2004 (12) TMI 301 - AT - Income Tax

Summary

Issues Involved:
Addition made towards unexplained investment in cost of construction of the residential house by invoking the provisions of Section 69B of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Reference to Valuation Officer:
The primary issue in this appeal is the addition made towards unexplained investment in the cost of construction of the assessee's residential house. The Assessing Officer (AO) referred the matter to the Assistant Valuation Officer (AVO) under Section 133(6) of the Income Tax Act, 1961, who determined the cost of construction at Rs. 9,66,516 by applying CPWD rates. The AO made an addition of Rs. 4,16,516 based on this report.

2. Competency of AO to Call for Valuation Report:
The assessee's counsel argued that the AO is not competent to call for a report from the Valuation Officer under Section 133(6) of the Act, as supported by the Supreme Court decision in Smt. Amiya Bala Paul vs. CIT. The counsel also emphasized that construction costs in Shimoga are lower than in other cities and provided confirmatory letters from the contractor, Shri Rajashekarappa, stating the cost was Rs. 5,50,000.

3. Retrospective Application of Section 142A:
The Departmental Representative argued that Section 142A, inserted by the Finance (No. 2) Act, 2004, clarifies that the AO always had the power to refer to the Valuation Officer. Hence, the reference made under Section 133(6) should be deemed as done under Section 142A. However, the assessee's counsel contended that Section 142A does not apply to assessments completed before 30th Sept., 2004, and that the new power under Section 142A is distinct from the powers under Section 133(6).

4. Validity of AVO's Report:
The Tribunal noted that the AVO's report was the only material for making the addition and that the AO had no prior suspicion of understatement in the cost of construction. The Tribunal found that the Department's own witness, Shri Rajashekarappa, corroborated the assessee's declared cost of Rs. 5,50,000. Additionally, the assessee provided a valuation report from a registered valuer, estimating the cost at Rs. 5,52,020, which was consistent with the assessee's declaration.

5. Rejection of Registered Valuer's Report:
The AVO rejected the registered valuer's report, claiming it was based on post-completion inspection and lacked architectural drawings. However, the Tribunal noted that the AVO also inspected the property post-completion and that the registered valuer used local PWD rates, which should be preferred over CPWD rates.

6. Examination of Contractor:
The Tribunal highlighted that the AVO had the opportunity to obtain details from the contractor, Shri Rajashekarappa, who confirmed the cost of construction. The Tribunal found no reason to disbelieve the contractor's statements, which were consistent with the registered valuer's report and the assessee's declared cost.

7. Flaws in AVO's Estimation:
The Tribunal identified flaws in the AVO's estimation, including the failure to consider that the foundation existed since 1972. The Tribunal concluded that the AVO's report could not be relied upon and that the AO should accept the assessee's declared cost of construction.

Conclusion:
The Tribunal allowed the appeal, directing the AO to accept the assessee's claim of Rs. 5,50,000 as the cost of construction, thereby rejecting the addition made by the AO.