Cit v. Dinesh J Ain

% IN THE HIGH COURT OF DELHI AT NEW DELHI Reserved on : 26^ September. 2012. Date of Decision : 28^ September. 2012. + ITA 1667/2010 + ITA 85/2011 CIT versus DINESHJAINHUF + ITA 1800/2010 + ITA 1803/2010 + ITA 1805/2010 + ITA 1807/2010 + ITA 1809/2010 + ITA 1811/2010 + ITA 1812/2010 + ITA 1813/2010 + ITA 1967/2010 + ITA 1972/2010 CIT versus LATA JAIN + ITA 1815/2010 + ITA 1816/2010 + ITA 1817/2010 + ITA 1818/2010 + ITA 1819/2010 + ITA 1968/2010 + ITA 1969/2010 ITA No. 1667/2010 & conn. Appellant Respondent Appellant Respondent Page 1 of2 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. (: + ITA 1970/2010 + ITA 1971/2010 CIT versus DINESH JAIN Appellant Respondent Presence: Mr. SanjeevSabharwal,sr. standingcounselwithMr.Puneet Gupta,jr. standingcounselandMs. GayatriVerma,Adv. for revenue. Mr. AjayVohra,Ms. KavitaJhaandMr. VaibhavKulkarni, Advs. for respondent. CORAM: MR. JUSTICE S. RAVINDRA BHAT MR. JUSTICE R.V. EASWAR

¶1Whether,Reportersof localpapersmay beallowedto seethejudgment?

¶2To be referred to the Reporters or not?

¶3Whetherthejudgmentshouldbereportedinthe Digest? R.V. EASWAR. J.: For order, see ITA No.1814/2010. SEPTEMBER 28, 2012 vld ITANo.1667/2010 & conn. 0) (R.V. EASWAR) JUDGE (S. RAVINDRA BHAT) JUDGE Page 2 of2 A IN THE HIGH COURT OF DELHI AT Ni:W DELHI % + ITA 1667/2010 + ITA 85/2011 CIT versus DINESH JAIN tlUF ITA 1800/2010 + ITA 1803/2010 ITA 1805/2010 ITA 1807/2010 ITA 1809/2010 ITA 1811/2010 ITA 1812/2010 ITA 1813/2010 + ITA 1967/2010 + ITA 1972/2010 CIT versus LATA JAIN ITA 1814/2010 ITA 1815/2010 ITA 1816/2010 ITA 1817/2010 ITA 1818/2010 ITA 1819/2010 ITA 1968/2010 ITA No. 1814/2010 & conn. Reserved on : 26"^ September, 2012. Date of Decision : 28"^ September, 2012 Appellant Respondent Appellant Respondent Pcii.e 1 of 10 + ITA 1969/2010 -I-ITA 1970/2010 + ITA 1971/2010 CIT versus DINESH JAIN Appellant Respondent Presence ; Mi". Sanjeev Sabharwal, sr. standing counsel with Mr. Puneet Gupta,jr. standing counsel and Ms. Gayatri Verma, Adv. for revenue. Ml". Ajay Volii-a,Ms. Kavita Jha and Mr. Vaibhav Kulkarni, Advs. for respondent. CORAM: MR. JUSTICE S. RAVINDRA BHAT MR. JUSTICE R.V. EASWAR

¶1Whether Reporters of local papers may be allowed to see the judgment? Yes

¶2To be referred to the Reporters or not? Yes

¶3Whether the judgment should be reported in the Digest? R.V. EASWAR, J.: These are appeals filed by the Commissioner of Income-tax under section 260A of the Income Tax Act, 1961 ("Acf) against the orders of the Income Tax Appellate Tribunal ("Tribunal"). The following common substantial questions of law were framed by the court on 3-2-2011: "Whether learned ITAT erred in deleting the addition made by the Assessing Officer on account of unexplained investment in rent yielding property by applying the provisions of Rule 3 of Par B of Schedule to the Wealth Tax Act? " ITAN0.I8M/2OIO & conn.

