Income Tax Appellate Tribunal - Indore
Pradeep Soni & Others, vs Assessee on 12 February, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL,
INDORE BENCH, INDORE
BEFORE SHRI JOGINDER SINGH, JUDICIAL
MEMBER AND
SHRI R.C. SHARMA, ACCOUNTANT MEMBER
ITA Nos.177 to 179/Ind/2009
A.Ys. - 2000-01 to 2002-03
Pradeep Soni & Others
L/H. Late Babulal Soni,
Milan Sweets & Namkeen,
189, M.P. Nagar, Bhopal
PAN - ATFTS 9970 H Appellant
Vs.
ITO-1(2), Bhopal
Respondent
Appellant by Shri R.N. Gupta, CA
Respondent by K.K. Singh, CIT, DR
ORDER
PER SHRI R.C. SHARMA, Accountant Member
These appeals are filed by the assessee against the consolidated order of ld. CIT(A)-I, Bhopal, dated 12.2.2009, for the assessment year 2000-01 to 2002-03.
2. Facts in brief are that the assessee was engaged in the business of making and selling of namkin and sweets under the name and style of M/s. Milan Sweet and Namkin. Assessee
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filed return of income declaring income of Rs. 1,40,000/- and Rs. 1,50,000/- for the assessment year 2000-01 and 2001-02 on 30th March, 2002. Return for the assessment year 2002-03 was filed on 09.08.2002 declaring income of Rs. 1,60,000/-. Income was returned on the basis of retail trader offering income @ 5% of the gross receipt. Gross receipts were shown at Rs. 24.80, 26.80 and 32.00 lacs in the assessment year 2000-01, 2001-02 and 2002-03 respectively. No books of account were maintained on the plea of Section 44AF of the Income-tax Act, 1961. All the returns as per Department were processed u/s 143(1). On 2.1.2006 the AO made a reference to the DVO u/s 142A in respect of all the assessment years under consideration. The DVO's report was obtained by the Assessing Officer on 9.3.2006. Thereafter, the AO issued notices u/s 148 on 28.3.2006 for all the years under consideration. In the reasons so recorded the AO has mentioned that the assessee has concealed particulars of investment made in construction of building. The amount arrived at by the DVO as per his report dated 9.3.2006 was bifurcated in three years and exactly the same amount was 2
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mentioned in the reasons so recorded for reopening the assessment. While framing the assessment u/s 143(3) read with Section 147, the AO referred the survey carried out u/s 133A on 18.12.2002 relevant to the assessment year 2003-04 at the business premises of the assessee. As per AO, no books of account or rough registers or sales vouchers were found during survey. Cash of Rs. 37,970/- was found. In the statement recorded during survey, assessee, Shri Babulal Soni admitted the non-maintenance of the books of account. Shri Babulal Soni also stated that whatever items of raw materials like milk, vegetable, mawa are brought to the shop, the payment for the same and payment to the workers were made in cash only. During survey, it was also found out that building premises situated at 189, Zone I, M.P. Nagar was owned by Smt. Bhagwati Soni W/o Shri Babulal Soni. The business activity was done from this place under the name and style of M/s. Milan Sweets and Namkeen and Milan Fast Food.
3. The AO did not accept the assessee's version regarding annual sales and profit thereon in the respective years, he 3
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estimated the sales at Rs. 1.10 crores in the assessment year 2000-01, Rs. 1.15 crores in assessment year 2001-02 and Rs. 1.20 crores in assessment year 2002-03 as against the sales of Rs. 24.80 lakhs, Rs. 26.80 lakhs and Rs. 32.00 lakhs for the assessment years 2000-01, 2001-02 and 2002-03 respectively.
As against the profit rate of 5 % applied by the assessee u/s 44AF, the AO has computed profit by applying profit rate of 15 % on the sales estimated by him.
4. As regards the building, situated at 189 M.P. Nagar, it was submitted before the AO that the said building has been constructed on a plot purchased from Bhopal Development Authority by the assessee's mother Smt. Bhagwati Soni in the year 1977. This plot was allotted under the freedom-fighter's quota, because appellant's father was a freedom fighter. Mother of the appellant Smt. Bhagwati Soni died on 7/8/2001, and after her death the plot alongwith the building constructed thereon was mutated in the name of his father Shri Babulal Soni. Shri Babulalji Soni also died on 27.6.2005. It was stated before the AO that for the construction of the building, the mother of the assessee obtained the permission 4
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on 2.2.1977 from the Municipal Corporation, Bhopal ( Copy attached ), and immediately after having obtained such permission, she started constructing the building. It is submitted that the Basement and the ground floor was completed first, i.e. before 30.01.1987 as is evident from the Municipal Authorities' notice dated 30.01.87, and 23.02.87. The further construction up to the mezzanine floor ( third floor) was completed before 31.3.99, and thereafter for making construction of further two floors above the aforesaid third floor, permission was obtained from Municipal Authorities on 21.04.99 ( Copy of approved map was filed ). On the strength of Municipal permission dated 21.4.99, further floors i.e. fourth and fifth floor were constructed in financial year 1999-
2000, and 2000-01 . The construction was however, finally completed before 17.1.2001. This fact is also evident from the following documents :-
(i) Sanction of unauthorized construction by approval dated 17.01.2001 ( Copy filed ).
(ii) Municipal Corporation Compounding Fee Receipt No.2202/57 dated 17.01.2001 ( Copy filed). 5
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(iii) Municipal Corporation Compound Fee Demand Notice dated 16.1.2001. ( Copy filed )
5. It was also submitted that the above documents conclusively prove the fact that the first three floors of the house (basement, ground and mezzanine ) were completed before 31.3.99. The subsequent two floors were completed in financial year 1999-2000 and 2000-01. ( Relevant assessment years 2000-01 and 2001-02). Thus the above documents establish the fact that the first three floors were completed before 31.3.99 i.e. up to assessment year 1999-2000. The other two floors i.e. fourth and fifth floors were constructed and completed in assessment year 2000-01 and 2001-02.
6. By referring to the reference to the DVO u/s 142A on 2nd January, 2006, and on the basis of DVO's report dated 9.3.2006, an addition of Rs. 37 lakhs, Rs. 50 lakhs and Rs. 58.98 lakhs were made u/s 69 on account of unexplained investment in building. Aggrieved by the order of AO, the assessee filed the appeal before the ld. CIT(A). Before the ld. CIT(A), the assessee challenged the validity of reopening of 6
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assessment, on the plea that merely on the basis of DVO's report, the assessment cannot be reopened.
7. It was submitted that in all the above three assessment years, the issue of notice u/s 148 and the re-assessment made are unlawful and without jurisdiction and, therefore, the re-
assessment orders for all the three assessment years be cancelled. It is added that the regular returns in the normal course of the said years were filed on the dates as under :-
1. A.Y. 2000-01 30.03.2002
2. A.Y. 2001-02 30.03.2002
3. A.Y. 2002-03 09.08.2002
8. It was argued that after submitting the returns above, the appellant did not receive any communication from the Department as to the disposal of the said returns. Time period for issue of notice u/s 143(2) also expired. The re-assessment orders show that the AO had made reference u/s 142A of the Income-tax Act, 1961, to the DVO for the assessment of cost of construction of the building. The particulars of which have been given by the Assessing Officer in para 2 of his order. The DVO submitted the report to the AO vide letter dated 9.3.2006 7
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as mentioned by the Assessing Officer in his assessment order. The A.O. further mentions in his order that the DVO vide letter dated 27.3.2006 clarified that the cost of construction has been distributed as under :-
1. Financial year Rs.37,00,000 1999-2000 ( 40000000-30000) (Credit of salvage)
2. Financial year Rs. 50,00,000/-
2000-01
3. Financial year Rs. 58,98,334/-
2001-02 Total Rs. 1,45,98,334/-
It was further submitted that the AO in the assessment order further says that based on the findings of DVO,notices u/s 148 were issued on 28.3.2006 which were served on appellant on 5.4.2006 and thus he issued notices u/s 148 for all the said three years and in the said notices he specifically mentioned that the above reported cost of the DVO is proposed to be assessed. It was also contended that in view of this position, the re-assessment proceedings and the issue of notices u/s 148 are unlawful and without jurisdiction because
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(i) Reference to u/s 142A is also invalid because on the date when such reference was made no proceedings of assessment/re-assessment were pending.
(ii) The issue of notices u/s 148 since issued solely on the basis of DVO's report are impermissible in law and, therefore, the issue of such notices u/s 148 are wholly unlawful and without jurisdiction.
9. Validity of reference made to the DVO u/s 142A was also challenged on the plea that no assessment proceedings were pending as on 2nd January, 2006, when reference was made to the DVO. Reliance was placed on the decision of the Jurisdictional High Court in support of the proposition that where no assessment proceedings were pending on the date of issue of commission, the Commission issued to the DVO u/s 131(1)(d) to ascertain the cost of construction was invalid. For this purpose, reliance was also placed on the decision of M.P. High court in the case of Chowdhary Builders Private Limited, 209 CTR 133. Reliance was also placed on the decision of 9
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Hon'ble M.P. High Court in the case of Navendram Ahuja, 290 ITR 453, ( M.P.), wherein it was held that commission u/s 131(1)(d) could be issued by the Assessing Officer only during pendency of the assessment proceedings and the reference by the Assessing Officer to the DVO being prior to the initiation of assessment proceeding was not valid and consequently valuation report of the DVO cannot be made use for making any addition u/s 69 in respect of unexplained investment in construction of building.
