THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on: 18.02. 2013
+ ITA 1089/2011
+ ITA 1090/2011
CIT ..... Appellant
versus
DISCOVERY ESTATES PVT. LTD. ..... Respondent
+ ITA 1097/2011
CIT ..... Appellant
versus
DISCOVERY HOLDINGS PVT. LTD. ..... Respondent
Advocates who appeared in this case:
For the Appellant : Mr N. P. Sahni, Sr. Standing Counsel with Mr Ruchesh Sinha,
Jr. Standing Counsel.
For the Respondents : Mr G. C. Srivastava with Ms Preeti Bhardwaj, Advocates.
CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE R.V.EASWAR
JUDGMENT
R.V. EASWAR, J
These three appeals relating to two different assessees were heard
together since common issues are involved and, therefore, a single order
is passed for the sake of convenience.
ITA 1089/2011,1090/2011 & 1097/2011 Page 1 of 20
2. The appeals are by the Revenue. ITA Nos.1089/2011 and
1090/2011 relate to the same assessee i.e. Discovery Estates Pvt. Ltd. and
ITA No.1097/2011 relates to another company of the same group by
name Discovery Holdings Pvt. Ltd. On 13.02.2012, the following
substantial questions of law were framed by this Court in all the three
appeals:
"(i) Whether the Income Tax Appellate Tribunal was right
in holding that the rental income should be assessed under
the head "income from business" and not under the head
"income from house property"?
(ii) Whether the Income Tax Appellate Tribunal was right
in holding that the sale consideration disclosed by the
assessee on sale of shops should be accepted?
(iii) Whether the findings recorded by the Income Tax
Appellate Tribunal in respect of the question number (ii) are
perverse?"
3. It is common ground that the first substantial question of law is to
be answered in the negative, in favour of the Revenue and against the
assessee in view of the judgment of this Court in CIT Vs. M/s Ansal
Housing Finance and Leasing Co. Ltd. & Ors. decided on 31.10.2012 in
ITA 18/1999.
4. So far as the other two substantial questions of law are concerned,
they are connected with each other. The brief facts in this connection
may be noticed. We are taking up first the facts in ITA No.1089/2011.
ITA 1089/2011,1090/2011 & 1097/2011 Page 2 of 20
The assessee is engaged in the business of construction of commercial
complexes. In the accounting year ended on 31.03.2006 relevant to the
assessment year 2006-07, it had constructed 67081 sq. ft. area of a
shopping mall called City Square Mall. The construction cost including
the land cost amounted to `5,456/- per sq. ft. The shops in the complex
were sold. In respect of 7 shops, the Assessing Officer noticed that the
assessee had booked sales at `6,000/- per sq. ft. in the ground floor in the
year 2003 whereas in the year 2005, shops in the same floor were booked
at the rate of `3,390/- per sq. ft. One of the shops was even found to have
been sold at the rate of `2,300/- per sq. ft. which was even less than the
land cost of `2,332/- per sq. ft. The AO further noted that even in respect
of the same floor, different rates were being charged from different
customers. The following table sets out the relevant details:-
Date of Floor Name of Area Sold Rate
agreement Buyer Sq. ft.
12.05.03 GF-16 Anju Arora 1394 6000
02.09.03 UG-16 Promila Arora 1882.17 4000
06.10.03 UG-17 Bimal Chawla 1133.49 4000
05.01.05 GF-ATM-5 Sanjay Kumar 252.17 4748
27.01.05 GF-ATM-2 Vandana 295 3390
Arora
ITA 1089/2011,1090/2011 & 1097/2011 Page 3 of 20
04.10.05 TF-05 Revie 2736.83 2300
07.12.05 GF-ATM-4 Laxmi 275.8 5438.72
opticals
5. On the basis of the above findings, the Assessing Officer came to
the conclusion that the assessee had suppressed the sale price and had
booked losses which was not justified. According to him, no person
would sell the property at prices even below the cost if he wishes to
remain in business. He, therefore, disallowed the loss of `1,31,60,475/-
shown by the assessee on sale of shops. This figure was arrived at by
deducting the cost of `4,47,11,920/- from the sale price of `3,15,51,445/-.
6. On appeal, the assessee submitted as follows:-
(a) The rate at which space in a shopping mall is sold depends
on various factors such as time, location, floor, size,
approach, demand and supply etc. Therefore, there cannot
be a uniform sale price. By way of example, it was pointed
out that the shop sold to Anju Arora was in the ground floor
and had the best approach and was ideally located as
compared to the other shops. The buyer was also in great
hurry as he realised the advantages. The assessee took
ITA 1089/2011,1090/2011 & 1097/2011 Page 4 of 20
advantage of these factors and could strike a better bargain.
