2022 (4) TMI 806 - AT - Income Tax

Reopening of assessment u/s 147 - difference pointed out by the DVO in his valuation report - AO has formed his belief for escapement of income on the basis of the incriminating documents/files impounded during the survey proceedings - HELD THAT - Assessment, on the basis of DVO's report, cannot be reopened as held by the Hon'ble Supreme Court in the case of M/s Dhairya Construction Co. 2010 (2) TMI 612 - SC ORDER and in the case of Sargam Cinema 2009 (10) TMI 569 - SC ORDER Amount of escaped assessment is not emanating from any evidence on record found during survey but it is the difference pointed out by the DVO in his valuation report. The report of DVO is not an information for re-opening assessment u/s 147 of the Act. The AO has to apply his mind to the information if any collected and must form a belief on them. As we have noted earlier that assessment, on the basis of DVO's report, cannot be reopened as held by the Hon'ble Supreme Court in the case of M/s Dhairya Construction Co. 2010 (2) TMI 612 - SC ORDER therefore, it is abundantly clear that reassessment proceedings initiated by the assessing officer is bad in law and therefore should be quashed. CIT(A) during the appellate proceedings, observed that there were no such discrepancies in the construction expenses - the assessing officer is referring to certain material without describing them and quantifying the amounts contained therein. There should be a live link between the material coming to the notice of the Assessing Officer and the formation of belief regarding the escapement of income. In the present case, there is no material except the valuation report of DVO which has a live link and base for the assessing officer to form a belief regarding the escapement of income. Rather, the natural conclusion which can be drawn is that the assessing officer has re-opened the assessment on the basis of DVO's valuation report - we decline to interfere with the order of Id. CIT(A) in deleting the aforesaid additions. His order on this addition is, therefore, upheld and the grounds of appeal of the Revenue are dismissed.

Issues Involved:
1. Validity of reopening proceedings under section 148 of the Income Tax Act, 1961.
2. Admissibility of evidence found during survey proceedings.
3. Rejection of books of accounts before referring the matter to the District Valuation Officer (DVO).
4. Basis for addition of unexplained investments based on DVO's report.
5. Legality of reference to the DVO without initiating assessment proceedings.

Detailed Analysis:

1. Validity of Reopening Proceedings under Section 148:
The primary issue is whether the reopening of assessments under section 148 was valid. The Revenue argued that the reopening was justified based on incriminating documents impounded during survey proceedings. However, the Tribunal found that the reopening was primarily based on the DVO's report, which is not a valid ground for reopening as per the Supreme Court rulings in M/s Dhairya Construction Co. and Sargam Cinema. The Tribunal concluded that the reassessment proceedings initiated by the Assessing Officer (AO) were bad in law and should be quashed.

2. Admissibility of Evidence Found During Survey Proceedings:
The Revenue contended that loose papers and files found during the survey constituted admissible evidence of unaccounted expenses. However, the Tribunal noted that these documents were not confronted to the assessee during the survey or subsequent assessment proceedings. The Tribunal emphasized that the AO did not quantify the amounts contained in these documents or correlate them with the books of accounts, thereby failing to establish a direct nexus between the impounded documents and the alleged escapement of income.

3. Rejection of Books of Accounts Before Referring the Matter to the DVO:
The Revenue argued that the AO was justified in referring the matter to the DVO without rejecting the books of accounts due to the defects found during the survey. In contrast, the Tribunal held that the AO must reject the books of accounts before making such a reference, as mandated by law. The Tribunal observed that no specific defects were pointed out in the books of accounts, and the AO did not issue a show-cause notice indicating the intention to reject the books before referring the matter to the DVO.

4. Basis for Addition of Unexplained Investments Based on DVO's Report:
The AO made additions based on the difference between the construction cost estimated by the DVO and the cost shown by the assessee. The Tribunal, however, found that the DVO's report alone could not form the basis for such additions. The Tribunal reiterated that the AO must apply his mind to the information collected and form a belief regarding the escapement of income, which was not done in this case. The Tribunal upheld the CIT(A)'s decision to delete the additions made by the AO.

5. Legality of Reference to the DVO Without Initiating Assessment Proceedings:
In the assessee's appeal for A.Y. 2012-13, the issue was whether the reference to the DVO was legal, given that the assessment proceedings had not been initiated at the time of the reference. The Tribunal found that the reference was made without fulfilling the conditions of Section 131(1)(d) and before issuing the first statutory notice under Section 143(2). The Tribunal concluded that the reference to the DVO was illegal and allowed the assessee's appeal.

Conclusion:
The Tribunal dismissed the Revenue's appeals for A.Ys. 2008-09 to 2010-11, upholding the CIT(A)'s order to quash the reopening proceedings and delete the additions. In the assessee's appeal for A.Y. 2012-13, the Tribunal allowed the appeal, finding that the reference to the DVO was illegal and the additions based on the DVO's report were not justified. The Tribunal emphasized the necessity of rejecting the books of accounts before referring the matter to the DVO and the requirement for the AO to form a belief based on concrete evidence rather than solely relying on the DVO's report.

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