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Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Before: Shri Chandra Poojari, AM & Shri George George K, JM
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
ITA No.66-67/Coch/2017 & CO 16/C/2017. 2 M/s.Mfar Hotels & Resorts (P) Ltd. has also filed a cross objection supporting the order of the CIT(A). The relevant assessment year is 2002-2003.
Common issue is raised in these appeals. Hence, these cases were heard together and disposed off by this consolidated order.
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
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 of hotel building during the previous year relevant to the concerned assessment year. The cost of construction as per the books of account of the assessee was Rs.34,47,91,568. In support of the cost of construction, the assessee had filed valuation report from the Approved Valuer
ITA No.66-67/Coch/2017 & CO 16/C/2017. 3 M/s.Mfar Hotels & Resorts (P) Ltd. and Chartered Engineer. In the said report submitted by the Approved Valuer and Chartered Engineer, the cost of investment was estimated at Rs.33,45,33,333. The Assessing Officer was of the view that since the approved valuer’s report showed less of investment than the value admitted by the assessee in its books of account, it was necessary to determine the correct value of investment and for the above said purpose, the case was referred to the Departmental Valuation Officer (DVO) u/s 142A of the I.T.Act. As per the DVO’s valuation report received by the Assessing Officer on 23.03.2005, the cost of construction was determined at Rs.36,94,66,000. Since the value determined by the DVO exceeded the value declared by the assessee in its books of account, the Assessing Officer granted an opportunity of hearing as stipulated u/s 142A(3) of the I.T.Act on 28.03.2005. In response, the assessee filed a reply on 29.03.2005 in which it had objected to the Assessing Officer’s proposal for adoption of DVO’s value in the assessment. The objections of the assessee was summarized by the A.O. in para 4 of the impugned order, which reads as follows:-
“4. In its reply, the assessee has objected the proposal for adoption of the departmental valuer’s figure in the assessment. The assessee’s grievances are summarised as under:-
(i) In the absence of a detailed valuation report, it is not possible to compare the cost estimated by the valuation officer with the actual expenses incurred.
ITA No.66-67/Coch/2017 & CO 16/C/2017. 4 M/s.Mfar Hotels & Resorts (P) Ltd. (ii) Sufficient time was not granted to the assessee for furnishing a detailed reply on the valuation report.
(iii) The Valuation Officer had not given an opportunity to the assessee of being heard before fixing a higher value in the valuation report.
Besides, it is argued that various mistakes and duplications have been noticed in the valuation report.”
4.2 However, the AO rejected the objections raised by the assessee and held that even if mistakes and duplication had crept-in in the DVO’s valuation report, the same needs to be correct by the DVO. According to the Assessing Officer, the value determined 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
ITA No.66-67/Coch/2017 & CO 16/C/2017. 5 M/s.Mfar Hotels & Resorts (P) Ltd. 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 and the value recorded in the books amounting to Rs.2,46,74,432/- (Rs.36,94,66,000/- - Rs.34,47,91,568/-) is assessed to tax u/s 69B of the Act.”
