DVO Estimate Alone Can’t Create ‘Unexplained Investment’ – ITAT Deletes Additions on Hostel Construction

A K Kupparaju and Brothers Charitable Foundation Trust Vs ACIT (ITAT Bangalore)

DVO Estimate Alone Can’t Create ‘Unexplained Investment’ – ITAT Deletes Additions on Hostel Construction

In a significant ruling, the Bangalore ITAT deleted additions made against a charitable trust solely on the basis of a DVO valuation report, holding that a mere difference in estimated construction cost cannot justify addition u/s 69B unless the department proves actual unaccounted investment with cogent evidence.

The assessee trust had constructed Boys’ and Girls’ Hostels over several years and disclosed total construction cost of about ₹28.83 crore in its books. The DVO estimated the cost at ₹29.15 crore, resulting in a difference of approximately ₹32 lakh spread across six assessment years. Based solely on this valuation difference, the AO treated the amount as unexplained investment u/s 69B.

The Tribunal noted that the DVO himself had adopted the Plinth Area Rate and Cost Index Method because day-to-day construction accounts, structural drawings and certain details were not fully available. However, the ITAT emphasized that the valuation report itself was only an estimate and could not automatically replace the actual books of account maintained by the assessee.

Importantly, the Bench observed that the Revenue failed to point out any “latent, patent and glaring defect” in the books or actual construction expenditure recorded by the trust. The Tribunal also highlighted that during search proceedings against trustees, no incriminating material or evidence of unaccounted expenditure relating to hostel construction was found.

The ITAT further noted that the overall variation between declared cost and DVO valuation was only around 10.99%, which was within a reasonable margin considering long-term construction activity spread over multiple years. The Tribunal even referred to the tolerance concept recognized under section 50C and observed that minor valuation differences by themselves cannot justify additions.

Relying heavily on the Karnataka High Court judgment in CIT vs. Vasudev Construction, the Tribunal reiterated that a DVO report by itself is not incriminating material, and in the absence of seized evidence showing suppression of investment, additions u/s 69B cannot survive merely on valuation estimates.

Accordingly, the ITAT deleted additions for AYs 2012-13 to 2017-18 aggregating to over ₹32 lakh. However, for AY 2018-19, the Tribunal dismissed the assessee’s appeal holding that issues arising from an earlier intimation u/s 143(1) could not be challenged indirectly in proceedings u/s 153C without separately filing appeal or rectification against the original intimation.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

These are 7 appeals filed by the Assessee/Appellant against the consolidated order passed by the Ld. COMMISSIONER OF INCOME TAX (Appeals)-15, Bengaluru dated 27-Nov-2025 wherein the appeals filed by the assessee for the Assessment Years 2013-14, 2014-15 were partly allowed and appeals for the Assessment Years 2012-13, 2015-16, 2018-19 were dismissed. Therefore the assessee is in appeals.

2. The solitary issue involved in 6 appeals is regarding addition u/s. 69B of the Act for respective years on the basis of the report of the DVO being the estimate of cost of construction of the Boys & Girls Hostels. In the 7 th appeal the issue is that there is no addition made in the assessment order, but income computation started from income as per Intimation u/s 143(1) (a) of the act , assessee is agitating those addition as assessee did not file appeal against the intimation.

3. The necessary facts show that assessee is a charitable trust registered u/s. 12A of the Act. For the impugned AY 2012-13 return of income was filed on 1.10.2012 at the total income of NIL. Subsequently survey u/s. 133A of the Act was conducted at the campus of the assessee on 14.12.2019. Subsequently notice u/s. 148 was issued to the assessee on 18.3.2019 against which the assessee vide letter dated 23.3.2019 reiterated the original return filed.

4. The facts show that assessee incurred certain expenses towards construction of the Boys & Girls Hostels. The AO referred the matter to the DVO u/s. 142A to ascertain the cost of construction. The DVO submitted report on 27.10.2020. According to that report, addition u/s. 69B of the Act was made to the total income of the assessee of Rs.3,59,917. Appeal was preferred before the ld. CIT(A) who confirmed the addition.

5. Identical additions on the basis of valuation report were made in the respective assessment years. Therefore all these appeals have been filed before us.

6. During the course of survey, the ld. AO observed that assessee has made large investment in property and claimed capital expenditure of Rs.3,23,86,144 for AY 2012-13. The assessee during the course of assessment proceedings could not produce bills and vouchers to the extent of expenditure incurred and therefore the ld. AO referred the matter to the ld. DVO to determine the cost of construction of the above property. The ld. DVO held that complete day to day construction accounts were not available and further the structural foundation and service drawings were also not available with the assessee. Therefore, adopting the Plinth Area Rate and Cost Index Method of Valuation cost of construction was arrived at. As per the report of the Valuer against the cost incurred by the assessee of Rs.3,23,86,144 adopted the cost of construction at Rs.3,27,46,061 and made an addition of Rs.3,59,917.

