2007 (8) TMI 639

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..... relates to the correctness of the report of the District Valuation Officer determining the cost of investment in buildings constructed by the assessee as a builder for business purpose. (iv) The fourth issue relates to the assessee' s claim that in case the addition on account of so-called undisclosed investment in construction of building made under section 69C of the Act, 1961, is upheld, then the assessee may be allowed corresponding deduction of similar expenditure under section 37 of the Act. (v) The fifth issue is against levy of interest under sections 234A, 234B and 234C of the Act. (vi) The sixth issue is against initiation of penalty proceedings under section 271(1)(c) of the Act. 3. We have heard the parties. 4.1 The brief facts as have been revealed from the records and are relevant for disposal of all these four appeals are that the assessee is in the line of construction of buildings for sale. The returns of income for the assessment years 1995-96, 1996-97, 1997-98 and 1998-99 declaring income at nil, Rs.8,09,820, Rs. 1,51,290 and Rs. 2,08,055 respectively were filed on November 30, 1996, November 30, 1996, August 31, 1998, and March 31, 1999, respectively. 4 .....

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..... ee, however, when called upon to explain the non-availability of the aforesaid vouchers had filed the photocopies of relevant bills but the same were rejected by the Assessing Officer on the ground that the bills were handwritten. (b) With respect to the discrepancy at Sl. No. (ii), the assessee' s reply was that the concerned person paying petty unskilled labour were not available when the assessment was going on and, therefore, their signatures could not be obtained at that time. The Assessing Officer considered this defect as a serious defect. (c) With respect to discrepancy at Sl. No. (iii), the assessee' s case was that the signatures of these three persons (cited in above tabular form) could not be procured due to oversight. However, the Assessing Officer' s observation at page No. 5 of the assessment order (specifically) was that the payments claimed in the names of these three persons cannot be accepted in principle. (iv) Another discrepancy alleged by the Assessing Officer was with respect to alleged difference with respect to accounts of the following parties available in the assessee' s books of account and vice versa : (a) Account of M/s. Shiv Traders : From t .....

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..... ge 7 of the assessment order are in the following terms : "That, in view of para-wise discussion along with comments, it is held that the book result shown by the assessee-firm is not acceptable. The correctness and completeness of the books of account are not found. It is, therefore, book result of the assessee-firm is hereby rejected by invoking the section 145(3) of the Act and accordingly, assessment is being finalized in the manner provided in section 144 of the Act." 4.5 The Assessing Officer, further noticed that the assessee had constructed bungalows under the name of the building " Ashlesha Bungalows" at Anand during the period July, 1993, to December, 1998 and had shown the total cost of construction for entire project at Rs. 2,37,96,653. 4.6 The Assessing Officer, for the reasons best known to him (since there is no reference as to how or on what basis, he doubted the correctness of cost of the construction of building, which was the assessee' s stock-in-trade shown by the assessee as incorrect), referred the matter to the DVO requiring him to estimate the cost of construction of the said building during the period July, 1993, to December, 1998, by invoking his power .....

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..... tion 148 of the Act on March 28, 2003. 4.11 During the course of assessment proceedings, in consequence upon initiation of proceedings under section 147 of the Act for all these three assessment years, the Assessing Officer noticed similar petty discrepancies, such as absence of some vouchers and absence of signatures on some vouchers of the recipients, as were noticed in the assessment year 1997-98 and on the same reasoning rejected the books of account for these three assessment years also. 4.12 The details of assessed income for these assessment years as per orders dated March 28, 2003 are as under : Sl. No.   Assessment year(s) Income as per return (Rs.) Total assessed income (Rs.)     Addition   1.  1995-96  Nil 9,60,547* 9,60,547  2.  1996-97  8,09,824 + 24,88,488 32,98,312  3. 1998-99 2,08,055 + 16,93,468 19,01,523  *This addition, in all the three assessment years, is on account of alleged undisclosed investment in construction of building, which was assessee's stock-in-trade by mentioning in the caption "expenses understated as disclosed above". 4.13. The assessee went in appeal against all th .....

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..... ion, allowance or relief in the return then, the same will be deemed to be the case where income chargeable to tax has escaped assessment. In the instant case, it was clear to the Assessing Officer that the appellant has understated the income, on the basis of the report of the DVO, wherein, there was substantial difference between the investment estimated by the DVO and shown by the appellant in its books. It may be mentioned here that earlier no assessment under section 143(3) was completed and only return was processed under section 143(1)(a) and accordingly, the Assessing Officer has earlier not had any occasion to apply his mind in relation to the aforesaid point and decide the issue. The issue has first been taken up while taking the case under section 147 and accordingly, it cannot be said to be the change of opinion of the Assessing Officer as contended by the appellant. Hence, the action of the Assessing Officer in passing an order under section 143(3) read with section 147 is held correct." For assessment year 1996-97 : "3.3 Before discussing main ground No. 1, the appellant has also raised a ground against the issuance of notice under section 148. It was argued tha .....

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..... ssment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return then, the same will be deemed to be the case where income chargeable to tax has escaped assessment. 3.4 In the instant case, it was clear to the Assessing Officer that the appellant has understated the income, on the basis of the report of the DVO, wherein there was substantial difference between the investment estimated by the DVO and shown by the appellant in its books. It may be mentioned here that earlier no assessment under section 143(3) was completed and only return was processed under section 143(1) and accordingly, the Assessing Officer has earlier not had any occasion to apply his mind in relation to the aforesaid point and decide the issue. The issue has first been taken up while taking the case under section 147 and accordingly, it cannot be said to be change of opinion of the Assessing Officer, as contended by the appellant. Hence, the action of the Assessing Officer in passing an order under section 143(3) read with section 147 is held correct." 4.15 For the assessment year 1997-98, .....

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..... f construction to the DVO. 6.2 Learned counsel for the assessee, after referring to the assessment order, submitted that though the Assessing Officer has also not specified or referred to any information/material for having reason to believe that any income had escaped assessment, the only reason could be either the escapement of disallowance to be made under section 40A(3) of the Act or the alleged undisclosed investment in the building, but on the facts of the case and as has been admitted by the Assessing Officer in the assessment order itself, these two additions could also not be the basis of forming a belief that the income had escaped assessment. The Learned counsel for the assessee has supported his plea by drawing our attention towards the second para of the assessment order at page 1 which specifically reads as " during the course of hearing, it noticed that the assessee had made payment through bearer cheque to M/s. Harikrupa Engineering Works on March 23, 1996, amounting to Rs. 27,728, the same payment has violated the provisions of section 40A(3) of the Act, 20 per cent. of the said amount, i.e., Rs. 5,545 was disallowed and added to the income of the assessee" . Ref .....

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..... ear 1997-98 which reads " while hearings were carried out and following discrepancies were noted" . From this narration, learned counsel for the assessee submitted that the so-called discrepancies were also found only during the course of proceedings in consequence upon the issuance of notice under section 148 of the Act, 1961. 6.5 The learned counsel for the assessee, in view of the above facts, submitted that the proceedings under section 147 of the Act, for the assessment year 1997-98 were initiated without there being any information or material with the Revenue authorities which could lead them or make them to have reasons to believe that any income chargeable to tax had escaped assessment. 6.6 He, therefore, submitted that the initiation of proceedings under section 147 of the Act, was illegal and bad in law and therefore, all subsequent proceedings were illegal and bad in law. 6.7 With respect to the assessment years 1995-96, 1996-97 and 1998-99, learned counsel for the assessee, submitted that though there is nothing in the assessment orders as to why and on what basis, the proceedings under section 147 of the Act were initiated, but from para 3.3 for the assessment year .....

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..... f a very small amount. Keeping in view the fact that financial implications are of a very trivial nature, there is no ground to interfere under section 260A. Conclusion : Findings recorded by the Tribunal and setting aside the reopening of assessment and deleting the addition on the basis of evidence on record wherein no error has been found hence no substantial question of law arises ; no interference warranted also for the reason that the tax effect would be of a very small amount. (iii) Roof and Tower Construction (P.) Ltd. v. Asst. CIT [2001] 72 TTJ (Cal) 433 Headnote : Reassessment-Reason to believe-Assessee-company engaged in the business of constructing residential complexes and selling flats therein-Assessing Officer reopened the assessments under the belief that sales consideration has been suppressed by the assessee which was formed on the basis of DVO' s report-Not justified-Addition could not be made to the returned income because, the sale price as per assessee' s account was less than the value indicated in the DVO' s report-Reopening not valid. Held The scope and effect of section 147, as substituted with effect from April 1, 1989, is much wider. If the .....

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..... ssioner of Income-tax (Appeals) was justified in quashing the reassessment proceedings. Brig. B. Lall v. WTO [1981] 127 ITR 308 (Raj), CIT v. Smt. Prem Kumari Surana [1994] 206 ITR 715 (Raj) and Smt. Amal Das v. CIT [1984] 146 ITR 216 (P&H) followed ; Abdul Majid v. ITO [1989] 178 ITR 616 (MP) and Smt. Tarawati Debi Agarwal v. ITO [1986] 162 ITR 606 (Cal) relied on. Conclusion : Valuation report by the DVO after completion of assessment cannot be considered as information for making reassessment under section 147(b). (2) For the proposition that once the assessee has produced valuation report of a registered valuer the same cannot be rejected without giving itemwise comments/analysis and reasons to show that the same is not tenable, reliance was placed on the following : (i) Asst. CIT v. Vinodkumar Agarwal [2002] 82 ITD 1 (Hyd.) (page 11) : By the same principles we hold that the method of valuation to be adopted for evaluating the cost of construction should be the method that is most beneficial to the assessee and which is opted by him. We fail to understand as to why the DVO is unable to estimate the cost of construction on the basis of detailed quantities method, when .....

