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TMI Blog2019 (3) TMI 1978X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the assessee. Further the amended provision requires the DVO to give opportunity of being heard to the assessee and send a copy of the report to the assessee. The amended provision of section 142A of the I.T.Act (w.e.f. 01.10.2014), going by the dictum laid down by the Hon ble Apex Court in the case of Sunita Mansingha [ 2017 (4) TMI 303 - SUPREME COURT ] has application to the facts of the instant case. Having held that the amended provision of section 142A of the I.T.Act has application to the facts of the case, we have to necessarily hold the rejection of books of account is not a pre-condition for reference to the DVO u/s 142A of the I.T.Act. Also we notice that in the instant case various discrepancies in the valuation report pointed out by the assessee was never addressed to by the DVO nor by the Assessing Officer. On the contrary, the Assessing Officer did not give proper opportunity of hearing to the assessee on account of the assessment becoming time barred and this is clear from para 5 of the assessment order, wherein it is mentioned since the case is getting time barred by limitation on 30.01.2005, the contentions raised by the assessee could not be considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sri. K.T.Mohanan ORDER Per George George K., JM These appeals by the Department arise out of two orders of the CIT(A) dated 22.12.2016 and 29.12.2016. The assessee has also filed a cross objection supporting the order of the CIT(A). The relevant assessment year is 2002-2003. 2. Common issue is raised in these appeals. Hence, these cases were heard together and disposed off by this consolidated order. 3. The solitary issue raised in both the appeals is whether the CIT(A) is justified in deleting the addition made u/s 69B of the Income-tax Act. We shall adjudicate first ITA No.67/Coch/2017 ITA No.67/Coch/2017 4. Brief facts in relation to the above case are as follows:- 4.1 The assessee is a company engaged in the business of running a five star hotel and a convention centre. For the assessment year 2002-2003, the return of income was filed on 30.10.2002 declaring a loss income of Rs.11,93,72,022. The return was processed u/s 143(1) of the I.T.Act on 04.02.2003. Subsequently, the assessment was taken up for scrutiny by issuance of notice u/s 143(2) of the I.T.Act. It was noticed by the Assessing Officer that assessee had completed construction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the DVO u/s 142A of the I.T.Act was binding on him and since the assessment was getting time barred on 31.03.2005, the grievances raised by the assessee could not be considered due to paucity of time. Accordingly, the difference between the value determined by the DVO s report and the value disclosed by the assessee in its books of account as regards the construction of the hotel building was added to the total income and assessed u/s 69B of the I.T.Act. The relevant finding of the Assessing Officer in this regard reads as follows:- 5. I have carefully considered the arguments put forth by the assessee. If at all certain mistakes and duplications have crept-in in the valuation report, it has o be got corrected by the Valuation Officer. All other points raised by the assessee are to be considered only by the Valuation Officer. Since the case is getting barred by limitation on 31-3-2005, the contentions raised by the assessee could not be considered at this stage. Moreover, the value determined by the Valuation Officer u/s 142A is binding on the assessing officer. In the ircumstances, the difference in the value of investment in the hotel building as per the valuation report ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ongly held that his independent analysis and judgment were not necessary and that the Valuation Report U/s 142A was binding on him. This amounts to procedural anomaly and militates against the validity of the assessment made (vi) The books of accounts of the Appellant had not been rejected or challenged or held as invalid, to justify making a reference u/s 142A and consequent additions/assessments. This action is illogical and inconsistent and unlawful. u) On the merits of the value derived by the DVO, his Valuation Report is determined, inter alia: (i) To have used the macro and top-down Plinth Area Rate and Cost Index Method (that uses the CPWD's across-the-board rates and figures, which even when adjusted for differentiations on account of specificity and customization driven by qualitative differences will result in statistical variations within certain Confidence Intervals); (ii) to have adopted figures such as Pile Foundation and Wood Work rates without demonstrated basis (such as average third party or market standards); (iii) To have made arbitrary (possibly necessary from a civil engineering standpoint) adjustments to the estimates as evidenced on page n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. The learned CIT(Appeals) is not correct to hold that the determination of investment by CVO did not meet the principles of nature justice, since the valuation made by the CVO was after meeting all of the requirements for doing so. 5. The various case laws relied upon by the learned CIT(Appeals) are not squarely applicable to the facts of the present case, being distinguishable on facts. 6. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of Commissioner of Income Tax(Appeals) may be set aside and that of the Assessing Officer restored. 