2012 (10) TMI 158 - HC - Income Tax

Unexplained investment in rent yielding property - ITAT deleted the addition - Held that - Section 69B does not permit an inference to be drawn from 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 dangerous 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 . The error committed by the income-tax authorities in the present case is to jump the first step in the process of applying section 69B - that of proving understatement of the investment - and apply the measure of understatement. If anything, the language employed in section 69B is in stricter terms than the erstwhile section 52(2). It does not even authorize 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 AO even to show the exact extent of understatement of the investment, it does not even give the AO the option of applying any reasonable yardstick to measure the precise extent of understatement of the investment once the fact of understatement is proved. It appears that the AO 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 some reasonable yardstick to measure the extent of understatement - 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, it is unable to approve of the decision of the income-tax authorities. Section 69B was wrongly invoked. The order of the Tribunal is approved & the substantial question of law is answered in favour of the assessee

Issues Involved:
1. Whether the ITAT erred in deleting the addition made by the Assessing Officer on account of unexplained investment in rent-yielding property by applying the provisions of Rule 3 of Part B of the 3rd Schedule to the Wealth Tax Act.

Issue-wise Detailed Analysis:

1. Background and Facts:
The case involves appeals filed by the Commissioner of Income-tax under section 260A of the Income Tax Act, 1961, against the orders of the Income Tax Appellate Tribunal (ITAT). The core issue revolves around the deletion of additions made by the Assessing Officer (AO) concerning unexplained investments in properties that were yielding rent.

2. Findings of the Assessing Officer:
During a search operation under section 132 of the Act, the AO discovered investments in properties by the assessee. One such property, Flat No.306, was purchased for Rs. 17,55,000 but was generating a rental income of Rs. 7.02 lakhs per annum. The AO concluded that the property's fair market value should be estimated using Rule 3 of the Schedule III to the Wealth Tax Act, 1957, leading to an assessed value of Rs. 82,87,500. The difference between this value and the declared amount was treated as unexplained investment under section 69B of the Act.

3. Appeal and Evidence by the Assessee:
The assessee contested the AO's findings, providing evidence of comparable properties to demonstrate that the declared purchase price was accurate. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO's view in principle but reduced the additions.

4. Tribunal's Decision:
The ITAT, referencing its earlier orders and Supreme Court judgments, deleted the entire addition made under section 69B. The Tribunal emphasized the necessity of direct evidence to prove understatement of consideration.

5. Revenue's Contention:
The revenue argued that high rental returns indicated an understatement of the purchase price, justifying the AO's reliance on Rule 3 of Schedule III to the Wealth Tax Act. They contended that judicial notice should be taken of the common practice of not disclosing full consideration in property transactions.

6. Legal Interpretation of Section 69B:
The court highlighted that Section 69B requires the AO to first "find" that the assessee has "expended" an amount not fully recorded in the books. This finding must be based on evidence. The court noted that no incriminating material was seized during the search to suggest understatement of the purchase price. The reliance on Rule 3 of Schedule III to the Wealth Tax Act was deemed inappropriate as it does not estimate the fair market value but merely computes the value for wealth tax purposes.

7. Burden of Proof:
The court emphasized that the burden of proving understatement of investment lies with the AO. Without foundational evidence of such understatement, the application of Section 69B is invalid. The court referenced the Supreme Court's decision in K.P. Varghese, which underscored the necessity of proving actual understatement before adopting any measure of understatement.

8. Judicial Precedents:
The court cited several judgments, including K.P. Varghese and Lalchand Bhagat Ambica Ram, to support the principle that additions cannot be made based on suspicion or common practices without concrete evidence.

9. Conclusion:
The court concluded that the income-tax authorities erred by assuming understatement of investment without evidence. Consequently, the Tribunal's decision to delete the additions was upheld. The substantial question of law was answered in favor of the assessee, and the appeals filed by the CIT were dismissed.

Summary:
The judgment revolves around the deletion of additions made by the AO under Section 69B for unexplained investments in properties. The court emphasized the necessity of concrete evidence to prove understatement of investment and rejected the AO's reliance on Rule 3 of Schedule III to the Wealth Tax Act. The Tribunal's decision to delete the additions was upheld, and the appeals by the CIT were dismissed.

← Previous Next →