Delhi High Court
Cit vs Arens Developers & Engg on 6 March, 2012
Author: Sanjiv Khanna
Bench: Sanjiv Khanna, R.V. Easwar
$~2
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Date of Decision : 6th March, 2012.
+ ITA 145/2012
CIT ..... Appellant
Through Mr. Abhishek Maratha, sr. standing
counsel with Ms. Anshul Sharma, Adv.
versus
ARENS DEVELOPERS & ENGG ..... Respondent
Through
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE R.V. EASWAR
SANJIV KHANNA,J: (ORAL)
1. This appeal filed by the Revenue under Section 260A of the
Income Tax Act, 1961( „Act‟, for short) impugns the order dated
21.04.2011 passed by the Income Tax Appellate Tribunal
(„Tribunal‟, for short) in the case of Arens Developers and Engineers
Ltd., the assessee. This appeal relates to the assessment year 2002-
ITA 145/2012 Page 1 of 8
03.
2. Only one contention has been raised before us by the Revenue.
Ld. senior standing counsel for the Revenue submits that the
Assessing Officer was justified in making additions on the ground of
understatement of sale consideration and computing the same by
capitalizing the annual rent. He submits that the method adopted by
the Assessing Officer was justified and in support of his submission
has relied upon the decision of Madras High Court in Rane (Madras)
Ltd. Vs. CIT (2003) 259 ITR 307.
3. The CIT(Appeals) deleted the said addition of Rs.3,52,66,096/-
after referring to the factual matrix. Search operations were
conducted during the relevant year but no incriminating material/
document regarding understatement sale transaction was found. The
documents/ material did not indicate that the properties were sold for
higher consideration, than the amount mentioned in the agreements.
The parties to whom the properties were sold had affirmed the said
transaction and the consideration paid. The CIT(Appeals) held that
ITA 145/2012 Page 2 of 8
the rent capitalization method is not a proper method for determining
the deemed sale consideration for the properties as there was no
material to show that there was understatement and thus rent
capitalization method cannot be the basis to hold and compute the
alleged understatement of the sale consideration.
4. The aforesaid findings recorded by the CIT(Appeals) have
been affirmed by the Tribunal, who have stated as under :
"12. We have hard (sic.) both the parties and gone
through the material available on record. The Assessing
Officer had estimated the value of the property based on
rent capitalization method which is applicable to wealth
tax proceedings. During the course of search no mater[al
(sic.) was found to suggest that properties were sold at
higher price than the price mentioned in sale deeds. The
Assessing Officer had proceeded to value the property on
rent capitalization method merely on assumption and
surmises. No material has been brought on record to
justify that the sale value was lower than the actual price
for which the properties were sold. In the absence of any
material on record to establish that the sale consideration
of the properties was more than the recorded value, in
our considered opinion, Assessing Officer was not
justified in estimating the sale consideration on the basis
of rent capitalization method. Accordingly, we do not
ITA 145/2012 Page 3 of 8
find any infirmity in the order of Ld. CIT (A) deleting
the addition."
5. The reasoning and findings recorded by the CIT (Appeals) and
the tribunal, we do not merit interference. The decision of the
Madras High Court relied upon by the assessee in the case of Rane
(Madras) Ltd. (supra) is in a different background and not apposite.
In that case, fair market value of the property as on 01.01.1964 had
to be estimated/ calculated for the purpose of Section 55 A of the
Act. The assessee had submitted a report of a registered valuer. The
Assessing Officer, estimated fair market value of the property as on
1.1.1964 by adopting the rent capitalization method as provided in
Schedule III to the Wealth Tax Act, 1957. The value as on
01.01.1964 had to be estimated and the High Court for the reasons
stated, accepted the valuation method applied by the Assessing
Officer. This is different from stating that understatement of sale
consideration without any other evidence/material can be assumed,
measured and computed by applying rent capitalization method. In a
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given case, the said contention/ method may go against the Revenue
and lead to evasion of tax.
6. In the present case, the assessee has sold properties. The
statement of the parties to whom the properties were sold have been
recorded. All of them have confirmed the sale consideration
mentioned in the sale document/agreement. In the search no
incriminating material or evidence to show and establish
understatement of sale consideration was found. The observations
of the Assessing Officer for adopting the rent capitalization method,
in the assessment order read: -
"Suppression of Sale Consideration
During the course of assessment proceedings, it
was noted that the assessee suppressed sale
consideration on sale of immovable properties. The
assessee takes advantage of the fact that in such sale
considerations, the buyer also affirms the consideration
because the buyer is also a beneficiary as far as evasion
of income tax is concerned. In such situation, it is very
difficult for the department to establish that the sale
consideration has been suppressed. This fact however,
does not need any confirmation as far as reality is
concerned."
ITA 145/2012 Page 5 of 8
Therefore, the Assessing Officer held: -
"The perusal of details submitted by the assessee company,
indicate that sale consideration shown by the assessee
company is absurd when compared with the rentals,
these properties were fetching. The transactions have
taken place in the F.Y. 2001-02 when the return on
capital at the maximum, is estimated between 10-12%
per annum. Even if the assessee is considered to have
entered into a bad deal, return on capital for the buyer
should not be more than 20% per annum by any stretch
of imagination. It is important to mention here that the
properties are brand new construction and given on rent
to reputed companies.
The assessee was asked to explain how the sale
consideration is justified when compared with the rent,
which the sold property, was fetching. The explanation
given by the assessee has been considered. I am not able
to understand the claim of the assessee from any
parameter. The claim of the assessee is primarily based
on the argument that its sale considerations are supported
by sale deed/ other agreements etc. The assessee can not
be allowed to take advantage of this situation because the
transactions are prima facie absurd and most definitely
qualify to be "mutually-beneficial-collusive
transactions". In these circumstances and considering
the absurdities, claimed by the assessee in its books of
account, I do not find that the books of accounts in any
manner, indicate real state of affairs. Sale consideration
on the rented properties is estimated at the max to give
15% return to the buyer."
ITA 145/2012 Page 6 of 8
7. The aforesaid observations indicate that the Assessing Officer
failed to conduct a detailed enquiry and verification, which may have
justified their stand regarding understatement or non-declaration of
the actual sale consideration. The Assessing Officer should have
collected the necessary material/evidence with reference to other sale
instances in the same building or in adjacent/similar buildings. The
Assessing Officer did not consider and collect evidence on the rate of
rent and capital value of the building in the area. The Assessing
Officer did not undertake the said exercise. He expressed his
inability to verify and by applying the rent capitalization method, he
held and concluded that the sale consideration was understated, if we
take the rate of return as 15% to the buyer. This is only an
assumption and cannot be accepted. The aforesaid observation does
not mean that in no case, the Assessing Officer can rely upon rent
capitalization method but there should be a justification and material
to hold, show and establish that there was an understatement of the
ITA 145/2012 Page 7 of 8
sale consideration. Once it is shown that consideration has been
understated, it may be open to the Assessing Officer to quantify the
same by reference to the market value arrived at by the rent
capitalization method in the absence of any material to show the
precise extent of understatement. (See the observations of the
Supreme Court in K. P. Varghese v. ITO, (1981) 131 ITR 597 @
616).
In view of the failure of the Assessing Officer to conduct the
necessary enquiries at the assessment stage and the factual findings
recorded by the CIT(Appeals), which have been affirmed by the
tribunal, we do not find any substantial question of law arises and the
appeal is dismissed. No costs.
SANJIV KHANNA, J.
R.V.EASWAR, J. March 06, 2012 vld ITA 145/2012 Page 8 of 8