10. Trading addition made by estimating sales at higher figure was also challenged on the plea that there was no material or any evidence before the AO to assume sale at Rs. 1.10 crores in the assessment year 2000-01, Rs. 1.15 crores in assessment year 2001-02 and Rs. 1.20 crores in assessment year 2002-03 as against the sales of Rs. 24.80 lakhs, Rs. 26.90 lakhs and Rs. 32.00 lakhs for the assessment years 2000-01, 2001-02 and 2002-03 respectively. It was also contended that the assessee was carrying on retail trade of sweet and namkeen and since sales was below Rs. 40 lakhs, no books of account were maintained and in the return of 10
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income, profit was shown at 5% of the sales. However, the ld. CIT(A) did not accept the assessee's contention with regard to validity of reopening and confirmed the reopening of assessment after having the following observations :-
"4.1 I have considered the above submissions. The ld. Authorized Representative seems to be presuming too much and seeks to build his case on mere hypothetical assumptions. The easiest option that could have been easily available was to seek inspection of the office records and base his arguments on the facts gathered form there. It has always to be remembered that there is no presumption against the law or its implementation.
Nor is the issue of notices u/s 148 solely on the basis of DVO's report impermissible in law, as the ld. Authorized Representative seems to suggest. As has been held in the decision in the case of CWT vs. Chhatrshal Sinhji D. Zala,(1981) 25 CGR 260 91982) 8 Taxman 205: (1982) 135 ITR 826 ( Guj), ordinarily a valuation report can constitute information for the 11
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purpose of Section 147(b). It was also held in Amrut Talkies vs. ITO, (1984) 150 ITR 386 (Karn) that assessments completed after accepting the cost of construction of a registered valuer and later, on the basis of the report of the official valuer showing a higher cost of construction, action initiated u/s147(b) was held to be valid. Obviously, the notices issued u/s 148 were valid.
4.2 To my mind there is no merit in the ld.
Authorized Representative's submissions that the issue of notices u/s 148 was invalid and without jurisdiction. The facts attending the present matter speak for themselves. The expression " reason to believe" introduced in Section 147 by the Amending Act, 1989, is well settled through a plethora of rulings. It is not a condition precedent that the AO should convene the assessee, or to intimate to him the nature of the alleged escapement or to give him an opportunity of being heard, before he decides to operate the powers conferred by the Section. The 12
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expression " reason to believe" postulates belief and the existence of reasons for that belief. The belief must be held in good faith, it cannot be merely a pretense. There should be facts before the AO that reasonably give rise to such belief but they need not at that stage be irrefutably conclusive to support his tentative conclusion. Such belief at that stage obviously, is a tentative belief to be examined and scrutinized on such evidence as may be available in the proceedings for assessment or reassessment. The satisfaction of the AO for the purpose of reopening an assessment is subjective in character and the scope of appellate review is limited. When the reasons recorded show a nexus between formation of belief and the escapement of income, a further enquiry about the adequacy or sufficiency of the material to reach such belief is not open to scrutiny. These propositions are trite and it would be sufficient to advert to the decision of the Hon'ble Gujarat High Court in Praful Chunilal Patel : Vasant Chunilal Patel 13
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vs. ACIT, (1999) 236 ITR 832, 839 ( Guj ) where it was held thus :
"As noted above the provisions of Section 147 require that the AO should have reason to believe that any income chargeable to tax has escaped assessment. The word " reason" in the phrase " reason to believe " would mean cause or justification. If the AO has a cause or justification to think or suppose that income had escaped assessment he can be said be have a reason to believe that such income had escaped assessment. The words "reason to believe" cannot mean that the AO should have finally ascertained the facts by legal evidence. They only mean that forms a belief from the examination lie makes and if he likes from any information that he receives. If he discovers or finds or satisfies himself that the taxable income has escaped assessment, it would 14
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amount to saying that he had reason to believe that such income had escaped assessment. The justification for his belief is not to be judged from the standards of proof required for coming to a decision. A belief though justified for the purpose of initiation of the proceedings under Section 147 may ultimately stand altered after the hearing and while reaching the final conclusion on the basis of the intervening enquiry. At the stage where he finds a cause or cause or justification to believe that such income has escaped assessment the AO is not required to base his belief on any final adjudication of the matter.. In cases where the AO had overlooked something at the first assessment there can in opinion be no question of any change of opinion when the income which was chargeable tot ax is taxed as it ought to have been under the law but was not 15
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due to an error committed at the first
assessment."
4.3 The function of the AO is to administer the Act with solicitude for public treasury and with fairness to the tax payers. He is necessarily armed with great powers, Up to four years an assessment is open to his unreserved consideration on his formation of the requisite belief. If he has such reason, he has the power, and we may add that it is his duty to reopen the door and demand the amount legally owing. His formation of belief is not a judicial decision, but an administrative decision. It does not determine anything at this initial stage but the AO has a duty to proceed so as to obtain what the taxpayer was always bound to pay if the increase is justified at all.
The decision to initiate the proceedings is not to be preceded by any judicial or quasi-judicial enquiry. His reasoning may be the result of official information or his own investigation or may come from any source that he considers reliable. His reason is not to 16
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be judged by a court by the standard of what the ideal man would think. He is the actual man trusted by the legislature and charged with the duty of forming of a belief, for the mere purposes of determining whether he should proceed to collect what is strictly due by law, and no other authority can substitute its standard of sufficient reason in the circumstances, or his opinion or belief for his. Unless the ground or material on which his belief is based, is found to be so irrational as not to be worthy of being called a reason by any honest man his conclusion that it constitutes a sufficient reason really existed, and if it did whether it was so irrational as to outside the limits of his administrative discretion with which the AO honestly comes to a conclusion that a mistake has been made, it matters nothing so as his jurisdiction to initiate the proceedings u/s 147 is concerned that he may have come to an erroneous conclusion whether on law or on facts. His jurisdiction to initiate proceedings u/s 17
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147 for assessment and re-assessment is even in such case correctly and rightly exercised though he may have taken an erroneous view of the law with regard to the mistake committed at the first assessment proceedings that he has found out.
Therefore, unless it is shown that the AO enquired into the matter at all or that he never honestly believed that a mistake has been made the result of his investigation and initiation of the proceedings u/s 147 of the Act cannot be challenged on the ground of want of jurisdiction. The pleadings urged by the ld. Authorized Representative on the point of jurisdiction are, therefore, rejected. "
11. The ld. CIT(A) also confirmed the action of the AO with regard to the estimation of the sales and the trading addition made by applying net profit rate of 15 %. Aggrieved by the order of the ld. CIT(A), the assessee is in further appeal before us in respect of all the years under consideration. Following common grounds have been raised.
I.T.A.No. 177/Ind/2009 ( A.Y. : 2000-01 ) :
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12. The assessee has taken the following grounds of appeal:
"1.That on the facts & in the circumstances of the case, the decision is contrary to law, materially incorrect and unsustainable in law as well as facts, and that all the findings of the learned lower authorities therein are also contrary to the evidence and incorrect.
2.That on the facts & in circumstances of the case and in law, the issue of notice u/s l48 & the re-
assessment made are unlawful and without jurisdiction and, therefore, the same be cancelled.
3.That on the facts & in the circumstances of the case and in law, the learned lower authorities erred and not justified in estimating the assessee's sales at Rs.1,10,00,000/- and applying net profit @ 15% thereon and thus estimating the income of the assessee at Rs.16,50,000/-. Such estimates are purely wild guesswork, without reference to any evidence or material, therefore be quashed and the business income as shown in the return be accepted. 19
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4.That on the facts & in the circumstances of the case and in law, the reference to valuation cell for the assessment of the cost of construction by the A.O. to the DVO is wholly unlawful and unjustified and the DVO's report based on wrong assumption of facts is an inadmissible evidence in law hence the addition made at Rs.37,00,000/- on the basis of such erroneous report is unlawful and unjustified and, therefore, be deleted.
5.That on the facts & in the circumstances of the case and in law, the report of the DVO is not based on proper appreciation of the facts, and that he has wrongly taken that the floors basement to fifth floor were constructed during the period 1.4.99 to 31.3.2003, and hence such report is not a reliable piece of evidence, and the addition made at Rs.37,00,000/- on the basis of such erroneous report is unlawful and unjustified.
6.That on the facts & in the circumstances of the case and in law, the method of valuation as adopted 20
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by the DVO is wholly erroneous and injudicious as it did not take into consideration the actual cost incurred by the assessee, and the same is also not based on the State PWD CSR. Thus the estimate of the cost of construction of the DVO is neither fair nor judicious, nor it is lawful and, therefore, addition made on the basis of such report is wholly unlawful and unjustified.
8.That on the facts & in the circumstances of the case and in law, the findings of the learned CIT(A) that the construction which was completed before 31.3.99 were demolished are wholly unlawful and incorrect, and the same therefore be quashed.
8.That on the facts & in the circumstances of the case and having regard to the evidence placed before the learned lower authorities, it be held that the construction basement and the ground floor portion of the building was completed before 30.01.1987, and therefore, the investment made in the said portion of building is not assessable to tax in the impugned 21
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assessment year.
9. That on the facts & in the circumstances of the case and having regard to the evidences placed before the learned lower authorities, it be held that the construction of first floor (mezzanine floor) portion of the building was completed before 31.03.1999, and therefore the investment made in the said portion of building is not assessable to tax in the impugned assessment year.