4.3 Aggrieved by the order of the assessment making addition u/s 69B of the I.T.Act, the assessee preferred appeal to the first appellate authority. The CIT(A) held that the A.O. is not justified in referring the issue to the Valuation Officer u/s 142A of the I.T.Act without rejecting the books of account of the assessee. Accordingly, the CIT(A) concluded that the addition made u/s 69B of the I.T.Act was not justified. The gist of the finding of the CIT(A) reads as follows:-
t) In sum, the AO is seen to have committed the following errors in due process and compliance with statutory mandates: (i) The reasons for the reference made u/s 142A and the consequent assessment made u/s 69B are manifestly unstated and unclear. No excess investment made outside the books of accounts justifying this action has been imputed, unearthed or determined by the AO Therefore, the reference made to the DVO u/s 142A is not upheld. (ii) The Appellant's detailed submissions pointing out the mistakes and omissions Valuation carried out by the DVO, based on a study of the abstract of the Valuation Report were ignored. Thus, the possibility of mistakes and errors in the DVO's Valuation Report had been ignored by the AO in the impugned assessment order with the mere statement
ITA No.66-67/Coch/2017 & CO 16/C/2017. 6 M/s.Mfar Hotels & Resorts (P) Ltd. that "these mistakes and duplications have to be got corrected by the Valuation Officer". (iii) The AO had not sought any clarification about the reason for the difference between the A VCE's valuation and the value as 'per the books of accounts of the Appellant (the reason that drove the reference made u/s 142A) during the impugned assessment proceedings, which would have helped resolve the matter at that time ahead of the passing of the impugned assessment order. The ratio in the case of Smt. Saraswati Devi Gehlot vs Income Tax Officer (supra) cited by the Appellant is held to be applicable. (iv) Section 142A(3) of the Act mandates that the Appellant should have been heard before taking into account the Valuation Report of the DVO, which was not done by the AO
All of the above actions amount to violation of the principles of fairness and natural justice and is held against the validity of the assessment made. (v) The AO has wrongly 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:
ITA No.66-67/Coch/2017 & CO 16/C/2017. 7 M/s.Mfar Hotels & Resorts (P) Ltd. (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 number 2 [at SI. Nos. 11.1.1 to 11.1.3 on percentage basis (6%, 15% and 100% respectively) of a mounts of Rs. 38.54 lakhs, Rs.85.83 lakhs and Rs. 123.87 lakhs respectively] against the head of account "SH Services", on page number 6 [at SI. No. 13.96 of an amount of Rs. 2.22 lakhs] against the head of account "Extra for Additional Storey's" and at page number 6 [at Sl. No. 13 .97 of an amount of Rs. 252.65 lakhs] against the head of account "Extra for Pile Foundation", resulting in all to a consolidated ad hoc adjustment totalling Rs. 503.16 crores. These additions, being estimates could well account for the variations observed by the AO. (iv) To have made other assumptions that are to be expected in an exercise dealing in estimates that aim at retrospective and retroactive validation, but which can be expected to create differences. The statistical variations of 6% to 7%, in themselves low, amongst the 3 values in disputed conference in the instant case can be further narrowed if detailed examination is carried out on the
ITA No.66-67/Coch/2017 & CO 16/C/2017. 8 M/s.Mfar Hotels & Resorts (P) Ltd. assumptions, rates, information and sources employed by the DVO. The various disputes on technical numbers and values raised by the Appellant in its Grounds of Appeal needs to be seen against this backdrop.
All of the other submissions on facts, judicial ratios and arguments made in its defence by the Appellant, not separately and explicitly discussed above, are accepted to the extents respectively applicable. 17. In sum, the Appeal is allowed. The AO is directed to delete the enhancement and assessment made of Rs. Rs. 2,46,74,432/-.
4.4 Aggrieved by the order of the CIT(A), the Revenue has filed the present appeal before the Tribunal raising the following grounds:-
“1. The order of the CIT(Appeals) opposed to the facts and circumstances of the case as well the legal principles enabling reference u/s.142A of the Income Tax Act.
The learned CIT(Appeals) is not correct to hold that the reference u/s.142A was defied in absence of rejection of the books of accounts, since section142A nowhere prescribes for rejection of books of accounts before proceeding to make reference under that section.
The learned CIT(Appeals)' decision to hold the addition on account of Rs.2,46,74,4321- made on account of understatement of investment in hotel building by the assessee is unsupported, unwarranted and uncalled for.
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
ITA No.66-67/Coch/2017 & CO 16/C/2017. 9 M/s.Mfar Hotels & Resorts (P) Ltd. valuation made by the CVO was after meeting all of the requirements for doing so.
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.
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.”
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 and after considering the reply dated 29.03.2005 of the assessee, the Assessing Officer determined u/s 69B amount of investment etc. not fully disclosed in the books of account in the books of account Rs.2,46,74,432 based the valuation and report of DVO.
(iv) The CIT(A) has deleted the same on the ground that (a) for reference u/s 142A, the books of account should be rejected, (b) the addition of Rs.2,46,74,432
ITA No.66-67/Coch/2017 & CO 16/C/2017. 10 M/s.Mfar Hotels & Resorts (P) Ltd. is unsupported, unwarranted and uncalled for and (c) DVO did not meet principles of natural justice.
