Income Tax Appellate Tribunal - Ahmedabad
Amit Estate Organizer vs Income Tax Officer on 27 August, 2007
Equivalent citations: (2008)113TTJ(AHD)1018
ORDER
I.S. Verma, J.M.
1. As these appeals are by the same assessee, for the sake of convenience, we dispose of these appeals by this common/consolidated order.
2. Though the assessee has raised various grounds, but at the time of hearing, parties were in agreement that all these four appeals of the assessee involved following issues:
(i) The first issue is with respect to validity of proceedings under Section 147 of the Act, 1961 initiated by the AO by issuing notice under Section 148 of the Act on 27th March, 2003 (for asst. yrs. 1995-96, 1996-97 and 1998-99) and on 28th Jan., 2000 for asst. yr. 1997-98.
(ii) The second issue is with respect to rejection of assessee's books of account and consequential application of provisions of Section 145 of the Act.
(iii) The third issue relates to correctness of report of the DVO determining the cost of investment in buildings constructed by the assessee as a builder for business purpose.
(iv) The fourth issue relates to assessee's claim that in case the addition on account of so-called undisclosed investment in, construction of building made under s, 69C of the Act, 1961 is upheld, then the assessee may be allowed corresponding, deduction of similar expenditure under Section 37 of the Act.
(v) The fifth issue is against levy of interest under Sections 234A, 23413 and 234 C of the Act.
(vi) The sixth issue is against initiation of penalty proceedings under Section 271(1 )(c) of the Act.
3. We have heard the parties.
4.1. The brief facts as have been revealed from the records and are relevant for disposal of all these four appeals are that the assessee is in the line of construction of buildings for sale. The returns of income for asst. yrs. 1995-96, 1996-97, 1997-98 and 1998-99 declaring income at nil. Rs. 8,09,820, Rs. 1,51,290 and Rs. 2,08,055 respectively were filed on 30th Nov., 1996, 30th Nov., 1996, 31st Aug., 1998 and 31st March, 1999 respectively.
4.2 The returns for all the aforesaid four assessment years were processed under Section 143(l)(a) of the Act.
4.3 Later on, the AO issued notices under Section 148 of the IT Act, 1961 on 28th Jan., 2000 for asst. yr. 1997-98 and proceeded to frame the assessment. During the course of proceedings under Section 147 of the Act, for asst. yr. 1997-98, the AO noticed that the assessee had made payment through "bearer cheque" amounting to Rs. 27,728 on 23rd Aug., 1996 to M/s Harikrupa Engineering Works and after considering the same in violation of provisions of Section 40A(3) of the Act, disallowed 25 per cent of the said payment.
4.4 During the course of carrying on proceedings under Section 147 of the Act, the AO scrutinized the assessee's books of account and rejected the same as per his finding contained in para II of the assessment order, where, inter alia, the AO alleged to have found following discrepancies:
(i) According to the AO, vouchers for the following expenses were not available:
(a) For carpentry work Rs. 1,000 (b) For colour work Rs. 1,320 (c) For fabrication work Rs. 472 (d) For plumbing work Rs. 27,793
(ii) The AO had, further, found that vouchers for following expenses were not bearing signatures of the recipient:
(a) Voucher in the name of Shri Rameshbhai Nathabhai Parmar for Rs. 20 paid on account of welding of gate and voucher for Rs. 10 paid for one acid bottle.
(b) Voucher in the name of Shri Parmar Mangalbhai Somabhai for Rs. 200 paid on account of garden levelling work of block No. 6.
(c) Voucher in the name of Shri Prafulbhai for Rs. 550 paid for water, sprinkling for 22 days @ Rs. 25 per day.
(d) Voucher in the name of Shri Rajesh for Rs. 55 paid for purchase of 4 Nos. Kodaly, tea, coffee and breakfast.
(iii) The third discrepancy alleged by the AO was that the vouchers for payment of salary to following three persons were unsigned:
Sl. Name of person(s) On account of Paid Amount No(s) (in Rs.) 1. Shri Rameshbhai Nathabhai Parmar Salary 900 2. Shri Bhanubhai Manibhai Salary 1,400 3. Shri Kiritbhai J. Salary 1,500 Assessee's explanation and AO's findings:
(a) With respect to discrepancy at sl. No. (i), the assessee, however, when called upon to explain the non-availability of aforesaid vouchers had filed the photocopies of relevant bills but the same were rejected by the AO on the ground that the bills were handwritten.
(b) With respect to discrepancy at sl. No. (ii), the assessee's reply was that the concerned person paying petty unskilled labour were not available when the assessment was being going on and, therefore, their signatures could not be obtained at that time. The AO, considered this defect as a serious defect.
(c) With respect to discrepancy at sl. No. (iii), the assessee's case was that the signatures of these three persons (cited in above tabular form) could not be procured due to oversight. However, the AO's observation at page No. 5 of the assessment order (specifically) was that the payments claimed in the names of these three persons cannot be accepted in principle.
(iv) Another discrepancy alleged by the AO was with respect to alleged difference was with respect to accounts of following parties available in the assessee's books of accounts and vice versa:
(a) Account of M/s Shiv Traders:
From the copy of assessee's accounts procured from M/s Shiv Traders, the AO found that the opening balance shown by the assessee was Rs. 682, whereas opening balance shown by M/s Shiv Traders was Rs. 958. It was, further, found that the assessee had showed to have made payments of Rs. 44,817 to M/s Shiv Traders on 24th Feb., 1997, whereas M/s Shiv Traders had credited payments to the extent of Rs. 45,323 on 28th Feb., 1997. The assessee's case was that it had issued a cheque for Rs. 44,817 to M/s Shiv Traders against payment of one bill and the same was accounted for in the account of M/s Shiv Traders appearing in assessee's book and it was on verification from M/s Shiv Traders that they had accounted for only an amount of Rs. 45,323. The difference of Rs. 506 was on account of Kasar accounted by M/s Shiv Traders in their books of account and credited to assessee's accounts. In support of this explanation, the assessee had filed a letter from M/s Shiv Traders confirming the accounting for Rs. 506 on account of Kasar allowed to the assessee.
The AO however, did not accept this explanation on the ground that assessee's books were audited under Section 44AB of the Act and any reconciliation should have been carried on direct audit.
(b) Account of M/s Amit Traders:
According to the AO, the assessee's books of account were showing a closing balance of Rs. 50,200, whereas M/s Amit Traders had shown closing balance in the accounts of assessee at Rs. 47,200.
When the assessee was called upon to explain the discrepancy, the assessee submitted that the difference was on account of credit note No. 1914 of Rs. 200 and credit note No. 1891 of Rs. 2,800 both dt. 31st Dec, 1996 which were accounted for by M/s Amit Traders by crediting the assessee's accounts, but had not informed the assessee by the closing date. The assessee had, further, stated that the assessee had not been supplied those credit notes till the day reply was filed with the AO.
The AO, however, did not accept this explanation and clothed himself with the jurisdiction to reject the assessee's books of account by invoking the provisions of Section 145(3) of the Act and for making assessment under Section 144 of the Act. The relevant observation of the AO at page No. 7 of the assessment order are in the following terms:
That, in view of para wise discussion along with comments, it is held that the book result shown by the assessee firm is not acceptable. The correctness and completeness of the books of account are not found. It is, therefore, book result of the assessee firm is hereby required by invoking the Section 145(3) of the Act and accordingly, assessment is being finalized in the manner provided in Section 144 of the Act.
4.5 The AO, further noticed that the assessee had constructed bunglows under the name of the building "Ashlesha Bunglows" at Anand during the period July, 1993 to December, 1998 and had shown the total cost of construction for entire project at Rs. 2,37,96,653.
4.6 The AO, for the reasons best known to him (since there is no reference as to how or on what basis, he doubted the correctness of cost of the construction of building, which was assessee's stock-in-trade shown by the assessee as incorrect), referred the matter to the DVO requiring him to estimate the cost of construction of the said building during the period July, 1993 to December, 1998 by invoking his power under-s. 131(l)(d) of the Act. The DVO estimated the cost of construction of the entire building and also the year wise investment therein as per his report dated (not available) at Rs. 3,25,63,445 as against cost of construction shown by the assessee at Rs. 2,37,96,653.
4.7 The year wise cost of construction shown by the assessee and as estimated by the DVO were as under:
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Sl. Period of Cost of Fair cost of Difference
No. construction construction/as construction (Rs.)
shown by the (Rs.)
assessee (Rs.)
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1. 7/93 to 3/94 13,64,923 18,33,939 4,79,016
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2. 4/94 to 3/95 27,45,946 37,06,493 9,60,547
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3. 4/95 to 3/96 67,39,422 92,27,910 32,98,312
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4. 4/96 to 3/97 68,78,879 94,57,014 25,78,135
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5. 4/97 to 3/98 45,22,750 62,16,218 19,01,523
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6. 4/98 to 12/98 15,44,733 21,21,871 5,77,138 Total 2,37,96,653 3,25,63,445
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4.8 The AO, after providing the assessee an opportunity of being heard considered the cost of construction estimated by the DVO as correct and subsequently completed assessment under Section 143(3) r/w Section 148 of the Act on 28th March, 2002 by making following two additions:
(i) Disallowance under Section 40A(3) of the Act = Rs. 5,545 (ii) Addition on account of alleged undisclosed = investment in construction of building by mentioning caption 'Expenses understated as Rs. 25,78,135 discussed in para 2'
4.9 Before completing the assessment for asst. yr. 1997-98, i.e. when assessment proceedings for asst. yr. 1997-98 were going on, the AO issued notice under Section 148 of the Act for asst. yrs. 1995-96, 1996-97 and 1998-99 on 27th March, 2002 which were served on the assessee on 30th March, 2003.
4.10 In response to aforesaid notices under Section 148 of the Act, the assessee wrote letters dt. 29th March, 2003 (seems to have been wrongly mentioned by the AO as 29th April, 2002) requesting the AO to consider the returns of income filed by the assessee for these three relevant assessment years on 30th Nov., 1996, 30th Nov., 1996 and 31st March, 1999 respectively as having been furnished in response to aforesaid notices under Section 148 of the Act. Assessment for asst. yrs. 1995-96, 1996-97 and 1998-99 were completed under Section 143(3) r/w Section -148 of the Act on 28th March, 2003.
4.11 During the course of assessment proceedings, in consequence upon initiation of proceedings under Section 147 of the Act for all these three assessment years the AO noticed similar petty discrepancies, such as absence of some vouchers and absence of signatures on some vouchers of the recipients, as were noticed in asst. yr. 1997-98 and on the same reasoning rejected the books of accounts for these three assessment years also.
4.12 The details of assessed income for these assessment years as per orders dt. 28th March, 2003 are as under:
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Sl. No. (s) Asst. year(s) Income as per Total assessed
return income
Addition
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1. 1995-96 NIL 9,60,547* 9,60,547
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2. 1996-97 8,09,824 32,98,312 24,88,488
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3. 1998-99 2,08,065 19,01,523 16,93,468
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* This addition, in all the three assessment years, is on account, of alleged undisclosed investment in construction of building, which was assessee's stock-in-trade by mentioning in the caption "Expenses understated as disclosed, above.
4.13 The assessee went in appeal against all the four assessments framed by the AO after taking recourse to provisions of Section 147 of the Act, 1961 and in addition to objecting to the rejection of the books of account and addition/additions on merits, objected to the validity of the proceedings initiated under Section 147 of the Act and consequential validity of notices under Section 148 of the IT Act, 1961.
4.14 The CIT(A) rejected the assessee's legal objection with respect to validity of proceedings under Section 147 of the Act and validity of notice under Section 148 of the Act, as per para No. 3.3 for asst. yr. 1995-96, para Nos. 3.3 and 3.4 for asst. yr. 1996-97, and para Nos. 3.3 and 3.4 for asst. yr. 1998-99 which are in the following terms:
For asst yr. 1995-96 3.3 During the course of assessment proceedings for asst. yr. 1997-99, the matter of estimating the cost of construction was referred to the DVO and report of the same was obtained, which was also given to the appellant for his explanation and comment, and AO after considering the objection of the appellant, has held that the report of the Valuation Officer is taken for the purpose of determining the investment in the construction of Ashlesha Bunglows, Accordingly, the investment as determined on the basis of report of the DVO related to the period under consideration was taken by the AO and difference between the above and the amount shown by the appellant being Rs. 9,60,547 was added.
Before discussing main ground No. 1, the appellant has also raised ground against the issuance of notice under Section 148. it was argued that reassessment cannot be reopened on the basis of report of DVO. This argument has been considered. In fact, the decision referred by the appellant in this regard were related to assessment year prior to asst. yr. 1989-90. With effect from 1st April, 1989, the provisions of Section 147 have undergone a vast change. Clause (b) of Expln. 2 clearly covers the position as in the case of the appellant. It has been provided in the aforesaid clause where return of income has been furnished and no assessment has been made and it is noticed by the AO that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return then, same will be deemed to be the case where income chargeable to tax has escaped assessment.
In the instant case it was clear to the AO that the appellant has understated the income on the basis of the report of the DVO wherein there was substantial difference between the investment estimated by the DVO and shown by the appellant in its books. It may be mentioned here that earlier no assessment under Section 143(3) was completed and only return was processed under Section 143(l)(a) and accordingly, the AO has earlier not had any occasion to apply his mind in relation to aforesaid point and decide the issue. The issue has first been taken up while taking the case under Section 147 and accordingly, it cannot be said to be change of opinion of AO, as contended by the appellant. Hence, the action of the AO in passing an order under Section 143(3) r/w Section 147 is held correct.
For asst. yr. 1996-97 3.3 Before discussing main ground No. 1, the appellant has also raised ground against the issuance of notice under Section 148. It was argued that reassessment cannot be reopened on the basis of report of DVO. This argument has been considered. In fact, the decision referred by the appellant in this regard were related to assessment year prior to asst. yr. 1989-90. With effect from 1st April, 1989, the provisions of Section 147 have undergone a vast change. Clause (b) of Expln. 2 clearly covered the position as in the case of the appellant. It has been provided in the aforesaid clause where return of income has been furnished and no assessment has been made and it is noticed by the AO that the assessee has understated the income or has claimed excessive loss,' deduction, allowance or relief in the return then, same; will be deemed to be the case where income chargeable to tax has escaped assessment.
3.4 In the instance case, it was clear to the AO that the appellant has understated the income on the basis of the report of the DVO, wherein there was substantial difference between the investment estimated by the DVO and shown by the appellant in its books. It may be mentioned here that earlier no assessment under Section 143(3) was completed and only return was processed under Section 143(1) and accordingly the AO has earlier not had any occasion to apply his mind in relation to aforesaid point and decide the issue. The issue has first been taken up while taking the case under Section 147 and accordingly it cannot be said to be change of opinion of AO, as contended by the appellant. Hence, the action of the AO in passing an order under Section 143(3) r/w Section 147 is held correct.
For asst. yr. 1998 99 3.3 Before discussing main ground No. 1, the appellant has also raised ground against the issuance of notice under Section 148. It was argued that reassessment cannot be reopened on the basis of report of DVO. This argument has been considered. In fact, the decision referred by the appellant in this regard were related to assessment year prior to asst. yr. 1989-90. With effect from 1st April, 1989, the provisions of Section 147 have undergone a vast change. Clause (b) of Expln. 2 clearly covers the position as in the case of the appellant. It has been provided in the aforesaid clause where return of income has been furnished and no assessment has been made and it is noticed by the AO that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return then, same will be deemed to be the case where income chargeable to tax has escaped assessment.
3.4 In the instant case, it was clear to the AO that the appellant has understated the income, on the basis of the report of the DVO, wherein there was substantial difference between the investment estimated by the DVO and shown by the appellant in its books. It may be mentioned here that earlier no assessment under Section 143(3) was completed and only return was processed under Section 143(1) and accordingly, the AO has earlier not had any occasion to apply his mind in relation to aforesaid point and decide the issue. The issue has first been taken up while taking the case under Section 147 and accordingly, it cannot be said to be change of opinion of AO, as contended by the appellant. Hence, the action of the AC) in passing as order under Section 143(3) r/w Section 147 is held correct.
4.15 For asst. yr. 1997-98, the CIT(A) duly noted the assessee's objection in para No. 3.4 of the appellate order, but did not decide this issue.
4.16 So far as the disallowance under Section 40A(3) for asst. yr. 1997-98 and additions in all four assessment years having been made by the AC) on account of alleged undisclosed investment in construction of the building under caption "Expenses understated as discussed above", are concerned, the CIT(A) confirmed the orders of the AO.
5. The assessee is aggrieved with the orders of the CIT(A) and, hence, in appeal before us.
6. First of all, the learned Counsel for the assessee has challenged the validity of proceedings initiated under Section 147 of the Act by submitting that the AO, after having processed the return for all the assessment years under Section 143(l)(a) of the Act, was not justified in initiating the proceedings under Section 147 of the Act.
6.1 Referring to assessment orders as well as orders of the CIT(A), the learned Counsel for the assessee, submitted that so far as asst. yr. 1997-98 is concerned, none of the authority has not referred to any evidence or reason which could have made the AO to have reasons to believe that a particular income had escaped assessment. The learned Counsel for the assessee, after drawing our attention to para No. 3.1 of the CIT(A) for asst. yr. 1997-98 submitted that in absence of any other finding of any of the two authorities, the observation of the CIT(A) to the effect that "the case was taken up by issuing notice under Section 148 r/w Section 147 of the Act dt. 28th Jan., 2000 and was completed under Section 143(3) of the Act", is the only clue which leads one to believe that proceedings under Section 147 of the Act. for asst. yr. 1997-98 were initiated without there being any information/material with the Revenue which could make the AO to have reasons to believe that a particular income had escaped assessment. In other words according to the learned Counsel, proceedings under Section 147 of the Act were initiated only to make roving inquiries and referring the matter relating to cost of construction to the DVO.
6.2 The learned Counsel for the assessee, after referring to assessment order, submitted that though the AO has also not specified or referred to any information/material for having reason to believe that any income had escaped assessment, the only reason could be either the escapement of disallowance to be made under Section 40A(3) of the Act, or the alleged undisclosed investment in the building, but on the facts of the case and as have been admitted by the AO in the assessment order itself, these two additions could also not be the basis of forming a belief that the income had escaped assessment.
The learned Counsel for the assessee has supported his plea by drawing our attention towards of second para of assessment order at page No. 1 which specifically reads as "during the course of hearing, it noticed that the assessee had made payment through bearer cheque to M/s Harikrupa Engineering Works on 23rd March, 1996 amounting to Rs. 27,728, the same payment has violated the provisions of Section 40A(3) of the Act, 20 per cent of the said amount, i.e. Rs. 5,545 was' disallowed and added to the income of the assessee". Referring to aforesaid observations of the AO, the learned Counsel for the assessee submitted that it is quite evident that the fact of payment of Rs. 27,728 having been made by bearer cheque also had come to the notice of the AO only during the course of hearing of proceedings initiated in consequence upon the issuance of notice under Section 148 of the Act on 28th Jan., 2000 and consequential furnishing of return by the assessee, meaning thereby that before proceeding with the proceedings initiated under Section 147 of the Act, and consequential assessment proceedings, the AO had no knowledge of any payment having been made in contravention of provisions of Section 40A(3) of the Act.
6.3 Still further, the learned Counsel for the assessee submitted that so far as information with respect to undisclosed investment in construction is concerned, here, again the alleged difference in cost of construction shown by the assessee and estimated by the DVO was known to the AO only in consequent upon the reference made under Section 131(l)(d) of the Act, to the DVO only on 26th Dec, 2001 as is evident from para No. 1.2 of the valuation report where the DVO, in the column "letter number and date under which reference was received", has mentioned as "nil dt. 26th Dec., 2001". From this fact, the learned Counsel for the assessee submitted that the notice under Section 148 of the Act for asst. yr. 1997-98 was issued on 28th Jan., 2000 and served on the assessee on 8th Feb., 2000, whereas the reference under Section 131(l)(d) to the DVO was made by the AO as per letter No. nil dt. 26th Dec., 2001, i.e. only during the course of assessment proceedings under Section 147 of the Act 1961.
(Emphasis, italicised in print, ours).
6.4 Coming to the rejection of assessee's books of account, the learned Counsel for the assessee, first of all, submitted that the AO having not made any addition as a result of rejection of books of account in any of the assessment year, he could not have any information which could have led him to have reason to believe that any income had escaped assessment could be taxed only by rejecting the books of account. For supporting his plea, he drew our attention to last sentence of third para at page No. 2 of assessment order for asst. yr. 1997-98 which reads as "while hearings were carried out and following discrepancies were noted". From this narration, the learned Counsel for the assessee, submitted that the so-called discrepancies were also found only during the course of proceedings in consequence upon the issuance of notice under Section 148 of the Act, 1961.
6.5 The learned Counsel for the assessee, in view of above facts, submitted that the proceedings under Section 147 of the Act, for asst. yr. 1997-98 and were initiated without there being any information or material with the Revenue authorities which could lead them or make them to have reasons to believe that any income chargeable to tax had escaped assessment.
6.6 He. therefore, submitted that the initiation of proceedings under Section 147 of the Act, was illegal and bad in law and therefore, all subsequent proceedings were illegal and bad in law.
6.7 With respect to asst. yrs. 1995-96, 1996-97 and 1998-99, the learned Counsel for the assessee, submitted that though there is nothing in the assessment orders as to why and on what basis, the proceedings under Section 147 of the Act. initiated, but from para No. 3.3 for asst. yr. 1995-96. para Nos. 3.3 and 3.4 for asst. yr. 1996-97 and para Nos. 3.3 and 3.4 for asst. yr. 1998-99. it is gathered that the proceedings under Section 147 of the Act for all the three years, were initiated solely on the basis of valuation report and. therefore, the same were not validly initiated. According to him, proceedings under Section 147 of the Act cannot be initiated solely on the basis of valuation report.
6.8 For the various propositions, the learned Authorised Representative relied on the decisions and relevant observations therein, as detailed below:
(1) For the proposition that even if the original return of income was processed under Section 143(l)(a), only on the basis of the report of DVO, the reopening under Section 147 is not permissible was placed on the following decisions and the observation thereof.
(i) Darshan Singh v. AO (2002) 123 Taxman 324 (Asr)(Mag) Section 147. r/w Section 148 of the IT Act, 1961-Income escaping assessment- Position after 1st April, 1989-Asst. yr. 1995-96--Weather AO was justified in reopening assessment merely on basis of Valuation Officer's report where there was no other material with AO for initiating reassessment proceedings and assessee's return had been processed earlier under Section 143(l)(a)-Held. No.
(ii) CIT v. Smt. Usha Mathur Headnote:
Appeal (High Court)-Substantial question of law-Tribunal has recorded each finding on the basis of the evidence on the file and also held that valuation report cannot be made basis of reopening sale of the assessment and also deleted addition on sale of jewellery-No error in the finding of fact recorded by the Tribunal has been pointed out- Consequently, no substantial question of law arises also the ultimate tax liability would be of a very small amount-There is therefore no ground to interfere under Section 260A.
Held Each finding has been recorded by Tribunal on the basis of the evidence on the file. No error in the findings of fact recorded by the Tribunal has been pointed out. Consequently, no substantial question of law arises for the consideration of the Court in this appeal. There is another aspect of the matter. Even if the contention raised by the Revenue were to be gone into the ultimate tax liability would be of a very small amount. Keeping in view the fact that financial implications are of a very trivial nature, there is no ground to interfere under Section 260A.
Conclusion Findings recorded by Tribunal and setting aside the reopening of assessment and deleting the addition on the basis of evidence on record wherein no error has been found hence no substantial question of law arises; no interference warranted also for the reason that the tax effect would be of a very small amount.
(iii) Roof & Tower Construction (P) Ltd. v. Asstt. CAT Reassessment-Reason to believe-Assessee company engaged in the business of constructing residential complexes and selling flats therein AO reopened the assessments under the belief that sales consideration has been suppressed by the assessee which was formed on the basis of DVO's report-Not justified-Addition could not be made to the returned income because, the sale price as per assessee's account was less than the value indicated in the DVO's report-Reopening not valid Head-note:
Reassessment-Reason to believe-Assessee company engaged in the business of constructing residential complexes and selling flats therein- AO reopened the assessments under the belief that sales consideration has been suppressed by the assessee which was formed on the basis of DVO's report-Not justified-Addition could not be made to the returned income because, the sale price as per assessee's account was less than the value indicated in the DVO's report-Reopening not valid Held The scope and effect of the Section 147, as substituted w.e.f. 1st April, 1989, is much wider. If the AO simply has reason to believe that income has escaped assessment, it confers upon him the jurisdiction to reopen the assessment. However, a completed assessment cannot be reopened on the basis of DVO's report and a DVO report cannot amount to 'information' or to 'reason to believe' that any income has escaped assessment. A valuation report is at best an opinion about the fair market value of a capital asset. The reason for reopening of assessments, as recorded by the AO, is AO's belief that sales consideration has been suppressed by the assessee. At this stage sufficiency or correctness of the reasons of reopening the assessments is not required to be examined. It is to be only seen whether there is some prima facie material on the basis of which Revenue could reopen the case and whether such a material has any relevance to the income escaping assessment. However, as mentioned earlier the reasons of reopening the assessments are not relevant to any suppression of sales which is said to be the income escaping assessment. If the reasons of reopening cannot be said to be relevant for ascertaining whether or not any income has escaped assessment due to suppression of sales, it is only axiomatic that such reasons cannot constitute even 'prima facie' material on the basis of which the Revenue could reopen the case.-ITO v. Lakhmani Mewal Das and Bhola Nath Majumdar v. ITO (1997) 137 CTR (Gau) 198 relied on; K.P. Varghese v. ITO and NRK Ramkumar Raja v. ITO (1999) 106 Taxman 81 (Mad) applied.
Conclusion Reopening of assessment merely on the basis of DVO's report is not sustainable.
