2019 (10) TMI 846 - AT - Income Tax

Capital gain contribution - Reference to DVO - Difference between the value determined by the DVO and the value declared by the assessee - non rejection of books of accounts - HELD THAT - Assessing Officer while passing the order for assessment year 2010-11 has himself accepted the value determined by the DVO and has made proportionate addition for assessment year 2010-11. Therefore, when the Ld.CIT(A), following the report of the DVO has reduced the disallowance, the Revenue should not have any grievance. Accordingly, the grounds raised by the Revenue are dismissed. Coming to the grievance of the assessee, it is an admitted fact that the books of account of the assessee have not been rejected before referring the matter to the DVO for determination of the cost of construction. The Hon'ble Supreme Court in the case of Sargam Cinema 2009 (10) TMI 569 - SC ORDER has held that an assessing authority cannot refer any matter to the DVO without rejecting the books of account. Since, in the instant case, it is an admitted fact that the books of account of the assessee are not rejected and the assessee has maintained all bills and vouchers which are not found to be false or untrue, therefore, without rejecting the books of account of the assessee, the Assessing Officer could not have referred the matter to the DVO for determination of the cost of construction and thereby making addition on the basis of such difference. Even otherwise also, it is an admitted fact that the difference between the cost of construction declared by the assessee at ₹ 85.22 crores as against the value determined by the DVO of ₹ 82.68 crores is only 2.54 crores which is less than 3% of the total cost of construction declared by the assessee. Thus, the difference being less than 3% is very insignificant. We find the Hon'ble Delhi High Court in the case of CIT vs. Ambience Developers and Infrastructure (P) Ltd., 2012 (8) TMI 157 - DELHI HIGH COURT has held that for insignificant difference between cost of construction as per books of account and that estimated by the DVO, addition on the basis of DVO s report is not justified. Since, in the instant case, the assessee has maintained the books of account supported by bills and vouchers for the construction of the mall and hotel, which was not rejected by the Assessing Officer before sending the matter to the DVO for determination of the cost of construction and since the difference in the value declared by the assessee and the value determined by the DVO is also very insignificant being less than 3% of the total cost of construction declared by the assessee, therefore CIT(A) was not justified in sustaining the addition - Decided in favour of assessee.

Summary

Issues Involved:
1. Allocation of construction costs between mall and hotel projects.
2. Validity of the DVO's report and its reliance.
3. Rejection of books of account before referring to DVO.
4. Insignificant differences in cost estimation.

Detailed Analysis:

1. Allocation of Construction Costs Between Mall and Hotel Projects:
The Assessing Officer (AO) identified anomalies in the cost allocation between the mall and hotel projects. The AO noted that the cost of land in certain villages was not reduced from the project cost, and there was an imbalanced allocation of construction costs between the mall and hotel. The AO recalculated the costs, leading to a significant addition to the assessee's income due to the perceived overstatement of construction costs.

2. Validity of the DVO's Report and Its Reliance:
The Commissioner of Income Tax (Appeals) [CIT(A)] relied on the District Valuation Officer's (DVO) report obtained during the appeal proceedings, which resulted in a partial relief for the assessee. The CIT(A) sustained an addition of ?90,50,894 based on the DVO's report but deleted an addition of ?9,67,27,979. The assessee contested the reliance on the DVO's report, arguing that the cost determination should be based on actual expenses incurred as reflected in audited financial statements. The CIT(A)'s decision was challenged by both the assessee and the Revenue.

3. Rejection of Books of Account Before Referring to DVO:
The assessee argued that the AO could not refer the matter to the DVO without first rejecting the books of account, citing the Supreme Court's decision in Sargam Cinema vs. CIT. The Tribunal agreed with this argument, noting that the books of account were not rejected, making the reference to the DVO and subsequent addition unjustified.

4. Insignificant Differences in Cost Estimation:
The Tribunal observed that the difference between the cost declared by the assessee and the DVO's valuation was less than 3%, which was deemed insignificant. Citing the Delhi High Court's decision in CIT vs. Ambience Developers and Infrastructure (P) Ltd., the Tribunal held that such minor variations do not justify additions based on the DVO's report.

Conclusion:
The Tribunal dismissed the Revenue's appeal, agreeing with the CIT(A)'s partial relief based on the DVO's report. However, the Tribunal allowed the assessee's appeal, setting aside the addition of ?90,50,894, emphasizing that the AO's reference to the DVO was improper without rejecting the books of account and that the difference in cost estimation was insignificant. The Tribunal's decision was pronounced on 10.10.2019, resulting in the appeals filed by the assessee being allowed and the Revenue's appeal being dismissed.