Assessee prevails as Third Member rejects Section 69 addition based on DVO report

The Third Member ruled in favor of the assessee, stating that no addition under section 69 could be made based on the Departmental Valuation Officer's report. The assessee's appeals were allowed, and the matter was referred back to the regular Bench for appropriate orders.

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Issues Involved:
1. Validity of reference to the Departmental Valuation Officer (DVO).
2. Adoption of Central Public Works Department (C.P.W.D.) rates versus State Public Works Department (State P.W.D.) rates.
3. Rejection of books of account and unexplained investment u/s 69 of the Income-tax Act, 1961.

Summary:

1. Validity of Reference to the Departmental Valuation Officer (DVO):
The assessee contended that the reference to the DVO by the Assessing Officer was unnecessary and unwarranted since the books of account were accepted. The Tribunal held that the Assessing Officer is authorized to refer to the DVO for determining the cost of construction, and there is no prohibition under the Income-tax Act against such a reference. The Andhra Pradesh High Court in Daulatram v. ITO and the Madras High Court in C.T. Laxmandas v. Asstt. CIT upheld the validity of such references u/s 55A. However, the Judicial Member dissented, stating that the DVO's report is not dependable evidence for cost determination and that the Assessing Officer must have cogent evidence to reject the disclosed cost.

2. Adoption of Central Public Works Department (C.P.W.D.) Rates versus State Public Works Department (State P.W.D.) Rates:
The assessee argued that the valuation should be based on State P.W.D. rates rather than C.P.W.D. rates. The Tribunal noted that the assessee did not provide evidence of State P.W.D. rates. The Judicial Member emphasized that the DVO is not a cost analyst and the C.P.W.D. rates are not applicable for non-metropolitan areas. The Third Member agreed that the valuation should be based on State P.W.D. rates, as supported by the Tribunal's decision in M.S. Ponraj v. ITO.

3. Rejection of Books of Account and Unexplained Investment u/s 69:
The Tribunal upheld the addition made by the Commissioner of Income-tax (Appeals) as unexplained investment u/s 69, despite the assessee's books being accepted. The Judicial Member disagreed, stating that the Assessing Officer must find defects in the books of account to invoke u/s 69. The Third Member concluded that the reference to the DVO without recording satisfaction was invalid, the valuation report was non est, and no addition was justified since the books were not rejected. The Madras High Court in K.K. Seshaiyer v. CIT supported this view, emphasizing that the actual cost recorded in the books should be accepted if no defects are found.

Conclusion:
The Third Member ruled in favor of the assessee, stating that no addition u/s 69 could be made based on the DVO's report. The assessee's appeals were allowed, and the matter was referred back to the regular Bench for appropriate orders.

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