(iv) ITO v. Vijay Kumar (ITO v. Mahesh Kumar) (ITO v. Parmanand) (2001) 73 TTJ(Jd) 17 Reassessment under Section 147(b)-Information-AO was not authorised to make reference to DVO when the assessments were already completed- Report of DVO is an opinion and the AO cannot use it as information for reopening the assessment Headnote:
Reassessment under Section 147(b)-Information-AO was not authorised to make reference to DVO when the assessments were already completed- Report of DVO is an opinion and the AO cannot use it as information for reopening the assessment Held The assessment had already been completed and as such the AO had no reason to make the reference to DVO under Section 131(l)(d). The report obtained from the DVO is just an opinion and cannot be considered as information for initiating reassessment proceedings. The CIT(A) was justified in quashing the reassessment proceedings.-Brig. B. Lall v. WTO , CAT v. Smt Prem Kumari Surana and Smt. Amala Das v. CIT followed; Abdul Majid v. ITO and Smt. Tamwati Debi Agarwal v. ITO relied on.
Conclusion Valuation report by DVO after completion of assessment cannot be considered as information for making reassessment under Section 147(b).
(2) For the proposition that once the assessee has produced valuation report of a registered values the same cannot be rejected without giving itemwise comments/analysis and reasons to show that the same is not tenable, reliance was placed on the following:
(i) Asstt. CAT v. Vinodkumar Agarwal (2002) 77 TTJ (Hyd) 943 : (2002) 82 ITD 1 (Hyd) By the same principles we hold that the method of valuation to be adopted for evaluating the cost of construction should be the method that is most beneficial to the assessee and which is opted by him. We fail to understand as to why the DVO is unable to estimate the cost of construction on the basis of detailed quantities method, when with the same information the empanelled valuer of the IT Department i.e. the registered valuer could estimate the cost of construction on detailed quantities method. It is also found from record that the registered valuer's report containing the estimation of cost of construction by adopting detailed quantities method was available to the DVO. The Jaipur Bench of the Tribunal in Smt. Rekhadevi's case (supra), had held that it is not right for the DVO to reject the registered valuer's report without giving any reason and without making further investigations and when the registered valuer's report being made with itemwise analysis, is against law. In this case also, the Valuation Officer has summarily rejected the report of the registered valuer without giving itemwise comments/analysis and itemwise reasons or demonstrating in any manner, whatsoever that the valuation report of the registered valuer is clearly undisputably untenable.
We find that the DVO has acted in a cavalier manner while inspecting the premises of the building in an hour, that too on the date of reference itself, which happened to be the date of search operations, during the course of search operations, without notice transcending all principles of natural justice. Further, he declined to adopt the detailed quantities method of valuation, on the pretext that some material drawings were not furnished to him. The short-cut methods of evaluating cost of construction i.e. plinth area method is resorted to on the pretext of non availability of some material, when a registered valuer could do the same valuation of the same building on the basis of the same material/drawings on a detailed valuation method. Private parties cannot be expected to maintain all the detailed drawings sought by the DVO. Law does not require the impossible to be done. The DVO has also not stated as to why he was unable to accept the quantities and rates arrived at by the registered valuer. He gave no reason why they have to be disbelieved or are inaccurate. The AO should have insisted that the DVO investigate the matter properly adhering to the principles of natural justice. We are convinced with the argument of the learned Counsel for the assessee that when as late as in the year 1991, apartments and commercial spaces were being sold in the city at the rate of Rs. 225 to Rs. 275 per sq. yd. inclusive of land cost and development and profit, the DVO valued the cost of construction at Rs. 368 per sq. yd. during the year 1985 to 1987. To our mind, this is highly irrational and far from reality. For all these reasons we uphold the contentions of the assessee's counsel and reject the report of the DVO as not good evidence.
(ii) Modern Construction Development & Project Promotion v. Asstt. CAT (1997) 63 ITD 235 (Cal)
11. On analysing the aforesaid judgment, we find that in order to refer the matter to the valuation cell, the AO should first point out the defects in the books maintained by the assessee. In the following decisions it was held that when the assessee maintained accounts regularly, addition cannot be made on the basis of the report of the DVO without pointing out any defects in the books:
(a) Shekhar Chand & Sons' case (supra);
(b) Western Estate's case (supra);
(c) Vindaban Chitra Mandir's case (supra);
(d) Shekhar Chand Jain & Son's case (supra);
(e) Tek Chand's case (supra);
(f) Nishant Housing Development (P) Ltd.'s case (supra);
(g) Smt. Uma Devi Jhawar's case (supra).
12. From the aforesaid judgment the following proposition would emerge:
(a) For the purpose of making an addition, towards unexplained investment, the AO is under legal obligation to verify the books and vouchers maintained by the assessee in support of the cost of construction shown by him and point out specific defects;
(b) Upon rejection of the books or upon pointing out defects, the AO would acquire the right to refer the matter to the Valuation Officer, if so required; and
(c) When the assessee produces registered valuer's report based on the State PWD rates, it cannot be simply rejected without giving cogent reasons.
(3) For the proposition that for minor and insignificant errors, the books of accounts cannot be rejected, reliance was placed on the following:
(i) Uttam Chuna Pathar Udyog v. ITO (1997) 59 TTJ (Raj) 763 : (1998) 65 ITD 466 (Raj) Accounts-Rejection-Minor defects in accounts-Assessee wrongly showing the attendance of workers on 29th and 30th February- Plausible explanation given-AC) could have verified the wages from other relevant records-Internal vouchers could be relied upon and cross verified from other relevant records-Simply a few clerical errors, lack of few vouchers or absence of a particular record do not make the whole accounts incorrect if fair profits are deducible-Provisions of Section 145(2) could not be invoked in above circumstances-AO comparing expenditure per metric tonne under each head with similar expenditure incurred by some other firms-Conditions under which assessee firm was functioning was altogether different-Disallowances deleted
(ii) Alka Stone Crusher Co. v. AO (1998) 101 Taxman 271 (Jab)(Mag) Section 145 of the IT Act, 1961-Method of accounting-Estimation of profit-Asst. yrs. 1986-87 and 1987-88-Whether, where lower authorities disallowed expenditures shown in P&L a/c which were very nominal compared to gross profit on ground that vouchers for all expenses were not available and where no default was pointed out in account books, gross profit declared by assessee on basis of account books could not be rejected merely on ground that certain small expenses were not properly vouched-Held, yes.
(iii) Md. Umer v. CIT Accounts-Rejection-Once the method of accounting has been regularly employed and profits could properly be deduced from such method, that is the end of the matter.
Headnote:
Accounts-Rejection-Once the method of accounting has been regularly employed and profit could properly be deduced from such method, that is the end of the matter.
Held The method of accounting employed by the assessee has been regularly employed and income, profits and gains could properly be deduced from such regularly employed method of accounting, that is the end of the matter for the purpose of the proviso to Sub-section (1) of Section 145. As there is no finding in the present case that any of the entries in the books of account was not correct, there is no finding that the assessee is not employing a method of accounting and there is no finding that such a method of accounting has been irregularly employed be the assessee. In the absence of any such finding, there being no reason germane to the unacceptability of the book results, it must be held that the Tribunal as well as the Revenue authorities below had no materials before them, on the basis of which it could be said that the trading results were not verifiable and that, therefore, they should not be accepted, nor is it their case that the trading results could not be deductible from the entries of the books of account regularly employed.
Conclusion Where method of accounting employed by the assessee had been regularly employed and income, profits and gains could properly be deduced from such method, no scope for rejection of books.
(iv) CIT v. Padamchand Ramgopal Accounts-Rejection-Insignificant mistakes noticed in one year cannot be basis for rejecting the accounts of other year Headnote:
Account-Rejection-Insignificant mistakes noticed in one year cannot be basis for rejecting the accounts of other year.
Held It was not justified in holding that the additions made by the ITO were in accordance with law. Those additions were arbitrarily made. No reasons were given to reject the accounts relating to the asst. yrs. 1954-1955, 1955-56, 1956-57 and 1957-58. 'Further, the method adopted for determining the escaped income appears to be highly capricious.
Conclusion No reasons were given to reject the accounts for the relevant year, rejection was not justified.
(v) Badshah Construction Co. v. Dy. CIT (2003) 127 Taxman 153 (Indore)(Mag) Section 145 of the IT Act, 1961-Method of accounting-Rejection of accounts-Asst. yr. 1995-96-AO rejected books of account of assessee on ground that muster rolls did not indicate complete addresses of labourers, signatures and thumb impressions were not verifiable, cartage, transport, repair and maintenance expenses were not supported by vouchers and some vouchers were self-made-AO estimated net profit at rate of 12.5 per cent against 10.13 per cent claimed by assessee and made addition accordingly-Whether basis for rejection of books of account under Section 145 should be more than mere stereo type allegation, especially when assessee claims that accounts are regularly maintained, supported with bills and vouchers and subject to statutory audit-Held, yes-Tribunal in case of same assessee for asst. yrs. 1985-86, 1987-88 and 1993-94 had not justified such stereo type basis for rejection of book results under Section 145(2}-Whether, therefore, there was no justification to invoke Section 145(2) and reject books of account and make addition applying net profit rate of 12.5 per cent-Held, yes.
(4) For the proposition that if regular books of accounts are maintained, no addition can be made under Section 69B/69C only on the basis of the report of the DVO.
(i) Nishant Housing Development (P) Ltd. v. Asstt. CAT (1995) 52 ITD 103 (Pat)
27. The case law is. therefore, overwhelmingly in favour of the assessee that the cost of construction as per books cannot be rejected and on estimate made without first bringing the case either under proviso to Section 145(1) or under Section 145(2). The case has been brought under neither of these. We, therefore, hold that the cost of construction as per assessee's books cannot be rejected and a higher estimate cannot be made either on the basis of the DVO or any other case considered comparable. The additions sustained by the CIT(A) are. therefore, deleted on this preliminary issue.
(ii) Sri Har Samp Cold Storage & General Mills v. ITO (1988) 27 ITD 1 (Del)(TM)
9. For these reasons, I am of the opinion that "the ITO not having pointed out any defects in the account books, should not have rejected the accounted version and the CIT(A) having found that the valuation made by the DVO was excessive to a great extent, should have examined the matter in greater detail and in any case should have found out defects in the accounted version and not having done that, his order also suffers from the same defects as that of the ITO" and that the view expressed by the learned JM placing reliance upon another order of the Tribunal taking a similar view is more acceptable, I, therefore, agree with the view expressed by the learned JM.
(iii) Babyland Hostel v. ITO (1988) 31 TRJ (Ahd) 136 : 39 Taxman 238 (Ahd)(Mag)
10. We have carefully considered the rival submission of the parties and perused the material already brought on record and we are constrained to observe that this litigation could have been avoided, if the IT authorities had taken proper care and appreciated the assessee's case in proper perspective. It is pertinent to note that the assessee has maintained proper books of accounts in respect of the construction of the property in question, not only that the books of accounts are fully supported by vouchers and bills. In fact this aspect of the matter has not been challenged either by the ITO or by the CIT(A), on the contrary, the CIT(A) has given clear finding that such position is available in this case. In this view of the matter, we fail to appreciate how an addition could not be made on the basis of "probable cost of construction." We are constrained to observe that even though the CIT(A) has given his findings which are clearly in favour of the assessee, he thought it fit to sustain certain additions by estimating the cost of constructions at Rs. 500 per sq. mtr., without any basis for this action. It appears to us that all these litigations have started only because such operation under Section 132 of the Act carried out at the premises of the assessee and the Department could not find anything in such operation. We make this observation as according to us, the IT authorities were not justified in ignoring the books of accounts of the assessee specifically maintained in respect of the cost of construction of the property in question which were fully supported by vouchers, bills, etc. In fact, as would appear from the orders of the IT authorities (reproduced above) that they have simply ignored the books of accounts of the assessee without pin-pointing any glaring or major defects therein. Surely, the addition made by giving blink eye to the material available on record cannot get approval from a judicial body like the Tribunal. In fact, in the aforesaid two orders of the Tribunal, the Tribunal has deleted certain "addition made by the IT authorities on the fact and circumstances which are identical to the one obtaining in the instant case with which we fully concur. In this view of the matter, we are of the opinion that there is no justification of making any addition in the manner made by the ITO or sustained by the CIT(A). We would therefore direct the ITO to accept the assessee's cost of construction at Rs. 3,27,728 and modify the assessment accordingly. In this view of the matter, we delete the addition as sustained by the CIT(A). The ITO is, therefore, directed to modify the assessment accordingly.
(iv) ITO v. Pitamber Industries (P) Ltd. (1992) 42 ITD 373 (Del) When the assessee maintained books of account and recorded investment in those books of account, it becomes compulsory as per the legislative mandate that the ITO should point out defects in the maintenance of those books of account. It is not open to him to ignore the evidence provided by these entries in the books of account and go only by the valuation report given by the Valuation Officer. When the ITO proposes to go by the Valuation Officer's report, it means that the books of account maintained by the assessee and produced by him in support of cost of construction within the meaning of Section 143(3) of the IT Act, require specific comment to reject the material as unreliable. The ITO can only make the assessment after rejecting the evidence produced by the assessee in support of his return. The assessee can, therefore, offer the books of account maintained by him in support of his cost of construction. The ITO must look into that evidence and point out the defects with regards to falsity and unreliability of these evidences. It is only after the evidence is rejected on the specific point, the ITO will get the power to estimate the cost of construction and rely upon the report of the Valuation Officer. The unreliability of the books of account without showing defect in that, cannot be taken for granted.
(v) Asstt. CIT v. Smt. P. Appayamma {1993) 66 Taxman 104 (Hyd)(Mag) Section 69 of the IT Act, 1961-Unexplained investment--Asst. yrs. 1986-87 and 1987-88.... Asscssee constructed second floor of building and produced amount books as well as valuation report in support of cost of construction-ITO, however, obtained valuation report from Valuation Officer wherein cost of construction was estimated at a higher value- Relying on this report and without pointing out any defects in assessee's accounts book ITO added difference as an explained investment to assessee's income-Whether ITO's action could be sustained-Held, No. Section 7 of the WT Act, 1957-Valuation of assets-Asst. yrs. 1986-87 and 1987-88- -Whether addition on account of unexplained investment was sustainable nearly on basis of report of Valuation Officer when assessee had produced amounts in support of cost of construction and no defects had been found therein-Held, No.
(vi) Shiv Engg. Works v. ITO (1990) 53 Taxman 109 (Jp) (Mag) Section 69 of the IT Act, 1961-Unexplained investment-Asst. yr. 1981-82--Assessee had started construction of building in 1973 and completed it in December 1981-Finding cost of construction disclosed by assessee unsatisfactory, ITO referred matter to valuation cell.... Deference of Rs. 66,509 between valuation as worked out by valuation cell and as disclosed by assessee was added to total income of assessee-Whether since ITO was not able to point out any defects in books of accounts maintained by assessee, he was not justified in rejecting book results and substituting figures, even if they were alleged to be figures of undisclosed investment based on report of an expert and, thus, aforesaid amount of addition was not assessable in hands of assessee-Held, yes.
(vii) ITO v. Dreamland Enterprises (1995) 81 Taxman 143(Ahd)(Mag) Section 69 of the IT Act, 1961-Unexplained investment-Asst. yr. 1987-88-Whether, when cost of construction declared by assessee was supported by regular books of account and vouchers, correctness of which was not disputed by AO or Departmental Valuation Officer (DVO) by bringing any specific material on record, CIT(A) was fully justified in holding that no addition could be validly made on account of any understatement of cost of construction nearly on basis of difference between actual cost disclosed by assessee, which was supported by regular books of account and vouchers, and estimate of cost of construction made by DVO, particularly in a ease where assessee had submitted complete details both in terms of quantity and value to DVO as well as AO-Held, yes. (viii) M. Selvaraj v. ITO I am therefore, of the opinion that so far as the present case is concerned, the Revenue having not rejected the books of account of the assessee there was no justification for disputing the cost of construction recorded in the books or making any addition on this point.
In view of the totality of the aforesaid discussion, I hold:
(i) The commission issued by the AO under Section 131(l)(b) of the Act without recording his satisfaction that the cost of construction shown by the assessee was not correct, was not valid.
(ii) The valuation report given by the Valuation Officer in consequence upon an invalid order issuing commission was a non est report and could not be relied upon.
(iii) The assessee's books of account having not been rejected, no addition was called for on the ground that the cost of construction shown by the assessee was not correct.
(iv) If at all the valuation was to be determined it should have been determined on the basis of the State PWD rates and not the Central PWD rates.
Having arrived at the aforesaid conclusions, I am of the opinion that on the facts and circumstances of the case there can be no addition under Section 69 of the Act either as a whole or on proportionate basis in any of the assessment year, i.e., 1990-91 and 1991-92, on the basis of the report of the DVO and, consequently, I answer the question referred for my opinion in the negative in favour of the assessee and against the Revenue. The assessee's appeals are accordingly allowed.
(5) For the proposition that even if any addition is made under Section 69C, there shall have to be a corresponding deduction of identical amount till asst. yr. 1999-2000.
(i) Nishant Housing Development (P) Ltd. v. Asstt. CIT (1995) 52 ITD 103 (Pat) If followed that in the former case, if the assessee has incurred expenditure in excess of the amounts recorded in the books, then the unexplained expenditure would be assessable as income under Section 69C of the IT Act. On the other hand, in the case of a capital investment, unexplained investment if any will be assessable under Section 69 of the IT Act, 1961. There are different consequences in the two situations. In the first situation although some amount may be assessable as unexplained expenditure under Section 69C, as soon as the amount is debited in the P&L a/c, the addition is neutralised and the net result is a nil addition. However, in the latter case, since unexplained investment does not go to the P&L a/c, there is no figure setting it off and the entire amount remains income. This distinction has been kept in view by the AO. In the present case, as has been discussed in the assessment order, even if there was some unexplained expenditure, the addition under Section 69C of the Act and the additional debit in the P&L a/c will neutralise each other.
(ii) Ruby Builders v. ITO Income from undisclosed sources-Addition under Section 69C-AO relied on the report of the DVO to make addition on account of unexplained cost of construction-AO has not been able to find any specific defect in the books of accounts of the assessee-Cost of construction was recorded in books on the basis of bills issued by builder-Further, construction was made in the course of business-Assuming addition is made, the entire expenditure has to be allowed as deduction Held It is pertinent to note that the AO has not been able to find any specific defect in the books of accounts, of the assessee with regard to the cost of construction may be because of the fact that the cost of construction was debited in the books of the account on the basis of bills issued by E and the real construction work was carried out only by E who were being separately assessed to tax. In this view of the matter the additions made merely on the basis of the report of the DVO in which main emphasis was on some discrepancies in the measurement of areas by the approved valuer, which subsequently were found to be non-existent, cannot be justified.
The matter can be looked from another angle also. Admittedly the assessee was carrying out the construction of the shopping centre in the course of business. Thus, in the present case assuming that even if any addition is required to be made under Section 69C, the entire expenditure towards it has to be allowed as a deduction under Section 37(1). Thus, taking into consideration the totality of the facts and circumstances of the case, the Departmental authorities were not justified in making the disputed addition because even if the assessee did incur some additional expenditure in the cost of construction, the equivalent debit in the P&L a/c will neutralise each other and no addition could be made.
Conclusion Addition could not be made on account of unexplained investment in construction simply on the basis of report of DVO where the cost of construction was debited in accounts on the basis of bills raised by builder and AO found no specific defect in the books of accounts.
(iii) S.F. Wadia v. ITO (1987) 27 TTJ (All) 437 : (1986) 19 ITD 306 (All)
13. When we are on provisions contained in Section 69C, we would like to mention that section was inserted vide Taxation Laws Amendment Act, 1975 w.e.f. 1st April, 1976 on the basis of recommendation made by the select committee, as found in the report submitted in 1973. The section is introduced with an intention to cover the whole expenses which are not deductible while computing the income and are required to be added as income from undisclosed sources. Such expenditure would cover expenditure at the time of marriage, furnishing of a house, household expenditure and gifts. If Section 69C is sought to be invoked for an expenditure deductible while computing the income under any head probably the action would cut at the root of the intention as no addition would be made.
14. The phraseology in the section goes to show that before invoking the section it must be conclusively established by evidence or material to prove that the amount spent is an expenditure and the expenditure is incurred by the assessee only and the same is not deductible while computing the income under any head under the Act. Thus, the primary onus is on the Revenue.
(v) Tirupati Builders v. ITO (2003) 126 Taxman 54 (Rajkot)(Mag) Section 145 of the IT Act, 1961-Method of accounting-Rejection of accounts-Asst. yrs. 1985-86 to 1987-88-Assessee was a partnership firm in construction business who constructed properties and declared cost of construction as per books of account maintained by them-AO noted that assessee had understated cost of construction-So he referred matter to Departmental Valuation Officer (DVO) for determination of cost-Assessment was already complete under Section 143(1) before DVO's report was received-Later AO reopened assessments under Section 147(b) and made addition of difference of cost-CIT(A) held that proceedings under Section 147(b) were invalid-CIT(A) deleted additions but enhanced profit to 15 per cent as against 10 per cent disclosed by assessee-Tribunal directed AO to determine construction cost after giving assessee proper opportunity to cross-examine DVO-However, AO did not allow assessee to cross-examine DVO and made additions-On appeal, CIT(A) estimated cost of construction himself without relying upon DVO's report totally- Whether CIT(A) had rightly observed that non compliance of directions of Tribunal by AO did not render hold proceedings a nullity though it reduced considerable evidential value of DVO's report-Held, yes- Whether moment, CIT(A) arrived at conclusion that DVO's report solely could not we made basis for estimating cost, he should have considered some other material-Held, yes-Whether AO had willfully violated directions of Tribunal and that arrogant conduct could expose him to contempt proceedings-Held, yes-Whether addition to assessee's income could have been made on common knowledge that persons engaged in construction usually understate cost of construction-Held, no-Whether estimation of cost of construction by AO was justified-Held, no- Whether, therefore, addition to assessee's income had to be deleted- Held, yes.
(vi) B & Brothers Engineering Works v. Dy. CIT The next ground of appeal relates to the addition made by the AO on account of investment of Rs. 13,59,000 on account of alleged unrecorded purchases as per discussion contained in para 3 of the assessment order. The contention of the assessee before us was that there was no unrecorded purchase as per detailed explanation given by the assessee vide letters dt. 21st Dec, 1998 and 24th Dec, 1998 copies of which have been given to us at pp. 124 to 139 of the paper book. However, the assessee has taken an alternative plea that even if it is assumed for argument's sake that there has been unaccounted investment in the purchase, the same is required to be taxed under Section 69C and accordingly deduction of an equivalent amount has to be allowed under Section 37 because the expenditure has been incurred for the purpose of acquiring goods/raw materials for the purpose of business of the assessee. We find force in this submission which is duly supported by the decision of the Ahmedabad Bench of the Tribunal in the case of Ruby Builders (supra). Accordingly, the addition of Rs. 13,59,000 on account of alleged unaccounted purchase of material is directed to be deleted.
(vii) M.K. Mathivathanan v. ITO (1990) 36 TTJ (Mad) 417 : (1989) 31 ITD 114 (Mad)
10. Based on the remand report, we have heard the parties. The provisions of Section 69C read as under:
69C. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such or part thereof, or the explanation, if any, offered by him is not, in the opinion of the ITO, 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.
The gist of the decision of the Tribunal in S.F. Wadia's case (supra) was that unexplained expenditure had to be asked with reference to the provisions of Section 69C but where such unexplained expenditure was actually incurred for business purposes and not recorded in the books, such expenditure will have to be allowed separately -as a deduction. To illustrate : Suppose the total unexplained expenditure comes to rupees 'A' and this is comprised of personal expenditure of rupees 'B'. capital expenditure of rupees 'C and expenditure relation to disclosed business of rupees 'D' then while under Section 69C an addition of rupees 'A' would have to be made, a separate deduction would have to be given of rupees 'D', relating to business expenditure incurred but not accounted for. The resultant net addition would be rupees 'A' minus 'D'. Where unaccounted expenditure is rupees 'A' and there is no personal expenditure and no capital expenditure and the whole unexplained expenditure relates to a disclosed business then 'D' will be equal to 'A' and while rupees 'A' can be added under Section 69C, an equivalent amount of rupees 'D' would have to be now separately allowed as a deduction.
7.1 On the other hand, the learned Departmental Representative in addition to supporting the order of the CIT(A) submitted that proceedings under Section 147 of the Act can be initiated on the basis of report of the DVO and for that purpose, relied on the decisions in following cases:
(i) Praful Chunilal Patel v. M.J. Makwana, Asstt. CIT ;
(ii) Grover Nursing Home v. ITO ;
(iii) Smb Shashi Jain v. CIT ;
(iv) Bawa Abhai Singh v. Dy. CIT (2001) 168 CTR (Del) 521 : (2002) 253 ITR 83 (Del).
7.2 With respect to the assessee's submission that if addition is made under Section 69C of the Act, the corresponding deduction should be allowed on account of expenses/purchases, the learned Departmental Representative submitted that so far as assessment years prior to amendment are concerned, the assessee may be allowed corresponding deduction.
8. We have considered the rival submissions, facts and circumstances various decisions relied upon by the parties. After having considered the totality of the facts and circumstances of the case, we are of the opinion that to decide the issue with respect to validity of initiation of proceedings under Section 147 of the Act, it is desirable, first to consider the provisions of Section 147 and, therefore, we proceed to consider the same.
147. Income escaping assessment.-If the AO (has reason to believe) that any income chargeable to tax has escaped assessment for any assessment year, he may. subject to the provisions of Sections 148 to 153 assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be for the assessment year concerned (hereafter in this section and in Sections 148 to 153 referred to as the relevant assessment year):
Provided that where an assessment under Sub-section (3) of Section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under Section 139 or in response to a notice issued under Sub-section (1) of Section 142 or Section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year.
Explanation 1.-Production before the AO of account books or other evidence from which material evidence could with due diligence have been discovered by the AO will not necessarily amount to disclosure within the meaning of the foregoing proviso.
