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TMI Blog2002 (3) TMI 927X X X X Extracts X X X X X X X X Extracts X X X X ..... e receipts of ₹ 12,83,350 have been declared. 2.2 At the time of assessment proceedings, when the assessee produced various books of account, the AO noted there was an alleged stock register, which was freshly written. This was written by the accountant at the division office and not at the site. He also noted that no separate stock registers for different projects were maintained. As per entries in the alleged stock register, the material for construction has been issued, but no receipts, etc. have been maintained for issuing the same. For which project, the material was issued is also not known. The AO, therefore, recorded the statement of Shri Rajesh Saxena, the accountant of the assessee, who makes entries in the books of account. In his statement Shri Saxena admitted that the entries in the stock register were made on the basis of information given by Mistri. However, Shri Saxena was not able to pint point the name of the Mistri, who used to give that information. The AO also observed that when the materials were issued, no voucher in token of the issue of material, was maintained. Besides above, the accountant also stated the entries in the cash book and the stock re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee made his written submissions vide letter dt. 21st March, 2000. However, the reply dt. 21st March, 2000, was not found to be satisfactory by the AO. On this date, the AO asked the assessee to furnish the details of investments made during financial year 1999-2000 also. However, the assessee stated that the details of investments made by it during financial year 1999-2000 were not available at present. 2.6 The AO, therefore, rejected the books of account under s. 145(3) of the Act mainly due to the following defects : (1) Proper stock register and work-in-progress register was not maintained; (2) No separate particulars of expenses are maintained for each project; (3) Some of the purchases made in cash, are not verifiable. 2.7 He accordingly held that the assessment of the assessee has to be made as per the provisions of s. 144 of the Act. He, therefore, held that : (1) On the contract receipts of ₹ 12,83,350, 8 per cent net profit rate will be applied; (2) The pro rata undisclosed investment in Friends Apartments during the relevant assessment year comes to ₹ 81,69,717, which is added to the total income of the assessee; (3) In respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ril, 1997. (2) There was no basis with the AO for making reference to the DVO to estimate the cost of construction. (3) The property, namely, Friends Apartments was under construction as on 31st March, 1997, and even on 9th Dec., 1999, i.e. the date of alleged visit by DVO. Though the DVO has estimated the cost of construction in respect of Friends Palace also, the AO did not make any addition on account of undisclosed investment in that building on the ground that the same was under construction, but rejecting the same claim in respect of Friends Apartments was whimsical. (4) Bifurcation of the investment in each year on pro rata basis was imaginary as in some year, there may be substantial investment whereas in some year, it can be only nominal. (5) The difference in estimating of cost on main items (cost incurred by the assessee vis-a-vis cost estimated by DVO) was as under : Item DVO rate/cost Actual rate/cost Lifts ₹ 13.68 lacs each ₹ 5.75 lacs each (contract filed) Marble Stone ₹ 335 per sq. m. plus co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sq. m. Cost of 2 lifts 27,36,000 per sq. m. (7) When the assessee furnished the cost of construction met by it and the AO was not satisfied with it, he could have asked the assessee to furnish report of the approved valuer in respect of Friends Apartments, but the same was not done. (8) Since assessee was carrying on construction in course of business, and building was not constructed as capital investment, expenses would be debited in P L a/c and as such even if assessee incurred expenditure in excess of amounts recorded in books and such excess expenditure was treated as assessee's income under s. 69C, same amount would have to be debited in P L a/c and addition under s. 69C would be neutralised and net result would be 'nil' addition. Reliance was placed on the decision of Bombay Bench of the Tribunal in the case of Nisant Hosing Development (P) Ltd. vs. Asstt. CIT (1995) 52 ITD 103(Patna). (9) The business assets (stock-in-trade) cannot be termed as investments. The nature of investments as contemplated under ss. 69, 69A and 69B refer to bullion, jewellery, money or valuable articles, and not to stock-in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termine whether the matter regarding valuation of stock-in-trade could be referred to the DVO as he has not exercised this power in the case of any other builder whose assessments were completed by him during this period only for reasons best known to him alone. 2.10 The CIT(A) considered the findings of the AO, the submissions of the assessee, the comments of the AO and the counter-reply of the assessee. She observed that the report of the DVO was only advisory in nature. But the AO has taken this report to be gospel truth. In her view the addition made on the basis of difference worked out between the value of stock-in-trade reflected in the balance sheet/P L a/c and the books and as determined by the DVO was not called for. Firstly, because valuation of stock-in-trade/work-in-progress has to be done as per prescribed method given in s. 145A which was a procedural section and applied to all pending proceedings. The basis on which the said valuation was made was not provided to the appellant. Unless the conditions precedent for making a reference were satisfied, the AO could not make a reference in exercise of general power of enquiry as held in the case of Hotel Amar vs. