2015 (5) TMI 83 - HC - Income Tax

Re-assessment proceedings - ITAT set aside the re-assessment proceedings on the ground that without rejecting the books of account of the assessee and by making reference to only the report of DVO addition was not justified - Held that - In the present case, the proceedings have been sought to be opened by way of re-assessment, during the subsequent assessment proceedings, without following the prescribed procedure of rejecting the books of account which had been maintained by the assessee and thus, the questions of law necessarily have to be decided against the Revenue. Tribunal was correct in deleting the additions made by the AO who never rejected the books of account before referring the matter to the DVO and on the basis of her report, the re-assessment proceedings could not have been initiated, the present appeals are dismissed. - Decided in favour of assessee.

Summary

Issues:
1. Whether reassessment proceedings solely based on the report of DVO without rejecting the books of account are justified.
2. Whether the AO should have rejected the books of account before referring the matter to the DVO.

Analysis:
Issue 1:
The judgment involved ITA Nos. 212, 213, 210 & 211 of 2013, related to assessment years 2004-05, 2005-06, 2007-08 & 2009-10, dealing with common questions of law and facts. The Revenue challenged the decision of the Income Tax Appellate Tribunal (ITA) which set aside re-assessment proceedings for assessment year 2004-05, based solely on the DVO's report without rejecting the books of account. The Revenue argued that the reassessment was also based on the addition made in assessment proceedings for 2007-08. The Tribunal allowed the appeals of the assessee, citing that the case could not be reopened solely on the DVO's report without rejecting the books of account.

Issue 2:
During the assessment for the year 2007-08, it was observed that the assessee had discrepancies in the construction of the factory building. The AO referred the matter to the valuation cell, leading to a notice under Section 148 of the Income Tax Act. The assessee contended that the account books were maintained with all details and challenged the DVO's report. The CIT upheld the AO's decision, emphasizing the rejection of books of account under Section 145(3) due to discrepancies. The Tribunal relied on precedents and held that reference to the DVO can only be made after rejecting the books of account on a legal basis. The High Court agreed, citing previous judgments and circulars, emphasizing the necessity of rejecting books of account before referring to the DVO.

In conclusion, the High Court dismissed the appeals, affirming that the AO should have rejected the books of account before referring the matter to the DVO. The reassessment proceedings solely based on the DVO's report without rejecting the books of account were deemed unjustified, in line with established legal principles and precedents.