2017 (7) TMI 301 - AT - Income Tax

Court Invalidates DVO Reference, Emphasizes Need for Concrete Evidence in Tax Cases

The court found the reference to the Departmental Valuation Officer (DVO) under Section 131(1)(d) of the Income Tax Act invalid and the substitution of ... Addition on account of profit earned on sale of property - stock-in-trade - substituting sale consideration with FMV of the property - assessee has challenged the reference made to the DVO u/s 131(1)(d) - Held that:- We are inclined to agree with the contentions of the assessee that reference made in the present case to the DVO for determining the FMV of the property sold was not in conformity with law. It is not disputed that the reference in the present case was made u/s 131(1)(d) of the Act and further it is also not disputed that the asset was a stock-in-trade of the assessee. It is settled law that the reference to the DVO can be made only by resorting to specific provision providing for the same by the Legislature and not by virtue of or by invoking any general provision. The reference in the present case having been made under general provision u/s 131(1)(d) is, therefore, illegal and invalid and beyond the powers of the Assessing Officer. Further, even for a moment if we assume that reference was made u/s 142A and the mentioning of section 131(1)(d) was wrong, the reference, we hold, is still not valid since, as rightly argued by the Ld. counsel for the assessee, as per the provisions of section 142A prevailing at the time the reference was made, the reference could have been made only for determining the cost of construction of the asset and not the sale consideration of the asset. Considering the fact that the assessee has established the sale consideration received by virtue of the sale deed, coupled with the fact that no shred of evidence, of the assessee having earned more than the stated consideration, has been brought on record by the Revenue, we unhesitantingly hold that the Assessing Officer has erred in taking the fair market value as the sale consideration received by the assessee and by doing so has sought to tax the notional profits of the assessee, which is not permissible under the Act. Assessee has rightly referred to the decision of the Apex Court in the case of CIT vs Calcutta Discount Co. Ltd. (1973 (4) TMI 6 - SUPREME Court) wherein it was held that where a trader transfers goods to another trader at a price less than the market price and the transaction is a bonafide one, the taxing authority cannot take into account the market price of those goods, ignoring the real price fetched to ascertain the profit from the transaction. Thus reference made to the DVO for determining the FMV of the property was invalid and as consequence the sale consideration of the property could not have been substituted by FMV determined by the DVO. - Decided in favour of assessee. Issues Involved:1. Validity of the reference made to the Departmental Valuation Officer (DVO) under Section 131(1)(d) of the Income Tax Act.2. Substitution of the sale consideration with the Fair Market Value (FMV) determined by the DVO.3. Taxation of notional profits.4. Errors in the DVO’s valuation report.Issue-wise Detailed Analysis:1. Validity of the Reference to the DVO:The assessee challenged the reference made to the DVO under Section 131(1)(d) of the Income Tax Act, arguing it was illegal. The court agreed, citing the Supreme Court's decision in Amiya Bala Paul Vs. CIT (262 ITR 407), which clarified that the Assessing Officer (AO) can only refer a matter for valuation under specific provisions of the Act, not under general provisions like Section 131(1)(d). The court further noted that even if the reference was assumed to be made under Section 142A, it would still be invalid as this section, at the time, only allowed for determining the cost of construction, not the sale consideration.2. Substitution of Sale Consideration with FMV:The AO substituted the sale consideration with the FMV determined by the DVO, suspecting the property was sold at a lower value than its worth. The court found this substitution invalid, emphasizing that the DVO’s report alone could not establish that the assessee received more than the stated sale consideration. The court reiterated that suspicion, however grave, cannot be the basis for making an addition, and there must be concrete evidence to prove that the assessee received an amount higher than what was declared.3. Taxation of Notional Profits:The court held that by substituting the sale consideration with the FMV, the AO attempted to tax the notional profits of the assessee, which is impermissible under the law. The court cited several judgments, including K.P. Varghese Vs. ITO (131 ITR 597), which established that the onus is on the revenue to prove any understatement in the document and that the actual consideration received was more than what was declared.4. Errors in the DVO’s Valuation Report:The assessee pointed out errors in the DVO’s report, such as the adoption of circle rates for commercial properties instead of residential ones. The court noted that the lower authorities did not consider these discrepancies, further weakening the reliance on the DVO’s report for determining the sale consideration.Conclusion:The court concluded that the reference to the DVO was invalid, and the substitution of the sale consideration with the FMV was erroneous. It held that the AO’s action resulted in the taxation of notional profits, which is not permissible. Consequently, the court set aside the order of the CIT (Appeals) and deleted the addition made to the assessee’s income. The appeals were allowed in favor of the assessee.