CIT vs. LATA JAIN

IN THE HIGH COURT OF DELI{I AT NEW DELHI Reserved on : 26ft September.2012. Date of Decision : 28h September.2012. + + rTA 1667/2010 ITA 8s/2011 CIT + + -r -r -r -r + + + + -r + + + -l- + -l- versus DINESH JAIN HUF rTA 1800/2010 ITA 1803/20t0 rTA 1805/2010 ITA 1807 /2010 ITA 1809/2010 ITA r811/2010 ITA 1812/2010 rTA 1813/2010 ITA1967t20t0 ITAT972I2OTO CIT versus LATA JAIN ITA r815/2010 ITA 181612010 ITA t8t7/2010 ITA 181 8/2010 rrA 1819/2010 ITA 196812010 ITA 1969/2010 ..... Appellant ..... Respondent ..... Appellant ..... Respondent ITA No. I 66712010 & conn. Pagel of2 Signing Date:07.09.2024 17:11:16 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. Signature Not Verified

+ + ITA 1970/2010 ITA I97II2OTO 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. KavitaJha and Mr. Vaibhav Kulkarni, Advs. for respondent. CORAM: MR. JUSTTCE S. RAVINDRA BHAT MR. JUSTICE R.V. EASWAR l. Whether Reporters of local papers may be allowed to see the judgment? 2. To b6 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. [t.^--,. (R.V. EASWAR) JUDGE versus DINESH JAIN SEPTEMBER 28,2012 vld ..... Appellant ..... Respondent (s. RAVTNDRA BHAT) JUDGE ITA No.l66712010 & conn. Page2 of?

IN TIIE IIIGH COURT OF'DELHI AT NEW DELHI + + ITA 1667|2OTO ITA 85/2011 CIT Reserved on : 26e September.2012. Date of Decision : 28tl'septernber,2012. ..... Appellant ..... Respondent ..... Appellant ..... Respondent Page I ofl0 versus DINESH JAIN HUF ITA 180012010 ITA 1803120t0 ITA 180s/2010 ITA 180712010 ITA 1809/2010 ITA 181 Il2OTO ITA 18I2I2OIO ITA 1813/2070 rTA t967 /2010 ITA T972I2OIO CIT + + -r + + + I-T- + + -r- vefsus LATA JAIN ITA 1814/2010 ' ITA 1BISIZOLO ITA 181612010 ITA 18T7I2OIO ITA 181 8/2010 ITA 1819/2010 ITA 1968/2010 + -r -r I-r -r + + ITA No. I 814/2010 & conn.

G + . ITA 1969/2010 . + ITA 1970/2010 + ITA197t/20t0 CIT ..... Appellanf versus DINESH JAIN ..... Respondent Presence : Mr. Sanjeev Sabharwal, sr. standing counsel with Mr. Puneet Gupta, jr. standing counsel and Ms. Gayatri Venna, Adv. for '-r: iil:ffir Vohra, Ms. Kavita Jha and Mr. Vaibhav I(ulkarni, Advs. for respondent. CORAM: MR. JUSTICE S. RAVINDRA BHAT' MR. JUSTICE R.V. EASWAR 1. Wrether Reporters of local papers may be allowed to see'the judgrnent? 2. To be referred to the Reporters or not? Y 3. Whether the judgment should be reported in the Digest? .i R.V. EASWA.R, J.: ' . These are appeals filed by the Cornmissioner 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 comrlon substantial questions of law were framed by the court on3-2-20II: "Whether learned ITAT erced in deleting the addition ntade by the Assessing Officer on account of unexplained investment in rent yielding property by applying the provisions of Rule 3 of Par B of 3''" Schedule to the Wealth Tax Act? " . ITA No.l 814/2010 & conn. Page 2 of l0

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 fonn 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, represente.d 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 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 sacros&nct and that the Assessing Officer can go behind it and find out the "cotrect and fair valuations of the imrnovable 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.27,98,268 for Flat No.6 and Rs.2L57,975 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 30-9-2009 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 vs ITo (r98r) 131 ITR 597 and cITvs shivakami company (p) Ltd. (tgg6) 159 ITR 71 and the judgrnents of this court in CIT vs Shakuntala Devi in ITA No.345l2007, CIT vs Ashok Khetrapal (2007) 294 ITF. 143 and CIT vs Manoi Jain (2006) 2S7ITR 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 Mr. Sabhalwal for the revenue is that where the facts and circumstances pennit an inference of understaternent 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 of I0

