2017 (2) TMI 683 - HC - Income Tax

High Court rules in favor of assessee on DVO reference, partially upholding appeal under Income Tax Act.

The High Court upheld the appeal in part, ruling in favor of the assessee regarding the illegal reference to the DVO before rejecting the account books ... Validity of reference to Valuation Officer under Section 142A - Rejection of books of account and application of Section 145(3) - Estimation of income on best judgment in absence of verifiable vouchersValidity of reference to Valuation Officer under Section 142A - Rejection of books of account and application of Section 145(3) - Reference to the DVO made before rejection of books of account is invalid and the reference in this case was bad. - HELD THAT: - The Tribunal and the CIT were found to have erred in upholding a DVO reference made prior to the formal rejection of the assessee's books. The court observed that the assessing officer issued notice for production of books and made the reference to the DVO on 09.09.2011, whereas the books were rejected only on 29.12.2011 and opportunities to produce were still extant (including a date of 15.09.2011 fixed for production). Relying on the settled principle that a reference under Section 142A can be made only after books of account are rejected, the court held the earlier reference to the DVO to be contrary to law and therefore bad.Question answered in favour of the assessee; the reference to the DVO was invalid.Rejection of books of account and application of Section 145(3) - Estimation of income on best judgment in absence of verifiable vouchers - Addition on account of alleged extra profit by applying a higher gross profit rate was justified in principle and the matter is remanded for reconsideration. - HELD THAT: - The assessing officer rejected the books for want of verifiable vouchers, maintenance of stock/registers and correlation between raw material consumption and production, applied Section 145(3) and estimated income by applying the prior year's gross profit rate to the assessed turnover. The court noted that these factual and evidentiary aspects - non-production of vouchers, absence of stock/registers and unverifiable consumption - justified estimation in principle and that precedents permit assessment by best judgment where books are not properly maintained. Rather than deciding the quantum afresh, the court directed reconsideration by the CIT in light of these facts and the legal position, requiring the CIT to reexamine the addition within the specified timeframe.Second question decided in favour of the department; matter remanded to the CIT for reconsideration and fresh decision within three months.Final Conclusion: The appeal is disposed: the Tribunal's affirmation of the DVO reference was set aside (reference invalid); the assessing officer's estimation of extra profit was upheld in principle and the matter is remanded to the CIT for reconsideration and decision within three months. Issues involved:1. Justification of affirming the order of the Ist Appellate Authority regarding the deletion of the addition made under Section 69 of the Income Tax Act due to unexamined books of accounts.2. Deletion of the addition of Rs. 1,21,61,243/- towards extra profit after rejecting account books under Section 145(3) of the Income Tax Act.Analysis:1. The appeal was filed by the department against an order of the Tribunal for the assessment year 2009-10. The assessing officer made an addition under Section 69 of the Act due to a difference in the cost of construction. The assessee failed to produce account books despite multiple opportunities. The assessing officer referred the matter to the DVO before rejecting the account books, which is against the law. The reference to the DVO can only be made after the rejection of account books as per Section 142A of the Act. The High Court, citing a Supreme Court case, held the reference to the DVO was illegal as it was made before the rejection of account books. Therefore, the first question was answered in favor of the assessee.2. The assessing officer made an addition towards extra profit by adopting a different gross profit rate after rejecting the account books under Section 145(3) of the Act. The officer found discrepancies in the maintenance of accounts, lack of stock registers, and unverifiable raw material consumption. The CIT and Tribunal did not consider these aspects and deleted the addition. The department argued that in such cases, estimation based on best judgment is necessary, and additions can be made if discrepancies are found. The Court agreed with the department on this issue, deciding in their favor and remanding the matter to the CIT for reconsideration within three months.In conclusion, the High Court upheld the appeal in part, answering the first question in favor of the assessee and the second question in favor of the department. The matter was remanded to the CIT for further consideration within a specified timeframe.