CIT vs. DINESH JAIN

IN THE HIGI{ COURT OF DELHI AT NEW DELHI Reserved on : 26h September.2012. Date of Decision : 28ft September.2012. + + TTA T667|2OTO ITA 8s/2011 CIT versus DINESH JAIN HUF ITA 1800/2010 ITA 1803/2010 ITA 1805/20t0 ITA 180712010 ITA 1809/2010 ITA 181r/20r0 rTA t8t2l20t0 ITA 1813/2010 TTAT967/2OTO rTA t97212010 CIT LATA JAIN rrA 1815/2010 ITA 181612010 ITA 1817/2010 rrA 1818/2010 rrA 1819/2010 ITA 1968t20t0 rrA 196912010 + + + -r + + + + + + ..... Appellant ..... Respondent ..... Appellant ..... Respondent -r + + + + + -r ITA No. 16671201 0 & conn. Page I of2 2012:DHC:7795-DB

(pl/ + ITA 197012010 + ITAI9Tt/2010 CIT 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 l. 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.1814/2010. SEPTEMBER 28,2012 vtd versus DINESH JAIN kl.-,--. . (R.V. EASWAR) JUDGE I |.-.J-,,&*P (s. RAVINDRA BHAT) JUDGE ..... Appellant ..... Respondent ITA No. 166712010 & conn. Page2 of2 2012:DHC:7795-DB

IN THE HIGH COURT OF DEL}II AT NEW DELHI Reserved on : 26tl'septernber. 2012. Dateof Decisiorr,@ + + ITA1667I2OIO ITA 85/2011 CIT versus DINESH JAIN HUF ITA 1800/2010 ITA 1803/2010 ITA 1805/2010 ITA 180712010 ITA 1809/20t0 ITA 1811/2010 ITA 18T2/2OIO ITA 1813/2070 TTA 1967 /2OTO ITA I972I2OIO CIT ..... Appellant ..... Respondent + f -r + + -r + + + + ..... Appellant ..... Respondent Page I ofl0 + + + f + + -r vefsus LATA JAIN ITA 181412010 ITA 1BI5I2OIO ITA 18T6120T0 ITA 18r7/2010 ITA 1818/2070 rrA 181912010 ITA 1968/2010 ITA No. I 814/201 0 & conn. 2012:DHC:7795-DB

IT- + -l- rTA 1969/20t0 ITA 1970/2010 ITA I97II2OTO CIT ..... Appellant versus DINESH JAIN ..... 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 IW. vaibhav Kulkarni- {dvs. for respondent. CORAM: MR. JUSTICE S. RAVINDRA BHA]I MR. JUSTICE R.V. EASWAR 1. whether Reporters of local papers may be allowed to see the juclgrnent? 2. To be referred to the Reporters or not? J 3. Whether the judgrnent should be reported in the Digest? .1 R.V. EASWAR, J.: These are appeals filed by the Comrnissioner of Income-tax under section 260A of the Income Tax Act, 1961 ("Act,,) against the orders of the I'come Tax Appellate Tribu'al ("Tribunar"). The following common substantial questions of law were framed by the court on3-2-20rr: "whether learned ITAT erred in deleting the addition tnade by the Assessing officer on account of unexplained investment in rent Iir,l4iryS ?roperty by applying the provisions of Rute 3 of par B of 3''o Schedule to the Wealth Tax Act? " ITA No. I 8 l4l2010 & conn. Page 2 of 10 2012:DHC:7795-DB

6 2. ITA No.l814l20l0 has by consent of the parties been taken as the lead matter. The facts necessary for our purpose in brief are that there was a search operation under sec.l32 of the Act in the residential and business prernises of the assessee Dinesh Jain on 9-12-2003. The rnaterials seized during the search revealed, inter alia, investment in various properties by the assessee. One such property was Flat No.306, Pahn Court, Sukharali Chowk, Gurgaon, which was purchased for Rs.17,55,000. The Assessing Officer noticed that this was a comrnercial 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 income could not have been acquired for Rs.17.55 lakhs. 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 rnore than what was ,disclosed 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. FIe accordingly calculated the "net annualised maintainable rent" of the property at Rs.6,63,000 and multiplying the same by I2.5 as provided in the Ruie cited above, arrived at the value of the properry 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 investrrent. under sec.698. 3. Sirnilar 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 ITA No.18l4/2010 & conn. Page 3 of l0 2012:DHC:7795-DB

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.pulchase consideration, the assessee also adduced evidence in the form of cbmparable 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 docurnent, represented the real and actual consideration for the properties and nothing was paid as on-rnonies 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 Offrcer can go behind it and find out the "correct and fair valuations of the immovable properties due to the fact that no direct evidences in these transactions can be gathered". In this view of the ffiatter, he upheld the view taken by the Assessing Officer in principle. However, lre reduced the additions to Rs.27,9g,269 for Flat No.6 and Rs.22,57,9.75 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-g-200g in the assessee's case for sotne earlier years, deleted the entire addition made'under sec.69B, following the judgrnents of the Supreme Couft in K.p. varghese vs ITo (198r) 131 ITR 597 and CIT vs Shivakami company (p) Lrd. (r9BO 159 ITR 71 and the judgrnents of this court in CIT vs Shakuntala Devi in ITA No.345l2007, cIT vs Ashok Khetrapal (2007) 294 ITR 143 and cIT vs Manoi 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 iv{r. Sabharwal for the revenue is that where the facts and circumstances pe'nit an inference of understatetnent 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 ofI0 2012:DHC:7795-DB