5. The revenue has also filed a written submission, which reads as follows: (i) As there was a huge difference i.e. Rs.1,02,58,235 between the cost of investment in M/s.MFAR Hotels, Kundanoor junction admitted by the assessee in books of account (Rs.34,47,91,568 and the value determined by the Approved Valuer (Rs.33,45,33, 333) there was a valid reason for reference u/s 142A of the I.T.Act to DVO by the Assessing Officer. (ii) The DVO has determined the value of cost of construction @ Rs.36,94,66,000 (vide report dated 23.03.2005). (iii) After affording opportunity on 28.03.2005 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment in the 5 star hotel building and on the basis of a detailed valuation report, the assessing officer has made additions of Rs.2,46,74,432 and the same be upheld. (e) Further, as the construction of 5 star hotel require high standards in all aspects civil, electrical, architecture, open area, parking area, the additions made was reasonable and be upheld. (vi) The CIT(A) has accepted the submissions of the respondent assessee in its defence, without considering the DVO s detailed report dated 2 3.03.20095 and DVO s letter dated 06.09.2006 (where all the objections raised by the assessee have not only been met but reasons for higher valuation been given). In view of the above, the Hon ble ITAT may uphold the order of the Assessing Officer. 6. The learned AR strongly supported the order of the Assessing Officer. The learned AR submitted that section 142A of the I.T.Act had undergone substantial changes with effect from 01.10.2010 (amended vide Finance (No.2) Act, 2014). According to the learned AR, subsequent ot the amendment with effect from 01.10.2014, rejection of the books of account is not a condition precedent for reference to valuation u/s 142A of the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principles of natural justice. According to the CIT(A), there is huge variation in the valuation done by the DVO and the investments recorded as per the books of account of the assessee primarily on account of discrepancies / mistakes on the part of the DVO, which was neither corrected by the DVO or the Assessing Officer. The CIT(A), essentially decided the issue in favour of the assessee for the reason that the A.O. did find any excessive investment made outside the books of account and rejection of books of account is a precondition for reference to DVO u/s 142A of the I.T.Act. 7.1 There are number of judicial pronouncements holding that the reference to DVO under section 142A of the I.T.Act is possible only upon finding that the books of accounts maintained by the assessee is not correct and the value estimated by the Assessing Officer varies substantially from what is recorded in the books of accounts. The various judicial pronouncements confirms that the process of estimation cannot be done if the investment is properly recorded in the books of accounts and the Assessing Officer is satisfied with the correctness and completeness of such books of accounts. If the AO is not s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law laid down by the Supreme Court in Sargam Cinema v. CIT (2010) 328 ITR 513 for not making any addition on the basis of the Departmental Valuation Officers report without first rejecting the books of accounts, is valid up to the period prior to the insertion of sub-section (2). As the assessment year under consideration is 20062007, being the year anterior to the amendment, the same will be governed by the judgement in Sargam Cinema's case (supra) and not the later amendment nullifying the pro tanto effect of this judgement . 7.3 The above finding of the Hon ble Tribunal is to the effect that the rejection of books of accounts, as decided by the Apex Court is valid for all assessment years prior to 01.10.2014, till the section is amended to neutralise the decision of the Apex Court. 7.4 However, we notice that the Hon ble Supreme Court in the case of CIT v. Sunita Mansingha [(2017) 393 ITR 121 (SC)] had held that the assessment cannot be said to be final and conclusive when appeal preferred by the Revenue u/s 260A of the I.T.Act was pending before the Rajasthan High Court. Accordingly, the Hon ble Supreme Court was of the view that the amended provision of section 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... application to the facts of the case, we have to necessarily hold the rejection of books of account is not a pre-condition for reference to the DVO u/s 142A of the I.T.Act. Therefore, the finding of the CIT(A) on this score is set aside. 7.6 However, we notice that in the instant case various discrepancies in the valuation report pointed out by the assessee was never addressed to by the DVO nor by the Assessing Officer. On the contrary, the Assessing Officer did not give proper opportunity of hearing to the assessee on account of the assessment becoming time barred and this is clear from para 5 of the assessment order, wherein it is mentioned since the case is getting time barred by limitation on 30.01.2005, the contentions raised by the assessee could not be considered at this stage . It was clear that there was no proper examination either by the DVO nor by the Assessing Officer with regard to the objections raised by the assessee in regard to the valuation report. The A.O. had also stated that DVO s report is binding on him. This statement of the A.O. is incorrect. The report of the DVO is only advisory in nature and not binding on A.O. Therefore, we deem it appropriate to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order and respectfully disagree