Thereafter for four months, no shop could be sold and,
therefore, prices had to be reduced.
(b) In the case of Promila Arora and Bimla Chawla, the prices
were lower than in the case of Anju Arora because the shops
were located in the upper floor. In the case of Sanjay
Kumar, the price was higher because the shop was located in
the ground floor, though it could not fetch the same price as
in the case of sale to Anju Arora because of less
advantageous location. The sale to Vandana Arora was at a
price lower than the price paid by Sanjay Kumar as this
space was not properly connected in the sense that there was
only one entry from outside.
(c) The shop sold to Revie was in the third floor and was of a
large area and, therefore, could fetch only `2,300/- per sq. ft.
(d) By December, 2005, the project was completed and the cost
was known to the assessee and, therefore, a shop of a small
size in the ground floor was able to fetch `5,438/- pr sq. ft.
which is equal to the cost of land and construction.
ITA 1089/2011,1090/2011 & 1097/2011 Page 5 of 20
(e) After December 2005 till March 2006, there was no sale of
shops which shows that the demand for shopping space
could widely fluctuate.
(f) There was no evidence brought on record to establish any
understatement of sale consideration. No independent
inquiries were made by the Assessing Officer to bring in
comparable cases of sale at higher prices.
(g) The Assessing Officer, if he had suspected the declared sale
prices, ought to have raised queries but he did not do so.
7. On consideration of the above submissions, the CIT (Appeals) held
that there was no justification for disallowing the loss on the sale of
shops. He accordingly directed the Assessing Officer to allow the loss.
8. The Revenue carried the matter in appeal before the Income Tax
Appellate Tribunal in ITA No.3617/DEL/2009. The Tribunal took up the
appeals of the Revenue in the case of the assessee for the assessment year
2007-08 (ITA No.3495/DEL/2010) as also in the case of M/s. Discovery
Holdings Pvt. Ltd. for the assessment year 2007-08 (ITA
No.3431/DEL/2010) and disposed of all the three appeals by a common
order dated 25.02.2011. The issue relating to the disallowance of loss on
ITA 1089/2011,1090/2011 & 1097/2011 Page 6 of 20
the sale of shops in the case of Discovery Estates Pvt. Ltd. for the
assessment year 2006-07 and the deletion of the addition of
`1,72,80,780/- made by the AO for the assessment year 2007-08 as well
as the deletion of the addition of `31,32,992/- made by the Assessing
Officer on similar grounds in the case of M/s. Discovery Holdings Pvt.
Ltd. for the assessment year 2007-08 were considered together from
paragraph 15 of the order. After considering in detail the facts and the
rival submissions, the Tribunal recorded the following findings in
Paragraph 19 of its common order:-
(a) The assessee is maintaining proper books of accounts and
the Assessing Officer has not pointed out any specific
defects therein.
(b) The view of the Assessing Officer that there can be no loss
in real estate business and the assessee cannot sell the shops
below cost price is not correct, having regard to the facts.
(c) The assessee has given reasons as to why it booked sales at
the initial stage at a lower price. It was found that the
assessee could not book a single shop for sale in the year
2004 and during the period from May 2003 to December
ITA 1089/2011,1090/2011 & 1097/2011 Page 7 of 20
2004, it could book only five shops for sale. These factors
suggest that in the beginning of the business, the assessee is
forced to offer some concession in the price to draw custom.
(d) The Assessing Officer could have brought evidence on
record to show that any purchaser had actually paid a price
higher than the price shown in the books. No such evidence
was forthcoming. There was not even material to doubt the
sale transactions.
(e) It is not permissible for the Assessing Officer to rely on the
perceived general market conditions; the price shown by an
assessee cannot be doubted for the reason that in the opinion
of the Assessing Officer, the real estate prices did not show
any downward trend.
(f) The market prices can at best be a starting point for further
inquiry but they cannot be substituted for the price shown by
the assessee in the books of accounts.
On the basis of the aforesaid findings, the Tribunal upheld the order of
the CIT (Appeals). It may be noted that since the CIT (Appeals) had
deleted the additions in all the three cases, the Tribunal upheld the
ITA 1089/2011,1090/2011 & 1097/2011 Page 8 of 20
decision of the CIT (Appeals) in all the three appeals filed by the
Revenue for identical reasons.