¶2ITA No.1814/2010 has by consent of the parties been taken as tlie lead matter. The facts necessary for our purpose in brief are that there was a search operationunder sec.132 of the Act in the residentialand businesspremisesof 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 propertywas Flat No.306,Palm Court, SukharaliChowk, Gurgaon,which was purchased for Rs.17,55,000. The Assessing Officer noticed that this was a commercialpropertywhichwas fetchinga rent of Rs.7.02laldisper annum. He was of the view that a property which was fetching such a substantialrental income could not have been acquired for Rs.17.55 laldrs. Almost 40% of the investmentwas being got back by the assesseeby way of rent every year, which was disproportionallyhigh in comparisonwith the amountinvested.According to him, returns on investment were in the range of 10% 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 property should be estimatedin accordancewith Rule 3 of the ScheduleIII to the Wealth Tax Act, 1957. He accordingly calculated the "net annuahsed 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 difference 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.

¶3Similar 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. 1,38,26,450.

¶4The assessee filed an appeal against the assessment and questioned, inter' alia, the addition made under section 69B. Besides challenging the adoption of ITA No. 1814/2010 & conn. )- the value of the properties calculatedon the basis of Rule 3 of ScheduleIII to the WealthTax Act for puiposes of comparisonand for ascertainingthe alleged unexplainedportion of the purchase consideration,the assessee also adduced evidence in the form of comparableproperties 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,representedthe 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 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 as 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 immovable properties due to the fact thai 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 prmciple. However, he reduced the additions to Rs.27,98,268 for Flat No.6 and Rs.22,57,975 for Flat No.306.

¶6There 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 v-s' ITO (1981) 131 ITR 597 and CIT vs Shivakami Company (P) Ltd. (1986) 159 ITR 71 and the judgments of this court in CIT vs Shakuntala Devi in ITA No.345/2007, CIT vs Ashok Khetmpal (2007) 294 ITR 143 and CIT vs Manoj Jain {1006) m ITR 285.

¶7We should have thought that the question is concluded by the judgments cited above, both of the Supreme Court and of this comt, but the contention of Ml". 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. 1814/2010 & conn. impossibleto obtain. He points out to what he describesas "disproportionately high returns for the investment"in the properties-the rental income is 40% of the investment in the first year, and that would not have been possible unless a much higher amount than what was declaredhad 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 notifications have been issued under section 75 of the Stamp Act prescribingcircle rates for the properties and rarely do properties get transferred for such rates.

¶8These arguments are certainly attractive but the language employed by Section 69B is the first stumbling block which Mi". Sabharwal has to overcome. The section is in the foUowing terms: "SECTION 69B - AMOUNT OF INVESTMENTS, ETC., NOT FULLY DISCLOSED IN BOOKS OF ACCOUNT. Where in any financial year the assessee has made investments or isfound 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, jeM'ellery 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, in the opinion of the Assessing Officer^satisfactoiy, the excess amount may be deemed to be the income ofthe assessee for such financial 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.

¶9A "finding" obviously should rest on evidence, hi the present case, it is common ground that, no incriminating material was seized during the search ITA No. 18l't/2010 & conn. Page 5 ot'lO which revealed any understatementof the purchaseprice. That is preciselythe reasonwhy the AssessingOfficerhad to resortto Rule 3 of ScheduleIII 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 computing the value of an asset for the pmposes 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 pretensionsto ascertainingthe fair market value of an asset for the purposes of the Wealth Tax Act. Prior to the amendmentmade w.e.f. 1-4-1989the section providedfor the estimationof the fair market value of an asset on the principleof 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 willingbuyer, all fictional.This fictionfacilitateda realisticestimationof the fair market value of the property, and it moved with the ups and downs of the market. Not anymore. From 1-4-1989, the value was frozen. For all times to come, an immovablepropertythat fetchesrent shall be valued at 12.5 times the net maintainable rent.

