2012 (9) TMI 157 - HC - Income Tax

Difference in the estimated cost determined by the Valuation Officer and the actual cost - addition of undisclosed income - assessee contested against reference made to the Valuation Officer for valuation of the cost of construction - Held that - On a plain reading of section 142A it is apparent that the question of estimating the value of any investment would arise only when the books of account are not reliable and accordingly the AO would first be required to reject the books of account before making a reference to the Valuation Officer, thus as rightly contended by the assessee that the report of the Valuation Officer cannot form the foundation for rejection of the books of account. From the tenor of the order of the AO it is apparent that he has made the reference to the Valuation Officer merely to seek expert advice regarding the cost of construction. There is nothing in the assessment order to suggest that the AO had any doubt regarding the cost of construction or that he was not satisfied regarding the correctness or completeness of the books of account - prior to making the reference to the Valuation Officer, the AO has not ascertained as to what was the defect in the cost of construction disclosed by the assessee in its returns of income - as the AO has not brought any material on record to establish that the assessee had made any unaccounted investment in the construction of the building in question and that the books of account do not reflect the correct cost of construction the reference made to the Valuation Officer for estimating the cost of construction was not Valid - in favour of assessee.

Issues Involved:
1. Validity of the reference made by the Assessing Officer to the Valuation Cell for estimating the cost of construction.
2. Whether the addition of Rs. 5,89,779 made by the Assessing Officer was justified or based on conjectures and lack of evidence.

Issue-wise Detailed Analysis:

1. Validity of the Reference to the Valuation Cell:

The appellant challenged the order passed by the Income Tax Appellate Tribunal (ITAT), which upheld the addition made by the Assessing Officer (AO) based on the valuation report from the Departmental Valuation Cell. The core issue was whether the AO was justified in making a reference to the Valuation Officer without first rejecting the books of account. The appellant argued that the AO could not refer the matter to the Valuation Officer without detecting defects in the books of account, citing the Supreme Court decision in Sargam Cinema vs. Commissioner of Income-tax and the Allahabad High Court decision in Commissioner of Income-tax vs. Lucknow Public Educational Society.

The respondent contended that the very act of making the reference indicated the AO's dissatisfaction with the books of account. The Tribunal had found a significant disparity between the valuation reports from the approved valuer and the Valuation Officer, justifying the AO's reference.

The court noted that, at the time of the reference, there was no statutory provision empowering the AO to make such a reference. The Supreme Court in Amiya Bala Paul v. Commissioner of Income-Tax had held that the AO's general powers of inquiry did not include the power to refer to the Valuation Officer. The Legislature later inserted section 142A in the Act with retrospective effect, empowering the AO to estimate the value of investments by referring to the Valuation Officer.

The court examined the nature of the AO's powers under section 142A, which allows for estimation of the value of investments when the books of account are not reliable. The court held that the AO must first reject the books of account before making a reference to the Valuation Officer. The report of the Valuation Officer cannot form the foundation for rejecting the books of account.

In this case, the AO had recorded that the accounts were duly audited and complete. There was no indication that the AO had any doubts about the cost of construction or the correctness of the books of account. The reference to the Valuation Officer was made merely to seek expert advice, without ascertaining any defect in the cost of construction shown by the assessee. The court concluded that the reference was invalid as the AO had not rejected the books of account before making the reference.

2. Justification of the Addition of Rs. 5,89,779:

The second issue was whether the addition of Rs. 5,89,779 made by the AO was justified or based on conjectures and lack of evidence. The court observed that the AO made the addition solely based on the difference between the cost of construction as determined by the Valuation Officer and the cost shown by the assessee. There was no material on record to establish that the assessee had made any unaccounted investment in the construction of the building.

The court reiterated that the AO must first reject the books of account before making a reference to the Valuation Officer. In this case, the AO had not recorded any defect in the books of account nor had he rejected them. The addition was made purely based on the valuation report, which was invalid due to the improper reference.

The court held that the Tribunal was not justified in upholding the addition made by the AO. Both questions were answered in favor of the assessee, and the appeal was allowed. The order passed by the Tribunal was quashed and set aside.

Conclusion:

The court concluded that the reference made by the AO to the Valuation Officer was invalid as it was not preceded by the rejection of the books of account. Consequently, the addition of Rs. 5,89,779 based on the invalid reference was also unjustified. The appeal was allowed, and the Tribunal's order was quashed.

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