CIT vs. DINESH JAIN

14 + + + .I_v1 | + + + + + I-T' IN THE HIGH COURT OF DELHI AT NEW DELHI Reserved on : 26ft September.2012. pate of Decision : 28ft September.2012. % + + ITA T667|2OTO ITA 85/2011 CIT versus DINESH JAIN HUF ITA 1800/2010 rrA 1803/2010 ITA 1805/2010 ITA 1807 t20r0 ITA 1809/2010 ITA 181r/20r0 rTA 1812/20t0 rTA 1813/20t0 ITA 196712010 rTA 1972/2010 CIT ..... Appellant ..... Respondent ..... Appellant ..... Respondent I + + .+ + + + + versus LATA JAIN ITA 1815/2010 ITA 1816120T0 ITA 1817/2010 rrA 1818/2010 rrA 1819 /2010 ITA 1968/20t0 ITA 1969/2010 ITA No. 1667/201 0 & conn. Page I of2 2012:DHC:7814-DB

/2 + ITA 197012010 + ITAI9Tt/2010 CIT ..... Appellant ..... Respondent Presence' H;i"ili::;*ilffilsi mffi :;hr,T'#Sl;1:.J revenue. Mr. Ajay Vohra, Ms. Kavita Jha and Mr. Vaibhav Kulkarni, Advs. for respondent. CORAM: ' 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. SEPTEMBER 28,2012 . vld k*.-' (R.V. EASWAR) JUDGE IlA,e^L (s. RAVINDRA BHA JUDGE 'r' 'l versus DINESH JAIN r) ITA No. 1667/2010 & conn. Page2 of2 2012:DHC:7814-DB

/8 IN THE HIGH COURT OF'DELHI AT NEW DELHI Reserved on : 26tl' Septernber. 2012. Date of Decision : 28th Septernber. 2012. 'r 1- + + + -T- + + + '1- + -r TTA 1667|2OIO ITA 85/2011 CIT .i VEISUS DINESH JAIN HUF ITA 1800/2010 ITA 1803/2010 ITA 1805/2010 ITA 1807/2010 ITA 1809/2010 ITA 1811/2010 ITA 181212010 ITA 1813/2010 ITA T967/2OTO TTA 1972/2OTO CIT ..... Appellant ..... Respondent ..... Appellant ..... Respondent Page I ofl0 + -r + + f -r + t' LATA.IAIN ITA 1814/2010 ITA 18T5/2OTO ITA 1816/2010 ITA 181712010 ITA 1818/2010 ITA 1819/2OTO ITA 1968/2010 ITA No. l8l4/2010 & conn. 2012:DHC:7814-DB

+ ITA1969/2010 . + ITA 1970/2010 + ITAt9TI/2010 1f ..... Appellant CIT velsus DINESH JAIN o .T ..... Respondent Presence : \zk. 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 Mr. Vaibhav Kulkarni, Advs. for respondent. CORAM: ,-\ MR. JUSTICE S. RA\iINDRA BHAT ' MR. JUSTICE R.V. EASWAR 1 . whether Reporters of local papers may be allowed to see the judgrnent? 2. To be refemed to the Reporters or not? J 3. Whether the judgrnerit 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 cornmon substantial questions of law were framed by the court on3-2-20r1: "Wether learned ITAT erred in delettng the additton rnade by the Assessing officer on account of unexplained investment in rent ryglding property by applying the provisions of Rule 3 of par B of 3'" Schedule to tlte Wealth Tax ActT I fA No. I 6 l4l2010 & conn. Page 2 of 10 2012:DHC:7814-DB

>O ?tt I 2. ITA No.l 814/2010 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.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 alta, investrnent in various properties by the. assessee. One such properfy was Flat No.306, Palm Court, Sukharali Chowk, Gurgaon, which was purchased for Rs.17,55,000. The Assessing Officer noticed that this was a commercial properfy 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. Almost 40Yo 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 |0o/o per annuln. He therefore took the view that the'assessee rnust have invested more 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, L957. He accordingly calculated the "net annualised maintainable rent" of the property at Rs.6,63,000 and multiplying the sarne by 12.5 as provided in the Rule cited above, arrived at the value of the properfy 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 arnount shown in the sale document came to Rs.65,32,500 which was assessed as unexplained investmelt under sec.69B. 3. Similar. addition was tnade in respect of another properfy (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 raade under section 69B. Besides challenging the adoption of ITA No.l 814/201 0 & conn. Page3 ofl0 f 2012:DHC:7814-DB