7. Search u/s. 132 of the Act was conducted on 17.12.2020 in the case of Mr. C A Sundararajan at the office premises of Atria Institute of Technology. According to the ld. AO Mr. C S Sunder Raju and Mr. K. Nagaraju are the trustees of the above assessee trust. During the course of search some incriminating documents were found related to this trust and therefore the case of the assessee was selected for scrutiny u/s. 153C of the Act for AYs 2015-16 to 2018-19.

8. For the AYs 2012-13 to 2017-18 the assessee has incurred cost of construction of building of Rs.28,83,34,980. The valuation report of the DVO has shown that the estimated cost of construction is Rs.29,15,39,332. Therefore the total addition of Rs.32,04,352 was made for these assessment years on the basis of val. ion adopted by the DVO for the respective years against the cost of construction incurred by the assessee. The tabulated chart of the respective assessment year wise addition is as under: –

9. The ld. CIT(A) issued 10 notices to the assessee which remained unresponded. The ld. CIT(A) referred to the assessment order and Statement of Facts filed before him and based on this, he held that assessee trust failed to substantiate and explain the difference between the valuation adopted by the DVO and the cost of construction shown by the assessee and therefore the addition was confirmed.

10. The assessee in appeals before us for all these assessment years. The claim of the assessee is that addition is made in the hands of the assessee merely on the basis of cost of construction estimated by the DVO. In the assessment proceedings, there is no reference of finding by the ld. AO that the cost of construction incurred by the assessee of the Boys & Girls Hostel is not supported by vouchers and bills. Further merely because some of the vouchers are self made, the ld. AO could not trigger a reference to the DVO as such. It was further stated that even otherwise the valuation report of the DVO is also an estimate. Unless the facts on record and cost of construction in the books of account are held to be invalid or defective, addition could not have been made. The ld. AR vehemently submitted that the reopening of the assessment was made merely because there was a search at the premises of the trustees. There is no reference in the assessment order that any material of unaccounted income invested in the trust property for construction of Boys & Girls Hostel was recovered, which even remotely suggests that such cost of construction is not recorded in the books of account of the assessee. The ld. AR also referred to the chart and submitted that the total cost of construction incurred by the assessee is Rs.28.83 crores and the valuation estimated by the DVO is Rs.29.15 crores resulting into a difference of merely approximate 10%. Thus, such kind of difference in the estimate of cost of construction determined by the DVO could not have been made to the total income of the assessee. He otherwise referred that whenever there is a valuation by Govt. authority, the Income Tax Act also gives a tolerance limit of 10% as provided in section 50C of the Act. Accordingly the addition deserves to be deleted.

11. The ld. DR vehemently submitted that there is a difference in cost of construction estimated by the DVO and cost of construction recorded in the books of the trust. There is an excess cost of construction determined by the DVO which the assessee failed to explain and therefore the addition is rightly made and confirmed by the ld. CIT(A).

12. We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. As per para 7 to 10 of the assessment order for AY 2012­13, this addition was made. We find that the assessee could not produce certain details and vouchers and therefore to elucidate the correct capital expenditure, valuation was referred to the ld. DVO. The ld. DVO held that day to day construction accounts are not available and further structural and foundational service drawings were also not available and therefore he adopted the Plinth Area Rate and made the valuation. Based on this, the difference between the value adopted by the DVO and the cost recorded in the books of the trust were added as unexplained investment u/s. 69B of the Act. We find that unless there is a latent, patent and glaring defect pointed out by the ld. AO in the cost of construction shown by the assessee, the addition merely on the basis of opinion of the ld. DVO that too which is approximately only 10% could not have been made in the hands of the appellant trust. Both the ld. lower authorities have looked into only the difference between the valuation report and the actual cost of construction incurred by the assessee. Even the ld. DVO has made the addition only on the basis of applicable Plinth Area Rate and adopting cost of construction as per Cost Inflation Index. In para 6, the ld. AO has himself stated that in absence of proper detail, Plinth Area Rate and Cost Index Method of Valuation was adopted. No doubt there cannot be any issue on the valuation made by the DVO. However, looking at the totality of the facts that the construction activity continued for 5 years of Boys & Girls Hostels, during the course of search at the premises of trustees no evidences and unaccounted expenditure related to Boys & Girls Hostel was found. Further as the difference between the cost of construction incurred by the assessee and the cost of construction estimated by the ld. DVO is merely 10.99%, for the reason that actual cost of construction could not have been replaced by the opinion of the DVO without pointing out any patent and glaring defects in the cost of construction shown by the assessee. Further the valuation report made by the DVO is also based on standard cost of bill of material.

