have been possible unless a rquch higher amount than what was declared had been invested by the assessee. The refurns, according to him, are so high that they shock the conscience of the court. He contends that judicial notice can be taken note of the fact, under section 57 of the Evidence Act, that riotifications have been issued under section 75 of the Stamp Act prescribing circle rates for the properties and rarely do properties get transferred for such rates. 8. These argurnents are certainly attractive but the language ernployed by Section 698 is the first stumbling block which Mr. Sabharwal has to overcorne. The section is in the following terms: ,,SECTION 698 - AMOLTNT OF INT/ESTMENTS, ETC., NOT FULLY DISCLOSED IN BOOKS OF ACCOUNT. Where tn any financial year the assessee has made investments or is found to be the owner of any bullion, jewellery, or other valuable article, and the Assessing officer finds that the amount expended on making such investments or in acquiring such bullion, jewelleyy or other valuable article exceeds the amount recorded ii thts behalf in the boolcs of account maintained by the assessee for any source of income, and the assessee offers no explanation about such excess amount or the explanation offered by him is not, in the opinion of the Assessing Officer, .satisfactory, the excess amount may be deemed to be the income of the assessee for suchfinancial year. \" The section in terms requires that the Assessing Officer has to first \"find\" that the assessee has \"expended\" an amount which he has not fully recorded in his books of account. It is only then that the burden shifts to the assessee to furnish a satisfactory explanation. Till the initial burden is discharged by the Assessing Officer, the section remains dormant. 9. A \"finding\" obviously should rest on evidence. In the present case, it is comlnon ground that no incriminating material was seized during the search ITA No. l814/2010 & conn. Page 5 of l0 which revealed any understatement of the purchase price. That is precisely the reason why the Assessing OfFrcer had to resort to Rule 3 of Schedule III to the Wealth Tax Act. This Rule does not even claim to estirnate the \"fair market value\" of an asset; it'merely lays down a procedure for computing the value of an asset for the purposes of the Wealth Tax Act. The Schedule derives its authority from Section 7(1) of the Wealth Tax Act. The section, as it now stands, has dropped all pretensions to ascertaining the fair market value of an asset for the purposes of the Wealth Tax Act. Prior to the amendment made w.e.f. I-4-I989 the section provided for the estimation of the fair market value of an asset on the principle of what it would fetch if sold in the open market. This involved an assumption of an open market, be it fictional, a willing seller and a willing buyer, all fictional. This fiction facilitated a realistic estimation of the fair rnarket value of the properfy, and it rnoved with the ups and downs of the market. Not anymore. From I-4-1989, the value was frozen. For all times to come, an imrnovable properfy that fetches rent shall be valued at 12.5 times the net maintainable rent. 10. There is a fundamental fallacy in invoking the provisions of the Wealth Tax Act to the application of section 698 of the Income Tax Act, notwithstanding that both the Acts are cognate and have even been said to constitute an integrated scheme of taxation. Under the Income Tax Act, we are to find what was the real and actual consideration paid by the assessee and. whether the fuIl consideration has been recorded in the books. Under section 7(1) of the 'V/ealth Tax Act as it stood before I-4-I989, we are to estirnate the fair market value of the asset; after this date, it i's not even estimation of the fair market value, but computation of the value of the asset on the basis of certain rules prescribed by the statute. If A dies leaving prime properfy in Connaught Place to his son B, B pays nothing for the property; the properfy may command a r4arket price of several crores. If \"A\", because of his love and affection for \"B', sells the properly for Rupee One to \"B\"; in this case, the consideration paid is only Rupee One, though the property is worth several rnillions. If the Assessing Officer having jurisdiction over \"8\" has to make an addition under section 698, he can do so only if he \"finds\" that B has \"expended\" money which he has not fully recorded in this books of account; he cannot rnake any ITA No.l814/2010 & conn. Page 6 of 10 .: a ), 7 fetch several crore ofrupees in the 'l addition merely because the property could market. 11. Secticjn 698 does not permit an inference to be drawn from the circumstances^surrounding the transaction that the purchaser of the property must have paid more than what was actually recorded in his books of account for the sirnple reason that such an inference could be very subjective and could involve the dangeroujr consequence of a notional or fictional income being brought tci tax contrary to the strict provisions of Article 265 of the Constitution of India and Entry 82 in List I of the seventh schedule thereto which deals with \"Taxes on income other than agriculfural income\". This was one of the majoi considerations that weighed with the Supreme Court in K.P. Varghese (supra) in which case the provisions of .sub-section (2) of section 52 fell for interpretation. It was observed that Parliarnent cannot choose to tax as income an itern which in no rational sense can be regarded as a citizen's income or even receipt. Section 52(2) (which now stands omitted) applied to the transferor of properfy for a consideration that was lesser than the fair rnarket value by 15% or lnore; in such a case, the Assessing Officer was conferred the power to adopt the fair market value of the properly as the sale price and cornpute the capital gains accordingly. The Supreme Court held that it was the burden of the Assessing Officer to prove that there was understatement of consideration and once that burden was discharged it was not required of him to prove the precise extent of understatement and he could adopt the difference between the stated consideration and the fair rnarket value of the properly as the understatement. The sub-section was held to provide for a \"stafutory best judgrnent\" once actual understatement was proved; it obviated the need to prove the exact amount of understaternent. Additional reasons for the result were (a) that the marginal note to the section refe*ed to \"cases of understatement\"; (b) the'speech of the Finance Minister while iirtroducing the provision; and (\") the absurd or irrational results that would flow from a literal interpretation of the sub-section, ' which could not have been intended by the legislature. 