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..... 5 per sq. yd. inclusive of land cost and development and profit, the DVO valued the cost of construction at Rs. 368 per sq. yd. during the years 1985 to 1987. To our mind, this is highly irrational and far from reality. For all these reasons we uphold the contentions of the assessee' s counsel and reject the report of the DVO as not good evidence. (ii) Modern Construction Development and Project Promotion v. Asst. CIT [1997] 63 ITD 235 (Cal) (page 244). 11. On analyzing the aforesaid judgment, we find that in order to refer the matter to the valuation cell, the Assessing Officer should first point out the defects in the books maintained by the assessee. In the following decisions it was held that when the assessee maintained accounts regularly, addition cannot be made on the basis of the report of the DVO without pointing out any defects in the books : (a) Sheikhar Chand and Sons' case [1990] 186 ITR 269 (All) (b) Western Estates' case [1994] 209 ITR 343 (Cal) (c) Vindaban Chitra Mandir' case [1994] 209 ITR 520 (All) (d) Shekhar Chand Jain & Sons' case [1988] 32 TTJ (Delhi) 570 (e) Tek Chand' s case [1995] 52 ITD 197 (Jodh) (f) Nishant Housing Development (P.) Ltd. .....

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..... Umer v. CIT [1975] 101 ITR 525 (Patna) Headnote : Accounts-Rejection-Once the method of accounting has been regularly employed and profit could properly be deduced from such method, that is the end of the matter. Held The method of accounting employed by the assessee has been regularly employed and income, profits and gains could properly be deduced from such regularly employed method of accounting, that is the end of the matter for the purpose of the proviso to sub-section (1) of section 145. As there is no finding in the present case that any of the entries in the books of account was not correct, there is no finding that the assessee is not employing a method of accounting and there is no finding that such a method of accounting has been irregularly employed by the assessee. In the absence of any such finding, there being no reason germane to the unacceptability of the book results, it must be held that the Tribunal as well as the Revenue authorities below had no materials before them, on the basis of which it could be said that the trading results were not verifiable and that, therefore, they should not be accepted, nor is it their case that the trading results could n .....

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..... .) Ltd. v. Asst. CIT [1995] 52 ITD 103 (Patna) 27. The case law is, therefore, overwhelmingly in favour of the assessee that the cost of construction as per books cannot be rejected and an estimate made without first bringing the case either under proviso to section 145(1) or under section 145(2). The case has been brought under neither of these. We, therefore, hold that the cost of construction as per assessee' s books cannot be rejected and a higher estimate cannot be made either on the basis of the report of the DVO or any other case considered comparable. The additions sustained by the Commissioner of Income-tax (Appeals) are, therefore, deleted on this preliminary issue. (ii) Sri Har Sarup Cold Storage and General Mills v. ITO [1988] 27 ITD 1 (Delhi) 9. For these reasons, I am of the opinion that the Income-tax Officer not having pointed out any defects in the account books, should not have rejected the accounted version and the Commissioner of Income-tax (Appeals) having found that the valuation made by the DVO was excessive to a great extent, should have examined the matter in greater detail and in any case should have found out defects in the accounted version and not .....

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..... aterial available on record cannot get approval from a judicial body like the Tribunal. In fact, in the aforesaid two orders of the Tribunal, the Tribunal has deleted certain addition made by the Income tax Authorities on the facts and circumstances which are identical to the one obtaining in the instant case with which we fully concur. In this view of the matter, we are of the opinion that there is no justification of making any addition in the manner made by the Income tax Officer or sustained by the Commissioner of Income-tax (Appeals). We would, therefore, direct the Income-tax Officer to accept the assessee' s cost of construction at Rs. 3,27,728 and modify the assessment accordingly. In this view of the matter, we delete the addition as sustained by the Commissioner of Income-tax (Appeals). The Income-tax Officer is, therefore, directed to modify the assessment accordingly. (iv) ITO v. Pitamber Industries (P.) Ltd. [1992] 42 ITD 373 (Delhi) When the assessee maintained books of account and recorded investment in those books of account, it becomes compulsory as per the legislative mandate that the Income-tax Officer should point out defects in the maintenance of those .....

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..... cember 1981-Finding cost of construction disclosed by assessee unsatisfactory, ITO referred matter to valuation cell Difference of Rs. 66,509 between valuation as worked out by valuation cell and as disclosed by assessee was added to total income of assessee-Whether since ITO was not able to point out any defects in books of account maintained by assessee, he was not justified in rejecting book results and substituting figures, even if they were alleged to be figures of undisclosed investment based on report of an expert and, thus, aforesaid amount of addition was not assessable in hands of assessee-Held, yes. (vii) ITO v. Dreamland Enterprises [1995] 81 Taxman (Mag) 143 (Ahd) Section 69 of the Income-tax Act, 1961-Unexplained investment-Assessment year 1987-88-Whether, when cost of construction declared by assessee was supported by regular books of account and vouchers, correctness of which was not disputed by Assessing Officer or District Valuation Officer (DVO) by bringing any specific material on record, Commissioner of Income-tax (Appeals) was fully justified in holding that no addition could be validly made on account of any understatement of cost of construction mearly o .....

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..... unexplained expenditure would be assessable as income under section 69C of the Income-tax Act. On the other hand, in the case of a capital investment, unexplained investment if any will be assessable under section 69 of the Income-tax Act, 1961. There are different consequences in the two situations. In the first situation although some amount may be assessable as unexplained expenditure under section 69C, as soon as the amount is debited in the profit and loss account, the addition is neutralized and the net result is a nil addition. However, in the latter case, since unexplained investment does not go to the profit and loss account, there is no figure setting it off and the entire amount remains income. This distinction has not been kept in view by the Assessing Officer. In the present case, as has been discussed in the assessment order, even if there was some unexplained expenditure, the addition under section 69C of the Act and the additional debit in the profit and loss account will neutralize each other. (ii) Ruby Builders v. ITO [1999] 63 TTJ (Ahd.) 202 Income from undisclosed sources-Addition under section 69CAssessing Officer relied on the report of the DVO to make add .....

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..... report submitted in 1973. The section is introduced with an intention to cover the whole expenses which are not deductible while computing the income and are required to be added as income from undisclosed sources. Such expenditure would cover expenditure at the time of marriage, furnishing of a house, household expenditure and gifts. If section 69C is sought to be invoked for an expenditure deductible while computing the income under any head probably the action would cut at the root of the intention as no addition would be made. 14. The phraseology in the section goes to show that before invoking the section it must be conclusively established by evidence or material to prove that the amount spent is an expenditure and the expenditure is incurred by the assessee only and the same is not deductible while computing the income under any head under the Act. Thus, the primary onus is on the Revenue. (iv) Tirupati Builders v. ITO [2003] 126 Taxman (Mag) 54 (Rajkot) Section 145 of the Income-tax Act, 1961-Method of accounting Rejection of accounts-Assessment years 1985-86 to 1987-88Assessee was a partnership firm in construction business who constructed properties and declared co .....

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..... and December 24, 1998, copies of which have been given to us at pages 124 to 139 of the paper book. However, the assessee has taken an alternative plea that even if it is assumed for argument' s sake that there has been unaccounted investment in the purchase, the same is required to be taxed under section 69C and accordingly, deduction of an equivalent amount has to be allowed under section 37 because the expenditure has been incurred for the purpose of acquiring goods/raw materials for the purpose of business of the assessee. We find force in this submission which is duly supported by the decision of the Ahmedabad Bench of the Tribunal in the case of Ruby Builders [1999] 63 TTJ 202. Accordingly, the addition of Rs.13,59,000 on account of alleged unaccounted purchase of material is directed to be deleted. (vi) M. K. Mathivathanan v. ITO [1989] 31 ITD 114 (Mad) " 10. Based on the remand report, we have heard the parties. The provisions of section 69C read as under : '69C. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such or part thereof, or the explanation, if any, offered by him is not, in the opinion of .....

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..... facts and circumstances and various decisions relied upon by the parties. After having considered the totality of the facts and circumstances of the case, we are of the opinion that to decide the issue with respect to validity of initiation of proceedings under section 147 of the Act, it is desirable, first to consider the provisions of section 147 and, therefore, we proceed to consider the same. "147. Income escaping assessment.-If the Assessing Officer (has reason to believe) that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) : Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no acti .....

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..... income, but can recompute the loss or the depreciation allowance or any other allowance, as the case may be. 8.3 The power so vested in the Assessing Officer can be exercised within a period of four years from the end of the assessment year irrespective of fact as to whether assessment under section 143(3) of the Act has been made or not, but if the power is to be exercised after the expiry of four years, then in cases where assessment under section 143(3) has been made, the power can be exercised only if there is failure on the part of the assessee either to make a return under section 139 of the Act in response to notice under section 142(1) of the Act or under section 148 or to disclose fully and truly are material facts necessary for his assessment for that assessment year. 8.4 As per Explanation 2(b) to section 147 where the assessee has furnished the return of income, but no assessment has been made and if it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return, then such claim or relief, as the case may be, will be deemed to be income which has escaped assessment, meanin .....

