2007 (8) TMI 639 - AT - Income Tax

Validity of notice u/s 148 for reopening assessment - Investment in construction of building - Justification of reference to DVO by the Assessing Officer - Validity of proceedings u/s 147 based on DVO report and other defects - Rejection of books of account and subsequent additions - basis of valuation report of the DVO procured by the Assessing Officer during the course of proceedings u/s 147 - Difference of opinion between ld members - Third Member Order - The returns for all the assessment years 1995-96, 1996-97, 1997-98 and 1998-99 were processed u/s 143(1)(a) and intimations issued thereunder - HELD THAT - learned Judicial Member, observed that the assessee, admittedly, furnished returns of income for all the assessment years and no assessment under section 143(3) had been made and therefore it could have been a case of escapement only in a case where-(i) the Assessing Officer was seized of any information or material which could lead him to have reason to believe that an income depicted by such information or material had escaped assessment, and (ii) if it were found that the assessee had understated the income or had claimed excessive loss, deduction, allowance or relief in the return. For the reopening for the assessment year 1997-98 he held that though the Commissioner of Income-tax (Appeals) has not decided the issue, it being a legal issue can be decided by the Tribunal as no investigation of facts were required. He referred to para 3.17 of the order of the Commissioner of Income-tax (Appeals) and held that the proceedings under section 147 were initiated without there being any information or material with the Assessing Officer for having reason to believe that any income chargeable to tax had escaped assessment and also that there was no allegation which could satisfy the requirement of Explanation 2(b) to section 147 of the Act and, therefore, it has to be taken that the proceedings under section 147 were initiated solely for the purpose of roving enquiry. He further held that books of account cannot be rejected as the defects were trifle and insignificant and reference to the DVO was not valid. He further observed that the cases of the assessee for the assessment years 1995-96, 1996-97 and 1998-99 were reopened solely on the basis of the valuation report of the DVO and there was no other information for reopening the assessment. The DVO report is only an estimate in advisory capacity and, therefore, could not be the basis for reopening of assessment in view of the decisions of the Tribunal, Amritsar Bench, in the case of Darshan Singh v. Assessing Officer 2002 123 Taxman (Mag) 324 and Jodhpur Bench, in the case of ITO v. Vijay Kumar 2001 73 TTJ 17. On the merits, he deleted the additions by holding that there was no good reason for rejecting the books of account and additions could not be made on mere difference in the cost of construction estimated by the DVO and as recorded in books of account of the assessee. The learned Accountant Member , on the other hand, held that it was a case of post amendment period after April 1, 1989, and the Assessing Officer can reopen the assessment for escapement of income read with the Explanation to section 147. According to him, the issue of reopening assessment for the assessment year 1997-98 is to be set aside. He however upheld the validity of reopening in other three years. According to him, the defects though minor in amount were sufficient to refer the matter to DVO and after the insertion of section 142A in the statute these defects along with the DVO report justified reopening. On the merits, he held that though the defects were trifle and the books of account may not be rejected but looking to the facts and circumstances of the case, a disallowance of five per cent. of the expenses was to be made to cover the unexplained expenditure. He observed that for making an addition the Department cannot place 100 per cent. reliance on the DVO s report which is just an estimate by a technical person and when the assessee himself has recorded the entire cost of construction in its books of account which were duly audited as per provisions of the Income-tax Act ; and that the report of the registered valuer furnished by the assessee also supported the construction cost recorded by the assessee in its books of account with a variation of Rs.1.51 lakhs. Third Member - My opinion, therefore, on the questions referred is as under 1. The proceedings initiated u/s 147 of the Act, for the assessment year 1997-98, are to be set aside to examine validity of proceedings in the eye of law and the consequent subsequent proceedings. And also On the facts and circumstances of the case, when the assessee having not disputed the sufficiency of reasons for reopening, neither before the Assessing Officer nor before the Commissioner of Income-tax (Appeals), nor where any decision was rendered by the Commissioner of Income-tax (Appeals), nor there is any material available on record for deciding the question of sufficiency of reasons of reopening, which has been raised for the first time before the Tribunal, the matter is required to be restored to the Commissioner of Income-tax (Appeals) for deciding the issue after appreciation of reasons recorded for reopening the assessment u/s 147. 2. The rejection of books of account for the assessment year 1997-98 was justified so as to authorize the Assessing Officer to make reference to the DVO asking to determine the cost of construction of the building known as Ashlesha Bungalows situated at Anand Bakrol Road, Bakrol, Anand, having 31 units out of which having 20 units of A-type, 2 units of type-C, 1 unit of type-D double-storied and Bungalow A-27. And also, after insertion of section 142A in the statute by the Finance (No. 2) Act, 2004, with retrospective effect from 15-11-1972, a reference made by the Assessing Officer to the DVO to make an estimate of such value and report, was justified. 3. The addition made on account of alleged investment in construction of building, known as Ashlesha Bungalows situated at Anand Bakrol Road, Bakrol, Anand, having 31 units out of which having 20 units of A-type, 2 units of type-C, 1 unit of type-D double-storied and Bungalow A-27 during the previous year relevant to the assessment year 1997-98 on the basis of huge difference in the cost estimated in the valuation report of the DVO coupled with other defects pointed out and the difference in such value even by the assessee s own appointed registered valuer can be sustained in all the years. And also, in view defects pointed out in the books of account, failure of the assessee to furnish details regarding quantities of different building materials consumed and various services like water, sanitary installation and electrical provisions in the building, extra items valued individually by the DVO after physical inspection of building, against which a lump sum value at a very low figure taken by the registered valuer in his report, warrants and justify addition of five per cent. of the cost of construction recorded by the assessee in his books of account. For assessment years 1995-96, 1996-97 and 1998-99 4. The proceedings initiated u/s 147 of the Income-tax Act, 1961, on the basis of valuation report of the DVO procured by the Assessing Officer during the course of proceedings u/s 147 of the Act for the assessment year 1997-98, coupled with other defects pointed out above can be held to be valid proceedings in the eye of law and, consequently, the subsequent proceedings also can be held to be valid. And also Where returns have been merely processed u/s 143(1), there was reason to believe that there was an escapement of income u/s 147, in view of various defects found in the books of account in the assessment year 1997-98 regarding cost of construction of very same building which was also under construction during the assessment years 199596, 1996-97 and 1998-99, huge difference of Rs. 87.66 lakhs found as per DVO s report, shortfall of Rs. 1.51 lakhs as per registered valuer s report, failure of the assessee to furnish detail of materials consumed and various services like water, sanitary installation and electrical provisions in the building, qualification in the DVO s report regarding huge cost incurred in addition/alteration work carried out but not considered in the valuation report. And on the answer to the aforesaid question above being affirmative, on the facts and in the circumstances of the case the report of the DVO which was obtained during the course of proceedings u/s 143(3)/ 147 for the assessment year 1997-98 in respect of very same building which was also under construction during the assessment years 1995-96, 1996-97 and 1998-99, can be validly used during the course of assessment proceedings u/s 143(3)/147 for the assessment years 1995-96, 1996-97 and 1998-99. Both the Members opined that, the rejection of books of account may not be valid in the eye of law for all these three years.

