2024 (9) TMI 529 - HC - Income Tax

Reopening assessment based solely on valuation report without proper examination by Assessing Officer held invalid under section 148

Delhi HC held that reopening of assessment based solely on District Valuation Officer's report without proper application of mind by Assessing Officer is ... Validity of reopening of assessment based on report of the District Valuation Officer [“DVO”] - “reason to believe” v/s “reason to suspect” - HELD THAT:- Proximity of the reasons with the belief of escapement of income is the determinative factor for re-opening of the assessment. Absence of reasons would obviate the possibility of a belief and would bring the case in the realm of mere suspicion which cannot be a ground for re-opening of assessment. On a perusal of the reasons recorded by the AO, it is apparent that the sole ground for reopening the assessment is the valuation of the Officer who had estimated the investment made in renovation/ reconstruction of the property even though, the petitioner had declared the cost of the said property under the head “Fixed Assets and Capital WIP”. Simply relying upon the report/estimate of the Valuation Officer, AO jumped to the conclusion that the amountrepresents the income of the assessee chargeable to tax which has escaped assessment for the AY 2011-12 and 2010-11. There is no statement or discussion by the AO as to what was the basis and why he should proceed on the valuation report, its contents and why he should rely on the same. The reasons do not reflect that AO has applied his mind to the facts of the case to ascertain as to whether in fact the assessee had already declared the value of the aforesaid property under “Fixed Assets and Capital WIP” or whether such valuation is correct and proper and not. Case of the petitioner is squarely covered by the ratio laid down by the Apex Court in the case of Dhariya Construction Company [2010 (2) TMI 612 - SC ORDER] - Thus impugned notice (s) u/s 148 are unsustainable - Decided in favour of assessee. Issues Involved:1. Validity of reassessment action initiated under Section 148 of the Income Tax Act.2. Reliance on the District Valuation Officer's (DVO) report for issuance of notice under Section 148.3. Application of mind by the Assessing Officer (AO) in forming a belief of income escapement.4. Legal precedents regarding the sufficiency and validity of DVO reports as basis for reassessment.Issue-wise Detailed Analysis:1. Validity of reassessment action initiated under Section 148 of the Income Tax Act:The core issue is whether the reassessment action initiated through notices under Section 148, dated 30.03.2015, for Assessment Years (AY) 2011-12 and 2010-11, is valid. The reassessment was based on the DVO's report, which estimated the investment in property renovation/reconstruction at Rs. 2,11,99,57,449/-, while the petitioner had declared the cost under 'Fixed Assets and Capital WIP' at Rs. 592,13,59,681/-. The Court found that the AO did not sufficiently apply his mind to the DVO's report or the petitioner's declared values, leading to a conclusion that the reassessment proceedings were not sustainable.2. Reliance on the District Valuation Officer's (DVO) report for issuance of notice under Section 148:The Court examined whether the DVO's report could serve as a basis for issuing a notice under Section 148. The petitioner argued that the DVO's report was not tangible material for forming a belief of income escapement, especially since the petitioner had already declared a higher property value. The Court referenced the Supreme Court's decision in Assistant Commissioner of Income Tax, Gujarat vs. Dhariya Construction Company, which held that the DVO's opinion per se is not information for reopening assessment under Section 147. The AO must apply his mind to the information and form a belief thereon.3. Application of mind by the Assessing Officer (AO) in forming a belief of income escapement:The Court scrutinized whether the AO had applied his mind to the DVO's report and the petitioner's financial declarations. It was found that the AO did not discuss or analyze why he should rely on the DVO's report or its contents. The reasons recorded by the AO lacked a clear basis for proceeding with the valuation report. The Court emphasized that the AO must form a belief based on a close nexus between the material before him and the belief of income escapement, which was absent in this case.4. Legal precedents regarding the sufficiency and validity of DVO reports as basis for reassessment:The Court referred to several legal precedents, including the Supreme Court's decisions in Bawa Abhai Singh v. Dy. Commissioner of Income-Tax and Dhariya Construction Company, and the Delhi High Court's ruling in Mahashay Chunnilal vs. Deputy Commissioner of Income-Tax. These cases established that the DVO's report alone is insufficient for reopening assessments without the AO applying his mind and corroborating the report with other evidence. The Court concluded that the AO's reliance solely on the DVO's report without further analysis rendered the reassessment proceedings invalid.Conclusion:The Court allowed the petitions, quashing the notices under Section 148 dated 30.03.2015 for AY 2011-12 and 2010-11, and set aside the reassessment proceedings initiated as a result of these notices. The decision underscores the necessity for the AO to apply his mind and substantiate the reasons for believing that income has escaped assessment, rather than relying solely on the DVO's report.