9. For the sake of completeness, we may notice the facts relating to
the assessment year 2007-08 in the case of M/s. Discovery Estates Pvt.
Ltd. in ITA No.1090/2011 and in the case of M/s. Discovery Holdings
Pvt. Ltd. in ITA No.1097/2011. In the case of Discovery Estates Pvt.
Ltd., the Assessing Officer, on a scrutiny of the sale agreements filed
before him and the copy of the accounts noted that though the total cost
of construction, including the land cost, came to `5,456/- per sq. ft., the
assessee had booked sales in the first floor at `5,000/- per sq. ft and sold
the third floor shop to M/s. Vatika Hospitality Pvt. Ltd. at `5,412/- per sq.
ft. From these figures, he drew the inference that the assessee had
suppressed the sale price. According to him, it was not acceptable that
the shops could be sold at the rates which are less than the total cost of
construction. Moreover, some of the shops sold by the assessee were to a
company by name M/s. Sewa Buildcon Pvt. Ltd., which is a sister
concern of M/s. Sewa International Fashion Ltd., which was a partner of
the joint venture under which the shopping mall namely, City Square
Mall was constructed. There was no registered sale deed for the sale of
ITA 1089/2011,1090/2011 & 1097/2011 Page 9 of 20
shops to Sewa Buildcon Pvt. Ltd; there was only a simple agreement.
The Assessing Officer, in the absence of a registered sale document, took
the view that the rent capitalization method will be appropriate to
determine the fair market value of the properties. He calculated the fair
market value of the property in accordance with the method prescribed by
Rule 1 BB of the Wealth tax Rules, 1957 under the rent capitalization
method and arrived at the fair market value of the rented property which
was sold to Sewa Buildcon Pvt. Ltd. during the year at `3,84,86,160/-.
The difference between the fair market value arrived at as above and sale
price disclosed by the assessee came to `1,72,80,780/- which was added
as sale consideration received outside the books of accounts. This
addition as noted earlier was deleted by the CIT (Appeals) whose
decision was confirmed by the Tribunal.
10. In the case of Discovery Holdings Pvt. Ltd., the assessee
constructed a mall known as Mega City Mall. A total area of 201127 sq.
ft. was completed in the relevant year, with 16744 sq. feet area under
construction. The cost of the land and the construction cost was declared
at `3,023/- per sq. ft. As in the other case, in this case also, the Assessing
Officer noticed variation in the prices charged from different customers,
ITA 1089/2011,1090/2011 & 1097/2011 Page 10 of 20
which are all noted in Paragraph 6 of the assessment order and came to
the conclusion that these variations clearly showed that the assessee had
suppressed the sale and booked a loss. For reasons that are similar to the
reasons given in the case of M/s. Discovery Estates Pvt. Ltd. for the
assessment year 2006-07 (ITA No.1089/2011), the Assessing Officer
made an addition of `31,32,992/- to the book results. In doing so, he
picked out only five properties for special treatment and made the
addition in the following manner:-
Particular Area Rate/sq. ft. Value Value @
(Sq.ft.) 3750/- = per
sq. ft.
SF-11 738.64 2750 20,31,260 27,69,900
SF-10 738.64 2750 20,31,260 27,69,900
SF-08 738.64 3001 22,17,000 27,69,900
SF-09 738.64 3001 22,17,000 27,69,900
SF-15 813.35 3074 25,00,000 30,49,612
10996520 14129512
Difference `31,32,992/- =
It will be noticed from the above table that the Assessing Officer adopted
the sale price of `3,750/- per sq. ft. as against the declared sale
consideration and arrived at the addition. As noted earlier, the addition
ITA 1089/2011,1090/2011 & 1097/2011 Page 11 of 20
was deleted by the CIT (Appeals), whose decision was confirmed by the
Tribunal.
11. The main contention taken up on behalf of the Revenue was that
the CIT (Appeals) as well as the Tribunal did not examine the assessment
orders in the manner expected of them and both these authorities have
deleted the additions made by the Assessing Officer without proper
reasons. It was submitted that there was no satisfactory answer to the
query raised by the Assessing Officer as to why and how the properties
could be sold at a price which was lesser than the cost of construction
(including land cost). It was further submitted that a part of the shops in
the City Square Mall was sold by the assessee Discovery Estates Pvt. Ltd.
to a sister concern at low prices and these sales were suspect. There
were, it is contended, no registered sale deeds and the shops were being
sold on the basis of unregistered agreements and thus there was no
scrutiny of the sales by the registering authorities and this aspect was
overlooked by the CIT (Appeals) as well as the Tribunal. It was thus
contended that the findings recorded by the Tribunal were vulnerable to
the criticism of being perverse.
