Kailash Chand Garg v. The Commissioner of Income-tax, Kota
[Citation -2017-LL-1012-6]

Citation 2017-LL-1012-6
Appellant Name Kailash Chand Garg
Respondent Name The Commissioner of Income-tax, Kota
Court HIGH COURT OF RAJASTHAN
Relevant Act Income-tax
Date of Order 12/10/2017
Judgment View Judgment
Keyword Tags computation of capital gain • transfer of capital asset • unexplained expenditure • unexplained investment • cost of construction • hypothetical income • cost of acquisition • cost of improvement • unexplained money • capital account • capital receipt • revenue receipt • black money
Bot Summary: The fiction created by Sec.45 r/w 48 of the Act is only to tax the net profit/gain arising from transfer of capital asset as a chargeable income and not in relation to the assessment by deeming an unexplained expenditure as income chargeable to tax u/s 69C of the Act. The section provides that the income chargeable under that had shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset : the cost of acquisition of the capital asset.... favours the view that the transfer of goodwill intially generated in a business does not give rise to a capital gain for the purposes of income-tax. As the relevant statutory provisions of the Indian Income Tax Act, 1922 are substantially similar to the corresponding provisions of the Income Tax Act, 1961, that appeal is also liable to be dismissed. The accrual of the income or its receipt; but the substance of the matter is the income, if income does not result at all, there cannot be a tax, even tough in book- keeping, an entry is made about a hypothetical income which does not materialize. Where income has been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. For ready reference the same is reproduced below:- Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part Assessing officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year: Provided that, notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income The above unexplained expenditure of Rs.219466/- incurred by assessee was taxable u/s 69C in A.Y.92-93, the same was not taxed due to time bearing provisions. As per Section 69C no unexplained expenditure shall be allowed as a deduction under any head of income.


HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR 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 of 35A, New Colony, Kota 324007. Appellant Versus commissioner of Income Tax, Central Revenue Building, Rawat Bhata 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 VYAS JUDGMENT 12/10/2017 1. By way of this appeal, appellant has challenged judgment and order of Tribunal, whereby Tribunal has dismissed appeal of assessee confirming order of CIT as well as AO. 2. This Court while admitting appeal on 21.09.2016 framed following substantial questions of law:- (i) Whether on facts and in circumstances of case and in law, ld. ITAT was justified in confirming action of AO in taxing entire (deemed) gross sales consideration as Long Term Capital Gain u/s 45 of Act even without reducing admitted cost of acquisition of Rs.2,97,311/- incurred (indexed cost of Rs.7,42,530/-), ignoring mandatory provisions contained u/s 48 of Act and thus thereby taxing gross receipts and not income and completely ignoring ration laid in case of Shoorji Ballabh Das & Co. 46 ITR 144 (SC) holding that income tax is tax on real income and not on notional income? (2 of 10) [ITA-106/2015] (iii) Whether on facts and in circumstances of case and in law, on true and correct interpretation of Sec. 69C and its Proviso be read in isolation of main provision? 3. Counsel for appellant contended that all authorities have committed serious error in invoking Section 69C and misinterpreting provisions of Chapter-E. It is further contended that it is well settled that deeming provision and legal fiction is required to be construed very strictly and only for purpose for which it was enacted. So far as Sec.48 of Act is concerned, its use is confined only to computation of capital gain arising from transfer of capital asset which is deemed to be income chargeable to tax u/s 45 of Act. Chapter VI-E is complete code in itself and resultant amount after computation as provided therein, is final amount to be taxed. charging section and computation provision together constitute integrated code. It does not admit of intrusion of any other deeming provision like unexplained investment, unexplained money, bullion, jewellery or unexplained expenditure etc. resorting to Sec.69, 69A, 69B or 69C of Act. fiction created by Sec.45 r/w 48 of Act is only to tax net profit/gain arising from transfer of capital asset as chargeable income and not in relation to assessment by deeming unexplained expenditure as income chargeable to tax u/s 69C of Act. Sec.69 itself is legal fiction whereby investment into asset is treated as income, if it is not disclosed in regular books of account. No further legal fiction from elsewhere in statute can be borrowed to extend field of Section 45 r/w 48. (3 of 10) [ITA-106/2015] 4. He also contended that profit arising from sale of capital asset is capital receipt and not being revenue receipt, is not income. It is with this purpose, legal fiction by way of sec.45 r/w 48 of Act was introduced. However, this fiction cannot be extended any further so as to admit application of Sec.69C of Act. Hence, provisions of Sec.69C of Act nor therefore, its Proviso could have been invoked. 