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

ITAT Delhi held that AO cannot refer matter to DVO under section 142A without first rejecting books of account, following Allahabad HC precedents. The reference to DVO was invalid as books were not rejected, making the valuation report inadmissible for addition under section 69. Regarding section 68 addition for share application money, tribunal restored matter to AO with direction to provide final opportunity to assessee to prove identity, creditworthiness of share applicants and genuineness of transaction. Appeal decided in favor of assessee on valuation issue and allowed for statistical purposes on share money issue.

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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.

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