with the conclusions arrived in his order and I proceed to write a separate order. The facts are not reiterated here since it has been elaborately dealt by the learned JM. 2. The primary issue raised by the Revenue in this case is with regard to the conclusion of the CIT(A) that rejection of books of account is not a pre-requisite for referring the valuation of asset u/s 142A of the I.T.Act. In this connection, the contention of the assessee and the ground on which the First Appellate Authority had passed the order is that the reference to Valuation Officer itself is not in accordance with the law. The reason put forward by the AO for reference to DVO for valuing the hotel building is that the valuation report of the Approved Valuer submitted by the assessee is lower than the value declared in the books of accounts. At this point of time the A.O. has not given an opportunity to the assessee to explain the reason for the difference. Further as per section 69B of the I.T.Act when the value of investment is not recorded in the books of account or the value expended on making such investment exceeds the value recorded in the books of account in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ooks of accounts. The various judicial pronouncements confirms that the process of estimation cannot be done if the investment is properly recorded in the books of accounts and the Assessing Officer is satisfied with the correctness and completeness of such books of accounts. If the AO is not satisfied with the correctness and completeness of the books of accounts, he should record his findings and reasoning and reject the books of accounts to proceed for estimation of the value of investments by referring to DVO. The Hon ble High Court of Gujarat in the case of Goodluck Automobile (P) Ltd. v. ACIT (359 ITR 306)(Guj), while analyzing section 142A stated as follows:- From the language employed in the heading of the section as well as the opening part of the said section it can be seen that the expression used by the Legislature is estimate . Thus a resort can be made to the said provision by the Assessing Officer for the purpose of estimating the value of any investment in the circumstances referred to therein. It is common knowledge that the question of estimate arises only when the books of account of the assessee are not reliable. In other words, if the Assessing Officer is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal reads as follow: It is relevant to note that sub-section (2) of section 142A as inserted by the Finance (NO.2) Act 2014, with effect from 1.10.2014 provide that the Assessing Officer may make a reference to the valuation officer under section (1) whether or not he is satisfied about the correctness or completeness of the accounts of the assessee. There was no analogous provision prior to this insertion. This shows that the position of the law laid down by the Supreme Court in Sargam Cinema v. CIT (2010) 328 ITR 513 for not making any addition on the basis of the Departmental Valuation Officers report without first rejecting the books of accounts, is valid up to the period prior to the insertion of sub-section (2). As the assessment year under consideration is 2006-2007, being the year anterior to the amendment, the same will be governed by the judgement in Sargam Cinema's case (supra) and not the later amendment nullifying the pro tanto effect of this judgement . 7. This finding of the Tribunal make the law very clear and unambiguous to the effect that the rejection of books of account, as decided by the Hon ble Apex Court in the case of Sargam Cinema reported ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates that the assessment in this case has not attained finality, since the appeal filed by the Department to the Tribunal was pending when section 142A of the I.T.Act was substituted with effect from 01.10.2014. Therefore, according to the learned JM, section 142A of the I.T.Act substituted with effect from 01.10.2014 has application to the facts of the present case. For concluding so, the learned JM relies on the judgment of the Hon ble Apex Court in the case of CIT v. Sunita Mansingha [(2017) 393 ITR 121 (SC)]. According to me the judgment of the Hon ble Apex Court in the case of Sunita Mansingha (supra) will not apply to the facts of the present case. The Hon ble Apex Court in the case of Sunita Mansingha (supra) was interpreting proviso to section 142A(3) of the I.T.Act (which was in existence from the date of insertion of section 142A of the I.T.Act till section 142A of the I.T.Act was substituted w.e.f. 01.10.2014). The newly substituted section 142A(3) of the I.T.Act w.e.f. 01.10.2014 does not have a proviso. Therefore, the principle laid down by the judgment of the Hon ble Supreme Court does not have application to the newly inserted section 142A of the I.T.Act. I do admit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Asst. Commissioner of Income-tax, Corporate Circle-1(2), Kochi. Vs. M/s Mfar Hotels Resorts (P) Ltd., (Earlier known as MFAR Hotels Ltd., N.H Bypass, Kundanoor Junction, Maradu P.O, Kochi-682 034. PAN AABCM 9267 F APPELLANT RESPONDENT CO No.16/COCH/2017 Assessment year : 2002-03 M/s Mfar Hotels Resorts (P) Ltd., (Earlier known as MFAR Hotels Ltd., N.H Bypass, Kundanoor Junction, Maradu P.O, Kochi-682 034. PAN AABCM 9267 F Vs. The Asst. Commissioner of Income-tax, Corporate Circle-1(2), Kochi. APPELLANT RESPONDENT Revenue by : Smt. A.S Bindhu, Sr. DR Assessee by : Sri K.T Mohanan, CA Date of hearing : 23.08.2019 Date of Pronouncement : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer on 23.03.2005, the cost of construction was determined at Rs.36,94,66,000/. 