AMAR SINGH CHAUDHARY,JABALPUR vs. PRINCIPLE COMMISSIONER OF INCOME TAX -1, JABALPUR

ORDER

Per Sanjay Arora, AM:

(AY 2009-10) Amar Singh Choudhary v. Pr. CIT 4. We have heard the parties and have perused the material on record. Status of Inquiry 4.1 Our first observation in the matter is a complete opaqueness as to what transpired during the assessment proceedings in respect of the assessee’s claim for cost of improvement for Rs. 30 lacs. Notice u/s. 142(1) was issued on 16.3.2015 for 20.3.2015. The same, even as the captioned subject mentions only AY 2011-12, is for all the years inasmuch as the queries raised were common for all the years. Reply thereto, presumably furnished, has, very strangely, not been placed on record. There is, in fact, no query in respect of the ‘cost of improvement’ in the said notice. The said claim, as it appears, came to light on the assessee furnishing the details of the capital gains, sought per para (v) of the notice. What were these details? Whether and what, if any, query in respect of cost of improvement was, if at all, made – which would in fact depend upon the disclosure and the statement of the nature and the cost of improvement claimed by the assessee? How was this communicated to the assessee? What was the assessee’s reply thereto? Was any material called for, or furnished, in substantiation? There is, inexplicably, no reference to any such material either in the revisionary proceedings or even before us. Why? While the ON states of the Inspector’s report being in confirmation of the assessee’s submissions, the said submissions are themselves conspicuous by their absence. As it would appear to us, there were no submissions, and the claim for cost of marble flooring in bed rooms and granite platforms in kitchen was made through the working of the capital gains, called for. Even the same, i.e., the said working, has not been brought on record. Continuing further, how was the charge on the assessee raised? How was the same arrived at, which would presumably be, even as stated by the ld. Pr. CIT, the difference between the cost of the material to be provided and that sought by the assessee. The significance of this statement by the ld. Pr. CIT, which is only understandable, and neither denied (AY 2009-10) Amar Singh Choudhary v. Pr. CIT nor clarified by the assessee, is toward the quantum of the claim, which therefore ought to be in a far lower sum, on which aspect, again, there has been no inquiry. Then, when and how was the amount paid? Was it receipted, as it ought to be? If not, inasmuch as there is no receipt, why? 4.2 We may, next, in view of the complete absence of any evidence led by the assessee toward it’s claim, examine it from the stand-point of logistics. The stated modification necessarily implies the assessee specifying the quality of the marble and granite to be used and, further, an agreement on their respective rates, as well as that of the material substituted, as also the quantity/s thereof. The latter, though agreed to be provided free-of-cost, a value would have to be imputed in its respect inasmuch as the same stands substituted, requiring the assessee to pay an additional sum. Rather, in-as-much as the change involves special effort on the part of the Builder and, besides, as apparent, a change in the profile of the labour work, the Builder might well have raised a charge in its respect, if not toward its’ margin as well. In any case, all this could not be, firstly, without specifics (and, further, agreed to between the parties) and, secondly, wholly undocumented, as is strangely the case. Even if, as it appears, a lump sum figure (of Rs.30 lacs) was finally agreed upon, the same would only be on the basis of some underlying data or estimates, albeit informed – wholly absent, as indeed is any evidence as to the same being agreed upon. Why, the modification itself cannot be carried out in the absence of these, basic details. The agreement itself is no mean task, involve as it does a number of imponderables and parameters, and which explains our stating of the lack, nay, a complete absence of any material evidencing the same, as strange. The marble and granite to be used instead, would have to be specified by the assessee. Given the wide variety available in the market, with further their rates subject to constant change, this specification is itself remarkable. Only one with a considerable knowledge and experience in the trade would be in a position to 5 | P a g e (AY 2009-10) Amar Singh Choudhary v. Pr. CIT bargain in its respect with the Builder/Developer, who, being bulk buyers, are therefore able to bargain rates (from the suppliers) not accessible to individual buyers as the assessee. Why would it, then, pass on the benefit of such lower rates on the substituted material, cost of which is to be none-the-less, as afore- noted, imputed. Likewise, for the replacement material. In fact, even the quantity/s aspect would need resolution inasmuch as, apart from measurement, qua which the assessee may not have the relevant maps as the same do not generally form part of the agreement, is the aspect of wastage, as both, marble and granite fitting entails considerable wastage, so that the cost incurred and, thus, charged, would only be with reference to the gross quantity/s of the material. Why, the market is so dynamic that it is inconceivable to predicate