2012 (8) TMI 157 - HC - Income Tax

Additions to the returned income - difference between the cost of construction as disclosed by assessee and as estimated by the District Valuation Office - Held that - Since AO had not rejected the books of accounts u/s 145(3), by pointing out any defect, the reference to the DVO was not valid and therefore, his report could not be used for framing assessment u/s 143(3) read with Section 153A. The scope and ambit of section 69B and 69C are altogether different. The connotation to the investment appearing in section 69B has to be in the context of investments made in some property or any other type of investment and it could not be the business expenditure. The word investment contained in section 69B deals with investment in bullion, jewellery or other valuable article, etc. If the contention of learned counsel for the Revenue is accepted and the expression is given a wider meaning as sought to be made out, the provisions of section 69C shall be rendered otiose. Except the report of the DVO on which the AO relied upon there was nothing on record to suggest that there was any other evidence to disbelieve the expenditure shown by the assessee. In fact the seized documents pertaining to this company were duly confronted vide questionnaire and the reply furnished thereof satisfactorily explains the transactions recorded therein which have been verified vis- -vis books of account/Balance Sheet - as can be seen from a comparison of the valuation by the assessee with that of the DVO the variation is only 3.86 % which is a very minor variation - As AO did not examine the variations, with specific reference to any items of expenditure that were unreasonable additions made cannot be warranted - in favour of assessee.

Issues Involved:
1. Validity of the reference to the Valuation Officer under Section 142A of the Income Tax Act.
2. Justification for additions made by the Assessing Officer based on the Valuation Officer's report.
3. Examination of the difference between the cost of construction as per the books of accounts and the estimated cost by the Valuation Officer.
4. Consideration of the Supreme Court and High Court precedents regarding the rejection of books of accounts before referring to the Valuation Officer.

Issue-wise Detailed Analysis:

1. Validity of the reference to the Valuation Officer under Section 142A of the Income Tax Act:
The court examined whether the reference to the Valuation Officer (DVO) by the Assessing Officer (AO) was valid. The AO had made this reference based on seized documents suggesting unrecorded construction expenses. However, the Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) found that the AO did not identify specific defects in the audited books of accounts. The court referenced the Supreme Court's judgment in Sargam Cinema v Commissioner of Income Tax, which held that the AO could not refer the matter to the DVO without first rejecting the books of accounts. The court concluded that the reference to the DVO was invalid as the AO had not rejected the books of accounts.

2. Justification for additions made by the Assessing Officer based on the Valuation Officer's report:
The AO made additions to the returned income based on the difference between the cost of construction as disclosed in the returns and the cost estimated by the DVO. The CIT(A) and ITAT struck down these additions, noting that the AO had not pointed out any defects in the books of accounts. The court upheld this view, emphasizing that the AO could not rely solely on the DVO's report for making additions without first finding the books of accounts unacceptable.

3. Examination of the difference between the cost of construction as per the books of accounts and the estimated cost by the Valuation Officer:
The court noted that the difference between the cost of construction as per the books of accounts and the DVO's estimate was only 3.86%, which is marginal and acceptable. The CIT(A) had held that such minor variations are expected due to differing perceptions and practices in the construction business. The court agreed with this assessment, stating that the minor variation did not justify the additions made by the AO.

4. Consideration of the Supreme Court and High Court precedents regarding the rejection of books of accounts before referring to the Valuation Officer:
The court cited several precedents, including the Supreme Court's decision in Amiya Bala Paul v Commissioner of Income Tax, which held that the AO could not make additions based solely on the DVO's valuation without rejecting the books of accounts. The court also referenced its own decision in Commissioner of Income-tax v. Aar Pee Apartments P. Ltd., which clarified that Section 142A does not apply to unexplained expenditure under Section 69C. The court reiterated that the AO must first find specific defects in the books of accounts before referring to the DVO.

Conclusion:
The court concluded that the AO's reference to the DVO was invalid as the books of accounts were not rejected. The minor variation of 3.86% between the disclosed cost and the DVO's estimate did not justify the additions. The court found no infirmity in the ITAT's decision and dismissed the appeals, stating that no substantial question of law arose for consideration.

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