Whether when assessee does not cooperate in assessment and DVO also adopts arm-chair approach of making no independent inquiry, merely following return on capital method AO can make huge additions as unexplained investment - NO: HC

THE issue before the Bench is - Whether when the assessee does not cooperate in the assessment proceedings and the DVO also adopts arm-chair approach of making no independent inquiry, merely following the return on capital investment method the AO can make huge additions as unexplained investment. And the verdict favours the assessee.

Facts of the case

The assessee, an individual, had filed the return for AY 2007-08. Revenue conducted a search and seizure u/s 132 in respect of the Gopal Zarda Group including the assessee, and proceedings u/s 153A were initiated. The case of the assessee was centralized by an order and notice was issued u/s 153A requiring the assessee to file return. The assessee filed a return declaring income of Rs. 12,76,890/-. The original return in this case was filed on 05.11.2008 declaring income of Rs. 12,62,699/- . The difference was on account of interest income from bank which was declared at Rs. 14,846/-; subsequently it was disclosed as Rs. 29,035/-. AO held that property bearing No. 201 to 210, 15, Community Centre, Karkardooma, Delhi-92 shown to have been purchased for a consideration of Rs. 51 lakhs was not correctly valued. This was because it was let out to one M/s CRR Capital Services Ltd. for a monthly rent of Rs. 3,10,114/-. The assessee was asked to explain why the purchase price of the property be not determined on the basis of return on investment method and the difference be not treated as unexplained investment. In reply the assessee submitted that the property was acquired for the consideration shown in the sale deed. No other document was found to reflect the payment over and above the consideration disclosed to the authorities. During the course of assessment, the AO referred the matter for valuation of the property u/s 142(A). Apparently, the report was not available at the time of completion of assessment. Consequently, the AO estimated the purchase consideration of Rs. 1.25 crores and added Rs. 74 lacs as investment from undisclosed sources and sought to tax the same as unexplained investment. On appeal, CIT(A) allowed the assess's appeal. On further appeal, Tribunal had also rejected the Revenue's appeal.

Before the High Court, Revenue's counsel urged that the AO’s order could not be faulted under the circumstances because he adopted a reasonable method for arriving at the value of the property. Explaining this, it had submitted that the return of Rs. 3,10,114/- per month as rent was disproportionate and excessive having regard to the declared cost of acquisition of the property and therefore the adoption of the return on capital method in these circumstances was reasonable. The counsel submitted that the AO had no choice because the assessee did not cooperate. It was also submitted that DVO’s report subsequently furnished clearly showed that the assessee did not cooperate and care to respond to notices which compelled him to state that he could not complete the valuation exercise. The counsel also highlighted the fact that CIT (A) had accepted the assessee’s contention even without calling for a remand report.

On the other hand, the assessee's counsel had submitted that whilst the AO could possibly have entertained a suspicion, that by itself could not have led to adoption of the return on capital method without a finding based upon materials that the cost of acquisition of the property was undervalued. The counsel in this regard relied upon the judgment of HC in CIT vs. Agile Properties (P.) Ltd. 2014-TIOL-626-HC-DEL-IT and CIT vs. Dinesh Jain HUF: 2012-TIOL-1060-HC-DEL-IT.

Held that,

++ from the above discussion, it is apparent that what excited the AO’s suspicion was that as against the cost of acquisition of Rs. 51 lakhs or so, the assessee declared a monthly rent of Rs. 3,10,114/- for the premises. This is no doubt unusual and the AO’s suspicion was perhaps in the circumstances, justified. However, that does not validate the sequitur or the sequence of events which followed. Whilst, the AO referred the matter to DVO and could have relied upon an adverse report after putting it in a manner known to law to the respondent, what is evident is that the AO proceed to add Rs. 74 lakhs without the benefit of any scientific or reasonable determination as to the value. The fact that the assessee did not cooperate would not absolve the AO from adopting some methodology in arriving at the market value which according to him had not been disclosed by the assessee. The task of the DVO in the circumstances became crucial; he could not have indulged an arm chair exercise by merely issuing notices to the assessee. He could have possibly visited the premises as the address was known and gathered information of the market value at the time of the inspection or even at the time of the acquisition of the property not only by the assessee but by other contemporaneous transactions in properties situated in the vicinity; he could have gathered information about the prevailing circle rate as on the date of acquisition as well as other relevant materials. The DVO’s lack of information or inputs only compounded the error in the present case;

++ in Dinesh Jain this Court observed 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”. This was one of the major considerations that weighed with the Supreme Court in K.P. Varghese in which case the provisions of subsection (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 income 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 property as the sale price and compute the capital gains accordingly. The SC 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 understatement. 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 from a literal interpretation of the sub-section, which could not have been intended by the legislature;

++ in the present case, there was no basis for the AO to determine that the true value of the property was Rs. 1.25 crores, by adopting the return on capital method. The AO was under a duty first to ascertain what was according to him the true cost of the property. Not having done so, that error could not have been compounded by adopting a completely different methodology without any positive finding as to the cost of acquisition. The conclusions of the CIT (A) therefore, could not be faulted with, where it had observed that on a consideration of the above facts and the legal position as emerging from the decisions relied upon by the appellant it is seen that the addition made for Rs. 74 lacs is purely based on estimate and conjecture and there is no substance in the estimate made by the AO, who in any case is not authorized to make any estimate under the provisions of section 142(2A). Moreover, section 69/69B are deeming provisions and it is trite law that deeming provisions are to be strictly interpreted. AS there is no invoke section 69/69B therefore for this reason too the addition made for Rs. 74 lacs is not sustainable in law. Accordingly, the AO is directed to delete the addition made for Rs. 74 lacs on account of unaccounted investment made by the assessee out of undisclosed sources of income. For the forgoing reasons, this Court finds that there is no substantial question of law requiring determination in the present appeal. The same is consequently dismissed