4. In the order of assessment passed u/s.143(3) of the Act dated 30.3.2005 the difference between the cost of construction of the hotel as determined by the DVO at Rs.36,94,66,000 in his report and the cost of construction of the hotel premises as recorded by the Assessee in the books of account at Rs.34,47,91,568 viz. a sum of Rs. 2,46,74,432/- was added to the total income of the Assessee as unexplained investments in construction u/s.69B of the Act. Another order u/s.143(3) read with Sec.147 of the Act was passed by the AO on 27.12.2007. After the order dated 143(3) dated 30.3.2005 was passed by the AO, the DVO in his communication dated 23.9.2005 informed the AO that a sum of Rs.11,95,000/- being the cost of glazed tiles on dado walls in toilets was left out in the earlier valuation report and therefore the order dated 27.12.2007 was passed u/s.143(3) read with Sec.147 of the Act making further addition of Rs.11,95,000/-. That is how two appeals came to be filed by the Assessee against the two assessment orders before CIT(A). 5. The CIT(A) held that the A.O. was not justified in referr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon ble Supreme Court in the case of CIT Vs. Sunita Mansingha 393 ITR 121 (SC), wherein the Hon ble Supreme Court held as follows: in view of the fact that Section 142A was inserted by Finance (No.2) Act, 2014 (23 of 2004) w.e.f. 15th November, 1972 and subsequently again substituted by Finance Act, 2010 (14 of 2010) w.e.f. 1st July, 2010 and Finance (No.2) (225 of 2014) w.e.f. 1st October, 2014, as the proviso to sub-section (3) of Section 142A as it existed during the relevant period, reference to the Departmental Valuation Officer can be made because assessment in the present case had not become final and conclusive because the appeal preferred by the Revenue under section 260A of the Income Tax Act, 1961 was pending before the Rajasthan High Court. 8. The learned JM thereafter held that in view of the decision of the Hon ble Supreme Court the reference to the DVO without rejecting books of accounts was valid because as per the Hon ble Supreme Court Judgment, the amendment to Sec.142A of the Act applies to all pending proceedings and the Assessee s case was before the Tribunal and therefore it was a pending proceeding and therefore the question of valuation of invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case is getting time barred by limitation on 30.01.2005, the contentions raised by the assessee could not be considered at this stage . It was clear that there was no proper examination either by the DVO nor by the Assessing Officer with regard to the objections raised by the assessee in regard to the valuation report. The A.O. had also stated that DVO's report is binding on him. This statement of the A.O. is incorrect. The report of the DVO is only advisory in nature and not binding on A.O. Therefore, we deem it appropriate to restore the issue to the Assessing Officer to consider the objections of the assessee, so that the discrepancies / objections raised by the assessee to the valuation report could be addressed and a clear finding can be given on the discrepancies / objections of the assessee. It is ordered accordingly. 9. The learned AM however did not agree with the aforesaid observations of the learned JM and he took the following view: 10. The learned JM in his order had stated that section 142A of the I.T.Act is a procedural section and applies to the pending assessment. Further, the learned JM states that the assessment in this case has not attained finali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned DR and their submissions were identical to the view of the Learned AM and Learned JM respectively. 11. I have carefully considered the rival submissions and the conflicting views expressed by the learned JM and AM in their respective orders. Let me first trace the historical background of Sec.142A of the Act. 12. Section 142A of the Income-tax Act, 1961 inserted by the Finance Act, 2004, with effect from November 15, 1972 enables the Assessing Officers to make a reference to Valuation Officer for the purpose of making assessment or reassessment under the Act. For quite sometime, the legal basis of a reference to Valuation Officer of the Department to determine cost of construction of buildings was the subject-matter of controversy before various Courts, some courts deciding in favour and some against the revenue, till the issue was decided by the Apex Court in the case of Smt. Amiya Bala Paul v. CIT [2003] 262 ITR 407 (SC). The legal basis of such references under sections 55A, 142(1), 131 and 133(6) was held as infirm in the said judgment. However, the law has been amended by the Finance Act No. 2, 2004 inserting section 142A with effect from November 15, 1972 enabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mission , which inter alia, empowers the Court to make a local investigation and also to hold a scientific, technical and expert investigation . Using this power, the Assessing Officer has been making a reference to the Valuation Officer for estimating the cost of construction of properties. The scope of power vested in an Assessing Officer under section 131 to make a reference to the Valuation Officer for estimating the cost of construction of properties has been a subject-matter of litigation. A new section 142A has been inserted by the Finance (No. 2) Act, 2004 to specifically provide that an Assessing Officer has the power to make a reference