5. He also invited our attention to provisions of Section 45(1) and 48, reads as under:- 45.(1) Any profits or gains arising from transfer of capital asset effected in previous year shall, save otherwise provided in section 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under head Capital gains , and shall be deemed to be income of previous year in which transfer took place. Mode of Computation. 48. income chargeable under head Capital gains shall be computed, by deducting from full value of consideration received or accruing as result of transfer of capital asset following amounts, namely:- (I) expenditure incurred wholly and exclusively in connection with such transfer; (ii) cost of acquisition of asset and cost of any improvement thereto. 6. It is also argued that assessee is entitled to benefit under clause (2) but same has been denied on ground that same was not reflected in books of account. 7. Mr. Gargieya also relied upon following decisions: 1. Commissioner of Income Tax vs. B.C. Srinivasa Setty (1981) 128 ITR 0294 (SC), wherein it has been observed as under:- (4 of 10) [ITA-106/2015] 7. Section 45 charges profits or gains arising from transfer of capital asset to income-tax. asset must be one which falls within contemplation of section. It must bear that quality which brings Section 45 into play. To determine whether goodwill of new business is such asset, it is permissible, as we shall presently show, to refer to certain other sections of head, "Capital gains". Section 45 is charging section. For purpose of imposing charge, Parliament has enacted detailed provisions in order to compute profits or gains under that head. No existing principle or provision at variance with them can be applied for determining chargeable profits and gains. All transactions encompassed by Section 45 must fall under governance of its computation provisions. transaction to which those provisions cannot be applied must be regarded as never intended by Section 45 to be subject of charge. This inference flows from general arrangement of provisions in Income-tax Act, where under each head of income charging provision is accompanied by set of provisions for computing income subject to that charge. character of computation provisions in each case bears relationship to nature of charge. Thus charging section and computation provisions together constitute integrated code. When there is case to which computation provisions cannot apply at all, it is evident that such case was not intended to fall within charging section. Otherwise one would be driven to conclude that while certain income seems to fall within charging section there is no scheme of computation for quantifying it. legislative pattern discernible in Act is against such conclusion. It must be borne in mind that legislative intent is presumed to run uniformly through entire conspectus of provisions pertaining to each head of income. No doubt there is qualitative difference between charging provision and computation provision. And ordinarily operation of charging provision cannot be affected by construction of particular computation provision. But question here is whether it is possible to apply computation provision at all if certain interpretation is pressed on charging provision. That pertains to fundamental integrality of statutory scheme provided for each head. (5 of 10) [ITA-106/2015] point to consider then is whether if expression "asset" in Section 45 is construed as including goodwill of new business, it is possible to apply computation sections for quantifying profits and gains on its transfer. 8. mode of computation and deductions set forth in Section 48 provide principal basis for quantifying income chargeable under head "Capital gains". section provides that income chargeable under that had shall be computed by deducting from full value of consideration received or accruing as result of transfer of capital asset : (ii) cost of acquisition of capital asset.... favours view that transfer of goodwill intially generated in business does not give rise to capital gain for purposes of income-tax. Upon aforesaid considerations, Civil Appeal No. 1146(T) of 1975 and Civil Appeal No. 1378 of 1976 must be dismissed. Civil Appeal No. 926 of 1973 raises same question with reference to Section 12B, Indian Income Tax Act, 1922. As relevant statutory provisions of Indian Income Tax Act, 1922 are substantially similar to corresponding provisions of Income Tax Act, 1961, that appeal is also liable to be dismissed. Accordingly, appeals are dismissed with costs. Appeals dismissed. 