13. Honourable Karnataka High court in Commissioner of Income-tax, Central Circle vs. Vasudev Construction [2014] 44 taxmann.com 30 (Karnataka)/[2014] 363 ITR 247 (Karnataka)[30-01-2014] has held as under :-

“9. The records clearly disclose that search was conducted in the residence and business premises of Sri. Nagendra Baliga, who is one of the partners of respondent-Firm. During the course of search, the said Nagendra Baliga made a statement that he has invested a sum of Rs.65,00,000/- for construction of the buildings. On the basis of bills of materials purchased, labour charges paid, cheques relating to the assessee-Firm found during the search, a notice was issued under Section 158-BD calling upon the assessee to file the return of undisclosed income for the block period 01-04-1989 to 28-01-2000. The assessee filed NIL returns. Thereafter, a notice was issued under Section 143(2) and 142(1) of the Act. The construction of the buildings by the assessee-Firm was referred to the DVO, for valuation under Section 133(6) of the Act and for estimating the cost of construction of two buildings. The DVO submitted a report on 15-04-2002. There was difference in valuation by the assessee-Firm and the Valuator to an extent of Rs.20,97,351/-. The assessee-Firm filed objections to the report of the DVO. Comments were called for from the DVO. The DVO by his further report dated 12-09-2002 rectified certain mistakes and gave certain benefits to the assessee and he had not offered any comments for some objections. In view of that, the Assessing Officer added the said sum of Rs.20,97,351/- to the undisclosed income and assessed for tax.

10. The records further disclose that during the course of search, no incriminating documents were traced. However, certain documents like bills of materials purchased, labour charges paid and some cheques issued by the Firm were seized. The assessee-Firm has only two partners i.e. Nagendra Baliga and his wife. Construction of two buildings is the maiden project of the assessee-Firm. As on the date of search, the building was not completed and there was no income from the building. There was no positive comments from the DVO with regard to suppression of material facts by the assessee which would amount to undisclosed income. The Managing Partner of the Firm is primarily a Jeweller by profession, constituted a Firm to take up the work of construction of the buildings. The difference in the cost of construction cannot constitute undisclosed income for the block period. On verification of the revised report submitted by the DVO, the differences between the valuation of the assessee-Firm and the DVO is less than 15%. There is no specific finding by the Assessing Officer with regard to any concealment. Further, there was no material found during the search indicating that there were expenses incurred on construction by the assessee  that were not recorded in the books of accounts. In the absence of any seized material and solely on the basis of the report of the DVO, there cannot be any finding with regard to the undisclosed income. No material has been found at the time of search for initiating proceedings under Section 158-BD of the Act. Solely on the basis of the Valuation report, block assessment cannot be made. Further, it is relevant to mention that the assessee-Firm came into existence on 28-01-1998. The Firm does not have its own income. The Managing Partner of the assessee-Firm is a jeweller by profession. His income was assessed and tax has been levied. Hence, it is not open to the appellant to tax once again in the guise of undisclosed income. The order passed by the Assessing Officer is contrary to the law laid down by the Hon’ble Supreme Court in the cases referred to above by the advocate appearing for the respondent. The Hon’ble Supreme Court in a judgment reported in Hotel Blue Moon (supra) has clearly held that the undisclosed income unearthed as a result of search. The scope and its ambit is limited in that sense to materials unearthed during the search. Paragraph 12 of the judgment reads as under:

“Chapter XIV-B provides for an assessment of the undisclosed income unearthed as a result of search without affecting the regular assessment made or to be made. Search is the sine qua non for the block assessment. The special provisions are devised to operate in the distinct field of undisclosed income and are clearly in addition to the regular assessments covering the previous years falling in the block period. The special procedure of Chapter XIV-B is intended to provide a mode of assessment of undisclosed income, which has been detected as a result of search. It is not intended to be substituted for regular assessment. Its scope and ambit is limited in that sense of materials unearthed during search. It is in addition to the regular assessment already done or to be done. The assessment for the block period can only be made on the basis of evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with the Assessing Officer. Therefore, the income assessable in block assessment under Chapter XIV-B is the income not disclosed but found and determined as the result of search under section 132 or requisition under Section 132A of the Act.”

Further, in a judgment reported in Bimal Auto Agency (supra), the Gauhati High Court held that, the report of DVO does not constitute a material or information to the search. Paragraph 13 of the judgment reads as under:

“…….. Admittedly, no evidence or materials was discovered in the course of the search of the premises of the group to which the assessee belongs. The undisclosed income insofar as the building is concerned was solely made on the basis of the report of DVO as obtained by the search party. The report of the DVO does not constitute materials or information relatable to the search. Such a view have been recorded in the judgments of the Madhya Pradesh High Court in CIT v. Khushlal Chand Nirmal Kumar (supra) and Delhi High Court in CIT v. Manoj Jain (supra) and CIT v. Ashok Khetrapal (supra). While expressing our respectful agreement with the said views, it has to be held that the determination of undisclosed income of Rs. 40,04,359/- in respect of the building in question being solely on the basis of the report of the DVO was rightly interfered with by the learned Tribunal. The said conclusion of the learned Tribunal, therefore, will not be open to interference.”