to the Valuation Officer for estimating the value of investment, expenditure, etc. This section has been inserted with retrospective effect from 15th November, 1972 to save the cases where such references have been made in the past and are still pending in litigation at one stage or the other. Sub-section (1) of the new section provides that where an estimate of the value of any investment referred to in section 69 or section 69B or the value of any bullion, jewellery or other valuable article referred to in section 69A or sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et value, of any asset, property or investment and submit a copy of report to him. (2) The Assessing Officer may make a reference to the Valuation Officer under sub-section (1) whether or not he is satisfied about the correctness or completeness of the accounts of the assessee. (3) The Valuation Officer, on a reference made under sub-section (1), shall, for the purpose of estimating the value of the asset, property or investment, have all the powers that he has under section 38A of the Wealth-tax Act, 1957 (27 of 1957). (4) The Valuation Officer shall, estimate the value of the asset, property or investment after taking into account such evidence as the assessee may produce and any other evidence in his possession gathered, after giving an opportunity of being heard to the assessee. (5) The Valuation Officer may estimate the value of the asset, property or investment to the best of his judgment, if the assessee does not co-operate or comply with his directions. (6) The Valuation Officer shall send a copy of the report of the estimate made under sub-section (4) or sub-section (5), as the case may be, to the Assessing Officer and the assessee, within a period of six mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er taking into account the evidence produced by the assessee and any other evidence in his possession or gathered, after giving an opportunity of being heard to the assessee.If the assessee does not cooperate or comply with the directions of the Valuation Officer he may, estimate the value of the asset, property or investment to the best of his judgment. 43.4 It has also been provided that the Valuation Officer shall send a copy of his estimate to the Assessing Officer and the assessee within a period of six months from the end of the month in which the reference is made. On receipt of the report from the Valuation Officer, the Assessing Officer may, after giving the assessee an opportunity of being heard, take into account such report in making the assessment or reassessment. 43.5 Sections 153 and 153B of the Income-tax Act have also been amended to provide that the time period beginning with the date on which the reference is made to the Valuation Officer and ending with the date on which his report is received by the Assessing Officer shall be excluded from the time limit provided under the aforesaid section for completion of assessment or reassessment. 43.6 Applicabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er stood in the way of the power of the AO to make a reference to the DVO but the requirement that finding that the books of accounts maintained by the Assessee is not correct and the value estimated by the AO varies substantially from what is recorded in the books of accounts is required to be satisfied before making a reference to DVO. It has been held by the Hon ble Supreme Court in the case of Sargam Cinemas Vs. CIT 262 ITR 513 (SC) that rejection of books of accounts is a pre-condition for making a reference to DVO. Therefore in cases where this requirement was not satisfied, the addition made on account of unexplained investments in construction was being deleted. It is only with a view to remove such hurdle that Sec.142A of the Act was substituted by inserting a new Sec.142A by the Finance (No.2) Act, 2014, which no longer requires rejection of books of accounts of an Assessee to make a reference to the DVO. 21. Whether the observations in the case of Sunita Mansingha (supra) can be the basis to hold that the reference to the DVO is valid in the present case, is the next aspect on which I need to delve. In the case of CIT Vs. Sunita Mansingha 393 ITR 121 (SC), the facts w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions cannot have the effect of dispensing with the requirements for making a valid reference to the DVO as held by the Hon ble Supreme Court in the case of Sargam Cinemas Vs. CIT 262 ITR 513 (SC) wherein it was held that rejection of books of accounts is a precondition for making a reference to DVO. The learned JM has taken the view that the substituted provisions of Sec.142A as substituted by the Finance (No.2) Act, 2014 whereby the requirement of rejection of books of accounts as a pre condition for making a valid reference to DVO, will also have application to pending proceedings. In the absence of any provision similar to the proviso to Sec.142A(3) in the newly substituted Sec.142A by the Finance Act, 2014, no such inference can be made. When the new Sec.142A was inserted by the Finance (No.2) Act, 2014, the proviso to Sec.142A(3) did not exist as it no longer served any purpose. The legislature was conscious of the fact that the substitution of Sec.142A by the Finance (No.2) Act, 2014 was made only for the purpose of overruling the legal position as interpreted by various High Courts and Supreme Court in the case of Sargam Cinemas (supra). The legislature did not make the law ..... X X X X Extracts X X X X X X X X Extracts X X X X
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