12. While the omitted section 52(2) applied to the transferor of the properly, section 698 applies to the transferee - the purchaser - of the properly. It refers ITANo.18l420l0 & conn. Page 7 of l0 l', I to the money \"expended\" by the assessee, but not recorded in his books of account, which is a clear reference to undisclosed incorne being used in the investment. Applying the logic and reasoning in K.P. Varghese (supra) it seems to us that even for the purposes of Section 698 it is the burden of the Assessing Officer to first prove that there was understaternent of the consideration (investment) in the books of account. Once that undervaluation is established as a matter of fact, the Assessing Officer, ir1 the absence of any satisfactory explanation from the assessee as to the source of the undisclosed portion of the investment, can proceed to adopt some dependable or reliable yardstick with which to measure the extent of understatement of the investment. One such yardstick can be the fair market value of the properfy determined in accordance with the Wealth Tax Act. We however clarify that this Court is not concluding that such yardstick is determinative; in view of the findings arrived at by us that the Assessing Officer did not gather foundational facts to point to undervaluation the adoption of the norms under.the Wealth Tax Act is not commented upon by us. 13. The grror committed by the income-tax authorities in the present case is to jump the first gtep in the process of applying section 698 - that of proving understatement of the investment - and apply the measure of understaternent. If . anything, the language employed in section 698 is in stricter terms than the erstwhile section 52(2).It does not even authorise the adoption of any yardstick to measure the precise extent of understatement. There can therefore be no compromise in the application of the section. It would seern to require the Assessing Officer even to show the exact extent of understaternent of the investment; it does not even give the Assessing Officer the option of applying any reasonable yardstick to measure the precise extent of understatement of the investment once the fact of understatement is proved. It appears to us that the Assessing Officer is not only required to prove understatement of the purchase price, but also to show the precise extent of the understatetnent. There is no authority given by the section to adopt sorne reasonable yardstick to rneasure the extent of understatement. But since it rnay not be possible in all cases to prove the precise or exact amount of undisclosed investment, it is perhaps . reasonable to permit the Assessing Officer to rely on sorre acceptable basis of ITA No. I 814/2010 & conn. Page 8 ofl0 /'i rl @) '-T, l. ascertaining the market value of the properfy. to assess the undisclosed investment. Whether the basis adopted by the Assessing officer is an acceptable one or not rnay depend on the facts and circumstances of the particular case. That question may however arise only when actual understatement is first proved by the Assessing Officer. It is only to this extent that the rigour of the burden placed on the Assessing Officer may be relaxed in cases where there is evidence to show understatement of the investment. but evidence to show the precise extent thereof is lacking. 14. In Lalchand Bhagat Ambica Ram Vs, Commissioner of Income Tax, 'Bihar and orissa (1959) 37 ITR 288, the Supreme Court disapproved the practice of making additions in the assessments on mere suspicion and surmise or by taking note of the notorious practices prevailing in trade circles. At page 299 of the report, it was observed as follows : \"Adverting to the various probabilities which weighed wtth the Income-tax Officer we may observe that the notoriety for . smuggling food grains and other commodities to Bengal by country boats acquired by Sahibgunj and the notoriety achieved by Dhulian as a great receiving centre for such commoditfes were merely a background of susptcion and the appellant could not be tarred with the same brush as eyery arhatdar and grain merchant who might have been indulging in smuggling operattons, without ioto of evidence in that behalf \" This takes care of the argument of Mr. Sabharwal that judicial notice can be taken of the practice prevailing in the property market of not disclosing the full consideration for transfer of properties. 15. Since the entire case has proceeded on the assumption that there was understatement of the investment, without a finding that the assessee invested more than what was recorded in the books of account, we are unable to approve of the decision of the income-tax authorities. Section 698 was wrongly invoked. The order of the Tribunal is approved; the substantial question of law is answered in the negative, in favour of the assessee and against the CIT. ITA No. I 814/201 0 & conn. Page 9 of l0 v L6. Since the basis of the additions made rn all the other cases is the same as in ITA No.1814/2010, the substantial questions of law in those cases are also sirnilarly answered. I7. The appeals filed by the CIT are dismissed with no order as to costs. t ' l. I M *'*+'. cn.v.EAswAR) JUDGE SEPTEMBER 28,2012 vld (s. RAVINDRA BHAT) JT]DGE ITA No.l8l4/2010 & conn. 10 Page 10 of tt I i I ,,7 t. :i {is' "