2019 (9) TMI 628 - AT - Income Tax

Unexplained cash credit u/s 68 - share capital of the company which was treated as unexplained investments - HELD THAT - Section 68 allows the assessing officer to make the addition of unexplained cash credit. As per section 68, the sum should be credited in the books of accounts of the assessee and the source of which remained unexplained. In the instant case, land and building was constructed by the co-owners and the same was transferred - no credit for which the source was remained unexplained. Since the assessee has furnished all the details of the co-owners with confirmation letters, income tax assessment particulars and produced all the directors except 4 mentioned in the assessment order, the burden of the assessee got discharged and shifted to the AO. AO has not conducted the enquiries, did not give any finding that the company infused cash credits in the books and made the investments from unexplained sources. In the instant case, since all the promoter directors / co-owners are assessed to tax, explained the sources for investment in land and building in their hands, there is no case for making addition u/s 68 of the Act in the hands of the company and if at all any unexplained investment remained, the same required to be examined in the hands of individual share holders / co-owners in the respective assessment years of investment. - Decided against revenue. Capital gain computation - validity of valuation report and the assessment made by the AO on the basis of the report of Departmental Valuation Officer (DVO) - CIT(A) held that the report submitted by the DVO is non-est in law and has no value in the eyes of the law. Accordingly deleted the addition made by the AO - HELD THAT - Though the assessee raised objection before the AO, the AO ignored the objection raised by the assessee and discussed the issue of time limit available for completion of assessment and justified the assessment without considering the actual objection raised by the assessee. Since there is no extension of time for submission of report is allowed under the Act and no concession was made available to the DVO for non cooperation of the assessee, the report submitted by the DVO beyond the time limit is invalid and is to be treated as non-est. The Ld.CIT(A) rightly held that the report of the DVO cannot be relied upon or considered by the AO to frame the assessment u/s 143(3). In the grounds of appeal, though the department contended that AO has not fully relied upon the DVO's Valuation report and taken as a guidance, it is found from the order of the AO that the assessment was framed on the basis of the DVO s report. From plain reading of the assessment order it evidenced that the AO has made the addition purely relying on the DVO s report. Since the report of the DVO is non-est the assessment made on the basis of invalid report is unsustainable. Accordingly, we uphold the order of the Ld.CIT(A) and dismiss the appeal of the revenue. Allowance granted CIT(A) on account of self-supervision and the rate difference - objection of the department is that the CIT(A) has taken inconsistent stand with regard to validity of the report and the concessions granted to the assessee on the same report relating to rate difference and self supervision - HELD THAT - CIT(A) rightly adjudicated the grounds raised by the assessee both on validity of assessment made on invalid valuation report and also on rebates requested by the assessee. Thus we do not find any error in the order of the Ld.CIT(A) in adjudicating the alternate grounds. In this regard, we confine ourselves in holding that the Ld.CIT(A) is right in adjudicating the alternate grounds, but we are not going into merits of the order of the Ld.CIT(A) with regard to allowances granted by the Ld.CIT(A) in respect of rebate for rate differences, savings for self supervision etc. and the said issues are kept open. Since we have held that the additions made on the basis of invalid report are unsustainable, we uphold the order of the Ld.CIT(A) and dismiss the appeals of the revenue. Therefore, we consider it is not necessary to adjudicate the grounds raised by the revenue with regard to allowances granted by the Ld.CIT(A) in respect of rate differences and self supervision.

Summary

Issues Involved:
1. Validity of the addition of ?2,38,17,377/- as unexplained investments under Section 68.
2. Validity of the valuation report submitted by the Departmental Valuation Officer (DVO) and the assessment based thereon.
3. Allowance of deductions for self-supervision and rate differences.

Issue-wise Detailed Analysis:

1. Validity of the Addition of ?2,38,17,377/- as Unexplained Investments under Section 68:

The revenue contested the deletion of the addition of ?2,38,17,377/- representing the share capital of the company treated as unexplained investments by the Assessing Officer (AO). The AO found that the co-owners of the building, including Alla Siva Reddy and 14 others, invested ?9,07,94,000/- in the purchase of land and construction of the building. The assessee company, a closely held company, issued shares in lieu of the transfer of land and building. The AO treated the investment as unexplained under Section 68 due to the failure to produce certain directors for examination.

The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, observing that the investments were made from Financial Year 2010-11 to 2014-15, and the investments relevant to the assessment year under consideration were only ?51,80,256/-. The CIT(A) noted that the investments were transferred to the company in lieu of shares, with no infusion of cash, and relied on the decision of V.R.Global Energy of the Hon'ble Madras High Court, which held that the allotment of shares in settlement of pre-existing liability does not constitute unexplained cash credit under Section 68.

The Tribunal upheld the CIT(A)'s decision, stating that the source of investment was explained in the individual hands of the directors, and there was no unexplained cash credit in the company's books. The Tribunal dismissed the revenue's appeal on this ground.

2. Validity of the Valuation Report Submitted by the Departmental Valuation Officer (DVO) and the Assessment Based Thereon:

The AO referred the cost of construction to the DVO, who submitted the report beyond the six-month period prescribed under Section 142A. The AO relied on this report to make additions for unexplained investment in the cost of construction.

The CIT(A) held that the DVO's report was non-est (invalid) due to its submission beyond the statutory period and deleted the addition based on this report. The Tribunal agreed with the CIT(A), emphasizing that the DVO is required to submit the report within the prescribed time, and any report submitted beyond this period is invalid and cannot be relied upon for assessment purposes.

The Tribunal noted that the AO's assessment was based purely on the DVO's report, which was invalid. Consequently, the Tribunal upheld the CIT(A)'s decision and dismissed the revenue's appeal on this ground.

3. Allowance of Deductions for Self-Supervision and Rate Differences:

The revenue argued that the CIT(A) took an inconsistent stand by granting deductions for self-supervision and rate differences after holding the DVO's report as non-est. The CIT(A) had allowed a 15% deduction for rate differences and self-supervision, which the AO had rejected.

The Tribunal held that the CIT(A) was right in adjudicating the alternate grounds raised by the assessee, including the deductions for rate differences and self-supervision. However, the Tribunal did not delve into the merits of these allowances, as the primary issue was the validity of the DVO's report.

Since the Tribunal upheld the CIT(A)'s decision that the additions based on the invalid DVO report were unsustainable, it did not find it necessary to adjudicate the grounds regarding the allowances granted by the CIT(A) for rate differences and self-supervision. The Tribunal dismissed the revenue's appeals and the assessee's cross-objections as infructuous.

Conclusion:

The Tribunal dismissed the revenue's appeals and the assessee's cross-objections, upholding the CIT(A)'s decisions on all grounds. The Tribunal emphasized the importance of adhering to statutory time limits for submitting valuation reports and the necessity of explaining the source of investments in the hands of individual directors, rather than the company, in cases of share allotment in lieu of pre-existing liabilities.