10.That on the facts & in the circumstances of the case and having regard to the evidences placed before the learned lower authorities, it be held that the Second floor, Third floor, and the small portion on Fourth & Fifth floor (for lift & its control panel purpose) of the building were constructed during the period 21.04.1999 to 17.01.2001, and therefore, the investment made in the said portion of building is only required to be considered in assessment years 2000-01 & 2001-02.
11.That on the facts & in the circumstances of the case and in law, the assessee is not liable for interest u/s 22
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234B & 234C. The said levies are unlawful and, therefore, be cancelled."
ITA No.178/Ind/2010 (AY: 2001-02):
13. The assessee has taken the following grounds of appeal:
"1. That on the facts & in the circumstances of the case, the decision is contrary to law, materially incorrect and unsustainable in law as well as facts, and that all the findings of the learned lower authorities therein are also contrary to the evidence and incorrect.
2. That on the facts & in circumstances of the case and in law, the issue of notice u/s l48 & the re- assessment made are unlawful and without jurisdiction and, therefore, the same be cancelled.
3. That on the facts & in the circumstances of the case and in law, the learned lower authorities erred and not justified in estimating the assessee's sales at Rs.1,15,00,000/- and applying net profit @ 15% 23
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thereon and thus estimating the income of the assessee at Rs.17,25,000/-. Such estimates are purely wild guesswork, without reference to any evidence or material, therefore be quashed and the business income as shown in the return be accepted.
4. That on the facts & in the circumstances of the case and in law, the reference to valuation cell for the assessment of the cost of construction by the A.O. to the DVO is wholly unlawful and unjustified and the DVO's report based on wrong assumption of facts is an inadmissible evidence in law hence the addition made at Rs.50,00,000/- on the basis of such erroneous report is unlawful and unjustified and, therefore, be deleted.
5. That on the facts & in the circumstances of the case and in law, the report of the DVO is not based on proper appreciation of the facts, and that he has wrongly taken that the floors basement to fifth floor were constructed during the period 1.4.99 to 31.3.2003, and hence such report is not a reliable 24
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piece of evidence, and the addition made at Rs.50,00,000/- on the basis of such erroneous report is unlawful and unjustified.
6. That on the facts & in the circumstances of the case and in law, the method of valuation as adopted by the DVO is wholly erroneous and injudicious as it did not take into consideration the actual cost incurred by the assessee, and the same is also not based on the State PWD CSR. Thus the estimate of the cost of construction of the DVO is neither fair nor judicious, nor it is lawful and, therefore, addition made on the basis of such report is wholly unlawful and unjustified.
7. That on the facts & in the circumstances of the case and in law, the findings of the learned CIT(A) that the construction which was completed before 31.3.99 were demolished are wholly unlawful and incorrect, and the same therefore be quashed.
8. That on the facts & in the circumstances of the case and having regard to the evidence placed before 25
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the learned lower authorities, it be held that the construction basement and the ground floor portion of the building was completed before 30.01.1987, and therefore the investment made in the said portion of building is not assessable to tax in the impugned assessment year.
9. That on the facts & in the circumstances of the case and having regard to the evidences placed before the learned lower authorities, it be held that the construction of first floor (mezzanine floor) portion of the building was completed before 31.03.1999, and therefore the investment made in the said portion of building is not assessable to tax in the impugned assessment year.
10. That on the facts & in the circumstances of the case and having regard to the evidences placed before the learned lower authorities, it be held that the Second floor, Third floor, and the small portion on Fourth & Fifth floor (for lift & its control panel purpose) of the building were constructed during the 26
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period 21.04.1999 to 17.01.2001, and therefore, the investment made in the said portion of building is only required to be considered in assessment years 2000-01 & 2001-02.
11. That on the facts & in the circumstances of the case and in law, the assessee is not liable for interest u/s 234B & 234C. The said levies are unlawful and, therefore, be cancelled." ITA No.179/Ind/2009 (AY: 2002-03)
14. The assessee has taken the following grounds of appeal:
"1. That on the facts & in the circumstances of the case, the decision is contrary to law, materially incorrect and unsustainable in law as well as facts, and that all the findings of the learned lower authorities therein are also contrary to the evidence and incorrect.
3. That on the facts & in circumstances of the case and in law, the issue of notice u/s l48 & the re- 27
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assessment made are unlawful and without jurisdiction and, therefore, the same be cancelled.
4. That on the facts & in the circumstances of the case and in law, the learned lower authorities erred and not justified in estimating the assessee's sales at Rs.1,20,00,000/- and applying net profit @ 15% thereon and thus estimating the income of the assessee at Rs.18,00,000/-. Such estimates are purely wild guesswork, without reference to any evidence or material, therefore be quashed and the business income as shown in the return be accepted.
5. That on the facts & in the circumstances of the case and in law, the reference to valuation cell for the assessment of the cost of construction by the A.O. to the DVO is wholly unlawful and unjustified and the DVO's report based on wrong assumption of facts is an inadmissible evidence in law hence the addition made at Rs.58,98,334/- on the basis of such erroneous report is unlawful and unjustified and, therefore, be deleted.
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6. That on the facts & in the circumstances of the case and in law, the report of the DVO is not based on proper appreciation of the facts, and that he has wrongly taken that the floors basement to fifth floor were constructed during the period 1.4.99 to 31.3.2003, and hence such report is not a reliable piece of evidence, and the addition made at Rs.58,98,334/- on the basis of such erroneous report is unlawful and unjustified.
7. That on the facts & in the circumstances of the case and in law, the method of valuation as adopted by the DVO is wholly erroneous and injudicious as it did not take into consideration the actual cost incurred by the assessee, and the same is also not based on the State PWD CSR. Thus the estimate of the cost of construction of the DVO is neither fair nor judicious, nor it is lawful and, therefore, addition made on the basis of such report is wholly unlawful and unjustified.
8. That on the facts & in the circumstances of the 29
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case and in law, the findings of the learned CIT(A) that the construction which was completed before 31.3.99 were demolished are wholly unlawful and incorrect, and the same therefore be quashed.
9. That on the facts & in the circumstances of the case and having regard to the evidence placed before the learned lower authorities, it be held that the construction basement and the ground floor portion of the building was completed before 30.01.1987, and therefore the investment made in the said portion of building is not assessable to tax in the impugned assessment year.
10. That on the facts & in the circumstances of the case and having regard to the evidences placed before the learned lower authorities, it be held that the construction of first floor (mezzanine floor) portion of the building was completed before 31.03.1999, and therefore the investment made in the said portion of building is not assessable to tax in the impugned assessment year.
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11. That on the facts & in the circumstances of the case and having regard to the evidences placed before the learned lower authorities, it be held that the Second floor, Third floor, and the small portion on Fourth & Fifth floor (for lift & its control panel purpose) of the building were constructed during the period 21.04.1999 to 17.01.2001, and therefore, the investment made in the said portion of building is only required to be considered in assessment years 2000-01 & 2001-02.
12. That on the facts & in the circumstances of the case and in law, the assessee is not liable for interest u/s 234B & 234C. The said levies are unlawful and, therefore, be cancelled."
15. The first common grievance of the assessee in all the years relates to validity of reopening. The contention of the learned counsel for the assessee was that the returns for the assessment years 2000-01 & 2001-02 were filed on 30th March, 2003, for assessment year 2002-03 return was filed on 31
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9.8.2003, the fate of which was not known as to whether these returns were processed u/s 143(1) or assessments were framed u/s 143(3) of the Act. As per the learned counsel for the assessee, last date of limitation for completion of assessment u/s 143(3) of the Act available to the department was 31st March, 2003, 31st March, 2004 and 31st March, 2005 for the assessment years 2000-01, 2001-02 and 2002-03 respectively. However, notice for reopening of assessment was issued on 28.3.2006. The learned counsel for the assessee drew our attention to the reference made u/s 142A to the DVO on 2.1.2006 on which date no proceedings of assessment/reassessment were pending. After receipt of the DVO's report on 9.3.2006 the Assessing Officer has issued notice u/s 148 on 28.3.2006 and in these notices the Assessing Officer has adopted the same figure as escaped income which the DVO has distributed in his letter to the Assessing Officer No. DVO/BPL/IT-27/05-06/454 in different financial years as a cost of building. The crux of grievance of the assessee was that the Assessing Officer has first referred the matter to the DVO for gathering information for reopening 32
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the assessment and then after the receipt of the DVO's report notices u/s 148 were issued. Reliance was placed on the decision of the ITAT, Ahmedabad Bench in the case of Umiya Cooperative Housing Society Limited; 94 TTJ 392 wherein it was held that section 142A empowers the Assessing Officer to require the Valuation Officer for making the estimate of value of any asset provided the Assessing Officer required the same for purpose of making the assessment or reassessment. This provision does not empower the Assessing Officer to refer the matter to the DVO for gathering information for reopening of assessment. Making the assessment and reopening of assessment are two different things. When the process of reopening of assessment ends and the assessment is validly reopened, thereafter the process of making the assessment starts. It was therefore held that even after insertion of section 142A the Assessing Officer should have reason to believe that any income chargeable to tax has escaped assessment as provided u/s 147 and thereafter only the notice for reassessment can be issued u/s 148. It was observed that even after insertion of section 142A there is no amendment in 33
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the language of section 147 therefore the condition prescribed u/s 147 for reopening of assessment still exists. Accordingly, the Tribunal held that notices issued u/s 148 were not in accordance with law, the same were quashed and consequently the assessments completed in pursuance to the notices u/s 148 were quashed The learned counsel for the assessee further submitted that this decision was followed by the ITAT, Lucknow Bench in the case of Vijeta Education Society; 118 ITD 328 and further the same principle of law was followed by the ITAT, Jaipur Bench in the case of Govardhan Builders; 29 SOT 72. The learned counsel for the assessee also placed reliance on the decision of the jurisdictional High Court in the case of Choudhary Builders Pvt. Ltd.; 209 CTR 133 wherein it was held that commission issued to the DVO u/s 131(1)(d) to ascertain the cost of construction was invalid where no assessment proceedings were pending on the date of issue of commission. As per the learned counsel for the assessee, M.P. High Court also in another case of Nevendram Ahuja; 290 ITR 453 held that commission u/s 131(1)(d) could be issued by the Assessing 34
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Officer only during the pendency of the assessment proceedings and the reference by the Assessing Officer to the DVO being prior to the initiation of assessment proceedings was not valid and consequently the valuation report of the DVO cannot be made use for making any addition u/s 69 in respect of unexplained investment in construction of the building.
