1997 (1) TMI 133 - AT - Income Tax

Issues Involved:
1. Cost of construction of a rice mill.
2. Additions made under Section 69 of the IT Act, 1961.
3. Validity of the assessment made under Section 144.
4. Reliance on the valuation report versus the books of account.
5. Apportionment of unexplained investment across assessment years.

Issue-wise Detailed Analysis:

1. Cost of Construction of a Rice Mill:
The sole common issue in these appeals pertains to the cost of construction of a rice mill and the consequent additions made under Section 69 of the IT Act, 1961, for the assessment years 1984-85 and 1985-86. The assessee, a partnership firm, constructed a rice mill during the period from February 1984 to December 1984. The admitted cost of construction as per books was Rs. 9,08,580. However, the Departmental Valuation Officer (DVO) determined the cost of construction at Rs. 15,08,200 based on the land and building method. The difference between the admitted cost and the estimated cost was Rs. 5,93,200, which was treated as unexplained investment by the Assessing Officer (AO).

2. Additions Made Under Section 69 of the IT Act, 1961:
The AO apportioned the unexplained investment proportionately for the assessment years 1984-85 and 1985-86. The AO treated the difference between the admitted cost and the cost determined by the valuation cell as unexplained investment and apportioned it between the assessment years 1984-85 and 1985-86 at Rs. 1,09,020 and Rs. 4,90,598 respectively. The learned CIT(A) granted part relief by reducing the cost of construction and determined the unexplained investment at Rs. 4,10,884, spreading it over the assessment years 1984-85 and 1985-86 at Rs. 74,706 and Rs. 3,36,178 respectively.

3. Validity of the Assessment Made Under Section 144:
The assessment for the assessment year 1985-86 was originally made under Section 144 of the IT Act. The learned CIT(A) set aside the ex parte assessment under Section 144 and directed it to be redone in accordance with the law. The assessment was subsequently redone under Section 143(3) making certain additions under Section 69. The Tribunal found that the ex parte assessment made under Section 144 had become infructuous due to the reassessment under Section 143(3).

4. Reliance on the Valuation Report Versus the Books of Account:
The Tribunal emphasized that the AO cannot resort to an estimate of cost of construction without first rejecting the books of account. The assessee maintained regular books of account supported by valid vouchers and bills regarding the materials purchased. The AO did not point out any defect or mistake in the books of account. The Tribunal cited the decision of the Tribunal, Delhi 'C' Bench in the case of Harsarup Cold Storage & General Mills vs. ITO 27 ITD 1 (TM), which held that the AO must record his observation as to the reliability, authenticity, and correctness of the evidence before rejecting the books and resorting to an estimate. The Tribunal also referred to the Rajasthan High Court's decision in CIT vs. Pratap Singh, Amrosh Singh, Rajinder Singh (1993) 200 ITR 788 (Raj), which held that the valuation report can be considered only when the books of account are not reliable or are not supported by proper vouchers.

5. Apportionment of Unexplained Investment Across Assessment Years:
The Tribunal noted that the period of construction covered by the assessment year 1984-85 was only two months, while the period of construction covered by the assessment year 1985-86 was nine months. The AO apportioned the unexplained investment proportionately between the two assessment years. However, the Tribunal found that the AO did not follow the proper procedure of rejecting the books of account before making an estimate based on the valuation report.

Conclusion:
The Tribunal concluded that the AO did not have valid grounds for rejecting the cost of construction reflected in the books of account and resorting to an estimate based on the valuation report. The Tribunal deleted the impugned addition made under Section 69 of the IT Act towards unexplained investment in construction for both the assessment years under consideration. Consequently, the appeals filed by the assessee were allowed, and the appeals filed by the Revenue were dismissed.

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