IN THE ITAT AGRA BENCH
Prahalad Kumar Jindal
Assistant Commissioner of Income-tax
IT Appeal No. 137 (Agr.) of 2012
[Assessment year 2004-05]
September 21, 2012
A.L. Gehlot, Accountant Member
This is an appeal filed by the assessee against the order dated 14.09.2011 passed by the ld. CIT(A)-I, Agra for the A.Y. 2004-05 on the following grounds :-
“1. Because in the circumstances of the case and law on the subject the Ld. Commissioner of Income (Appeals) has erred in estimating the cost of construction of the factory building at Rs. 16,17,040/- as against Rs. 13,29,552/- declared by the appellant as per account books and thus, sustaining addition to the extent of Rs. 2,87,468/- for unexplained investment in the factory building.
2. Because in the circumstances of the case the reference to the valuation officer was not justified, proper and legal in as much as the cost of construction was duly supported by the Account Books, bills and vouchers in which nothing wrong was found. The Account books have not been rejected.
3. Because the reliance placed on the valuation report of the Ld. Valuation Officer is wrong, improper and unjustified. The comments and the valuation report of the Registered Valuer have not been considered properly and in the right perceptive.
4. Because the estimation of the cost of construction of the factory building at Rs. 16,17,040/- is also very much excessive.”
2. The brief facts of the case are that during the assessment proceedings the A.O. noticed that the assessee has shown Rs. 13,29,552/- investment in construction of factory building. The assessee in order to justify the cost of investment shown furnished a valuation report of Registered Valuer who estimated the investment at Rs. 13,55,000/-. The A.O. made addition of Rs. 4,65,348/- on account of unexplained investment in construction of factory building after getting this factory building valued by the Departmental Valuation Officer (DVO) who estimated the construction cost at Rs. 17,19,900/- as against the construction cost shown by the assessee at Rs. 13,29,552/-. The assessee challenged the order of the A.O. before the CIT(A). A revised report of D.V.O. and registered valuer were also furnished before the CIT(A). The CIT(A) after considering the revised reports of the D.V.O. as well as registered valuer and after considering the objections of the assessee regarding estimation of the cost by D.V.O., the CIT(A) restricted the addition to the extent of Rs. 2,87,488/-. According to CIT(A), the estimation of construction cost after giving certain adjustment against D.V.O.’s report should be Rs. 16,17,040/- as against the investment declared by the assessee at Rs. 13,29,552/. Before the deletion of addition, the CIT(A) has also considered report of another registered valuer estimating cost of construction at Rs. 13,21,383/-. The CIT(A) rejected the assessee’s contention that the cost of construction has been shown correctly in the books of account. The CIT(A) observed that the assessee did not maintain complete set of structural drawings and design along with T & P material and other consumables used in construction of building. Therefore, it was not possible to compute the correct amount of investment made in construction of the factory. The CIT(A) further observed that the assessee himself not being sure about the cost of construction declared by him in the books of account, therefore, he got it valued by two different registered valuers adopting two different valuation methods.
3. The ld. Authorised Representative with reference to A.O.’s order submitted that the A.O. made addition without rejecting the books of account of the assessee. Ld. Authorised Representative submitted that the assessee has categorically submitted before the A.O. that the assessee has invested in construction of factory building. The expenditure based on materials purchased and services obtained from reputed companies backed by their invoices and there is no element of concealed expenditure on construction of factory building. Ld. Authorised Representative submitted that as regards the measurements taken by the assessee and by the D.V.O. there is no dispute regarding the quantity of materials consumed in the construction of factory building. The only difference in major items given in the report are with regard to the rates applied by the D.V.O. which are too much and at higher side in view of the current market conditions and ground realities. The D.V.O. has taken higher rate of 3 years ago which is not correct. Ld. Authorised Representative while concluding his argument submitted that without rejecting books of account the A.O. cannot make addition on account of construction of factory building. Ld. Authorised Representative in support of his contention relied upon an order of I.T.A.T., Lucknow Bench in the case of ITO v. Vijeta Educational Society  118 ITD 382 (Luck.).
4. The ld. Departmental Representative, on the other hand, relied upon the order of CIT(A).
5. We have heard the ld. Representatives of the parties and records perused. The issue under consideration is under the facts and circumstances of determination of cost of construction of factory building. Whether estimation made by D.V.O’s is to accept or construction cost shown in books of account regularly maintained by the assessee. To appreciate the issue, we would like to reproduce the relevant section 142A of the Act which reads as under :-
“142A. (1) For the purposes of making an assessment or reassessment under this Act, where an estimate of the value of any investment referred to in section 69 or section 69B or the value of any bullion, jewellery or other valuable article referred to in section 69A or section 69B [or fair market value of any property referred to in sub-section (2) of section 56] is required to be made, the Assessing Officer may require the Valuation Officer to make an estimate of such value and report the same to him.
(2) The Valuation Officer to whom a reference is made under sub-section (1) shall, for the purposes of dealing with such reference, have all the powers that he has under section 38A of the Wealth-tax Act, 1957 (27 of 1957).
(3) On receipt of the report from the Valuation Officer, the Assessing Officer may, after giving the assessee an opportunity of being heard, take into account such report in making such assessment or reassessment:
Provided that nothing contained in this section shall apply in respect of an assessment made on or before the 30th day of September, 2004, and where such assessment has become final and conclusive on or before that date, except in cases where a reassessment is required to be made in accordance with the provisions of section 153A.
