Estimation of On Money- The Dust Settles

[Bharat Agarwal]

1. The concept of taxation world over is based upon the “real income” theory.  The earliest tax jurisprudence as laid down by the apex court held that only real income can be taxed and not notional income has been diluted by the legislature over the years. Various deeming fictions have been introduced under the Income Tax Act, to treat the “fair market value” as transaction value instead of agreement value  purportedly as a measure to counter the tax evasion. For  instance :-

• Section 50C deems the consideration on sale of immovable property to be higher of the value mentioned in the agreement or the stamp duty value.  Such higher value is treated as sale consideration in the hands of the seller for the purpose of calculation of capital gain, irrespective of sale consideration as per agreement.
• Section 56(2)(vii)  treats the differential between stamp duty value and the agreement value as the income of the purchaser and such income is taxed under the head “Income from Other Sources”.
• Section 43CA treats the stamp duty value as the minimum sale value in the hands of the builder and such value is taken as sale consideration for calculating the business income, if the agreement value is less than such stamp duty value.

2. Although, the provisions enlisted above give statutory recognition to the process of following stamp duty valuation as the “fair market value” of the immovable property, yet the officers proceed to estimate “on money” over and above this “fair market value”. It is normal to come across assessment orders where the assessing officer has estimated “on money” in property transactions on the basis that certain other flats in the same building have been sold at prices higher than the basic stamp duty valuation. Such estimation has been questioned by the assessee before the courts.

3. In almost all the cases of estimation of “on money”, the department relies upon the decision of the Supreme Court in the Sales Tax case of CST v. Esufali H.M. Abdulali 1973 (4) TMI 49 - SUPREME Court . The apex court upheld the estimation of turnover made by the Sales Tax authorities on the basis of sales recorded in the sale book only  for 13 days. The authorities had estimated the turnover for the entire financial year on the basis of such sale book. The apex court upheld the departmental action stating that there was clear indication of unrecorded sales carried out  by the assessee although the sales books for such period were not found.  

4. The above decision is applied indiscriminately by the Revenue authorities in the cases where evidence of “on money” is found in case of few flats sold in a building.  As a matter of routine, the Revenue authorities estimate similar “on money in all other flats as well even though for such flats no evidence has been found for any “on money”.  While doing so, the value of the flats as per the stamp authority is totally ignored. The contention of the Revenue  in such matter  is that  after adding  the “on money” component to the value of  flat for which evidence is found, the actual market value of the flat is arrived at.  Such market value is taken as the base price in estimating the consideration in all other flats instead of the stamp duty value.  

5. The above view has been accepted by the courts in the following cases :

• Diamond Investment & Ors. v/s Department of Income Tax, 2010 (7) TMI 1037 - ITAT MUMBAI :

This was an ex-parte order and the facts recorded by the Tribunal were that the assessee had charged differential rates from various parties and the Assessing Officer found that there was no proper explanation as to why lower rate was charged in respect of two flats with a particular party. It was in this background the Assessing Officer made an addition on account of suppressed sale with regard to the flat sold to that party. On these facts the Tribunal had come to a conclusion that the Assessing Officer can draw inference from the surrounding circumstances specifically when the Assessing Officer has brought on record that the flats in the same building had been sold to higher price than sold to a particular party.  Since there was no arguments from the assessee side it is not known what the full facts of the case were.