Summary

Issues Involved:
1. Validity of proceedings u/s 147 initiated by the Assessing Officer.
2. Rejection of assessee's books of account and application of section 145.
3. Correctness of the District Valuation Officer's (DVO) report on the cost of investment in buildings.
4. Assessee's claim for deduction u/s 37 if addition u/s 69C is upheld.
5. Levy of interest u/s 234A, 234B, and 234C.
6. Initiation of penalty proceedings u/s 271(1)(c).

Summary:

Issue 1: Validity of Proceedings u/s 147
The Assessing Officer initiated proceedings u/s 147 by issuing notices u/s 148 based on discrepancies in the assessee's accounts and a significant difference in the cost of construction as reported by the DVO. The Tribunal held that the reopening of assessments for the years 1995-96, 1996-97, and 1998-99 was valid as the DVO's report coupled with other defects provided sufficient material for the Assessing Officer to form a belief that income had escaped assessment. However, the reopening for the assessment year 1997-98 was set aside for fresh adjudication by the Commissioner of Income-tax (Appeals) to examine the validity of proceedings based on the reasons recorded.

Issue 2: Rejection of Books of Account and Application of Section 145
The Tribunal found that the defects pointed out by the Assessing Officer in the books of account were minor and did not justify the rejection of books u/s 145(3). However, these defects were sufficient to refer the matter to the DVO and form a belief of income escapement. The Tribunal concluded that the rejection of books of account was not justified, but minor discrepancies warranted some additions.

Issue 3: Correctness of the DVO's Report
The DVO estimated the cost of construction significantly higher than what was recorded in the assessee's books. The Tribunal held that the DVO's report, though an estimate, could not be entirely disregarded and should be taken as a guide. The Tribunal decided to retain an addition of 5% of the cost of construction recorded by the assessee in its books to cover unaccounted expenses.

Issue 4: Deduction u/s 37 if Addition u/s 69C is Upheld
The Tribunal concluded that the amendment brought in section 69C by the Finance (No. 2) Act, 1999, was applicable only for the assessment year 1999-2000 and subsequent years. Therefore, the assessee was not entitled to any deduction on this account for the years under consideration.

Issue 5: Levy of Interest u/s 234A, 234B, and 234C
The Tribunal did not specifically address the issue of interest levied u/s 234A, 234B, and 234C, implying that the interest levied was upheld as per the provisions of the Act.

Issue 6: Initiation of Penalty Proceedings u/s 271(1)(c)
The Tribunal did not specifically address the issue of the initiation of penalty proceedings u/s 271(1)(c), implying that the initiation of penalty proceedings was upheld as per the provisions of the Act.

Conclusion:
The Tribunal allowed the assessee's appeals in part by setting aside the reopening of the assessment for the year 1997-98 for fresh adjudication and retaining an addition of 5% of the cost of construction for the other years. The rejection of books of account was not justified, and the DVO's report was to be taken as a guide rather than a conclusive evidence. The assessee's claim for deduction u/s 37 was not allowed.