the materials which would be used five years hence, much less their rates. The assessee substituting ‘granite’ with ‘granite’, i.e., in kitchens, the same would only be due to a change in the quality/specification, substituting it perhaps with one that is more in vogue at the relevant time. How did the assessee know of the quality of the granite to be used, being surely not specified in the agreement, to ask for a different quality thereof, again implying a communication between the two qua the same? In any case, it is only an agreement over the specifics, implying their knowledge and communication and, in fact, an agreement on all related aspects, which could result in the crystallization of the job to be performed as well as its cost. In sum, the negotiations, integral and intrinsic to the process, for arriving at a meeting of minds, involve proposal/s and counter proposal/s, which rather continue even after the agreement, i.e., spill over to the performance part of the contract, all of which is completely missing. Further, even if one were to ignore all this, and proceed on the basis that the Builder was a trusted party, on whom the assessee therefore relied for all the specifics, i.e., as to quality, quantity, rate/s of the material, labor, etc., and agreed to pay what was asked for, why, one wonders, didn’t he say so. The Revenue, where it wished to, could in verification seek clarification from the 6 | P a g e (AY 2009-10) Amar Singh Choudhary v. Pr. CIT Builder, who would, having, as stated, carried out the modification, where required to, furnish the necessary details, including evidence as to the cost incurred. This in fact was the assessee’s argument before us, put forth by it’s counsel, Sh. Purohit, in response to the Revenue’s argument of the cost claimed being wholly unsubstantiated. The cost, he would aver, having been in fact incurred by the Builder, only it would be in possession of the relevant vouchers, so that the same could not be expected to be furnished by the assessee. In other words, no adverse inference could be, under the circumstances, drawn from the assessee’s failure to furnish the said evidence. True, but then, what, in its stead, is the evidence/s led by the assessee? The basis of the assessee’s claim is the agreement arrived at between him and the Builder, so that the same is the minimum that the assessee, given his stand, was expected to produce in evidencing his claim qua the cost of improvement. And which could, as indicated earlier, where deemed proper, as it ought to have been, cross verified by the Revenue, including the incurring of the additional cost and booking of the revenue there-against by the Builder. The absence of the agreement, vital to the assessee’s case, is unexplained; rather, even not inquired into, and demonstrates an absence of application of mind by the AO. On the contrary, as we shall presently see, the Builder has an entirely different story to tell about the same. 4.3 We, next, consider the Inspector’s report, which forms the fulcrum of the assessee’s case. The first thing that strikes one, looking thereat, is that it is an unsigned document, not bearing even the name of the Inspector who had ostensibly carried out the inspection. The same, therefore, has no sanctity, much less evidentiary value, in law. The same, accordingly, only needs to be rejected outright. We may, nevertheless, if only to understand the nature of the enquiry made, or stated to be, examine it. Per the same, dated 24.3.2015, the Inspector, i.e., presumably, in-as-much as his capacity (designation) as such, which is 7 | P a g e (AY 2009-10) Amar Singh Choudhary v. Pr. CIT normally stated below the name – missing in this case, has also not been stated, has, in compliance of the direction by the ITO, Ward-2(5), Jabalpur, carried out an inspection of the flats/duplexes built under the ‘Apsara’ project, again presumably on 24/3/2015. It states that in almost all the flats marble/granite, which seemed expensive, had been used in all the rooms and kitchen respectively. The same, thus, has no bearing on the cost stated to have been incurred toward the improvement (of the capital asset), claimed and allowed, and its scope is only toward verifying the said improvement. Even with regard thereto, i.e., the said verification, the same (report) is neither here nor there. It does not state if the flats/duplexes inspected were those allotted to the assessee, which only would make the report meaningful. That would, in the first place, require the assessee to provide a list of all such flats/duplexes, along with their identification numbers, etc. to the AO. When & how was this done? Further, as the report says, he inspected almost all the flats/duplexes, in which case the enquiry, rather, goes against the assessee in-as-much as, if, as stated, marble and granite had in fact been used in all of them, no difference stands observed between the flats given to the assessee and to others. Also, it cannot be that he inspected only the assessee’s flats, which again would be of no consequence. It is only when the residential units of the assessee – details of which are absent, are inspected and, further, compared with others (so that the same would also require being inspected), finding a difference between the flooring (in the rooms) and quality of the granite used (in the kitchen) in one set of apartments