2002 (3) TMI 927 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of the addition of Rs. 81,69,717 made by AO under Section 69 of the Act on account of unexplained investment in the property constructed for sale.
2. Validity of reference to the DVO for determining the cost of construction under Section 131(1)(d) of the Act.
3. Application of net profit rate by the AO and CIT(A) on contract receipts/work-in-progress.

Issue-wise Detailed Analysis:

1. Deletion of the Addition of Rs. 81,69,717:
The Revenue challenged the deletion of the addition of Rs. 81,69,717 made by the AO under Section 69 of the Act for unexplained investment in the property constructed for sale. The AO had noted several discrepancies in the assessee's stock register and other records, leading to the rejection of the books of account under Section 145(3) of the Act. The AO then referred the matter to the DVO, who estimated the cost of construction significantly higher than declared by the assessee. The CIT(A) deleted the addition, holding that the DVO's report was advisory and the AO could not base the addition solely on this report without proper basis. The CIT(A) also noted procedural lapses in the issuance of notice under Section 131 by the DVO, which was challenged by the assessee. The Tribunal upheld the CIT(A)'s decision, noting that the AO's reliance on the DVO's report without addressing the assessee's objections and procedural issues was not justified.

2. Validity of Reference to the DVO:
The AO issued a commission under Section 131(1)(d) to the DVO for determining the investments in the properties. The CIT(A) held that the DVO had no powers to issue notice under Section 131 and that the reference was invalid. The Tribunal, however, reversed this finding, stating that the AO was within his rights to issue such a commission under Section 131(1)(d) for obtaining expert opinion on the cost of construction. The Tribunal cited several judicial precedents to support the validity of the reference, emphasizing that the DVO's report, while not binding, had persuasive value and could be considered by the AO in the assessment process.

3. Application of Net Profit Rate:
The AO applied an 8% net profit rate on contract receipts and a 10% rate on work-in-progress, rejecting the books of account maintained by the assessee. The CIT(A) reduced the net profit rate to 4% for both completed and incomplete projects, noting that this rate was applied in other similar cases. The Revenue argued that the CIT(A) had no basis for reducing the rate and that the books of account were rightly rejected due to discrepancies. The Tribunal found that the CIT(A) had provided reasons for applying the 4% rate and dismissed the Revenue's appeal on this ground. However, the Tribunal allowed the assessee's appeal, holding that the rejection of books of account based on non-maintenance of a separate stock register was not justified. The AO was directed to accept the book results declared by the assessee for the contract business.

Conclusion:
The Tribunal upheld the CIT(A)'s deletion of the addition made by the AO under Section 69, reversed the finding on the invalidity of the reference to the DVO, and directed the AO to accept the book results declared by the assessee for the contract business. The Tribunal emphasized the need for proper procedural adherence and consideration of expert opinions in the assessment process.