@ 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 fusi 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 sectidn 75 of the Stamp Act prescribing circle rates for the properties and rarely do properties get transferred for such rates. 8. These arguments are ceftainly attractive but the language ernployed by Section 698 is the first sturnbling block which Mr. Sabharwal has to overcorne. The section is in the following terms: ,SECTION 698 - AMO(]NT OF INVESTMENTS, ETC., NOT FULLY DISCLOSED IN BOOI{S OF ACCOUNT. where in any financtal year the assessee has made tnvestrnents or is found to be the owner of any bullion, jewellery, or other valuable article, and the Assessing officer finds that the atnount expended on making such investments or in acquiring such bullion, jewellery or other varuable article ,*rrid, ti" amount recorded in this behalf in the books of account maintained by the assessee for any source of income, and. the assessee offers no explqnation about such excess atnount or the explanation offired by him is not, in the opinion of the Assessing officer', satisfactory, the excess amount may be deemed to be th-e income of the assessee for suchfinancial year.,, The section in tenns 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 rernains donnant. 9' A "finding" obviously should rest on evidence. In the present case, it is comrlon ground that no incrirninating material was seized during the search ITA No. l8 1412010 & conn. Page 5 of 10 2012:DHC:7795-DB

which revealed any understatement of the purchase price. That is precisely the reason'why the Assessing Officer had to resort to Rule 3 of Schedule III to the Wealth Tax Act. This Rule does not even clairn 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 frorn Section 7(1) of the Wealth Tax Act. The section, as it now stands, has dropped all pretensions to asceftaining the fair market value of an asset for the puqposes 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 rnarket 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 estirnation of the fair market value of the property, and it rnoved with the ups and downs of the rnarket. Not anymore. From L-4-I989, the value was frozen. For all tirnes to corne, an imrnovable properly that fetches rent shall be valued at I2.5 times the net rnaintainable 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 Incorne 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 V/ealth Tax Act as it stood before I-4-I989, we are to estirnate the fair rnarket 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 prescribed by the statute. If A dies leaving prime 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 "8", sells the properly for Rupee One to "B"; in this case, the copsideration paid is only Rupee One, though the property 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 "f1nds" that B has "expended" money which he has not fully recorded in this books of account; he cannot make any ITA No.l814/2010 & conn. Page 6 of l0 2012:DHC:7795-DB

,t^ ( q2, \/ in the addiiion rnerely because the property could fetch several crore of rupees market. 11. Section 698 does not pennit an inference to be drawn frorn the circumstances surrounding the transaction that the purchaser of the property rnust 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 dangeroqs consequence of a notional or fictional incorne being brought to tax contrary to the strict provisions ofArticle 265 of the Constitution of India and Entry 82 in List I of the seventh schedule thereto which deals with "Takes on income other than agricultural income". This was one of the rnajor considerations that weighed with the Supreme Coutt 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) (which now stands omitted) applied to the transferor of property for a consideration that was lesser than the fair market value by 15% or more; in such a case, the Assessing Officer was conferred the power to adopt the fair market value of the properfy 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 hirn 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 understaternent. Additional reasons for the result were (a) that the rnarginal note to the section referred to "cases of understatement"; (b) the speech of the Finance Minister while introducing the provision; and (") the absurd or irrational results that would flow frorn alitercl, 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 property, section 698 applies to the transferee - the purchaser - of the property. It refers ITA No. 1 8 l4l2010 & conn. Page 7 of 10 2012:DHC:7795-DB

to the money "expended" by the assessee, but not recorded in his books of account, which is a clear reference to undisciosed 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 ii is the burden of the Assessing. Offrcer 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 Officer, 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 sorne dependable or reliable yardstick with rvhich to measure the extent of understatement of the investment. One such yardstick can be the fair market value of the property determined in accordance with the Weal'ch 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 cornrnented 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 698 - that of proving understatement of the investment - and apply the measure of understaternent. If anything, the language ernployed 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 cornpromise 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 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 understaternent of the purchase price, but also to show the precise extent of the understaternent. There is no authority given by the section to adopt some 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 soure acceptable basis of iTA No. 1 814/2010 & conn. PageS ofl0 2012:DHC:7795-DB

ascertaining the rnarket 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 the facts and circumstances of the particular case. That question may however arise only when actual understaternent is first prpved 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 Antbica Ram Vs. Commissioner of Income Tax, Bihar and Orissa (L959) 37 ITR 288, the Supreme Court disapproved the practice of rnaking additions in the assessrnents on lnere 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 variotts probabilities which weighed with the Income-tax Officer we may observe that the notoriety for smuggling ftod'grains and other commodities to Bengal by country boats acqutred by Sahibgunj and the notoriety achieved by Dhtilian as a great receiving centre for such commodit[es 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 indulging in smuggling operations, without an iot7 of evidence in that behalf, This takes care of the argurnent 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 lnore 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. l8 l4l2010 & conn. Page 9 of10 2012:DHC:7795-DB

,/,("/w / \ ,/ 16. Sinoe the basis of the additions made in all the other cases is the salne as in ITANo.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. I M *'*r', (R.V.EASWAR) JUDGE 'ti (s. RAVINDRA BHAT) JUDGE Page l0 of SEPTEMBER 28,20L2 vld ITA No. l8l4/2010 & conn. 10 €$' 2012:DHC:7795-DB