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2024 (8) TMI 743 - AT - Income TaxAssessment u/s 153A - unexplained investment made in the construction of Hotel Building - addition invoking the provisions of section 69 r.w.s. 115BBE - 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 - As decided in own case 2023 (12) TMI 803 - ITAT CHANDIGARH noted that the report of the DVO is purely based on estimation basis. The assessee had filed various objections against the said report. One of the important objections of the assessee was that the DVO had taken the rates of construction as per the Central Public Works Department (CPWD) rate. It was submitted that the property was situated in the State of Punjab. That the DVO, subject to a other objections, was otherwise required to take the prescribed rates of State Public Works Department (PWD rates). It was submitted before the Assessing Officer that there was difference of at least 25% in the rates of construction released by the CPWD as compared to PWD rates. We, further, note that no incriminating or corroborating evidence was found during the course of search action at the office premises of the assessee prompting the search party/Assessing Officer to get the report of the DVO regarding the cost of construction. The issue has been settled by the various Hon ble High Courts, who have been unanimously on the point that if during the course of search, no incriminating material was found exhibiting unexplained investment by an assessee, merely, on the basis of DVO s report, the addition cannot be made. Decided in favour of assessee. Rejection of books of accounts u/s 145(3) - as noted difference between the amount invested in the building and amount as disclosed in the books of accounts, therefore, the books of accounts are liable to be rejected - HELD THAT - We agree with the contention so advanced by the ld AR as the whole basis of rejection of books of accounts was difference in amount invested in building and as we have deleted the same, there is no justifiable basis for rejection of books of accounts and hence, the said ground of appeal is allowed. Disallowing the current year business loss being without pointing out any defect and not allowed to be carried forward to the subsequent years - Since the very basis of rejection of books of accounts is not sustainable as discussed above, we see no basis for denying the current year business loss and carry forward of the same for set off in subsequent years. Hence, the ground of appeal is allowed. Disallowance of deduction u/s 35AD - expenditure incurred on hotel building - AO held that the Hotel being run by the assessee company is not registered / classified as a star rated Hotel by the Central Government for the Financial Year under consideration - scope of certificate as subsequently obtained - HELD THAT - As decided in River View Hotels 2018 (7) TMI 1079 - ITAT AHMEDABAD there is no time limit of obtaining star certificate as prescribed in Section 35AD(8)(a)(c)(iv) of the Act and only requirement is to build and operate two or more star hotel classified by the Central Government and the AO has misconstrued the said clause where he observed that in order to avail the benefit of a three star category hotel, the assessee was required to classify his three star category hotel in the year of operation as the benefit of this can only be given to a two and above star hotel and the said finding of the AO were set aside. No contrary authority has been brought on record. In the instant case, we find that the hotel being run by the assessee has been duly granted a four star rating certificate by the Ministry of Tourism, Government of India and thus, it qualify as a specified business for the purposes of claim of deduction u/s 35AD of the Act. The compliance of other conditions are not in dispute - there is no justifiable basis to deny the claim of deduction and the assessee is held eligible for claim of deduction u/s 35AD of the Act. Assessee ground of appeal is allowed.