Explanation 2.-For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:
(a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax:
(b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the AO that the assessee has understated the income or has claimed excessive, loss, deduction, allowance or relief in the return:
(c) where an assessment has been made, but:
(i) income chargeable to tax has been underassessed : or (ii) such income has been assessed at too low a rate : or
(iii) such income has been made the subject of excessive relief under this Act :or
(iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed.
8.1 From the aforesaid provisions, it is gathered that the AO has been given power to initiate proceedings under Section 147 of the Act, if he has reason to believe that any income chargeable to tax has escaped assessment and, subject to provisions of Sections 148 to 153, can assess or reassess such escaped income and also any other income chargeable to tax which has escaped assessment, but comes to his notice, subsequently, in the course of proceedings under Section 147 of the Act.
8.2 The AO, not only can assess or reassess the escaped income, but can recompute the loss or the depreciation allowance or any other allowance, as the case may be.
8.3 The power so vested in the AO can be exercised within a period of 4 years from the end of the assessment year irrespective of fact as to whether assessment under Section 143(3) of the Act has been made or not, but if the power is to be exercised after the expiry of four years, then in cases where assessment under Section 143(3) has been made, the power can be exercised only if there is failure on the part of the assessee either to make a return under Section 139 of the Act in response to notice under Section 142(1) of the Act or under Section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year.
8.4. As per Expln. 2(b) to Section 147 where the assessee has furnished the return of income, but no assessment has been made and if it is noticed by the AO that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return, then such claim or relief, as the case may be, will be deemed to be income which has escaped assessment, meaning thereby that the AO can initiate proceedings under Section 147 of the Act in such cases also.
9. So far as the present case is concerned, admittedly, the assessee had furnished returns of income for all the assessment years and no assessment under Section 143(3) had been framed. Under these circumstances, we are of the opinion that the assessee's case could have been a case of escapement of income only in case:
(i) The AO was seized of any information or material which could lead him to have reason to believe that an income depicted by such information or material had escaped assessment, or
(ii) If it was found that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return, otherwise, there was no reason for initiating proceedings under Section 147 of the Act.
(iii) In other words, the assessee's case for asst. yfs. 1995-96, 1996-97 and 1998-99 would be a case of escapement of income, only if conditions mentioned in Expln. (2)(b) to Section 147 of the Act are satisfied, otherwise not, whereas for asst. yr. 1998-99, the assessee could be only of regular assessment and not of escapement of income.
10. Coming to the facts and circumstances of the case, we have gathered from assessment orders passed under Section 143(3) of the Act r/w Section 148 of the Act, and orders of the CIT(A) that the orders are absolutely silent as to the availability of any information or material with the AO before initiating the proceedings under Section 147 of the Act, which could have made him to have reason to believe that any income had escaped assessment.
11. Similarly, neither the AO nor the CIT(A) has alleged that they had noticed any understatement of income or excessive claim of loss, deduction, allowance or relief in any of the return, except that (i) para No. 3.3 for asst. yr. 1995-96, the learned CIT(A) has stated as under:
3.3 During the course of assessment proceedings for asst. yr. 1997-98, the matter of estimating the cost of construction was referred to the DVO and report of the same was obtained, which was also given to the appellant for his explanation and comment, and AO after considering the objection of the appellant, has held that the report of the Valuation Officer is taken for the purpose of determining the investment in the construction of Ashlesha Bunglows. Accordingly, the investment as determined on the basis of report of the DVO related to the period under consideration was taken by the AO and difference between the above and the amount shown by the appellant being Rs. 9,60,547 was added.
Before discussing main ground No. 1, the appellant has also raised ground against the issuance of notice under Section 148. It was argued that reassessment cannot be reopened on the basis of report of DVO. This argument has been considered. In fact, the decision referred by the appellant in this regard were related to assessment year prior to asst. yr. 1989-90. With effect from 1st April, 1989, the provisions of Section 147 have undergone a vast change. Clause (b) of Expln. 2 clearly covers the position as in the case of the appellant. It has been provided in the aforesaid clause where return of income has been furnished and no assessment has been made and it is noticed by the AO that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return then, same will be deemed to be the case where income chargeable to tax has escaped assessment.
In the instant case, it was clear to the AO that the appellant has understated the income, on the basis of the report of the DVO, wherein, there was substantial difference between the investment estimated by the DVO and shown by the appellant in its books. It may be mentioned here that earlier no assessment under Section 143(3} was completed and only return was processed under Section 143(1) and accordingly, the AO has earlier not had any occasion to apply his mind in relation to aforesaid point and decide the issue. The issue has first been taken up while taking the case under Section 147 and accordingly, it cannot be said to be change, of opinion of AO, as contended by the appellant. Hence, the action of the AO in passing an order under Section 143(3) r/w Section 147 is held correct.
(ii) In appellate order for asst. yr. 1996-97, the CIT(A) in para No. 3.4 has observed as under:
3.4 In the instant case, it was clear to the AO that the appellant has understated the income, on the basis of the report of the DVO. wherein, there was substantial difference between the investment estimated by the DVO and shown by the appellant in its books. It may be mentioned here that earlier no assessment under Section 143(3) was completed and only return was processed under Section 143(1) and accordingly, the AO has earlier not had any occasion to apply his mind in relation to aforesaid point and decide the issue. The issue has first been taken up while taking the case under Section 147 and accordingly it cannot be said to be change of opinion of AO, as contended by the appellant. Hence, the action of the AO in passing an order under Section 143(3) r/w Section 147 is held correct.
(iii) In appellate order for asst. yr. 1998-99 the CIT(A) has again, in para No. 3.4 observed as under:
3.4 In the instant case, it was clear to the AO that the appellant has understated the income, on the basis of the report of the DVO, wherein, there was substantial difference between the investment estimated by the DVO and shown by the appellant in its books. It may be mentioned here that earlier no assessment under Section 143(3) was completed and only return was processed under Section 143(1) and accordingly, the AO has earlier not had any occasion to apply his mind in relation to aforesaid point and decide the issue. The issue has first been taken up while taking the case under Section 147 and accordingly, it cannot be said to be change of opinion of AO, as contended by the appellant Hence, the action of the AO in passing an order under Section 143(3) r/w Section 147 is held correct.
(iv) So far as the asst. yr. 1997-98 is concerned, though the CIT(A) has noted the assessee's objection in this regard, in para No. 3.4 of the appellate order, but. has not decided the same.
12. From the aforesaid notings/observations/conclusion arrived at by the learned CIT(A), it is absolutely clear that proceedings under Section 147 of the Act for asst. yrs. 1995-96, 1996-97 and 1998-99 had been initiated solely on the basis of valuation report of the DVO meaning thereby that before the availability of the DVO's report, the AO had no information or material which could lead him to have reason to believe that any income for asst. yrs. 1995-96, 1996-97 and 1998-99 had escaped assessment.
13. Coming to the assessee's objection that proceedings under Section 147 of the Act could not be initiated for these three assessment years solely on the basis of the report of the DVO. We, after having considered the totality of the facts and circumstances of the case, are of the opinion that the AO having no other information or material except the report of the DVO, which was nothing, but only estimate in advisory capacity, the AO had no jurisdiction to initiate proceedings under Section 147 of the Act. Our decision is supported by the decision of Tribunal Amritsar Bench in the case of Darshan Singh v. AO (2002) 123 Taxman 324 (Asr)(Mag) and decision of Tribunal Jodhpur Bench in the case of ITO v. Vyay Kumar (2001) 73 TTJ (Jd) 17.
13.1(1) The facts, in the case of Darshan Singh (supra) were that the assessee had furnished its return for asst. yr. 1995-96 which was processed under Section 143(1) (a) of the Act. Since the assessee has constructed a house, the AO has referred the case of the house constructed by the assessee to the Departmental Valuation Officer (DVO). The valuation made by the DVO was more than the cost of construction shown by the assessee. Thereupon, the AO issued a notice under Section 148 of the Act and required the assessee to produce the books of account and other materials made of assessee's valuer, to do the same. The AO framed the assessment order under Section 144 of the Act and thereby added the difference between the value of the house as declared by the assessee and as reported by the DVO to the total income of the assessee. On appeal, the CIT(A) reduced the amount of addition made by the AO.
13.1(ii) On further, appeal to the Tribunal, the Hon'ble Amritsar Bench allowed the assessee's appeal after relying on the decision of Tribunal Amritsar Bench of Karamjit Electrical Mfg. Co. (P) Ltd. v. Asstt. CIT in ITA Nos. 515 to 517/Asr/2000 [reported at (2004) 89 TTJ (Asr) 465-Ed.] for the asst. yrs. 1989-90, 1991-92 and 1992-93, decision of Calcutta Bench in the case of Roof & Tower Construction (P) Ltd. v. Asstt. CIT wherein it has been held that the valuation report is only an opinion of valuer and it neither amounts to 'information' nor to 'reasons to believe' that any income has escaped assessment', and decision of High Court of Punjab & Haryana in the case of Grower Nursing Home v. ITO (supra) wherein it has been held that even the report of the DVO cannot be made the sale basis for initiating the proceedings under Section 147 r/w Section 148 of the Act. The relevant part of the order of the Tribunal (headnotes) reads as under:
On a perusal of the reasons recorded by the AO for reopening the assessment, it was clear that the reassessment proceedings were initiated merely on the basis of the DVO's report and there was no other material with the AO for initiating the reassessment proceedings. In the case of CIT v. Smt Usha Mathur , it was held that when the assessment was made under Section 143(1), no addition could be made on the basis of valuation cell's report in a reassessment proceeding. The instant Bench of the Tribunal in the case of Smt. Peramjit Kaur v. ITO (ITA Nos. 275 and 276 (Asr) of 2001) also held that a valuation report is at best an information about the fair market value of the capital asset. It has also been held that the AO is not justified in reopening the assessment merely on the basis of the report of the DVO.
In the instant case also, there was no other material with the AO except the report of the DVO and on the basis of which the reopening was not valid. Therefore, in view of the above decision, the AO was not justified in reopening the assessment on the basis of report of the DVO. In the result, the appeal was to be allowed.
13.2(i) Decision in the case of ITO v. Vijay Kumar (supra).
13.2(ii) The brief facts in this case were as under:
3. The fact giving rise to these appeals are that Shri Parmanand, Shri Mahesh Kumar and Shri Vijay Kumar jointly made investment in construction of the hotel building at Mt. Abu on co-ownership basis. As per the books of account, such investment was shown as Rs. 3,34,132 and Rs. 1,45,868 during the previous year relevant to asst. yrs. 1986-87 and 1987-88 respectively. Initially, the assessments of the relevant years in respect of all the three assessees were completed under Section 143(1). Subsequently, the AO made a reference under Section l31(l)(d) to the DVO who furnished his report on 27th March, 1989, estimating the total cost of construction at Rs. 8,61,827 out of which the amount of Rs. 5,99,916 was estimated as related to asst. yr. 1986-87 whereas the balance amount of Rs. 2,61,911 was estimated as having been incurred during the previous year relevant to asst. yr. 1987-88. Consequently, the AO considered the cost of construction shown less by the assessee as income escaping assessment and notices under Section 148 were issued to all the three assessees. Finally the assessments were completed under Section 148 by the AO on all the three assessees for asst. yr. 1986-87 as well as asst. yr. 1987-88 relying on the report of DVO and adding the cost of construction shown less by the assessees as unexplained investment in their hands in equal ratio. The matter was carried before the concerned CIT(A) having jurisdiction over the cases who held that all the assessments made under Section 148 were ab initio invalid following the decision of Hon'ble High Court of Rajasthan in the case of Brig. B. Lall v. WTO . Aggrieved by the same, the Revenue has preferred these six appeals before us.
13.2(iii) It was in view of above facts that the Hon'ble Bench held as under:
Reassessment under Section 147(b)-Information-Valuation report of DVO- Reference under Section 131(1)(d) can be made to DVO only while trying a suit and not in a completed suit-AO was therefore, not authorised to make such reference when the assessments were already completed-Further, report of DVO was just an opinion and could not be used by the AO as information for reopening the assessment-CIT(A) rightly cancelled the reassessments.
Held The reference was made by the AO to the DVO only after the assessments were completed under Section 143(1) and as provided in Section 131(l)(d) such reference could have been made only while trying the suit and certainly not in respect of a completed suit. In the instant cases, the assessment had already been completed and as such the AO had no reason to make the reference to DVO under Section 131(1) (d). The report obtained from the DVO is just an opinion and cannot be considered as information for initiating reassessment proceedings. The CIT(A) was quite justified in quashing the reassessment proceedings.-Brig. B. Lall v. WTO , Smt. Amala Das v. CIT followed; Abdul Majid v. ITO and Smt. Tarawati Debi Agarwal v. ITO relied on."
13.2(iv)(a). Reliance is also placed on the decision of Hon'ble High Court of Madras in the case of Kamalam Rajendran v. IAC wherein the Hon'ble High Court has observed that valuation report is only an opinion and also the decision of Hon'ble Punjab & Haryana High Court in the case of Grover Nursing Home (supra) which has been relied upon by the learned Departmental Representative also, where the Hon'ble High Court has held that the report of the DVO cannot be made the sole basis for initiating action under Section 147 of the Act r/w Section 148 of the Act. According to Hon'ble High Court, the valuation report can be considered with other facts, for forming the belief that assessee's income has escaped assessment which, in our opinion, means that the AO cannot form the belief that assessee's income has escaped assessment solely on the basis of report of the DVO.
13.2(iv)(b) We, further, rely on the decision of Hon'ble Gauhati High Court in the case of Bhola Nath Majumdar v. ITO and Ors. wherein the Hon'ble High Court has held that report of the DVO is not an opinion within the meaning of Section 147(b) of the Act.
14.1(i) So far as the decision relied upon by the learned Departmental Representative are concerned, we. after having gone through the same, are of the opinion that decision of Punjab & Haryana High Court in the case of Grover Nursing Home (supra) is of no help to the Revenue because the Hon'ble High Court has specifically stated that Valuation Officer's report cannot be made the sole basis for initiating the proceedings under Section 147 r/w Section 148 of the Act. On the contrary, it supports the assessee's plea.
14.1(ii) So far as decision of Hon'ble Gujarat High Court in the case of Prqful Chunilal Patel v. M.J. Makwana, Asstt. CIT (supra) is concerned, we are of the opinion that this decision is also of no help to the Revenue because in this case, the proceedings under Section 147 of the Act were not initiated either on the basis of report of the Valuation Officer or without there being report of the Valuation Officer. Similarly, the decision of Hon'ble Delhi High Court in the case of BawaAbhai Singh v. CIT (supra), though is in favour of Department, but we in view of the settled proposition that when there are conflicting decisions of High Courts different than the jurisdictional High Court, then the decision favourable to the assessee should be followed, are bound to follow other decisions mentioned hereinbefore which are in favour of assessee.
14.1(iii) Coming to the decision of Hon'ble Allahabad High Court in the case of Smt. Shashi Jain (supra), we, for the reasons stated with respect to decision of Hon'ble Delhi High Court (supra), are of the opinion that this decision is not binding on us, we follow the decision in favour of assessee.
14.2 Even otherwise, so far as decision at sl. Nos. (ii) and (iii) above are concerned, we are of the opinion that these decisions, at the most, can be applied only for asst. yrs. 1995-96, 1996-97 and 1998-99 but not asst. yr. 1997-98 and since the basis for taking action under Section 147 of the Act, in all these three assessment years is the valuation report procured after initiating action under Section 147 of the Act for asst. yr. 1997-98, and we, already having held the action under Section 147 of the Act for asst. yr. 1997-98 as illegal and bad in law. These decisions are also of no help to the Revenue.
15.1 Having held as above, all subsequent proceedings including issuance of notices under Section 148 of the Act and subsequential framing of assessments are also held to be illegal and bad in law.
15.2 Consequently, the assessments for all these three assessment years framed under Section 143(3) r/w Section 148 of the Act are cancelled as being illegal and bad in law.
16. So far as initiation proceedings under Section 147 of the Act for asst. yr. 1997-98 is concerned, we are of the opinion that since the CIT(A) has not decided the issue, we, in normal course, would have remanded the issue back to him for fresh decision, but since the issue is legal one and requires no investigation of any further fact, the remanding of the issue back to the file of CIT(A) will not serve any useful purpose. Moreso when, it is well settled that if the CIT(A) has failed to decide a particular ground, the said ground is deemed to have been rejected. In view of these facts, we, in the interest of substantial justice, and to avoid multiplicity of the proceedings, decide the issue considering that the CIT(A) has rejected the assessee's objection against validity of initiation of proceedings under Section 147/validity of notice under Section 147 of the Act.
17. From the assessment order as well as order of the CIT(A), for asst. yr. 1997-98 the only reason for which the proceedings initiated under Section 147 of the Act seems to have been initiated is gathered from para No. 3.1 of the order of the CIT(A) which reads as under:
3.1. The facts of case are that a return showing income of Rs. 1,51,290 filed for asst. yr. 1997-98 was processed under Section 143(1)(a). The appellant is a builder/organizer which has constructed scheme named as 'Ashlesha Bunglows'. The case was taken up by issuing notice under Section 148 r/w Section 147 dt. 28th Jan., 2000 and was completed under Section 143(3). During the course of hearing, the AO called for the contra accounts of various parties and noticed the difference between the amount shown by the appellant and the contra accounts provided by the parties. Further, it is also observed during-the course of hearing that some of the expenses were claimed, however, no supporting vouchers were produced. The AO also made personal visit of the site i.e. 'Ashlesha Bunglow', Anand Bakrol Road, Anand and found that it is situated on the Anand Bakrol Road in the posh area with all facilities such as garden, club, cable, EPABX systems, etc. (Emphasis, italicised in print, ours)
18.1 From plain reading of the aforesaid part of the order of CIT(A), it is gathered that the proceedings under Section 147 of the Act were initiated without there being any information or material with the AO for having reason to believe that any income chargeable to tax had escaped assessment and also that there was no allegation which could satisfy the requirement of Expln. 2(b) to Section 147 of the Act.
18.2 Since the learned Departmental Representative has also not brought to our notice any information or material which could have led the AO to have reason to believe that any income chargeable to tax had escaped assessment or requirement of Expln. 2(b) were satisfied, it has to be taken that proceedings under Section 147 of the Act were initiated solely for the purpose of making roving inquiries and referring the issue relating to cost of construction of the building (which otherwise was assessee's stock-in-trade), to the Valuation Officer.
19.1 Having come to the finding that proceedings under Section 147 of the Act were initiated only for making roving inquires and for referring to the matter relating to cost of construction of building to the Valuation Officer (supra), we after following the decision of Tribunal, Amritsar Bench and Jodhpur Bench in the case of Darshan Singh v. AO (supra) and in the case of ITO v. Vijay Kumar (supra) respectively, are of the opinion that the proceedings initiated under Section 147 of the Act for asst. yr. 1997-98 were not legal in the eyes of law and, therefore, the same are held to be illegal and bad in law.
19.2 Having held as above, we are, further, of the opinion that all the consequential proceedings including issuance of notice under Section 148 of the Act and assessment framed under Section 143(3) r/w Section 148 of the Act on 28th March, 2002 were also illegal and bad in law. The assessment is, therefore, quashed/cancelled.
20.1 Even otherwise, the validity of initiation of proceedings under Section 147 of the Act, so far as asst. yr. 1997-98 is concerned, can be tested on the basis of another plea of the assessee that the AO has no jurisdiction to make reference to Valuation Officer unless he was of the opinion that the cost of construction as detailed in the books of account was not the correct cost and for forming such an opinion, he was bound to reject the assessee's books of account, meaning thereby that the issue can be tested on the plea that without rejecting the books of account, which were maintained by the assessee in the regular course of business, by following the same method of accounting year after year and recording full and complete details of amounts has been spent towards cost of construction, the AO should not have referred the matter to the Valuation Officer and so far as assessee's case is concerned, i.e. so far as asst. yr. 1997-98 is concerned, since the reference to Valuation Officer was made only during the course of carrying on the proceedings under Section 147 of the Act, there was no justification either in rejecting the books of account or making a reference to the Valuation Officer.
20.2(i) To consider the assessee's aforesaid plea, it is necessary for us to travel in the body of the assessment order for asst. yr. 1997-98 and after having gone through out the assessment order, what we are able to find is that the AO has rejected the assessee's books of account as per his observations contained in para No. II wherein he has pointed out various discrepancies (petty) and has rejected the assessee's explanation. These discrepancies and assessee's explanation have already been dealt with by us in para No. 4.4 of this order.
(ii) From the indepth analysis of the assessment order contained from page Nos. l to 7, what is borne out is that the AO has rejected the assessee's books of account solely on the basis of following discrepancies:
(a) For absence of vouchers for carpentry work, colour work, fabrication work and plumbing work, totalling to Rs. 30,585 though, the assessee had produced photocopies of bills for these expenses also.
(b) For absence of signatures of four** persons on the vouchers for payment of Rs. 20 and Rs. 10 for welding of gate and for one acid bottle, respectively paid to Shri Rameshbhai Nathabhai, vouchers for Rs. 200 on account of payment for garden levelling work of block No. 6 and paid to Shri Parmar Maganbhai S., expenditure of Rs. 550 paid to Shri Prafulbhai for water sprinkling for 22 days (at Rs. 25 per day) and
(c) For absence of signatures on salary vouchers for Rs. 900 paid to Shri Rameshbhai Nathabahi, Rs. 1,400 paid to Shri Bhanubahi Manibhai and Rs. 1,500 paid to Shri Kiritbhai J.
(d) The discrepancy for the accounts of two parties; namely, M/s Shiv Traders and M/s Arnit Traders.
(iii) Further, first of all, we are of the opinion that the explanation and evidence furnished by the assessee with respect to aforesaid alleged serious (in the opinion of the AO) discrepancies, were rejected by the AO in an arbitrary manner and with predetermined notion, which is evident from the fact that the evidence furnished by the assessee was never verified by the AO. For example, the copies of bills, for which vouchers were not found were rejected on the ground that they were hand made. Similarly, the payment of salary was not accepted for want of signature on vouchers. If the AO was not satisfied, he could have verified from assessee's books of account as to whether the work for which the salary was paid had been done or not. Similarly, the amounts for which vouchers were found as unsigned was totalling to Rs. 835 (Rs. 30 + 200 + 550 + 55) which could not be basis for rejection of books of account. So far as discrepancy in the accounts of M/s Shiv Traders and M/s Amit Traders is concerned, we are of the opinion that assessee had explained the discrepancy and there was no question of rejecting the same.
20.3 In view of above discussion, we are of the opinion that the rejection of books of assessee on the basis of aforesaid alleged discrepancy was absolutely illegal and bad in law.
21. Even otherwise, if we consider the discrepancies as having not been explained (only for the purpose of discussion), then only the right course for the AO was to disallow these petty expenses, but in no case was justified in rejecting the books of account.
22. The validity of rejection of books of account can further be test on the basis of provision of Section 145 of the Act as they adjusted at the relevant time. The provisions of Section 145 prior to 1st April, 1997 were as under:
Section 145. Method of accounting-(1) Income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources' shall, subject to the provisions of Sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
Provided that in any case where the accounts are correct and complete to the satisfaction of the AO but the method employed is such that, in the opinion of the AO, the income cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the AO may determine:
Provided further that where no method of accounting is regularly employed by the assessee, any income by way of interest on securities shall be chargeable to tax as the income of the previous year in which such interest is due to the assessee:
Provided also that nothing contained in this sub-section shall preclude an assessee from being charged to income-tax in respect of any interest on securities received by him in a previous year if such interest had not been charged to income-tax for any earlier previous year.
(2) Where the AO is not satisfied about the correctness or the completeness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee, the AO may make an assessment in the manner provided in Section 144.
Section 145. Method of accounting (w.e.f. 1st April, 1997)-(1) Income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources' shall, subject to the provisions of Sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
(2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessee or in respect of any class of income, (3) Where the AO is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in Sub-section (1) or accounting standards as notified under Sub-section (2), have not been regularly followed by the assessee, the AO may make an assessment in the manner provided in Section 144.
22.1 Since the initiation of assessment year, in which the AO had initiated proceedings under Section 147 of the Act, after rejecting the books of account and had referred to the matter for valuation of cost of construction to the Valuation Officer is asst. yr. 1997-98, we would like to deal with the assessee's case with respect to provisions of Section 145 relevant for asst. yr. 1997-98 and after considering the relevant provisions, are of the opinion that so far as asst., yr. 1997-98 is concerned, the AO was bound to compute the assessee's income in accordance with either cash or mercantile system of accounting regularly employed by the assessee, whereas, the assessee was bound to maintain the accounts as per accounting centres notified by the Government from time to time in Official Gazette.
22.2 It was only if the AO was not satisfied about the correctness or completeness of the assessee's books of account or was of the opinion that the assessee was not following the. accounting standards as notified under Sub-section (ii) of Section 145 or if the assessee was not regularly following the system of accounting; i.e. cash or mercantile that the AO could reject the books of account and proceed to make assessment under Section 144 of the Act.
22.3 If we test the assessee's case for asst. yr. 1997-98, in the light of aforesaid provisions of Section 145 of the Act, it will be found that:
(i) It is not Revenue's case that the assessee has not followed accounting standard, if any, notified by the Government.
(ii) The only basis for rejecting the books of account, as have been found from the assessment order and discussed in foregoing part of this order by us is the alleged discrepancy which we have already held to be to have been explained by the assessee and even otherwise were not sufficient so as to make the AO itself dissatisfied with regard to correctness or completeness of the assessee's accounts.
22.4 In the totality of the facts and circumstances of the case, we are, therefore, of the opinion that the provisions of Section 145(3) could not be invoked so far as assessee's case for asst. yr. 1997-98 is concerned.
23.1 Since we have come to the conclusion that assessee's books of account for asst. yr. 1997-98 could not be rejected, our next conclusion is that if the books of account could not be rejected, then, the AO had no jurisdiction to refer the matter relating to cost of construction to the Valuation Officer, meaning thereby that prefers to Valuation Officer made by the AO was illegal and bad in law.