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..... r after considering the objection of the appellant, has held that the report of the valuation officer is taken for the purpose of determining the investment in the construction of Ashlesh Bungalows. Accordingly, the investment as determined on the basis of report of the DVO related to the period under consideration was taken by the Assessing Officer and difference between the above and the amount shown by the appellant being Rs. 9,60,547 was added. Before discussing main ground No. 1, the appellant has also raised ground against the issuance of notice under section 148. It was argued that reassessment cannot be reopened on the basis of report of the DVO. This argument has been considered. In fact, the decisions referred to by the appellant in this regard were related to the assessment year prior to the assessment year 1989-90. With effect from April 1, 1989, the provisions of section 147 have undergone a vast change. Clause (b) of Explanation 2 clearly covers the position as in the case of the appellant. It has been provided in the aforesaid clause where a return of income has been furnished and no assessment has been made and it is noticed by the Assessing Officer that the asses .....

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..... herein, there was substantial difference between the investment estimated by the DVO and shown by the appellant in its books. It may be mentioned here that earlier no assessment under section 143(3) was completed and only the return was processed under section 143(1) and accordingly, the Assessing Officer has earlier not had any occasion to apply his mind in relation to the aforesaid point and decide the issue. The issue has first been taken up while taking the case under section 147 and accordingly, it cannot be said to be change of opinion of the Assessing Officer, as contended by the appellant. Hence, the action of the Assessing Officer in passing an order under section 143(3) read with section 147 is held correct." (iv) So far as the assessment year 1997-98 is concerned, though the Commissioner of Income-tax (Appeals) has noted the assessee' s objection in this regard, in para 3.4 of the appellate order, he has not decided the same. 12. From the aforesaid notings/observations/conclusion arrived at by the learned Commissioner of Income-tax (Appeals), it is absolutely clear that proceedings under section 147 of the Act for the assessment years 1995-96, 1996-97 and 1998-99 had b .....

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..... Electrical Mfg. Co. P. Ltd. [I. T. A. Nos. 515 to 517/Amritsar/2000] for the assessment years 198990, 1991-92 and 1992-93, the decision of the Calcutta Bench in the case of Roof and Tower Construction (P.) Ltd. v. Asst. CIT [2001] 72 TTJ (Cal) 433 wherein it has been held that the valuation report is only an opinion of the valuer and it neither amounts to " information" nor to " reason to believe" that any income has escaped assessment, and the decision of the High Court of Punjab and Haryana in the case of Grover Nursing Home [2001] 248 ITR 493 wherein it has been held that even the report of the DVO cannot be made the sale basis for initiating the proceedings under section 147 read with section 148 of the Act. The relevant part of the order of the Tribunal (headnotes) reads as under : "On a perusal of the reasons recorded by the Assessing Officer for reopening the assessment, it was clear that the reassessment proceedings were initiated merely on the basis of the DVO' s report and there was no other material with the Assessing Officer for initiating the reassessment proceedings. In the case of CIT v. Smt. Usha Mathur [2001] 252 ITR 179 (P&H) ; 119 Taxman 439 (P&H), it was held .....

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..... s by the assessees as unexplained investment in their hands in equal ratio. The matter was carried before the concerned Commissioner of Income-tax (Appeals) having jurisdiction over the cases who held that all the assessments made under section 148 were ab initio invalid following the decision of the honourable High Court of Rajasthan in the case of Brig. B. Lall v. WTO [1981] 127 ITR 308 ; [1980] 15 CTR 180. Aggrieved by the same, the revenue has preferred these six appeals before us." 13.2(iii) It was in view of above facts that the honourable Bench held as under : Reassessment under section 147(b)-Information-Valuation report of DVO-Reference under section 131(1)(d) can be made to DVO only while trying a suit and not in a completed suit-Assessing Officer was therefore, not authorized to make such reference when the assessments were already completed-Further, report of DVO was just an opinion and could not be used by the Assessing Officer as information for reopening the assessment-Commissioner of Income-tax (Appeals) rightly cancelled the reassessments. Held The reference was made by the Assessing Officer to the DVO only after the assessments were completed under section .....

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..... High Court in the case of Grover Nursing Home [2001] 248 ITR 493 is of no help to the Revenue because the honourable High Court has specifically stated that Valuation Officer's report cannot be made the sole basis for initiating the proceedings under section 147 read with section 148 of the Act. On the contrary, it supports the assessee' s plea. 14.1(ii) So far as the decision of the honourable Gujarat High Court in the case of Praful Chunilal Patel [1999] 236 ITR 832 is concerned, we are of the opinion that this decision if also of no help to the Revenue because in this case, the proceedings under section 147 of the Act were not initiated either on the basis of report of the Valuation Officer or without there being a report of the Valuation Officer. Similarly, the decision of the honourable Delhi High Court in the case of Bawa Abhai Singh v. Deputy CIT [2002] 253 ITR 83, though in favour of the Department, but we in view of the settled proposition that when there are conflicting decisions of the High Courts different than the jurisdictional High Court, then the decision favourable to the assessee should be followed, are bound to follow other decisions mentioned hereinbefore which .....

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..... ice under section 147 of the Act. 17. From the assessment order as well as the order of the Commissioner of Income-tax (Appeals), for the assessment year 1997-98 the only reason for which the proceedings initiated under section 147 of the Act seem to have been initiated is gathered from para 3.1 of the order of the Commissioner of Income-tax (Appeals) which reads as under : "3.1 The facts of case are that a return showing income of Rs.1,51,290 filed for the assessment year 1997-98 was processed under section 143(1)(a). The appellant is a builder/organizer which has constructed a scheme named as ' Ashlesha Bungalows' . The case was taken up by issuing notice under section 148 read with section 147 dated January 28, 2000, and was completed under section 143(3). During the course of hearing, the Assessing Officer called for the contra accounts of various parties and noticed the difference between the amount shown by the appellant and the contra accounts provided by the parties. Further, it is also observed during the course of hearing that some of the expenses were claimed, however, no supporting vouchers were produced. The Assessing Officer also made personal visit of the site, i. .....

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..... the basis of another plea of the assessee that the Assessing Officer has no jurisdiction to make reference to the Valuation Officer unless he was of the opinion that the cost of construction as detailed in the books of account was not the correct cost and for forming such an opinion, he was bound to reject the assessee' s books of account, meaning thereby that the issue can be tested on the plea that without rejecting the books of account, which were maintained by the assessee in the regular course of business, by following the same method of accounting year after year and recording full and complete details of amounts spent towards cost of construction, the Assessing Officer should not have referred the matter to the valuation officer and so far as the assessee' s case is concerned, i.e., so far as the assessment year 1997-98 is concerned, since the reference to the Valuation Officer was made only during the course of carrying on the proceedings under section 147 of the Act, there was no justification either in rejecting the books of account or making a reference to the Valuation Officer. 20.2(i) To consider the assessee' s aforesaid plea, it is necessary for us to travel in the .....

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..... had been done or not. Similarly, the amounts for which vouchers were found as unsigned was totalling to Rs. 835 (Rs. 30 + 200 + 550 + 55) which could not be basis for rejection of the books of account. So far as the discrepancy in the accounts of M/s. Shiv Traders and M/s. Amit Traders is concerned, we are of the opinion that the assessee had explained the discrepancy and there was no question of rejecting the same. 20.3 In view of the above discussion, we are of the opinion that the rejection of books of assessee on the basis of the aforesaid alleged discrepancy was absolutely illegal and bad in law. 21. Even otherwise, if we consider the discrepancies as having not been explained (only for the purpose of discussion), then the only right course for the Assessing Officer was to disallow these petty expenses, but in no case was justified in rejecting the books of account. 22. The validity of rejection of books of account can further be test on the basis of the provision of section 145 of the Act as they adjusted at the relevant time. The provisions of section 145 prior to April 1, 1997, were as under : "145. Method of accounting.-(1) Income chargeable under the head ' Profits .....

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..... ngs under section 147 of the Act, after rejecting the books of account and had referred to the matter for valuation of cost of construction to the Valuation Officer is the assessment year 1997-98, we would like to deal with the assessee' s case with respect to the provisions of section 145 relevant for the assessment year 1997-98 and after considering the relevant provisions, are of the opinion that so far as the assessment year 1997-98 is concerned, the Assessing Officer was bound to compute the assessee' s income in accordance with either the cash or the mercantile system of accounting regularly employed by the assessee, whereas, the assessee was bound to maintain the accounts as per accounting standards notified by the Government from time to time in the Official Gazette. 22.2 It was only if the Assessing Officer was not satisfied about the correctness or completeness of the assessee' s books of account or was of the opinion that the assessee was not following the accounting standards as notified under sub-section (2) of section 145 or if the assessee was not regularly following the system of accounting, i.e., the cash or the mercantile that the Assessing Officer could reject t .....