Issues Involved:
1. Sustaining additions on account of alleged unexplained investment. 2. Invocation of provisions of Section 69 read with Section 115BBE. 3. Reference to the Departmental Valuer without incriminating evidence. 4. Ignoring jurisdictional ITAT and High Court judgments. 5. Validity of reference to the Valuation Officer. 6. Following predecessor's order for a different assessment year. 7. Application of CPWD rates instead of PWD rates. 8. Confirmation of addition on a substantive basis. 9. Rejection of books of accounts under Section 145(3). 10. Disallowance of current year business loss and carried forward losses. 11. Disallowance of deduction under Section 35AD. 12. Lack of specific findings for disallowance under Section 35AD. Detailed Analysis: 1. Sustaining Additions on Account of Alleged Unexplained Investment: The assessee challenged the addition of Rs. 2,09,48,986/- for A.Y. 2017-18, Rs. 2,02,71,026/- for A.Y. 2018-19, and Rs. 2,03,67,385/- for A.Y. 2019-20 on the grounds of alleged unexplained investment in the construction of a hotel building. The Assessing Officer (AO) relied on the Departmental Valuation Officer (DVO) report, which estimated the cost of construction significantly higher than what was declared by the assessee. The Tribunal noted that no incriminating material was found during the search at the assessee's premises, and the additions based solely on the DVO's report were not justified. 2. Invocation of Provisions of Section 69 Read with Section 115BBE: The AO invoked Section 69 read with Section 115BBE to tax the alleged unexplained investment. The Tribunal held that in the absence of any incriminating material found during the search, the invocation of these provisions was not valid. 3. Reference to the Departmental Valuer Without Incriminating Evidence: The assessee argued that the reference to the DVO was invalid as no incriminating evidence was found during the search. The Tribunal agreed, citing the Supreme Court's decision in PCIT vs. Abhisar Buildwell Pvt. Ltd., which held that in the absence of incriminating material, no addition can be made based solely on the DVO's report. 4. Ignoring Jurisdictional ITAT and High Court Judgments: The assessee contended that the CIT(A) ignored relevant judgments, including those of the jurisdictional ITAT and the Delhi High Court in Abhinav Kumar Mittal, which held that no reference to the Valuation Officer could be made without incriminating material. The Tribunal found merit in this argument and noted that the CIT(A)'s reliance on certain judgments was misplaced. 5. Validity of Reference to the Valuation Officer: The Tribunal held that the reference to the Valuation Officer was not valid in the absence of incriminating material found during the search. The Tribunal emphasized that the DVO's report was based on estimation and could not be the sole basis for making additions. 6. Following Predecessor's Order for a Different Assessment Year: The CIT(A) followed the order of his predecessor for A.Y. 2016-17, which was under appeal. The Tribunal noted that the facts and circumstances for the assessment years under consideration were different, and the CIT(A) should have independently evaluated the evidence. 7. Application of CPWD Rates Instead of PWD Rates: The assessee argued that the DVO's report was based on CPWD rates, which are higher than PWD rates. The Tribunal agreed, noting that the jurisdictional High Court in CIT vs. Rajesh Mahajan had held that CPWD rates are higher by 30%. The Tribunal found that the DVO's reliance on CPWD rates was not justified. 8. Confirmation of Addition on a Substantive Basis: The Tribunal held that the substantive addition in the hands of the assessee company was not justified, as the construction was funded by the shareholders/directors, and the company had not commenced its business operations during the relevant period. 9. Rejection of Books of Accounts Under Section 145(3): The AO rejected the books of accounts under Section 145(3), citing discrepancies in the investment amounts. The Tribunal found no defects in the books of accounts, which were duly audited, and held that the rejection was not justified. 10. Disallowance of Current Year Business Loss and Carried Forward Losses: The AO disallowed the current year business loss and did not allow the carried forward of losses. The Tribunal held that since the rejection of books of accounts was not justified, there was no basis for disallowing the business loss and carried forward losses. 11. Disallowance of Deduction Under Section 35AD: The AO disallowed the deduction under Section 35AD, citing the absence of a star rating certificate for the hotel. The Tribunal noted that the certificate was subsequently obtained and that the section does not mandate the certificate to be effective from a particular date. The Tribunal held that the assessee was eligible for the deduction. 12. Lack of Specific Findings for Disallowance Under Section 35AD: The Tribunal found that the AO did not provide specific findings for disallowing the deduction under Section 35AD. The Tribunal allowed the deduction, noting that the hotel had commenced operations and the necessary conditions were met. Conclusion: The Tribunal allowed the appeals of the assessee for all three assessment years, holding that the additions based on the DVO's report were not justified in the absence of incriminating material found during the search. The Tribunal also allowed the deduction under Section 35AD and held that the rejection of books of accounts and disallowance of business losses were not justified.
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