23.2(i) Without prejudice to the above, we, further, are of the opinion that the reference made to the Valuation Officer by the AO in exercise of powers under Section 131(l)(d) of the Act, as has been held by the Hon'ble Supreme Court in the case of Smt. Amiya Bala Paul v. CIT , was illegal and bad in law and the same could not be taken into account.
(i) For making any addition in asst. yr. 1997-98.
(ii) For initiating the proceedings under Section 147 for asst. yrs. 1995-96, 1996-97 and 1998-99 as well as for making any addition on the basis of such report in these three assessment years.
23.2(ii) Here, it can be argued that after the insertion of provisions of Section 142A by the Finance (2) Act, 2004 with retrospective effect from 15th Nov., 1972, the decision of Hon'ble Supreme Court in the case of Amiya Bald: Paul (supra) do not survive, but we are of the opinion that it is not so because the provisions of Section 142A, though have been made applicable only to the cases where the assessments had not become final on or before 30th day of September, 2004, but in our opinion, these provisions have not made the references having made under Section 131(l)(d) of the Act in the cases where the assessments have not become final till 30th Sept., 2004 ( as envisaged in the provisions of Section 142A of the Act) as valid references and it is so because the legislature while enacting the provisions of Section 142A of the Act has not validated references having been made under Section 131(l)(d) of the Act in the cases where assessments have not become final by 30th Sept., 2004.
23.2(iii) The Hon'ble Supreme Court, in the case of Amiya Bala Paul (supra), having invalidated the reference made under Section 131(l)(d) of the Act for want of jurisdiction of the AO and there being neither amendment in Section 131(l)(d) of the Act nor there being validation clause in Section 142A of the Act, the references made under Section 131(l)(d) of the Act prior to coming of Section 142A of the Act on the statute and the assessment in such cases having remained pending after 30th Sept., 2004, in our opinion, survive and in view of the decision of Hon'ble Supreme Court in the case of Amiya Bala Paul (supra) get rendered illegal and bad in law.
23.2(iv) Coming of provisions of Section 142A of the Act on the statute with retrospective effect from 15th Nov., 1972, in our opinion, has vested the AO with jurisdiction to make a reference for estimation of the value of any investment referred to in Section 69, 69A or 69B of the Act, in pending matters. In a nutshell, we are of the opinion that retrospective applicability of provisions of Section 142A of the Act, effects the cases where assessments are still pending and there has been no reference under Section 131(l)(d) of the Act because after these provisions having come on statute the AO has been given power to make a reference to the Valuation Officer and not the cases where reference under Section 131(l)(d) had been made before coming of Section 142A of the Act and the assessments have not become final by 30th Sept., 1994. In such case, the reference made under Section 131(l)(d) of the Act and, consequently, valuation report get hit by the decision of Hon'ble Supreme Court (supra). In other words, so far as references having already been made under Section 131(1) (d) of the Act are concerned, we are of the opinion that if assessments have not become final in such cases by 30th Sept., 2004 such references and consequential report of the Valuation Officer have to be held to be illegal and bad in law and we do so.
23.2(v) Even otherwise, the word used in Section 142A(i) of the Act, is "an estimate of the value" which refers to only estimate and an estimate can never be a basis for having reasons to believe. We are, therefore, of the opinion that even if for the sake of arguments, the reference under Section 139(l)(d) of the Act in this case is considered to be valid, then also the valuation report could not be a basis for the AO to have reasons to believe that any income chargeable to tax escaped assessment so as to make in power with the authority to make a reference to the Valuation Officer so far as asst. yrs. 1995-96, 1996-97 and 1998-99 are concerned.
24. In view of above discussion and the facts and circumstances of the case, we are of the opinion that initiation of proceedings under Section 147 of the Act, for asst. yr. 1997-98, were absolutely illegal and bad in law.
25. So far as asst. yrs. 1995-96, 1996-97 and 1998-99 are concerned, we are of the opinion that the basis for initiation of proceedings under Section 147 of the Act. for these years being the valuation report under reference and the same having being held to be illegal and bad in law, the proceedings initiated under Section 147 of the Act for these three years also become illegal and bad in law and so are the consequential assessments. Assessments under Section 147 of the Act for these assessment years are also, therefore, declared illegal and bad in law.
On merits:
26. So far as merits of the issues raised by the assessee in all these four appeals are concerned, the assessee has in a nutshell, has taken the following stands:
26.(i) The first objection raised by the assessee is that the books of account for asst. yr. 1997-98, have been rejected in an arbitrary and unjustified manner because the assessee had maintained the same in regular course of business, followed the same from time to time of accounting and had not contravened the requirement of provisions of Section 145 of the Act.
So far as asst. yrs. 1995-96, 1997-98 and 1998-99 are concerned, the assessee had raised objection that when books of account for asst. yr. 1997-98 could not be rejected, then there was no question of making reference to the Valuation Officer for estimation of cost of construction and if it was so, then there was no question for initiating proceedings under Section 147 of the Act for these three assessment years which ultimately results in the proposition that there was no question of scrutinizing the assessee's books of account and consequently, no question of rejecting the same.
26.(ii) The second objection raised by the learned Counsel for the assessee was that the assessee having furnished report of the registered valuer, the AO was not justified in not considering the same without pointing out any infirmity or defect therein. Drawing our attention towards observation of the AO at page No. 14 of the assessment order, the learned Counsel for the assessee had submitted that the assessee had along with its reply dt. 22nd March, 2002, submitted the report of registered valuer, Shri Mahesh P. Bhatt which was dt. 15th March, 2002 and as per which the cost of construction had been estimated at Rs. 2,39,47,000 as against Rs. 2,37,96,653 as per assessee's books of account.
According to the learned Counsel for the assessee, this report of the registered valuation was ignored by the AO solely on the basis of following observations:
(a) That, the valuation (as per report) itself differ with the value shown by the assessee firm i.e. Rs. 2,37,96,653 for the entire project.
(b) That, the report was hurriedly prepared by Shri Mahesh P. Bhatt, registered valuer.
(c) That, the assessee firm has submitted a fresh, another valuation report prepared by Shri Mahesh P. Bhatt mentioned dt. 15th March, 2002 on 22nd March, 2002, whereas the same could have been submitted during the course of hearing dt. 18th March, 2002.
(d) After having observed as above, the AO has concluded that "it proves that this report was prepared in a hurried manner, whereas the DVO has made detailed report after visiting the site twice and after taking all aspects relevant to cost of construction into consideration". Analyzing the aforesaid reasons given by the AO for ignoring the assessee's valuation report, the learned Counsel for the assessee submitted that none of the observations of the AO were relevant for rejecting the valuation report of the registered valuer.
(e) Explaining further, the learned Counsel for the assessee, expressed his surprise as to how the valuation of the registered valuer could be rejected, firstly, on the basis of some difference in value estimated by the registered valuer and shown by the assessee's books of account, secondly, how the AO was concerned, with the time taken by the registered valuer for preparing the valuation report and thirdly, how the report, which as per AC) could be submitted on 18th March, 2002 can be ignored if it was submitted on 22nd March, 2002, but duly during the course of assessment proceedings.
In a nutshell, the learned Counsel for the assessee submitting that the AO had brushed aside the report of the registered valuer absolutely in an arbitrary and illegal manner contrary to the settled provisions of law. In support of his submissions, reliance was placed on the decisions detailed in para 6.8(2) (supra) of this order.
26.(iii) The third objection raised by the learned Counsel for the assessee was that even if it is assumed that report of the Valuation Officer was validly procured, then also there could not be any addition solely on the basis of that report because the valuation report with respect to estimation of cost of construction was only of estimate, whereas addition under the provisions of income-tax can be made only on the basis of positive evidence. Reference in this respect was made to the decisions having been detailed in para No. 6.8(4) (supra) of this order.
26.(iv) The next submission raised by the learned Counsel for the assessee that in any case, if any, addition is sustained by invoking the provisions of Section 69C, i.e. on account of alleged difference in cost of construction; there shall have to be a corresponding deduction of identical amount because the amendment brought about in Section 69C by Finance (2) Act of 1999 being effective from 1st April, 1999 was applicable only for asst. yr. 1999-2000 and subsequent assessment years. Reliance in this respect was placed on the decisions which have been detailed in para 6.8(5) (supra) of this order.
27. The learned Departmental Representative, on the other hand, so far as first three objections are concerned, supported the orders of the CIT(A). However, with respect to assessee's claim of deduction of corresponding expenditure (in case of any addition is sustained under Section 69C of the Act). It was agreed by him that the assessee is entitled to benefit of expenses to the extent of investment which is taxed in the years prior to amendment in this Section 69C of the Act.
28. Having considered the rival submissions, facts and circumstances of the case, various decisions relied upon by the parties and provisions of law, we are of the opinion that:
(i) So far as assessee's objection against justification of rejection of books of account for asst. yr. 1997-98 is concerned, we have already discussed this issue in aforesaid para No. 26(i) (supra) of this order and have already concluded that there was no justification for rejecting the assessee's books of account for asst. yr. 1997-98. The action of the AO was illegal and bad in law.
(ii) So far as rejection of books of account for asst. yrs. 1995-96, 1996-97 and 1998-99 are concerned, we are of the opinion that we having held the rejection of books of account for asst. yr. 1997-98 as unjustified and illegal, there was no question for the Revenue to obtain a valuation report from the Valuation Officer and, consequently, there was no reason for initiating proceedings under Section 147 of the Act for asst. yrs. 1995-96, 1996-97 and 1998-99 and if that was the ease, then there was no reason for conducting the assessment proceedings and. consequently, no question of rejection of books of account for these three assessment years.
In view of above facts and circumstances of the- case, we have no option to hold that there was no question of rejecting the books of account of asst. yrs. 1995-96, 1996-97 and 1998-99.
(iii) Coming to the assessee's objection with regard to arbitrary rejection of report of the registered valuer, we, after having considered the observations of the AO at page No. 14 of the assessment order, which were referred to by the learned Counsel for the assessee, during the course of hearing of these appeals and the learned Departmental Representative having not refuted the factual observation of the AO, are of the opinion that the AO was bent upon to make the additions and, consequently, for achieving that goal, ignored/brushed aside the report of the registered valuer on conjunctures and surmises. The action of the AO is therefore, held to be illegal and bad in law. Our findings find support from decisions relied upon by the learned Counsel for the assessee and details in para 6.8(2) (supra) of this order.
(iv) So far as assessee's objection that there could not be addition solely on the basis of report of the Valuation Officer, we are, again of the opinion that when AO had no justification to reject the assessee's books of account, there was no question for obtaining the report of the Valuation Officer and even if he had obtained such report, the same being only the estimate, no addition could be made on solely on the basis of that report.
So far as facts of the present case are concerned, the Revenue has not drawn our attention towards any evidence, what to be said of positive/cogent evidence, which could suggest that there was any other material except the record of the Valuation Officer for making addition for all these four assessment years.
29. In view of above facts and circumstances of the case, we, after following the proposition of law laid down by various Courts and Tribunals in the cases detailed in para No. 6.8(4) (supra) of this order delete the addition having been made on account of alleged undisclosed investment in construction in all four assessment years.
30. So far as assessee's plea that in case any addition is sustained under Section 69C of the Act, the assessee may be allowed corresponding deduction on account of expenditure because amendment brought in Section 69C of the Act in prospective was applicable only for asst. yr. 1999-2000 and subsequent years, we are of the opinion that the amendment brought in Section 69C of the Act being of clarificatary nature will be deemed to be applicable retrospectively, i.e. to all the matter pending on that date and, therefore, in our considered opinion, the assessee will not be entitled to any deduction on this account.
31. In the result, all the four appeals of the assessees are allowed except on the point of claim of corresponding deduction against the addition under Section 69C of the Act, 1961.
32. In the result, all the four appeals of the assessee are allowed.
R.C. Sharma, A.M. 26th Dec, 2005
1. I have carefully gone through the order proposed by the learned Brother JM on the issue involved in the appeals filed by the assessee. I also have the benefit of discussion with my learned Brother in an endeavour to arrive at an agreed order, but I am unable to persuade myself to concur with his conclusion both with respect to validity of reopening and merit of addition to be made.
2. The facts in brief are that the assessee is firm of a builder/organizer-which has constructed a scheme named as 'Ashlesha Bungalows' having 31 bunglows with common amenities and infrastructure facilities like garden, roads, street lights, borewell with RCC overhead storage tank, club house, swimming pool, common plots with gardening etc. Expenditure incurred on the cost of construction of the scheme was accounted by the assessee in its books of account during the following years under consideration, as follows:
Assessment Expenditure shown year by the assessee 1995-96 Rs. 27,45,946 1996-97 Rs. 67,39,422 1997-98 Rs. 68,78,879 1998-99 Rs. 45,22,750
3. Returns of income for these asst. yrs. 1995-96, 1996-97, 1997-98 and 1998-99 were filed on 30th Nov., 1996, 30th Nov., 1996, 31st Aug., 1998 and 31st March, 1999 respectively. All these returns were processed under Section 1.43(1) (a) of the IT Act and no scrutiny assessments were made. Later on, the AO issued notice under Section 148 on 28th Nov., 2000 for asst. yr. 1997-98. During the course of assessment under Section 143(3)/147 for the asst. yr. 1997-98, the AO observed that certain contra accounts from various parties were called for and it was noticed that the amount shown by the assessee did not tally with the contra accounts provided by these parties. Further it was observed during the course of hearing that some of the expenses were claimed under construction account, however, no supporting vouchers were produced. The AO also noticed some discrepancy with reference to expenditure claimed under the head 'Carpentry work, colour work, fabrication work, plumbing work with reference to amount of expenses claimed in the books of account vis-a-vis amount for which vouchers were furnished. The AO also rioted that certain transactions or balances as appearing in the copy of accounts of various concerns were not tallying with the accounts of the assessee. After having above observation and calling for assessee's explanation, the AO held that correctness and completeness of books of account are not found. The project cost debited in the books of account was not found satisfactory by the AO. He, therefore, rejected the books by invoking the provisions of Section 145(3) and made reference to the DVO for working out the correct cost of construction. The team of DVO visited the site twice in the presence of partners of the assessee firm and its chartered accountant/Authorised Representative, and worked out the cost of construction of the entire project to the tune of Rs. 3,25,63,445 whereas the assessee has shown the cost of construction in its books of account at Rs. 2,37,96,653. Thus a difference of Rs. 87,66,792 was found in the cost of construction debited in its books during the relevant assessment years under consideration and the valuation arrived at by the DVO.
4. The year-wise cost of construction shown by the assessee and as determined by the DVO were as under:
Sl. Period of Cost of construction Fair cost of Difference
No. construction as shown by the construction
assessee
1 7/93 to 3/94 13,64,923 18,33,939 4,79,016
2 4/94 to 3/95 27,45,946 37,06,493 9,60,547
3 4/95 to 3/96 67,39,422 92,27,910 32,98,312
4 4/96 to 3/97 68,78,879 94,57,014 25,78,135
5 4/97 to 3/98 45,22,750 62,16,218 19,01,523
6 4/98 to 12/98 15,44,733 21,21,871 5,77,138
----------- -----------
Total 2,37,96,653 3,25,63,445
----------- -----------
5. In the report the DVO observed at page Nos. 4 and 5 that the assessee has not supplied the details regarding quantities of different materials consumed and various services like water supply, sanitary installation and electrical provisions provided in the property. DVO also qualified his report with the observation that cost of construction of one bungalow No. A-27 was not incorporated in the report as the same was alleged to be constructed by a NRI residing abroad but no documentary evidence was produced by the assessee, the correctness of assessee's claim therefore could not be ascertained. It was also observed that in some bungalows huge additions/alternation renovation work has been carried out but the same has not been considered in the valuation amount on the plea of the assessee that additions/alteration work was carried out by the occupants themselves. After the DVO's report was handed over by the AO to the assessee on 16th March, 2002, the assessee submitted a registered valuer report to the AO on 22nd March, 2002. Even in the registered valuer report so furnished by the assessee, the valuation was worked out at Rs. 239.47 lakhs as against cost recorded by assessee in its books of account at Rs. 237.96 lakhs. Thus the cost recorded by the assessee in its books of account was lower than Rs. 1.51 lakhs as compared to the value determined by assessee's own valuer. After calling for assessee's explanation with regard to the difference in the cost of construction and the qualifications in the DVO's report, the AO made addition of Rs. 25,78,135 pertaining to the difference in cost of construction for asst. yr. 1997-98 under consideration. Disallowance under Section 40A(3) was also made while finalizing the assessment.
6. Thereafter a notice under Section 148 was issued on 27th March, 2002 for reopening the assessment for asst. yrs. 1995-96, 1996-97 and 1998-99, the returns of which had already been processed under Section 143(l)(a). Similar discrepancy was noticed by the AO in the books of account, bills, vouchers, etc., while completing the assessment under Section 143(3) r/w Section 147 for these assessment years.
7. While verifying the statement of closing stock of work-in-progress of the building under construction, the AO found that the scheme of assessee was for constructing 51 units, whereas the assessee had shown details of 33 units. It was explained by the assessee that many customers had purchased two plots, but construction was carried out at one plot, the assessee firm had charged development cost for both the plots. The AO further observed that the assessee was silent on the details of plot Nos. 1-3, 5, 10, 12, 13, 26, 27, 32, 33 and 45-47. Even if it is presumed that no construction is carried out on these plots the expenses of common amenities should have been equally divided and charged by the assessee and should have been reflected in the chart of closing stock of work-in-progress. Therefore as per AO, the working of closing stock of work-in-progress is not correct. After pointing out some other minor defects, the AO held that:
It is impossible to work out the correct working of raw material purchased, consumed and closing stock of raw material and expenses incurred in construction activities during the year. Further the assessee has not entered all the expanses in its books of account. Therefore the reliability, correctness and completeness of books of account maintained by the assessee is not established. The AO was not satisfied about the correctness and completeness of books of account maintained by the assessee. Therefore the book results were not accepted and same were rejected by invoking the Section 145(3) of the IT Act, and accordingly assessment was finalized in the manner provided in Section 144 of the IT Act.
8. Thereafter, the AO made addition on account of difference in cost of construction as arrived at as per DVO's report in respective assessment years. In the appeals filed by the assessee for asst. yrs. 1995-96, 1996-97 and 1998-99, the CIT(A) held the reopening to be valid by observing that:
For asst. yr. 1995-96 3.3. During the course of assessment proceedings for asst. yr. 1997-98 the matter of estimating the cost of construction was referred to the DVO and report of the same was obtained, which was also given to the appellant for his explanation and comment, and AO after considering the objection of the appellant, has held that the report of the Valuation Officer is taken for the purpose of determining the investment in the construction of Ashlesha Bunglows. Accordingly, the investment as determined on the basis of report of the DVO related to the period under consideration was taken by the AO and difference between the above and the amount shown by the appellant being Rs. 9,60,547 was added.
Before discussing main ground No. 1, the appellant has also raised ground against the issuance of notice under Section 148. It was argued that reassessment cannot be reopened on the basis of report of DVO. This argument has been considered. In fact, the decision referred by the appellant in this regard were related to assessment year prior to asst. yr. 1989-90. With effect from 1st April, 1989, the provisions of Section 147 have undergone a vast change. Clause (b) of Expln. 2 clearly covers the position as in the case of the appellant. It has been provided in the aforesaid clause where return of income has been furnished and no assessment has been made and it is noticed by the AO that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return then, same will be deemed to be the case where income chargeable to tax has escaped assessment.
In the instant case, it was clear to the AO that the appellant has understated the income on the basis of the report of the DVO, wherein there was substantial difference between the investment estimated by the DVO and shown by the appellant in its books. It may be mentioned here that earlier no assessment under Section 143(3) was completed and only return was processed under Section 143(l)(a) and accordingly the AO has earlier not had any occasion to apply his mind in relation to aforesaid point and decide the issue. The issue has first been taken up while taking the case under Section 147 and accordingly, it cannot be said to be change of opinion of AO, as contended by the appellant. Hence, the action of the AO in passing an order under Section 143(3) r/w Section 147 is held correct.
9. With regard to the merit of addition the CIT(A) stated that facts are common as discussed by him in the asst. yr. 1997-98, he thus confirmed the addition on merits also.
10. Following was the observation of CIT(A) while confirming the addition made in the asst. yr. 1997-98:
The facts of the case are that a return showing income of Rs. 1,51,290 filed for asst. yr. 1997-98 was processed under Section 143(l}(a). The appellant is a builder/organizer which has constructed scheme named as 'Aslesha Bunglows'. The case was taken up by issuing notice under Section 148 r/w Section 147 dt. 28th Jan., 2000 and was completed under Section 143(3). During the course of hearing, the AC) called for the contra accounts of various parties and noticed the difference between the amount shown by the appellant and the contra accounts provided by the parties. Further, it is also observed during the course of hearing that some of the expenses were claimed, however, no supporting vouchers were produced. The AO also made personal visit of the site i.e. 'Ashlesha Bunglows' Anand Bakrol Road, Anand and fund that it is situated on the Anand Bakrol Road in the posh area with all facilities such as garden, club, cable, EPABX systems etc. In view of the above, AO observed that the cost of construction shown by the appellant is not correct. Accordingly, AO referred the matter to the DVO, Ahmedabad for computing the cost of construction of the project and submit valuation report. The DVO visited the site twice and after taking into consideration whatever details was given by the appellant, prepared his report. Copy of the report was given by the AO to the appellant for his explanation and comments, if any. The AO has noticed various defects in the books of account and accordingly, rejected the book results shown by the appellant.
After considering the objection of the appellant, the AO observed that cost of construction as estimated by the DVO is to be taken against the cost of construction shown by the appellant. Accordingly, the AO has made addition of difference between the cost of construction estimated by the DVO and the cost of construction shown by the appellant pertaining to the year under consideration."
One of the arguments of the appellant is against rejection of book results under Section 145(3) and referring the matter to the DVO for taking his opinion regarding cost of construction. On perusal of the assessment order, it is noticed that the AO has pointed out various defects in the books of account maintained by the appellant for the year under consideration.
Another argument taken by the appellant is that in view of the decision of Supreme Court in the case of Amiya Bala Pal (supra), reference to DVO made by the AO for estimating cost of construction is bad in law. I have considered the argument taken by the appellant. It may be mentioned that provision of newly inserted Section 142A are quite clear in this regard. This section has been inserted with retrospective effect from 15th Nov., 1972. As per this section, where an estimate of the value of any investment referred to in Section 69 or 69B is required to be made, then, AO may require the Valuation Officer to make an estimate of such value and report the same to him. The only exception has been provided by way of proviso, wherein, it has been mentioned that nothing contained in this section will apply where assessment, has become final and conclusive on or before 30th Sept., 2004. In the instant case, the assessment has not become final and conclusive as the additions have been made by the AO and appeal is pending before CIT(A) as on 30th Sept., 2004. Hence, exception provided in proviso would not apply in the instant case as the appellant.
As regards another argument of the appellant that Section 142A is applicable only to Section 69 or Section 69B or 69A and hence, as in appellant's case, additions are made under Section 69C, same is not covered, is concerned, this argument is being discussed in detail in the subsequent paras of this order. In brief, it is mentioned here that the investment in the construction of 'Ashlesha Bunglows' is basically an investment and it cannot be treated as expenditure. In normal course also, wherever excess stock is found during the course of survey, same has been held to be unexplained investment in stock by the various High Courts and same is added under Section 69 or 69B depending upon whether it is fully undisclosed or partly undisclosed. Accordingly, even though the bunglows are stock in trade for the appellant firm, but then, if any investment is found not fully recorded in the books, then, same is to be required to be added under Section 69B. It cannot be considered as unexplained expenditure. In fact the AO has neither specifically mentioned Section 69C nor Section 69B. However, language of the additions gives an impression that this has been added considering unexplained expenditure, which is nothing but a technical mistake made by the AO and same is not going to effect the contents and logic of addition. The addition has been made in effect, under Section 69B as it is in relation to unexplained investment. Accordingly, it is quite clear that provisions of Section 142A are clearly applicable in the instant case and the valuation report of DVO is a valid piece of evidence, which has been obtained for the purpose of estimating/determining the amount of investment in 'Ashlesha Bunglows'.
Without prejudice to above, as regards decision of Hon'ble Supreme Court in the case of Amiya Bala Pal (supra) is concerned, the attention of the undersigned was drawn by the AO in its remand report that Hon'ble Tribunal in ITA No. 2841, 2847/Kol/1997 in the case of Binadevi Shah v. ITO, Ward 1, Silliguri, has upheld the decision of Hon'ble Supreme Court to the extent that the AO was not competent to make a reference to the Departmental Valuer for determining the cost of construction as per the provisions of Section 55A of the IT Act. In the aforesaid decision, the Tribunal has further clarified that the decision of the Hon'ble Supreme Court was regarding erroneous exercise of power under Section 55A for determining the cost of construction but is not applicable. In case where the report of the Departmental valuer is obtained under Section 131(l)(d) of the Act, for determining the cost of construction which is used by the AO as an evidence.
In view of the aforesaid facts and circumstances, it is held that reference to the Valuation Officer made by the AO for taking his expert opinion in estimating the investment in the construction of tenements /bunglows is justified.
It is pertinent to mention here that while estimating the investment in the bunglows, the DVO has duly considered the argument/submission taken by the appellant. The appellant has stated that bunglow No. A-27 was not constructed by it but has been constructed by the present owner. As the owner was not available, considering the submissions of the appellant, the valuation of 31 bunglows excluding A-27 was done. Moreover, it was noticed by the DVO that huge addition, alterations, renovations have been carried out in some of the bunglows but same has not been considered by him in the valuation amount on the plea that these additions /alterations was carried out by the occupants of the bunglows themselves and not by the appellant. If these were added, the valuation would have been much higher. On the other hand, in the valuation report of approved valuer, the valuation has been taken for 31 bunglows.
Accordingly, the AO is right in adopting the investment in the construction of Ashlesha Bunglows, as estimated by the DVO.
