2014 (9) TMI 607 - AT - Income Tax

Tribunal overturns rejection of books, highlights need for specific defects in assessment

M/s. Shri Gian Resorts Versus Vs. Income Tax Officer

The Tribunal allowed the assessee's appeal, overturning the rejection of books and addition for construction cost differences. The Revenue's appeal was ... Rejection of books of accounts u/s 145(3) – Difference in cost of construction of building of marriage palace – Held that:- The AO raised four objections while rejecting the books of account starting with earth filling expenses are not debited, fuel/diesel expenses are not debited, labour expenses appears to be on the lower side as proportionate to the material purchased and as per valuation report, the construction cost if estimated at ₹ 1,24,53,238/- as against declared by the assessee at ₹ 36,29,948/- during the year, there was a difference of ₹ 88,23,290/- and why the same should not be added to the income of the assessee as unexplained investment while rejecting the books of account u/s 145(3) of the Act - having not pointed out any defect in the same, the AO was not justified in sustaining the addition of ₹ 12,74,574/- on account of earth filling, which in fact, has been deleted by the ld. CIT(A) – assessee submitted that all the expenses and details were submitted before the AO and no specific defect has been pointed out on this account as well In the absence of any specific defect on this account, books of account cannot be rejected - relying upon Commissioner Of Income-Tax Versus Sheikhar Chand And Sons [1990 (5) TMI 24 - ALLAHABAD High Court] - the AO was not justified in rejecting the books of account and the CIT(A) was not justified in confirming the action of the AO with regard to invocation of provisions of section 145(3) of the Act – Decided in favour of assessee. Reference made to DVO – Held that:- Since, the order of the CIT(A) with regard to invoking the provisions of section 145(3) of the Act is set aside, therefore, the AO was not justified in referring the matter to the DVO. Following the decision in Sargam Cinema vs. CIT [2009 (10) TMI 569 - Supreme Court of India] - no addition could have been made by the AO and no addition could have been sustained by the CIT(A) – Decided in favour of assessee. The AO has got the valuation report of the building done from the DVO and the report was submitted to the assessee and the assessee got the valuation done from the registered valuer Mr. Manikant Garg in view of the DVO’s valuation, who pointed out the defect in the DVO’s report and the assessee submitted that the detailed report will be submitted in due course - But the AO did not provide any time since the assessment was time barring – it was prepared during the appellate proceedings, which has rightly been admitted by the CIT(A) and there was no defect in the same - CIT(A) is not justified in confirming the addition of ₹ 24,68,661 – Decided in favour of assessee. Issues Involved:1. Rejection of books of account under Section 145(3).2. Addition on account of difference in cost of construction.3. Deletion of addition on account of cost of earth filling.4. Admission of additional evidence by CIT(A) under Rule 46A(1)(c).Issue-wise Detailed Analysis:1. Rejection of Books of Account under Section 145(3):The assessee challenged the rejection of its books of account by the Assessing Officer (AO), arguing that no specific defects were pointed out. The AO had rejected the books on the grounds that expenses on material and labor appeared low, and no earth filling expenses were debited. The AO referred the matter to the Valuation Officer (VO) under Section 142A(1) of the Income Tax Act, 1961. The VO estimated the cost of construction significantly higher than what was recorded in the books. The CIT(A) upheld the AO's rejection of the books, citing discrepancies between the VO's estimates and the books. The Tribunal, however, found that the AO did not provide specific defects and relied merely on the higher valuation by the VO, which is not a sufficient basis for rejecting the books. The Tribunal cited various judicial precedents, including the Supreme Court's decision in Sargam Cinema vs. CIT, emphasizing that books cannot be rejected solely based on a valuation report.2. Addition on Account of Difference in Cost of Construction:The AO added the difference between the VO's estimated cost and the cost recorded in the books as unexplained investment under Section 69. The CIT(A) partially upheld this addition but allowed some relief based on the assessee's objections and a report by the assessee's registered valuer. The Tribunal noted that the registered valuer's detailed report, which highlighted discrepancies in the VO's report, was not adequately considered by the AO. The Tribunal found that the CIT(A) allowed relief on an estimate basis without specific defects in the registered valuer's report. Consequently, the Tribunal held that no addition could be sustained without concrete evidence of defects in the assessee's records.3. Deletion of Addition on Account of Cost of Earth Filling:The AO added Rs. 12,74,724/- for earth filling, rejecting the assessee's claim that the seller of the land provided earth filling free of cost. The CIT(A) deleted this addition, noting that the AO's inquiry confirmed the seller's statement. The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO did not find any fault in the assessee's explanation or the seller's affidavit. The Tribunal concluded that the books could not be rejected on this ground.4. Admission of Additional Evidence by CIT(A) under Rule 46A(1)(c):The CIT(A) admitted additional evidence, including the registered valuer's detailed report, under Rule 46A(1)(c), as the AO did not provide the assessee sufficient opportunity to present this during the assessment proceedings. The Tribunal found this admission justified, noting that the AO's refusal to consider the detailed report due to time constraints was not a valid reason to deny the assessee's right to present relevant evidence.Conclusion:The Tribunal allowed the assessee's appeal, reversing the CIT(A)'s decision to uphold the rejection of books and the addition on account of construction cost differences. The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s deletion of the addition for earth filling expenses and the admission of additional evidence. The Tribunal's decision emphasized the necessity of specific defects in the books of account to justify their rejection and the inadmissibility of relying solely on valuation estimates for such rejections.Order Pronounced:The Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal, with the order pronounced in open court on 2nd August 2014.