Late Shri Kailash Chand Garg v. The Commissioner Of Income Tax, Central Revenue Building, Rawatbhata Road, Kota

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 106 / 2015 Late Shri Kailash Chand Garg, proprietor M/s Garg Sari Centre,Kota through Legal Heir Smt. Manju, aged 58 years resident of35A, New Colony, Kota – 324007. ----Appellant Versus The commissioner of Income Tax, Central Revenue Building, RawatBhata Road, Kota-324009. ----Respondent _____________________________________________________ For Appellant(s) : Mr. Mahendra Gargieya For Respondent(s) : Ms. Parinitoo Jain with Ms. Shiva Goyal _____________________________________________________ HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYASJUDGMENT 12/10/2017 1.By way of this appeal, the appellant has challenged thejudgment and order of the Tribunal, whereby the Tribunal hasdismissed the appeal of the assessee confirming the order of CITas well as AO. 2.This Court while admitting the appeal on 21.09.2016 framed the following substantial questions of law:- “(i)Whether on facts and in the circumstances ofthe case and in law, the ld. ITAT was justified inconfirming the action of the AO in taxing the entire(deemed) gross sales consideration as Long TermCapital Gain u/s 45 of the Act even without reducingthe admitted cost of acquisition of Rs.2,97,311/-incurred (indexed cost of Rs.7,42,530/-), ignoringthe mandatory provisions contained u/s 48 of theAct and thus thereby taxing the gross receipts andnot the income and completely ignoring the rationlaid in the case of Shoorji Ballabh Das & Co. 46ITR 144 (SC) holding that income tax is a tax onreal income and not on notional income? (iii)Whether on facts and in the circumstances ofthe case and in law, on a true and correctinterpretation of Sec. 69C and its Proviso be read inisolation of the main provision?” 3.Counsel for the appellant contended that all theauthorities have committed serious error in invoking Section 69Cand misinterpreting the provisions of Chapter-E. It is furthercontended that it is well settled that a deeming provision and legalfiction is required to be construed very strictly and only for thepurpose for which it was enacted. So far as Sec.48 of the Act isconcerned, its use is confined only to the computation of capitalgain arising from the transfer of a capital asset which is deemed tobe an income chargeable to tax u/s 45 of the Act. Chapter VI-E isa complete code in itself and the resultant amount after thecomputation as provided therein, is the final amount to be taxed.The charging section and the computation provision togetherconstitute an integrated code. It does not admit of intrusion of anyother deeming provision like unexplained investment, unexplainedmoney, bullion, jewellery or unexplained expenditure etc.resorting to Sec.69, 69A, 69B or 69C of the Act. The fictioncreated by Sec.45 r/w 48 of the Act is only to tax the netprofit/gain arising from transfer of capital asset as a chargeableincome and not in relation to the assessment by deeming anunexplained expenditure as income chargeable to tax u/s 69C ofthe Act. Sec.69 itself is a legal fiction whereby investment into anasset is treated as income, if it is not disclosed in the regularbooks of account. No further legal fiction from elsewhere in thestatute can be borrowed to extend the field of Section 45 r/w 48. 4.He also contended that profit arising from sale ofcapital asset is a capital receipt and not being a revenue receipt, isnot an income. It is with this purpose, a legal fiction by way ofsec.45 r/w 48 of the Act was introduced. However, this fictioncannot be extended any further so as to admit application ofSec.69C of the Act. Hence, the provisions of Sec.69C of the Actnor therefore, its Proviso could have been invoked. 5.He also invited our attention to the provisions of Section 45(1) and 48, reads as under:- 4.He also contended that profit arising from sale ofcapital asset is a capital receipt and not being a revenue receipt, isnot an income. It is with this purpose, a legal fiction by way ofsec.45 r/w 48 of the Act was introduced. However, this fictioncannot be extended any further so as to admit application ofSec.69C of the Act. Hence, the provisions of Sec.69C of the Actnor therefore, its Proviso could have been invoked. 5.He also invited our attention to the provisions of Section 45(1) and 48, reads as under:- 45.(1)Any profits or gains arising from thetransfer of a capital asset effected in the previousyear shall, save an otherwise provided in section54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H,be chargeable to income-tax under the head“Capital gains”, and shall be deemed to be theincome of the previous year in which the transfertook place. “Mode of Computation. 