11. With regard to deduction claimed under Section 69C, the CIT(A) observed that:
Section 69 covers the situation where in particular financial year the assessee has made investment which are not recorded in the books. Section 69B covers the situation wherein particular financial year, the assessee has made investment or is found to be owner of money, bullion, jewellery or other valuable articles and such investment is partly reflected in the books of account Section 69C covers the situation wherein particular financial year the assessee incurred some expenditure and he is unable to explain the source of such expenditure fully or partly.
Now, it has to be seen that whether investment in stock-in-trade not fully or partly recorded in the books, is to be required to be added under Section 69/69B (as the case may be) or under Section 69C. There have been ample number of decisions of Hon'ble High Courts wherein, the excess investment in stock-in-trade has been held to be correctly added under Section 69B and not under Section 69C. Section 69C deals with the situation where the assessee has incurred expenditure. This expenditure may be in relation to household expenses or may be expenditure on marriage or other such situation. In any case, fully unaccounted or partly unaccounted amount used in purchasing or acquiring stock-in-trade will not be treated as unexplained expenditure and it has to be obviously treated as unexplained investment in acquiring the asset, which is stock-in-trade. Accordingly, addition on account of unexplained investment in the construction of bunglows, though same may be stock-in-trade, has to be made correctly under Section 69B.
In this regard the decision of Hon'ble High Court in the case of Dhansiram' Agarwal (supra) is quite relevant. In this judgment, the Hon'ble High Court has held that where there is discrepancy between the value of stock disclosed to the bank and value shown in the books of account and no satisfactory is offered regarding such discrepancy, the amount of discrepancy regarding stock is held assessable under Section 69B of the IT Act. There are other ample number of decisions in which issue of addition of closing stock has been held to be correctly made as unexplained investment under Section 69B.
Some of them are mentioned as below:
(1) CIT v. N. Swamy ;
(2) Swadeshi Cotton Mills Co. Ltd. v. CIT ;
(3) CIT v. General Metal Works ;
(4) S. Murugappa Chettiar v. CIT ;
(5) Century Foams (P) Ltd. v. CIT .
In any case, addition on account of excess stock or discrepancy in stock has not been need to be correct under Section 69C, by the Hon'ble Courts.
Accordingly, I agree with the view of the present AO in his remand report that addition of unaccounted investment in acquiring the asset namely Abhishek Bunglow, though the same is stock-in-trade, is required to be made under Section 69B. It may be mentioned here that in fact the AO has not specifically specified that the addition has been made under Section 69C. As no any section has been specified, accordingly, the addition can be considered to have been made under Section 69B, which is the correct section. Without prejudice to above, I also agree with the view of the AO that mere technical mistake made by the erstwhile AO by using the language of undervalued expenditure while making addition, instead of correct phrase namely unexplained investment (under Section 69B), can be corrected by the CIT (A).
The argument of the appellant that deduction of same amount, which have been added may be given as the amount of excess expenditure is a business expenditure. I have considered this argument. Firstly as discussed hereinabove, the addition has been in effect made by way of unexplained investment in acquiring stock-in-trade. As already discussed, in any case, addition on account of excess investment in stock-in-trade has to be made under Section 69B.
12. After having similar observation as was made in the asst. yr. 1995-96, in the asst. yrs. 1996-97 and 1998-99 also the AO made addition on account of difference in construction cost as recorded by the assessee in its books of accounts as compared to the valuation determined by the DVO in his report. The CIT(A) also in 1996-97 and 1998-99 confirmed the action of the AO both on legal ground of validity of reopening as well as on merits after having the same observation as was made in asst. yr. 1995-96. Aggrieved by the above orders of the CIT(A), the assessee is in further appeal before us.
13. The assessee is aggrieved by reopening of assessment under Section 147, for rejection of books of account under Section 145, confirmation of addition under Section 69B, not giving deduction under Section 69C and addition made on account of difference in cost of construction.
14. The basic two issues which falls for our consideration are (i) validity of reopening under Section 147 and (ii) the merit of addition made after pointing out defects in the books of account, qualifications found in the DVO report regarding non furnishing of various details etc., and with reference to difference in cost of construction recorded in the books of account vis-a-vis value determined by the DVO.
15. First we will take up asst. yrs. 1995-96, 1996-97 and 1998-99 wherein reopening* was based on defects pointed out in the books of account in respect of construction cost debited therein during the course of scrutiny assessment proceedings under Section 143(3) for asst. yr. 1997-98, and the huge difference in cost of construction amounting to Rs. 87.66 lakhs, which was found when the matter was referred to DVO. The basic contention of the learned Authorised Representative was that there were no valid reasons for reopening the assessment under Section 147. He further submitted that there was no any information/material which could make the AO to have reason to believe that any income had escaped assessment. As per learned Authorised Representative the DVO's report cannot be made the basis for reopening the completed assessment. He further submitted that the defects pointed out during the course of assessment under Section 143(3)/147 for the asst. yr. 1997-98 was very minor mistakes and the same could not be made the basis for rejection of books of account and referring the matter to the DVO for estimating the cost of construction. He further drawn our attention to various decisions of Tribunal in support of the contention that unless defects are found in the books and same are rejected, no addition can be made only on the basis of DVO's report which is just an estimate of cost of construction. All other contentions made by learned Authorised Representative have already been recorded in the draft order of Brother JM, therefore they are not repeated here.
16. On the other hand, learned Departmental Representative submitted that mistake were found in the books of account during scrutiny assessment for asst. yr. 1997-98, with respect to construction cost debited therein. The AO rejected books of account and the matter was referred to the DVO for determining the correct cost incurred on construction. Huge difference of Rs. 87.66 lacs was found in the construction cost as compared to the DVO's report. The registered valuer's report submitted by the assessee himself was also showing excess cost of Rs. 1.51 lacs. All these were sufficient for having a reasonable belief that similar construction cost incurred in the asst. yrs. 1995-96, 1996-97 and 1998-99 in respect of very same building had escaped assessment.
17. I have considered the rival contentions, carefully gone through the orders of lower authorities, valuation report prepared by the DVO as well as registered valuer. I have also perused the replies filed by the assessee before the lower authorities as contained in the paper book. I have also deliberated on the judicial precedents cited by learned Authorised Representative and learned Departmental Representative at bar as well as discussed by lower authorities in their respective orders in the factual matrix of instant case.
18. First, I will take up legal issue regarding reopening for the asst. yrs. 1995-96, 1996-97 and 1998-99.
19. As per provisions of Section 147 prevailing during the assessment years under consideration, if the AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may subject to provisions of Sections 148 to 153, assess or reassess such income.
20. On a comparison of the provisions as it stood before the Direct Tax Laws (Amendment) Act, 1987 and the provisions as substituted by the Direct Tax Laws (Amendment) Act, 1987, it would be clear that:
-the scope and effect of Section 147 as substituted w.e.f. 1st April, 1989, as also Sections 148 to 152 are substantially different from the provisions as stood prior to such substitution.
21. Under old provisions of Section 147, separate Clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under Section 147(a) two conditions were required to be satisfied : firstly, the AO must have reason to believe that income, profits or gains chargeable to income taxable have escaped assessment, and secondly, he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions are conditions precedent to be satisfied before the AO could have jurisdiction to issue notice under Section 148 r/w Section 147(a). But under the substituted new Section 147, the existence of only the first condition would suffice. In other words, if the AO for whatever reason has reason to believe that income has escaped assessment, it confers jurisdiction to reopen the assessment. It. is, however, to be noted that both the conditions must be fulfilled, if the case falls within the ambit of proviso to Section 147 as stood after amendment.
22. Thus as per the amended provisions of Section 147, for reopening of an assessment there should be a reason to believe that income chargeable to tax had escaped assessment for any assessment year. Such reason to believe can be raised in any manner and is not qualified by a precondition of faith and true disclosure of material facts by an assessee as contemplated in preamended Section 147(a) and the AO can, under the amended provisions, legitimately reopen the assessment in respect of income which had escaped assessment. Viewed in that angle, power to reassessment is much wider under the amended provisions and can be exercised even after assessee has disclosed fully and truly all material facts. Reasons which may weigh with the AO may be the result of his own investigation and may also come from any source that he considers reliable. Forming of this belief is an administrative decision to be arrived at in judicial manner. The AO is required to act fairly and judiciously. His belief must have substance and must not be a shadow. There is no dispute to the well settled legal proposition that such belief should be bonajide and should not be based on vague, arbitrary and non-specific information.
23. Undisputedly, in the present case, returns filed for all the asst. yrs. 1995-96, 1996-97 and 1998-99 were processed under Section 143(l)(a), and no scrutiny assessment was framed thereon. During the course of assessment under Section 143(3)/147 in the asst. yr. 1997-98, the AO found defects in the books of account and matter was referred to the DVO and a huge difference of Rs. 87.66 lakhs in cost of construction was found. The main issue before us is whether on the basis of defects found in the books of account, discrepancies noted in the construction expenses and the suppliers accounts etc., in the course of scrutiny assessment for the asst. yr. 1997-98 and the huge difference of Rs. 87.66 lacs found in the cost of construction of the same building which was also under construction during the relevant asst. yrs. 1995-96, 1996-97 and 1998-99, and where the report of DVO was qualified with reference to the fact that assessee had not supplied various details regarding quantities of different materials consumed and various services provided in the scheme like water supply, sanitary installation and electrical provisions, can it be said that there was no reason before the AO to believe that income for the asst. yrs. 1995-96, 1996-97 and 1998-99 attributable to the construction of very same building had escaped assessment ? The huge difference found in the cost of construction as per DVO's report was pertaining to the very same buildings which was under construction during the asst. yrs. 1995-96, 1996-97 and 1998-99. Various defects pointed out in the books of account with respect to construction expenses debited therein, discrepancy in the balances of suppliers in the statement of account collected by the AC) as compared to the balances as appearing in assessee's books of account as found during scrutiny assessment for the asst. yr. 1997-98, huge difference of Rs. 87.66 lacs found as per DVO's report, report of the DVO was qualified for not furnishing of various information and details called for by him, have definitely close nexus with the belief that there was escapement of income in these years. It is very pertinent to mention here that while forming the belief the AO is required to establish that there were some cogent reason for forming belief that there was escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a reasonable belief. The DVO's report was prepared after having physical inspection of the building in the presence of the partners and Authorised Representative of the assessee. After considering the reply of the assessec, the DVO arrived at a valuation which was much higher than the cost recorded in the books of account in the respective assessment years under consideration. Formation of belief by the AO was essentially with his objective satisfaction. The huge difference in the cost of construction arrived at, as per the DVO's report, accompanying by defects found in the cost of construction recorded by the assessee during the asst. yr. 1997-98 which was under scrutiny and the qualification made by the DVO in its report, we can reasonably say that the AO was having sufficient and relevant material upon which he could reasonably and rationally form the requisite opinion for reopening of the assessment for asst. yrs. 1995-96, 1996-97 and 1998-99 during which similar cost for the construction of the same building has also been incurred by the assessee. It is also pertinent to mention here that even though the defects found in the books of account were not serious as to justify the rejection of book results for making addition after the assessment has been reopened, but those defects were undoubtedly relevant while making a reference to the DVO and while forming the belief that there was escapement of income. Furthermore the quantum involved in the defects pointed by the AO may lead to the addition on lower side once the assessment has been reopened but it cannot be ignored altogether while forming the belief regarding escapement of income. Even if small defects found in the books regarding cost of construction or small discrepancy found in the statement of suppliers of building materials involving not huge amount, these are one of the cogent materials for forming the belief that there is escapement of income in the form of similar construction cost incurred by the assessee in respect of very same building which was under construction during the asst. yrs. 1995-96, 1996-97 and 1998-99.
24. The Allahabad High Court in the case of Smt Shashi Jain v. ITO held that valuer's report in respect of investment in house was reason to believe that income has escaped assessment. In this case notice under Section 148 was issued by the AO on the basis of DVO's report, returns for the asst. yrs. 1990-91, 1991-92, 1992-93, 1993-94, 1994-95 and 1995-96, were processed under Section 143(l)(a). Contention of assessee was that returns of all these years were filed in time and assessments were also completed under Section 143(l)(a) and that even the valuer did not give opportunity of hearing before making the report. It was held by Hon'ble High Court that valuer report was with respect to house constructed by the assessee and that on the basis of valuer report the AO had reason to believe that income chargeable to tax had escaped assessment. It was further held by the Court that assessee will have opportunities to contest the correctness of the valuer's report during the course of assessment proceedings in pursuance of notice under Section 148.
25. Similarly, the Delhi High Court in Bawa Abhai Singh v. Dy. CIT (2001) 168 CTR (Del) 521 : (2002) 253 ITR 83 (Del) held that DVO's report can constitute foundation or information to invoke the jurisdiction on the AO to reopen the assessment under Section 147 for the asst. yr. 1995-96, which have already been completed even under Section 143(3). It was categorically observed by the Hon'ble Court that after considering the valuation, the AO has come to the conclusion that the assessee has understated the amount invested in the house and it cannot be said that the report of the Valuation Officer containing his conclusion about valuation cannot constitute information or has to be totally excluded from the consideration, even if it is held that the report is of no significance after the assessment has been completed. It was further observed that 'reason to believe' must be tenable in law and only if the reason has no nexus with the belief or there is no material or tangible information for forming a reasonable belief that it could be held that reopening was not valid.
26. The Hon'ble Supreme Court in the case of ITO v. Selected Dalurband Coal Co. (P) Ltd. held that report given by the Government Department after conducting inspection, giving reasonably specific estimate of excessive coal mining done by the assessee over and above the figures disclosed by it was sufficient for reopening the completed assessment. It was further observed that whether facts stated in the report are true or not is not the concern at the stage of issuing notice under Section 148 for reopening the assessment. It may well be that the assessee may be able to establish that the facts stated in the said letter are not true, but that conclusion can be arrived at only after making the necessary Enquirer. At the stage of issuance of notice under Section 148, the only question is whether there was relevant material on which reasonable person could have formed the requisite belief. It was, therefore, held that issuance of notice under Section 148 was valid.
27. In Ganga Saran &. Sons (HUF) v. ITO the Delhi High Court observed that where the AO obtained information that for the purpose of bank loan, the assessee has produced valuer's report to the bank wherein the valuation of the property has been shown at a figure higher than the consideration shown by the assessee in the sale deed, the material placed on record was sufficient to empower the AO to initiate proceedings under Section 147. The Delhi High Court upheld the reopening on the ground that valuation report prepared for the purpose of bank loan constituted 'information' before the AO that the market value of the property on the date of sale was considerably in excess of the consideration shown by the assessee in the sale deed. In the High Court's view, this information was sufficient to give the officer reason to believe that capital gains assessable under the head had escaped assessment.
28. The Hon'ble Punjab & Haryana High Court, in Grover Nursing Home v. ITO , held that though report of DVO cannot be made the sole basis for initiating action under Section 147 r/w Section 148, it can certainly be considered with other facts for forming belief that assessee's income has escaped assessment. It was held that there being no explanation by the assessee about the difference between the cost of construction of building shown by the assessee and the cost determined by the DVO, reopening of assessment by issuing notice under Section 148 was valid.
29. In the instant case before us, the AO has found during the course of scrutiny assessment for the asst. yr. 1997-98 that there were defects in the books of account with regard to cost of construction accounted for in respect of building which was also under construction during the asst. yrs. 1995-96, 1996-97 and 1998-99. These defects in the books of account accompanied with DVO's report indicating the huge difference of Rs. 87.66 lakhs and the facts of assessee's failure to furnish details regarding quantities of different materials consumed and various services like water supply, sanitary installation and electrical provisions in the property, was sufficient to form opinion that there was escapement of income during these years also.
30. The Madhya Pradesh High Court in Vippy Processors (P) Ltd. v. CIT , held that difference between valuation of property disclosed by the assessee and that prepared by the DVO constituted adequate reason for reopening the assessment and therefore, notice under Section 148 issued by the AO, after recording the said reason was found valid.
31. The Madras High Court in the case of Sri Krishna Mahal v. Asstt. CIT held that the report of DVO prima facie showed that cost of construction had been understated by the assessee, that was sufficient for giving jurisdiction to the AO for belief that income had escaped assessment and for issuing impugned notice under Section 148.
32. In the instant case before us, while comparing the DVO's report with the report of registered valuer as submitted by the assessee, we found that cost estimated by DVO specifically in respect of bitumen road, casted sitting chair, borewell with pump, street lighting and cable lying with fluorescent tubes, EPBX cable laying etc. were not provided in the registered valuer's report. We also found that extra items provided in the entire scheme was item-wise valued by the DVO after physical inspection at Rs. 1,24,81,677 against which total value was taken by the registered valuer at only Rs. 34,52,964 without specifying each and every such item. We also found that specific qualification was made by the DVO in his report regarding non-furnishing of documentary evidence of construction of one bungalow A-27, by one NRI, the cost of which DVO could not incorporate in his valuation report and the observation was also made with reference to huge addition/alteration on renovation work stated to be carried out by the occupant, the cost of which was also not incorporated in the valuation report.
33. Therefore, after having above observations in the course of scrutiny assessment for the asst. yr. 1997-98 the AO issued notice under Section 148 on 27th March, 2002 for reopening the assessment for asst. yrs. 1995-96, 1996-97 and 1998-99.
34. In view of above discussion, we found that following material was available for forming the opinion that income for the asst. yrs. 1995-96, 1996-97 and 1998-99 had escaped assessment:
(i) Defects found by the AO in the books of account with regard to (a) construction cost debited therein (b) discrepancy in the contra account of various parties i.e. supplier of building materials (c) absence of vouchers of expenses on construction account (d) discrepancy with reference to expenditure claimed under the head carpentry work, colour work, fabrication work, plumbing work attributable to amount of expenses claimed in the books of account vis-a-vis amount of vouchers furnished (e) certain transactions or balances as appearing in the copy of accounts of various concerns not tallying with the accounts of the assessee.
(ii) DVO report indicating (a) vast difference of Rs. 87.66 lakhs in the cost of construction as shown by the assessee in its books of account as compared to the valuation arrived at by the DVO (b) qualifications with regard to failure of assessee in supplying details regarding quantities of different materials consumed and various services like water supply, sanitary installation and electrical provisions provided in the property (c) non-inclusion of cost of construction of one bungalow (No. A-27) in the valuation report alleged to be constructed by NRI but no documentary evidence was produced by the assessee, therefore, correctness of assessee's claim could not ascertained (d) huge addition/alterations renovations work carried out in some bungalows but the same could not be considered in the valuation amount on the plea of the assessee that additions/alterations work was carried out by the occupants.
(iii) Registered valuer report submitted by the assessee himself also indicated excess cost incurred in the construction, amounting to Rs. 1.51 lakhs as compared to the cost found recorded in assessee's books of account.
(iv) Difference in DVO's report as compared to registered valuer report with respect to cost determined specifically in respect of bitumen road, casted sitting chair, borewell pump, street lighting and cable lying with florescent tubes, and EPBX cable lying etc., which were not provided in the registered valuer's report furnished by the assessee. Extra item provided in the entire scheme was item-wise valued by DVO after physical inspection of site and building along with assessee and his Authorised Representative at Rs. 1,24,81,677 against which total value taken by the registered valuer in its report was only Rs. 34,52,964 without specifying each and every item.
35. As per our considered view, above material/information was sufficient to form a belief that there was escapement of income in the asst. yrs. 1995-96, 1996-97 and 1998-99 during which construction of project was undertaken by the assessee. All these reasons have rational connection with and relevant bearing on the formation of the belief that income had escaped assessment. These reasons cannot said to extraneous or irrelevant for the formation of belief of escapement. It is pertinent to mention here that at the time of issuing notice under Section 148, the sufficiency or correctness of the material is not a thing to be considered at this stage. Once the assessment is reopened it will be open to the assessee to prove that the assumptions of facts which were made the basis of reopening the assessment were not fully correct. It is to be noted that decision to initiate proceedings under Section 147 is not to be preceded by any judicial or quasi judicial enquiry. Reasons which may weigh with the AO may be the result of his own investigation and may come from any source that he considers reliable. Formation of his belief is not a judicial decision but is an administrative decision. Nevertheless, he is required to act fairly and judiciously.
36. In view of above discussion we are inclined to hold that there were more than sufficient reasons for forming the belief regarding escapement of income. The AO was justified in issuing notice under Section 148 in respect of asst. yrs. 1995-96, 1996-97 and 1998-99, the returns of which were processed under Section 143(l)(a). Before parting with the matter, it is very pertinent to mention here that reopening of assessments which have been completed under Section 143(3), is not so easy to reopen under Section 147, merely on the basis of DVO's report subject to certain exceptions where the peculiar facts and circumstances warrants so, as compared to cases where returns have been merely processed under Section 143(l)(a).
37. Let us now discuss the Tribunal orders relied on by the Brother JM for reaching to the conclusion that there was no reason to believe that any escapement of income was there and that DVO's report which is nothing but only an estimate, the AO had no jurisdiction to initiated proceedings under Section 147 once returns have been processed by issue of intimation under Section 143(l)(a). I am aware of the fact that in terms of judicial system, I am bound to follow the decision of Co-ordinate Bench but I will be failing in my duty if I blindly apply the same without examining the matter in details to find out whether it is really applicable to the facts and circumstances of this case and the provisions of law as applicable to the assessment years under consideration. As and when we say that issue under consideration is squarely covered by the proposition laid down in particular decision of Tribunal, High Court or Supreme Court, we have to see that not only facts and circumstances are the same, but also the provisions of Act are in pari materia. In saying so, I am guided by the following observations of Hon'ble Supreme Court in the case of CIT v. Sun Engineering Works (P) Ltd. :
It is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Supreme Court divorced from the context of the question under consideration and treat it to be the complete law declared by the Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before the Court. A decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, Courts must carefully try to ascertain the true principle laid down by the decision.
38. The learned Brother (JM), while allowing the assessee's ground for reopening, held that the DVO's report is just an estimate and no reopening can be made on the basis of such report. Most of the cases relied on by the learned Brother relate to reopening of assessment with reference to assessment which was completed under Section 143(1), prior to amendment of Section 143(1) w.e.f. 1st April, 1989. Therefore, it is very pertinent to bring on record the scope of Section 143(l)(a) as prevailing during the asst. yrs. 1995-96, 1996-97, 1997-98 and 1998-99 under consideration as compared to the scope of Section 143(1) as existed prior to 1st April, 1989.
39. The crux of the provisions of Section 143(1), upto 31st March, 1989, was that after a return of income was filed the AO could make an assessment under Section 143(1) without requiring presence of the assessee or production by him of any evidence in support of the return. Where the assessee objected to such assessment or where the officer was of the opinion that the assessment was incorrect or incomplete or the officer did no complete the assessment under Section 143(1), but wanted to make an inquiry, a notice under Section 143(2) was required to be issued to the assessee requiring him to produce evidence in support of his return. After considering the material and evidence produced and after making necessary inquiries, the officer had power to make assessment under Section 143(3).
40. With effect from 1st April, 1989, the provisions underwent substantial and material changes. A new scheme was introduced and the new substituted Section 143(1) prior to subsequent substitution w.e.f. 1st June, 1999 in Clause (a), a provision was made that where a return was filed under Section 139 or in response to a notice under Section 142(1) and any tax or refund was found due on the basis of such return after adjustment of TDS, any advance tax or any amount paid otherwise by way of tax or interest, an intimation was to be sent under Section 143(1)(a), without prejudice to the provisions of Section 143(2) to the assessee specifying the sum so payable and such intimation was deemed to be a notice of demand issued under Section 156. The first proviso to Section 143(l)(a) allowed the Department to make certain adjustments in the income or loss declared in the return. They were as follows:
(a) An arithmetical error in the return, accounts and documents accompanying it were to be rectified.
(b) any loss carried forward, deductions, allowance or relief which on the basis of the information available in such return, accounts or documents, was prima facie admissible, but which was not claimed in the return was to be allowed; and
(c) any loss carried forward, relief claimed in the return which on the basis of the information as available in such return, accounts or documents were prima facie inadmissible was to be disallowed.
41. What were permissible under the first proviso to Section 143(l)(a) to be adjusted were (i) only apparent arithmetical errors in the return, accounts or documents accompanying the return, (ii) loss carried forward, deduction, allowance or relief, which was prima facie admissible on the basis of information available in the return but not claimed in the return, and similarly, (iii) those claims which were on the basis of the information available in the return, prima facie inadmissible, were to be rectified/allowed/disallowed. What was permissible for correction of errors apparent on the basis of the documents accompanying the return ? The AO had no authority to make adjustments or adjudicate upon any debatable issue. In other words, the AO had no power to go behind the return, accounts or documents either in allowing or in disallowing deduction, allowance or relief.
42. The provisions of Section 143(l)(a) are without prejudice to the provisions of Section 143(2). Though, technically the intimation issued was deemed to be a demand notice issued under Section 156 that did not per se preclude the right of the AO to proceed under Section 143(2). That right is reserved and not taken away. Between the period from 1st April, 1989 to 31st March, 1998, the second proviso to Section 143(l)(a), required that where adjustments were made under first proviso to Section 143(1)(a), an intimation had to be sent to the assessee notwithstanding that no tax or refund was due from him after making such adjustments. With effect from 1st April, 1998, second proviso to Section 143(l)(a) was substituted by the Finance Act, 1997, which was operative till 1st June, 1999. The requirement was that intimation was to be sent to the assessee whether or not any adjustments had been made under the first proviso to Section 143(1) and notwithstanding that no tax or interest was found due from the assessee concerned. Between 1st April, 1998 to 31st March, 1999, sending of an intimation under Section 143(l)(a) was mandatory.
43. Thus, legislative intent is very clear from the use of the word 'intimation' as substituted for assessment', the AO is free to make any addition after grant of opportunity to the assessee. By making adjustments under the first proviso to Section 143(l)(a), no addition which is impermissible by the information in the return could be made by the AO. Reason is that under Section 143(l)(a) no opportunity is granted to the assessee and the AO proceeds on his opinion on the basis of the return filed by the assessee. The very fact that no opportunity of hearing being given under Section 143(l)(a) indicates that the AO has to proceed accepting the return and making the permissible adjustments only.