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..... ITR 407 does not survive, but we are of the opinion that it is not so because the provisions of section 142A, though made applicable only to the cases where the assessments had not become final on or before September 30, 2004, in our opinion, these provisions have not made references made under section 131(1)(d) of the Act in cases where the assessments have not become final till September 30, 2004 (as envisaged in the provisions of section 142A of the Act) valid references and it is so because the Legislature while enacting the provisions of section 142A of the Act has not validated references having been made under section 131(1)(d) of the Act in cases where assessments have not become final by September 30, 2004. 23.2(iii) The honourable Supreme Court, in the case of Smt. Amiya Bala Paul [2003] 262 ITR 407, having invalidated the reference made under section 131(1)(d) of the Act for want of jurisdiction of the Assessing Officer and there being neither amendment in section 131(1)(d) of the Act nor there being validation clause in section 142A of the Act, the references made under section 131(1)(d) of the Act prior to the coming of section 142A of the Act on the statute and the .....

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..... the case, we are of the opinion that initiation of proceedings under section 147 of the Act, for the assessment year 1997-98, was absolutely illegal and bad in law. 25. So far as the assessment years 1995-96, 1996-97 and 1998-99 are concerned, we are of the opinion that the basis for initiation of proceedings under section 147 of the Act, for these years being the valuation report under reference and the same having being held to be illegal and bad in law, the proceedings initiated under section 147 of the Act for these three years also become illegal and bad in law and so are the consequential assessments. The assessments under section 147 of the Act for these assessment years are also, therefore, declared illegal and bad in law. On merits : 26. So far as the merits of the issues raised by the assessee in all these four appeals are concerned, the assessee has, in a nutshell, taken the following stands : 26.(i) The first objection raised by the assessee is that the books of account for the assessment year 1997-98, have been rejected in an arbitrary and unjustified manner because the assessee had maintained the same in regular course of business, followed the same from time to .....

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..... ation" . Analyzing the aforesaid reasons given by the Assessing Officer for ignoring the assessee' s valuation report, learned counsel for the assessee submitted that none of the observations of the Assessing Officer were relevant for rejecting the valuation report of the registered valuer. (e) Explaining further, learned counsel for the assessee, expressed his surprise as to how the valuation of the registered valuer could be rejected, firstly, on the basis of some difference in value estimated by the registered valuer and, shown by the assessee' s books of account, secondly, how the Assessing Officer was concerned, with the time taken by the registered valuer for preparing the valuation report and, thirdly, how the report, which as per the Assessing Officer could be submitted on March 18, 2002 can be ignored if it was submitted on March 22, 2002, but duly during the course of assessment proceedings. In a nut-shell, learned counsel for the assessee submitting that the Assessing Officer had brushed aside the report of the registered valuer absolutely in an arbitrary and illegal manner contrary to the settled provisions of law. In support of his submissions, reliance was placed o .....

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..... n law. (ii) So far as rejection of books of account for the assessment years 1995-96, 1996-97 and 1998-99 are concerned, we are of the opinion that we, having held the rejection of books of account for the assessment year 1997-98 as unjustified and illegal, there was no question for the Revenue to obtain a valuation report from the Valuation Officer and, consequently, there was no reason for initiating proceedings under section 147 of the Act for the assessment years 1995-96, 1996-97 and 1998-99 and if that was the case, then there was no reason for conducting the assessment proceedings and, consequently, no question of rejection of books of account for these three assessment years. In view of the above facts and circumstances of the case, we have no option to hold that there was no question of rejecting the books of account for the assessment years 1995-96, 1996-97 and 1998-99. (iii) Coming to the assessee' s objection with regard to arbitrary rejection of the report of the registered valuer, we, after having considered the observations of the Assessing Officer at page 14 of the assessment order, which were referred to by learned counsel for the assessee, during the course o .....

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..... are allowed except on the point of claim of corresponding deduction against the addition under section 69C of the Act, 1961. 32. In the result, all the four appeals of the assessee are allowed. R. C. Sharma (Accountant Member). 26th Dec, 2005 1. I have carefully gone through the order proposed by the learned brother (Judicial Member) on the issue involved in the appeals filed by the assessee. I also have the benefit of discussion with my learned brother in an endeavour to arrive at an agreed order, but I am unable to persuade myself to concur with his conclusion both with respect to validity of reopening and the merits of addition to be made. 2. The facts in brief are that the assessee is a firm of builder/organizer which has constructed a scheme named as " Ashlesha Bungalows" having 31 bungalows with common amenities and infrastructure facilities like garden, roads, street lights, borewell with RCC overhead storage tank, club house, swimming pool, common plots with gardening, etc. Expenditure incurred on the cost of construction of the scheme was accounted by the assessee in its books of account during the following years under consideration, as follows : Assessment year Ex .....

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..... relevant assessment years under consideration and the valuation arrived at by the DVO. 4. The year-wise cost of construction shown by the assessee and as determined by the DVO was as under : Sl. No. Period of construction Cost of construction as shown by the assessee (Rs.) Fair cost of construction (Rs.) Difference (Rs.) 1. 7/1993 to 3/1994 13,64,923 18,33,939 4,79,016 2. 4/1994 to 3/1995 27,45,946 37,06,493 9,60,547 3. 4/1995 to 3/1996 67,39,422 92,27,910 32,98,312 4. 4/1996 to 3/1997 68,78,879 94,57,014 25,78,135 5. 4/1997 to 3/1998 45,22,750 62,16,218 19,01,523 6. 4/1998 to 12/1998 15,44,733 21,21,871 5,77,138   Total 2,37,96,653 3,25,63,445   5. In the report the DVO observed at pages 4 and 5 that the assessee has not supplied the details regarding quantities of different materials consumed and various services like water supply, sanitary installation and electrical provisions provided in the property. The DVO also qualified his report with the observation that cost of construction of one bungalow No.A-27 was not incorporated in the report as the same was alleged to be constructed by a non-resident Indian residing abroad .....

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..... ed that no construction is carried out on these plots the expenses of common amenities should have been equally divided and charged by the assessee and should have been reflected in the chart of closing stock of work-in-progress. Therefore, as per the Assessing Officer, the working of closing stock of work-in-progress is not correct. After pointing out some other minor defects, the Assessing Officer held that : " It is impossible to work out the correct working of raw material purchased, consumed and closing stock of raw material and expenses incurred in construction activities during the year. Further, the assessee has not entered all the expenses in its books of account. Therefore, the reliability, correctness and completeness of books of account maintained by the assessee is not established. The Assessing Officer was not satisfied about the correctness and completeness of books of account maintained by the assessee. Therefore, the book results were not accepted and same were rejected by invoking the section 145(3) of the Income-tax Act, and accordingly assessment was finalized in the manner provided in section 144 of the Income-tax Act." 8. Thereafter, the Assessing Officer m .....

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..... completed and only the return was processed under section 143(1)(a) and accordingly the Assessing Officer has earlier not had any occasion to apply his mind in relation to the aforesaid point and decide the issue. The issue has first been taken up while taking the case under section 147 and accordingly, it cannot be said to be change of opinion of the Assessing Officer, as contended by the appellant. Hence, the action of the Assessing Officer in passing an order under section 143(3) read with section 147 is held correct." 9. With regard to the merits of the addition the Commissioner of Incometax (Appeals) stated that the facts are common as discussed by him in the assessment year 1997-98, he thus confirmed the addition on the merits also. 10. The following was the observation of the Commissioner of Income-tax (Appeals) while confirming the addition made in the assessment year 1997-98 : " The facts of the case are that a return showing income of Rs.1,51,290 filed for the assessment year 1997-98 was processed under section 143(1)(a). The appellant is a builder/organiser which has constructed scheme named as ' Ashlesha Bungalows' . The case was taken up by issuing notice under se .....

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..... estimating cost of construction is bad in law. I have considered the argument taken by the appellant. It may be mentioned that the provision of newly inserted section 142A are quite clear in this regard. This section has been inserted with retrospective effect from November 15, 1972. As per this section, where an estimate of the value of any investment referred to in section 69 or 69B is required to be made, then, the Assessing Officer may require the Valuation Officer to make an estimate of such value and report the same to him. The only exception has been provided by way of the proviso, wherein, it has been mentioned that nothing contained in this section will apply where assessment has become final and conclusive on or before September 30, 2004. In the instant case, the assessment has not become final and conclusive as the additions have been made by the Assessing Officer and appeal is pending before the Commissioner of Income-tax (Appeals) as on September 30, 2004. Hence, exception provided in the proviso would not apply in the instant case of the appellant. As regards another argument of the appellant that section 142A is applicable only to section 69 or section 69B or secti .....

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..... of the honourable Supreme Court was regarding erroneous exercise of power under section 55A for determining the cost of construction but is not applicable. In case where the report of the Departmental valuer is obtained under section 131(1)(d) of the Act, for determining the cost of construction which is used by the Assessing Officer as an evidence. In view of the aforesaid facts and circumstances, it is held that reference to the Valuation Officer made by the Assessing Officer for taking his expert opinion in estimating the investment in the construction of tenements/bungalows is justified. It is pertinent to mention here that while estimating the investment in the bungalows, the DVO has duly considered the argument/ submission taken by the appellant. The appellant has stated that bungalow No. A-27 was not constructed by it but has been constructed by the present owner. As the owner was not available, considering the submissions of the appellant, the valuation of 31 bungalows excluding A-27 was done. Moreover, it was noticed by the DVO that huge addition, alterations and renovations have been carried out in some of the bungalows but same has not been considered by him in the .....