48. The income chargeable under the head “Capitalgains” shall be computed, by deducting from thefull value of the consideration received or accruingas a result of the transfer of the capital asset thefollowing amounts, namely:- (I) expenditure incurred wholly and exclusively inconnection with such transfer; (ii) the cost of acquisition of the asset and the costof any improvement thereto.” 6.It is also argued that the assessee is entitled to the benefit under clause (2) but the same has been denied on theground that the same was not reflected in the books of account. 7. Mr. Gargieya also relied upon the following decisions: 1. Commissioner of Income Tax vs. B.C. SrinivasaSetty (1981) 128 ITR 0294 (SC), wherein it has beenobserved as under:- “Mode of Computation. 48. The income chargeable under the head “Capitalgains” shall be computed, by deducting from thefull value of the consideration received or accruingas a result of the transfer of the capital asset thefollowing amounts, namely:- (I) expenditure incurred wholly and exclusively inconnection with such transfer; (ii) the cost of acquisition of the asset and the costof any improvement thereto.” 6.It is also argued that the assessee is entitled to the benefit under clause (2) but the same has been denied on theground that the same was not reflected in the books of account. 7. Mr. Gargieya also relied upon the following decisions: 1. Commissioner of Income Tax vs. B.C. SrinivasaSetty (1981) 128 ITR 0294 (SC), wherein it has beenobserved as under:- 7. Section 45 charges the profits or gains arisingfrom the transfer of a capital asset to income-tax.The asset must be one which falls within thecontemplation of the section. It must bear thatquality which brings Section 45 into play. Todetermine whether the goodwill of a new business issuch an asset, it is permissible, as we shall presentlyshow, to refer to certain other sections of the head,"Capital gains". Section 45 is a charging section. Forthe purpose of imposing the charge, Parliament hasenacted detailed provisions in order to compute theprofits or gains under that head. No existing principleor provision at variance with them can be applied fordetermining the chargeable profits and gains. Alltransactions encompassed by Section 45 must fallunder the governance of its computation provisions.A transaction to which those provisions cannot beapplied must be regarded as never intended bySection 45 to be the subject of the charge. Thisinference flows from the general arrangement of theprovisions in the Income-tax Act, where under eachhead of income the charging provision isaccompanied by a set of provisions for computing theincome subject to that charge. The character of thecomputation provisions in each case bears arelationship to the nature of the charge. Thus thecharging section and the computation provisionstogether constitute an integrated code. When there isa case to which the computation provisions cannotapply at all, it is evident that such a case was notintended to fall within the charging section.Otherwise one would be driven to conclude that whilea certain income seems to fall within the chargingsection there is no scheme of computation forquantifying it. The legislative pattern discernible inthe Act is against such a conclusion. It must be bornein mind that the legislative intent is presumed to rununiformly through the entire conspectus of provisionspertaining to each head of income. No doubt there isa qualitative difference between the chargingprovision and a computation provision. And ordinarilythe operation of the charging provision cannot beaffected by the construction of a particularcomputation provision. But the question here iswhether it is possible to apply the computationprovision at all if a certain interpretation is pressedon the charging provision. That pertains to thefundamental integrality of the statutory schemeprovided for each head. The point to consider then is whether if theexpression "asset" in Section 45 is construed asincluding the goodwill of a new business, it is possibleto apply the computation sections for quantifying theprofits and gains on its transfer. 8. The mode of computation and deductions set forthin Section 48 provide the principal basis forquantifying the income chargeable under the head"Capital gains". The section provides that the incomechargeable under that had shall be computed bydeducting from the full value of the considerationreceived or accruing as a result of the transfer of thecapitalasset: (ii) the cost of acquisition of the capital asset.... The point to consider then is whether if theexpression "asset" in Section 45 is construed asincluding the goodwill of a new business, it is possibleto apply the computation sections for quantifying theprofits and gains on its transfer. 