2. Commissioner of Income Tax vs. AAR PEE Apartments (P) Ltd. (2009) 319 ITR 0276 (DEL), wherein it has been observed as under:- 9. It is clear from reading of Sub-section (1) of this provision that it enables Assessing Officer to get valuation done from Valuation Officer in certain specific types of cases. These would be cases wherein estimate of value of any investment referred to in Section 69 or 69B or value of any bullion, jewellery or other valuable article referred to in Section 69A or 69B is required. There is no mention about Section 69C of Act. As is clear from above, Section 69A deals with unexplained money. Section 69B likewise relates to amount of investment, etc., not fully disclosed books of account. On other hand, provision relates to unexplained expenditure in Section 69C. (6 of 10) [ITA-106/2015] 10. In present case, Assessing Officer had doubts about expenditure incurred on project. As pointed out above, assessee had shown expenditure on Yusuf Sarai Project as Rs. 39,69,440. Since Assessing Officer had doubted this expenditure, he referred matter to DVO for purpose of determining cost of construction of said project. However, as pointed out above, for purpose of getting himself satisfied about purported unexplained expenditure under Section 69C powers under Section 142A could not be invoked. 11. Learned Counsel for Revenue submitted that such power could be traced to Section 69B of Act which relates to amount of investment, etc., not fully disclosed in books of account. 12. Her submission was that "expenditure" incurred should be considered as coming within expression "investment". 13. We cannot agree with this submission of learned Counsel for Revenue. If investments could include within its fold expenditure as well which is incurred by businessman during course of his business, there was no necessity of having separate provision under Section 69C of Act which deals with unexplained "expenditure" and reads as under: 69C. Where in any financial year assessee has incurred any expenditure and he offers no explanation about source of such expenditure or part thereof, or explanation, if any, offered by him is not, in opinion of Assessing Officer, satisfactory,. amount covered by such expenditure or part thereof, as case may be, may be deemed to be income of assessee for such financial year. 14. scope and ambit of Section 69B and 69C are altogether different. connotation to investment appearing in Section 69B has to be in context of investments made in some property or any other type of investment and it could not be business expenditure. word "investment" contained in Section 69B deals with investment in bullion, jewellery or other valuable article, etc. If contention of learned Counsel for Revenue is accepted and expression is given wider meaning as sought to be made out, provisions of (7 of 10) [ITA-106/2015] 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. Chamanlal Mangaldas & Co., assessee was also managing agent of company, and under agreement was entitled to receive commission at certain rate. By another agreement, commission earned by managing agent for calendar year 1950 was reduced by Rs. 1 lakh. That agreement took place during previous year, and resolution of board of directors of managed company was also in previous year. It was, however, made final on April 8, 1951, at meeting of board of directors, but that was beyond previous year. High Court of Bombay held that by reason of resolution during currency of previous year, right of assessee to commission ceased to be under original agreement and depended upon and arose only after decision of board of directors to reduce commission. assessee was, therefore, not held liable on larger sum which, it was held, was only hypothetical income, which it might have earned if old agreement had continued to subsist. facts of present case are almost identical, and principle applied by Bombay High Court governs this case. reason is plain. Income tax is levy on income. No doubt, Income-tax Act takes into account two points of time at which liability to tax is attracted, viz., accrual of income or its receipt; but substance of matter is income, if income does not result at all, there cannot be tax, even tough in book- keeping, entry is made about " hypothetical income " which does not materialize. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains income of recipient, even though given up, tax may be payable. Where, however, income can be said not to have resulted at all, there s obviously neither accrual nor receipt of. Income, even though entry to that, effect might,, incineration circumstances, have been made in books of, account. This is exactly what has happened in this case, as it happened in Bombay case, which was approved by this court. Here too, agreements within previous year replaced earlier agreements, and altered rate in such way as to make income different from what had been entered in books of account mere book-keeping entry cannot be income, unless income has actually resulted, and in present case, by change of terms income which accrued and was received consisted of lesser amounts and not larger. This; was (8 of 10) [ITA-106/2015] not a. gift by assessee firm to manager companies. reduction was part of agreement entered into by assesses firm to secure long-term managing agency arrangement for two companies which it had floated. 