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..... e of stock disclosed to the bank and value shown in the books of account and no satisfactory is offered regarding such discrepancy, the amount of discrepancy regarding stock is held assessable under section 69B of the Income-tax Act. There are other ample number of decisions in which issue of addition of closing stock has been held to be correctly made as unexplained investment under section 69B. Some of them are mentioned as below : (1) CIT v. N. Swamy [2000] 241 ITR 363 (Mad) ; (2) Swadeshi Cotton Mills Co. Ltd. v. CIT [1989] 180 ITR 651 (All); (3) General Metal Works v. CIT [1988] 172 ITR 173 (All) ; (4) S. Murugappa Chettiar v. CIT [1988] 174 ITR 245 (Ker) ; (5) Century Foams Pvt. Ltd. v. CIT [1994] 210 ITR 625 (All). In any case, addition on account of excess stock or discrepancy in stock has not been need to be correct under section 69C, by the honourable courts. Accordingly, I agree with the view of the present Assessing Officer in his remand report that addition of unaccounted investment in acquiring the asset, namely, Abhishek Bungalow, though the same is stock-in-trade, is required to be made under section 69B. It may be mentioned here that in fact the Ass .....

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..... struction recorded in the books of account vis-a-vis the value determined by the DVO. 15. First we will take up the assessment years 1995-96, 1996-97 and 1998-99 wherein reopening was based on defects pointed out in the books of account in respect of construction cost debited therein during the course of scrutiny assessment proceedings under section 143(3) for the assessment year 1997-98, and the huge difference in cost of construction amounting to Rs.87.66 lakhs, which was found when the matter was referred to the DVO. The basic contention of the learned authorised representative was that there were no valid reasons for reopening the assessment under section 147. He further submitted that there was no information/material which could make the Assessing Officer to have reason to believe that any income had escaped assessment. As per the learned authorised representative the DVO' s report cannot be made the basis for reopening the completed assessment. He further submitted that the defects pointed out during the course of assessment under section 143(3)/147 for the assessment year 1997-98 were very minor mistakes and the same could not be made the basis for rejection of the books o .....

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..... od before the Direct Tax Laws (Amendment) Act, 1987 and the provisions as substituted by the Direct Tax Laws (Amendment) Act, 1987, it would be clear that: the scope and effect of section 147 as substituted with effect from April 1, 1989, as also sections 148 to 152 are substantially different from the provisions as stood prior to such substitution. 21. Under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under section 147(a) two conditions were required to be satisfied : firstly, the Assessing Officer must have reason to believe that income, profits or gains chargeable to income taxable have escaped assessment, and secondly, he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions are conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under section 148 read with sectio .....

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..... r 1997-98 and the huge difference of Rs. 87.66 lakhs found in the cost of construction of the same building which was also under construction during the relevant assessment years 1995-96, 1996-97 and 1998-99, and where the report of the DVO was qualified with reference to the fact that the assessee had not supplied various details regarding quantities of different materials consumed and various services provided in the scheme like water supply, sanitary installation and electrical provisions, it can be said that there was no reason before the Assessing Officer to believe that income for the assessment years 1995-96, 1996-97 and 1998-99 attributable to the construction of very same building had escaped assessment? The huge difference found in the cost of construction as per the DVO' s report was pertaining to the very same buildings which was under construction during the assessment years 1995-96, 1996-97 and 1998-99. Various defects pointed out in the books of account with respect to construction expenses debited therein, discrepancy in the balances of suppliers in the statement of account collected by the Assessing Officer as compared to the balances as appearing in the assessee' .....

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..... ing escapement of income. Even if small defects found in the books regarding cost of construction or small discrepancy found in the statement of suppliers of building materials involving not huge amount, these are one of the cogent materials for forming the belief that there is escapement of income in the form of similar construction cost incurred by the assessee in respect of very same building which was under construction during the assessment years 1995-96, 1996-97 and 1998-99. 24. The Allahabad High Court in the case of Smt. Shashi Jain v. ITO [1997] 228 ITR 682 held that the valuer' s report in respect of investment in-house was reason to believe that income has escaped assessment. In this case notice under section 148 was issued by the Assessing Officer on the basis of the DVO' s report, returns for the assessment years 1990-91, 1991-92, 1992-93, 1993-94, 1994-95 and 1995-96, were processed under section 143(1)(a). Contention of the assessee was that returns of all these years were filed in time and assessments were also completed under section 143(1)(a) and that even the valuer did not give opportunity of hearing before making the report. It was held by the honourable High .....

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..... rson could have formed the requisite belief. It was, therefore, held that issuance of notice under section 148 was valid. 27. In Ganga Saran and Sons (HUF) v. ITO [1981] 130 ITR 212, the Delhi High Court observed that where the Assessing Officer obtained information that for the purpose of bank loan, the assessee has produced valuer' s report to the bank wherein the valuation of the property has been shown at a figure higher than the consideration shown by the assessee in the sale deed, the material placed on record was sufficient to empower the Assessing Officer to initiate proceedings under section 147. The Delhi High Court upheld the reopening on the ground that valuation report prepared for the purpose of bank loan constituted " information" before the Assessing Officer that the market value of the property on the date of sale was considerably in excess of the consideration shown by the assessee in the sale deed. In the High Court' s view, this information was sufficient to give the officer reason to believe that capital gains assessable under the head had escaped assessment. 28. The honourable Punjab and Haryana High Court, in Grover Nursing Home' s case [2001] 248 ITR 493, .....

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..... s, EPABX cable laying, etc., were not provided in the registered valuer' s report. We also found that extra items provided in the entire scheme was item-wise valued by the DVO after physical inspection at Rs. 1,24,81,677 against which total value was taken by the registered valuer at only Rs. 34,52,964 without specifying each and every such item. We also found that specific qualification was made by the DVO in his report regarding non-furnishing of documentary evidence of construction of one bungalow A-27, by one non-resident Indian, the cost of which the DVO could not incorporate in his valuation report and the observation was also made with reference to huge addition/alteration on renovation work stated to be carried out by the occupant, the cost of which was also not incorporated in the valuation report. 33. Therefore, after having above observations in the course of scrutiny assessment for the assessment year 1997-98, the Assessing Officer issued notice under section 148 on March 27, 2002, for reopening the assessment for the assessment years 1995-96, 1996-97 and 1998-99. 34. In view of above discussion, we found that the following material was available for forming the opini .....

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..... site and building along with the assessee and his authorised representative at Rs.1,24,81,677 against which the total value taken by the registered valuer in its report was only Rs. 34,52,964 without specifying each and every item. 35. As per our considered view, the above material/information was sufficient to form a belief that there was escapement of income in the assessment years 1995-96, 1996-97 and 1998-99 during which construction of project was undertaken by the assessee. All these reasons have rational connection with and relevant bearing on the formation of the belief that income had escaped assessment. These reasons cannot be said to be extraneous or irrelevant for the formation of belief of escapement. It is pertinent to mention here that at the time of issuing notice under section 148, the sufficiency or correctness of the material is not a thing to be considered at this stage. Once the assessment is reopened it will be open to the assessee to prove that the assumptions of facts which were made the basis of reopening the assessment were not fully correct. It is to be noted that the decision to initiate proceedings under section 147 is not to be preceded by any judicia .....

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..... le nor permissible to pick out a word or a sentence from the judgment of the Supreme Court divorced from the context of the question under consideration and treat it to be the complete law declared by the court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before the court. A decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, courts must carefully try to ascertain the true principle laid down by the decision." 38. The learned brother (Judicial Member), while allowing the assessee' s ground for reopening, held that the DVO' s report is just an estimate and no reopening can be made on the basis of such report. Most of the cases relied on by the learned brother relate to reopening of assessment with reference to assessment which was completed under section 143(1), prior to amendment of section 143(1) with effect from April 1, 1989. Therefore, it is very pertinent to bring on record the scope of section 143(1)(a) as prevailing during the assessment years 1995-96, 1996-97, 1997-98 and .....

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..... missible under the first proviso to section 143(1)(a) to be adjusted were (i) only apparent arithmetical errors in the return, accounts or documents accompanying the return, (ii) loss carried forward, deduction, allowance or relief, which was prima facie admissible on the basis of information available in the return but not claimed in the return, and similarly, (iii) those claims which were on the basis of the information available in the return, prima facie inadmissible, were to be rectified/allowed/disallowed. What was permissible for correction of errors apparent on the basis of the documents accompanying the return? The Assessing Officer had no authority to make adjustments or adjudicate upon any debatable issue. In other words, the Assessing Officer had no power to go behind the return, accounts or documents either in allowing or in disallowing deduction, allowance or relief. 42. The provisions of section 143(1)(a) are without prejudice to the provisions of section 143(2). Though, technically the intimation issued was deemed to be a demand notice issued under section 156 that did not per se preclude the right of the Assessing Officer to proceed under section 143(2). That righ .....

