CIT vs. LATA JAIN

)q (/ 2. ITA No.7814/20I0 has by consent of the parties been taken as the lead matter. The facts necessary for our pulpose in brief are that there was a search operation under sec.132 of the Act in the residential and business prernises 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 properfy which was'fetching a rent of Rs.7.02 lakhs pdr 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 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 him, returns on investment were in the range of 10Yo per annum. 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 rnarket value of the property 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 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 amount 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 came to Rs.65,32,500 which was assessed as unexplained investment under sec.69B. 3. Similar. addition was rnade 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. I,38,26,450. 4. The assessee filed an appeal against the assessrnent and questioned, inter alia, the addition made under section 698. Besides challenging the adoption of ITA No. 1 8 l4l201 0 & conn. Page3 of10

2-O 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 cornparable properties in the same building, such as Flat No.511 and several other instanccs 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 considerati.on. 5. The CIT(A) obtained a retnand 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.27,98,268 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 30-9-2009 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 K.p. Varghese vs ITo (I98r) tgt ITR 597 and CIT vs Shivalcami Company (p) Ltd. (t9s6) 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 Manoj Jain (2006) 287 ITR 28s. 7 . We should have thought that the question is concluded by the judgments cited above, both of the Supreme Court and of this court, but the contention of Mr. Sabharwal for the revenue is that where the facts and circumstances pennit an inference o.f understatement 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. Page4 ofI0

Lt irnpossible to obtain. He points out to what he describes as "disproportionately high retums for the investment" in the properties - the rental income is 40o/o of the investment in the firsi 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, a.re 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 notifications 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 stumbling block which Mi. Sabharwal has to overcorne. The section is in the following terms: . ,,SECTION 698 - AMOUNT OF INT/ESTMENTS, ETC., NOT FULLY DISCLOSED IN BOOKS OF ACCOUNT. Where 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 ma/cing such investments or in acquiring such bullion, jewellery or other valuable article exceeds' the amount recorded tn this behalf in the boolcs of account mainta.tned by the assessee for any source of income, and the assessee offirs no explanation about such excess atnount or tlrc explanation offered 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 as s es s ee for s uch fi,nancial year.,' The section in terms requi/es 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 common ground that no incrirninating rnaterial was seized. during the search ITA No.l814/2010 & conn. Page 5 of 10

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 estimate 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 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-4-1989 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 estirnation of the fair market value of the ploperty, and it moved with the ups and downs of the market. Not anylnore. From l-4-I989, the value was frozen. For all tirnes to come, an imtnovable property that fetches rent shall be valued at I2.5 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 Income 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 faii 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 cefiain rules prescribed by the statute. If A dies leaving prirne properfy 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 "B"; in this case, the consideration 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 "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 of 10

>9 addition merely because the properfy could fetch several crore of rupees in the market. 11. Section 698 does not, perrnit 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 simple reason that such an inference could be very subjective and could involve the dangeroqp consequence of a notional or fictional income being brought to tax contrary to the slrict 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 incorne other than agricultural income". This was one of the rnajor considerations that weighed with the Supreme Court in I(.P. Varghese (supra) in which case the provisions of sub-section \Zl of section 52 fell for interpretation. It was observed that Parliarnent 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 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 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 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 judgrnent" 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 rnarginal note to the section referred to "cases of understaternent"; (b) the speech of the Finance Minister while introducing the provision; and (.) the absurd or irational 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 property, section 698 applies to the transferee - the purchaser - of the property. It refers ITA No. I 8 l4l2010 & 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 matler 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 rneasure the extent of understaternent 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 clarifr that this Court is not concluding that such yardstick is deterrninative; 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 cornmented upon by us. 13. The gnor 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 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 compromise in the application of the section. It would seern 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 yardsticlr 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 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 some reasonable yaldstick 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 sorne acceptable basis of ITA No. I 8 14/2010 & conn. Page 8 of10

,- 24' ascertaining the market value of the properly to assess the undisclosed ' investment. Whether the basis adopted by the Assessing Officer is il1 acceptable one or not may depend on the facts and circumstances 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 may be relaxed in cases, where there is evidence to show understaternent of the investment. 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 assessments on mere suspicion and surmise or by taking note of the notorious practices prevailing in trade circies. 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 grains. and other cornmodities to Bengal by country boats acquired by Sahibgunj and the notoriety achieved by Dhilian 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 might have been indulging in smuggling operations, without an iota 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 properfy market of not disclosing the full consideration for transfer of properties. 15. Since the entire case has proceeded on the assurnptibn 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. 1 8 l4l201 0 & conn. Page 9 of l0