ITA 1089/2011,1090/2011 & 1097/2011 Page 12 of 20
12. On behalf of the assessee, it was submitted that the features noticed
by the Assessing Officer in the course of the assessment proceedings such
as absence of registered sale documents, sale of shops to a sister concern,
difference in sale prices of the shops etc. have all been properly explained
by the assessees and that at best, these features can only be a starting
point for further inquiry and so long as there was no evidence brought on
record to show suppression of the sale prices, no addition can be made.
It was submitted that the assessing authority has no power to disturb the
sale price shown except in three cases. The first is under Section 145 of
the Act. Where the sale of properties is part of the business of the
assessee, the Assessing Officer, if he is of the opinion that the accounts
are not correct and complete, may proceed to reject the books of accounts
and thereafter make a best judgment assessment of the income in the
manner prescribed by Section 144. The second is the case where Section
50 C of the Act is invoked on the basis of the prices fixed by the Stamp
Valuation Authorities of the State Government. That section, it is pointed
out, however, applies only in the computation of capital gains and cannot
BE availed by the Revenue where the profits of the business are to be
computed.
ITA 1089/2011,1090/2011 & 1097/2011 Page 13 of 20
13. The third is the case of section 92BA inserted by the Finance Act,
2012 w. e. f. 01.04.2013. This section gives power to the assessing
officer to recalculate the profits shown by the assessee in cases of
"specified domestic transactions", where the aggregate of such
transactions entered into in the relevant accounting year exceeds a sum of
`5 crores. According to the learned counsel for the assessee, except in
these three situations, the Act does not permit the enhancement of the
profits of the business shown by the assessee. It is further pointed out
that in the present case, the assessing officer has not invoked section 145
(3). It is this sub-section that empowers him, where he is not satisfied
about the correctness or completeness or the accounts of the assessee, to
make an assessment to the best of his judgment in the manner provided in
section 144. Therefore, there is no option to the assessing officer except
to accept the book results. It is, however, conceded that if there is
evidence to show suppression of the sale price, in that case the assessing
officer can very well invoke the aforesaid provision of the Act, reject the
books of the assessee as being incorrect and proceed to estimate the sale
price. It is, however, pointed out that there is no such evidence in the
ITA 1089/2011,1090/2011 & 1097/2011 Page 14 of 20
present case. It is further contended that this is the basis of the order of
the Tribunal which can hardly be characterised as perverse.
14. On a careful consideration of the matter we are inclined to accept
the submissions of the learned counsel for the assessee and agree with
him that the findings recorded by the Tribunal are not perverse. It is not
correct to say that the assessee did not satisfactorily answer the queries
raised by the assessing officer on noticing the absence of registered sale
documents, variations in sale prices of shops in the same floor, sale of
shops to sister concerns, etc. They have all been answered by the
assessees and we have adverted to the replies of the assessee while
summarising its submissions made before the CIT (Appeals). Neither the
CIT (Appeals) nor the Tribunal found anything amiss in those replies/
submissions. The power of the assessing officer to raise valid queries on
the basis of the facts or unusual features noticed by him must be
conceded. The features noticed by him in the assessees' business
certainly constitute a starting point of inquiry. They are, however, not to
be taken as evidence or material showing any suppression or
understatement of the sale price. If on further probe, the assessing officer
was able to unearth any evidence or material on the basis of which actual
ITA 1089/2011,1090/2011 & 1097/2011 Page 15 of 20
suppression of the sale price could be found, then the additions made on
that basis would be valid. Even if the evidence does not show the precise
amount of suppressed sale price, but shows clearly and categorically that
there was understatement of sale consideration, that would be sufficient
to empower the assessing officer to reject the account books as being
incorrect and incomplete. He may thereafter make an estimate of the
profits of the business to the best of his judgment, on the basis of the
evidence unearthed by him revealing suppression of sale price. But it is
not open to him, merely on the basis of what he perceives to be the
market conditions, to make additions to the sale price or the profits,
without any evidence of understatement. These principles have been kept
in mind by the Tribunal and, therefore, its order cannot be faulted or
branded as perverse. Moreover, as rightly pointed out on behalf of the
assessee, there is no other provision in the Act permitting the assessing
officer to enhance the profits or the sale price except section 50C and
section 92BA. Section 50C does not apply to the present case as it
applies only to a case of capital gains. Section 92BA also does not apply
as it came into force only from the assessment year 2012-13. Moreover,
ITA 1089/2011,1090/2011 & 1097/2011 Page 16 of 20
it applies only to such domestic transactions as may be prescribed by the
competent authority.