16. The learned counsel for the assessee also placed reliance on the decision of the ITAT, Indore Bench, in the case of Padam Singh, reported in 10 ITJ 460 wherein it was held that since no proceedings were pending before the Assessing Officer for the assessment year under appeal, the reference to the DVO to ascertain the cost of construction itself was invalid and bad in law. It was, therefore, held by the Tribunal that the Assessing Officer was not justified in making reference to the DVO to ascertain the cost of construction. Resultantly, the Assessing Officer was not justified in reopening the assessment on the basis of report obtained from the DVO under an invalid reference. In view of all these submissions and decisions, learned counsel for the assessee argued that 35
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reassessment proceedings are invalid and without jurisdiction, therefore, reassessment made in all the three years 2000-1 to 2002-03 be cancelled.
17. On the other hand, the contention of the learned CIT DR was that while reopening the assessment, sufficiency of reasons is to be seen as held in the case of Phoolchand; 203 ITR 456. As per the learned counsel for the revenue since there was escapement of income in respect of cost of construction estimated by the DVO, the Assessing Officer was justified in reopening the assessment for such escaped investment. As per the learned CIT DR, the returns so filed by the assessee were procured u/s 143(1) and no scrutiny assessment was framed u/s 143(3), therefore, there is nothing wrong for reopening for the relevant assessment year in respect of escaped income invested in building. With regard to validity of reopening, learned CIT DR drew our attention to the observation of the learned Commissioner of Incometax (Appeals) in the appellate order at page 4.2 wherein it was observed that the expression "reason to believe" reintroduced in section 47 by the amending Act, 1989 is well settled 36
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through a plethora of ruling. It is not a condition precedent that the Assessing Officer should convene the assessee or to intimate to him the nature of the alleged escapement or to give him an opportunity of being heard before he decided to operate the powers conferred by the section. It was also observed that the expression "reason to believe" postulates belief and the existence of reasons for that belief. The belief must be held in good faith, it cannot be merely a pretence. The satisfaction of the Assessing Officer for purpose of reopening of assessment is subjective in character and the scope of appellate review is limited. When the reasons recorded show a nexus between formation of belief and the escapement of income, a further enquiry about the adequacy or sufficiency of the material to reach such belief is not open to scrutiny. It was also observed that the Assessing Officer's reasoning may be the result of official information or his own or may come from any source that he considers reliable, his reasons are not to be judged by a court by the standard of what the ideal man would think. He is the actual main trusted by the legislature and charged with the duty of forming a belief for the mere 37
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purpose of determining whether he should proceed to collect what is strictly due by law. If the Assessing Officer honestly comes to a conclusion that a mistake has been made, it matters nothing so as his jurisdiction to initiate the proceedings u/s 147 is concerned that he may have come to all erroneous conclusion whether of law or facts. The jurisdiction to initiate proceedings u/s 147 for assessment and reassessment is even in such cases correctly and rightly exercised though he may have taken an erroneous view of law with regard to mistake committed at the assessment proceedings that he has found it. Therefore, unless it is shown that the Assessing Officer inquired the matter at ill or that he never honestly believed that a mistake has been made, the result of his investigation and initiation of proceedings u/s 147 of the Act cannot be challenged on the ground of want of jurisdiction.
18. In view of these observations of the learned Commissioner of Incometax (Appeals), the contention of learned CIT DR was that the assessments were validly reopened.
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19. We have considered the rival contentions and also deliberated on the decisions cited by the learned counsel for the assessee with reference to the issue of notice u/s 148 and validity of reassessment u/s 147 on the basis of DVO's report. Recently, the Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers Private Limited; 291 ITR 500 held that at the time of issue of notice, it is sufficient that prima facie reasons and material should be with the Assessing Officer that there is escapement of some income. At the time of issue of notice, the Assessing Officer is not required to conclusively establish that there is escapement of income. Mere bona fide reason to believe that there is escapement of income is sufficient for issue of notice u/s 148. Hon'ble Supreme Court further observed that the expression "reason to believe" in section 147 would mean cause or justification. If the Assessing Officer has caused or justified 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 Assessing Officer should have finally ascertained the facts by legal evidence or 39
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conclusion. What is required is "reason to believe" but not the established fact of concealment of income. At the stage of issue of notice, the only question whether there was relevant material on which a reasoned person should 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 subjective satisfaction of the Assessing Officer.
20. Ld.Authorized Representative also contended that while holding whether in a case where assessment is made u/s 143(1) and not u/s 143(3) it is not possible to hold view that income escaping assessment is always justified. Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers Private Limited (supra), also held that in case of intimation u/s 143(1), the AO can reopen the assessment if there are reasons to believe that income of assessee has escaped assessment. The crux of the provisions of sec.143(1) up to 31st March, 1989, was that after a return of income was filed the Assessing Officer could make an assessment under section 143(1) without requiring presence of the assessee or 40
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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).
21. 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 with effect from 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 tax deducted at source, any advance tax or any amount paid otherwise by way of tax or interest, an intimation was to be sent u/s 143(1)(a), without 41
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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(1)(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.
22. What were permissible under the first proviso to section 143(1)(a) to be adjusted were (i) only apparent arithmetical errors in the return, accounts or documents 42
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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 Assessing Officer had no authority to make adjustments or adjudicate upon any debatable issue. In other words, the Assessing Officer had no power to go behind the return, accounts or documents either in allowing or in disallowing deduction, allowance or relief.
23. The provisions of section 143(1)(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 Assessing Officer 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 43
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proviso to section 143(1)(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(1)(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(1)(a) was mandatory.
24. Thus, legislative intent is very clear from the use of the word 'intimation' as substituted for 'assessment', the Assessing Officer is free to make any addition after grant of opportunity to the assessee. By making adjustments under the first proviso to section 143(1)(a), no addition which is impermissible by the information in the return could be made by the Assessing Officer. Reason is that under section 44
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143(1)(a) no opportunity is granted to the assessee and the Assessing Officer 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(1)(a) indicates that the Assessing Officer has to proceed accepting the return and making the permissible adjustments only.
25. As a result of insertion of Explanation to section 143 by the Finance Act (No.2) of 1991 with effect from 1-10-1991 and subsequently with effect from 1-6-1994 by Finance Act 1994 and ultimately omitted with effect from 1-6-1999 by Explanation as introduced by the Finance Act (No.2) of 1999, an intimation sent to the assessee under section 143(1)(a) was deemed to be an order for purposes of section 246 between 1- 6-94 to 31-3-95 and under section 264 between 1-10-1991 and 31-5-1999. 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 45
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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(1)(a) as stood prior to 1st April 1989, the Assessing Officer 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.
26. The Central Board of Direct Taxes (CBDT) had issued various circulars in this regard explaining the purpose behind the provisions of section 143(1)(a), namely, to minimize the Departmental work in scrutinizing each and every return, and to concentrate on selective scrutiny of returns.
27. Under the first proviso to section 143(1) with effect from 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 46
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payable by the assessee, or (b) no refund is due to him. It is significant that the acknowledgement is mostly done by the ministerial staff and not by the Assessing Officer. 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(1)(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.
28. 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 with effect from 1st April 1989, as also sections 148 to 152 are substantially different from the provisions as stood prior to such substitution.
47
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29. 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 Assessing Officer 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 Assessing Officer could have jurisdiction to issue notice under section 148 read with section 147(a). But under the substituted new section 147, the existence of only the first condition would suffice. In other words, if the Assessing Officer 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 48
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the conditions must be fulfilled, if the case falls within the ambit of proviso to section 147 as stood after amendment.
30. Thus as per the amended provisions of sec.147, for re- opening 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 pre-condition of faith and true disclosure of material facts by an assessee as contemplated in pre-amended section 147(a) and the Assessing Officer can, under the amended provisions, legitimately re-open the assessment in respect of income which had escaped assessment. Viewed in that angle, power to re-assessment 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 Assessing Officer 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 Assessing Officer is required to act fairly and judiciously. His belief must 49
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have substance and must not be a shadow. There is no dispute to the well settled legal proposition that such belief should be bona fide and should not be based on vague, arbitrary and non-specific information.