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..... as meaning sometimes " the computation of income" sometimes " the determination of the amount of tax payable" and sometimes " the whole procedure laid down in the Act for imposing liability upon the taxpayer" . In the scheme of things the intimation under section 143(1)(a) cannot be treated to be an order of assessment. The distinction is also well brought out by the statutory provisions as they stood at different points of time. Under section 143(1)(a), as stood prior to April 1, 1989, the Assessing Officer had to pass an order if he decided to accept the return, but under the amended provisions, the requirement of passing of an assessment order has been dispensed with and instead an intimation is required to be sent. 45. The Central Board of Direct Taxes (CBDT) had issued various circulars in this regard explaining the purpose behind the provisions under section 143(1)(a), namely, to minimize the Departmental work in scrutinizing each and every return, and to concentrate on selective scrutiny of returns. 46. Under the first proviso to section 143(1) with effect from June 1, 1999, except as provided in the provision itself, the acknowledgment of the return shall be deemed to be .....

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..... e said case held that when the assessment was made under section 143(1), reopening on the basis of valuation cells report no addition can be made which amounts to review of its earlier order. In our view, in the instant case also on the basis of the decision of the honourable Punjab and Haryana High Court in the case of Smt. Usha Mathur [2001] 252 ITR 179 it can be held that the Assessing Officer was not justified in reopening the assessment, on the basis of report of the DVO." 50. It is very clear from the above observation and conclusion that the Tribunal has treated the issue as squarely covered by the decision of the jurisdictional High Court in the case of Smt. Usha Mathur [2001] 252 ITR 179 (P & H). 51. I will be failing in my duty if I do not elaborate the decision of Smt. Usha Mathur [2001] 252 ITR 179 (P&H) by basing on which Tribunal held that reopening on the basis of the DVO report was not justified where the return has been processed under section 143(1)(a). The following are the facts and conclusions arrived at by the Punjab and Haryana High Court. 52. The assessee deriving income from job-work and interest filed her return for the assessment year 1989-90 and the a .....

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..... ing has been recorded by the Tribunal on the basis of evidence on file and no error in the finding of fact recorded by the Tribunal was pointed out. The High Court, therefore, held that no substantial question of law arises for consideration of this court in this appeal. Thus, it cannot be inferred that the honourable High Court has given any verdict or proposition on the question of law regarding the validity of the reopening of assessment on the basis of the DVO' s report. 55. In view of the above, the order of the Tribunal relied on by the learned Brother is of no help to the assessee for arriving at the conclusion that there is no legality in reopening the assessment on the basis of the DVO' s report once the returns are processed under section 143(1)(a) by issuing the intimation. 56. Reliance was also placed on the decision of the Tribunal, Calcutta Bench in the case of Roof and Tower Construction (P.) Ltd. [2001] 72 TTJ 433. 57. We have carefully gone through the impugned order of the Tribunal and found that in this case the Assessing Officer reopened the assessment under the belief that sales consideration had been suppressed by the assessee which was formed on the basis .....

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..... ed under section 143(1)(a) cannot be said to be an assessment at par with earlier provisions of section 143(1), as they existed prior to 1989. Furthermore, the power of the Assessing Officer to make a reference to the DVO has been specifically inserted by introduction of section 142A with retrospective effect. Thus, this case is also of no help to the assessee for the relevant assessment years, namely, 1995-96, 199697, 1997-98 and 1998-99 under consideration. 60. The brother Judicial Member has also discussed the decision of the Punjab and Haryana High Court in the case of Grover Nursing Home [2001] 248 ITR 493 in support of the proposition that mere DVO' s report cannot be made the sole basis for initiating action under section 147, read with section 148. We have carefully gone through the whole order and found that in this case reassessment was held to be valid on the basis of the DVO' s report and the assessee' s failure to explain the difference between the cost of construction recorded in the books of account vis-a-vis DVO' s report. 61. However, in the instant case before us, as we have already discussed in detail in addition to the DVO' s report there were so many other ma .....

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..... ment for the assessment years 1995-96, 1996-97 and 1998-99 were justified. 65. Now, coming to the merits of the addition made by the Assessing Officer on the basis of the DVO' s report. It involves two aspects. The first is justification/power of the Assessing Officer to make a reference to the DVO and the second is, the addition to be made on the basis of report obtained under such reference. Section 142A has been introduced in the statute book by the Finance (No. 2) Act, 2004, with retrospective effect from November 15, 1972, according to which for the purpose of making an assessment or reassessment under this Act, where an estimate of the value of any investment is required to be made, the Assessing Officer may require the Valuation Officer to make an estimate of such value and report the same to him. It has been further provided in sub-section (2) of section 142A that the Valuation Officer to whom a reference is made under subsection (1) shall, for the purpose of dealing with such reference, have all the powers that he has under section 38A of the Wealth-tax Act, 1957. As per the provisions of sub-section (3) of section 142A, on receipt of report from the Valuation Officer, th .....

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..... of the Assessing Officer for making reference to the Valuation Officer for determining the quantum of unexplained investment involved in the cost of construction. The decisions cited by the learned authorised representative with reference to powers of Assessing Officer to make a reference, relates to the pre-amended position, therefore not applicable to the facts and circumstances of the instant case in view of the amendment brought in by the insertion of section 142A with retrospective effect. 68. Now, coming to the quantum of addition which can be made on the basis of such report. 69. There is no dispute to the well-settled legal proposition followed by the judicial precedents that the valuer' s report as referred under section 131(1)(d) is only by way of guidance and before using the same the Assessing Officer should give full opportunity to the assessee and also give reasons and justification for adopting the valuation made by the DVO, in place of the construction cost actually debited in the books of account which is also supported by the registered valuer report furnished by the assessee. 70. There is also no dispute to the well-settled legal proposition that no addition .....

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..... ation work has been carried out but the same has not been considered in the valuation amount on the plea of the assessee that additions/alteration work was carried out by the occupants. 72. However, on a perusal of record, we found that the objections raised by the DVO with regard to non-furnishing of details of quantities of different materials consumed could not be met by the assessee before the lower authorities. However, with regard to the DVO' s observation regarding bungalow No. A-27 and addition/ alteration work carried out in some of the bungalows, no addition was finally made by the Assessing Officer while framing the order under section 143(3). Therefore, we can also ignore these observations of the DVO. It is pertinent to mention here that these observations of the DVO were relevant for forming the reason to believe while issuing notice under section 148, but once the assessment is reopened and the Assessing Officer also do not give due credence to such observation/qualification of the DVO, while making addition on the merits under section 143(3), we are least concerned with the same. We also found while comparing the DVO' s report with the registered valuer' s report a .....

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..... by the own valuer of the assessee in its report, as compared to the cost actually recorded by the assessee in its books of account, as discussed hereinabove. 75. Now, coming to the assessment year 1997-98, which was reopened by issue of notice under section 148 after return was processed under section 143(1)(a). From the record, we found that neither at the stage of the Assessing Officer nor before the Commissioner of Income-tax (Appeals), the assessee was having any grievance with regard to insufficiency of reasons for reopening the assessment. During the entire course of reassessment proceedings the assessee has not disputed the reopening as invalid on the ground of sufficient reason to believe that there was escapement of income. We also found that even before the first appellate authority, no ground has been taken by the assessee in the memo of appeal filed in Form No. 35 alleging the action of the Assessing Officer for reopening the assessment under section 147. 76. We have also carefully gone through the memo of appeal (Form No. 35) filed before the Commissioner of Income-tax (Appeals), as placed in the paper book, and found that no ground as to the validity of reopening wa .....

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..... assessee is directed to raise this ground with supporting evidence for inadequacy of reasons recorded for reopening, if any, before the Commissioner of Income-tax (Appeals). Needless to say that the assessee should be given full opportunity before deciding the issue on validity of reopening. 77. Before parting with the matter, it is pertinent to mention that the learned brother Judicial Member has taken the view that since the Commissioner of Income-tax (Appeals) has failed to the dispose of the particular ground the said ground is deemed to have been rejected but since this ground has not been decided by the Commissioner of Income-tax (Appeals), we deem it fit to decide the same. I am not agreeing with the observations of the learned brother Judicial Member that the Commissioner of Income-tax (Appeals) had not decided this ground, in so far as without any ground challenging the illegality of reopening having been taken by the assessee in the grounds of appeal before the Commissioner of Income-tax (Appeals), no duty is cast on the Commissioner of Income-tax (Appeals) to decide the same. There is also no mention of rejection of this ground of validity of reopening in the order of .....

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..... struction recorded by the assessee in its books of account. We direct accordingly. 80. In the result, the appeal of the assessee is allowed in part in terms indicated herein above. REFERENCE UNDER Section 255(4) OF THE IT ACT. 1961 I.S. Verma, J.M. January, 2006 1. As there is a difference of opinion, the matter is being referred to the honourable President of the Tribunal with a request that the following questions may be referred to a Third Member or pass such order as the honourable President may think fit. A. Assessment year 1997-98 : Question No. 1. Whether, in the facts and circumstances of the case and in law, the proceedings initiated under section 147 of the Act for the assessment year 1997-98, can be held to be valid proceedings in the eye of law and, consequently, can the subsequent proceedings also be held to be valid? Question No. 2. In case, the answer to question No. 1 above, is in the affirmative, then whether, the rejection of books of account for the assessment year 1997-98 was justified so as to authorize the Assessing Officer to make reference to the DVO asking to determine the cost of construction of the building known as " Ashlesha Bungalows" situate .....