• Gopal Lal Bhadruka v/s DCIT, 2012 (6) TMI 657 - ANDHRA PRADESH HIGH COURT

In this case, during the course of search and seizure operation, it came to light that the sale consideration as per the sale deed did not tally with the actual payments made by the purchasers and there was suppression of sale receipts. On scrutiny of eight sale deeds, it appeared that receipt of on money was paid to A.H. Statement of G was recorded on more than one occasion and he confirmed the receipt of on-money. Most of the purchasers of eight plots from whom evidence of payment of on-money was found, confirmed the payment of on-money. The main issue before the Assessing Officer was the suppression of sale proceeds and estimation of undisclosed income of A.H. and substantive addition was made in respect of A.H. while protective assessment was made in respect of sale on G and A. The main contention of the assessee was that the acknowledgement of on-money by G and A cannot be held to be sufficient evidence to show that true sale proceeds have been suppressed by A.H. and that he has received on-money. The appellate authority had come to a conclusion that there was sufficient material to conclude with A.H. who had received on-money. The Tribunal also confirmed the findings recorded by the Assessing Officer and the learned Commissioner (Appeals). The Hon'ble High Court appreciated the facts recorded by the Tribunal held that no substantial question arises in this case. Further, the High Court after analyzing the provisions of section 153A, 153C, observed that the principle laid down by the Hon'ble Supreme Court in CST v. Esufali H.M. Abdulali 1973 (4) TMI 49 - SUPREME Court , will also apply in case of section 153 and 153C and if there is adequate material before the Assessing Officer with regard to the receipt of on-money, the Assessing Officer can draw an adverse inference.

• CIT v/s Chetan Das Lachman Das, 2012 (8) TMI 367 - DELHI HIGH COURT

In this case, it was found that the assessee has recorded two rates as found from the seized papers but entered only the lower rate in the sales bill. The entire seized material showed that the assessee was suppressing the sale rate disclosed in the books of account. On the basis of seized material, the Assessing Officer rejected the book results after applying the provisions of section 145 and estimated the income earned by the assessee. It was in this background, the High Court in principle, upheld the contentions of the Assessing Officer, however, the entire matter was set aside to the Tribunal to examine whether the learned Commissioner (Appeals) was justified in substantially reducing the additions by holding that the sales turnover cannot be estimated on the basis of seized material. Since there was a discrepancy in the facts recorded by the Tribunal, the findings of the Tribunal was not appreciated and the matter was restored back to the Tribunal for fresh consideration.

• On the other hand, the Delhi High Court in the case of CIT v. Discovery Estates (P.) Ltd. 2013 (3) TMI 124 - DELHI HIGH COURT took a divergent view and did not approve the action of the Revenue authorities in presuming “on money”. It held that sale of each unit in a building is a contract separately executed between the buyer and the seller. Therefore, no uniformity  can be applied in  the price in each case.  Secondly, each property has its own specific feature and therefore the  value will vary accordingly.  For instance, property facing the road would fetch higher price than the property behind.  Similarly, the value of property would be different for two premises of two different floors. In the city like Mumbai, even the view from the flats leads to differential pricing. Besides specific characteristic of the property,  the market conditions, the financial condition of the builder/seller would also determine the contract price of the flat.  These factors  could lead to heavy price differential between two flats in the same building. The timing difference on sale of flats in ongoing project also alters the price in big way. Therefore, the concept of estimating sale consideration on the basis of standard unit price is seriously incorrect.

• A  similar view has been taken by the Mumbai ITAT in the case of ACIT  v. M/s. Metro Construction Company 2013 (7) TMI 687 - ITAT MUMBAI   wherein it has been held by the hon’ble ITAT that if there were evidences that certain flats were sold for “on money”, there was no evidence that such “on money” was charged in other flats. Therefore, it cannot be said with certainty that for  the flats  for which no evidence either way was found, any “on money” payment has been made. Therefore, while deleting the addition of “on money” on such type of flats, the Mumbai ITAT disapproved the estimation of “on money” theory. It further compared the price of the flats on which “on money” was charged with the price of the flats on which “on money”  was estimated  and came to a conclusion that the price of the flat before adding “on money” was higher than the price of the flats after adding “on money”, and hence no “on money” could be estimated. This order of ITAT subsequently stands affirmed by the Hon’ble Mumbai High Court.

• In the case of CIT v. Dolphin Builders (P.) Ltd. 2013 (6) TMI 103 - MADHYA PRADESH HIGH COURT , a search was conducted by Income Tax Department u/s.132 of the Act in the premises of G in which some papers were found and some figures were noted.  The AO concluded that the total sales proceeds as accounted in the books of accounts has been understated as against the sale proceeds as per the seized documents. In this regard the Madhya Pradesh high court held that there was no evidence in the matter that the excess amount, if any, was collected by G. Apart from this, the department had not examined any purchaser or flat owner to verify the correctness of the noting that some higher amount was paid by the said purchaser to G or the fact that actual price was much higher to the price which was recorded in the account books. Though there may be some doubt about the price of the flats but until and unless it could have been proved by some evidence, aforesaid doubt cannot take place of proof. Until and unless such noting is corroborated by some material evidence, the AO erred in making addition in the income.

