CIT V. DINESH JAIN

ITA/1817/2010

AI Insights

The case revolves around a series of appeals by the CIT against Dinesh Jain HUF and others concerning alleged unexplained investments in properties, which were assessed under Section 69B of the Income Tax Act. The primary contention was whether the assessee had understated the investment in these properties. The ITAT had earlier deleted the additions made by the Assessing Officer, citing precedents that required direct evidence of understatement, which was lacking in this case. The High Court, referencing various Supreme Court and High Court judgments, upheld the ITAT's decision, noting that the CIT did not meet the burden of proof required to substantiate the claim of understatement of investment.

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 688761 (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; Income Tax; Unexplained investment; Valuation of property; Wealth Tax
• Section: 132; 69B; 260A; 3; 7(1); 52(2)

Judgement Text

"e IN THE HIGH COURT OF DELHI AT NEW DELHI Reserved on : 26ft September.2012. Date of D'ecision : 28s September.2012. + + ITA1667/2010 ITA 85/2011 CIT versus DINESH JAIN HUF ITA 1800t2010 ITA 1803/2010 rTA l80s/20r0 ITA 1807 /2070 ITA 1809/20t0 ITA 181r/20r0 ITA l8r2/20r0 ITA 18t3/20t0 rTAt967/2010 ITA t972/20r0 CIT + + + -r + + + I -r + + + + + + + + + LATA JAIN ITA 1815/2010 rTA 1816 t20t0 ITA 1817/2010 ITA 1818/2010 ITA l8t9/2010 ITA 1968/2010 ITA t969/20r0 ..... Appellant ..... Respondent ..... Appellant ..... Respondent ITA No.l66712010 & 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 r97112010 ..... Appellant versus DINESH JAIN ..... Respondent Presence : Mr. Sanjeev Sabharwal, sr. standing counsel with Mr. Puneet Gupta, jr. standing counsel and Ms. Gayatri Verma, Adv. for revenue. Mr. Ajay Vohra, Ms. Kavita Jha and Mr. Vaibhav Kulkarni, Advs. for respondent. CORAM: MR. JUSTICE S. RAVINDRA BHAT MR. JUSTICE R.V. EASWAR I . 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.l814/2010. hI*. (R.V. EASWAR) JUDGE (s. RAVTNDRA BHAT) JUDGE SEPTEMBER 28,2012 vld ITA No.l66712010 & conn. Page? of2 |.- . 7'- IN THE HIGH COURT OF DELHI AT NEW DELHI % Reserved on : 26ft Septernber.2012. Date of Decision : 28ft September.2012. ..... Appellant ..... Respondent ..... Appellant ..... Respondent Page I of10 + + rTA t667/2010 ITA 85/2011 CIT i t) t versus DINESH JAIN.TIJF 'ITA 1800/2010 ITA 1803/2010 ITA 1805/2010 ITA 1807/2010 ITA 1809/2010 ITA 181 IlzOLO ITA 1812/2010 ITA 1813/2010 rTA 196712010 TTA L972I2OIO CIT vefsus LATA JAIN ITA 1814/2010 ITA 181s/2010 ITA 18T6/20T0 ITA 1817/2010 ITA 1818/2010 ITA 1819 1201,0 ITA 196812010 + + + + + + + -r f + + + + + '+ + + ITA No.l814/2010 & conn. + + + ITA 196912010 ITA 1970/2010 'ITA I97I/2010 CIT versus DINESH JAIN ..... Appellant ..... Respondent Presence : Mr. Sanjeev Sabharwal, sr. standing counsel with Mr. Puneet .Gupta, jr. standing counsel and Ms. Gayatri Verma, Adv. for revenue. . Mr.Ajuy 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 refened to the Reporters or not? ) 3. Whether the judgment should be reported in the Digest? 1 R.V. EASWAR. J:: These are appeals filed by the Commissioner 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 Gommon substantial questions of law were framed by the court on3-2-201I: \"Whether learned ITAT erred in deleting the addition made by the Assessing Officer on account of unexplained investment in rent yie.lding property by applying the provisions of Rule 3 of Par B of 3'o Schedule to the Wealth Tax Act? \" - ITANo.l814/2010 & conn. Page 2 of 10 2. ITA No.18l4/20t0 has by consent of the parties been taken as the lead matter. The facts necessary for our pur?ose 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, investrnent irt various properties by the assessee. One such property was Flat No.306, Palm Court, Sukharali Chowk, Gurgaon, which was pluchased for Rs.17,55,000. The Assesping Officer noticed that this was a c6mmercial property which was'fetching a rent of Rs.7.02 lakhs per annum. He .was of the view that a property which was fetching such a substantial rental incorn6.could not have been acquired for Rs.17.55 lakhs. Almost 40% 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 l}Yo per annum. He therefore took the view that the assessee must have invested more than what was disclosed in the sale document which attracted the provisions of Section 69B 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 annualised maintainable rent\" of the property at Rs.6,63,000 and multiplying the same by 12.5 as provided in the Rule cited above; arrived at the value of the property at Rs.82,87,500 and held that \"that is the valuation or the amount which the assessee must have paid\". The difJerence between value of the property 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 under 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 made under sec.69B was Rs. 1,3 8,26,450. 