vis-a-vis the other, that the report would be valid, and in satisfaction of the purpose it sets out to attain, i.e., verify the stated modification having been carried out in the residential units delivered to the assessee. Even here, the inspection being carried out in March, 2015, i.e., years later, by which time all the flats would have been, as indeed stated, sold by the assessee, it might well be that the modification observed had been carried out by the present owners (or if different from the person/s to whom the assessee sold the same, even the 8 | P a g e (AY 2009-10) Amar Singh Choudhary v. Pr. CIT previous owners). As such, factors such as enquiry with the owners regarding the flooring, etc., and, equally, the nature and uniformity of the difference between the two sets of flats/duplexes, etc. would only complete the enquiry, establishing, completely missing, whether the stated modification was actually carried out and, if so, at the assessee’s instance, justifying payment of additional sum by him, at whatever value, to the Builder. Then, again, while the assessee claims marble flooring only in the bed rooms, the report says of it being in all the rooms. What does that mean: Has the Builder, in benevolence, provided marble even where not sought by the assessee? The inspection by the inspector, i.e., assuming so, is, thus, worthless and, in any case, farcical, if not a pretense. The said report – which does not concern the cost aspect – is to be, thus, at the highest, ignored, and, in the least, considered a sham document. That is, to be, either way, rubbished. 4.4 Coming back to our earlier observation (para 4.2) of the Builder having in fact, rather than confirming, refuted the assessee’s stand as to the payment thereto being toward cost of improvement. To clarify matters, there was in fact no enquiry by the AO with the Builder. Our statement is based on the Builder’s stand qua the payment of Rs.30 lacs, besides another in the sum of Rs.10 lacs, before its’ AO. The absence of any reference by the assessee to the sum of Rs. 10 lacs is surprising as the same, given his contractual relationship with the Builder (vide agreement dated 05.9.2003), would impact the capital gain arising to him. The Builder’s reply (dated 23.12.2013), as furnished in its assessment proceedings, is extracted in the relevant part in the ON. The same, also read out during hearing, reads as under: ‘14) Reply to query No. 66 The assessee firm entered into an agreement for development of property and sale thereof with Amar Singh Choudhary. The project name is “Apsara Apartments”. The copy of agreement is attached.

(AY 2009-10) Amar Singh Choudhary v. Pr. CIT As per the agreement, a sum of Rs. 50,00,000/- was to be paid up-front and later share of construction was to be given. The payment was made to Shri Amar Singh Choudhary as mentioned hereunder:- Sr. No. Cheque No. Dated Amount 1 120560 05.09.2003 Rs. 25,00,000 2 943569 12.04.2004 Rs. 5,00,000 3 696838 18.08.2005 Rs. 10,00,000 Total Rs. 40,00,000 Due to dispute in the family of land owners, stay was by the court of law. Therefore the balance of Rs. 10,00,000 [Rs. 50 lacs less Rs. 40 lacs] as originally agreed upon by the firm and land owners, was not given. Instead (the) firm demanded compensation for stoppage of work. The land owners paid the compensation for delay of work by Chq. No. 008285 dated 16.07.2007 for Rs. 30,00,000/-. The compensation received was transferred to P&L a/c as misc. income. Copy of ledger for payment made and received to Amar Singh Choudhary is attached.” (emphasis, ours) The Builder, thus, claims to have: (a) withheld the payment of the outstanding amount of Rs.10 lacs out of the cash component of the consideration, i.e., Rs.50 lacs; and (b) received, instead, another sum of Rs.30 lacs from the assessee (vide Cheque No.008285, dated 16.7.2007), by way of compensation for stoppage of work, stated to be on account of a dispute in the family of the land owners. Shri Purohit, on being required to explain this anomaly during hearing; there being inexplicably no whisper of any such dispute or compensation by the assessee, would submit that it is one man’s word against another, and the AO chose to go by the assessee’s version, taking a possible view in the matter. The question, however, is, on what basis? Further, if this is not reason enough to undertake enquiry or, as the case may be, further inquiry, what, one may ask, would be? We have already discussed the intricacies and complexities involved in the seemingly straight forward work of replacement of material, i.e., given the realities of the commercial word and the conflict of interest, requiring resolution, through negotiations, of a range of (AY 2009-10) Amar Singh Choudhary v. Pr. CIT issues, highlighting some. And, further, of a complete absence of any evidence toward the same, further suggesting that perhaps a trust between the two parties, fostered over the years (of which there is though no indication), may have obviated the protracted process, leading to an understanding between them, even as the absence of any agreement, in modification of the earlier one, i.e., to that extent, would continue to remain unexplained. And here we have, instead of a confirmation or understanding, a different story altogether of the matter, and of which the AO was in fact aware. The need for enquiry, it needs to be