.\ u the value of the properties calculated on the basis of Rule 3 of Schedule III to the Wealth Tax Act for purposes of compalison and for ascertaining the alleged unexplained portion of the purchase consideration, the assessee also adduced evidence in flre fonn of comparable properties in the sanle 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 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 earlicr year, held that the amount declared by the assessee as purchase price cannot be taken as sacrosanct a.nd that the Assessing Officer can go behind it and find out the "colrect 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 utatter, 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 Fiat 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 sorne earlier years, deleted the entire addition made under sec.69B, following the judgrnents of the.Supreme Court n I{.p. Varghese vs ITo (r98r) 131 ITR 597 and CITvs shivakami company (p) Ltd. (r9s6) 159 ITR 71 and the judgments of this court in CIT vs Shalcuntala 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 iW. Sabharwal for the revenue is that where the facts and circumstances pennit 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. l8 l41201 0 & conn. Page 4 ofl0 'r 2012:DHC:7814-DB

). -?\ impossible to obtain. He points out to what he describes as "disproportionately high returns for ttre investment" in the properties - the rental income is 40o/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 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 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 sturnbling block which Mr. Sabharwal has to overcome. The section is in the following terms: ,'SECTION 698 - AMOLTNT OF INI/ESTMENTS, ETC., NOT FULLY DISCLOSED IN BOOKS OF ACCOUNT. J were in any financial year the assessee has made : investrnents 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 ntaking such investments or in acquiring such bullion, jewellery or other valuable article exceeds the amount recorded in this behalf in the boolcs of account maintained by the assessee for any source of income, and the assessee offers no explanation about such excess amount or the explanatton offered by htm is not, in the opinion of the Assessing officer, satisfactory, the excess amount may be deemed to be the income of the as s es s e e for s uch fi,nancial 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. 9. A "finding" obviously should rest on evidence. In the present case, it is coulmon ground that no incriminating material was seized during the search ITA No. l814/2010 & conrr. Page 5 of10 f 2012:DHC:7814-DB

-'i which revealed any understaternent of the purchase price. That is precisely the reason why the Assessing Ofhcer 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 rnerely 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 sectio4: os 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 arnendment 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 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 properfy, 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 come, an imrnovable properfy that fetches rent shall be valued at I2.5 tirnes the net maintainable rent. i0. There is a fundarnental fallacy in invoking the provisions of the Wealth Tax Act to the application of section 69F- 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 r 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 estimate the fair rnarket value of the asset; after this date, it is not even estimation 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 prope(y in Connaught Place to his son B, B pays nothing for the properfy; 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 properfy is worlh several rnillions. If the Assessing Officer having jurisdiction over "8" has to make an addition under section 698, he can do so only if he "finds" that B has "expended" rnoney which he has not fully recorded in this books of account; he cannot rnake any ITA No.1 814/2010 & conn. Page 6 ofl0 .< 2012:DHC:7814-DB

I -{i lJ 4 addition merely because the properfy could fetch several crore of rupees in the market. 11. Section 69r* 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 simple 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 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 itern 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 properfy 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 property as the sale price and compute the capital gains accordingly. The Suprerne 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 rnarket value of the properry 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 understaternent"; (b) the speech of the Finance Minister while introducing th9 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. Wrile the ornitted section 52(2) applied to the transferor of the propeffy, section 698 applies to the transferee - the purchaser - of the properfy. It refers ITA No. I 8 l4l2010 & conn. Page 7 of l0 2012:DHC:7814-DB

.a ') to the money "expended" by flre 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 Officer to first prove that there was understatement of the consideration (investrnent) 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 porlion of the investment, can proceed to adopt sorne dependable or reliable yardstick with which to measure the extent of understaternent of the investment. One such yardstick can be the fair malket value of the properfy detennined 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 foundational facts to point to undervaluation the adoption of the nonns under the Wealth Tax Act is not comrnented upon by us. 13. The prror committed by the incorne-tax authorities in the present case is to jurnp 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 rneasure the precise extent of understatement. There can.therefore be no compromise in the application of the section. It would seeln to require the Assessing Officer oven 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 rneasure 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 extent 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 pennit the Assessing Offrcer to rely on soille acceptable basis of ITA N0.1814/2010 & conn. Page8 ofl0 o a 2012:DHC:7814-DB

C '] ascertaining the market value of the properfy 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 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. Commtssioner of Incotne Tax, Bihar and Orissa (1959) 37 ITR 288, the Supreme Court disapproved the practice of rnaking additions in the assessments 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 various probabilities which weighed wtth 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 Dhtilian 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 ntight have been indulging in smuggling operations, without an iota of evidence in that behalf," This takes care of the argument of Mr. Sabharwal that judicial.notice can be tpken of the practice prevailing in the properfy market of not disclosing the fulI consideration for transfer of properties. 15. Since the entire case has proceeded on the assumption that there was understaternent 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 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 assess.ee and against the CIT. ITA No. 1814/2010 & conn. Page 9 of l0 T 2012:DHC:7814-DB

>t \ 16. Sinqe 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. I7. The appeals filed by the CIT are dismissed with no order as to costs. If . I M ,-**+'. (RJ/. EASWAR) JUDGE \-' (s. RAVINDRA BHAT) Jt]DGE SEPTEMBER 28,20t2 .<. vld -1 I ITA No. l'8 l4120 I 0 & conn. 10 Page l0 of !:*l*) r 2012:DHC:7814-DB