2008 (10) TMI 62 - HC - Income Tax

Construction of house property - determination of value - undisclosed income - difference of less than 15 % between the amount disclosed by the assessee in construction of the house difference between the plea of the assessee on the issue on investment on house property and valuer s report is so meagre that one can assume it to be bona fide difference, fit to be ignored - Tribunal was not justified in adding the amount as an undisclosed income - impugned orders of AO and ITAT are set aside

Summary

Issues:
1. Discrepancy in the cost of construction of a house property.
2. Assessment of undisclosed income under section 158BB of the Income-tax Act.
3. Interpretation of the valuation report and its impact on assessing undisclosed income.
4. Application of the Supreme Court judgment in K. P. Varghese case [1981] 131 ITR 597.

Issue 1: Discrepancy in the cost of construction of a house property:
The appeals arose from search and seizure operations where a significant difference was found between the cost of construction disclosed by the assessees and the valuation by the departmental valuer. The Assessing Officer assessed undisclosed income based on this difference, leading to appeals before the Tribunal.

Issue 2: Assessment of undisclosed income under section 158BB:
The Assessing Officer assessed undisclosed income under section 158BB of the Income-tax Act, considering the undisclosed investments found during the search. The assessees contended that no incriminating papers were found during the search, and hence, no concealed income should be assessable. However, the Tribunal held that the Assessing Officer could base undisclosed income on further material or information available, even if not found during the search.

Issue 3: Interpretation of the valuation report and its impact on assessing undisclosed income:
The Tribunal considered whether the valuation estimate should be treated as part of the search material under section 158BB. The Tribunal rejected the assessees' argument that a difference of less than 15% between disclosed amount and valuation should be ignored, citing changes in relevant provisions and the need for relevant information for computing undisclosed income.

Issue 4: Application of the Supreme Court judgment in K. P. Varghese case [1981] 131 ITR 597:
The assessees relied on the Supreme Court judgment in K. P. Varghese case [1981] 131 ITR 597 to argue that a difference of less than 15% should be ignored. The Tribunal, however, held that the judgment was in relation to a deleted provision and that no hard and fast rule could be applied to ignore differences in valuation. The High Court found merit in the assessees' argument, emphasizing the bona fide nature of the difference and the practical variability in valuation estimates.

In conclusion, the High Court allowed the appeals, setting aside the orders of the Assessing Officer and the Tribunal related to the house property. It held that the difference in undisclosed income found by the valuer and disclosed by the assessees was meager and should be ignored. The Court emphasized the practical challenges in valuing a property and the lack of a statutory provision to determine a specific percentage for discrepancies.