2015 (2) TMI 772 - HC - Income Tax

Unexplained investment under Section 69B - assessee refereed matter to DVO - CIT(A) deleted the additions made for the assessment years 1994-1995 and 1995-1996, and directed the entire unexplained investment to be assessed as income for the assessment year 1996-1997 also confirmed by Tribunal - Held that - In the case on hand, it is beyond any cavil that the books of account furnished by the assessee were never rejected. No explanation was called for from the assessee stating that there was concealment or understatement of amount in the books of account. The initial burden cast on the department to prove that there was understatement or concealment of income has not been discharged and, therefore, the Assessing Officer is not empowered to refer the matter to the Departmental Valuation Officer or rely on such report. - Decided in favour of the assessee

Issues:
1. Validity of Tribunal's order on estimated cost of construction
2. Rightness of Tribunal's decision on estimated cost of construction
3. Applicability of Section 69B in light of factual findings
4. Entitlement of Assessing Officer to resort to Section 69B without rejecting books of account

Analysis:

Issue 1: Validity of Tribunal's order on estimated cost of construction
The appellant challenged the order of the Income Tax Appellate Tribunal regarding the estimated cost of construction for the assessment year 1996-1997. The Tribunal upheld the estimate made by the Commissioner of Income Tax (Appeals) despite the appellant accounting for the entire cost of construction in their books without any flaws identified by the Assessing Officer. The Tribunal considered the reasonableness of the estimate based on local area rates and quality of materials used in construction.

Issue 2: Rightness of Tribunal's decision on estimated cost of construction
The Tribunal affirmed the Commissioner of Income Tax (Appeals)'s decision on the estimated cost of construction, emphasizing that the Assessing Officer could not find any discrepancies in the appellant's accounting of the construction costs. The Tribunal criticized the Departmental Valuation Officer's valuation methods, highlighting the use of excessive rates for plinth area and emphasizing that the State P.W.D. Rates should have been applied instead of C.P.W.D. Rates due to the construction location and quality.

Issue 3: Applicability of Section 69B in light of factual findings
The Tribunal examined the applicability of Section 69B concerning unexplained investments, considering the factual findings that the Assessing Officer did not identify any payments made beyond those accounted for in the books to the contractor for construction costs. The Tribunal questioned the justification for upholding the estimated cost as unexplained investment under Section 69B when the actual costs were meticulously recorded and no defects were found in the accounting.

Issue 4: Entitlement of Assessing Officer to resort to Section 69B without rejecting books of account
The core issue in the appeal was whether the Assessing Officer could invoke Section 69B and refer the matter to the Departmental Valuation Officer without rejecting the appellant's books of account. The court emphasized that the burden of proof lies with the Assessing Officer to establish any understatement or concealment of income before resorting to external valuations. Citing legal precedents, the court ruled in favor of the appellant, stating that without rejecting the books of account, reliance on valuation reports was unjustified.

In conclusion, the High Court allowed the appeal, ruling in favor of the appellant based on the failure of the Assessing Officer to discharge the burden of proof regarding understatement or concealment of income before resorting to external valuations under Section 69B. The court highlighted the importance of not rejecting books of account without proper justification before seeking alternative valuation methods.

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