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2021 (7) TMI 1421 - AT - Income TaxValidity of assessment u/s 143(3) - principal addition in this case is on account of a valuation difference (of a storage Godown) based on the report by the Departmental Valuation Officer (DVO) to whom reference was made by the AO during assessment proceedings - as argued appellate order is without proper application of mind by the first appellate authority and there has been no consideration of the assessee s replies and explanations furnished during the assessment proceedings for which reference was made - HELD THAT - Valuation being a technical matter, while the AO is not a technical person, the statute provides for a reference by him to the DVO where he seeks to verify the veracity of the assessee s claim with regard to the cost of acquisition/construction of an asset incurred during the relevant previous year (s.142A). The law accordingly obliges an appellate authority (including the Tribunal) to hear the DVO in adjudicating an appeal agitating an addition based on his valuation report. This has not been observed by the ld. CIT(A), which procedure he shall accordingly comply with in the set aside proceedings, dilating on and issuing specific finding/s qua each item of valuation being contested by the assessee before him. Whether a rejection of accounts has to necessarily precede a reference to the DVO u/s. 142A? - As the cost met by the assessee, or otherwise proved to have been incurred, or even not incurred by the assessee, as in the case of gift, inheritance, etc., and irrespective of its reflection in his accounts, where maintained, forms part of the assessee s explanation, and it is only the balance, excess cost, which is unexplained with any evidence, for which the rule of evidence (ss. 69/69A) deems it to be his income for the relevant year. Where, then, one may ask, is the question, i.e., for invocation of this rule of evidence, of the rejection of the books of account of the assessee s business, which may not even be maintained or even not bear the said cost, and which (rejection) is for the purpose of properly deducing the business income, which is not a concomitant of the said invocation, and may even be independent of it? Why, the business itself may not have commenced, as in the case of Warehouse business in the instant case. The question begs an answer before the decision in Sargam Cinema 2009 (10) TMI 569 - SC ORDER holding a reference without rejection of accounts as bad, could be relied upon. As seen, the clear and settled law does not require the rejection of accounts and, where so, is deemed irrelevant where specific adjustments to the returned income are made on the basis of the satisfaction of the relevant provisions of law, even though the said adjustments pertain to the entries in those accounts, while for an addition u/s. 69/69A the accounts are in fact being accepted to the extent of the relevant entries therein. The said decision does not cite the precise question of law raised before it for being answered, and indeed that admitted and answered by the Hon ble Court. Further still, the judgment is sans any discussion of or on the law in the matter or reference to any precedents. The issue that therefore arises for being answered first is if, in view of the clear provisions of law and the scheme of the Act, and as further explained and expounded by the Apex Court per its several decisions, including by its larger Benches, could the said judgment be regarded as a complete statement of law in the matter and, where considered so, the basis thereof, as also the specification of the said statement. Before parting, it may be clarified that the various issues discussed with reference to the invalidity of the AO s reference to the DVO are only with a view to emphasize the several aspects/dimensions of the matter on which, therefore, adjudication, where sought, may be required upon considering all the factual and legal aspects, including those, not discussed, as are agitated or otherwise deemed relevant, per a speaking order. No final opinion in the matter is expressed or may be construed as such. That is, is a case of an open set aside.
Issues Involved:
1. Non-application of mind by the first appellate authority. 2. Non-provision of proper opportunity of hearing. 3. Validity of the appellate order under section 250(6) of the Income Tax Act. 4. Relevance of the Departmental Valuation Officer (DVO) report. 5. Application of the Sargam Cinema judgment. 6. Rejection of books of account and its implications. 7. Admissibility of evidence obtained through invalid procedures. 8. Requirement of rejection of accounts before reference to the DVO. Issue-wise Detailed Analysis: 1. Non-application of mind by the first appellate authority: The appellant argued that the appellate order was made without proper application of mind by the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) did not consider the assessee’s replies and explanations furnished during the assessment proceedings. The tribunal noted that the operative part of the impugned order did not satisfy the test of section 250(6) of the Income Tax Act, which mandates that the order must state the points for determination, the decision thereon, and the reasons for the decision. This requirement is irrespective of the representation or otherwise before him of either appellant or the respondent. 2. Non-provision of proper opportunity of hearing: The appellant contended that there was no proper opportunity of hearing provided by the CIT(A). The tribunal observed that the CIT(A) proceeded ex parte the appellant without ensuring proper service of notice of hearing. The tribunal emphasized that it is incumbent upon the appellate authority to provide a reasonable opportunity of hearing to the assessee, especially when proceeding ex parte. 3. Validity of the appellate order under section 250(6) of the Income Tax Act: The tribunal found that the appellate order did not meet the requirements of section 250(6) of the Act. The order did not state the points for determination, the decision thereon, and the reasons for the decision. The tribunal highlighted that this provision is clear and unambiguous and applies irrespective of whether the order is ex parte or not. The appellate authority must examine the case of the assessee and specify reasons for upholding or rejecting the assessing officer’s view. 4. Relevance of the Departmental Valuation Officer (DVO) report: The principal addition in the case was due to a valuation difference based on the DVO’s report. The tribunal noted that valuation is a technical matter, and the AO is not a technical person. The statute provides for a reference to the DVO for verifying the cost of acquisition/construction of an asset. The appellate authority must hear the DVO in adjudicating an appeal agitating an addition based on his valuation report. 5. Application of the Sargam Cinema judgment: The appellant cited the Sargam Cinema v. CIT judgment, where the Apex Court set aside an addition based on a DVO report as the reference was made without rejecting the assessee’s books of account. The tribunal highlighted that the books of account of the assessee’s food-grain business were not produced before the AO, and the income was returned on a presumptive basis. The tribunal emphasized that the question of non-production of books is rendered superfluous as the income was not returned or assessed based on the books of account. 6. Rejection of books of account and its implications: The tribunal discussed whether a rejection of accounts must necessarily precede a reference to the DVO under section 142A. The tribunal noted that the law does not require the rejection of accounts for making a reference to the DVO. The AO can rely on the material gathered in pursuance of the reference, subject to the principles of natural justice. The tribunal cited several precedents, including CIT v. H.M. Esufali H.M. Abdulali and CIT v. Daulat Ram Rawatmull, to support this view. 7. Admissibility of evidence obtained through invalid procedures: The tribunal emphasized that the validity of an assessment is not impacted by the validity of the material gathering process. Evidence obtained as a result of an invalid procedure can still be used, subject to the principles of natural justice. The tribunal cited Pooran Mal v. Director of Inspection (Inv.) and Dr. Pratap Singh & Anr. v. Director of Enforcement to support this view. 8. Requirement of rejection of accounts before reference to the DVO: The tribunal discussed whether the rejection of accounts is necessary before making a reference to the DVO. The tribunal noted that the clear and settled law does not require the rejection of accounts for making a reference to the DVO. The tribunal highlighted that the accounts are accepted to the extent of the relevant entries therein, and it is only the excess cost that is unexplained which is deemed as income. Conclusion: The tribunal set aside the appellate order and remanded the matter back to the CIT(A) for a fresh decision on the merits of the case after providing a reasonable opportunity of hearing to the assessee. The CIT(A) must consider all the factual and legal aspects, including those discussed in the tribunal's order, and issue a speaking order. The appeal by the assessee was allowed for statistical purposes.
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