44. As a result of insertion of Explanation to Section 143 by the Finance Act (No. 2) of 1991 w.e.f. 1st Oct., 1991 and subsequently w.e.f. 1st June, 1994 by Finance Act 1994. and ultimately omitted w.e.f. 1st June, 1999 by Explanation as introduced by the Finance Act (No. 2) of 1999, an intimation sent to the assessee under Section 143(l)(a) was deemed to be an order for purposes of Section 246 between 1st June, 1994 to 31st March, 1995 and under Section 264 between 1st Oct., 1991 and 31st May, 1999. The expressions 'intimation' and 'assessment order' have been used at different places. Contextual difference between the two expressions has to be understood in the context of the expressions used. Assessment is used as meaning some times the computation of income' some times 'the determination of the amount of tax payable' and some times the whole procedure laid down in the Act for imposing liability upon the tax payer. In the scheme of things the intimation under Section 143(1)(a) cannot be treated to be an order of assessment. The distinction is also well brought out by the statutory provisions as they stood at different points of time. Under Section 143(l)(a) as stood prior to 1st April, 1989, the AO had to pass an order if he decided to accept the return, but under the amended provisions, the requirement of passing of an assessment order has been dispensed with and instead an intimation is required to be sent.
45. The Central Board of Direct Taxes (CBDT) had issued various circulars in this regard explaining the purpose behind the provisions of Section 143(l)(a), namely, to minimize the Departmental work in scrutinizing each and every return, and to concentrate on selective scrutiny of returns.
46. Under the first proviso to Section 143(1) w.e.f. 1st June, 1999, except as provided in the provision itself, the acknowledgment of the return shall be deemed to be intimation under Section 143(1) where (a) either no sum is payable by the assessee, or (b) no refund is due to him. It is significant that the acknowledgment is mostly done by the ministerial staff and not by the AO. Thus the intimation does not have all the characteristics of an assessment as understood in the common parlance or even during taxing statutes. Further, the intimation under Section 143(l)(a) was deemed to be a notice of demand under Section 156 for the purpose of making machinery provisions relating to recovery of tax applicable. By such application only tax amount indicated to be payable by the intimation became permissible and nothing more can be inferred from the deeming section. Thus during the relevant asst. yrs. 1995-96, 1996-97, 1997-98 under consideration, when the returns were processed under Section 143(1)(a), there being no assessment a such, there is no room to contend that there was change of opinion or that cost of construction debited in the books of account were subject to verification by the AO, when such intimation was sought to be reopened.
47. Recently, the jurisdictional High Court in the case of S.R. Koshti v. CIT dealing with the asst. yr. 2001-02, has categorically held that 'intimation under Section 143(1) is not an order of assessment'.
48. Similarly, in some of the cases cited and relied on by the learned Brother relate to scope of the provisions of Section 148 as they stood prior to amendment by Direct Tax Laws Amendment Act, 1987.
49. First case relied on by the learned brother was Darshan Singh v. AO (2002) 123 Taxman 324 (Asr)(Mag), in which it was held by Tribunal, Amritsar Bench that the reopening of assessment by issuing of notice under Section 148 for asst. yr. 1995-96 is not valid on the basis of valuer's report where return has been processed under Section 143(l)(a). Following was the observation and conclusion of the Bench:
Shri Sudhir Sahgal, advocate, the learned Counsel for the assessee, draw our attention to the decision of the jurisdictional High Court in the case of CIT v. Smt Usha Mathur and submitted that the facts of the present case are almost similar to the facts of the case of Smt. Usha Mathur (supra) and the Hon'ble High Court in the said case held that when the assessment was made under Section 143(1), reopening on the basis of valuation cells report no addition can be made which amounts to review of its earlier order. In our view, in the instant case also on the basis of the decision of the Hon'ble Punjab & Haryana High Court in the case of Smt. Usha Mathur (supra) it can be held that the AO was not justified in reopening the assessment, on the basis of report of the DVO.
50. It is very clear from the above observation and conclusion that Tribunal has treated the issue squartely covered by the decision of jurisdictional High Court in the case of Smt. Usha Mathur (supra).
51. I will be failing in my duty if I do not elaborate the decision of Smt. Usha Mathur by basing on which Tribunal held that reopening on the basis of DVO report was not justified where return has been processed under Section 143(1)(a). The following are the facts and conclusions arrived at by the P&H High Court.
52. The assessee deriving income from job work and interest filed her return for asst. yr. 1989-90 and the assessment was completed under Section 143(1). In this case, assessee, along with her husband constructed a house. The assessee was having 50 per cent share. During the assessment proceedings in case of assessee's husband, AO referred the matter to the valuation cell. On the basis of report, certain additions were made in the cost of construction. As a result, addition of Rs. 10,704 was made in the hands of the assessee's husband on account of investment in construction of house. On the basis of valuation report, the AO issued notice under Section 148 to the assessee and reopened her case. The assessee's husband challenged the action of the AO in making the addition in his income. The Dy. CIT(A) accepted the contention of the assessee's husband. Revenue did not challenge that order of the Dy. CIT(A).
53. In the present case, the assessee challenged the validity of order reopening her assessment and also addition made to her income on account of cost of construction. The CIT(A) upheld the order of the AO. Aggrieved by the order, the assessee filed appeal before the Tribunal. After considering the matter, the assessee's claim was accepted by Tribunal after recording its findings. In further appeal filed by the Revenue against the order of the Tribunal, following was the conclusion of the Hon'ble High Court:
The Tribunal has examined the whole case at length. A detailed order running into 12 pages has been passed. Each finding has been recorded on the basis of the evidence on the file. No error in the findings of fact recorded by the Tribunal has been pointed out. Consequently, we do not find that any substantial question of law arises for the consideration of this Court in this appeal.
There is another aspect of the matter. Even if the contention raised by the Revenue were to be gone into, the ultimate tax liability would be of a very small amount. Keeping in view the fact that the financial implications are of a very trivial nature, we do not find any ground to interfere under Section 260A of the IT Act, 1961.
54. It is ciystal clear from the above judgment that Revenue's appeal was dismissed on the plea that detailed finding has been recorded by the Tribunal on the basis of evidence on file and no error in the finding of fact recorded by the Tribunal was pointed out. The High Court, therefore, held that there was no any substantial question of law arises for consideration of this Court in this appeal. Thus it cannot be inferred that the Hon'ble High Court has given any verdict or proposition on the question of law regarding validity of reopening of assessment on the basis DVO's report.
55. In view of the above, the order of the Tribunal relied on by the learned brother is of no help to the assessee for arriving at the conclusion that there is no legality in reopening the assessment on the basis of DVO's report once the returns are processed under Section 143(1) (a) by issuing the intimation.
56. Reliance was also placed on the decision of the Tribunal Calcutta Bench in the case of Roof & Tower Construction (P) Ltd. v. Asstt. CAT .
57. We have carefully gone through the impugned order of Tribunal and found that in this case the AO reopened the assessment under the belief that sales consideration had been suppressed by the assessee which was formed on the basis of DVO's report. It was held by the Tribunal that there was no direct nexus between DVO's report and the assessment of suppressed sales consideration and that addition could not be made to the returned income because, the sale price as per assessee's action was less than the value indicated in the DVO's report. Merely because the DVO's report suggests higher fair market value than the sale price disclosed by the assessee, it cannot be said that there is any reason to believe that income has escaped assessment.
58. It is crystal clear that in the above case the reopening of assessment was based on the plea that sale consideration has been suppressed by the assessee which was arrived at on the basis of DVO's report. However, in the instant case under our consideration, it is the cost of construction recorded in the books of account which has been disputed and the DVO has arrived at higher cost of construction, after having physical inspection and measurement of the property. There is no dispute in the instant case regarding suppression of sale consideration nor the question of fair market value of the property, so constructed. Thus, this case is also of no help to the assessee.
59. Another Tribunal order relied on by the learned brother was ITO v. Vijay Kumar (2001) 73 TTJ (Jd) 17. In this case, assessment was reopened by issue of notice under Section 147(b) for asst. yrs. 1986-87 and 1987-88. The reopening was held to be not justified by the Tribunal on the ground that reference could have been made by the AO to the DVO only while trying the suit and certainly not in respect of completed suit where assessment had already been completed under Section 143(1) and as such AO had no reason to make the reference to DVO under Section 131(l)(d) was made. In this case, reference to DVO was held to be invalid as the assessments were already completed under Section 143(1). As we have already discussed, the scope of Section 143(1) prior to amendment in 1989, relevant assessment years in this case was 1986-87 and 1987-88 where the earlier provisions of Section 143(1) were applicable and assessments were framed accordingly. However, in the instant case, before us no assessment has been framed and the returns have been processed under Section 143(l)(a). As discussed herein above, intimation issued under Section 143(l)(a) cannot be said to be an assessment at par with earlier provisions of Section 143(1), as they existed prior to 1989. Furthermore, power of the AO to make a reference to the DVO has been specifically inserted by introduction of Section 143A with retrospective effect. Thus this case is also of no help to the assessee for the relevant assessment years namely 1995-96, 1996-97, 1997-98 and 1998-99 under consideration.
60. The brother JM has also discussed the decision of P&H High Court in the case of (supra) in support of the proposition that mere DVO's report cannot be made the sole basis for initiating action under Section 147 r/w Section 148. We have carefully gone through the whole order and found that in this case reassessment was held to be valid on the basis of DVO's report and assessee's failure to explain the different between the cost of construction recorded in the books of account vis-a-vis DVO's report.
61. However, in the instant case before us, as we have already discussed that in detail that in addition to DVO's report there were so many other material available to the AO for forming belief that there was escapement of income and it is not only on the basis of mere DVO's report that assessment has been reopened. Thus, this case is also of no help to the assessee.
62. The next case relied on by the brother JM was Bhola Nath Majumdar v. ITO wherein Hon'ble Gauhati High Court held that there is no authority in the ITO under Section 55A to refer the valuation of a property after the assessment is completed by him, as the purpose of Section 55A is not to arm the ITO to make a roving and fishing inquiry for finding out materials for reopening or revising a completed assessment.
63. In the case discussed by the Hon'ble High Court, relevant assessment years under consideration were 1984-85 and 1985-86. In this case, the assessments for asst. yr. 1984-85 and 1985-86 were reopened on the basis of valuation report obtained under Section 55A after the original assessments were completed. However, in the instant case before us, only returns have been processed and intimation has been issued under Section 143(l)(a) which cannot be put a par with the assessment completed under old scheme of Section 143, prior to 1989. Furthermore, in our case reference was made to the DVO during the course of assessment proceedings for the asst. yr. 1997-98 after pointing out defects in the cost of construction as recorded by the assessee in his books of account and discrepancy in the statement of supplier of building materials, as compared to their respective balances in assessee's books of account. Thus this case is also of no help to the assessee.
64. In view of the above discussion and the judgments of various High Courts discussed above, we are of the considered view that various defects in the books of account along with vast difference in DVO's report as compared to cost of construction recorded by the assessee in its books of account, qualification in DVO's report and the difference in the cost determined by the registered valuer in the report furnished by the assessee himself, as compared to actual cost recorded by assessee in its books of account were sufficiently valid reasons for forming a belief that there was escapement of income. We, therefore, hold that reopening of assessment for asst. yrs. 1995-96, 1996-97 and 1998-99 were justified.
65. Now, coming to the merit of addition made by the AO on the basis of DVO's report. It involves two aspects. First is justification/power of AO to make a reference to the DVO and second is, addition to be made on the basis of report obtained under such reference. Section 142A has been introduced in the statute book by Finance No. 2 Act, 2004 with retrospective effect from 15th Nov., 1972, according to which for the purpose of making an assessment or reassessment under this Act, where an estimate of the value of any investment is required to be made, the AO may require the Valuation Officer to make an estimate of such value and report the same to him. It has been further provided in Sub-section 2 of Section 142A that the Valuation Officer to whom a reference is made under Sub-section (1) shall, for the purpose of dealing with such reference, have all the powers that he has under Section 38A of the WT Act, 1957. As per provisions of Sub-section (3) of Section 142A, on receipt of report from the Valuation Officer, the AO may, after giving the assessee an opportunity of being heard, take into account such report in making such assessment or reassessment. It is very much pertinent here to bring on record that while making a reference to the DVO after rejecting the books of account or pointing out mistakes in the construction account, the only moot question before the AO pertains to know the quantum of unaccounted investment made out of unaccounted money which has not been recorded in the books of account, and for which assessee do not offer any explanation about the nature and source of investment or the explanation offered by him is not found to be satisfactory. It is only after knowing the quantum of unexplained investment or the unaccounted money, that the second step before the AO is to make addition under any of the provisions contained under Section 69/69A/69B or 69C. It is therefore not very much pertinent to say that since after receipt of DVO's report the addition was made under Section 69C and not under Section 69/69A or 69B, the reference made to DVO under Section 131(l)(d) was not valid, since there is no mention of Section 69C in Section 142A.
66. Tribunal, Ahmedabad Bench, in the case of Umiya Co-operative Housing Society Ltd. v. ITO (2005) 94 TTJ (AM) 392 have held that Section 142A empowers the AO to require the Valuation Officer for making the estimate of value of any asset provided the AO required the same for the purpose of making the assessment or reassessment.
67. Similar view has been taken by the Tribunal, Rajkot Bench in the case of Asstt. CIT v. Nalanda Housing Development Ltd. (2005) 98 TTJ (Rajkot) 518 wherein it was held that after insertion of Section 142A with retrospective effect from 15th Nov., 1972, reference can be made by the AO to the Valuation Officer for making estimate of the value of investment referred to in Section 69 or 69A and report to the AO. In view of the above amended provisions empowering the AO to make a reference to the DVO, and the defects found in the construction expenses recorded in the books of account resulting into its rejection under Section 145(3), during scrutiny assessment proceedings for asst. yr. 1997-98, we do not find any infirmity in the action of the AO for making reference to the Valuation Officer for determining the quantum of unexplained investment involved in the cost of construction. The decisions cited by the learned Authorised Representative with reference to powers of AO to make a reference, relates to the preamended position, therefore not applicable to the facts and circumstances of the instant case in view of the amendment brought in by the insertion of Section 142A with retrospective effect.
68. Now coming to the quantum of addition which can be made on the basis of such report.
69. There is no dispute to the well settled legal proposition followed by the judicial precedents that the valuer's report as referred under Section 131(l)(d) is only by way of guidance and before using the same the AO should give full opportunity to the assessee and also give reasons and justification for adopting the valuation made by the DVO, in place of construction cost actually debited in the books of accounts which is also supported by the registered valuer report furnisned by the assessee.
70. There is also no dispute to the well settled legal proposition that no addition can be made merely on the basis of valuation report, which is just an estimate prepared by a technical person on the basis of physical inspection and measurement of building, without pointing out specific defects in the construction account kept in the books of account and/or rejecting the books of accounts under Section 145 or unless there is failure on the part of assessee to furnish the requisite information, details etc., required by the DVO/AO. Whenever the AO wants to adopt the valuation as made by the DVO, he is first of all required to point out the specific defects in the construction account maintained by the assessee or to indicate that construction cost shown in the books of account are not correct or that cost of construction could not be correctly deduced due to the information asked from the assessee but could not supplied by him to the AO/DVO.
71. In the instant case, we found that mistakes pointed out by the AO in the books of account are not very serious so as to warrant rejection of books of account. No defect was found by the AO in the method of accounting regularly and consistently followed by the assessee. Expenses which were not supported by vouchers were negligible looking to entire construction cost incurred by the assessee. Discrepancy in the balances of suppliers was duly explained by the assessee. As per our considered view books of account should not be rejected light heartedly unless there is cogent reasons for the same. In the instant case, we do not find any such cogent reasons for rejection of books of account out-rightly. However, at the very same time, we find that DVO has given certain qualification in his report to the effect that the assessee has not supplied the details regarding quantity of different materials consumed and various services like water supply, sanitary installation and electrical provisions provided in the property. DVO also qualified his report with the observation that cost of construction of one bungalow No. A-27 was not incorporated in the report as the same was alleged to be constructed by occupant, but no documentary evidence was produced by the assessee therefore the correctness of assessee's claim could not be ascertained. It was also observed that in some bungalows huge additions/alternation renovation work has been carried out but the same has not been considered in the valuation amount on the plea of the assessee that additions/alteration work was carried out by the occupants.
72. However, on perusal of record, we found that objections raised by the DVO with regard to non furnishing of details of quantities of different materials consumed could not be met by assessee before the lower authorities. However, with regard to DVO's observation regarding bungalow No. A-27 and addition/alteration work carried out in some of the bungalows, no addition was finally made by the AO while framing the order under Section 143(8). Therefore we can also ignore these observations of DVO. It is pertinent to mention here that these observations of DVO were relevant for forming the reason to believe while issuing notice under Section 148, but once the assessment, is reopened and the AO also do not give due credence to such observation/qualification of DVO, while making addition on merit under Section 143(3), we are least concerned with the same. We also found while comparing the DVO's report with the registered valuer's report as supplied by the assessee itself that the cost estimated by DVO specifically in respect of bitumen road, casted sitting chair, borewell with pump, street lighting and cable lying with florescent tubes, EPBX cable laying etc. were not provided in the registered valuer's report. We also found that extra items provided in the entire scheme was item-wise valued by the DVO after physical inspection at a much higher value against which total value was taken by the registered valuer at much lower sides without specifying each and every such item.
73. So far as AO's complete reliance on the DVO's report is concerned, we are inclined to agree with the learned Authorised Representative Mr. S.N. Soparkar that the AO had relied on DVO's report as a conclusive evidence while making the addition with reference to the total difference between cost recorded in the books of account and the value arrived at by the DVO, rather than treating the DVO's report as a mark of guidance. At this stage, as per our considered view, the AO should have confined himself to the points of difference indicated in the report of DVO by treating the report supplied by him (DVO) in advisory capacity, as a mark of guidance.
74. In view of the above discussion, we can safely conclude that for making addition Department cannot place 100 per cent reliance on DVO's report which is just an estimate by a technical person when the assessee himself has recorded entire cost of construction in its books of account which were duly audited as per provisions of IT Act. The mistakes pointed out by the AO were very venial, which do not justify the rejection of books of account under Section 145(3). The report of registered valuer furnished by the assessee also supported the construction cost recorded by the assessee in its books of account with a variation of Rs. 1.51 lakhs. Keeping in view the totality of facts and circumstances of the case, we are inclined to retain the addition to the extent of 5 per cent (five per cent) of cost of construction as recorded by the assessee in its books of account in respective assessment years under consideration, so as to cover unaccounted expenses with regard to observations made by the DVO in his report as well as the excess cost worked out by the own valuer of the assessee in its report, as compared to the cost actually recorded by the assessee in its books of account, as discussed hereinabove.
75. Now coming to the asst. yr. 1997-98, which was reopened by issue of notice under Section 148 after return was processed under Section 143(1)(a). From the record we found that neither at the stage of AO nor before the CIT(A), the assessee was having any grievance with regard to insufficiency of reasons for reopening the assessment. During the entire course of reassessment proceedings the assessee has not disputed the reopening as invalid on the ground of sufficient reason to believe that there was escapement of income. We also found that even before the first appellate authority, no ground has been taken by the assessee in the memo of appeal filed in Form No. 35 alleging the action of the AO for reopening the assessment under Section 147.
76. We have also carefully gone through the memo of appeal (Form No. 35) filed before the CIT(A), as placed in the paper book, and found that no ground as to the validity of reopening was raised, against the order of AO, before the CIT(A). That is the reason why the CIT(A) has not adjudicated this ground in his appellate order. For the first time before the Tribunal the assessee has taken a plea that the CIT(A) was not justified in confirming the action of the AO for reopening of assessment under Section 147. However, after carefully going through the order of the CIT(A), we do not find any mention of rejection of assessee's ground regarding reopening of assessment under Section 147. Thus the ground taken before the Tribunal is misconceived. However, since it is a legal ground, the assessee has all the rights to raise it before the Tribunal for the first time. However, at the very same time, it is pertinent to mention that this legal ground is not with regard to not issuing notice under Section 143(2) after filing of return in compliance of notice under Section 148 within a period of one year, nor there is any grievance regarding limitation for passing the order. It appears that the assessee is aggrieved for insufficient reasons for reopening of assessment. Since it is an appeal filed by the assessee, the onus is on the assessee to bring on record that the reasons recorded for reopening the assessment was not sufficient. We have carefully gone through the entire paper book filed by the assessee before the Bench, but did not found any such document to indicate sufficiency or inadequacy of reasons being recorded by the AO for reopening. Whether reasons were sufficient or not can only be decided after verification of the reasons recorded by the AO while reopening the assessment, which undisputedly has not been brought on record by the assessee in its paper book nor the same has been dealt with by any of the lower authorities in their respective order as the same was not disputed before them. The CIT(A) has also not decided the issue of validity of reopening since no ground was raised before him in the memo of appeal filed. In view of the above discussion, keeping in view interests of justice we are restoring this ground to the file of the CIT(A) for deciding the issue of reopening and the assessee is directed to raise this ground with supporting evidence for inadequacy of reasons recorded for reopening, if any, before the CIT(A). Needless to say that the assessee should be given full opportunity before deciding the issue on validity of reopening.
77. Before parting with the matter, it is pertinent to mention that the learned Brother JM has taken the view that since CIT(A) has failed to dispose the particular ground the said ground is deemed to have been rejected but since this ground which has not been decided by the CIT(A), we deem it fit to decide the same. I am not agreeing with the observations of learned Brother JM that the CIT(A) had not decided this ground, insofar as without any ground challenging the illegality" of reopening having been taken by the assessee in the grounds of appeal before the CIT(A), no duty is casted on the CIT(A) to decide the same. There is also no mention of rejection of this ground of validity of reopening in the order of CIT(A), nor the CIT(A) has recorded any finding or observations with regard to sufficiency or insufficiency of reasons of reopening. The CIT(A) in his order did not utter a single word justifying the action of the AO for reopening. Brother JM has taken a view that since reopening of asst. yr. 1997-98 was invalid, reference having been made by the AO, to DVO during the course of assessment proceedings under Section 143(3)/147 for the asst. yr. 1997-98, the. same was also illegal and therefore no reopening can be made on the basis of -such DVO's report. He, thus, concluded that the DVO report obtained by reopening the assessment for asst. yr. 1997-98 itself was not valid, therefore, reopening for the asst. yrs. 1995-96, 1996-97 and 1998-99 was also invalid. It is a trite law and also spelt out by Hon'ble Supreme Court in Pooron Mal v. Director of Inspection (Inv.) and Dr. Partap Singh v. Director of Enforcement , that information even though collected during illegal search are capable to be utilized by the Department for several purposes. It has been held that they have evidentiary value. I, therefore, do not agree with the learned brother JM that valuation report obtained during the course of assessment under Section 143(3) r/w Section 147 for asst. yr. 1997-98 cannot be utilized or made basis for reopening of assessment for asst. yrs. 1995-96, 1996-97 and 1998-99.
78. Without prejudice to restoring the issue regarding validity of reopening, for the asst. yr. 1997-98, to the file of the CIT(A), I am deciding the issue on merits which are squarely covered by the issue decided by me with detailed discussion, in respect of asst. yrs. 1995-96, 1996-97 and 1998-99.
79. As we have already taken a view that mistakes pointed out were not sufficient for rejection of books of account but at the same time keeping in view the observation and qualification in the DVO's report vis-a-vis difference in DVO's report and estimate prepared by the registered valuer, we are inclined to retain addition to the extent of 5 per cent of cost of construction recorded by the assessee in its books of account. We direct accordingly.
80. In the result, appeal of the assessee is allowed in part in terms indicated herein above.
REFERENCE UNDER Section 255(4) OF THE IT ACT. 1961 I.S. Verma, J.M. January, 2006 As there is a difference of opinion, the matter is being referred to the Hon'ble President of Tribunal with a request that following questions may be referred to a Third Member or pass such order as the Hon'ble President may think fit.
A. Asst. yr. 1997 98 Question No. 1. Whether, in the facts and circumstances of the case and in law, the proceedings initiated under Section 147 of the Act for asst. yr. 1997-98, can be held to be valid proceedings in the eyes of law and consequently, can the subsequent proceedings also be held to be valid ?
Question No. 2. In case, the answer to question No. I above, is in the affirmative, then whether, the rejection of books of account for asst. yr. 1997-98 was justified so as to authorize the AC) to make reference to the DVO asking to determine the cost of construction of the building known as "Ashlesha Bungalows" situated at Anand Bakrol Road, Bakrol, Anand having 31 units out of which having 20 units of A-type, 2 units of type-C, 1 unit of type-D double-storyed and Bungalow A-27 during the previous years relevant to asst. yrs. 1995-96 1996-97, 1997-98 and 1998-99 ?
Question No. 3. Whether, in the facts and circumstances of the case and in law, the addition made on account of alleged investment in construction of building, known as "Ashlesha Bungalows" situated at Anand Bakrol Road, Bakrol Anand having 31 units out of which having 20 units of A-type, 2 units of type-C. 1 unit of type-D double-storyed and Bungalow A-27 during the previous years relevant to asst. yr. 1997-98 solely on the basis of valuation report of the DVO can be sustained ?
B. Asst. yrs. 1995 96, 1996-97 and 1998 99 Question No. 1. Whether, in the facts and circumstances as well as in law, the proceedings initiated under Section 147 of the IT Act, 1961, solely on the basis of valuation report of the DVO procured by the AO during the course of proceedings under Section 147 of the Act for asst. yr. 1997-98, can be held to be valid proceedings in the eyes of law and, consequently, can the subsequent proceedings also be held to be valid ?
Question No. 2. Whether, in the facts and circumstances as well as in law, the rejection of books of the account be held to be valid in the eyes of law for all these three years ?
