2019 (2) TMI 2103 - AT - Income Tax

AO cannot refer matter to DVO under section 142A without first rejecting books of account

DCIT Versus M/s Parmarth Iron Pvt. Ltd. And (Vice-Versa)

ITAT Delhi held that AO cannot refer matter to DVO under section 142A without first rejecting books of account, following Allahabad HC precedents. The ... Validity of additions based on valuation report - Referring the matter to DVO u/s 142A without first rejecting the books of account - addition u/s 69 being unexplained investment in the factory building - HELD THAT:- AO in the instant case has not rejected the books of account before making a reference to the DVO. We find in the case of Lucknow Public Educational Society (2011 (3) TMI 1326 - ALLAHABAD HIGH COURT] has held that u/s 142A(1) the assessing authority cannot refer the matter to the DVO without first rejecting the books of account. We find also in the case of CIT vs Subhash Chandra Gupta [2013 (12) TMI 784 - ALLAHABAD HIGH COURT] has held that the Assessing Officer cannot refer the matter to the DVO without first rejecting the books of account. Thus unless and until the books of account are first rejected by the Assessing Officer, the Assessing Officer is not justified in making reference to the DVO u/s 142A and if reference is held to be had in law, the DVO’s report is to be ignored and cannot be the basis to make the addition. Thus AO is not justified in referring the matter to the DVO u/s 142A(1) without first rejecting the books of account. So far as the observation of the ld.CIT(A) that the assessee has not produced the books of account completely as per requirement of the Assessing Officer is concerned, the same is contrary to the facts. The finding of the CIT(A) shows that the assessee has maintained regular books of account. The reply of the assessee before the Assessing Officer as well as the observation given by the Assessing Officer in the body of the assessment shows that the assessee has produced the books of account. Decided in favour of assessee. Addition u/s 68 - share application money received by the assessee from the three persons - Addition made as assessee failed to produce the above parties for his examination and the letters issued to the above three parties were not complied with since one letter was returned unserved and the other two parties did not respond - Assessee argued that proper opportunity was not granted to the assessee - HELD THAT:- Considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore the issue to the file of the Assessing Officer with a direction to give one final opportunity to the assessee to substantiate with evidence to his satisfaction regarding the identity and credit worthiness of the share applicants and the genuineness of the transaction. The Assessing Officer shall decide the issue as per fact and law. Assessee's ground allowed for statistical purposes. Issues Involved:1. Addition on account of unexplained investment in the factory building.2. Addition under Section 68 for unexplained share application money.3. Legality of the reference to the Departmental Valuation Officer (DVO) under Section 142A without rejecting the books of account.4. Validity of the order passed under Section 154 by the CIT(A).Issue-wise Detailed Analysis:1. Addition on Account of Unexplained Investment in the Factory Building:The Assessing Officer (AO) added Rs. 4,01,79,659/- to the total income of the assessee, citing unexplained investment in the factory building based on the DVO's valuation report. The DVO determined the cost of construction at Rs. 5,64,07,000/- against the declared cost of Rs. 1,81,08,729/-. The CIT(A) partially upheld the AO's decision, retaining an addition of Rs. 1,18,54,248/- and deleting the rest. The Tribunal found that the AO referred the matter to the DVO without first rejecting the books of account, which is a legal requirement as per Section 142A and supported by various judicial precedents, including the jurisdictional High Court's decisions. Consequently, the Tribunal held that the reference to the DVO was not in accordance with the law, and the addition based on the DVO's report was invalid. The Tribunal allowed the assessee's appeal on this issue and dismissed the Revenue's grounds.2. Addition under Section 68 for Unexplained Share Application Money:The AO added Rs. 20 lakhs to the total income of the assessee under Section 68, citing the failure to produce the share applicants for examination and non-compliance with the summons issued. The CIT(A) confirmed this addition. The Tribunal noted the assessee's submission that proper opportunity was not granted and agreed to restore the issue to the AO for a fresh examination. The Tribunal directed the AO to give the assessee a final opportunity to substantiate the identity, creditworthiness of the share applicants, and the genuineness of the transactions. The Tribunal allowed the assessee's appeal for statistical purposes on this issue.3. Legality of the Reference to the DVO under Section 142A Without Rejecting the Books of Account:The Tribunal emphasized that the AO must first reject the books of account before referring the matter to the DVO under Section 142A. This principle is supported by various judicial decisions, including the Hon'ble Allahabad High Court's rulings in cases like CIT vs. Lucknow Public Educational Society and CIT vs. Subhash Chandra Gupta. The Tribunal found that the AO did not reject the books of account before making the reference to the DVO, rendering the reference invalid. Consequently, the DVO's report could not be the basis for any addition.4. Validity of the Order Passed under Section 154 by the CIT(A):The Revenue challenged the CIT(A)'s order under Section 154, which provided further relief to the assessee regarding self-supervision rebate, cost of construction of the underground water tank, and oil tank. The Tribunal did not find merit in the Revenue's grounds and upheld the CIT(A)'s order granting relief to the assessee.Conclusion:The Tribunal allowed the assessee's appeal for statistical purposes regarding the addition under Section 68 and dismissed the Revenue's appeals. The Tribunal held that the AO's reference to the DVO without rejecting the books of account was invalid, and no addition could be made based on the DVO's report. The decision was pronounced in the open court on 21.02.2019.