2014 (10) TMI 223 - HC - Income Tax

Challenging Unexplained Investments in Tax Assessment: Importance of Books of Account and Valuation Officer Referral

The Commissioner of Income Tax Versus M/s. Lakshmi Constructions

The Assessing Officer's addition of unexplained investment based on a Valuer's higher building cost estimate was challenged by a firm in a tax assessment ... Value of the building constructed by assessee-firm – Reference made to DVO - Held that:- The books of account maintained by an assessee have their own significance and importance in the context of the assessment under the Act - It is on account of the availability of books of account, that the assessee is relieved from the burden of maintaining the other evidence - An AO is conferred with the power to satisfy himself about the correctness of the books of account - it is only when the AO did not take the contents of the books of account, on their face value, that he could have resorted to an independent valuation - the Tribunal maintained the subtle distinction and held that even before ordering the valuation of any property by independent Valuer in respect of an assessee, who maintained books of account, the AO must express his lack of confidence in the books of account - That is not been done in the present case, the reference to the Valuation Officer cannot be sustained in law - though Section 142A of the Act was amended in the year 2004 with retrospective effect from 1972, it is difficult to sustain the exercise undertaken by the AO on the touch stone of that provision – Decided against revenue. Issues:1. Valuation of building disclosed in tax returns for the year 1991-92.2. Addition of unexplained investment by Assessing Officer.3. Appeal before Commissioner (Appeals) and Income Tax Appellate Tribunal.4. Justification for referring the matter to Valuation Officer.5. Importance of books of account in assessment under the Income Tax Act.6. Precedents regarding referral to Valuation Officer.7. Amendment to Section 142A of the Act.Valuation of Building:The respondent, a firm assessed to tax, disclosed a building construction cost of Rs. 23,75,000 for the year 1991-92. The Assessing Officer referred the matter to a Valuer who estimated the building's cost at Rs. 41,33,000. Consequently, the Assessing Officer added Rs. 17,48,000 as unexplained investment, leading to the respondent's appeal.Unexplained Investment Addition:The Commissioner (Appeals) remanded the matter to the Assessing Officer, stating that the amount could not be added without rejecting the books of account. The Tribunal later allowed the appeal, emphasizing that the Valuation Officer's reference required the Assessing Officer to doubt or reject the books of account.Referral to Valuation Officer:The Tribunal held that the Assessing Officer must express lack of confidence in the books of account before ordering independent valuation. Referring to precedents, it aligned with the Supreme Court's stance that the Valuation Officer referral is only valid if the books of account are rejected or disbelieved.Importance of Books of Account:Books of account are crucial in assessment under the Income Tax Act, relieving the assessee from additional evidence burden. The Assessing Officer can verify the books' correctness and make observations if found unreliable, conducting further assessments based on his findings.Amendment and Dismissal of Appeal:The judgment dismissed the appeal, noting the retrospective amendment to Section 142A of the Act in 2004. Despite the winding up of the assessee firm in 1992, the Assessing Officer's actions were deemed unjustifiable under the amended provision, leading to the appeal's dismissal without costs.Conclusion:The judgment highlights the significance of books of account in tax assessments and underscores the necessity for Assessing Officers to have valid reasons for referring matters to Valuation Officers. Precedents and legal principles guide the assessment process, ensuring fair treatment for taxpayers and adherence to statutory provisions.