11. The Appellate Authority as well as the Tribunal after considering the matter in detail corrected the mistake committed by the Assessing Officer. We find, no infirmity or irregularity in the order passed by the Appellate Authority and the Tribunal. Hence, appeal filed by the revenue is liable to be dismissed. The substantial questions of law framed in this appeal are held against the revenue.”

14. Looking at the percentage of difference, the construction activity going on for 6 assessment years, respectfully following the decision of Honourable Jurisdictional high court , we direct the ld. AO to delete the addition of Rs.3,59,917, Rs.4,68,412, Rs.5,22,927, Rs.6,60,280, Rs.7,45,738 & Rs.4,47,078 for all these 6 assessment years. Thus, the appeals for the AYs 2012-13 to 2017-18 are allowed.

15. Coming to the appeal of the assessee for AY 2018-19, we find that assessee has filed return of income u/s. 139 of the Act on 30.10.2018 at Rs. NIL. Subsequently it was found that because of search, notice u/s. 153C of the Act was issued which was served on the assessee. Subsequently the assessee filed return of income u/s. 153C of the Act on 8.3.2022 at a total income of Rs.1,77,800. The facts show that the income was determined at Rs.4,28,99,587 u/s. 143(1) of the Act processing the return filed u/s. 139. Therefore the ld. AO passed the assessment order u/s. 143(3) r.w.s. 153C of the Act on 30.3.2022 adopting the income determined u/s. 143(1) of Rs.4,28,99,587.

16. The assessee preferred appeal before the ld. CIT(A). The assessee did not furnish any information before the ld. CIT(A), despite notices issued on 10 occasions. Therefore the ld. CIT(A) disposed of the appeal of the assessee on its merits. The only grievance before the ld. CIT(A) was that the ld. AO was not justified in law in considering the starting point of computation at Rs.4,28,99,587 which is as per intimation u/s. 143(1) dated 23.3.2020.

17. The ld. CIT(A) held that as the intimation was passed in the case of assessee on the basis of return u/s. 143(1) on 23.3.2020, the assessee should have filed an appeal against such intimation or rectification. However, in the assessment order passed u/s. 153C of the Act the ld. AO has not made any addition, but has merely reiterated the original income determined by the AO u/s. 143(1) of the Act at Rs.4,28,99,587. Thus appeal of the assessee was dismissed.

18. The ld. AR reiterated the same facts which were stated in Ground No.7 of the appeal filed before the ld. CIT(A).

19. The ld. DR supported the order of the ld. CIT(A) at para 8.1.

20. On careful consideration of the facts, we find that the original return of income filed by assessee u/s. 139 of the Act on 30.10.2018 at Rs.NIL was processed u/s. 143(1) of the Act on 23.3.2020. Subsequently on the basis of search on the trustees of the assessee, a notice u/s. 153C of the Act was issued on 30.10.2021. The assessee filed return of income of RS.1,77,800. The ld. AO did not make any addition, but has reiterated the assessed income as per income assessed u/s. 143(1) by intimation dated 23.3.2020. If the assessee is aggrieved with the intimation passed u/s. 143(1) of the Act dated 23.3.2020, the right course of action according to the Income Tax Act would have been either to file an application for rectification u/s. 154 of the Act or to have filed appeal against such intimation before the ld. CIT(A). None of the recourse adopted by the assessee was shown before us. Therefore it is apparent that assessee was negligent in not caring its right against the intimation u/s. 143(1), but now agitating the issue which was not part of the assessment order u/s. 153C of the Act. The provisions of section 153C of the Act as held by the Hon’ble Supreme Court in the case of Abhisar Buildwell Pvt. Ltd. is to assess the unaccounted income of the assessee which is unearthed during the course of search. Therefore the intimation passed u/s. 143(1) of the Act on 23.3.2020 was prior to the date of search on 17.12.2020 on the trustees of the assessee. Thus, the addition made u/s. 143(1) of the Act could not have been agitated by the assessee before the ld. AO or before the ld. CIT(A). Therefore the appeal filed by the assessee for AY 2018-19 is  dismissed.

21. Accordingly, all these 7 appeals filed by the assessee are disposed of by allowing the appeals from AY 2012-13 to AY 2017-18 and dismissing the appeal for the AY 2018-19.

Order pronounced in the open court on 25^th May, 2026.