Books must be rejected before DVO reference under sections 142A and 131(1)(d); revenue appeals dismissed

HC held that, in light of the SC ruling in Sargam Cinema, the Assessing Officer must first reject the assessee's books of account before making a reference to the Departmental Valuation Officer under section 142A or section 131(1)(d) of the Income-tax Act. Consequently, the earlier view in Bhawani Shankar Vyas, permitting such reference without prior rejection of books, could not be followed. Upholding the Tribunal's approach and applying the law as declared by SC, HC held that no substantial question of law arose and dismissed the Revenue's appeals.

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Issues Involved:
1. Whether the Assessing Officer must record reasons or reject the books of account before referring a property to the Valuation Officer under section 142A of the Income-tax Act.
2. Interpretation and application of section 142A of the Income-tax Act, particularly regarding whether preconditions such as invoking section 145 are necessary for a reference to the Valuation Officer.

Detailed Analysis:

Issue 1: Necessity of Recording Reasons or Rejecting Books of Account Before Reference to Valuation Officer

The court examined whether it is mandatory for the Assessing Officer to record reasons regarding the reliability of the books of account or to reject the books of account before making a reference to the Valuation Officer under section 142A of the Income-tax Act. The context involved the Lucknow Public Educational Society, which was constructing a building, and the Assessing Officer referred the property to the Valuation Officer without rejecting the books of account.

The Tribunal had previously held that without rejecting the books of account, the Assessing Officer cannot resort to estimation. This decision was challenged by the Revenue, arguing that section 142A confers power on the Assessing Officer to direct the valuation of assets if not satisfied with the valuation in the books of account.

Issue 2: Interpretation and Application of Section 142A

Section 142A was introduced by the Finance (No. 2) Act, 2004, with retrospective effect from November 15, 1972. This section empowers the Assessing Officer to refer the matter to the Valuation Officer for estimating the value of any investment, bullion, jewellery, or other valuable articles. The court analyzed whether this section necessitates the rejection of the books of account before making such a reference.

The court reviewed several judgments from various High Courts and the Supreme Court:
1. K. K. Seshaiyer v. CIT [2000] 246 ITR 351 (Mad): The Madras High Court held that in the absence of recording that the books of account are not credible, it would not be open to call for a report of the District Valuation Officer.
2. CIT v. Star Builders [2007] 294 ITR 338 (Guj): The Gujarat High Court held that reference to the Valuation Officer cannot be made for the purpose of finding out the cost without rejecting the books of account.
3. CIT v. Hotel Joshi [2000] 242 ITR 478 (Raj): The Rajasthan High Court held that a reference to the Departmental Valuation Officer would arise only if the Assessing Officer was not satisfied with the accounts of construction produced by the assessee.
4. CIT v. Bhawani Shankar Vyas [2009] 311 ITR 8 (Uttarakhand): The Uttarakhand High Court held that it was not mandatory for the Assessing Officer to reject the books of account before making a reference under section 142A.
5. Sunder Carpet Industries v. ITO [2010] 324 ITR 417 (All): The Allahabad High Court held that the reference to the Departmental Valuation Cell for determining the investment in construction is lawful.
6. Sargam Cinema v. CIT [2010] 328 ITR 513 (SC): The Supreme Court held that the assessing authority cannot refer the matter to the Departmental Valuation Officer without first rejecting the books of account.

Conclusion:

The court concluded that the law, as declared by the Supreme Court in Sargam Cinema v. CIT, mandates that the assessing authority cannot refer the matter to the Departmental Valuation Officer without first rejecting the books of account. Consequently, the questions of law framed in the appeals did not arise, and all the appeals were dismissed.

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