• The issue again arose before the Mumbai ITAT in the case of M/s. Neelkamal Realtors and Erectors India Private Limited v. DCIT 2013 (8) TMI 557 (Mumbai ITAT) :

In this case the assessee was a builder & developer. It followed “project completion method” to declare income. During the course of assessment proceedings, assessee was asked to furnish party-wise details of flats sold with details of name and addresses of buyers, area of flats sold, total sale consideration, date of agreement, date of first payment received etc. On perusal of these details AO found that there were variations in price charged by assessee to various customers. Assessee gave details and reasons for such variation in sale rates. However, the AO ignored the same and made addition on the basis of difference between the rates charged. On appeal before CIT(A), it was held that market value of flats ought to have been considered instead of the actual sale consideration as per the provisions of section 50C and 56(2)(vii)(b)(ii) of the Act. However, the Mumbai ITAT held that both the provisions are inapplicable in the current case. It also held that the AO has simply brushed aside the explanations given by assessee qua each flat sold at lower rate by simply mentioning that such reduction was not justifiable or there was no explanation for lower rate or fabricated reasoning etc. Such rejection of assessee’s explanation in one stroke is wholly impermissible. If the AO was not satisfied with assessee’s explanation for charging a  lower rate in comparison with a higher rate of other flats, he was required to bring on record certain material to demonstrate that assessee, in fact, charged such higher rate. The rejection of assessee’s explanation for charging a lower sale price cannot be jettisoned without positively showing that assessee received a higher sale price. The AO cannot simply make addition on hypothetical basis by presuming a higher sale price by simply rejecting assessee’s explanation without cogent reasons. If this procedure is accepted, then it would amount to taxing hypothetical income instead of real income, which is obviously impermissible unless an express provision is enshrined in this regard.

In the case of CIT v/s Chetan Das Lachman Das, 2012 (8) TMI 367 - DELHI HIGH COURT the High Court upheld the concurrent finding of the CIT and the Tribunal that there was no basis of making any addition towards low gross profit as in the search on the assessee did not yield any incriminating material on the basis of which it can be said that the assessee was indulging in any kind of under invoicing and suppression of sale. The documents on which the Assessing Officer had placed reliance was seized from different person and not from the assessee and there was no nexus between the said material.

6.      On a perusal of the aforesaid judicial pronouncements the following propositions can be culled out :

1. The legislature has already provided for “fair market value” of immovable property being equal to the stamp duty valuation. Where the agreements are more than or equal to the market value as per stamp authority, normally there should not be an incidence of further estimation of “On Money”.
2. The department would be within its right to estimate higher sale consideration in case it is in possession of specific and cogent evidence of such payment by purchaser for the particular immovable property.
3. Any evidence found during search may be the starting point of further investigation by the department but the said evidence cannot be conclusive enough to override the statutory recognition of fair market value in the assessment. 
4. In absence of cogent evidence the explanation of assessee cannot be simply brushed aside, to estimate “On Money” by relying upon the decision of the H.M Eusufali (supra).
5. Where the assessee furnishes plausible reason for charging different rates for different types of flats then the department will not be justified in applying a standard rate.

Conclusion:

From a conspectus of cases as discussed above and the decisions of Mumbai and Delhi High Court, it is clear that the judicial opinion is against any estimation of “on money” in absence of specific information. The courts have always leaned in favour of taxing “real income” instead of “notional income”. The presumption and presupposition applied against the specific legal mandate is not easily upheld by courts. Probably a clearer instruction to field officers could save a lot of litigation and harassment of the tax payer.

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[Bharat Agarwal]

The credit for research is to CA Sneha Sarbhushan. Without her contribution this article would not have seen the day.