31. In the case of Rajesh Jhaveri, Hon'ble Supreme Court categorically dealt with reopening of assessment with regard to mode under which assessment has been done, either by way of the intimation u/s 143(1) or by way of scrutiny assessment order u/s 143(3). It was observed that there is a contextual difference between the two expressions in the context the expressions are used. The word "assessment" is used as meaning something "the computation of income", sometimes "determination of amount of tax payable" and sometimes the whole procedure laid down in the Act for imposing liability upon the tax payers. It was further observed that in the scheme of things, the intimation u/s 143(1)(a) cannot be treated to be an order of assessment. This distinction is also well brought out by the statutory provisions as they stood at different points of time, prior to 1st April, 1989, u/s 143(1)(a), the AO had to pass an assessment order if he decided to 50
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accept the return, but under the amended provisions, the requirement of passing of an assessment order has to be dispensed with and instead of it an intimation is required to be sent. It was further elaborated that under the first proviso to the newly substituted Section 143(1) w.e.f. 1st June, 1999, except as provided in the provision itself, acknowledgement of the return shall be deemed to be intimation u/s 143(1), where no sum is payable by the assessee or where no refund is due to him. It was categorically observed that acknowledgement is not done by the Assessing Officer, but by the ministerial staff. Under these circumstances, it cannot be said that the assessment has been made by the ministerial staff. The intimation u/s 143(1)(a) is deemed to be a notice of demand u/s 156. For the apparent purpose of making machinery provision relating to recovery of tax applicable. By such application only recovery indicated to be payable in the intimation becomes permissible and nothing more can be inferred from the deeming provision. Thus, there is no assessment u/s 143(1)(a) of the Act.
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32. It is crystal clear from the above decision of the Hon'ble Supreme Court which is having binding effect on us under Constitution of India that the processing of return u/s 143(1) does not amount to assessment order. Therefore, neither any opinion is formed nor there is a question of change of opinion. Since intimation u/s 143(1) is not an assessment, there is no question of any new material to empower the AO to reopen the assessment u/s 147, when there is a reason to believe that there is escapement of income. In the instant case before us, the return for all the years were processed u/s 143(1) and no assessment was framed by issue of notice u/s 143(2). Under these facts and circumstances, the proposition of law laid down by the Hon'ble Supreme Court in the case of Rajesh Jhaveri is clearly applicable. It is pertinent to mention here that Section 147 authorizes the AO to assess or reassess income chargeable to tax, when, he has reason to believe that income for any assessment year has escaped assessment.
33. After going through the reasons recorded for reopening, we are satisfied that the learned Commissioner of Incometax (Appeals) was justified in holding that the reopening of 52
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assessment was valid. In view of this latest decision of the Hon'ble Supreme Court we do not find any infirmity in the order of the learned Commissioner of Incometax (Appeals) in upholding the reassessment proceedings as valid proceedings.
34. In the result, the grounds taken by the assessee with regard to validity of reopening of assessment in all the years are dismissed.
35. The next common grievance of the assessee in all the years relates to validity of reference made to the DVO u/s 142A of the Act. In this regard, chronological date for filing the returns, date of intimation u/s 143(1), last date of limitation for assessment u/s 143(3), date of reference u/s 142A, date of DVO's report and date of issue of notice u/s 148 are as under :-
S.No. Particulars Assessment Years
2000- 2001- 2002-
01 02 03
1 Due date of return u/s 139
2 Return filed on 30.3.02 30.3.02 9.8.02
3 Date of intimation u/s Not Not Not
143(1)/assessment u/s known known known
143(3)
4 Last date of limitation for 31.3.03 31.3.04 31.3.05
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assessment u/s 143(3)
available
5 Date of reference u/s 142A 2.1.06 2.1.06 2.1.06
6 Date of DVO's Report 9.3.06 9.3.06 9.3.06
7 Date of issue of notice u/s 28.3.06 28.3.06 28.3.06
148
36. There is no dispute to the relevant dates mentioned hereinabove. On the basis of these dates, the contention of the learned counsel for the assessee was that reference was made on the date when no proceedings were pending before the Assessing Officer. For this purpose, reliance was placed on the decision of the MP High Court in the case of Choudhary Builders Private Limited, 209 CTR 133, wherein it was held that commission issued to the DVO u/s 131(1)(d) to ascertain the cost of construction was invalid where no assessment proceedings were pending on the date of issue of commission. Further reliance was placed on the decision of the MP High Court in the case of Nevendram Ahuja, 290 ITR 453 wherein it was held that commission u/s 131(1)(d) could be issued by the Assessing Officer only during the pendency of the assessment proceedings. Reference by the Assessing Officer to the DVO being prior to initiation of assessment proceedings 54
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was not valid and consequently the valuation report of the DVO cannot be made use for making addition u/s 69 of the Act with regard to investment in construction of building. Further reliance was placed by the learned counsel for the assessee on the decision of the Indore Bench in the case of Padamsingh, 10 ITJ 407 wherein it was held that since no proceedings were pending before the Assessing Officer for the assessment year under consideration, reference to the DVO to ascertain the cost of construction itself was invalid and bad in law. Further reliance of the learned counsel for the assessee was on the decision of the ITAT, Delhi Bench in the case of Subhashchandra Chopra wherein it was held that there is no denial that section 142A is introduced retrospectively by which reference could be made by the Assessing Officer to the DVO but such reference could only be made during the pendency of the proceedings. Reliance was also placed on the decision of the ITAT, Jabalpur Bench in the case of Ram Vishal Agrawal HUF; 9 ITJ 132 wherein it was held that in the absence of pending of assessment/reassessment proceedings, reference to the DVO is not permissible u/s 142A. Further reliance was 55
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placed on the decision of the MP High Court in the case of CIT v. Neelam Shukla (MAIT No. 18/2004) wherein it was held that where no proceedings in regard to assessment year was pending on the date of reference to the DVO u/s 131(1)(d), the reference was invalid and, therefore, the Assessing Officer could not have relied on the valuation report given by the DVO in pursuance to such invalid reference.
37. In view of the above, contention of the learned counsel for the assessee was that on the basis of invalid reference and consequent invalid valuation report, the addition u/s 69 in respect of unexplained investment in the construction of building is not permissible under law, hence, such addition made in the assessment year 2000-01, 2001-02 and 2002-03 deserves to be deleted.
38. On the other hand, learned CIT DR contended that after insertion of section 142A, the Assessing Officer is sufficiently empowered to make a reference to the DVO for estimating the correct cost of construction with reference to the quality of material used in the construction. Further contention of learned CIT DR was that on the basis of DVO's 56
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report, the Assessing Officer has called for any objection of the assessee and only after due consideration of these objections, the additions were made in respect of cost of construction incurred by the assessee.
39. We have considered the rival contentions, carefully gone through the orders of the authorities below and also deliberated upon the case laws cited by the learned counsel for the assessee and learned CIT DR during the course of hearing before us with reference to validity of reference made by the Assessing Officer u/s 142A when no assessment proceedings are pending before the Assessing Officer. As per the date-wise chart given hereinabove, we find that the assessee has filed return of income on 30th March, 2002 for the assessment year 2000-01 and 2001-02 and on 9.8.2002 for the assessment year 2002-03. As per Department these returns were processed u/s 143(1). Thereafter reference was made by the Assessing Officer to the DVO u/s 142A on 2.1.2006. The report of the DVO was obtained on 9th March, 2006. Thereafter, the Assessing Officer issued notice u/s 148 for all the assessment years under consideration on 28th March, 57
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2006. It is quite clear from the respective dates mentioned hereinabove that the reference was made on the date when no proceedings were pending before the Assessing Officer. Here first reference was made on 2.1.2006 to the DVO for estimating cost of construction and thereafter when his report was received, the assessment was reopened by issue of notice u/s 148 of the Act on 28.3.2006. The returns for all these years were filed in the year 2002, which were duly processed u/s 143(1) of the Act. The time limit for issue of notice u/s 143(2) had also been expired. Furthermore, the last date of limitation in respect of all the years for completion of assessment u/s 143(3) available to the Assessing Officer had also been expired on 31.3.2003, 31.3.2004 and 31.3.2005, when the reference was made to the DVO u/s 142A on 2.1.2006. Now applying the proposition of law laid down by the MP High Court in the case of Choudhary Builders Private Limited (supra) wherein it was held that commission issued to the DVO u/s 131(1)(d) to ascertain the cost of construction was invalid where no assessment proceedings were pending on the date of issue of commission. Similar proposition was laid 58
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down by the Hon'ble M.P. High Court in the case of Nevendram Ahuja (supra) and it was held that the Assessing Officer can issue commission only if proceedings are pending before him. A reference to the DVO was made by issue of a commission u/s 131(1)(d) when no proceedings relating to assessment year were pending. The issue of such commission by the Assessing Officer was held by the Hon'ble Jurisidictional High Court to be invalid and consequent valuation report of the DVO was held to be of no use for making any addition u/s 69 in respect of unexplained investment in the construction of the building.
40. Hon'ble Patna High Court in the case of Rena Sen; 235 UTR 219 held that the words "not-with-standing that no proceedings with respect to such person or class of persons are pending" occurring in sub-section (1A) of section 131 leave no room for doubt that while the authorities specified u/s 131(1A) are empowered to take action if there is "reason to suspect" that any income has been concealed or is likely to be concealed by any person or class of persons even though no proceedings with respect to such person or class of persons is 59
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pending before him or any other IT authorities, the authority specified in section 131(1) can do so only if proceeding is pending before them. It was held that contention of the department that the service of impugned notice would be deemed to be initiation of proceedings is completely misconceived. It was held that notice u/s 131(1)(d) can be issued only if a proceeding is already pending, no notice u/s 131(1)(d) could be issued in connection with ascertainment of cost of construction of a house by Assistant Valuation Officer when no proceedings were pending except a notice u/s 143(2) which was related to a year later on the period of construction.