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T. Laxman Das vs. Asstt. CIT (1994) 208 ITR 859(Mad). Hon'ble Kerala High Court in the case of G. Sukhesh vs. Dy. CIT (2000) 158 CTR (Ker) 118has considered the scope of s. 131(1)(d)/142(1A) of the IT Act. In the said case the Hon'ble Court has held that reference to the DVO was for the purpose of investigation. No illegality was committed by the AO so as to interfere with his discretion. 2.14 Similarly, in the case of Shashi Devi vs. ITO Ors. (1999) 154 CTR (MP) 1, the Hon'ble MP High Court had held that the commission issued to the DVO under s. 131(1)(d) of the Act was a valid reference. Hon'ble Kerala High Court in the case of G. Sukesh (supra) had held that the DDIT (Inv.) was empowered to refer the case for valuation under s. 131(1A) of the Act. In the case of CIT vs. Basana Rani Shah (2000) 163 CTR (Gau) 140: 156 Taxation 130 (Gau), the Hon'ble Gauhati High Court had held that it was always open to the assessing authority to seek expert opinion about cost of construction of a building. Such power was derived from ss. 131, 133(6) and 142(2) of the Act. The similar view was expressed by the Hon'ble Bombay High Court in the case of Jamuna Dass Madhav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O dt. 2nd June, 2000, were received by the CIT(A) on 12th June, 2000, but by that date, the CIT(A) had already passed the appellate order. Thus, it is not a case of inordinate delay on the part of the DVO in submitting his comments. 2.17 Learned Departmental Representative also stated that the CIT(A) was not justified in observing that the DVO cannot estimate the cost of investment in stock-in-trade. It was stated that such finding of the CIT(A) was against the provisions of law. Learned Departmental Representative further stated that supposing search and seizure operation under s. 132 of the Act takes place at the premises of a jeweller, the jewellery in that case was stock-in-trade. But the approved valuers of the jewellery are always called and they estimate the investment in the stock-in-trade. There was nothing illegal about it. No law prohibits so. An addition under s. 69 of the Act was permissible if there was difference between the cost of investment in the stock-in-trade declared by the assessee and valued by the approved valuer. In the case of the assessee, the building was a stock-in-trade and, therefore, the DVO had every authority to value the cost of investment in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is determined by applying the estimated GP rate on the cost of work certified and when this estimated GP is added to the cost incurred on the project during the year, it gives the value of work done which is the sales turnover. This is followed from year to year till the project gets completed. 5. It appears that an impression has been generated that the assessee has not shown any sales from these projects. In this connection it is stated that the assessee has specified in Note No. 6 (copy of audited accounts for the year ended 31st March, 1997, enclosed for perusal and ready reference), to accounts attached to and forming part of annual accounts as at 31st March, 1997, that during the year the management has created the value of work done as sales turnover . Thus, there can be no denial that the assessee has not made any sales during the year. 6. Further, if the assessee intends to mean that sales means bookings and that he has not made any booking during the year, this view cannot be accepted as : (a) firstly, as booking has no co-relation with the sales turnover figure shown in the P L a/c, which is the value of work done determined by the assessee on the basis of his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owever, in the case of a builder the opening stock, purchases, closing stock and GP are known and the turnover is the balancing figure, when the builder follows the percentage of work completed method of accounting. Thus, any variation in the trading account will correspondingly vary the turnover figure. 9. It is further submitted that during the assessment proceedings, AO asked the assessee vide questionnaire dt. 15th Feb., 2000, (copy enclosed) to furnish the rate per square feet for cost of construction and of sale. However, assessee vide letter dt. 3rd March, 2000, (copy enclosed) did not submit the same and the explanation given by the assessee appears to be evasive. 10. It has already been brought on record that the assessee does not maintain the separate stock register for each of the project, including contract work (which has no link with the sites referred for valuation). No record of work-in-progress (WIP) has been maintained. The building construction account as maintained in the books of accounts of assessee (copy enclosed), again does not show the project-wise details. The same has been admitted by the auditors vide Note No. 8 under the head Project/contract co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d counsel that the DVO has given his opinion in respect of investment in both the properties, namely, Friends Apartments and Friends Palace. The AO has accepted the report of the DVO in respect of Friends Apartments but has ignored the opinion in respect of Friends Palace. While relying on the Supreme Court's decision reported in Calcutta Co. Ltd. vs. CIT (1959) 37 ITR 1(SC) the learned counsel stated that the principles of harmonious construction have to be followed and as the AO has not given any reasons for making reference to the DVO, the CIT(A) was justified in holding that the reference by the AO to the DVO under s. 131(1)(d) of the Act was illegal. 