Unexplained investment additions under sections 69 and 115BBE deleted without incriminating material from search

The ITAT Chandigarh allowed the assessee's appeal on multiple grounds. The tribunal deleted additions made under sections 69 and 115BBE for unexplained investment in hotel construction, ruling that DVO reports based on estimation without incriminating material found during search cannot justify additions. The rejection of books of accounts under section 145(3) was overturned since it was based solely on the deleted construction investment addition. Business loss disallowance was reversed as the basis for rejection of books was unsustainable. The tribunal also allowed section 35AD deduction for hotel expenditure, holding that star rating certification can be obtained subsequently and the four-star certificate qualified the business for deduction benefits.

---

---

Issues Involved:
1. Sustaining additions on account of alleged unexplained investment.
2. Invocation of provisions of Section 69 read with Section 115BBE.
3. Reference to the Departmental Valuer without incriminating evidence.
4. Ignoring jurisdictional ITAT and High Court judgments.
5. Validity of reference to the Valuation Officer.
6. Following predecessor's order for a different assessment year.
7. Application of CPWD rates instead of PWD rates.
8. Confirmation of addition on a substantive basis.
9. Rejection of books of accounts under Section 145(3).
10. Disallowance of current year business loss and carried forward losses.
11. Disallowance of deduction under Section 35AD.
12. Lack of specific findings for disallowance under Section 35AD.

Detailed Analysis:

1. Sustaining Additions on Account of Alleged Unexplained Investment:
The assessee challenged the addition of Rs. 2,09,48,986/- for A.Y. 2017-18, Rs. 2,02,71,026/- for A.Y. 2018-19, and Rs. 2,03,67,385/- for A.Y. 2019-20 on the grounds of alleged unexplained investment in the construction of a hotel building. The Assessing Officer (AO) relied on the Departmental Valuation Officer (DVO) report, which estimated the cost of construction significantly higher than what was declared by the assessee. The Tribunal noted that no incriminating material was found during the search at the assessee's premises, and the additions based solely on the DVO's report were not justified.

2. Invocation of Provisions of Section 69 Read with Section 115BBE:
The AO invoked Section 69 read with Section 115BBE to tax the alleged unexplained investment. The Tribunal held that in the absence of any incriminating material found during the search, the invocation of these provisions was not valid.

3. Reference to the Departmental Valuer Without Incriminating Evidence:
The assessee argued that the reference to the DVO was invalid as no incriminating evidence was found during the search. The Tribunal agreed, citing the Supreme Court's decision in PCIT vs. Abhisar Buildwell Pvt. Ltd., which held that in the absence of incriminating material, no addition can be made based solely on the DVO's report.

4. Ignoring Jurisdictional ITAT and High Court Judgments:
The assessee contended that the CIT(A) ignored relevant judgments, including those of the jurisdictional ITAT and the Delhi High Court in Abhinav Kumar Mittal, which held that no reference to the Valuation Officer could be made without incriminating material. The Tribunal found merit in this argument and noted that the CIT(A)'s reliance on certain judgments was misplaced.

5. Validity of Reference to the Valuation Officer:
The Tribunal held that the reference to the Valuation Officer was not valid in the absence of incriminating material found during the search. The Tribunal emphasized that the DVO's report was based on estimation and could not be the sole basis for making additions.

6. Following Predecessor's Order for a Different Assessment Year:
The CIT(A) followed the order of his predecessor for A.Y. 2016-17, which was under appeal. The Tribunal noted that the facts and circumstances for the assessment years under consideration were different, and the CIT(A) should have independently evaluated the evidence.

7. Application of CPWD Rates Instead of PWD Rates:
The assessee argued that the DVO's report was based on CPWD rates, which are higher than PWD rates. The Tribunal agreed, noting that the jurisdictional High Court in CIT vs. Rajesh Mahajan had held that CPWD rates are higher by 30%. The Tribunal found that the DVO's reliance on CPWD rates was not justified.

8. Confirmation of Addition on a Substantive Basis:
The Tribunal held that the substantive addition in the hands of the assessee company was not justified, as the construction was funded by the shareholders/directors, and the company had not commenced its business operations during the relevant period.

9. Rejection of Books of Accounts Under Section 145(3):
The AO rejected the books of accounts under Section 145(3), citing discrepancies in the investment amounts. The Tribunal found no defects in the books of accounts, which were duly audited, and held that the rejection was not justified.

10. Disallowance of Current Year Business Loss and Carried Forward Losses:
The AO disallowed the current year business loss and did not allow the carried forward of losses. The Tribunal held that since the rejection of books of accounts was not justified, there was no basis for disallowing the business loss and carried forward losses.

11. Disallowance of Deduction Under Section 35AD:
The AO disallowed the deduction under Section 35AD, citing the absence of a star rating certificate for the hotel. The Tribunal noted that the certificate was subsequently obtained and that the section does not mandate the certificate to be effective from a particular date. The Tribunal held that the assessee was eligible for the deduction.

12. Lack of Specific Findings for Disallowance Under Section 35AD:
The Tribunal found that the AO did not provide specific findings for disallowing the deduction under Section 35AD. The Tribunal allowed the deduction, noting that the hotel had commenced operations and the necessary conditions were met.

Conclusion:
The Tribunal allowed the appeals of the assessee for all three assessment years, holding that the additions based on the DVO's report were not justified in the absence of incriminating material found during the search. The Tribunal also allowed the deduction under Section 35AD and held that the rejection of books of accounts and disallowance of business losses were not justified.

---