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..... of construction of very same building which was also under construction during the assessment years 199596, 1996-97 and 1998-99, huge difference of Rs. 87.66 lakhs found as per the DVO' s report, shortfall of Rs. 1.51 lakhs as per the registered valuer' s report, failure of the assessee to furnish details of materials consumed and various services like water, sanitary installation and electrical provisions in the building, qualification in the DVO' s report regarding huge cost incurred in addition/alteration work carried out but not considered in the valuation report. Question No. 2.-In case, answer to question No. 1 above is the affirmative, whether, on the facts and circumstances of the case, the report of DVO which was obtained during the course of proceedings under section 143(3)/147 for the assessment year 1997-98 in respect of very same building which was also under construction during the assessment years 1995-96, 1996-97 and 1998-99, can be validly used during the course of assessment proceedings under section 143(3)/147 for the assessment years 1995-96, 1996-97 and 1998-99. Question No. 3.-In case, answer to question No. 1 above is affirmative, whether, on the facts an .....

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..... for the assessment year 1997-98 was justified so as to authorize the Assessing Officer to make reference to the DVO asking to determine the cost of construction of the building known as ' Ashlesha Bungalows' situated at Anand Bakrol Road, Bakrol, Anand, having 31 units out of which having 20 units of A-type, 2 units of type-C, 1 unit of type-D double storied and Bungalow A-27 during the previous years relevant to the assessment years 1995-96, 1996-97, 1997-98 and 1998-99? 3. Whether, in the facts and circumstances of the case and in law, the addition made on account of alleged investment in construction of building, known as ' Ashlesha Bungalows' situated at Anand Bakrol Road, Bakrol, Anand, having 31 units out of which having 20 units of A-type, 2 units of type-C, 1 unit of type-D double-storeyed and Bungalow A-27 during the previous year relevant to the assessment year 1997-98 solely on the basis of valuation report of the DVO can be sustained." B. Assessment years 1995-96, 1996-97 and 1998-99 " 1. Whether, in the facts and circumstances as well as in law, the proceedings initiated under section 147 of the Income-tax Act, 1961, solely on the basis of valuation report of the .....

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..... ection 143(3)/147 for the assessment years 1995-96, 1996-97 and 1998-99. 3. In case, answer to question No. 1 above is in the affirmative, whether on the facts and circumstances of the case, keeping in view defects pointed out in the books of account, failure of the assessee to furnish details regarding quantities of different building materials consumed and various services like water, sanitary installation and electrical provisions in the building, extra items valued individually by the DVO after physical inspection of building, against which a lump sum value at a very low figure taken by the registered valuer in his report, warrants and justify addition of five per cent. of the cost of construction recorded by the assessee in his books of account." B. Assessment years 1995-96, 1996-97, 1997-98 and 1998-99 : " Whether, on the facts and circumstances of the case and in law, after insertion of section 142A in the statute by the Finance (No. 2) Act, 2004, with retrospective effect from November 15, 1972, a reference made by the Assessing Officer to the DVO to make an estimate of such value and report was justified in view of the consistent view taken by different Benches of th .....

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..... of Rs. 3,25,63,445. The year-wise cost of construction as shown by the assessee and as estimated by the DVO, is as under :   Sl. No. Period of construction Cost of construction as shown by the assessee (Rs.) Fair cost of construction (Rs.) Difference (Rs.) 1. 7/1993 to 3/1994 13,64,923 18,33,939 4,79,016 2. 4/1994 to 3/1995 27,45,946 37,06,493 9,60,547 3. 4/1995 to 3/1996 67,39,422 92,27,910 32,98,312 4. 4/1996 to 3/1997 68,78,879 94,57,014 25,78,135 5. 4/1997 to 3/1998 45,22,750 62,16,218 19,01,523 6. 4/1998 to 12/1998 15,44,733 21,21,871 5,77,138   Total 2,37,96,653 3,25,63,445   4. The assessee also filed a valuation report from the registered valuer who worked out the value at Rs. 2,39,47,000. After giving an opportunity of being heard to the assessee, the Assessing Officer made two additions, namely, disallowance under section 40A(3) of Rs. 5,545 being 25 per cent. of Rs. 22,180 and addition on account of undisclosed investment in construction for the year under consideration at Rs. 25,78,135. During the reassessment proceedings for the assessment year 1997-98, the Assessing Officer also issued notices under section 148 .....

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..... ated the income or had claimed excessive loss, deduction, allowance or relief in the return. For the reopening for the assessment year 1997-98 he held that though the Commissioner of Income-tax (Appeals) has not decided the issue, it being a legal issue can be decided by the Tribunal as no investigation of facts were required. He referred to para 3.17 of the order of the Commissioner of Income-tax (Appeals) and held that the proceedings under section 147 were initiated without there being any information or material with the Assessing Officer for having reason to believe that any income chargeable to tax had escaped assessment and also that there was no allegation which could satisfy the requirement of Explanation 2(b) to section 147 of the Act and, therefore, it has to be taken that the proceedings under section 147 were initiated solely for the purpose of roving enquiry. He further held that books of account cannot be rejected as the defects were trifle and insignificant and reference to the DVO was not valid. He further observed that the cases of the assessee for the assessment years 1995-96, 1996-97 and 1998-99 were reopened solely on the basis of the valuation report of the DV .....

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..... he assessment in view of the decision of the Gauhati High Court in the case of Bishnu Talkies v. CIT [2006] 287 ITR 372. He also relied on the decision of the Tribunal, Delhi Bench, in the case of Asst. CIT v. O. P. Chawla [2006] 8 SOT 242. Stating that it was nothing but a change of opinion, he referred to the decision of the Tribunal, Ahmedabad Bench, in the case of Umiya Co-operative Housing Society Ltd. v. ITO [2005] 94 TTJ 392. He submitted that the reference to the DVO was invalid as the defects pointed out during assessment proceedings for the assessment year 1997-98 were very minor mistakes and the same could not be made the basis for rejection of books of account and/or referring the matter to the DVO for estimating the cost of construction. On the merits, he submitted that both the Members agreed that the books of account could not be rejected and, therefore, no addition at all or at five per cent. as estimated by the learned Accountant Member was called for on the basis of the DVO reports and the remarks about not furnishing of details. He also submitted that valuation of cost of construction of the property is only an opinion and the amendment in section 142A was not re .....

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..... provisions empower the Assessing Officer to reopen the assessment if he, for whatever grounds, has reason to believe that income has escaped assessment. Power to reassess now can be exercised even after the assessee had disclosed fully and truly all material facts. Reasons for reopening may be the result of the Assessing Officer' s own investigation and might also come from any outside source. 13. The returns for all these assessment years 1995-96, 1996-97, 1997-98 and 1998-99 were processed under section 143(1)(a) and intimations issued thereunder. Such processing of returns or issuance of intimation cannot be said to be assessments in the eye of law much less assessments under section 143(3) or section 147 of the Act in view of the clear legislative intent that an intimation is not an assessment order. It is also evident from the use of the word " intimation" for " assessment" in section 143(1) of the Act. Recently, the Gujarat High Court in the case of S. R. Koshti v. CIT [2005] 276 ITR 165, has categorically held that " intimation under section 143(1) is not an order of assessment" . It is also held by the Supreme Court in the case of Assistant CIT v. Rajesh Jhaveri Stock Bro .....

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..... ncome is not the concern at that stage. This is so because the formation of the belief is within the realm of the subjective satisfaction of the Assessing Officer. It followed ITO v. Selected Dalurband Coal Co. Pvt. Ltd. [1996] 217 ITR 597 (SC) and Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 (SC). It is further held that taxing income escaping assessment in the case of an intimation under section 143(1)(a) is covered by the main provision of section 147 as substituted with effect from April 1, 1989, and initiating reassessment proceedings in the case of intimation would be covered by the main provision of section 147 and not the proviso thereto. Only one condition has to be satisfied. Failure to take steps under section 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings when intimation under section 143(1) has been issued by distinguishing Adani Exports v. Deputy CIT (Assessments) [1999] 240 ITR 224 (Guj). It held accordingly, that the Assessing Officer had jurisdiction to issue notice under section 148 for bringing to tax income escaping assessment in an intimation under section 143(1)(a) on the ground that the claim for bad debts b .....

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..... eceipts and expenses needs to be verified. The introduction of capital by all the partners of the firm also needs to be verified. In view of the above stated facts, coupled with the adverse remarks given by the chartered accountant in Schedule 1 forming part of accounts, it can be concluded that income liable to taxation has escaped assessment." 17. There was no challenge to the validity of reopening for this year either before the Assessing Officer or before the Commissioner of Income-tax (Appeals) ; nor is there any discussion or finding on this issue in either of the order. It is challenged before the Tribunal for the first time and both the Members allowed it to be raised and have dealt with the same, it being a question of law. The aforesaid reasons for reopening as extracted above are material to test the validity of reopening were not considered by either. In these circumstances the reopening question admitted for consideration has to be examined with reference to reasons recorded and the material contained therein. It might further be stated that reopening in this year is not on the basis of valuation report of the DVO and, therefore, it cannot be considered to determine .....

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..... laimed in the books of account vis-a-vis amount of vouchers furnished, (e) certain transactions or balances as appearing in the copy of accounts of various concerns not tallying with the accounts of the assessee. The DVO report also indicated the qualifications with regard to failure of the assessee in supplying details of quantities of different materials consumed and various services like water supply, sanitary installation and electrical provisions provided in the property ; the non-inclusion of cost of construction of one Bungalow (No. A-27) in the valuation report alleged to be constructed by the non-resident Indian for which no documentary evidence was produced by the assessee and the huge additions/alterations, renovation work carried out in some bungalows but the same was not considered in the valuation amount as the assessee claimed that additions/alterations work was carried out by the occupants. Therefore, the correctness of the assessee' s claim could not be ascertained. 20. Further, the registered valuer' s report submitted by the assessee himself also indicated excess cost incurred in the construction to the extent of Rs.1.51 lakhs as compared to the cost found recor .....