Question No. 3. Whether, in the facts and circumstances as well as in law, the addition made in all these three assessment years, on account of alleged investment in construction of building, known as "Ashlesha Bungalows" situated at Anand Bakrol Road, Bakrol. Anand having 31 units out of which having 20 units of A-type, 2 units of type-C, 1 unit of type-D double-stored and Bungalow A-27 during the previous years relevant to asst. yrs. 1995-96, 1996-97 and 1998-99 solely on the basis of valuation report of the Department Valuer can be sustained ?
R.C. Sharma, A.M. 23rd Jan., 2006 A. Asst. yrs. 199596, 1996 97, and 1998-99:
Question No. 1. Whether on the facts and circumstances of the case where returns have been merely processed under Section 143(1), there was reason to believe that there was an escapement of income under Section 147, in view of various defects found in the books of account in the asst. yr. 1997-98 regarding cost of construction of very same building which was also under construction during asst. yrs. 1995-96, 1996-97 and 1998-99, huge difference of Rs. 87.66 lakhs found as per DVO's report, short fall of Rs. 1.51 lakhs as per registered valuer's report, failure of the assessee to furnish details of materials consumed and various services like water, sanitary installation and electrical provisions in the building, qualification in the DVO's report regarding huge cost incurred in addition/alteration work carried out but not considered in the valuation report.
Question No. 2. In case, answer to question No. 1 above is affirmative, whether on the facts and circumstances of the case the report of DVO which was obtained during the course of proceedings under Section 143(3)/147 for the asst. yr. 1997-98 in respect of very same building which was also under construction during the asst. yrs. 1995-96, 1996-97 and 1998-99, can be validly used during the course of assessment proceedings under Section 143(3)/147 for the asst. yrs. 1995-96, 1996-97 and 1998-99.
Question No. 3. In case, answer to question No. 1 above is affirmative, whether on the facts and circumstances of the case keeping in view defects pointed out in the books of account, failure of the assessee to furnish details regarding quantities of different building materials consumed and various services like water, sanitary installation and electrical provisions in the building, extra items valued individually by the DVO after physical inspection of building, against which a lump sum value at a very low figure taken by the registered valuer in his report, warrants and justify addition of 5 per cent of the cost of construction recorded by the assessee in his books of account.
B. Asst. yrs. 1995-96, 1996-97, 1997-98 and 1998-99 Whether on the facts and circumstances of the case and in law, after insertion of Section 142A in the statute by the Finance (No. 2) Act, 2004, with retrospective effect from 15th Nov., 1972, a reference made by the AO to the DVO to make an estimate of such value and report, was justified, in view of consistant view taken by different Benches of the Tribunal.
C.Asst.yr. 1997-98 Whether on the facts and circumstances of the case, where the assessee having not disputed the sufficiency of reasons for reopening, neither before the AO, nor before the CIT(A), nor where any decision was rendered by the CIT(A), nor there is any material available on record for deciding the question of sufficiency of reasons of reopening, which has been raised for the first time before the Tribunal, the matter is required to be restored to the CIT(A) for deciding the issue after appreciation of reasons recorded for reopening the assessment under Section 147.
R.P. Garg, Vice President 27th Aug., 2007
1. On a difference of opinion, the President has referred the following questions for my opinion as Third Member, which reads as under:
Questions by JM A. Asst. yr. 1997-98
1. Whether, in the facts and circumstances of the case and in law, the proceedings initiated under Section 147 of the Act, for asst. yr. 1997-98, can be held to be valid proceedings in the eyes of law and, consequently, can be subsequent proceedings also be held to be valid ?
2. In Case, the answer to question No. 1 above, is in affirmative, then whether, the rejection of books of account for asst. yr. 1997-98 was justified so as to authorize the AO to make reference to the DVO asking to determine the cost of construction of the building known' as "Ashlesha Bungalows" situated at Anand Bakrol Road, Bakrol, Anand, having 31 units out of which having 20 units of A-type, 2 units of type-C, 1 unit of type-D-double-storied and Bungalow A-27 during the previous years relevant to asst. yrs. 1995-96, 1996-97, 1997-98 and 1998-99 ?
3. Whether, in the facts and circumstances of the case and in law, the addition made on account of alleged investment in construction of building, known as "Ashlesha Bungalows" situated at Anand Bakrol Road, Bakrol, Anand, having 31 units out of which having 20 units of A-type, 2 units of type-C, 1 unit of type-D -double-storied and Bungalow A-27 during the previous year relevant to asst. yr. 1997-98 solely on the basis of valuation report of the DVO can be sustained.
B. Asst. yrs. 1995 96, 199697 and 1998-99
1. Whether, in the facts and circumstances as well as in law, the proceedings initiated under Section 147 of the IT Act, 1961, solely on the basis of valuation report of the DVO procured by the AO during the course of proceedings under Section 147 of the Act for asst. yr. 1997-98, can be held to be valid proceedings in the eyes of law and, consequently, can the subsequent proceedings also be held to be valid ?
2. Whether, in the facts and circumstances as well as in law, the rejection of books of the account can be held to be valid in the eyes of law for all these three years ?
3. Whether, in the facts and circumstances as well as in law, the addition made in all these three assessment years, on account of alleged investment in construction of building, known as "Ashlesha Bungalows" situated at Anand Bakrol Road, Bakrol, Anand, having 31 units out of which having 20 units of A-type, 2 units of type-C, 1 unit of type-D- double-storied and Bungalow A-27 during the previous years relevant to asst. yrs. 1995-96, 1996-97 and 1998-99, solely on the basis of valuation report of the Departmental valuer can be sustained ?
Questions by AM A. Asst. yrs. : 1995 96, 1996 97 and 1998 99
1. Whether, on the facts and circumstances of the case where returns have been merely processed under Section 143(1), there was reason to believe that there was an escapement of income under Section 147, in view of various defects found in the books of accounts in the asst. yr. 1997-98 regarding cost of construction of very same building which was also under construction during asst. yrs. 1995-96, 1996-97 and 1998-99, huge difference of Rs. 87.6(3 lakhs found as per DVO's report, short fall of Rs. 1.51 lakhs as per registered valuer's report, failure of the assessee to furnish details of materials consumed and various services like water, sanitary installation and electrical provisions in the building, qualification in the DVO's report regarding huge cost incurred in addition /alteration work carried out but not considered in the valuation report.
2. In case, answer to question No. 1 above is affirmative, whether on the facts and circumstances of the case the report of DVO which was obtained during the course of proceedings under Section 143(3)/147 for the asst. yr. 1997-98 in respect of very same building which was also under construction during the asst. yrs. 1995-96, 1996-97 and 1998-99, can be validly used during the course of assessment proceedings under Section 143(3)/147 for the asst yrs. 1995-96, 1996-97 and 1998-99.
In case, answer to question No. 1 above is affirmative, whether on the facts and circumstances of the case keeping in view defects pointed out in the books of accounts, failure of the assessee to furnish details regarding quantities of different building materials consumed and various services like water, sanitary installation and electrical provisions in the building, extra items valued individually by the DVO after physical inspection of building, against which a lump sum value at a very low figure taken by the registered valuer in his report, warrants and justify addition of 5 per cent of the cost of construction recorded by the assessee in his books of accounts.
B. Asst. yrs. : 1995 96. 1996 97, 1997-98 and 1998 99 Whether, on the facts and circumstances of the case and in law, after insertion of Section 142A in the statute by the Finance (No. 2) Act, 2004, with retrospective effect from 15th Nov., 1972, a reference made by the AO to the DVO to make an estimate of such value and report, was justified, in view of consistent view taken by different Benches of the Tribunal.
C. Asst yr. : 1997 98 Whether, on the facts and circumstances of the case, where the assessee having not disputed the sufficiency of reasons for reopening, neither before the AO nor before the CIT(A), nor where any decision was rendered by the CIT(A), nor there is any material available on record for deciding the question of sufficiency of reasons of reopening, which has been raised for the first time before the Tribunal, the matter is required to be restored to the CIT(A) for deciding the issue after appreciation of reasons recorded for reopening the assessment under Section 147.
2. The assessee is in the business of construction of building for sale. The return of income for all the four impugned assessment years were processed under Section 143(l)(a) of the IT Act, 1961 accepting the returned income. The assessee constructed a bungalow namely "Ashlesha Bungalows", situated on Anand Bakrol Road, Bakrol, Anand, during the period from July, 1993 to December, 1998, showing a total expenditure on construction at Rs. 2,37,96,653. Notice under Section 148 of the Act was issued for asst. yr. 1997-98 on 28th Jan., 2000 and in this reassessment proceedings, the AO noticed that certain contra accounts called for from various parties did not tally with the account furnished by the assessee, the assessee had made payments through bearer cheques amounting to Rs. 27,728 on 23rd Aug., 1996 to M/s Harikrupa Engineering Works, in violation of Section 40A(3) of the Act. These were disallowed at 25 per cent. He also noticed that vouchers for expenditure worth Rs. 1,000 on account of carpentry work, Rs. 1,320 on account of colour work, Rs. 472 on account of fabrication work and Rs. 27,793 on account of plumbing work were not available. He also noticed certain other vouchers of Rs. 30, Rs. 200, Rs. 550, Rs. 55, Rs. 900, Rs. 1,400, Rs. 1,500, Rs. 506 and Rs. 3,000 were also not signed by the recipients. He, accordingly, rejected the books of account by invoking Section 145(3) of the Act.
3. The AO referred the matter to the District Valuation Officer (for short "DVO"), who estimated the cost of construction of the entire building and also year-wise investment at an aggregate amount of Rs. 3,25,63,445. The year-wise, cost of construction as shown by the assessee and as estimated by the DVO, is as under:
Sl Period of Construction Fair cost of Difference Rs.
No. construction cost shown by construction as
assessee Rs. per DVO Rs.
1. 7/93 to 3/94 13,64,923 18,33,939 4,79,016
2. 4/94 to 3/95 27,45,946 37,06,493 9,60,547
3. 4/95 to 3/96 67,39,422 92,27,910 24,88,488
4. 4/96 to 3/97 68,78,879 94,57,014 25,78,135
5. 4/97 to 3/98 45,22,750 62,16,218 16,93,468
6. 4/98 to 12/98 15,44,733 21,21,871 5,77,138
2,37,96,653 3,25,63,445 87,66,792
4. The assessee also filed a valuation report from the registered valuer who worked out the value at Rs. 2,39,47,000. After giving an opportunity of being heard to the assessee, the AO made two additions namely disallowance under s, 40A(3) of Rs. 5,545 being 25 per cent of Rs. 22,180 and addition on account of undisclosed investment in construction for the year under consideration at Rs. 25,78,135. During the reassessment proceedings for asst. yr. 1997-98, the AO also issued notices under Section 148 of the Act for the other three years 1995-96, 1996-97 and 1998-99 on 27th March, 2002, which was served on the assessee on 30th March, 2002. The assessee requested the AO to consider the returns originally filed in pursuance of these notices.
5. The AO, on verification of the statement of closing stock of work-in-progress of the building under construction noted that the scheme of assessee was to construct 51 units, whereas, the assessee had shown details of 33 units. In response to the explanation called for by the AO, the assessee submitted that many customers had purchased two plots, construction was carried out only at one plot but the assessee firm had charged development cost for both the plots. The AO further observed that the assessee was silent on the details of plot Nos. 1-3, 5, 10, 12, 13, 26, 27, 32, 33 and 45-47. He held that even if it were presumed that no construction was carried out on these plots, the expenses of common amenities should have been equally divided and charged by the assessee and should have been reflected in the chart of closing stock of work-in-progress. According to AO, the working of closing stock of work-in-progress was not correct. He thus completed assessments making addition on account of undisclosed investment in construction in the asst. yr.s. 1995-96 at Rs. 9,60,547, 1996-97 at Rs. 24,88,488 and 1998-99 at Rs. 16,93,468.
6. For all the four assessment years, the assessee filed appeal before the CIT(A), challenging reopening as well as the additions on merits. The-CIT(A) upheld the validity of the reopening as also the additions made by the AO.
7. The matter came up before the Tribunal and there struck a difference of opinion between the two Members. The learned JM, observed that the assessee, admittedly, furnished returns of income for all the assessment years and no assessment under Section 143(3) had been made and therefore it could have been a case of escapement only in a case where-(i) the AO was seized of any information or material which could led him to have reason to believe that an income depicted by such information or material had escaped assessment and (ii) if it were found that the assessee had understated the income or had claimed excessive loss, deduction, allowance or relief in the return. For the reopening for asst. yr. 1997-98 he held that though the CIT(A) has not decided the issue, it being a legal issue can be decided by the Tribunal as no investigation of facts were required. He referred to para 3.17 of the order of the CIT(A) and held that proceedings under Section 147 were initiated without there being any information or material with the AO for having reason to believe that any income chargeable to tax had escaped assessment and also that there was no allegation which could satisfy the requirement of the Expln. 2(b) to Section 147 of the Act and, therefore, it has to be taken that proceedings under Section 147 were initiated solely for the purpose of roving enquiry. He further held that books of account cannot be rejected as the defects were trifle and insignificant and reference to DVO was not valid. He further observed that the cases of the assessee for asst. yrs. 1995-96, 1996-97 and 1998-99, were reopened solely on the basis of the valuation report of DVO and there was no other information for reopening the assessment. The DVO report is only an estimate in advisory capacity and therefore could not be the basis for reopening of assessment in view of the decisions of the Tribunal, Amritsar Bench, in the case of Darshan Singh v. AO (2002) 123 Taxman 324 (Asr)(Mag) and Jodhpur Bench, in the case of ITO v. Vijay Kumar (2001) 73 TRJ (Jd) 17. On merits, he deleted the additions by holding that there was no good reason for rejecting the books of account and additions could not be made on mere difference in the cost of construction estimated by DVO and as recorded in books of account of the assessee.
8. The learned AM, on the other hand, held that it was a case of post amendment period after 1st April, 1989 and the AO can reopen the assessment for escapement of income read with the Explanation to Section 147. According to him, the issue of reopening assessment for asst. yr. 1997-98 is to be set aside. He however upheld the validity of reopening in other three years. According to him the defects though minor in amount were sufficient to refer the matter to DVO and after insertion of Section 142A in the statute these defects along with DVO report justified reopening. On merits, he held that though the defects were trifle and the books of account may not be rejected but looking to the facts and circumstances of the case, a disallowance of 5 per cent of the expenses was to be made to cover the unexplained expenditure. Me observed that for making an addition the Department cannot place 100 per cent reliance on DVO's report which is just an estimate by a technical person and when the assessee himself has recorded entire cost of construction in its books of account which were duly audited as per provisions of IT Act; and that the report of registered valuer furnished by the assessee also supported the construction cost recorded by the assessee in its books of account with a variation of Rs. 1.51 lakhs.
9. The learned Counsel for the assessee submitted that there were no valid reasons for reopening the assessment under Section 147 as there was no information/material by which the AO could have reasons to believe that any income had escaped assessment; that report of the DVO cannot be a basis for reopening the assessment in view of the decision of the Gauhati High Court in the case of Bishnu Talkies v. CIT (2007) 208 CTR (Gau) 248 : (2006) 287 ITR 372 (Gau). He also relied on the decision of the Tribunal, Delhi Benches, in the case of Asstt. CIT v. O.P. Chawla (2006) 8 SOT 242 (Del)(TM). Stating that it was nothing but a change of opinion, he referred to the decision of the Tribunal, Ahmedabad Benches, in the case of Umiya Cooperative Housing Society Ltd. v. ITO (2005) 94 TTJ (Ahd) 392. He submitted that the reference to DVO was invalid as the defects pointed out during assessment proceedings for the asst. yr. 1997-98 were very minor mistakes and the same could not be made the basis for rejection of books of account and/or referring the matter to the DVO for estimating the cost of construction. On merits he submitted that both the Members agreed that books of account could not be rejected and, therefore, no addition at all or at 5 per cent as estimated by the learned AM was called for on the basis of the DVO reports and the remarks about not furnishing of details. He also submitted that valuation of cost of construction of the property is only an opinion and the amendment in Section 142A was not relevant for this purpose.
10. The learned Departmental Representative, on the other hand, relied on the orders of the CIT(A) and submitted that reasons for reopening assessment for 1997-98 are not the valuation report but certain defects as pointed out in the reasons recorded. AO made reference to DVO on noticing such defects and rejection of books of account for determining the cost incurred on construction. There was huge difference in the cost of construction as per books of account and the valuation report. He further submitted that Section 142A is applicable as it was a case of continuing proceedings and in that connection, he relied on the decision of Allahabad High Court in CAT v. Smt Shashi Agarwal (2007) 210 CTR (All) 205 : (2007) 159 Taxman 340 (All) and the decision of the Tribunal, Delhi Benches, in the case of Asstt CAT v. Shakti Builders (2005) 93 TTJ (Del) 425. He further submitted that the discrepancies were only samples and, therefore, sufficient for making the additions in the income of the assessce. He also submitted that Valuation Officer has also found difference of about Rs. 1.50 lakhs in the cost of construction. This coupled with qualified report of the DVO were sufficient for reopening the assessment and making the additions. In this regard, he relied on the decision of the Tribunal, Delhi Benches, in the case of Hanemp Properties (P) Ltd. v. Asstt. CIT .
11. The parties are heard and their rival submissions considered. The first dispute to be dealt with is the validity of reopening. This issue is to be judged as per provisions of Section 147 as they stood at the relevant time. The provisions of Section 147 empowering the AO to reopen the cases are extracted in the order of the learned JM. It provided that if the AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may subject to provisions of Sections 148 to 153, assess or reassess such income. The proviso, however, provides for reopening the cases of earlier completed assessment under Section 143(3) or Section 147 only on failure of the assessee to disclose fully and truly the material facts.
12. The scope and effect of Section 147 have undergone a substantial change on amendment w.e.f. 1st April, 1989. The amended provisions empower the AO to reopen the assessment if he, for whatever grounds, has reason to believe that income has escaped assessment. Power to reassess now can be exercised even after assessee had disclosed fully and truly, all material facts. Reasons for reopening may be the result of AO's own investigation and might also come from any outside source.
13. The returns for all these asst. yrs. 1995-96, 1996-97, 1997-98, and 1998-99 were processed under Section 143(l)(a) and intimations issued thereunder. Such processing of returns or issuance of intimation cannot be said to be assessments in the eyes of law much less assessments under Section 143(3) or Section 147 of the Act in view of the clear legislative intent that an intimation is not an assessment order. It is also evident from the use of the word "intimation" for "assessment" in Section 143(1) of the Act. Recently, the Gujarat High Court in the case of S.R. Koshti v. CAT has categorically held that intimation under Section 143(1) is not an order of assessment'. It is also held by the Supreme Court in the case of Asstt. CAT v. Rajesh Jhaveri Stock Brokers (P) Ltd. , that under the scheme of Section 143(1) of the IT Act, 1961, as substituted w.e.f. 1st April, 1989, and prior to its substitution w.e.f. 1st June, 1999, what were permissible to be adjusted under the first proviso to Section 143(l)(a) were : (i) only apparent arithmetical errors in the return, accounts or documents accompanying the return; (ii) loss carried forward, deduction, allowance or relief, which was prima facie admissible on the basis of information available in the return but not claimed in the return, and similarly those claims which were, on the basis of the information available in the return, prima facie inadmissible, and were to be rectified/allowed/disallowed. What was permissible was correction of errors apparent on the basis of the documents accompanying the return. The AO had no authority to make adjustments or adjudicate upon any debatable issues. In other words, the AO had no power to go behind the return, accounts and documents, either in allowing or in disallowing deductions, allowance or relief. The legislative intent is very clear from the use of the word "intimation" as substituted for "assessment" that two different concepts emerge. While making an assessment, the AO is free to make any addition after grant of opportunity to the assessee. By making adjustments under the first proviso to Section 143(l)(a) no addition, which is impermissible by the information given in the return could be made by the AO. The intimation under Section 143(1)(a) cannot be treated to be an order of assessment. It further held that the expression "reason to believe" in Section 147 would mean cause or justification. If the AO has cause or justification to know or suppose that income had escaped assessment, he can be said to have reason to believe that income had escaped assessment. The expression cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion. The requirement is "reason to believe" and not to establish the fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed the requisite belief. Whether material would conclusively prove escapement of income is not the concern at that stage. This is so because the formation of the belief is within the realm of the subjective satisfaction of the AO. It followed ITO v. Selected Dalurband Coal Co. (P) Ltd. and Raymond Woollen Mills Ltd. v. ITO . It is further held that taxing income escaping assessment in the case of an intimation under Section 143(l)(a) is covered by the main provision of Section 147 as substituted w.e.f. 1st April, 1989, and initiating reassessment proceedings in the case of intimation would be covered by the main provision of Section 147 and not the proviso thereto. Only one condition has to be satisfied. Failure to take steps under Section 143(3) will not render the AO powerless to initiate reassessment proceedings when intimation under Section 143(1) has been issued by distinguishing Adani Exports v. Dy. CIT . It held accordingly, that the AO had jurisdiction to issue notice under Section 148 for bringing to tax income escaping assessment in an intimation under Section 143(l)(a) on the ground that the claim for bad debts by the assessee was not acceptable as the conditions for allowance specified in Sections 36(l)(vii) and (2) were not fulfilled.
14. Therefore, the assessment of these years can be reopened under Section 147 if the income of the assessee had escaped assessment by whatsoever reasons. The term "income escaped assessment" is enlarged to include cases falling within and enumerated in the Explns. (a) to (e), below Section 147. The present cases are claimed to fall in Clause (b) of the Explanation. This clause reads as under:
(b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the AO that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return.
15. In these cases the assessee has furnished the returns. No assessments were made, as processing of returns under Section 143(1) are not the assessments as aforesaid. There is no allegation that the assessee had claimed excessive loss, deduction, allowance or relief in the return. It is therefore, to be seen whether the assessee had understated the income in the return. The AO noticed that the assessee did it, namely, he understated the income.
16. The reopening of assessment for asst. yr. 1997-98 is to be examined first as this year is the starting point. Reasons recorded for reopening this assessment are as under:
In this case the return of income was filed on 31st Aug., 1998 showing total income of Rs. 1,51,290. However, on verification of audit report it is observed that there an adverse comment in the audit report regarding sundry debtors, creditors, loans and advances (ref. Schedule I, Para 3 of audit report).
There has been sharp fall in profit during the relevant financial year. Against profit of Rs. 8.09 lakhs shown in financial year 1995-96, the profit shown in financial year 1996-97 is only Rs. 1.49 lakhs. Though the receipts during the year has been half of what it was in previous year, it is noticed that unsecured loans have increased from Rs. 6,11,236 as on 31st March, 1996 to Rs. 9,42,560 during relevant financial year. Thus even though there has been sharp decrease in receipt and expenses, during the year, there has been phenomenal increase in unsecured loan. The requirement of funds, against, decline in receipts and expenses needs to be verified. The introduction of capital by all the partners of the firm also needs to be verified.
In view of the above stated facts, coupled with the adverse remarks given by the chartered accountant in Schedule 1 forming part of accounts, it can be concluded that income liable to taxation has escaped assessment.
17. There was no challenge to the validity of reopening for this year either before the AO or before the CIT(A); nor is there any discussion or finding on this issue in either of the order. It is challenged before Tribunal for the first time and both the Members allowed it to be raised and have dealt with the same, it being a question of law. The aforesaid reasons for reopening as extracted above are material to test the validity of reopening were not considered by either. In these circumstances the reopening question admitted for consideration has to be examined with reference to reasons recorded and the material contained therein. It might further be stated that reopening in this year is not on the basis of valuation report of DVO and therefore it cannot be considered to determine the validity or invalidity of reopening the assessment and the reference to DVO but has to be decided taking into consideration the reasons recorded aforesaid. In my opinion, therefore, the right course is to send the matter back for adjudication by the CIT(A) to decide the issue afresh in the light of the reasons and after affording adequate opportunity to the parties in the matter.
18. As for asst. yrs. 1995-96, 1996-97 and 1998-99, the reopening is for reasons which are identical except the quantum difference, recorded as under:
Assessee has constructed one bungalow scheme named as "Ashlesha Bungalows" at Anand Bakrol, Anand. The activities were carried out from financial year 1993-94. During the course of assessment proceedings for the asst. yr. 1997-98, it was noticed that certain site expenses such as carpentry work, fabrication work, plumping work, colour work, etc., were not tallied with vouchers. Further, it was also noticed that balances shown in the name of M/s Shiv Traders and M/s Ami Traders were also not tallied with the copies of accounts submitted by the concerned parties.
Considering these aspects, the case was referred to DVO, Ahmedabad, for working out cost of construction of the project. The DVO, Ahmedabad has scientifically worked out the expenses incurred during the asst. yr. 1995-96 amounting to Rs. 37,06,493 vide letter No. 2(28)DVO/2001-02/60(C), dt. 5th March, 2002, whereas, the assessee has shown expenses for the year under consideration was Rs. 27,45,946 which resulted into escapement of income to the tune of Rs. 9,60,547 for the asst. yr. 1995-96.
19. From these reasons it is evident that these assessments were reopened based on the fact that during assessment proceedings for asst. yr. 1997-98 the matter was referred to valuation cell and certain defects noticed in the books of account. The defects found by the AO in the books of account were with regard to (a) construction cost debited therein (b) discrepancy in the contra account of various parties i.e. supplier of building materials (c) absence of vouchers of expenses on construction account (d) discrepancy with reference to expenditure claimed under the head carpentry work, colour work, fabrication work, plumbing work attributable to amount of expenses claimed in the books of account vis-a-via amount of vouchers furnished (e) certain transactions or balances as appearing in the copy of accounts of various concerns not tallying with the accounts of the assessee. The DVO' report also indicated the qualifications with regard to failure of assessee in supplying details of quantities of different materials consumed and various services like water supply, sanitary installation and electrical provisions provided in the property; the non inclusion of cost of construction of one Bungalow (No. A-27) in the valuation report alleged to be constructed by NRI for which no documentary evidence was produced by the assessee , and the huge additions/alterations, renovation work carried out in some bungalows but the same was not considered in the valuation amount as the assessee claimed that additions/alterations work was carried out by the occupants. Therefore, correctness of assessee's claim could not be ascertained.
