2014 (1) TMI 1438 - AT - Income Tax

Unexplained investment - Held that - The only basis brought out by the Assessing Officer to make the impugned addition under Section 69B of the Act is the report of the DVO estimating the value of construction at higher figure - The report of the DVO is an estimate but not an evidence to prove any undisclosed investment in construction by the assessee - No infirmity or discrepancy has been established by the Assessing Officer in the account books maintained by the assessee - Following Sargam Cinema vs. CIT 2009 (10) TMI 569 - Supreme Court of India - No addition can be made on the basis of the report of the DVO without the books of account being rejected, wherein expenditure relating to the construction is recorded and such books of account have not been rejected by the Assessing Officer under Section 145 of the Act - Decided in favour of assessee.

Summary

Issues:
Single assessee's consolidated appeal against Commissioner of Income Tax (Appeals)-III's order on unexplained investment in Hospital Building's construction under Section 69B of the Income Tax Act, 1961 for assessment years 2001-02, 2002-03, and 2003-04.

Analysis:

1. Background and Consolidated Order:
The three appeals pertain to a single assessee challenging the Commissioner of Income Tax (Appeals)-III's consolidated order arising from the Assessing Officer's decisions for assessment years 2001-02, 2002-03, and 2003-04 under Section 143(3) of the Income Tax Act, 1961. The primary issue in all appeals is the addition made by the Assessing Officer regarding unexplained investment in the cost of construction of a Hospital Building under Section 69B of the Act.

2. Initial CIT(A) Order and Tribunal's Direction:
Initially, for the assessment year 2001-02, the CIT(A) set aside the addition, citing the Assessing Officer's lack of authority to refer to the Departmental Valuation Officer (DVO). However, the Tribunal later reversed this decision, directing a re-examination on the merits of the case in line with the provisions of Section 142A of the Act.

3. Assessee's Argument on Rejection of Books of Account:
The primary contention raised by the assessee was that the books of account regarding the construction cost were not rejected by the Assessing Officer, and thus, the referral to the DVO was unjustified. Citing the Supreme Court's judgment in Sargam Cinema vs. CIT (2010), the assessee argued that without rejecting the books of account, the reference to the DVO was not warranted.

4. Revenue's Counterargument and Tribunal's Analysis:
The Revenue argued that the books of account were not maintained as per Rule 6F of the Income Tax Rules, implying their rejection. However, the Tribunal analyzed that the Assessing Officer's mere observation on Rule 6F compliance did not equate to rejecting the books of account under Section 145 of the Act, as no discrepancies were pointed out.

5. Assessing Officer's Basis for Referral to DVO:
The Assessing Officer justified the referral to the DVO based on "local enquiries" indicating understated expenses by the assessee. However, the Tribunal found the lack of clarity on the nature and substance of these "local enquiries," emphasizing that without rejecting the books of account, such referrals were not justified.

6. Tribunal's Decision and Conclusion:
The Tribunal concluded that the Assessing Officer's reference to the DVO was not in line with the legal provisions, especially as the books of account were not rejected. Therefore, the additions made under Section 69B of the Act were deemed impermissible, and the Tribunal directed the Assessing Officer to delete the impugned addition based solely on the DVO's report.

In summary, the Tribunal allowed all appeals of the assessee, setting aside the Commissioner of Income Tax (Appeals)'s order and directing the deletion of the additions as the reference to the DVO was deemed improper without rejecting the books of account.