Explanation.- In this section, “Valuation Officer” has the same meaning as in clause (r) of section 2 of the Wealth-tax Act, 1957 (27 of 1957).]”
6. The section was inserted by the Finance (No.2) Act, 2004, with retrospective effect from November 15, 1972, to confer power on the Assessing Officer to refer the matter to the Valuation Officer which earlier had not been conferred. Earlier, there was a provision being section 55A to ascertain the fair market value of a capital asset for the purposes of Chapter IV. The issue as whether the Valuation Officer under section 55A of the Act could be appointed for valuation of an asset if in the opinion of the Assessing Officer the amount expected in making the investment exceeds the amount recorded on the books. The issue of referring to the Valuation Officer, came up for consideration before the Supreme Court in the case of Smt. Amiya Bala Paul v. CIT  262 ITR 407. The Supreme Court, after considering the scope and ambit of section 55A of the Act, held that it would not apply to proceedings under section 69B of the Act. Apparently, it appears that section 142A of the Act was introduced to cover this omission.
7. Now question to be seen under what circumstances the A.O. can refer the matter to the D.V.O. under section 142A of the Act. The issue came before the Hon’ble Uttarakhand High Court in the case of CIT v. Bhawani Shankar Vyas  311 ITR 8 where in it was held that it was not mandatory for the A.O. to reject the books of account first before making the reference under section 131(1) (d) of the Act or calling for a report of the valuer under section 142A of the Act. The same issue come up before the Hon’ble Supreme Court in the case of Sargam Cinema v. CIT  328 ITR 513 wherein the Hon’ble Apex Court held that the assessing authority cannot refer the matter to the Departmental Valuation Officer without first rejecting the books of account. Thus the above judgment of the Hon’ble Uttarakhand High Court in the case of Bhawani Shankar Vyas (supra) has impliedly overruled. The jurisdictional High Court of Allahabad in the case of CIT v. Lucknow Public Educational Society  339 ITR 588 followed the above judgement of Hon’ble Supreme Court in the case of Sargam Cinema (supra) and rejected the contention advanced on behalf of the Revenue that reference under section 142A can be made to the D.V.O. without rejecting books of account. The court held that once the law declared by the Apex Court that reference under section 142A cannot be made without rejecting books of account.
8. Now a further question which arises for examination is about the rejection of books of account. Section 145 of the Act provides that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Sub-section (3) of section 145 of the Act provides that where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144 of the Act. About the correctness or completeness of the accounts, the Hon’ble Rajasthan High Court in the case of CIT v. Hotel Joshi  242 ITR 478 held that a reference to the D.V.O. would arise only in a case where the A.O. was not satisfied with the accounts of construction produced by the assessee or where such account was kept. In that case, the assessee maintained regular books of account. All the amounts were vouched except some amount which was not supported by vouchers. The Tribunal held that if the books of account do not show any serious infirmity that should be accepted. Though the said judgment is in respect of reference under section 55A but the relevant finding required to be considered is whether on account of some of the amount which are not supported by vouchers can be said to be a serious infirmity in the books of account maintained by the assessee. The court held that such are not serious infirmity and books of account cannot be rejected.
9. In the light of above discussions, if we consider the facts of the case under consideration, we noticed that the A.O. did not reject the books of account regularly maintained by the assessee by invoking section 145(3) of the Act. The assessee raised the ground before the CIT(A) that reference under section 142A to the D.V.O. is without jurisdiction as the A.O. did not reject the books of account. The CIT (A) rejected the assessee’s contention with general observation without pointing out serious infirmity in the books of account maintained by the assessee. The CIT (A) on general presumption stated that the cost of construction recorded in the books of account is not supported by bills and vouchers without pointing out any specific instances. The CIT(A) has failed to point out any material in support of his finding that the books of account maintained by the assessee is liable to be rejected under auction 145(3) of the Act. We therefore, find that the in the case under consideration the A.O. made the reference under section 142A to D.V.O. without rejecting the books of account. In the light of law laid down by the Apex Court in the case of Sargam Cinema (supra), we find that in the case under consideration, the reference under section 142A by the A.O. is without jurisdiction. Even otherwise also, on merit, we noticed that there are various estimations of construction cost of factory building detailed as under :-
|As per books of account||Rs.13,29,552/-|
|As per DVO ‘s first report dt. 30.11.2006 (19,71,700)||Rs.19,17,654/-|
|Revised DVO report before A.O. 27/28/12/2006||Rs.17,94,900/-|
|As per Registered Valuer filed before A.O.||Rs.12,82,000/-|
|Revised report by DVO before CIT(A) dt. 24.08.2011||Rs.17,93,034/-|
|Revised report by Registered Valuer before CIT(A)||Rs.13,21,383/-|
|Further revised dated 18.12.2006||Rs.13,54,946/-|
|After adjustment by CIT(A) estimated construction cost||Rs.16,17,040/-|
10. It has been noticed from the above details of different estimations that there are number of different estimations of construction cost. There are no convincing reasons why the CIT(A) has estimated cost of construction only on the basis of D.V.O.’s. report. The action of the CIT (A) for estimation of construction cost on the basis of D.V.O.’s report cannot be approved particularly when the A.O. made reference under section 142A of the Act to D.V.O. without rejecting books of account regularly maintained by the assessee. Under the circumstances, the order of the CIT(A) is set aside and we delete the addition sustained by the CIT(A) Rs.2,87,488/-.
11. In the result, appeal of the assessee is allowed.