2023 (7) TMI 729 - AT - Income Tax

Tax Appeals Tribunal Overturns AO's Decision on Construction Income, Citing Incorrect Assessment Year

The ITO, Wd-2 (2) (5), Ahmedabad Versus M/s. Sheetal Associates,

The Commissioner of Income Tax (Appeals) upheld the appellant's position in a case involving the rejection of books of account by the Assessing Officer ... Valuation of the property - cost of investment in land - Relevance of valuation report of the DVO - AO computed the total income from construction activities by adopting the method of total income received from Payne Realtors Private Limited as reduced by the amount paid to the unit holders and part of opening stock and part of current year expenses - HELD THAT:- Since the Departmental Valuation Officer appointed by the Department to value the cost of investment in the aforesaid land and also the cost of construction incurred by the assessee for completion of project, has estimated the combined value of the cost of land and cost of construction at a value which is higher than that value submitted by the assessee, albeit marginally than the cost estimate given by the assessee, then no addition is called for in the instant set of facts. We observe that that Ld. CIT(Appeals) has noted that the cost of investment in land has been shown by the assessee at Rs. 3.25 crores and same has been valued by the DVO also at Rs. 3.25 crores. In case of cost of investment in building, the cost of construction has been declared by the assessee Rs. 10.79 crores, whereas the Departmental Valuation Officer has estimated the same at Rs. 11.03 crores. Therefore, on comparison of the two, the overall cost shown/claimed by the assessee is lesser than the valuation done by the DVO appointed by the Department. We are of the considered view that Ld. CIT(Appeals) has correctly held that since as per the report prepared by the DVO, the value of cost property is more as compared to the cost estimate given by the assessee, the addition made by the AO is not sustainable.Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer (AO) was justified in rejecting the assessee's books of account and making additions on account of alleged unproved purchases and expenses included in opening/closing work-in-progress (WIP) for the relevant year. 2. Whether the AO could examine and make additions in the current assessment year in respect of expenses allegedly incurred in earlier assessment years but claimed in the return for the current year. 3. Whether the valuation and cost figures produced by the Departmental Valuation Officer (DVO) sustain the AO's addition or support the assessee's declared cost of land and construction for the project. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legality of rejecting books of account and making additions based on alleged unproved purchases and expenses Legal framework: The AO may reject books of account where they are not maintained or where entries are found to be fictitious or not supported by evidentiary material; any such rejection must be based on findings relevant to the year under assessment and supported by material. Precedent Treatment: No specific judicial precedents were cited by the Tribunal or parties in the judgment for this issue; the Tribunal relied on factual and valuation material on record. Interpretation and reasoning: The AO's rejection was largely premised on findings concerning expenses claimed in an earlier year (relevant to the immediately prior assessment year) and on alleged discrepancies in purchases and expenses forming part of opening WIP for the year under appeal. The CIT(A) and the Tribunal examined record of scrutiny assessments for prior years, DVO's valuation report and year-wise sales/profit figures showing construction income in earlier years. The CIT(A) found AO's adverse findings related predominantly to the prior year and not to the transactions of the year under appeal; the Tribunal concurred that the AO had not pointed to contemporaneous defects in the current year's transactions to justify rejection of the books for the year under appeal. Ratio vs. Obiter: Ratio - AO cannot reject books of account for the current year on the sole basis of findings relating to an earlier assessment year unless a direct consequential linkage to the current year's returned income is established. Obiter - observations on general AO powers to verify entries spanning prior years where claimed in the current year (see Issue 2). Conclusions: The AO's rejection of books and resultant additions were not sustainable on the facts, because the adverse findings primarily pertained to an earlier year and no independent defect in the current year's transactions was established to justify rejection. Issue 2 - AO's power to examine expenses incurred in earlier years but claimed in the current year Legal framework: Tax administration is empowered to verify and scrutinize amounts claimed as expenses or opening/closing balances in the return for the year under assessment; if expenses incurred earlier are claimed in the return for the current year, the claim is examinable in the current assessment proceedings. Precedent Treatment: No precedent was relied upon or overruled; the Tribunal accepted the departmental submission on the general proposition of AO's examination powers. Interpretation and reasoning: The Tribunal agreed with the Revenue that the AO is entitled to examine expenses in detail even if the underlying incurrence relates to prior years, provided those amounts are claimed in the return under scrutiny. However, that entitlement does not substitute for evidential support showing a defect in the year before rejecting books or making additions. Thus, while the AO had the power to probe the claimed amounts, he must apply that power to facts of the year and produce findings relevant to the returned income of that year. Ratio vs. Obiter: Ratio - AO has jurisdiction to examine entries in the return for the year under assessment even if they reflect cost or expenses incurred in earlier years; such examination, however, must be factually grounded in the current year's records. Obiter - none beyond the accepted principle that mere historical incurrence does not immunize a claim from scrutiny. Conclusions: The Tribunal affirmed AO's power to probe earlier-incurred expenses claimed in the current return but held that AO did not demonstrate factual defects in the current year sufficient to sustain rejection/additions; accordingly, mere invocation of AO's power did not validate the additions. Issue 3 - Effect of the Departmental Valuation Officer (DVO) report on sustaining or negating AO's additions Legal framework: Valuation by a departmental expert (DVO) is material for assessing correctness of declared cost/valuation in property/works cases; such report carries weight unless specific defects in the valuation are demonstrated. Precedent Treatment: The Tribunal treated the DVO report as an expert valuation that cannot be lightly disregarded absent pointed defects; no judicial precedent was cited or overruled. Interpretation and reasoning: The DVO's report compared declared costs year-wise and yielded an overall construction plus land cost slightly higher (by Rs. 23,44,348) than the assessee's declared aggregate cost. The DVO inspected the property and produced detailed year-wise estimates; the Tribunal found the DVO's estimate marginally exceeded the assessee's declared figures and therefore did not support the AO's larger additions. Further, prior scrutiny assessments had accepted book results and the project had been referred to the DVO previously, supporting consistency of declared costs. The Tribunal emphasized that the DVO is an expert appointed by the department and his valuation cannot be disregarded without pointing out defects in the report. Ratio vs. Obiter: Ratio - Where a departmental expert's valuation of combined land and construction cost is equal to or higher than the assessee's declared cost, additions based on alleged understatement of cost are not sustainable absent demonstrable defects in the DVO report or independent contrary evidence. Obiter - the DVO's report having been made after the relevant year but incorporating subsequent additions was noted but not treated as undermining the report's value on the facts. Conclusions: The DVO's valuation being marginally higher than the assessee's declared cost undermined the AO's basis for additions; in absence of pointed deficiencies in the DVO report or independent contrary material, the additions could not be sustained. OVERALL CONCLUSION The Tribunal upheld the CIT(A)'s deletion of additions: (a) AO's rejection of books and additions were principally based on findings relating to an earlier assessment year and lacked specific adverse findings for the year under appeal; (b) although AO has power to examine earlier-incurred expenses claimed in the current year, that power was not exercised with factual findings justifying additions; and (c) the DVO's valuation, being marginally higher than the assessee's declared costs, negated the AO's basis for addition. The appeal by the Department was dismissed.