4. The assessee filed an appeal against the assessment and questioned, inter alia, the addition made under section 698. Besides challenging the adoption of ITA No. I 814/2010 & conn. Page 3 of l0 u /4, 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 sarne 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-monies over and above the stated consideration. 5. The CIT(A) obtained a remand report from the Assessini 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 as purchase price cannot be taken as sacrosanct and that the Assessing Officer can go behind it and find out the \"cotrect 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.27,98,268 for Flat No.6 and Rs.22,57,97 5 for Flat No.3 06. 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 (r98r) 131 ITR 597 and cIT vs shivakami company (P) Ltd. (1996) 159 ITR 71 and the judgments of this court n CIT vs Shakuntala Devi in ITA No.345i2007, CIT vs Asholc Khetrapal (2007) 294 ITR 143 and CIT vs Manoj Jain (2006) 287 ITR 28s. 7. We should have thought that the question is concluded by the judgments 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 permit 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 l4l2010 & conn. Page 4 of l0 t-1. I impossible to obtain. He points out to what he describes as \"disproportionately high returns for the investment\" in the properties - the rental income is 40%.of the investment in the firsi year, and that would not have been possible unless a . much higher amount than what was declared had been invested by the assessee. The returns, 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 arguments are certainly attractive but the language ernployed by Section 698 is the first stumbling blbck which Mr. Sabharwal has to overcome. The seotion is in the following terms: ,,SECTION 698 - AMOUNT OF INTESTMENTS, ETC., NOT , .FULLY DISCLOSED IN BOOKS OF ACCOUNT. . Where in 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, jewellery or other valuable article exceeds the . amount recorded in this. behalf in the books 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, tn the opinion of the Assessing Officer, satisfactory, the excess amount may be deemed to be the tncome of the assesseefor suchfinancialyear.\" The section in terms requires that the Assessing Officer has to first \"find'i 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 explatration. Till the initial burden is discharged by the Assessing Officer, the seition remains dormant. 9. A \"finding\" obviously should rest on evidence. In the present case, it is cofilmon ground that no incriminating material was seized during the search ITA No. l814/2010 & conn. Page 5 of 10 . which revealed any understatement of the purchase price. That is precisely the reas6n why the Assessing Officer had to resort to Rule 3 of Schedule III to the Wealth Tax Act. This Rule does not even claim to estimate the \"fair market value\" of an asset; it merely lays down a procedure for cornputing 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. 1-4-1989 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 f,rctional, a willing seller ' and a willing buyer, all fictional. This fiction facilitated a realistic estimation of the fair market value of the properfy, and it moved with the ups and downs of the market. Not anymore. From I-4-I989, the value was frozen. For all times to corne, an imrnovable properfy that fetches rent shall be valued at 72.5 tirnes 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 , fo 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 Wealth Tax Act as it stood before I-4-I989, we a\"re to estimate the fair market value of the aiset; after this date, it is 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 property in Connaught Place to his son B, B pays nothing for the property; the properfy may command a.market price of several crores. If \"A\", because of his love and affection for \"B\", sells the properly for Rupee One to \"8\"; in this case, the consideration paid is only Rupee One, though the properfy is worth several rnillions. If the Assessing Officer having jurisdiction over \"B\" has to make an addition under section 698, he can do so only if he \"flnds\" that B has \"expended\" money which he has not fully recorded in this books of account; he cannot make any iTA No.1814/2010 & conn. Page 6 of 10 addition merely because the properfy could fetch several crore of rupees in the market. 