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..... 1972, for purposes of assessment. It starts with the wording that " where an estimate of the value of any investment is required to be made, the Assessing Officer requires the Valuation Officer to make an estimate of such value and report the same to him" . The starting question is, " where an estimate of the value of any investment is required" . What are the parameters for such requirement? When does this situation arise? One thing is obvious that it is for the Assessing Officer to decide. But, is it absolute power unguided by any material as parameters? In other words, is it his sweet will or it should have some rationale? The Act is silent on this. It has to be on entertaining the view that the assessee had not declared the true cost of construction in its books of account. It is thus when the cost declared by the assessee is lower. The reference was made by the Assessing Officer on December 26, 2001, during the proceedings for the assessment year 1997-98. 23. It is true that the defects were minor and even though the defects found in the books of account were not so serious as to justify the rejection of book results for determining the income to the best of the judgment of t .....

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..... roperty on the date of sale was considerably in excess of the consideration shown by the assessee in the sale deed. It might be true that the DVO report is an estimate of the cost of construction but to hold that no reopening can be made on the basis of such report may not be correct in view of the aforesaid. 25. The Punjab and Haryana High Court, in Grover Nursing Home' s case [2001] 248 ITR 493, held that though report of the DVO cannot be made the sole basis for initiating action under section 147 read with section 148, it could, certainly be considered with other facts for forming belief that the assessee' s income has escaped assessment. There being no explanation by the assessee about the difference between the cost of construction of building shown by the assessee and the cost determined by the DVO, reopening of assessment by issuing notice under section 148 was valid. In the present cases, the report of the DVO was not the sole basis but also the defects enumerated in the reasons recorded aforesaid. It was a case of a civil writ relating to the assessment years 1993-94, 1994-95 and 1995-96. The court held " even though the report of the DVO cannot be made the sole basis fo .....

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..... -tax (Appeals) accepted the contention of the assessee' s husband and deleted the addition. The Revenue did not challenge that order of the Deputy Commissioner of Income-tax (Appeals). The High Court decided the case on the merits and in view of the smallness of the amount. It did not entertain the Revenue' s appeal on the plea that detailed finding has been recorded by the Tribunal on the basis of evidence on file and no error in the finding of fact recorded by the Tribunal was pointed out and, therefore, no substantial question of law had arisen for consideration of the court in the appeal. No finding or a verdict or a proposition on the question of law regarding validity of reopening of assessment on the basis of report of the DVO was given or discussed. 27. In the decision of the Tribunal Calcutta Bench in the case of Roof and Tower Construction (P.) Ltd. [2001] 72 TTJ (Cal) 433 the Assessing Officer reopened the assessment under the belief that the sale consideration was suppressed by the assessee and that belief was formed on the basis of report of the DVO. It was held by the Tribunal that there was no direct nexus between report of the DVO and the assessment of suppressed s .....

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..... is completed by him, as the purpose of section 55A is not to arm the Income-tax Officer to make a roving and fishing inquiry for finding out materials for reopening or revising a completed assessment. In this case, the relevant assessment years under consideration were 1984-85 and 1985-86, which were reopened on the basis of valuation report obtained under section 55A after the original assessments were completed. The case before us is not a case when assessment has already been completed. It is a case where only processing of the returns was thereby issue of intimations under section 143(1)(a). Furthermore, a reference was made to the DVO during the course of assessment proceedings for the assessment year 1997-98 after pointing out defects in the cost of construction as recorded by the assessee in his books of account and discrepancy in the statement of supplier of building materials, as compared to their respective balances in the assessee' s books of account. Thus, this case is also of no help to the assessee. 30. On justification/power of the Assessing Officer to make a reference to the DVO a reference to section 142A, as introduced by the Finance (No. 2) Act, 2004, with retr .....

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..... luer furnished by the assessee. In Shakti Builders [2005] 93 ITD 269, the Tribunal held that section 142A has been brought on the statute book retrospectively in order to nullify the effect of the judgment of the Supreme Court in the case of Smt. Amiya Bala Paul [2003] 262 ITR 407 wherein it has been held that none of the provisions of the Act conferred any power on the Assessing Officer to refer the matter to the Valuation Officer for determining the value of investment mentioned in section 69 or section 69A or section 69B. Because of this judgment, all the references to the Valuation Officers made by the Assessing Officer in various cases throughout the country became illegal being without authority of law and consequently, the additions made on the basis of valuation reports made by the Valuation Officers could be quashed/set aside/deleted by the appellate authorities/Tribunal/courts. Faced with this situation, Parliament inserted section 142A with retrospective effect so as to save the past actions of the Assessing Officer. However, Parliament in its own wisdom considered it necessary to exclude certain assessments from retrospective application of section 142A. Accordingly, a .....

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..... e parent Department of Central Public Works Department. Being a civil engineer he was an expert in the field of civil constructions. The opinion of an expert is admissible as evidence in a court of law. If there was a significant undervaluation that would be material evidence of understatement of consideration also in the event of the undervaluation not being satisfactorily explained by the assessee. In this case, the decision of Smt. Amiya Bala Paul [2003] 262 ITR 407, Britannia Industries Limited v. Deputy CIT [1999] 238 ITR 571 (Cal), CIT v. Kelvinator of India Ltd. [2002] 256 ITR 12 (Delhi) [FB], C. B. Gautam v. Union of India [1993] 199 ITR 530 (SC), Raza Sugar Co. Ltd. v. CIT [1981] 130 ITR 421 (Delhi), Rajinder Nath v. CIT [1979] 120 ITR 14 (SC), Roof & Tower Construction (P.) Ltd.' s case [2001] 72 TTJ (Cal) 433, K. M. Sharma v. ITO [1996] 221 ITR 202 (Delhi), K. P. Varghese [1981] 131 ITR 597 (SC) and Vidya Sagar v. CIT [2005] 277 ITR 120 (P & H) are considered. 33. In Smt. Shashi Agarwal [2007] 159 Taxman 340, the Allahabad High Court considered the scope of the proviso to section 142A and the contention of the Revenue was that the appeal under section 260A like an appea .....

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..... e assessments for the assessment years 1995-96, 1996-97 and 1998-99. 35. In Bishnu Talkies v. CIT [2006] 287 ITR 372 the High Court of Gauhati held that the function of a valuer of a property is a technical function requiring expert investigation for the purpose of estimating the cost of construction. A report of a valuer estimating the cost of construction would only be an opinion of the expert on a technical matter. It followed its earlier decision in the case of CIT v. Smt. Basana Rani Saha [2000] 243 ITR 780 (Gauhati). The report of the Valuation Officer is an opinion and it may create suspicion and doubt. Suspicion and doubt cannot be treated as opinion capable of forming reason to believe within the meaning of section 147. A report of a valuer estimating the cost of construction would only be an opinion of the expert on a technical matter and it cannot be treated as an opinion forming reason to believe within the meaning of section 147 and there being nothing on record to show that the Assessing Officer had recorded reasons, reopening merely on the basis of the report of the Valuation Officer was not valid. It was a reference to the High Court involving the assessment year 1 .....

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..... ent. On the contrary, for making addition the Department cannot place sole reliance on the DVO report and make the addition of entire difference. It is not sacrosanct but an estimate by a technical person and taken in advisory capacity and as a mark of guidance. On the contrary the mistakes pointed out by the Assessing Officer being very venial, might not justify the rejection of books of account under section 145(3), but these would be relevant to make disallowances, and additions to that extent have to be made. The books of account can be relied upon for what that is recorded therein and not, for that which is not recorded in the books. For that rejection of books for defect found therein may not be relevant. The DVO report shows a huge difference, a part of which of course is explained by the assessee but the other part remained unexplained. Therefore, the Revenue cannot place full reliance on the DVO report and make addition for the entire difference. The DVO report though of a technical expert, as aforesaid, has to be taken as a guidance and cannot be disregarded in view of the specific provisions of section 142A(3) for taking into consideration the report of the DVO in making .....

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..... d in the circumstances of the case and in law, after insertion of section 142A in the statute by the Finance (No. 2) Act, 2004, with retrospective effect from 15-11-1972, a reference made by the Assessing Officer to the DVO to make an estimate of such value and report, was justified. 3. On the facts and in the circumstances of the case and in law, the addition made on account of alleged investment in construction of building, known as " Ashlesha Bungalows" situated at Anand Bakrol Road, Bakrol, Anand, having 31 units out of which having 20 units of A-type, 2 units of type-C, 1 unit of type-D double-storied and Bungalow A-27 during the previous year relevant to the assessment year 1997-98 on the basis of huge difference in the cost estimated in the valuation report of the DVO coupled with other defects pointed out and the difference in such value even by the assessee' s own appointed registered valuer can be sustained in all the years. And also On the facts and in the circumstances of the case and keeping in view defects pointed out in the books of account, failure of the assessee to furnish details regarding quantities of different building materials consumed and various servic .....

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