20. Further the registered valuer's report submitted by the assessee himself also indicated excess cost incurred in the construction to the extent of Rs. 1.51 lakhs as compared to the cost found recorded in assessee's books of account. Further, on comparison between DVO report and registered valuer report with respect to cost determined specifically in respect of Bitumen Road, showed sitting chair, Borewell pump, street lighting and cable laying with florescent tubes, and EPBX cable laying etc. were found not provided in the registered valuer's report furnished by the assessee. Extra item provided in the entire scheme was item-wise valued by DVO after physical inspection of site and building along with assessee and his Authorised Representative at Rs. 1,24,81,677 against which total value taken by the registered valuer in its report was only Rs. 34,52,964 without specifying each and every item. This material/ information was sufficient to form a belief that there was escapement of income in the asst. yrs. 1995-96, 1996-97 and 1998-99 as well. All these factors have rational connection with and relevant bearing on the formation of the belief that income had, escaped assessment. These reasons are not extraneous or irrelevant for the formation of belief of escapement of income. It has to be kept in mind that at the time of issuing notice under Section 148, the sufficiency or correctness of the material is not a thing to be considered. It is another thing that after reopening of the assessment the assessee could prove that the assumptions of facts, which were made the basis of reopening the assessments, were not fully correct.
21. The next question is whether the report of the DVO can be a valid ground for reopening. The reference was made under Section 131(l)(d) of the Act. There was a doubt about the powers of the AO to refer the matter to valuation cell and the Supreme Court decision in the case of Smt. Amiya Bala Paul v. CIT , has also cautioned, though did not clearly state that it was invalid. On the contrary it held that a reference could be made under Section 131(l)(d) of the Act. In this case reference was made under Section 55A of the Act and that action of the AO was held could not to be supported by a reference under Section 131(l)(d) of the Act. In other words, it held that a reference can be made under Section 131(l)(d) by way of commission.
22. Be that as it may, Section 142(2A) was introduced to validating the reference made with retrospective effect from 15th Nov., 1972, for purposes of assessment. It starts with the wording that "where an estimate of the value of any investment is required to be made, the AO requires the Valuation Officer to make an estimate of such value and report the same to him". The starting question is, "where an estimate of the value of any investment is required". What are the parameters for such requirement? When does this situation arise? One thing is obvious that it is for AO to decide. But, is it absolute power unguided by any material as parameters? In other words, is it his sweet will or it should have some rationale? The Act is silent on this. It has to be on entertaining the view that the assessee had not declared the true cost of construction in its books of account It is thus when the cost declared by assessee is lower. References made by AO on 26th Dec, 2001 during proceedings for asst. yr. 1997-98.
23. It is true that defects were minor and even though the defects found in the books of account were not so serious as to justify the rejection of book results for determining the income to the best of the judgment of AO, these are defects, could be relevant and justified for making a reference to the DVO and forming the belief that there was escapement of income. Small, howsoever, the defects may be, would be defects and do not lose the character of defects. Even if small defects found in the books regarding cost of construction or small discrepancy found in the statement of suppliers of building materials, these could be the valid and sufficient materials for forming the belief of escapement of income and in my opinion, they were good reasons for making a reference to DVO, where a huge difference of Rs. 87.66 lakhs in cost of construction was noticed. The reopening on these facts cannot be said to be unjustified.
24. The report of DVO constitutes a valid foundation or information to invoke the jurisdiction on the AO to reopen the assessment under Section 147. In view of various decisions referred, namely, Allahabad High Court in Smt. Shashi Jain v. ITO ; Delhi High Court in Bawa Abhai Singh v. Dy. CIT (2001) 168 CTR (Del) 521 : (2002) 253 ITR 83 (Del); and in Ganga Saran & Sons (HUF) v. ITO ; Madhya Pradesh High Court, in Vippy Processors (P) Ltd. v. CIT ; Madras High Court in Sri Krishna Mahal v. Asstt. CIT . The Supreme Court in the case of ITO v. Selected Dalurband Coal Co. (P) Ltd. (supra) has even held that report given by the Government Department after conducting inspection, giving reasonably specific estimate of excessive coal mining done by the assessee over and above the figures disclosed by it was sufficient for reopening the completed assessment. It is also observed that whether facts stated in the report are true or not, is not the concern at the stage of issuing notice under Section 148 for reopening the assessment. It might well be that the assessee may be able to establish that the facts stated in the said report are not true, but that conclusion can be arrived at only after making the necessary enquiry. At the stage of issuance of notice under Section 148, the only question is whether there was relevant material on which reasonable person could have formed the requisite belief. The report in this case was, though prepared for the purpose of bank Joan constituted 'information' before the AO as the market value of the property on the date of sale was considerably in excess of the consideration shown by the assessee in the sale deed. It might be true that the DVO report is an estimate of the cost of construction but to hold that no reopening can be made on the basis of such report may not be correct in view of the aforesaid.
25. The Punjab & Haryana High Court, in Grover Nursing Home v. ITO , held that though report of DVO cannot be made the sole basis for initiating action under Section 147 r/w Section 148, it could, certainly be considered with other facts for forming belief that assessee's income has escaped assessment. There being no explanation by the assessee about the difference between the cost of construction of building shown by the assessee and the cost determined by the DVO, reopening of assessment by issuing notice under Section 148 was valid. In the present cases the report of the DVO was not the sole basis but also the defects enumerated in the reasons recorded aforesaid. It was a case of a civil writ relating to asst. yrs. 1993-94, 1994-95, and 1995-96. The Court held "even though the report of the DVO cannot be made the sole basis for initiating action under Section 147 r/w Section 148, it can certainly be considered with other facts for forming the belief that the income of the assessee had escaped assessment and in the facts of the present case, it is not possible to hold that the belief formed by respondent No. 2 is not, based on any material whatsoever. On the basis of the above conclusion, the impugned notices do not suffer from any jurisdiction or legal infirmity, which may justify interference by this Court under Article 226 of the Constitution of India." It discussed the cases of Acchut Kumar S. Inamdar v. P.R. Hajarnavis ; Smt Amala Das ; Kamalam Rajendran v. IAC ; Desai Brothers v. Dy. CIT and CAT v. Laxmidebi Mehta (1994) 121 CTR (CM) 171 : (1993) 70 Taxman 399 (Col) and concluded that though the report of DVO cannot be made the sole basis for initiating action under Section 147 r/w Section 148 it can certainly be considered with other facts for forming the belief that the income of the assessee has escaped assessment; there being no explanation about the difference between the cost of construction of building shown by it and the cost determined by DVO, notice could not be quashed.
26. The cases relied on by the assessee relate to reopening of assessment before the amendment w.e.f. 1st April, 1989, on which date the provisions underwent substantial and material change and therefore are not of much help. The first case is of CIT v. Smt. Usha Mathur . In this case, before the Punjab & Haryana High Court, the assessee was deriving income from job work and interest, filed her return of income for asst. yr. 1989-90 and the assessment was completed under Section 143(1). In this case, assessee and her husband constructed a house. During the assessment proceedings in case of husband of the assessee, AO referred the matter to the valuation cell. On the basis of report, an addition of Rs. 10,704 was made in his hands on account of investment in construction of house. The AO issued notice under Section 148 to the assessee on the basis of that valuation report. In the meantime, her husband challenged the action of the AO in making the addition in his income and the Dy. CIT(A) accepted the contention of the assessee's husband and deleted the addition. Revenue did not challenge that order of the Dy. CIT(A). The High Court decided the case on merits and in view of the smallness of the amount. It did not entertain Revenue's appeal on the plea that detailed finding has been recorded by the Tribunal on the basis of evidence on file and no error in the finding of fact, recorded by the Tribunal was pointed out and therefore, no substantial question of law (had) arisen for consideration of the Court in the appeal. No finding or a verdict or a proposition on the question of law regarding validity of reopening of assessment on the basis of report of the DVO was given, or discussed.
27. In the decision of the Tribunal Calcutta Bench in the case of Roof & Tower Construction (P) Ltd. v. Asstt. CIT (2001) 72 TTJ (CM) 433 the AO reopened the assessment under the belief that the sale consideration was suppressed by the assessee and that belief was formed on the basis of report of the DVO. It was held by the Tribunal that there was no direct nexus between report of the DVO and the assessment of suppressed sales consideration and that addition could not be made to the returned come because the sale price as per accounts of the assessee was less than the value indicated in the report of the DVO. Merely because the report of the DVO suggests higher fair market value than the sale price disclosed by the assessee, it cannot be said that there is any reason to believe that income has escaped assessment. It was not a case of difference in the cost of construction recorded in the books of account, which has been disputed and the DVO has arrived at higher cost of construction, after having physical inspection and measurement of the property. It was a case of assessment of higher consideration received by the assessee as if DVO report depicted the actual sale consideration. The Supreme Court decision in K.P. Varghese does not support it. Thus, this case is of no help to the assessee.
28. In Vijay Kumar (supra) the assessment was reopened by issue of notice under Section 147(b) for asst. yrs. 1986-87 and 1987-88. The reopening was held to be not justified by the Tribunal on the ground that reference could have been made by the AO to the DVO only while trying the suit and certainly not in respect of completed suit where assessment had already been completed under Section 143(1) and as such AO had no reason to make the reference to DVO under Section 131(l)(d). As already discussed, the scope of Section 143(1) prior to amendment in 1989, where the earlier provisions of Section 143(1) were applicable and assessments were framed accordingly. However, in the case before us no assessment could be said made as the returns have been processed under Section 143(l)(a) and the intimation' issued under Section 143(l)(a) is not an assessment. Furthermore, the power of the AO to make a reference to the DVO has been specifically inserted by introduction of Section 142A with retrospective effect. Thus this case also is of no help to the assessee for the relevant assessment years namely 1995-96, 1996-97 and 1998-99 under consideration.
29. In Bhola Nath Majumdar v. ITO Gauhati High Court held that there is no authority in the ITO under Section 55A to refer the valuation of a property after the assessment is completed by him, as the purpose of Section 55A is not to arm the ITO to make a roving and fishing inquiry for finding out materials for reopening or revising a completed assessment. In this case relevant assessment years under consideration were 1984-85 and 1985-86. which were reported on the basis of valuation report obtained under Section 55A after the original assessments were completed. The case before us is not a case when assessment has already been completed. It is a case where only processing of the returns was there by issue of intimations under Section 143(l)(a), Furthermore, a reference was made to the DVO during the course of assessment proceedings for asst. yr. 1997-98 after pointing out defects in the cost of construction as recorded by the assessee in his books of account and discrepancy in the statement of supplier of building materials, as compared to their respective balances in assessee's books of account. Thus this case is also of no help to the assessee.
30. On justification/power of AO to make a reference to the DVO a reference to Section 142A as introduced by Finance (No. 2) Act, 2004 with retrospective effect from 15th Nov., 1972 would be useful. According to Sub-section (1) of this section, where an estimate of the value of any investment is required to be made, the AO may require the Valuation Officer to make an estimate of such value and report the same to him. Sub-section (2) grants powers to the Valuation Officer to whom a reference is made under Sub-section (1) shall, for the purpose of dealing with such reference, to have all the powers that he has under Section 38A of the WT Act, 1957. Sub-section (3) of Section 142A, provides that on receipt of report from the Valuation Officer, the AO may, after giving the assessee an opportunity of being heard, take into account such report in making such assessment or reassessment. While making a reference to the DVO the only question the AO has to find out is the quantum of unaccounted investment not recorded in the books of accounts. It is only after knowing the quantum of unexplained investment or the unaccounted money that the second step before the AO is to make addition under any of the provisions contained under Section 69/69A/69B or 69C. The AO made a reference to the DVO, and found defects in the construction expenses recorded in the books of account, during scrutiny assessment proceedings for asst. yr. 1997-98, therefore there is. no infirmity in the action of the AO for making reference to the Valuation Officer for determining the quantum of unexplained investment involved in the cost of construction. The learned Authorised Representative cited certain decisions with reference to powers of AO to make a reference, but these all relate to the preamended position, therefore not applicable to the facts and circumstances of the instant case after the amendment brought in by the insertion of Section 142A with retrospective effect.
31. There is no dispute to the legal proposition followed by the judicial precedents that the report of the DVO is only by way of guidance and before using the same the AO should give full opportunity to the assessee and also give reasons and justification for adopting the valuation made by the DVO, in place of construction cost actually debited in the books of account which is also supported by the report of the registered valuer furnished by the assessee. In Shaktl Builders (supra) the Tribunal held that Section 142A has been brought on the statute book retrospectively in order to nullify the effect of the judgment of the Supreme Court in the case of Smt. Amiya Bala Paul v. CIT (supra) wherein it has been held that none of the provisions of the Act conferred any power on the AO to refer the matter to the Valuation Officer for determining the value of investment mentioned in Section 69 or Section 69A or Section 69B. Because of this judgment, all the references to Valuation Officers made by AO in various cases throughout the country became illegal being without authority of law and consequently, the additions made on the basis of valuation reports made by Valuation Officers could be quashed/set aside/deleted by the appellate authorities/Tribunal/Courts. Faced with this situation, the Parliament inserted Section 142A with retrospective effect so as to save the past actions of AO. However, the Parliament in its own wisdom considered it necessary to exclude certain assessments from retrospective application of Section 142A. Accordingly, a proviso was added to such section. The legislature has excluded only the cases falling in the second category, i.e., the concluded assessments from the operation of the provisions of the main section in order to avoid the hardships/chaos, which would have been caused/created because of the retrospective operation of such section. In other words, the legislature considered it necessary to confer the powers on AO retrospectively only in those cases which are pending for adjudication before the higher forum. If the contention of assessee's counsel were accepted then the entire purpose of the retrospective legislation would be lost. Proviso to Section 142A is applicable only to those cases where assessments have been made on or before 30th Sept., 2004, and such assessments have become final and conclusive by such date. Consequently, where such assessments have not become final due to pedency of appeal, this proviso would not be applicable and the reference made by AO to DVO is to be deemed validly made.
31.1 It is therefore held at only to those cases where assessments had been concluded before 30th Sept., 2004, proviso to Section 142A would be applicable and where the assessments had not concluded on that date due to pendency of appeal, etc. reference made to DVO by AO was deemed to have been validly made,
32. In Hanemp Properties (P) Ltd. v. Asstt. CIT (supra) before the Tribunal, Delhi Bench, it was held that where there is significant undervaluation of the property in the consideration as disclosed in the agreement between the parties and there is no plausible explanation for that undervaluation, the same would lead to the inference of evasion of tax or in other words the understatement of consideration also. Therefore the contention that, in the absence of direct evidence, the valuation report made by the Departmental valuer could not lead to the assessment of any undisclosed investment within the meaning of Sections 69, 69A, 69B and 69C could not be accepted. The reference made by the AO to the Departmental valuer could not be held to be bad in law, in view of the provisions of Section 142A, as inserted by the Finance (No. 2) Act, 2004, with retrospective effect from 15th Nov., 1972; that the Departmental valuer was a qualified engineer employed in the parent Department of CPWD. Being a civil engineer he was an expert in the field of civil constructions. The opinion of an expert is admissible as evidence in a Court of law. If there was a significant undervaluation that would be material 'evidence of understatement of consideration also in the event of the undervaluation not being satisfactorily explained by the assessee. In this case the decision of Amiya Bala Paul (supra); Britannia Industries Ltd. v. Dy. CIT ; CIT v. Kelvinator of India Ltd. (2002) 174 CTR (Del)(FB) 617 : (2002) 256 ITR 1 (Del)(FB); C.B. Gautam v. Union of India (1992) 108 CTR (SC) 304 (1993) r/w (1993) 110 CTR (SC) 179 : (1993) 199 ITR 530 (SC); Raza Sugar Co. Ltd. v. CIT ; Rajinder Nath v. CIT ; Roof and Tower Construction (P) Ltd. v. Asstt. CIT (supra); KM. Sharma v. ITO ; K.P. Varghese v. ITO (supra); Vidya Sagar v. CIT are considered.
33. In Smt. Subhas Agarwal (supra) the Allahabad High Court considered the scope of the proviso to Section 142A and the contention of the Revenue was that the appeal under Section 260A like an appeal before Tribunal is also a continuance of the assessment proceedings and it has to be treated as such within the meaning of the aforesaid proviso and since the appeals before the High Court are still pending which could not be finalised before 30th Sept., 2004, therefore, the case would not stand excluded from the applicability of the provisions of Section 142A of the IT Act. The High Court held that "s. 260A of the IT Act is a provision of appeal to High Court only on the satisfaction of the High Court that the case involves substantial question of law. It is not an appeal under the statute giving a vested right to challenge the assessment order after the assessment proceedings had crossed the stage of Tribunal. Even otherwise without any further detailed discussion it is to be kept in mind that in the appeal under Section 260A of the IT Act, the High Court would only look into the substantial question of law and would not enter into question of fact or reapplication of evidence unless the findings recorded are perverse. The order in the instant case passed by the Tribunal cannot be said to be bad in law nor it can be said that it suffers from any such error, which raises any substantial question of law. If the Tribunal while considering the appeals has correctly stated the facts and has rightly applied the law as was applicable on the date of consideration of the appeals, the same cannot be said to be faulty on any ground, which was not available to the Tribunal on the date of decision." It is further held that "the order passed by the Tribunal cannot be said to be erroneous also on the ground that on the date when the appeals under Section 260A of the IT Act are being decided some other view could be taken, if these appeals are taken as continuance of the assessment proceedings."
34. As observed by the Supreme Court in Pooran Mal v. Director of Inspection (Inv.) and Dr. Pratap Singh v. Director of Enforcement and Ors. , that an information even though collected during illegal search are capable to be utilized by the Department for several purposes. It has been held that they have evidentiary value. Therefore, the valuation report obtained during the course of assessment under Section 143(3) r/w Section 147 for asst. yr. 1997-98 can be utilized and made basis for reopening the assessments for asst. yrs. 1995-96, 1996-97 and 1998-99.
35. In Bishnu Talkies v. CIT (supra) the High Court of Gauhati held that the function of a valuer of a property is a technical function requiring expert investigation for the purpose of estimating the cost of construction. A report of a valuer estimating the cost of construction would only be an opinion of the expert on a technical matter. It followed its earlier decision in the case of CIT v. Smt. Basana Rani Saha . The report of the Valuation Officer is an opinion and it may create suspicion and doubt. Suspicion and doubt cannot be treated as opinion capable of forming reason to believe within the meaning of Section 147. A report of a valuer estimating the cost of construction would only be an opinion of the expert on a technical matter and it cannot be treated as an opinion forming reason to believe within the meaning of Section 147 and there being nothing on record to show that AO had recorded reasons, reopening merely on the basis of the report of the Valuation Officer was not valid. It was a reference to High Court involving asst. yr. 1988-89. Apparently a case before amendment in Section 147 and insertion of Section 142A of the Act w.e.f. 1st April, 1989.
36. In Umiya Co-operative Housing Society Ltd. (supra), the Ahmedabad Bench of the Tribunal held in a case for asst. yrs. 1997-98 to 1999-2000 that AO was not competent to refer the matter to the DVO at the time when no proceedings were pending before him. Section 142A empowers the AO to require the Valuation Officer for making the estimate of the value of any asset, which the AO may require for the purpose of making assessment or reassessment. It does not empower the AO to refer the matter to the DVO for gathering information for reopening of assessment. Making of reassessment and reopening of assessment are two different things. For issuing notice under Section 148, there should be reason to believe that any income has escaped assessment. Said condition prescribed in Section 147 exists even after the insertion of Section 142A. Here in this case the reference was made during the course of assessment proceedings for asst. yr. 1997-98, therefore the above case would be no help to the assessee.
37. Various defects in the books of account along with vast difference in the report of DVO as compared to cost of construction recorded in assessee's. books of account, which by itself is indicative of the unreliability of the accounts maintained by the assessee, the qualification in DVO report and the difference reflected also in the cost determined by the registered valuer in the report furnished by the assessee himself, were sufficiently valid reasons for forming a belief that there was escapement of income and uphold the reopening of assessment for asst. yrs. 1995-96, 1996-97 and 1998-99.
37.1 On merits it may be observed that some additions were called for. Department takes the DVO report as sacrosanct and makes the addition for the entire difference in cost worked out in DVO report and as shown in the books. On the contrary assessee's case is books depicts the real cost and no addition is called for at all. Neither seems be right in this regard. The report of DVO in view of clear provisions of Section 142A(3) has to be used by the AO in making the assessment or reassessment. On the contrary, for making addition Department cannot place sole reliance on DVO report and make the addition of entire difference. It is not sacrosanct but an estimate by a technical person and taken in advisory capacity and as a mark of guidance. On the contrary the mistakes pointed out by the AO being very venial, might not justify the rejection of books of account under Section 145(3), but these would be relevant to make disallowances, and additions to that extent have to be made. The books of account can be relied upon for what that is recorded therein and not, for that which is not recorded in the books. For that rejection of books for defect found therein may not be relevant DVO report shows a huge difference, a part of which of course is explained by the assessee but the other part remained unexplained. Therefore the Revenue cannot place full reliance on the DVO report and make addition for the entire difference. DVO report though of a technical expert, as aforesaid, has to be taken as a guidance and cannot be disregarded in view of the specific provisions of Section 142A(3) for taking into consideration the report of DVO in making assessment or reassessment on giving the assessee an opportunity of being heard on such report. The report of registered valuer furnished by the assessee also supports the fact that construction cost recorded by the assessee in its books of account was lower by Rs. 1.51 lakhs it would also not be justified to wholly rely on the accounts and making no addition at all. Keeping in view the totality of facts and circumstances of the case, it would be right to retain the addition to the extent of 5 per cent (five per cent) of cost of construction as recorded by the assessee in its books of accounts in respective assessment years under consideration, so as to cover unaccounted expenses with regard to observations made by the DVO in his report as well as the excess cost worked out by the own valuer of the assessee, as compared to the cost actually recorded by the assessee in its books of account, as discussed hereinabove.
38. My opinion therefore on the questions referred is as under:
1. On the facts and in the circumstances of the case and in law, the proceedings initiated under Section 147 of the Act, for asst. yr. 1997-98, is to be set aside to examine validity of proceedings in the eyes of law and the consequent subsequent proceedings.
And also On the facts and circumstances of the case, when the assessee having not disputed the sufficiency of reasons for reopening, neither before the AO nor before the CIT(A), nor where any decision was rendered by the CIT(A), nor there is any material available on record for deciding the question of sufficiency of reasons of reopening, which has been raised for the first time before the Tribunal, the matter is required to be restored to the CIT(A) for deciding the issue after appreciation of reasons recorded for reopening the assessment under Section 147.
2. The rejection of books of account for asst. yr. 1997-98 was justified so as to authorise the AO to make reference to the DVO asking to determine the cost of construction of the building known as "Ashlesha Bungalows" situated at Anand Bakrol Road, Bakrol, Anand, having 31 units out of which having 20 units of A-type, 2 units of type-C, 1 unit of type-D- double-storied and Bungalow A-27.
And also On the facts and in the circumstances of the case and in law, after insertion of Section 142A in the statute by the Finance (No. 2) Act, 2004, with retrospective effect from 15th Nov., 1972, a reference made by the AO to the DVO to make an estimate of such value and report, was justified.
3. On the facts and in the circumstances of the case and in law, the addition made on account of alleged investment in construction of building, known as "Ashlesha Bungalows" situated at Anand Bakrol Road, Bakrol, Anand, having 31 units out of which having 20 units of A-type, 2 units of type-C, 1 unit of type-D-double-storied and Bungalow A-27 during the previous year relevant to asst. yr. 1997-98 on the basis of huge difference in the cost estimated in the valuation report of the DVO coupled with other defects pointed out and the difference in such value even by assessee's own appointed registered valuer can be sustained in all the years.
And also On the facts and in the circumstances of the case and keeping in view defects pointed out in the books of accounts, failure of the assessee to furnish details regarding quantities of different building materials consumed and various services like water, sanitary installation and electrical provisions in the building, extra items valued individually by the DVO after physical inspection of building, against which a lump sum value at a very low figure taken by the registered valuer in his report, warrants and justify addition of 5 per cent of the cost of construction recorded by the assessee in his books of accounts.
Forasst. yrs. 1995 96, 1996 97 and 1998-99
4. On the facts and in the circumstances and in law, the proceedings initiated under Section 147 of the IT Act, 1961, on the basis of valuation report of the DVO procured by the AO during the course of proceedings under Section 147 of the Act for asst. yr. 1997-98, coupled with other defects pointed out above can be held to be valid proceedings in the eyes of law and, consequently the subsequent proceedings also can be held to be valid.
And also Where returns have been merely processed under Section 143(1), there was reason to believe that there was an escapement of income under Section 147, in view of various defects found in the books of accounts in the asst. yr. 1997-98 regarding cost of construction of very same building which was also under construction during asst. yrs. 1995-96, 1996-97 and 1998-99, huge difference of Rs. 87.66 lakhs found as per DVO's report, shortfall of Rs. 1.51 lakhs as per registered valuer's report, failure of the assessee to furnish details of materials consumed and various services like water, sanitary installation and electrical provisions in the building, qualification in the DVO's report regarding huge cost incurred in addition/alteration work carried out but not considered in the valuation report.
And on the answer to aforesaid question above being affirmative, on the facts and in the circumstances of the case the report of DVO which was obtained during the course of proceedings under Section 143(3)/147 for the asst. yr. 1997-98 in respect of very same building which was also under construction during the asst. yrs. 1995-96, 1996-97 and 1998-99, can be validly used during the course of assessment proceedings under Section 143(3)/147 for the asst. yrs. 1995-96, 1996-97 and 1998-99.
4. Both the Members opined that on the facts and circumstances as well as in law, the rejection of books of the account may not be valid in the eyes of law for all these three years.