2013 (9) TMI 684 - HC - Income Tax

Tribunal rules AO erred in rejecting books of account & violating tax laws, leading to dismissal of appeal

The Tribunal held that the Assessing Officer (A.O.) erred in rejecting books of account before referring the case to the Departmental Valuation Officer ... Reference to the DVO before rejecting the books of accounts - The A.O. did not find any defect in the books of account and without rejecting the books of account he referred the matter and got the valuation from the DVO – Held that:- A.O. put the cart before the horse – As per Sargam Cinema [2009 (10) TMI 569 - Supreme Court of India], A.O. could not have referred the matter to Departmental Valuation Officer without rejecting books of account. He had to first find out whether the books of account were maintained properly, give opportunity to the assessee to explain any deficiency or discrepancy in books of account and then only after he had rejected the books of account, he could have referred the matter to DVO for valuation for the purpose of assessment of income – In the present case, reference to valuation could not be made only to verify the investment disclosed in the construction of the building in books of account – Decided against the Revenue. Issues:1. Rejection of books of account before referring the case to DVO for valuation of property.2. Entitlement to benefits under section 11/10(23C) despite undisclosed income used for construction.Analysis:1. The appeal raised concerns regarding the rejection of books of account before referring the case to the Departmental Valuation Officer (DVO) for property valuation. The Tribunal found that the Assessing Officer (A.O.) did not provide sufficient reasons as required under Section 145(3) of the Income Tax Act to reject the books of account. The A.O. referred the matter to the DVO without rejecting the books, which was deemed unjustified. Citing the case law of Sargam Cinema v. CIT and CIT v. Lucknow Public Educational Society, the Tribunal held that the A.O. cannot refer the case to the DVO without first rejecting the books of account. Consequently, the Tribunal quashed the A.O.'s order as it was not in accordance with the law laid down by the Apex Court.2. The second issue revolved around the entitlement to benefits under section 11/10(23C) of the Income Tax Act despite using undisclosed income for construction. The A.O. proceeded to verify the cost of construction without rejecting the books of account, leading to a discrepancy in the valuation of the property. The Tribunal emphasized that the A.O. should have first determined the reliability of the books of account before referring the matter to the DVO. The A.O.'s actions were deemed to be in violation of the legal principles established by the Supreme Court. Ultimately, the Tribunal found no error of law in allowing the appeal and setting aside the orders passed by the A.O. and CIT (A), resulting in the dismissal of the income tax appeal.