DVO report additions deleted under section 153A without incriminating material from search operations

ITAT Chandigarh allowed the assessee's appeal and deleted additions made under section 153A based solely on DVO report. The tribunal held that without incriminating material found during search and with original assessment already completed, no additions could be made. The DVO reference was invalid as no incriminating material triggered it, and the report relied on pure estimation using inflated CPWD rates. Since the company's business had not commenced and construction was funded by shareholder capital, no undisclosed income existed to justify additions.

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Issues Involved:

1. Validity of reference to the Departmental Valuation Officer (DVO) in absence of incriminating material.
2. Justification of substantive addition in the hands of the assessee company.
3. Reliance on third-party documents not confronted to the assessee.
4. Validity of the DVO's report based on CPWD rates.
5. Justification of protective addition versus substantive addition.

Summary:

The captioned appeals concern the assessee, involved in the hotel business, challenging the orders of the Commissioner of Income Tax (Appeals)-5, Ludhiana, regarding additions made based on a DVO's report following a search and seizure operation under section 132 of the Income Tax Act.

Validity of Reference to the DVO:

The assessee argued that no incriminating material was found during the search at their premises, making the reference to the DVO invalid. The counsel for the assessee cited the Supreme Court decision in PCIT vs. Abhisar Buildwell Pvt. Ltd., asserting that without incriminating material, the DVO's reference was unlawful. The Tribunal agreed, noting that the DVO's report was based purely on estimation without any corroborating evidence from the search.

Justification of Substantive Addition:

The Assessing Officer had made substantive additions in the hands of the directors and protective additions in the hands of the assessee company. The CIT(A) converted these protective additions into substantive additions in the company's hands, which the assessee contested. The Tribunal found this conversion unjustified, especially since the company had not commenced business operations and had no income source, thus no undisclosed income could be presumed.

Reliance on Third-Party Documents:

The Tribunal noted that the document found from M/s Royal Builders, which was not confronted to the assessee, could not be used as a basis for additions. The CIT(A) had acknowledged that the additions were based on the DVO's report rather than the third-party document, which was merely a trigger for the valuation reference.

Validity of the DVO's Report Based on CPWD Rates:

The DVO's report, based on CPWD rates, was challenged by the assessee as these rates were higher than State PWD rates. The Tribunal agreed with the assessee's contention that CPWD rates include a higher profit margin and do not account for self-supervision and discounted material purchases, making the DVO's estimation unreliable.

Justification of Protective Addition versus Substantive Addition:

The Tribunal found that since the assessee company had not commenced business and the construction was funded by shareholders' capital, there was no basis for substantive additions in the company's hands. The Tribunal cited various judicial precedents, including the Supreme Court's decision in CIT vs. Bharat Engineering & Construction Co., to support this conclusion.

In conclusion, the Tribunal allowed the appeals, deleting the additions made by the Assessing Officer and confirmed by the CIT(A), and pronounced the order in the Open Court on 12th October, 2023.

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