2015 (2) TMI 446 - AT - Income Tax

Undisclosed investment on purchase of Flats - reopening of assessment u/s 147 - Jurisdiction of AO - Held that - In the reason for reopening there was no material whatsoever in the possession of the AO which suggests that assessee has invested unaccounted money in the purchase of flats. The reason mentions that it was from discreet enquiry . AO has found that assessee has owned the flats but the cost thereof seems to the AO as unreasonable. Thus there is no reason whatsoever in coming to this conclusion. Now it is mandated through section 142A of the Act that AO can refer to the valuation cell for an estimate of the value of the investment in connection with section 69,69A and 69B of the Act. However, this power of the AO cannot be applied indiscriminately without any reason. The AO has found that the investment was made into the flat in the name of the assessee and assessee's father. AO has also given a finding that except for a small amount of booking father has not made further investment and the bulk of the investment was made by the son. AO has drawn adverse inference on the basis that father was not aware of the actual investment. When the investment has been done by the assessee and the same is reflected in the assessee's books it is not understood as to how the father has to give a categorical statement regarding the actual investment in the property. In this situation AO has referred the matter for valuation vide letters dated 13.12.2010 and 16.12.2010. The valuation cell's report was received on 21.12.2011 and 27.12.2011 respectively. Thus there is no satisfaction of the AO nor there is any basis to make reference to valuation cell. Thus we hold that there was no reason or basis for the AO to hold that he was satisfied that the investment in flats reflected by the assessee in his books was unreasonable as compared to fair market value and the AO has not rejected the books of account. In such situation the mandate emanating from the case laws referred above clearly provide that the AO cannot make a reference to the Valuation Officer u/s 142A of the Act. Accordingly we hold that reference to the Valuation cell was bad and AO cannot make addition in this case on the basis of the Valuation report obtained under such reference . - Decided in favour of assessee.

Summary

Issues:
1. Validity of reassessment under section 147 of the Income Tax Act, 1961.
2. Sustainability of addition on account of undisclosed investment amounting to Rs. 15,46,700.

Issue 1: Validity of reassessment under section 147 of the Income Tax Act, 1961:

The appellant challenged the reopening of assessment under section 147 of the Income Tax Act, 1961, arguing that there was no material on record indicating any income had escaped assessment. The Assessing Officer (AO) initiated the reassessment based on discrepancies in the balance sheet, claiming that the appellant's deduction under section 24(b) was not allowable due to showing "Advance against Flat" without proper documentation. Additionally, the AO questioned the reasonableness of the appellant's investment in flats based on discrete inquiries. However, the Tribunal noted that the AO's decision to refer the matter to the Valuation Officer lacked a valid basis. The Tribunal cited relevant legal provisions and court decisions, emphasizing that the AO must first reject the books of account before making a reference to the Valuation Officer. As the AO failed to establish the need for valuation and did not reject the books of account, the Tribunal held the reference to the Valuation Officer as unjustified. Consequently, the Tribunal ruled in favor of the appellant on the jurisdictional issue, setting aside the orders of the lower authorities.

Issue 2: Sustainability of addition on account of undisclosed investment:

The appellant contested the addition of Rs. 15,46,700 on the grounds that the investment in the flats was duly recorded in the books of accounts and no material discrepancies were found by the Income Tax Officer (ITO). The appellant provided a valuation report from a registered valuer for the 3rd floor flat, which was not accepted by the Departmental Valuation Cell due to non-compliance with CBDT guidelines. Despite the appellant's efforts to substantiate the investment, the CIT(A) upheld the addition based on the Departmental Valuation Cell's report, considering it more authentic and acceptable. The Tribunal, however, found the valuation report's rejection by the Departmental Valuation Cell unjustified, as the AO did not reject the books of account. Citing legal precedents, the Tribunal emphasized that the AO must first reject the books before seeking valuation. As the AO's actions lacked a valid basis for referral to the Valuation Officer, the Tribunal concluded that the addition based on the valuation report was unsustainable. Consequently, the Tribunal allowed the appellant's appeal, setting aside the lower authorities' decisions on the issue of undisclosed investment.

In conclusion, the Appellate Tribunal ITAT Kolkata ruled in favor of the appellant on both issues, declaring the reassessment under section 147 invalid and rejecting the addition on account of undisclosed investment. The Tribunal emphasized the importance of following legal procedures and establishing a valid basis for reassessment and valuation referrals in income tax matters.