41. As per our considered view, section 131(1) provides that the Assessing Officer shall have the same powers as are vested in a Court under CPC, 1908 when trying a suit in respect of the matters enumerated including issue of commission. What is significant is use of the words "when trying a suit". A court can issue a commission only during the pendency of the suit. As the powers vested in the Assessing Officer are the same powers as are vested in a Court, it follows that the Assessing Officer can issue a commission only if the 60
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proceeding is pending before him. Undisputedly, in the instant assessment year under consideration reference was made by the Assessing Officer u/s 142A on 2.1.2006 on which date no proceedings were pending before the Assessing Officer with reference to these assessment years. As no proceedings in regard to these assessment years were pending before him, the Assessing Officer could not have issued the commission u/s 131(1)(d) and consequently the valuation report of the DVO received in pursuance of invalid commission cannot be made use of. Similar view has been taken by the Bombay High Court in the case of Jamnadas Madhavji & Company; 162 ITR 331 wherein it was held that the powers regarding discovery and production of evidence given to the IT authority u/s 131 are the same powers as vested in a Court under CPC while trying a suit. The existence of a suit or a proceeding is a sine qua non for exercise of such powers under CPC, therefore, power mentioned in section 131(1) can be exercised only if the proceeding is pending before the concerned Officer and not otherwise. It was also observed that this interpretation is consistent with the scheme of sub-section (1A) of section 131 61
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according to which it is competent for Assistant Director of Inspection to exercise powers u/s 131(1A) under certain circumstances even in absence of any pending proceedings. Pari materia, therefore, power in respect of matters mentioned in sub-section (1) of section 131 viz. (a) discovery and inspection (b) enforcing the attendance of any person and examining him on oath (©) compelling the production of books of accounts and other documents and (d) issuing commission. These can be exercised only if proceeding is pending before the concerned Officer and not otherwise.
42. In 1975 the Taxation Laws (Amendment) Act, 1975 introduced sub-s. (1A) in s. 131. Under this sub-section if the Assistant Director of Inspection has reason to suspect that any income has been concealed, or is likely to be concealed, by any person of class or persons, within his jurisdiction, then for any inquiry or investigation relating thereto, it shall be competent for him to exercise powers conferred under sub-s. (1) of s. 131, notwithstanding that no proceedings with respect to such person or class of persons are pending before him or any other IT authority. Absence of this non obstinate clause in 62
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s. 131(1) is significant. Reading s. 131(1) and s. 131(1A) together, it is obvious that whereas an officer mentioned in sub-s. (1) can exercise powers thereunder only if a proceeding is pending before him, the officer mentioned in sub-s. (1A) viz., the Assistant Director of Inspection can exercise such powers notwithstanding that no proceedings are pending before him or before any other officer. Distinction has thus been clearly maintained between the conditions necessary for the exercise of powers by these two categories of officers viz., those in sub- s. (1) and the one is sub-s. (1A) of s. 131. Thus existence of a pending proceeding is condition precedent for the exercise of powers under s. 131(1); there is no such condition precedent under s. 131(1A). Again, under sub-s. (3) of s. 131, any authority refereed to in sub-s. (1) or sub-s. (1A) of s. 131 may impound and retain in its custody any books of accounts or other documents produced before it in any proceeding under this Act. Further still, explanation (2) to s. 132 also indicates that but for its artificial and extended definition of the word 'proceeding', proceeding would mean one actually pending and not one completed and concluded. Also relevant to the context 63
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is the form of the summons [under s. 131(1)] which commences with the words "Whereas your attendance is required in connection with the proceedings under the IT Act in your case". Framed and prescribed at and since about the time s. 131(1) was enacted, this form constitutes, in a sense a contemporaneous exposition aiding and assisting a correct interpretation of s. 131(1). The form also assumes and presupposes the existence of a pending proceeding before the concerned officer.
43. Section 142 empowers the AO to require the Valuation Officer for making the estimate of the value of any assets provided the AO required the same for the purpose of making the assessment or re-assessment. However, the provisions of Section 142A does not empower the AO to refer the matter to the DVO for gathering information when no assessment proceedings is pending before him. Making the reassessment and reopening of assessment are two different things. When the process of reopening of assessment ends and the assessment is validly reopened, thereafter, the process of making reassessment starts. Nagpur Bench of I.T.A.T. in the 64
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case of Dr. Arjun D. Bharad vs. ITO, 78 TTJ 832, held that pendency of proceedings is sine que non for giving jurisdiction to the concerned authorities to make a reference to the DVO and the AO can exercise the power conferred on him u/s 131(1)(d) only if an independent proceedings is pending with him. Admittedly, in the instant case before us, when the AO made a reference to the DVO, no proceedings were pending before him and, therefore, he was not competent to refer the matter to the DVO. The language of Section 142A(1) clearly stipulates that for the purpose of making an assessment or reassessment under this Act, where an estimate of the value of any investment referred to in Section 69 or Section 69B or the value of any bullion, jewellery or other valuable articles referred to in Section 69A or Section 69B, 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.
44. From the above, it is evident that Section 142A empowers the AO to require the Valuation Officer for making the estimate of the value of any asset provided the AO required the same for the purpose of making the assessment or 65
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reassessment. However, the above provision does not empower the AO to refer the matter to the DVO for gathering information, when no assessment proceeding is pending before him. In the case of Choudhary Builders Private Limited (supra), Hon'ble Jurisdictional High Court held that since the Department has failed to show that any assessment proceedings was pending before the AO on 22nd May, 2001, when the Dy. CIT issued commission u/s 131(1)(d) to the DVO to ascertain the cost of construction, the reference so made was invalid, since no assessment proceedings were pending on the date of issue of commission.
45. I.T.A.T., Indore Bench in the case of Padam Singh (supra) held that reference to the Valuation Officer u/s 142A read with Section 131(1)(d) of the Income-tax Act, 1961, was not valid in view of the fact that no proceedings were pending before the AO when the reference was made to the DVO.
46. During the course of hearing, the learned counsel for the assessee also placed on record and highlighted our attention to the decision of MP High Court in the case of Smt. Neelam Shukla (MAIT 18/2004) - order dated 5.8.2005 which 66
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was subsequent to introduction of section 142A by the Finance (No. 2) Act, 2004. It was the contention of the learned AR that even after insertion of section 142A which was made effective retrospectively from 15.11.1972, the jurisdictional High Court has held that no reference can be made unless an assessment proceeding is pending before the Assessing Officer. The relevant question of law referred before the Hon'ble High Court was as under :-
"Whether the Tribunal committed error of law and facts in holding that reference to the Valuation Officer was not in accordance with law?
47. We have gone through the above order of the jurisdictional High Court wherein before reaching to the conclusion the court has specified at para 11 the relevant dates for issue of summons, notice u/s 142(1), etc. which reads as under :-
The following dates are relevant:
October to Search & seizure operations.
November, 1992
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26.2.1993 Order by ACIT, INV circle, Bhopal u/s
132(5).
21.5.2003 Reference by AICT (Investigation) to DVO
for valuation u/s 132(5).
8.10.1993 Valuation Report of DVO.
7.12.1993 Notice u/s 142(1).
16.12.1993 Service of notice u/s 142(1).
2.5.1994 Return filed by the assessee.
7.3.1996 Assessment order passed.
48. After referring to the above dates, the Court reached the following conclusion :-
"The Revenue does not dispute that the Commission to DVO u/s 131(1)(d) to value the premises was issued on 21.5.2003. Admittedly, no assessment proceedings were pending on 21.5.1993. The question in regard to validity of a reference u/s 131(1)(d) made, when no assessment proceedings were pending, was considered by us in COMMISSIONER OF INCOME TAX VS. NEVENDRAM AHUJA (ITA No.100/1999 decided on 1.2.2005) where following the decision of the Bombay High Court in Jamnadas Madhavji & Co. vs. J.B. Panchal, ITO 162 68
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(1986) ITR 331 and the decision in RINA SEN vs. CIT (ITA
219) we held that where no proceeding in regard to the assessment year was pending on the date of reference DVO u/s 131(1)(d), the reference was invalid. Following the said decision, we hold that the reference made on 21.5.1993 was invalid and, therefore, the AO could not have relied upon the valuation report given by DVO in pursuance of such invalid reference. Accordingly, the third question is answered in the negative, against the revenue."
49. It is clear from the above decision that no valid reference can be made to the DVO unless proceedings is pending before the AO. Both the lower authorities have not dealt with the issue of validity of making reference and the facts are also not clear from the record, in the interest of justice and fair play, we restore this ground back to the file of AO for deciding afresh in the light of relevant facts and applying the proposition of law laid down by various High 69
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Courts including Jurisdictional High Court and various Benches of Tribunal as discussed hereinabove. Accordingly, this ground of the assessee in all the years are allowed for statistical purposes.
