2024 (4) TMI 460 - HC - Income Tax

Validity of additions based on valuation report - Referring the matter to DVO without first rejecting the books of account - Best Judgement Assessment - Without rejecting the books of accounts AO proceeded to make reference u/s 142A to Departmental Valuation Officer (DVO) but later acting solely on the strength of estimation made by the DVO in his report AO proceeded to reject the books of accounts and make the Best Judgement Assessment wherein he relied on the estimation of investment made by the assessee as disclosed by the DVO. HELD THAT - Undeniably books of accounts of the assessee were not rejected on or before 5.4.2006. That consequence in law arose later after submission of the DVO report dated 14.9.2006. As decided in Sargam Cinema Haldwani 2009 (10) TMI 569 - SC ORDER Tribunal decided the matter rightly in favour of the assessee inasmuch as the Tribunal came to the conclusion that the assessing authority (AO) could not have referred the matter to the Departmental Valuation Officer (DVO) without books of accounts being rejected. In the present case a categorical finding is recorded by the Tribunal that the books were never rejected. This aspect has not been considered by the High Court. In the circumstances reliance placed on the report of the DVO was misconceived. Also see Lucknow Public Educational Society 2011 (3) TMI 1326 - ALLAHABAD HIGH COURT as held language of section 142A mean that before proceeding to call for a report of the Valuation Officer the books of account must be rejected. Decided against revenue.

Summary

Issues involved:
The issues involved in the judgment are related to the rejection of books of accounts by the Assessing Officer, reference made to the Departmental Valuation Officer (DVO), Best Judgement Assessment, and the correctness of the actions taken by the Income Tax Appellate Tribunal (ITAT).

Summary of the Judgment:

Rejection of Books of Accounts:
The appellant had filed its return for the assessment year 2004-05 supported by audited books of accounts. The Assessing Officer proceeded to make a reference to the Departmental Valuation Officer (DVO) under Section 142A of the Income Tax Act 1961 without rejecting the books of accounts. Subsequently, the Assessing Officer relied on the estimation made by the DVO to reject the books of accounts and make a Best Judgement Assessment based on the investment estimation disclosed by the DVO.

Legal Precedents:
The High Court referred to the case of Sargam Cinema, Haldwani vs Commissioner of Income Tax, where it was observed that the assessing authority cannot refer the matter to the DVO without rejecting the books of accounts. Similarly, in Commissioner of Income Tax vs Lucknow Public Educational Society, it was highlighted that before calling for a report from the Valuation Officer, the books of accounts must be rejected. The court emphasized that the issue has been settled by previous decisions and they are in agreement with the same.

Conclusion:
The High Court found no merit in the appeals as the issue of rejecting books of accounts before referring to the DVO has been conclusively settled by previous decisions. Therefore, the questions of law proposed in the appeals were deemed not to arise. Consequently, both appeals were dismissed, and no costs were awarded.

This judgment highlights the importance of following legal procedures and precedents in matters related to the rejection of books of accounts and making references to valuation officers in income tax assessments.