appreciated, is to ascertain the truth of the matter, which gets all the more accentuated in view of the conflicting claims. It is only where the evidence and the circumstances in favour of the assessee’s stand outweighs or, is, in the minimum, in balance with that in favour of the opposing view, that the AO could be said to be justified in choosing the assessee’s stand in preference to that of the Builder, taking a possible view. And which would, rather, require extensive, i.e., even more than the usual, inquiry. Not only is the assessee’s stand bereft of any evidence, no enquiry stands undertaken by the AO. Was the amount of Rs.10 lacs received by the assessee? If, as the assessee says (refer para 11 of the assessment order), of having received Rs. 5 lacs thereof in cash (legal tender), what is the evidence in its respect, as the same could not possibly be without a receipt. Rather, it being a trade expense for the Builder, hit by s. 40A(3), why, one wonders, would it pay in cash? We consider this aspect (of receipt of Rs.10 lacs) relevant as the same, as apparent, is, as per the version of the Builder, intertwined with the receipt of Rs.30 lacs from the assessee – both being toward compensation demanded by the Builder, and settled, thus, at Rs. 40 lacs. Further, was there a dispute in the family of the land owners, as stated by the Builder, or is the same a figment of its’ imagination? Why, and on what basis does it state so? Did the matter travel to the court, with it granting stay, resulting in stoppage of work? If so, from when to when? Was any compensation demanded? When and how? Was it paid? When and how? Again, 11 | P a g e (AY 2009-10) Amar Singh Choudhary v. Pr. CIT the Builder having admittedly received the sum of Rs.30 lacs or, as the case may be, Rs. 40 lacs, so that there is no outstanding claim by any party against the other, why would the Builder not state the truth? Rather, substitution of material, i.e., as per the assessee’s version, would enable it to set off the additional cost of material (as well as in fact of additional labour) against the additional receipt of Rs.30 lacs, while the compensation toward stoppage of work, as stated by it, is net income, as indeed accounted for, liable, and indeed offered, to tax in whole. The AO notes a complete variance in the stands of the two sides, the assessee and the builder, and yet chooses to ignore the same, stating (in the ON) the same to be rather a reason for re-examination in the case of the Builder. The same is incomprehensible as, firstly, it is his prime duty to consider the validity of the claims of the assessee – wholly un-evidenced and, two, the avoidance of tax, if any, is, as would be apparent from the foregoing, in the assessee’s case. The assessee has reported receipt of Rs. 45 lacs by cheque/s, as against Rs. 40 lacs stated by the Builder, toward cash component of the consideration on transfer of land. But, then, the same would stand to be confirmed with reference to the latters’ books and, where accounted, as it, being by cheque/s, would presumably be, does not result in/lead to any loss of revenue. As such, the AO seeking, on the contrary, a re-examination of the Builders’ case, is perverse and, in any case, itself proves the need for verification to resolve the contradicting claims of the parties. Further, it put pays the assessee’s claim that the cost of improvement having been incurred by the Builder, he ought to be absolved of the requirement of substantiating incurring the relevant expenditure. In fact, the burden to prove his claim/s continues in law to be on the assessee, though the onus thereon gets under the circumstances discharged, i.e., where the Builder issues a confirmation, furnishing its’ accounts, including vouchers, in substantiation.

(AY 2009-10) Amar Singh Choudhary v. Pr. CIT 4.5 The second area qua which the ld. Pr. CIT found the impugned assessment erroneous and prejudicial to the interests of the Revenue, is the non- examination of the sale deeds by the AO, stated to be incorrect by Shri Purohit. There is thus a tacit admission of the relevance of the said deeds, as well as their examination by the assessing authority. He, however, could not exhibit their production in the assessment proceedings, much less their examination. Even as much as a letter or communication, i.e., in reply to the queries/requisition dated 16.3.2015, has not been brought on record. How could, one wonders, the direction by the ld. Pr. CIT for their production and examination by the AO, under the circumstances, be regarded as unjustified or not valid in law. Case Law 5.1 Both the parties before us have relied on decisions, including by the Hon’ble jurisdictional High Court, without in any manner meeting those cited by the other, being By the Revenue (per the impugned order) Malabar Industrial Co. Ltd. vs. CIT [2000] 243 ITR 83 (SC) Rampyari Devi Sarogi vs. CIT [1968] 67 ITR 84 (SC) CIT v. Deepak Kumar Garg [2007] 299 ITR 435 (MP) CIT v. Himachal Pradesh Financial Corp.