CIT vs. DINESH JAIN

1< 'f IN THE HIGH COURT OF DELHI AT NEW DELHI + + ITAT667I2OTO ITA 8s/2011 CIT Reserved on : 26ft September.2012. Date of Decision : 28ft September.2012. ..... Appellant ..... Respondent ..... Appellant ..... Respondent + + + + -r + + + + + + + + + + , VETSUS DINESH JAIN HUF rTA 1800/2010 ITA 1803/2010 ITA 1805/2010 rTA 1807 /20t0 rTA 1809t2010 ITA 181U2010 ITA 1812/2010 ITA 18r3/20t0 rTAL967/2010 rTAL972t20t0 CIT + + LATA JAJN ITA 1815/2010 rTA 1816/2010 ITA 1817 t20r0 ITA 1818/2010 rTA 1819/2010 ITA 1968/2010 rTA 1969t2010 ITA No.1667/2010 & conn. Page I of2 2012:DHC:7812-DB

lt" + + ITA 197012010 rTAt9Tt/20t0 CIT versus DINESH JAIN 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.1814/2010. Presence : SEPTEMBER 28,2012 Yld ITA No. 166712010 & conn. Mr. Sanjeev Sabharwal, sr. standing counsel with Mr. Puneet Gupta, jr. standing counsel and Ms. Gayatri Verma, Adv. for revenue. Mr. Ajay Vohra, Ms. Kavitalha and Mr. Vaibhav Kulkarni, Advs. for respondent. l!*-.'.. cR.v. EASWAR) JUDGE ..... Appellant ..... Respondent (S. RAVINDRA BHAT) JTJDGE Page2 of2 2012:DHC:7812-DB

\r IN THE HIGH COURT OF DELHI AT NEW DELHI % Reserved on : 26tl' September. 2012. Date of Decision : 28th Septernber" 2012. + + + + + I-r -r t + + + -r ITA t667/2010 ITA85/2OII CIT versus. DINESH JAIN HUF ITA 180012010 ITA 1803/2010 ITA 180s/2010 ITA 1807t20r0 ITA 1809/2010 ITA 181T/2OIO ITA 1812/2010 ITA 18T3/2OTO ITAT967I2OTO rTAr972t20t0 CIT ..... Appellant ..... Respondent i.... Appellant ..... Respondent Page I ofl0 vefsus e LATA JAJN ITA 1814t2010 ITA 1815/2010 ITA 18t6120r0 ITA 1817/2010 rrA 1818/2010 rrA 1819/2010 ITA 1968/2010 + + + + + 1- ITA No. I 814/201 0 & conn. 2012:DHC:7812-DB

(q + ITA 196912010 . + ITA 1970/2010 + ITA197t/2010 CIT versus DINESH JAIN ..... Appellant ..... Respondent Presence : IW. 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 lfr. vaibhav Kulkarni. J. 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? Y : 3. Whether the judgment should be reported in the Digest? .1 , R.V. EASWA.R, J.: These are appeals filed by the cornmissioner of Incorne-tax under -: section 260A of the Income Tax Act, 1961 ("Act") against the orders of the Income Tax Appellate Tribunal ("Tribunal"). The following common e, substantial questions of law were framed by the court on3-2-2011: : "[4/hether learned ITAT erred in deleting the addition mad,e by the Assessing officer on eccount of unexplained investment in rent yflding property by applying the provisions of Rule 3 of par B of 3'" Schedule to the Wealth Tax Act? " . ITA No.l E 1412010 & conn. Page 2 of l0 2012:DHC:7812-DB

\1 t/ 2. ITA No.I8I4l20I0 has by consent of the parties been taken as the lead rnatter. The facts necessary for our purpose in brief are that there was a search operation under sec.I32 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, Pahn Court, Sukharali Chowk, Gurgaon, which was purchased for Rs.17,55,000. The Assessing Officer noticed that this was a commercial property which was fetching a rent of Rs.7.02 laktrs per annum. He was of the view that a property which was fetching such a substantial rental incorne 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 annum. He ther.efore took the view that the assessee must have invested lnore than what was disclosed in the sale document r,vhich attraited 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 annualised maintainable rent'r of the property at Rs.6,63,000 and multiplying the same by I2.5 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 arnount 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 calRe 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 rnade under sec.69B was Rs. 1,3 8,26,450. 4. The assessee filed an appeal against the assessrnent and questioned, inter alia, the addition made under section 69B. Besides challenging the adoption of ITA No. I 8 l4l2010 & conn. Page3 ofl0 C o 2012:DHC:7812-DB

i 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 remaud report frorn 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 irnrnovable 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.27,9g,26g 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-g-200g in the assessee's case for solne earlier years, deleted the entire addition made under sec.69B, following the judgrnents of the supreme court in I{.p. varghese vs ITo (1981) 131 ITR 597 and cIT vs shivakami company (p) Ltd. (19g6) 159 ITR 71 and the judgments of this court in CIT vs Shakuntala Devi in ITA No.345/2007, cIT vs Ashok Khetrapal (2007) 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 il4r. Sabharwal for the revenue is that where the facts and circumstances pe'nit an inference of understatement of consideration, it is not necessary to look for direct evidence of understaternent which, in the very nature of things, is ITA No. 1 8 l4l2010 & conn. Page 4 of l0 2012:DHC:7812-DB