11. Section 698 does not permit an inference to be drawn from the circumstances surrounding the transaction that the purchaser of the properly must have paid more than what was actually recorded in his books of account for the simple reason that such an inference could be very s_ubjective and could involve.the dangerouji consequence of a notional or fictional income being brought to tax contary to the strict provisions of'Article 265 of t}re Constitution of India and Entry 82 inl,ist I of the seventh schedule thereto which deals with \"Ta.xes on income other than agriculfural income\". This was one of the major '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 Parliament cannot choose to tax as income an item which in no rational sense can be regarded as a citizen's income or even receipt. Section 52(2) (whicl1 now stands omitted) applied to the transferor of properfy for I consideratioh that was lesser than the fair rnarket value by 15% or more; 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 compute 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 market value of the properfy as the understatement. The sub-section was held to provide for a \"statutory best judgment\" once actual ' understatement was proved; it obviated the need to prove the exact amount of I understatement. Additional reasons for the result were (a) that the marginal note to the section referred to \"cases of understatement\"; (b) the speech of the ' Finance Minister while introducing the provision; and (c) 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. Whiie the omitted section 52(2) applied to the transferor of the properfy, .section 698 applies to the transferee - the purchaser - of the property. It refers ITA N0.1814/2010 & conn. Page 7 of 10 @) /'i-l* I ,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. Applylttg the logic and reasonin g n K.P. Vargheie (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 understatement of the consideration (investment) in the books of account. Once that undervaluation is established as a matter of fact, the Assessing Off,rcer, in 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 ttre extent of understatement of the investment. One such yardstick can be the fair market value of the property 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 anived at by us that the Assessing Officer did not gather foundatioqal 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 step in the process of applying section 69B - that of proving understatement of the investment - and apply the measure of understatement. If anything, the language employed in sectibn 698 is in stricter'terms than the erstwhile sectibn 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 seem to require the Assessing Offrcer even to show the exact extent of understatement 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 exterit of the understatement. There is no authority given by the section to adopt solne reasonable yardstick to measure the extent of understatement. But since it may 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 some acceptable basis of iTANo.l814/2010 & conn. Page 8 of l0 .- ascertaining the market value of the properly. to assess the undisclosed investment. Whether the basis adopted by the Assessing Officer is an acceptable one'or not may depend on thei 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 'l ;;#Hl-#,',T1: il::l\"JJffliff l'*a'ing in trade circres At page \"Adverting to the various probabiltties which weighed with the Income-tax Officer we may observe that the notoriety for smuggling food grains. and other commodtties to Bengal by country boats acquired by Sahibgunj and the notoriety achteved by Dhttlian as a great receiving centre for such commodities were ' merely.a background of suspicion and the appellant could not, be . tarred with the same brush as every arhatdar and grain merchant who might have been indutging in smuggling operations, without an iota of evidence in that behalf,\" ,J *:\"'$nJ;:il1s,$:ffirtTfd:Hffii:l:'#:T:[T'ff;T'ff . consideration for transfer ofproperties. 15. Sincs 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 69B 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. ITANo.l8142010 & conn. Page 9 of 10 ^/ (V 16. Since the basis'of the additions made in all the other cases is the sulme as in ITA No.igt+/2010, the substantial questions of law in those cases are also ' similarly answered. 17. The appeals filed by the CIT are dismissed with no order as to costs. I lr I M .-.u+'. (RJ/. EASWAR) JTIDGE (s. RAVINDRA BHAT) JI]DGE L, , SEPTEMBER 28,20L2 vld ITA No. l8 l412010 & conn. 10 ' 6 ' 'r Page 10 of I t "