[2010]186 Taxman 105 (HP) Swarup Vegetable Products v. CIT [1991] 187 ITR 412 (All) Gee Vee Enterprises vs. Addl. CIT [1975] 99 ITR 375 (Del) By the assessee CIT v. Ratlam Coal Ash Co. [1988] 171 ITR 141 (MP) CIT v. Krishna Capbox (P.) Ltd. [2015] 372 ITR 310 (All) (besides these two, copies of which are on record, others, as under, where also mentioned during hearing, even as their copies not on record, were neither referred to, nor could possibly be responded to by the other side: CIT v. V. Dhana Reddy & Co. [2018] 407 ITR 96 (AP) 13 | P a g e (AY 2009-10) Amar Singh Choudhary v. Pr. CIT ITO v. DG Projects Ltd. [2012] 343 ITR 329 (Del) CIT v. Hindustan Mktg. & Adv. Co. Ltd. [2010] 46 DTR 109 (Del)) Surprisingly, even the decision by the Apex Court settling the law in the matter were not referred to during hearing or met by the other side. The Apex Court in Malabar Industrial Co. Ltd. (supra) enumerated a four-way test for an order being erroneous, i.e., wrong assumption of fact/s; incorrect application of law; non-application of mind; and an omission to observe the principles of natural justice. It is the non-application of mind with which we are concerned with in the instant case. For instance, in Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC), an assessment made by accepting the income returned as such, without inquiring if the income returned had indeed been earned by the person returning the same, was held by the Apex Court to be erroneous and prejudicial to the interests of the Revenue. The case law in the matter is legion, followed, as afore-stated, by the Hon’ble Courts, including the Apex Court (as in Toyota Motor Corp. v. CIT [2008] 306 ITR 52 (SC)), all through. We therefore do not consider it necessary or proper to dwell on the cited decisions, having, as afore- stated, not been met by either side. The said decisions, as their bare reading would show, are neither contradictory nor against the principles laid down by the Apex Court. Nothing therefore turns thereon. The difference in the final verdict in each case is in view of the obtaining factual finding, while what is relevant and binding is the principle/s laid down or adopted, i.e., the ratio decidendi. Continuing further, the reference to lack of enquiry is only toward the non-application of mind in-as-much as it is indicative thereof and, rather, its manifestation. As explained in Gee Vee Enterprises (supra), further adverting to a host of decisions, primarily by the Apex Court, including Rampyari Devi Sarogi (supra) and Tara Devi Agarwal (supra), also referred to in Malabar Industrial Co. Ltd. (supra), that the AO, being both an investigating and (AY 2009-10) Amar Singh Choudhary v. Pr. CIT adjudicating authority, cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. In its words: ‘It is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income-tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assessee in his return. The reason is obvious. The position and function of the Income-tax Officer is very different from that of a civil court. The statements made in a pleading proved by the minimum amount of evidence may be adopted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The Income-tax officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. It is because it is incumbent on the Income-tax Officer to further investigation the facts stated in the return when circumstances would make such an inquiry prudent that the word “erroneous” in section 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct.’ (emphasis, supplied) 5.2 A lot is often made, as indeed was before us, of an enquiry having been made, so that the notion of ‘proper inquiry’, a subjective matter, was vague, and not well-founded. The argument is misplaced. No inquiry, firstly, has been found to have been made in the instant case. Even on a general plane, such an argument is misconceived. Enquiry, its range and depth, is a matter of fact. The relevance of, or reference to, enquiry is only toward exhibiting, or lack of, application, or more aptly, due application of mind. The enquiry by the assessing authority, it may be appreciated, is not an end in itself, but a means to an end, i.e., to determine the truth of the matter. As such, it is only an enquiry which results in proper determination of the matter, i.e., the facts of the case, based on credible material, as would enable any reasonable person, properly instructed in law, to arrive at a decision, that could be regarded as due or proper enquiry, exhibiting application of mind. That is, only an inquiry as warranted in the facts and circumstances of the case would satisfy the test of inquiry, and it is 15 | P a g e (AY 2009-10) Amar Singh Choudhary v. Pr. CIT this that the qualifying words ‘due’ or ‘proper’, prefixing it, seek to signify. The reference by the Hon’ble Court to further inquiry or inquiries that should be made or are called for, in Gee Vee Enterprises (supra), as would also be clear from a reading of the extracted part, is only toward this. Sure, no quantitative test or measure in this regard has been developed by science, as indeed for appraising or evaluating an evidence, even as observed by the Apex Court in CIT v. Durga Prasad More [1971] 82 ITR 540 (SC), so that the matter has to be considered in light of the entirety of the facts and circumstances, including surrounding, and preponderance of probabilities. 5.3 The condition as to inquiry has since, i.e., by Finance Act, 2015, w.e.f. 01.6.2015, been incorporated in the statute, by way of Explanation 2(a) to section 263, which deems an absence of enquiry, i.e., as should have been made, as a case of the relevant order being erroneous and prejudicial to the interests of the Revenue, liable for revision u/s.