4. We have considered the rival submissions. The facts have been mentioned above. It appears that when the DVO estimated the cost of investment in the Friends Apartments, which forms the basis of addition under s. 69 by the AO, the same was challenged before the CIT(A). The CIT(A) has referred these objections in her order also but instead of giving a finding on merits, the CIT(A) accepted the claim of the assessee by holding that reference to DVO was invalid and, therefore, any addition based on such reports had to be dele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he takes up investigation. I have gone through the said provision, especially s. 131(1A). Counsel for the Department submitted that s. 131(1)(d) was misquoted and in any view the first respondent has got jurisdiction under s. 131(1A) of the IT Act to get a valuation report. Reference was also made to the decision in Jamnadas Madhavji Co. vs. ITO (1986) 58 CTR (Bom) 1: (1986) 162 ITR 331(Bom) : TC 60R.97. I am of the view it is only for the purpose of investigation first respondent called for a valuation report from the 2nd respondent. I do not find any illegality committed by the officer so as to interfere with the direction. 7. In the case of Shashi Devi (supra), the Hon'ble Madhya Pradesh High Court considered the issue and held as under : The submission of the learned counsel for the petitioner that the Department is making an investigation on basis of the declaration would not be correct. The Department is entitled to make an investigation into the income which has been explained and is certainly entitled to issue commissions for valuation of the property. When it is expected from an assessee that he would be honest and would pay the proper tax then it cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (No. 2) Act, 1998, w.e.f. 1st April, 1999. This is substantive provision of law which was brought on the statute with a prospective date. As the assessment year in question is 1997-98, such provision was not on the statute. Thus, shelter could not be taken under this section. We, therefore, do not agree with the finding of the CIT(A) that s. 145A was only a procedural section and, therefore, applies to all the pending assessments. While rejecting the finding of the CIT(A), we are further fortified by wording of s. 145A which begins with the word notwithstanding anything to the contrary contained in s. 145. This clearly indicates that the section brought on the statute was substantive and not procedural in nature. 10. A question has also been raised by the learned counsel to the effect that as the building in the case of the assessee was stock-in-trade, no addition under s. 69 could be made even if there was difference in the investment declared by the assessee and estimated by the AO. Sec. 69 is a part of Chapter VI. This chapter deals with the aggregation of income and set off or carry forward of loss. First part talks of aggregation of income which covers the ss. 66 to 69D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of Friends Apartments, though the same was incomplete. No reasons have been given by the AO for doing so. We are making these observations keeping in fact that the DVO in his report had also estimated the cost of construction in the Friends Palace. Such contradictions remained to be reconciled. 12. Keeping above facts and views, we feel that the CIT(A) should have considered the DVO's report on merit rather than holding the reference under s. 131(1)(d) as illegal. Needless to say that the DVO has submitted his report to the AO who followed the same in respect of Friends Apartments. The assessee chose to file his objections to the said report before the CIT(A). The CIT(A) forwarded a copy of the same to the DVO for his comments. The DVO's comments were to be obtained within a week from the receipt of the CIT(A)'s letter. The DVO was stationed in Jaipur and he informed the AO to make a request to the CIT(A) to grant a little more time in furnishing the comments. The AO vide his letter dt. 2nd June, 2000, appraised the CIT(A) this fact. The DVO's comments are dt. 2nd June, 2000, which were received by the CIT(A) on 12th June, 2000, but by that date, the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e also stated that while directing to apply 4 per cent net profit rate, the CIT(A) has observed that this net profit rate was adopted by the AO in respect of other builders. It was stated that such observation made by the CIT(A) were not correct as the same were not verifiable from the records of those builders. She, therefore, pleaded that the issue may be set aside and restored back to the file of the AO/CIT(A) to verify the correctness of the figure. 19. On the other hand, learned counsel supported the orders of the CIT(A). 20. We have considered the rival submissions. We find that in respect of completed projects, the AO had applied 8 per cent net profit rate on the receipts whereas in respect of non-completed project, he had applied 10 per cent net profit rate on the work-in-progress. 21. On appeal, the CIT(A) directed to apply a net profit rate of 4 per cent on all the receipts. While giving this direction, the CIT(A) has observed that this net profit rate was applied by the AO in the case of two other builders. Thus, she has given her reasons for application of 4 per cent net profit rate. The two builders were renowned builders and in case the Revenue was of the opi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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