2007 (9) TMI 326 - AT - Income Tax

Validity Of Reference to the DVO u/s 142A - Difference between estimate of cost of construction as per DVO's report and what is shown by the assessee in the books - Whether reference to Valuation Officer could be made without finding any defects in the books of account and rejecting the books u/s 145? - HELD THAT - In our considered view the provisions of section 142A cannot be read in isolation to section 145. In other words, if books of account are found to be correct and complete in all respect and no defect is pointed out therein and cost of construction of building is recorded therein, then the addition on account of difference in cost of construction could not be made even if a report is obtained within the meaning of section 142A from the DVO. It is because the use of the report of the DVO obtained u/s 142A is not mandatory but is discretionary as the word used is 'may' therein. Accordingly, we are of the considered view that in the present case when Assessing Officer has not rejected the books of account by pointing out any defects reference to the DVO will not be valid and, therefore, DVO's report could not be utilized for framing assessment even if such a report is considered to be obtained u/s 142A. Since reference to DVO being held as invalid, the assessment/reassessment framed thereafter would also be invalid. As a result, we uphold the order of the Ld. CIT(A) though on different grounds. We do not consider it necessary to deal with the other issues as they are of academic interest only. As a result, the assessments for the assessment years 1998-99, 1999-2000,2000-01 are also held invalid. Order of the Ld. CIT(A) is confirmed though on different grounds. Grounds of the revenue relating to this issue are rejected. Similarly, following our decision for assessment year 2001102, the orders of Ld. CIT(A) for the assessment years 2003-04 and 2004-05 are also confirmed though on different grounds. In the result, the appeals filed by the revenue for all these six assessment years are dismissed.

Issues Involved:
1. Deletion of additions made by the Assessing Officer on account of the difference in the valuation of the property.
2. Unexplained investment in the construction of the property leading to income from undisclosed sources.
3. Interest-free loan given by the assessee society to another society.
4. Validity of reference to the District Valuation Officer (DVO) without rejecting the books of account.

Detailed Analysis:

1. Deletion of Additions Made by the Assessing Officer:
The revenue contested the deletion of additions made by the Assessing Officer on account of differences in the valuation of the property for various assessment years. The Assessing Officer had reopened assessments based on the DVO's report, which indicated higher construction costs than those declared by the assessee. The assessee argued that the original assessments were completed with full disclosure, and the reopening was invalid. The CIT(A) held that even if there was income from undisclosed sources, it was fully applied for charitable purposes and thus exempt under section 11. The Tribunal upheld the CIT(A)'s decision, emphasizing that the reference to the DVO was invalid without rejecting the books of account.

2. Unexplained Investment in Property Construction:
The Assessing Officer treated the difference in the cost of construction as income from undisclosed sources, arguing that the assessee had other activities generating undisclosed income, which was used for construction. The CIT(A) countered that any addition made would still be exempt under section 11, as the income was applied for charitable purposes. The Tribunal supported this view, stating that the Assessing Officer did not provide any evidence of non-charitable activities or defects in the books of account.

3. Interest-Free Loan to Another Society:
For the assessment year 2003-04, the revenue challenged the deletion of an addition of Rs. 7 lakhs on account of an interest-free loan given by the assessee society to another society. The CIT(A) ignored the fact that the society had resolved to give loans at 10% interest, which was not charged in this case. The Tribunal referred to its decision in the assessee's own case for the assessment year 2001-02, where it was held that the loan was given with interest, and the security furnished was admissible in law. Thus, this ground of the revenue was also rejected.

4. Validity of Reference to the DVO Without Rejecting Books of Account:
The Tribunal focused on whether the reference to the DVO was valid without finding defects in the books of account. It was held that the Assessing Officer did not reject the books of account, which were audited and found no defects. The Tribunal cited various judicial precedents to support the view that without rejecting the books, a reference to the DVO for determining the cost of construction is invalid. The Tribunal concluded that the Assessing Officer's reference to the DVO was not justified, and the subsequent assessments based on the DVO's report were invalid.

Conclusion:
The Tribunal dismissed the appeals filed by the revenue for all six assessment years, confirming the CIT(A)'s orders on different grounds. The primary reason was the invalidity of the reference to the DVO without rejecting the books of account, which led to the deletion of additions made by the Assessing Officer. The Tribunal also upheld the view that any income from undisclosed sources applied for charitable purposes would still be exempt under section 11.

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