¶10There is a fundamental fallacy in invoking the provisions of the Wealth Tax Act to the application of section 69B 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 full consideration has been recorded in the books. Under section 7(1) of the Wealth Tax Act as it stood before 1-4-1989, we are to estimate the fair market value of the asset; 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 prescribedby the statute.If A dies leavingprime property in Connaught Place to his son B, B pays nothing for the property; the property may command a market price of several crores. If "A", because of his love and affection for "B", sells the property for Rupee One to "B"; in this case, the consideration paid is only Rupee One, though the property is worth several millions. If the Assessing Officer having jurisdiction over "B" has to make an addition under section 69B, 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 make any rrA No. 1814/2010 & conn. ) addition merely because the property could fetch several crore of rupees in the market.

¶11Section 69B does not permit an inference to be drawn from the circumstances surroimding the transaction that the purchaser of the property must have paid more than what was actuallyrecorded in his books of account for the simplereasonthat such an inferencecould be very subjectiveand could involve the dangerous consequence of a notional or fictional income being broughtto tax contraryto the strict provisionsof 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 agricultural 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 observedthat Parliamentcannot choose to tax as income an item which in no rational sense can be regarded as a citizen's income or even receipt. Section52(2) (which now stands omitted)appliedto the transferorof propertyfor a considerationthat was lesserthan the fair marketvalue by 15% or more; in such a case, the Assessing Officer was conferred the power to adopt the fair market value of the property 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 understatementof considerationand 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 property as the understatement. The sub-section was held to provide for a "statutory best judgmenf once actual understatement was proved; it obviated the need to prove the exact amount of 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.

¶12While the omitted section 52(2) applied to the transferor of the property, section 69B applies to the transferee-the purchaser - of the property. It refers ITA No. 1814/2010 & conn. Page 7 ofl 0 A to the money "expended" by the assessee, but not recorded in his books of account, which is a clear reference to undisclosed income being used in the investment.Applyingthe logic andreasoningin K.P. Varghese(supra) it seems to us that evenfor the purposesof Section69B it is the burdenof the Assessing Officer to first prove that there was understatement of the consideration (investment)in the books of account.Once that undervaluationis establishedas a matter of fact, the Assessing Officer, in the absence of any satisfactory explanationfrom the assesseeas to the source of the undisclosedportionof 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 marketvalue of the property determinedin accordance with the Wealth Tax Act. We however clarify that this Court is not concluding that such yardstickis 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.

¶13The error committed by the income-tax authorities in the present case is to jump the first step in the process of applyingsection 69B - that of proving understatement of the investment - and apply the measure of understatement. If anything, the language employed in section 69B 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 seem to require the Assessing Officer 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 measurethe precise extent of understatementof 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 understatement. There is no ^ authoritygiven by the sectionto adopt some reasonableyardstickto 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 ITA No. 1814/2010 & conn. ascertaining the market value of the property to assess the undisclosed investment. Whether the basis adopted by the Assessing Officer is an acceptable one or not may depend on the facts and circumstancesof 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 burdenplacedon the AssessingOfficermay be relaxedin cases where there is evidence to show understatement of the investment, but evidence to show the precise extent thereof is lacking.

¶14In Lalchand Bhagat Ambica Ram Vs. Commissioner of Income Tax, Bihar and Orissa (1959) 37 ITR 288, the Supreme Court disapproved the practiceof makingadditionsin the assessmentson mere suspicionand 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 M'hich weighed with 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 commodities were merely a background ofsuspicion and the appellant could not be tarred with the same brush as every arhatdar and grain merchant who might have been indulging in smuggling operations, without an iota ofevidence 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 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. ITA No. 18I'I/2010 & conn. Page 9 oflO r\

¶16Since the basis of the additions made in all the other cases is the same as in ITA No.1814/2010, the substantial questions of law in those cases are also similarly answered.

¶17The appeals filed by the CIT are dismissed with no order as to costs. SEPTEMBER 28, 2012 vld ITANo.l814/2010&conn. /u (R.V. EASWAR) JUDGE (S.RAVINDRA BHAT) JUDGE Page 10 of