2014 (4) TMI 424 - AT - Income Tax

Tribunal affirms CIT(A) decision, stresses book rejection before DVO valuation. Section 142A limits clarified.

The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeals. It emphasized the importance of rejecting the books of account before relying ... Addition made u/s 69 of the Act - Unverifiable payments and stocks - Reference made to DVO u/s 142A of the Act – Difference on cost of construction – Held that:- The decision in M/s. Legend Estates Pvt. Ltd. Versus Dy. Commissioner of Income-tax, Circle-16(1), Hyderabad [2014 (4) TMI 154 - ITAT HYDERABAD] followed – No proceedings were pending at the time of reference made to the DVO, regarding ascertainment of cost of construction of the project as the return of income - for the purpose of making an assessment or reassessment under this Act, once the process of assessment is initiated, the word ‘making’ should be presumed to be associated with both ‘assessment’ or ‘reassessment’, the reference u/s. 142A of the Act can be made - When there is process of assessment, which is initiated after filing of the return of income or issuance of notice u/s. 142(1) - the process of reassessment could be initiated only after issuance of notice u/s. 148(1) after duly fulfilling the formalities mentioned, the reference u/s. 142A of the Act can be made - the invoking of Sec. 142A is a process after the initiation of the assessment proceedings. Relying upon Umiya Co-operative Housing Society Ltd. v ITO [2005 (3) TMI 382 - ITAT AHMEDABAD-B] - A reference to DVO u/s. 142A can be made only when a requirement is felt by the AO for making such reference. Requirement would arise or could be felt only when there is some material with the AO to show that whatever estimate assessee has shown is not correct or not reliable - The use of word ‘require’ is not superfluous but signifies a definite meaning whereby some preliminary formation of mind by the AO is necessary which requires him to make a reference to the DVO u/s 142A - It can only be during the course of pendency of assessment or reassessment that the AO frame his mind to refer the property to valuation cell of the Department - if there is a basis to think that the assessee may have understated the cost of construction or whatever is declared by him in this regard is not believable - reference to valuation cell u/s. 142A can be made during the course of assessment and reassessment and not for the purpose for initiating assessment –Decided against Revenue. Issues Involved:1. Merits of CIT(A)'s decision without thorough examination.2. Difference in valuation as unexplained investment in construction.3. Efforts of the Assessing Officer (AO) in adding the difference in cost of construction as unexplained expenditure.4. Correctness of taxing unaccounted income in construction of flats under Section 69C of the IT Act.5. Validity of reference to the District Valuation Officer (DVO) under Section 142A.6. Use of information gathered from DVO's valuation report.7. Significance of assessee's books of account if DVO's valuation report is invalid.8. Disallowance of expenditure on sand based on impounded registers.9. Disallowance of expenditure on bricks based on impounded registers.Detailed Analysis:1. Merits of CIT(A)'s Decision:The CIT(A) allowed the assessee's appeal without delving into the merits of the case. The Tribunal found that the CIT(A) relied on an earlier ITAT order which the Department found deficient. However, the Tribunal upheld the CIT(A)'s decision, finding no infirmity in it.2. Difference in Valuation as Unexplained Investment:During a survey under Section 133A, discrepancies in payments and stock records led the AO to refer the matter to the DVO. The DVO's valuation showed a higher cost of construction than recorded in the assessee's books, leading to an addition under Section 69. The Tribunal noted that the AO did not find defects in the books of account before referring to the DVO, thus invalidating the addition based solely on the DVO's report.3. Efforts of the AO:The AO added the difference in construction cost as unexplained expenditure after giving the assessee a hearing. However, the Tribunal emphasized that without rejecting the books of account, the AO's addition based on the DVO's report was not justified.4. Taxing Unaccounted Income:The Tribunal reiterated that the AO must find defects in the books of account before making additions under Section 69C. Since the AO did not reject the books, the addition of unaccounted income in construction was not upheld.5. Validity of Reference to DVO:The Tribunal cited Section 142A, which allows the AO to refer to the DVO for valuation during assessment or reassessment. However, it clarified that such a reference is valid only when there are pending proceedings and some material suggesting underestimation by the assessee. The Tribunal found that the reference to the DVO was made without pending proceedings, making it invalid.6. Use of DVO's Valuation Report:Even if the DVO's reference was invalid, the Tribunal stated that information from the valuation report could not be used unless the books of account were rejected. The Tribunal relied on precedents, including the Hon'ble Delhi High Court's decision, which excluded unexplained expenditure under Section 69C from Section 142A's ambit.7. Significance of Assessee's Books:The Tribunal stressed that without rejecting the books of account, the AO could not make additions based on the DVO's report. The books maintained by the assessee were to be treated as the basis for assessment.8. Disallowance on Sand Expenditure:The AO's disallowance of sand expenditure was based on impounded registers showing lower expenses than recorded in the P&L account. The Tribunal found no defects pointed out in the books, thus invalidating the disallowance.9. Disallowance on Bricks Expenditure:Similar to sand expenditure, the AO disallowed bricks expenditure based on impounded registers. The Tribunal upheld that without rejecting the books of account, such disallowance was not justified.Conclusion:The Tribunal dismissed the Revenue's appeals, confirming the CIT(A)'s order. It emphasized the necessity of rejecting the books of account before making additions based on DVO's valuation and clarified the limited scope of Section 142A concerning unexplained expenditure under Section 69C. The Tribunal's decision was consistent with earlier judgments and upheld the principles of fair assessment.