\lv\ 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%o of the investment in the first year, and that would not have been possible unless a much higher amount than what was declared had been invested by the assessee. The retums, according to him, are so high that they sh6ck 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 Starnp 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 employed by Section 698 is the first stumbling block which Mr. Sabharwal has to overcome. The section is in the following terrns: ,,SECTION 698 - AMOUNT OF INT/ESTMENTS, 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 builton, jewellery, or other valuable article, and the Assesstng officer finds that the amoun.t 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 ntaintained by the assessee for any source of income, and the assessee offers no explanation about such excess antount or the explanation offered by him is not, in the opinion of the Assessing officer, satisfactory, the excess amount may be deerned to be the 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 remains dormant. 9. A "finding" obviously should rest on evidence. In the present case, it is corunon ground that no incriurinating rnaterial was seized during the search ITA No. l8 141201 0 & conn. Page5 of10 \ 2012:DHC:7812-DB

Lv which revealed any understatetnent of the purchase price. That is precisely the rriason 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 cornputing 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 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 estirnation 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 assurnption 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 moved with the ups and downs of the market. Not anymore. From I-4-1989, the value was frozen. For all tirnes to corne, an'immovable property that fetches rent shall be valued at I2.5 tirnes the net maintainable rent. i0. There is a fundamental fallacy in invoking the provisions of the Wealth Tax Act to the application of section 698 of the Income Ta,x 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 Wealth Tax Act as it stood before I-4-I989, we are to estirnate the fair market value of the asset; after this date, it is. not even estirnation of the fair market value, but cornputation of the value of the asset on the basis of certain rules prescribed by the statute. If A dies leaving prirne 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 properly 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 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 make any ITA N0.1814/2010 & conn. Page 6 ofl0 2012:DHC:7812-DB

t av> addition merely because the property could fetch several crore of rupees in the market. 11. Section 69B does not pennit an inference to be drawn from the circumstances surrounding the transaction that the purchaser of the properfy 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 dangeroqs consequence of a notional or fictional income being brought to 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 agricultural income". This was one of the major considerations that weighed with the Supreme Court in I(.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 itein which in no rational sense can be regarded as a citizen's incorne or even receipt. Section 52(2) (which now stands ornitted) 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 rnarket value of the properfy 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 understaternent and he could. adopt the difference between the stated consideration and the fair market value of the properfy as the understaternent. 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 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 inational 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 properfy, section 698 applies to the transferee - the purchaser - of the property. It refers ITA No. I 814/2010 & conn. Page 7 of 10 2012:DHC:7812-DB

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. 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 Offrcer to first prove that there was understatenient of the consideration (investment) in the books of account. Once that undervaluation is established as a rnatter 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 which to measure the extent cif understatetnent 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 arrived at by us that the Assessing Officer did not gather foundational facts to point to undervaluation the adoption of the nonns under the Wealth Tax Act is not commented upon by us. 13. The prror 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 understaternent of the investment - and apply the measure of understatement. 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 rneasure the precise extent of understaternent. There can therefore be no compromise in the application of the section. It would seeln 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 tneasure the precise extent of understatetnent 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 understaternent. There is no authority given by the section to adopt sorne reasonable yardstick to rneasure 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 solne acceptable basis of ITA No. 1 814/2010 & conn. Page 8 of 10 2012:DHC:7812-DB

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 rnay depend on the facts and circurnstances 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 rnay be relaxed in cases where there is evidence to show understatement of the investrnent. 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 assessrnents on rnere 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 with the Income-tax Officer we may observe that the notoriety for smuggling food g"ains and other commodities to Bengal by country boats acquired by Sahibgunj and the notoriety achieved by Dhr.ilianl as a great receivtng centre for such commodities were merely a background of susptcion 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, wtthout an iota 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 properly market of not disclosing the fulI consideration for transfer of properties. 15. Since the'entire case has proceeded on the assurnption thpt 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 incorne-tax authorities. Section 69r- 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 14/2010 & conn. Page 9 of l0 2012:DHC:7812-DB

il sirnilarly answered. 17. The appeals-filed by the CIT are dismissed with no order as to costs. M-'-* ' (R.V. EASWAR) Jt]DGE 16. Since the basis of the additions in ITA No.18 1412010, the substantial SEPTEMBER 28,2012 vld ITANo. l8l4/2010 & conn. 10 made in all the other cases is the same as questions of law in those cases are also (S. RAVINDRA BHAT) JT]DGE Page 10 of te' 2012:DHC:7812-DB