2014 (2) TMI 1152 - AT - Income Tax

Unexplained investment under sec. 69B - whether addition can be made on the basis of estimated value determined by the DVO? - Held that - AO did not point out any defects in the books of account of the assessee. He simply observed that assessee was asked to explained the investment made in the properties. The assessee has produced the books of account and other details. AO observed that since assessee failed to give explanation about the investment, therefore, it was referred to the DVO. We could appreciate the case of the Assessing Officer, had he made reference to any documents indicating the alleged unexplained investment and thereafter confronted the assessee, but he has simply observed that assessee failed to explain the investment, therefore, he made a reference to the DVO. He has not rejected the book results of the assessee by pointing out defects. Thus the assessing authority could not have referred the matter to the Departmental Valuation Officer (DVO) without the books of account being rejected. - Decided in favour of assessee. Royalty income - addition to income - Held that - There is no basis to assume receipt of royalty income, more so, in assessment year 2003-04, in the case of Relax Pharmaceutical Pvt. Ltd.,a related concern, Learned CIT(Appeals) has deleted the exclusion of 1% of the net profit on account of alleged royalty payment. In the case of assessee, there is no such evidence on the record, therefore, this addition is not sustainable. Learned CIT(Appeals) has rightly deleted the addition in both the years. - Decided in favour of assessee.

Summary

Issues involved:
1. Addition on account of unexplained investment under sec. 69B of the Act based on estimated value determined by the DVO.
2. Addition in total income on account of notional royalty income from M/s. Relax Pharmaceuticals.

Analysis:

Issue 1: Addition on account of unexplained investment under sec. 69B of the Act based on estimated value determined by the DVO:
The appeals were against orders passed by the Learned CIT(Appeals) for assessment years 2004-05 and 2007-08. The primary issue was whether an addition on account of unexplained investment under sec. 69B of the Act could be made based on the estimated value determined by the DVO. The Assessing Officer had made additions based on the valuation reports of properties purchased by the assessee, which differed significantly from the values shown by the assessee. The Assessing Officer did not find any defects in the books of account but referred the matter to the DVO due to the assessee's alleged failure to explain the investments. However, the CIT(Appeals) deleted the additions, citing the decision of the Hon'ble Supreme Court in a similar case where it was held that the assessing authority cannot refer the matter to the DVO without rejecting the books of account. The Tribunal concurred with the CIT(Appeals) and upheld the deletion of the additions in both assessment years.

Issue 2: Addition in total income on account of notional royalty income from M/s. Relax Pharmaceuticals:
The second issue pertained to the addition of notional royalty income from M/s. Relax Pharmaceuticals in the assessee's total income. The Assessing Officer contended that Relax Pharmaceuticals should pay royalty to the assessee for using its trademark, and added these amounts on a protective basis in the assessee's income. However, the CIT(Appeals) held that there was no basis for assuming that notional royalty income should be assessed in the hands of the assessee as there was no evidence of actual receipt of royalty. The Tribunal agreed with the CIT(Appeals) and dismissed the appeals, noting that the Assessing Officer failed to provide any evidence to support the addition of notional royalty income.

In conclusion, the Tribunal upheld the decisions of the CIT(Appeals) in both issues, thereby dismissing the appeals against the revenue's additions. The judgments were pronounced on 14.02.2014 by the Appellate Tribunal ITAT Delhi, with detailed analysis and reference to legal precedents in support of the decisions.