50. The assessee has also raised his contention with regard to merit of the addition made with reference to the valuation report which we think it appropriate to deal with without prejudice to our decision on the legal issue of reference to DVO as discussed above. From record we found that the Assessing Officer has made the addition for the alleged investment in building in the assessment years 2000-01 to 2002-03 as under :-
AY Amount
2000-01 3700000
2001-02 5000000
2002-03 5898337
1,45,98,337
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51. From the order of the Assessing Officer we find that the matter relates to building situated at plot no. 189, MP Nagar, Zone-I, Bhopal. As per the material and evidence placed on record, the plot was purchased by Smt. Bhagwati Soni wife of late Babulal Soni(the assessee) from Bhopal Development Authority in the year 1977. This plot was allotted under the freedom fighters quota because late Babulal Soni was a freedom fighter. Smt. Bhagwati Soni died on 7.8.2001 and the assessee Babulal Soni also died on 27.6.2005. The son of deceased assessee Pradeep Soni had submitted that the construction of building was done by the parents during their life time and in the same building the assessee late Babulal Soni was also carrying on retail business of sweets and Nemkeen. We also find that permission for construction of building from Municipal Corporation, Bhopal, was obtained on 2.2.1977 by Smt. Bhagwati Soni. She had constructed basement, ground floor and mezzanine floor. The relevant construction period as per record was from February, 1977 to 31.3.1999. It is evident from the approved Municipal plan dated 21.4.1999 as placed on record. This approved plan is in 71
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relation to first and second floors. There is also a mention in the plan regarding the existing constructed floors i.e. basement, ground floor and mezzanine floor. Thus the addition made by the Assessing Officer on account of investment in construction cost of basement, ground floor and mezzanine floor which were constructed by Smt. Bhagwati Soni, was not justified in the hands of the present assessee. The documentary evidence placed on record in the form of permission for construction of building plan and approved building plan dated 24.1.1999 clearly establishes the construction by Smt. Bhagwati Soni. The department has not brought any contrary material on record to suggest that during the period February, 1977 to 31st March, 1999 the construction was done by any of the present assessee. Thus, we found that the assessee has discharged its burden by placing on record evidence of Government authority which the department has not been able to dislodge by putting any other evidence to suggest that construction was carried on by the present assessee. We also find that the assessee has placed before the lower authorities copy of Municipal Corporation 72
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notice dated 30.1.1987 and 23.2.1987 which clearly indicate that there was construction in those years and for the excess construction the Municipal Corporation had issued notices to Smt. Bhagwati Soni and she had paid charges for the excess construction undertaken by her. We accordingly direct the AO to delete the addition made on account of cost of construction attributable to basement, ground floor and mezzanine floor.
52. From record we find that second phase of construction i.e. on first and second floors as per the approved building plan dated 21st April, 1999 was done between the period April, 1999 to January, 2001 which is evident from another Municipal approved plan dated 17.1.2001. It was placed before the lower authorities and also find place in the paper book filed before us. We find that in this plan dated 17.1.2001 the construction portion has been shown as first floor, second floor and some construction on Mumty, etc. on terrace floor.
During this period, the allegation of the Municipal Corporation was that some of the constructions undertaken by Smt. Bhagwati Soni was not in accordance with the approved plan, therefore, the Municipal authorities had compounded the said 73
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unauthorized construction and have also mentioned this fact in the said plan as placed on record. We also find that the compounding charges were also levied on Smt. Bhagwati Soni for such unauthorized construction amounting to Rs.56,549/- .The demand was raised through notice dated 16.1.2001 and the said compounding fee was paid by Smt. Bhagwati Soni on 17.1.2001. The relevant receipt no. 57 of Municipal Corporation, Bhopal, in the name of Smt. Bhagwati Soni is also placed on record. From the plan we also find that above the terrace floor there was also a construction of lift room/machine room, thus the period of second phase of construction between April, 1999 to 2001 was fully supported by documentary evidence placed before the lower authorities and also in the paper book filed before us. The department has not disputed these documents having been filed before the authorities below. The factum of construction was noticed by the department at the time of survey at the assessee's premises on 18.12.2002. At the relevant time of survey, the assessee, Babulal Soni, was alive and the reference was made by the Assessing Officer u/s 142A on 2.1.2006 for valuation of 74
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cost of construction of building. However, the DVO has mentioned in his report that period of construction of entire building is from April, 1999 to March, 2003. Thereafter, the DVO had distributed this cost between the period 2000-01 to 2002-03. Only after receipt of the DVO's report that the Assessing Officer has issued notice u/s 148 of the Act wherein as per the reasons mentioned the exact amount of construction cost taken by the DVO in different year was mentioned by the Assessing Officer as escapement of income for the relevant assessment years under consideration. However, the assessee has also furnished a certificate in the form of valuation report of Shri Rajesh Raina, a registered valuer approved by Government according to which building was completed by March, 2002. It is clear from the various documents placed on record as narrated below, which was placed by the assessee before the learned Commissioner of Incometax (Appeals) along with the application under rule 46A :-
(a) Municipal Corporation, Bhopal notice dated 30.1.87.
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(b) Municipal Corporation, Bhopal notice dated 23.2.87.
(c) Sanctioned of unauthorized construction approval dated 17.1.2001.
(d) Municipal Corporation Compounding Fee Receipt No. 2202/57 dated 17.1.2001.
(e) Municipal Corporation Compounding Fee Demand Notice dated 16.1.2001.
These documents were forwarded by the learned Commissioner of Incometax (Appeals) to the Assessing Officer calling for remand report. We also find that the Assessing Officer has also made inquiries from Bhopal Municipal Corporation for purpose of sending remand report. However, the contents of the remand report and outcome of such inquiry and the comments of the Assessing Officer were not incorporated by the ld. CIT(A) in his appellate order. It was also alleged by the learned counsel for the assessee that the assessee was never supplied the copy of remand report so as to enable him to submit his rejoinder.
53. In the valuation report given by the DVO he valued the estimated cost of construction incurred by the assessee and also mentioned the year of construction. The year in which such construction took place is to be judged from the relevant 76
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evidence produced by the assessee in this regard or the evidence gathered by the DVO or Assessing Officer during the assessment proceedings. The estimated cost of construction as arrived at by the DVO in the instant case was bifurcated by him in three years without assigning any reason for arriving at conclusion regarding year of construction. Further, no evidence was referred by the DVO or the A.O. to reach to the conclusion that construction was actually undertaken in the years mentioned in the DVO's report. On the other hand, the evidence placed on record by the assessee in the form of approved plan from Municipal Corporation, notice of Municipal Corporation dated 30.1.1987, 23.2.1987, sanction of unauthorized construction approval dated 17.1.2001, receipt of fee paid for compounding the unauthorized construction to the Municipal Corporation dated 17.1.2001 clearly establish relevant years in which construction was undertaken and completed. Whenever Municipal Corporation finds that there is any construction in deviation to the approved map and which falls in the set back area, there is a procedure for compounding the same by laying penal fee. The 77
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demand notice of Municipal Corporation dated 16.1.2001 clearly establishes the fact that construction had already taken place prior to 16.1.2001 part of which was not as per para meters of the approved plan. Therefore, the Municipal Corporation has asked for payment of compounding fee, which has actually been paid vide receipt no. 220/57 dated 17.1.2001. On the basis of these documentary evidence as placed on record and which was also furnished before the lower authorities, we can safely conclude that basement, ground floor and mezzanine floor which have been described by the DVO as first floor, had been constructed between February, 1977 to March, 1999 relevant to the assessment year 1977-78 to 1999-00. Thus, we do not find any justification in the addition made by the Assessing Officer in respect of these constructions during the relevant assessment years under consideration.
54. It is also clear from these documents that the first floor, second floor, terrace floor and lift room above the terrace floor were completed between April, 1999 to February, 2001 falling within the assessment years 2000-01 and 2001-02. 78
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However, the DVO has described first floor as second floor, second floor as third floor, terrace floor as fourth floor and floor above the terrace floor i.e. lift room as fourth floor. Thus, no addition was warranted even in respect of these constructions in the assessment year 2002-03, which has been wrongly done by the Assessing Officer. At the very same time, we find that after completing the construction work of hall which is situated on the first and second floor, the assessee has undertaken furnishing and interior decoration work in the previous year relevant to the assessment year 2002-03. Therefore, any addition in respect of these investments can be taken into account in the assessment year 2002-03. As per the details furnished by the assessee, on fourth and fifth floors along with Mumties on the terrace floor and lift room above the terrace floor, expenditure of Rs.7,30,000/- was incurred. The area covered by the halls on the 4th and 5th floor was around 5,943 sq.ft. As per the learned counsel for the assessee expenditure on construction of simple hall are much less than the expenditure incurred on construction of a house or residential apartment. For this 79
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purpose, reliance was placed on the decision of ITAT, Indore Bench, in the case of Navinchand Mehra; 32 ITC 198 wherein construction cost @ Rs. 237/- per sq. ft. was accepted during the period of 1996-97, 1997-98 and 2000-01. In the case of Purshottam Khatri v. ITO; 1 ITJ 474 the Indore Bench has held that construction cost @ Rs. 150/- should be accepted during the period 1986 to 1990. After referring to these decisions of the coordinate Bench the learned counsel for the assessee submitted that the area of construction on 4th and fifth floors is around 5943 sq.ft. and the total cost of Rs. 7,30,000/- was incurred thereon, the rate per sq. ft. works out to be Rs. 123/- which is quite reasonable keeping in view the rates accepted by the Tribunal in the decision cited hereinabove. With respect to the rate of construction at Rs. 123/- per sq.ft. We direct the Assessing Officer to properly adjust the same keeping in view the cost inflation index as notified by the Central Government for purpose of computing the cost of construction.