8. Counsel for respondent has taken to order of AO and contended that AO while considering matter has considered complete evidence on record and taking into consideration has given benefit under Section 48. She has also relied upon observations made by CIT(A), which reads as under:- As per section 48 this expenditure is allowable as cost of acquisition. However, Assessing Officer did not allow expenses as entire expenses were admittedly undisclosed. In my opinion in such cases section 69C is directly applicable. For ready reference same is reproduced below:- Where in any financial year assessee has incurred any expenditure and he offers no explanation about source of such expenditure or part [Assessing] officer, satisfactory, amount covered by such expenditure or part thereof, as case may be, may be deemed to be income of assessee for such financial year:] Provided that, notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be income of assessee shall not be allowed as deduction under any head of income] above unexplained expenditure of Rs.219466/- incurred by assessee was taxable u/s 69C in A.Y.92-93, same was not taxed due to time bearing provisions. But proviso to section 69C is clearly applicable. As per Section 69C no unexplained expenditure shall be allowed as deduction under any head of income. Accordingly it is held that no expenditure out of Rs.297311/- is allowable against sale of plot by assessee. (ii) Cost of boundary wall Rs.77726/- (iii) Cost of lease rend payment Rs.40795/- (9 of 10) [ITA-106/2015] For reasons, given by Assessing Officer in his order (reproduced earlier) it is clear that assessee fail to substantiate claim that these expenses were incurred from explained sources, same were treated undisclosed expenditure. As held earlier such expenses are not allowable as per provisions of section 69C. Accordingly it is held that no expenditure can be allowed due to over-riding effect of Section 69C of IT Act. However as amount is taxed under head capital gain Assessing Officer is directed to charge tax applicable for long term capital gain ground of appeal is, therefore, partly allowed. 9. Learned counsel for respondent contended that Tribunal while considering matter has rightly observed as under:- We have heard rival contentions and perused materials available on record. case before us poses peculiar situation where assessee concedes that cost of acquisition is not disclosed in books of account and at least amount of Rs.77,726/- and Rs.39,400/- is disclosed in books of account. claims have no basis and assessee is trying to be maneuver in trouble waters. We have perused much touted relevant balance sheet and capital account of assessee. Only words written against this amount is plot advance which does not mean to be incurred towards construction of boundary wall, it may be towards some other plot for which assessee is not coming clean. Besides assessee is blowing hot and cold, in 1992-93 he has not shown cost of acquisition/purchase value of alleged property in other years no direct evidence has been given except relying on some mischievous entries sometimes in balance sheet or in capital gain. It is difficult to believe that this clever assessee will there to show cost of improvement in books qua property whose cost is not shown in earlier books. Thus assessee s contentions lack any type of sincerity or corroboration worth appealing to logic. We do not see any infirmity in order of ld. CIT(A) in invoking overriding proviso to Sec. 69C. As per assessee s own acceptance in A.Y. 1992-93, no cost of acquisition was disclosed in (10 of 10) [ITA-106/2015] his books of accounts, therefore by deeming provisions of Sec. 69C same is deemed to be unexplained expenditure of assessee on which proviso to Sec.69C of Act has overriding effect. Assessee audacious claim may be right that nothing can be brought to tax as assessments for these years are now time barred, but proviso expressly debars allowance of any benefit in this behalf. Having accepted proposition, ld. CIT(A) s order deserves to be upheld and benefits of such unrecorded expenditure cannot be claimed by assessee in any year by this overriding proviso. As already mentioned apropos alternate contention of allowing amount of Rs.77,726/- and Rs.39,400/-, we have already rejected assessee s claim being without any basis and it digrees from issue. 10. We have to interpret Section 45, 48 and sub-clause 2, cost of acquisition to asset assessed and cost of any improvement thereof is required to be reflected in books of account and capital in balance sheet. If it does not show profits of assessee. Then it will amount to allowing black money converted into white without any payment. It is well- settled that books of accounts should show in balance sheet and states acquisition of cost and regular improvement of cost otherwise contention which has been raised by counsel for appellant is accepted, it relates to giving undue advantage to assessee. 11. In view of above, appeal deserves to be dismissed. Both issues are answered against assessee in favour of department. 12. appeal stands dismissed. (VIJAY KUMAR VYAS)J. (K.S.JHAVERI)J. Chouhna/68 Kailash Chand Garg v. Commissioner of Income-tax, Kota
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