8. The mode of computation and deductions set forthin Section 48 provide the principal basis forquantifying the income chargeable under the head"Capital gains". The section provides that the incomechargeable under that had shall be computed bydeducting from the full value of the considerationreceived or accruing as a result of the transfer of thecapitalasset: (ii) the cost of acquisition of the capital asset.... favours the view that the transfer of goodwill intiallygenerated in a business does not give rise to a capitalgain for the purposes of income-tax. Upon the aforesaid considerations, Civil Appeal No.1146(T) of 1975 and Civil Appeal No. 1378 of 1976must be dismissed. Civil Appeal No. 926 of 1973 raises the samequestion with reference to Section 12B, IndianIncome Tax Act, 1922. As the relevant statutoryprovisions of the Indian Income Tax Act, 1922 aresubstantially similar to the corresponding provisionsof the Income Tax Act, 1961, that appeal is also liableto be dismissed. Accordingly, the appeals aredismissed with costs. Appeals dismissed.” 2. Commissioner of Income Tax vs. AAR PEEApartments (P) Ltd. (2009) 319 ITR 0276 (DEL),wherein it has been observed as under:- 9. It is clear from the reading of Sub-section (1) ofthis provision that it enables the Assessing Officer toget the valuation done from the Valuation Officer incertain specific types of cases. These would be thecases wherein an estimate of the value of anyinvestment referred to in Section 69 or 69B or thevalue of any bullion, jewellery or other valuablearticle referred to in Section 69A or 69B is required.There is no mention about Section 69C of the Act. Asis clear from the above, Section 69A deals withunexplained money. Section 69B likewise relates tothe amount of investment, etc., not fully disclosedthe books of account. On the other hand, theprovision relates to unexplained expenditure inSection 69C. 10. In the present case, the Assessing Officer haddoubts about the expenditure incurred on the project.As pointed out above, the assessee had shown theexpenditure on the Yusuf Sarai Project as Rs.39,69,440. Since the Assessing Officer had doubtedthis expenditure, he referred the matter to the DVOfor the purpose of determining the cost ofconstruction of the said project. However, as pointedout above, for the purpose of getting himself satisfiedabout the purported unexplained expenditure underSection 69C powers under Section 142A could not beinvoked. 11. Learned Counsel for Revenue submitted that sucha power could be traced to Section 69B of the Actwhich relates to amount of investment, etc., not fullydisclosedinthebooksofaccount.12. Her submission was that the "expenditure"incurred should be considered as coming within theexpression"investment". 13. We cannot agree with this submission of learnedCounsel for the Revenue. If investments could includewithin its fold the expenditure as well which isincurred by a businessman during the course of hisbusiness, there was no necessity of having a separateprovision under Section 69C of the Act which dealswith unexplained "expenditure" and reads as under: 69C. Where in any financial year an assessee hasincurred any expenditure and he offers noexplanation about the source of such expenditure orpart thereof, or the explanation, if any, offered byhim is not, in the opinion of the Assessing Officer,satisfactory,. the amount covered by suchexpenditure or part thereof, as the case may be, maybe deemed to be the income of the assessee for suchfinancial year. 13. We cannot agree with this submission of learnedCounsel for the Revenue. If investments could includewithin its fold the expenditure as well which isincurred by a businessman during the course of hisbusiness, there was no necessity of having a separateprovision under Section 69C of the Act which dealswith unexplained "expenditure" and reads as under: 69C. Where in any financial year an assessee hasincurred any expenditure and he offers noexplanation about the source of such expenditure orpart thereof, or the explanation, if any, offered byhim is not, in the opinion of the Assessing Officer,satisfactory,. the amount covered by suchexpenditure or part thereof, as the case may be, maybe deemed to be the income of the assessee for suchfinancial year. 14. The scope and ambit of Section 69B and 69C arealtogether different. The connotation to theinvestment appearing in Section 69B has to be in thecontext of investments made in some property or anyother type of investment and it could not be thebusiness expenditure. The word "investment"contained in Section 69B deals with investment inbullion, jewellery or other valuable article, etc. If thecontention of learned Counsel for the Revenue isaccepted and the expression is given a widermeaning as sought to be made out, the provisions of Section 69C shall be rendered otiose. 3. Commissioner of Income Tax vs. Shoorji Vallabhdas& Co. (1962) 46 ITR 0144 (SC), where in it has been observed as under:- 14. The scope and ambit of Section 69B and 69C arealtogether different. The connotation to theinvestment appearing in Section 69B has to be in thecontext of investments made in some property or anyother type of investment and it could not be thebusiness expenditure. The word "investment"contained in Section 69B deals with investment inbullion, jewellery or other valuable article, etc. If thecontention of learned Counsel for the Revenue isaccepted and the expression is given a widermeaning as sought to be made out, the provisions of Section 69C shall be rendered otiose. 