@ irnpossible to obtain. He points out to what he describes as "disproportionately high returns for the investment'l in the properties - the rental income is 40% of the investtnent in the firsi year, and that would not have been possible unless a rnuch 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 Stamp Act prescribing circle rates for the properties and rarely do properties get transferred for such rates. 8. These arguments are cettainly attractive but the language ernployed by Section 69B is the first stumbling block which Mr. Sabharwal has to overcorne. The section is in the following tenns: ,,SECTION 698 - AMOUNT OF INI/ESTMENTS, ETC., NOT FULLY DISCLOSED IN BOOKS OF ACCOUNT. Where in any financtal 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 malcing such investments or in acquiring such bullf.on, jewellery 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 htm is not, in the opinion of the Assessing officer, satisfactory, the excess amount may be deerned to be the tncome of the assessee for suchfinancial year. " The section in terms requires that the Assessing Officer has to first "frnd" 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 expl'anation. Till the initial burden is diScharged by the Assessing Officer, the section rernains dormant. 9. A "finding" obviously should rest on evidence. In the present case, it is common ground that no incriminating material was seized during the search ITA No. I 814/2010 & conrr. Page 5 of10

which revealed any understaternent 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 claim to estirnate the "fair market value" of an asset; it rnerely 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 clropped all pretensions to ascertaining the fair mar*et 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 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 moved with the ups and downs of the market. Not anymore. From I-4-I989, the value was frozen. For all times to corne, an imrnovable property that fetches rent shall be valued at 12.5 tirnes the net maintainable 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 Wealth Tax Act as it stood before 1-4-1989, we are to estimate the fair market value of the asqet; after this date, it is not even estimation of the fair rnarket 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 property for Rupee One to "8"; in this case, the consideration paid is only Rupee One, though the'property is worth 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" money which he has not fully recorded in this books of account; he cannot make any ITA No. I 814/2010 & conn. Page 6 of 10

addition merely because the property could fetch several crore of rupe6's in the market. 11. Section 698 does not permit an inference to be drawn frorn the circumstances surrounding the transaction that the purchaser of the property 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 inf.olve the dangerou$ consequence of a notional or fictional income being brdught 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 rnajor cbnsiderations 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 incorne an item which in no rational sense can be regarded as a citizen's incorne 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 rnarket value by 15% or rnore; 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 understatement of consideration and once that burden was discharged it was not required of hirn to prove the precise extent of understaternent 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 judgrnent" once actual understaternent 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 (c) the absurd or . irrational results that would flow frorn a literal interpretation of the sub-section, which could not have been intended by the legislature. 12. While the ornitted section 52(2) applied to the transferor of the properly, section 698 applies to the transferee - the purchaser - of the properfy. It refers t ITA No.1 814/2010 & conn. Page 7 of 10

;' to the money "expended" by the assessee, but not recorded in his books of account, which is a clear reference to undisclosed 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 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 frorn the assessee as to the source of the undisclosed portion of 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 market value of the property determined in accordance with the Weal'th 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 commented upon by us. 13. The grror committed by the income-tax authorities in the present case is to jurnp the first step in the process of applying section 698 - that of proving understaternent of the investment - and apply the rneasure of understatement. If anything, the language ernployed in section 69B 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 seetn to require the Assessing Officer even to show the exact extent of understaternent 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 understalement 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 understatetnent. There is no authority given by the section to adopt sorne 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 permit the Assessing Officer to rely on solne acceptable basis of ITA No.1814/2010 & conn. Page 8 of 10

@ 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 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. Comrntssioner of Income Tax, Bihar and Orissa (1959) 37 ITR 288, the Supreme Court disapproved the practice of making additions in the assessrnents on mere 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 prol:abilities which 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 cornmodities were merely a background of suspicton and the appellant could not be tarred with the same brush as every arhatdar and grain rnerchant who might have been indulging in smuggling operations, without an iota of evidence in that behalf." This takes care of the argument of I\&. Sabharwal that judicial notice can be taken of the practice prevailing in the properly 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 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. l814/20 l0 & conn. Page 9 of l0