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2023 (12) TMI 803 - AT - Income TaxAssessment u/s 153A - addition based purely upon the report of the DVO - whether the report of the DVO obtained after search action can be based for making the impugned additions in this case in the absence of any incriminating material during the course of search action? - HELD THAT - The peculiar fact to be noted in this case is that no incriminating material was found during the course of search action at the premises of the assessee. The time period for initiating original scrutiny assessment u/s 143(3), by issue of notice u/s 143(2) of the Act, in this case has already lapsed on the date of search action, which means that the original assessment in this case stood completed and not abated on the date of search. The Hon ble Supreme Court in the case of PCIT vs. Abhisar Buildwell Pvt. Ltd. 2023 (4) TMI 1056 - SUPREME COURT has settled the proposition of law that in case of no incriminating material is found during the course of search action and the assessment stood completed and not abated for that assessment year, then no addition can be made in the absence of any incriminating material found during the course of search action. Validity of reference to the DVO - We note that as per the relevant provisions of the Act, if the department wanted to act on the said document, the proceedings could have been initiated u/s 153C of the Act against the assessee by recording satisfaction by the Assessing Officer of the searched person. Thereafter, after receipt of the documents from the Assessing Officer of the searched person, the Assessing Officer of the assessee could have initiated the proceedings u/s 153C of the Act. However, the department did not act on the said documents. Even otherwise, the said slip was a third party document, which was never confronted to the assessee. The difference of the amount mentioned in the said slip was also meager as compared to the additions made by the Assessing Officer. Thirdly, since the said document was not sufficient enough to base additions in this case, the said document at the most could have been a trigger point to initiate search action in the case of the assessee. As per the facts on the file, the matter was referred to the DVO after the search action at the premises of the assessee and admittedly, no incriminating material whatsoever was found during the search action, however no incriminating material was found, which could have been stated to be a trigger point to refer the matter to the DVO. Report of the DVO is based on pure estimation of investment. The DVO has taken the CPWD rates and as noted above, the CPWD rates are on more than 25% higher side as compared to the state-PWD. there is force in the contention of the ld. AR that a very high profit rate of the contractor is embedded in the departmental rates and further a lot of difference in expenditure occurs between a work got done through government contractor and the work got done under self-supervision and self-purchasing of the material. As per the settled law, neither reference to the DVO in this case was valid in view of the various decisions of the Hon ble High Courts as noted above nor the addition in this case was justified based purely upon the report of the DVO which was a work of pure estimation of cost based on government rates. Since the assessee company s business has not commenced and that the construction of the building was done out of the capital invested by the shareholders and hence, there was no case of earning of any income, what to say of any income from undisclosed sources, therefore, the substantive addition in the hands of the assessee company was not justified. The issue is squarely covered by the various decisions including the decision of Bharat Engineering Construction Co. 1971 (9) TMI 14 - SUPREME COURT referred by the assessee in the written submissions. The action of the CIT(A) in reversing the view point of the Assessing Officer on this issue, therefore, cannot be held to be justified. In view of this, the additions made in the case of the assessee cannot be held to be justified and the same are accordingly ordered to be deleted. Assessee appeal allowed.
Issues Involved:
1. Validity of reference to the Departmental Valuation Officer (DVO) in absence of incriminating material. 2. Justification of substantive addition in the hands of the assessee company. 3. Reliance on third-party documents not confronted to the assessee. 4. Validity of the DVO's report based on CPWD rates. 5. Justification of protective addition versus substantive addition. Summary: The captioned appeals concern the assessee, involved in the hotel business, challenging the orders of the Commissioner of Income Tax (Appeals)-5, Ludhiana, regarding additions made based on a DVO's report following a search and seizure operation under section 132 of the Income Tax Act. Validity of Reference to the DVO:The assessee argued that no incriminating material was found during the search at their premises, making the reference to the DVO invalid. The counsel for the assessee cited the Supreme Court decision in PCIT vs. Abhisar Buildwell Pvt. Ltd., asserting that without incriminating material, the DVO's reference was unlawful. The Tribunal agreed, noting that the DVO's report was based purely on estimation without any corroborating evidence from the search. Justification of Substantive Addition:The Assessing Officer had made substantive additions in the hands of the directors and protective additions in the hands of the assessee company. The CIT(A) converted these protective additions into substantive additions in the company's hands, which the assessee contested. The Tribunal found this conversion unjustified, especially since the company had not commenced business operations and had no income source, thus no undisclosed income could be presumed. Reliance on Third-Party Documents:The Tribunal noted that the document found from M/s Royal Builders, which was not confronted to the assessee, could not be used as a basis for additions. The CIT(A) had acknowledged that the additions were based on the DVO's report rather than the third-party document, which was merely a trigger for the valuation reference. Validity of the DVO's Report Based on CPWD Rates:The DVO's report, based on CPWD rates, was challenged by the assessee as these rates were higher than State PWD rates. The Tribunal agreed with the assessee's contention that CPWD rates include a higher profit margin and do not account for self-supervision and discounted material purchases, making the DVO's estimation unreliable. Justification of Protective Addition versus Substantive Addition:The Tribunal found that since the assessee company had not commenced business and the construction was funded by shareholders' capital, there was no basis for substantive additions in the company's hands. The Tribunal cited various judicial precedents, including the Supreme Court's decision in CIT vs. Bharat Engineering & Construction Co., to support this conclusion. In conclusion, the Tribunal allowed the appeals, deleting the additions made by the Assessing Officer and confirmed by the CIT(A), and pronounced the order in the Open Court on 12th October, 2023.
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