CIT vs. DINESH JAIN HUF

\x 2. ITA No.I8l4/2070 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.132 of the Act in the residential and business premises 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, 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 40% 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 hirn, refurns on investment were in the range of 70Yo per annuln. He therefore took the view that the assessee must 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 Broperly should be estirnated 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 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 befween 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 investment under sec.69B. 3. Similar.addition was tnade in respect of another property (Flat No.6 in the same building) acquired by the assessee and the total addition made under sec.69B was Rs. 1,38,26,450. 4. The assessee filed an appeal against the assessrnent and.questioned, inter alia, the addition rnade under section 69B. Besides challenging the adoption of ITA No. I 814/2010 & conn. I']age 3 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 allegbd 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-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 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.27,98,26g 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 some earlier years, deleted the entire addition made under sec.69B, following the jrrdgments 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.345l2007, cIT vs Ashok Khetrapal (2007) 294 ITR 143 and cIT vs Manoj Jain (2006) 287ITR 28s. 7 . We should have thought ihat the question is concluded by the judgments cited above, both of the Supreme Court and of this court, but the contention of VIr. Sabharwal for the revenue is that where the facts and circumstances pennit 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. I 8 l4l201 0 & conn. Page 4 of l0

lq irnpossible 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 firsi year, and that would not have been possible unless a much higher arnount 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 5l 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 certainly 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 - AMOUT{T OF INI/ESTMENTS, ETC., NOT FULLY DISCLOSED IN BOOKS OF ACCOUNT. Where in arry financial year the assessee has mad.e investments or is found to be the owner of any bullion, jewellery, or other valuable article, and the Assessing officer finds that ie amount expended on making such investments or in acquiring ' such bullion, jewellery or other valuable article exc"ids thL amount recorded in this behalf fn 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 offired by him is not, in the opinion of the Assessing officer, satisfactory, the excess amount may be d.eemed to be thi income of the assessee for suchfinanctal year. " The section in terms requires that the Assessing Officer has to first.,find,'th4t 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 Offrcer, the section remains dormant. 9. A "finding" obviously should rest on evidence. In the present case, it is comlnon ground that no incrirninating material was seized d.uring the search ITA No. 18 1412010 & conn. Page 5 of l0

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 claim to estirnate the "fair market value" of an asset; it merely lays down a procedure for computing the value of an asset for the pulposes 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 assumption of an open rnarket, be it fictional, a willing seller and a willing buyer, all fictional. This fiction facilitated a realistic estimation of the fair market value of the property, and it moved with the ups and downs of the market. Not anymore. Frorn l-4-I989, the value was frozen. For all tirnes to come, an irnmovable property that fetches rent shall be valued at 12.5 times the net rnaintainable rent. 10. There is a fundarnental 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-4-7gBg, we are to estirnate the fair market 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 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 properfy for Rupee One to "B"; in this case, the consideration paid is only Rupee One, though the properfy is worth several rnillions. If the Assessing Officer having jurisdiction over "8" has to make an addition under section 69B, 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. 1 814/201 0 & conn. Page 6 of10

addition rnerely because the property could fetch several crore of rupees in the market. il. 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 ieason that such an inference could be very subjective and could involve the dangeror4s consequence of a notional or fictional incorne 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 incorne". This was one of the rnajor considerations that weighed with the Supreme Courl 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 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 market value by 15% or more; in such a case, the Assessing Offrcer 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 him to prove the precise extent of understatement and he could adopt the difference between the stated consideration and the fair market value of the property 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 understatement. 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 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 omitted section 52(2) applied to the transferor of the properfy, section 698 applies to the transferee - the purchaser - of the properfy. It refers ITA No. l814/2010 & conn. Page 7 of 10

to the money "expended" by the aSsessee, but not reborded in his books of account, which is a clear reference to undisclosed income being used in the investment. Applying the logic and reasoning in I{.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 portion of the investment, can proceed to adopt sorne 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 properfy determined in accordance with the Wealth Tax Act. We however clariff 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 jump the first step in the process of applying section 698 - that of proving understatement of the investrnent - and apply the measure of understaternent. 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 measure the precise extent of understatement. There can therefore be no compromise 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 understaternent 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 understatement. There is no authority given by the section to adopt some 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. I 814/201 0 & conn. Page 8 of10

ascertaining the rnarket 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 circurnstances 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 investment. but evidence to show the precise extent thereof is lacking. 14. In Lalchand Bhagat Ambica Ram Vs. Commissioner of Incorne Tax, Bihar and Orissa (L959) 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 vari.otts probabilities which weighed with the Income-tax Officer we may observe that the notoriety for .smuggltng food gratns. and other commodities to Bengal by country boats acquired by'Sahibgunj and the notoriety achieved by Dhulian as a great receiving centre for such commodittes were merely a background of suspicion and the appellant could not be tarred with the same brush as every arhatdar and grain merch.ant who might have been indulging in smuggling operations, without an iota of evidence in that behalf." This takes care of the argunent of Mr. 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 assurnption 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 69ts- 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.18l4/2010 & conn. Page 9 of l0

0> 16. Since the basis of the additions made in all the other cases is the same.as in ITA No.1B14/2010, the substantial questions of law in those cases are also similarly answered. 17. The appeals filed by the CIT are dismissed with no order as to costs. Ilr I M *.--+'. (R.V.EASWAR) JTJDGE SEPTEMBER 28,2012 vld ITA Nb. I 814/2010 & conn. 10 .6) $s' 'i -J . r ?r t\-- \-J-e- (S. RAVINDRA BHAT) JUDGE Page 10 of