2024 (7) TMI 396 - AT - Income Tax

Valuation by the DVO - Addition on the basis of estimated cost setting aside actual cost as per books - applicability of section 142A of the Act to the valuation of WIP prior to its amendment - Non-Rejection of books of accounts - as per AO work-in-progress (WIP) is suppressed by the assessee and the certificate issued by civil engineer is not reliable - AO referred the case to the District Value Officer (DVO) to ascertain the fair market value of the work-in-progress. As alleged work-in-progress (WIP) is suppressed by the assessee and the certificate issued by civil engineer is not reliable - difference in the value of work-in-progress and passed an order under section 144 r.w.s. 142A - HELD THAT - AO must first express dissatisfaction with the books of accounts before referring the valuation. The judicial precedent in the case of Sargam Cinema 2009 (10) TMI 569 - SC ORDER supports this interpretation. The rejection of books of accounts by the Assessing Officer refers to the process, where the AO determines that the books of accounts maintained by the taxpayer are not reliable, accurate, or complete enough to assess the true income of the taxpayer. This rejection must be based on specific reasons and evidence that indicate discrepancies or inadequacies in the books of accounts including deviations from standard accounting practices. In our considered opinion, the AO has not provided detailed reasons and documentation to justify the rejection of the books of accounts. The addition is made on the estimated value, without substantial evidence to contradict the actual cost recorded by the assessee, which is not justifiable. Estimation exercise based on the average rate of Gross Profit for the whole project - While the Ld.CIT(A) provided partial relief, the recalculation of estimation does not rectify the fundamental issue of the improper application of section 142A of the Act without rejecting the books of accounts and without recording proper reason of assuming that the value of work-in-progress is suppressed. The AO must adhere to the provisions of sub-section (3) of the section 145 of the Act, before making an assessment in the manner provided in section 144 of the Act. The Ld.CIT(A) has not considered this before going ahead with his own estimation rejecting DVO s valuation. We also note that the Valuer (Shri A.Y. Chipa) has submitted the letter clarifying that he has not withdrawn the Certificate and its correctness should not be doubted. Both the Assessing Officer and the Ld.CIT(A) have not taken into consideration this letter by Valuer which is a basis for referring the Valuation to DVO. Based on the above analysis, we conclude that the addition based on the estimated cost, without discrediting the actual costs recorded, is not justifiable. Assessee appeal allowed.

Summary

Issues Involved:
1. Applicability of Section 142A of the Income Tax Act to the valuation of Work-in-Progress (WIP) before its amendment.
2. Justification for the rejection of books of accounts by the Assessing Officer (AO).
3. Validity of the addition made based on the estimated cost versus actual cost recorded in the books.
4. Consideration of the Certificate issued by the Government Registered Valuer.

Detailed Analysis:

1. Applicability of Section 142A of the Income Tax Act to the Valuation of WIP:
The primary issue revolves around whether Section 142A of the Act, prior to its amendment effective from 01-10-2014, applies to the valuation of WIP. The Ld. Counsel for the assessee argued that this section was not applicable to WIP valuation as it was meant for the valuation of investments or other articles under sections 69, 69A, or 69B of the Act. The AO's reference to the District Valuation Officer (DVO) for WIP valuation without rejecting the books of accounts was deemed improper. The Tribunal noted that the AO must first express dissatisfaction with the books of accounts before referring to the valuation, as supported by the judicial precedent in Sargam Cinema v. CIT (2010) 328 ITR 513 (SC).

2. Justification for the Rejection of Books of Accounts:
The AO did not provide detailed reasons or documentation to justify the rejection of the books of accounts. The Tribunal emphasized that the rejection must be based on specific reasons and evidence indicating discrepancies or inadequacies in the books, such as significant inaccuracies, incomplete records, or non-compliance with prescribed accounting standards. In this case, the AO did not record any such findings. The Tribunal noted that even if the Engineer's Certificate was incorrect, the addition could not be made solely based on this without rejecting the books of accounts.

3. Validity of the Addition Made Based on Estimated Cost:
The addition made by the AO was based on the estimated cost, which was not backed by substantial evidence to contradict the actual cost recorded by the assessee. The Tribunal found this approach unjustifiable. The Ld. CIT(A) provided partial relief by recalculating the estimation but did not fully address the core issue of the improper application of Section 142A without rejecting the books of accounts. The Tribunal concluded that the addition based on the estimated cost, without discrediting the actual costs recorded, was not justifiable.

4. Consideration of the Certificate Issued by the Government Registered Valuer:
The Certificate issued by the Government Registered Valuer was initially doubted, but the Valuer later clarified that he had not withdrawn the Certificate and that it should not be doubted. The Tribunal noted that both the AO and the Ld. CIT(A) did not consider this clarification, which was a basis for referring the valuation to the DVO. The Tribunal emphasized that the correctness of the Engineer's Certificate does not override the need to reject the books of accounts before making an addition.

Conclusion:
The Tribunal directed the deletion of the addition of Rs. 1,17,42,202/- confirmed by the Ld. CIT(A) for AY 2013-14, allowing the appeal of the assessee. For AY 2014-15, the Tribunal found that the issues were identical to those in AY 2013-14 and allowed the appeal based on the same reasoning. Consequently, both appeals of the assessee for AYs 2013-14 and 2014-15 were allowed.

Order:
The order was pronounced in the Open Court on 28 June 2024 at Ahmedabad, with both appeals of the Assessee in ITA Nos. 1719/Ahd/2019 & 1720/Ahd/2019 for AYs 2013-14 & 2014-15 allowed.