55. Thus, we found that construction of second, third, fourth and fifth floors was undertaken during the period 1999 80
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to 2002, falling in the assessment years 2000-01 and 2001-02. The assessee has also furnished valuation report by Chartered Engineer and Registered Valuer, M/s. Raina & Company, according to which the following is the area of construction :-
1) Second floor 362.35 Sq.Mtrs.
2) Third Floor 362.35 Sq.Mtrs.
3) Fourth Floor 92.09 Sq.Mtrs.
4) Fifth Floor 63.86 Sq.Mtrs.
56. The construction cost has been worked out by the Registered Valuer at Rs. 2500/- per Sq.Mtr., Rs. 2600/- per Sq.Mtr., Rs. 2700/- per Sq.Mtr and Rs. 2800/- per Sq.Mtr. for second, third, fourth and fifth floor respectively. Thus, the total cost of building comes to Rs. 32,78,620/-( Second, third, fourth and fifth floor). The cost of services on these floors work out to be Rs. 6,55,725/-. Items fitted with the building as per the market price was arrived at by Registered valuer at Rs.
16,21,137/-. As per Annexure 'C' giving full details of ceramic tiles, kotah stone slaps, granite slab etc. duly incorporating the area and rate of materials. The cost of extra items as per 81
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Annexure 'D' works out at Rs. 2,62,370/-. Thus, the entire cost of second, third, fourth and fifth floor including cost of services, items as per market rate and the extra items put therein works out to Rs. 58,17,852/-. The Registered Valuer has also given due reasoning for adopting the particular rate of construction. It appears that the AO has not given any reasons for disregarding the rate and the area measured by the Registered Valuer. Neither the objection raised by the assessee has been considered. In the interest of justice, we restore the matter back to the file of AO for re-evaluating the cost of construction of second, third, fourth and fifth floor in terms of our above discussion.
57. It was also argued by the learned counsel for the assessee that the method of valuation adopted by the DVO was not on the basis of the State PWD CSR rates applicable at Bhopal. Reliance was placed on the decision of the Delhi Bench in the case of Sikharchand Jain & Sons; 32 TTJ 570, Modern Construction and Developers; 63 ITD 235, Indore Bench (T M), T.M. Thanevala; 26 ITD 292; ITO v. Tekchand; 52 ITD 197. Thus, it was contended that even in respect of 82
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construction undertaken during the relevant assessment year, the DVO should adopt State PWD CSR rates applicable to Bhopal. Accordingly, we direct the Assessing Officer to have the valuation of 4th and 5th floors along with Mumties on the terrace floor and the room above the terrace floor in terms of our directions given hereinabove. Further, the contribution made by other family members towards construction of house should be given due care while considering the addition in respect of the construction of these floors. The Assessing Officer is also directed to adopt the State PWD CSR rates applicable at Bhopal. We direct accordingly.
58. Next grievance of the assessee relates to estimation of sales at abnormally higher figures and estimation of exorbitant net profit rate by the Assessing Officer.
59. We have considered the rival contentions, carefully gone through the orders of the authorities below and find from record that the assessee was engaged in the business of making and sale of sweets and Namkeen. As the assessee's sales were below Rs. 40 lacs, no books of accounts were maintained and the returns were filed by applying net profit 83
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rate of 5%. In the assessment year 2000-01 the assessee had shown sales of Rs. 24.80 lacs, in the assessment year 2001-02 Rs. 26.80 lacs and in the assessment year 2002-03 at Rs. 32 lacs and in the assessment year 2003-04 at Rs. 35.61 lacs. The profit was offered by computing the net profit rate @ 5% on the turnover.
With regard to addition made by the Assessing Officer by estimating sales and GP thereon, we find that no material was referred by the Assessing Officer for estimation of sales at Rs. 1.10 crores, Rs. 1.15 crore and Rs. 1.20 crore as against sales of Rs. 24.80 lakhs, Rs. 26.80 lakhs and 32.00 lakhs shown by the assessee in the assessment years 2000-01, 2001-02 and 2002-03 respectively. Even no basis was given by the Assessing Officer for applying net profit rate of 15 % as against rate of 5% applied by the assessee. Even during the course of survey on 18.12.2002, falling in the assessment year 2003-04 nothing was found by the department so as to presume that sale of the assessee was to the tune of Rs. 110 lacs in the assessment year 2000-01, Rs. 115 lacs in the assessment year 2001-02 and Rs. 120 lacs in the assessment year 2002-03. 84
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Without any basis or material even for name sake the Assessing Officer has just estimated the sales of the assessee at abnormally higher figures and also estimated net profit rate of 15 % in place of net profit rate of assessee at 5 %, made the trading additions which were confirmed by the learned Commissioner of Income Tax (Appeals).
60. As per our considered view, even while making 'best judgment assessment', the same should be based on cogent material on record. The Hon'ble Supreme Court in the case of Dhakeswari Cotton Mills Ltd. Vs. CIT,West Bengal reported in 26 ITR 775 observed that while making an assessment , the Assessing Officer is not allowed to make pure guess work without any evidence or material at all. There must be something more than bear suspicion to support any assessment and an assessment order passed on any suspicious conjuncture and surmises is liable to be set aside.
The Hon'ble Calcutta High Court in the case of CIT Vs. Ranicherra Tea Co.Ltd. reported in 207 ITR 979 observed that while making the 'best judgment assessment ', the Assessing Officer cannot act vindictively or capriciously because he must 85
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exercise the judgment in the matter. In making a "best judgment assessment ", the Assessing Officer does not possess absolute arbitrary authority to assess any figure he likes and that although he is not bound by strict judicial principles, he should be guided by rules of justice, equity and good conscience. The limit of the power of the Assessing Officer are implicit in the expression "best of his judgment assessment"
though there is an element of guess work in a "best judgment assessment", it shall not be a wild one, but shall have a reasonable nexus to the available material and circumstances of each case. Where the AO reject the rates shown by the assessee, he should refer the material or evidence which influenced him to reject the sales shown by the assessee.
61. The Hon'ble Supreme Court in Brij Bhusan Lal Praduman Kumar, etc. Vs. CIT (115 ITR 524), categorically observed that while making "best judgment assessment ", the Assessing Officer should keep in mind what honestly he believes to be fair estimation or the proper figure of assessment. Furthermore, Hon'ble Calcutta High Court in the case of CIT Vs. Popular Electric Co.Pvt.Ltd. observed that 86
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while making "best judgment ", the Assessing Officer should make independent and well grounded estimate and such estimate may be based on adequate and relevant materials.
62. As per our considered view, "best judgment assessment " is not a provision to penalize the assessee, but is a machinery provision to enable the Revenue to assess a person when situation warrants an assessment. Even while making an estimation the same should be rational and should be based on an honest guess work for which some valid basis is available to the Assessing Officer. The order involves exercise of 'judgment' by the Officer. A fair estimation of income has to be made, the Assessing Officer should take into consideration the totality of the facts and circumstances of the case in addition to proper evaluation of the material furnished by the assessee and collected by him by his own efforts. Where "best judgment assessment " power has been conferred, the limits of the power are implicit in the expression "best of his judgment assessment ". The judgment is vital to decide the matter with wisdom, truly and legally. Judgment does not depend upon the arbitrary capricious of the Assessing Officer, 87
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but on settled and invariable principle of justice. Though there is an element of guess work in "best judgment assessment ", it shall not be wild one, but shall have reasonable nexus to the available material and circumstances of each case. While estimating the Profit the Assessing Officer should be fair & reasonable and should keep into account the turnover and the Gross Profit of earlier years alongwith all the facts and circumstances of the case. It is not in dispute that in all the three years under consideration the years under estimation of sales by the Assessing Officer is not based on any material or evidence..
63. In the instant case, assessment for the assessment year 2003-04 which was framed prior to these assessment years, the Assessing Officer has estimated the sales at Rs.1.25 in place of sales shown by the assessee at Rs. 35.61 lacs, crores and after applying profit rate of 15% made the trading addition. We find that the matter travelled upto the Tribunal and the Tribunal vide its order dated 15th May, 2009 upheld the sales at Rs.50 lacs on which after applying the net profit rate of 6% trading addition was sustained. The Tribunal has 88
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elaborately dealt with all the issues and finally reached the conclusion that reasonable turnover of the assessee could at best be taken at Rs.50 lacs on which the rate of net profit is to be taken at 6%. As the facts and circumstances of the case during the years under consideration are same, we respectfully follow the decision of the Tribunal in the assessee's own case and direct the Assessing Officer to apply net profit rate of 6%. For the assessment year 2003-04 in place of sale of Rs. 35.61 lacs as shown by the assessee, the reasonable estimated sale has been accepted by Tribunal at Rs. 50 lacs. Keeping in view the totality of facts and circumstances of the case vis-à-vis our above observation, we direct for estimating the sales at 40% above the sales disclosed by the assessee in the respective years. Thus, in the assessment year 2000-01 we direct the adoption of sales of Rs.34.72 lacs, in the assessment year 2001-02 at Rs. 37.52 lacs and in the assessment year 2002-03 at Rs.44.80 lacs. All the sales have been taken by us at 140% of the sales disclosed by the assessee. The Assessing Officer is directed to apply net 89
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profit rate of 6% on such enhanced sales and to work out the G.P. addition accordingly.
64. In the result, the appeal of the assessee is partly allowed in all the years in terms indicated hereinabove.
This order has been pronounced in the open court on 28th February, 2011.
Sd/- sd/- (JOGINDER SINGH) (R.C. SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 28th February, 2011. CPU* 1828 90