2002 (7) TMI 47 - HC - Income Tax

Unexplained Expenditure - Construction Of Building - Tribunal, therefore, passed the final orders and expressed the view that even if the difference of actual cost estimated by the Departmental Valuation Officer and the cost shown by the assessee under section 69C may be assessable as unexplained expenditure as soon as the amount is debited in the profit and loss account the same is neutralised and the net result is nil addition. To neutralise the profit and loss account, the Legislature has amended section 69C and added a proviso to it with effect from April 1, 1999. - Tribunal also accepted the assessee s contention that the Departmental Valuation Officer had adopted the plinth area rate method which was an inferior method of determining the cost of construction and also did not accept the defects as pointed out by the Assessing Officer that the assessee ought to have maintained the consumption and balance of raw material either day-to-day accounts or on any regular interval of any specified period. - we are not inclined to interfere with the impugned judgment and order of the Tribunal.

Summary

Issues Involved:
1. Validity of proceedings initiated under section 147(b) of the Income-tax Act, 1961.
2. Determination of the cost of construction by the Departmental Valuation Officer (DVO).
3. Right of the assessee to cross-examine the DVO.
4. Assessment of profit on unexplained income.
5. Conduct of the Assessing Officer (AO) and adherence to Tribunal's directions.
6. Tribunal's decision on reassessment and cost determination.
7. Appeal against the Tribunal's order by the Revenue.

Issue-wise Detailed Analysis:

1. Validity of Proceedings under Section 147(b):
The Commissioner of Income-tax (Appeals) initially held that the proceedings initiated under section 147(b) for the assessment years 1985-86 and 1987-88 were invalid, canceling the reassessments and deleting additions made on account of unexplained cost of construction. However, the Tribunal justified the reopening of assessments, stating that the AO was correct in referring the cost determination to the DVO.

2. Determination of Cost of Construction by DVO:
The AO noted that the assessees had understated the cost of construction and referred the matter to the DVO. The DVO estimated higher costs than those declared by the assessees, leading to additions by the AO. The Tribunal later found that the AO did not grant proper hearing opportunities to the assessees before estimating the cost, necessitating a remand for reassessment.

3. Right of the Assessee to Cross-examine the DVO:
The Tribunal directed the AO to allow the assessees to cross-examine the DVO. However, the AO refused, stating that the DVO acted in an advisory capacity and was not a witness. The Tribunal criticized this refusal, emphasizing the necessity of cross-examination to ensure fair assessment. The Tribunal's direction was based on the principle that the assessees should have a reasonable opportunity to challenge the DVO's report.

4. Assessment of Profit on Unexplained Income:
The AO added 10% of the unexplained income as profit, which the Commissioner of Income-tax (Appeals) later increased to 15%. The Tribunal set aside this enhancement, directing the AO to reassess the cost of construction and profit margin de novo.

5. Conduct of the AO and Adherence to Tribunal's Directions:
The Tribunal took a serious view of the AO's conduct in not permitting cross-examination of the DVO, describing it as arrogant and warranting contempt proceedings. However, due to the lapse of time, no contempt proceedings were initiated. The Tribunal expressed disapproval of the AO's actions, which led to unnecessary litigation.

6. Tribunal's Decision on Reassessment and Cost Determination:
The Tribunal dismissed the Revenue's appeals and allowed the assessees' appeals with costs. It found that the AO's assessments based on the DVO's report were not acceptable and that the Commissioner of Income-tax (Appeals) had no material to enhance the cost of construction beyond what the assessees declared. The Tribunal also noted that any difference in cost estimation could be attributed to bona fide errors, referencing Supreme Court observations.

7. Appeal Against the Tribunal's Order by the Revenue:
The Revenue appealed against the Tribunal's order, arguing that the Tribunal erred in directing cross-examination of the DVO and that the AO's cost estimation was reasonable. The High Court, however, found no substantial questions of law to admit the appeals, emphasizing that the assessees were not given a reasonable opportunity of hearing by the DVO. The Court also noted the elapsed time and relatively small amounts involved, deciding against remanding the matters for reassessment.

Conclusion:
The High Court dismissed the Revenue's appeals, upholding the Tribunal's decision and emphasizing the necessity of fair hearing opportunities for assessees. The Court also highlighted the need for the Tribunal to consider whether quasi-judicial authorities like the DVO provide adequate hearing opportunities before directing cross-examination.