15. Several decades back the Madras High Court in the case of Shri
Ramalinga Choodambikai Mills Ltd. v. CIT: (1955) 28 ITR 952 held
that in the absence of any evidence to show either that the sales were
sham transactions or that the market prices were in fact paid by the
purchasers, the mere fact that goods were sold at a concessional rate
would not entitle the income tax department to assess the difference
between the market price and the price paid by the purchaser as profit of
the assessee. In CIT v. A. Raman & Co.: (1968) 67 ITR 11 the Supreme
Court held that the law does not oblige a trader to make the maximum
profit that he can out of his trading transactions. Income which actually
accrues is taxable, but income which the assessee could have, but has not
in fact earned, is not made taxable. These two judgments were
approvingly noticed and applied by the Supreme Court in CIT v. Calcutta
Discount Co. Ltd.: (1973) 91 ITR 8. These judgments apply to the
present case in favour of the assessee.
16. A Division Bench of this Court was examining a converse case in
CIT vs. Dinesh Jain HUF : (2012) 211 Taxman 23. There the question
ITA 1089/2011,1090/2011 & 1097/2011 Page 17 of 20
arose under section 69B of the Act as to what was the correct investment
made by the assessee in an immoveable property. The income tax
authorities relied on the fair market value of the property calculated on
the basis of rule 3 of Schedule III to the Wealth Tax Act which prescribed
the rent capitalisation method for valuation of immoveable properties.
The difference between the value of the property so calculated and the
actual price paid by the assessee in that case was sought to be added as
undisclosed investment. Disapproving the action, this Court held that the
Wealth Tax Act was concerned with the fair market value of the asset and
under Schedule III thereto, which came into force on 01.04.1989, it was
not even an estimate of fair market value of the asset, but a prescribed
computation of the value of the asset on the basis of the rent capitalisation
method. The difference between the fair market value of the property and
the investment made in the property for purposes of section 69B was
pointed out and it was held that a mechanical addition of the difference
between the value arrived at on the basis of the rent capitalisation method
and the actual investment made by the assessee in the property has to be
deprecated. We are referring to this aspect because in one of the cases
before us, the assessing officer has sought to adopt rule 1BB of the
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Wealth Tax Rules, which also prescribes the rent capitalisation method of
valuation of immoveable properties, and to make an addition to the sale
price on that basis. In our view such an approach cannot be
countenanced.
17. It only remains for us to refer to the observations of the assessing
officer to the effect that no one makes a loss in real estate business and
that the market perceptions indicate that the prices of the immoveable
properties are always on the upward trend. These observations have,
inter alia, formed the basis of the additions made by the assessing officer.
It was even suggested before us on behalf of the revenue that it is a
"notorious practice" prevailing in real estate circles that in all property
transactions there is non-disclosure of the full consideration. As pointed
out earlier, this cannot per se constitute the basis of the addition, though
we must hasten to add that it can very well be a starting point for further
investigation. In Lalchand Bhagat Ambica Ram vs. CIT: (1959) 37 ITR
288, the Supreme Court disapproved the practice of making additions in
the assessment on mere suspicion and surmises or by taking note of the
"notorious practice" prevailing in trade circles. It was observed as under:
"Adverting to the various probabilities which weighed with the
Income-tax Officer we may observe that the notoriety for
ITA 1089/2011,1090/2011 & 1097/2011 Page 19 of 20
smuggling food grains and other commodities to Bengal by
country boats acquired by Sahibgunj and the notoriety achieved
by Dhulian 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."
18. The Tribunal cannot be said to have taken into account irrelevant
material or ignored relevant material in arriving at its decision. It seems
to have applied the right principles in support of its decision. Its order
cannot therefore be termed as perverse.
19. For the aforesaid reasons we answer the second substantial
question of law in the affirmative, in favour of the assessee and against
the revenue. The third substantial question of law is answered in the
negative, in favour of the assessee and against the revenue.
20. In the result the appeals filed by the revenue are partly allowed.
R.V.EASWAR, J
BADAR DURREZ AHMED, J
FEBRUARY 18, 2013
gm/hs
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