3. Commissioner of Income Tax vs. Shoorji Vallabhdas& Co. (1962) 46 ITR 0144 (SC), where in it has been observed as under:- 10. In Commissioner of Income-tax v. ChamanlalMangaldas & Co., the assessee was also themanaging agent of a company, and under theagreement was entitled to receive commission at acertain rate. By another agreement, the commissionearned by the managing agent for the calendar year1950 was reduced by Rs. 1 lakh. That agreementtook place during the previous year, and theresolution of the board of directors of the managedcompany was also in the previous year. It was,however, made final on April 8, 1951, at a meetingof the board of directors, but that was beyond theprevious year. The High Court of Bombay held thatby reason of the resolution during the currency ofthe previous year, the right of the assessee tocommission ceased to be under the originalagreement and depended upon and arose only afterthe decision of the board of directors to reduce thecommission. The assessee was, therefore, not heldliable on the larger sum which, it was held, was onlya hypothetical income, which it might have earned ifthe old agreement had continued to subsist. Thefacts of the present case are almost identical, andthe principle applied by the Bombay High Courtgoverns this case. The reason is plain. Income taxis a levy on income. No doubt, the Income-tax Acttakes into account two points of time at which theliability to tax is attracted, viz., the accrual of theincome or its receipt; but the substance of thematter is the income, if income does not result atall, there cannot be a tax, even tough in book-keeping, an entry is made about a " hypotheticalincome " which does not materialize. Where incomehas, in fact, been received and is subsequentlygiven up in such circumstances that it remains theincome of the recipient, even though given up, thetax may be payable. Where, however, the incomecan be said not to have resulted at all, there sobviously neither accrual nor receipt of. Income,even though an entry to that, effect might,,incineration circumstances, have been made in thebooks of, account. This is exactly what hashappened in this case, as it happened in theBombay case, which was approved by this court.Here too, the agreements within the previous yearreplaced the earlier agreements, and altered therate in such a way as to make the income differentfrom what had been entered in the books of accountA mere book-keeping entry cannot be income,unless income has actually resulted, and in thepresent case, by the change of the terms theincome which accrued and was received consistedof the lesser amounts and not the larger. This; was not a. gift by the assessee firm to the managercompanies. The reduction was a part of theagreement entered into by the assesses firm tosecure a long-term managing agency arrangementfor the two companies which it had floated. 8.Counsel for respondent has taken to the order of AO and contended that AO while considering the matter hasconsidered the complete evidence on record and taking intoconsideration has given the benefit under Section 48. She has alsorelied upon observations made by CIT(A), which reads as under:- not a. gift by the assessee firm to the managercompanies. The reduction was a part of theagreement entered into by the assesses firm tosecure a long-term managing agency arrangementfor the two companies which it had floated. 8.Counsel for respondent has taken to the order of AO and contended that AO while considering the matter hasconsidered the complete evidence on record and taking intoconsideration has given the benefit under Section 48. She has alsorelied upon observations made by CIT(A), which reads as under:- “As per section 48 this expenditure is allowableas cost of acquisition. However, the AssessingOfficer did not allow the expenses as entireexpenses were admittedly undisclosed. In my opinion in such cases section 69C isdirectly applicable. For ready reference the same isreproduced below:- “Where in any financial year an assessee hasincurred any expenditure and he offers noexplanation about the source of such expenditureor part [Assessing] officer, satisfactory, theamount covered by such expenditure or partthereof, as the case may be, may be deemed tobe the income of the assessee for such financialyear:]Providedthat,notwithstandinganythingcontained in any other provision of this Act, suchunexplained expenditure which is deemed to bethe income of the assessee shall not be allowedas a deduction under any head of income]” The above unexplained expenditure ofRs.219466/- incurred by assessee was taxable u/s69C in A.Y.92-93, the same was not taxed due totime bearing provisions. But the proviso to section69C is clearly applicable. As per Section 69C nounexplained expenditure shall be allowed as adeduction under any head of income. Accordingly it is held that no expenditure out ofRs.297311/- is allowable against sale of plot byassessee. (ii)Cost of boundary wall Rs.77726/- (iii) Cost of lease rend payment Rs.40795/- For the reasons, given by Assessing Officer in hisorder (reproduced earlier) it is clear that assesseefail to substantiate the claim that these expenseswere incurred from explained sources, the samewere treated undisclosed expenditure. As held earlier such expenses are not allowableas per provisions of section 69C. Accordingly it is held that no expenditure can beallowed due to over-riding effect of Section 69C ofthe IT Act. However as the amount is taxed under the headcapital gain Assessing Officer is directed to chargetax applicable for long term capital gain The ground of appeal is, therefore, partlyallowed.” 9. Learned counsel for respondent contended that Tribunal while considering the matter has rightly observed as under:- (iii) Cost of lease rend payment Rs.40795/- For the reasons, given by Assessing Officer in hisorder (reproduced earlier) it is clear that assesseefail to substantiate the claim that these expenseswere incurred from explained sources, the samewere treated undisclosed expenditure. As held earlier such expenses are not allowableas per provisions of section 69C. Accordingly it is held that no expenditure can beallowed due to over-riding effect of Section 69C ofthe IT Act. However as the amount is taxed under the headcapital gain Assessing Officer is directed to chargetax applicable for long term capital gain The ground of appeal is, therefore, partlyallowed.” 9. Learned counsel for respondent contended that Tribunal while considering the matter has rightly observed as under:- “We have heard the rival contentions and perused thematerials available on record. The case before us posesa peculiar situation where the assessee concedes thatcost of acquisition is not disclosed in the books ofaccount and at least the amount of Rs.77,726/- andRs.39,400/- is disclosed in the books of account. Theclaims have no basis and assessee is trying to bemaneuver in the trouble waters. We have perused themuch touted relevant balance sheet and capital accountof the assessee. Only words written against thisamount is plot advance which does not mean to beincurred towards construction of the boundary wall, itmay be towards some other plot for which assessee isnot coming clean. Besides the assessee is blowing hotand cold, in 1992-93 he has not shown cost ofacquisition/purchase value of the alleged property inother years no direct evidence has been given exceptrelying on some mischievous entries sometimes inbalance sheet or in capital gain. It is difficult to believethat this clever assessee will there to show cost ofimprovement in books qua the property whose cost isnot shown in the earlier books. Thus the assessee’scontentions lack any type of sincerity or corroborationworth appealing to logic. We do not see any infirmity inthe order of the ld. CIT(A) in invoking the overridingproviso to Sec. 69C. As per assessee’s own acceptancein A.Y. 1992-93, no cost of acquisition was disclosed in his books of accounts, therefore by deeming provisionsof Sec. 69C the same is deemed to be unexplainedexpenditure of the assessee on which proviso toSec.69C of the Act has overriding effect. Assesseeaudacious claim may be right that nothing can bebrought to tax as assessments for these years are nowtime barred, but the proviso expressly debars allowanceof any benefit in this behalf. Having accepted theproposition, the ld. CIT(A)’s order deserves to beupheld and the benefits of such unrecorded expenditurecannot be claimed by the assessee in any year by thisoverriding proviso. As already mentioned aproposalternate contention of allowing the amount ofRs.77,726/- and Rs.39,400/-, we have already rejectedassessee’s claim being without any basis and it digreesfrom the issue.” 10.We have to interpret Section 45, 48 and sub-clause 2, the cost of acquisition to the asset assessed and cost of anyimprovement thereof is required to be reflected in the books ofaccount and capital in the balance sheet. If it does not show theprofits of the assessee. Then it will amount to allowing blackmoney converted into white without any payment. It is well-settled that the books of accounts should show in the balancesheet and states acquisition of the cost and regular improvementof the cost otherwise contention which has been raised by counselfor the appellant is accepted, it relates to giving undue advantageto the assessee. 11.In view of the above, the appeal deserves to bedismissed. Both the issues are answered against the assessee infavour of the department. 12.The appeal stands dismissed. (VIJAY KUMAR VYAS)J. (K.S.JHAVERI)J.