(v) The order of the CIT(A) is not acceptable for the following reasons.
(a) The provisions of section 142A nowhere prescribe for rejection of books of account. As per section 142A(2), the A.O. may make a reference to the Valuation Officer, whether or not he is satisfied about the correctness or completeness of the accounts. In this case there is a huge difference of Rs.1,02,58,235 between books of account and value determined by approved valuer. Hence the addition of the A.O. be upheld.
(b) As may be seen from the DVO report dated 23.03.2005 and DVOs letters dated 13.12.2004 (questionnaire), 31.12.2004, 20.01.2005 to assessee, the DVO has called for required details such as structural drawings including foundation, recorded measurement for the concealed items, water supply, electrical installation, method of constructions, copy of the bills / vouchers for purchase and payments, statement of quantity of materials used in the work like steel, cement, brick, wood, metals, labour etc., item-wise Registered Valuer’s Report and after inspection has given a detailed report floor-wise for the 5 + attic floor after valuing extra items, services, additional items determining the value of Rs.36,94,66,000.
(c) To the CIT(A)-IV, DVO vide letter dated 06.09.2006 given reasons such as superior joinery and fittings, teak-work, very superior sanitary / piping fittings being 5 star hotels, external service connection cost for electrical, water and sewages, Jaisalmer flooring with Italian marble border, wooden flooring, size and wardrobe, polished granite table top, pile foundation and fire escape stairs for the objections raised by assessee vide letter dated 29.03.2005, 29.03.2004.
ITA No.66-67/Coch/2017 & CO 16/C/2017. 11 M/s.Mfar Hotels & Resorts (P) Ltd. (d) The DVO has given valid reasons for valuations point-wise / item-wise to the assessee’s objections. Therefore, after affording reasonable opportunity and on the basis of 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 23.03.20095 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.
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.T.Act. The learned AR submitted in this case the assessment year being 2006-2007, rejection of the books of account is a condition precedent prior to reference u/s 142A of the I.T.Act, in view of the judgment of
ITA No.66-67/Coch/2017 & CO 16/C/2017. 12 M/s.Mfar Hotels & Resorts (P) Ltd. the Hon’ble Apex Court in the case of Sargam Cinema v. CIT [(2010) 328 ITR 513 (SC)].
We have heard the rival submissions and perused the material on record. In the instant case, the assessee had completed construction of Five Star Hotel during the relevant previous year. The cost of construction as per the books of account of the assessee was Rs.34,47,91,568. To support the cost of construction in assessee’s books of account, the assessee had submitted a Valuation Report of an Approved Valuer and Chartered Engineer (AVCE). According to the learned AR, the AVCE’s report was as per the requirements of the lending institution. As per the Approved Valuer and Chartered Engineer’s report, the value of the building constructed by the assessee was Rs.33,45,33,333. The Assessing Officer was of the view that since there was difference in value determined by the Approved Valuer and the cost of investment as per the books of account of the assessee to determine the correct value of the investment, the matter needs to be referred to the DVO, Valuation Cell, u/s 142A of the I.T.Act. Accordingly, the matter was referred to the DVO on 06.12.2004. The DVO forwarded an extract of Valuation Report to the Assessing Officer on 23.03.2005, wherein the total cost of construction was Rs.36,94,66,000. Since the value determined by the DVO exceeded the value declared by the assessee in its books of account, an opportunity was given to the assessee u/s 142A(3) of the I.T.Act and the difference in the cost of construction
ITA No.66-67/Coch/2017 & CO 16/C/2017. 13 M/s.Mfar Hotels & Resorts (P) Ltd. estimated by the DVO from that of the investment recorded in the books of account of the assessee amounting to Rs.2,46,74,432 (36,94,66,000 – 34,47,91,568) was assessed to tax u/s 69B of the I.T.Act. The CIT(A) deleted the addition made u/s 69B of the I.T.Act. The CIT(A) held that the Assessing Officer has not found any infirmity in the books of account maintained by the assessee for a reference to the DVO u/s 142A of the I.T.Act. According to the CIT(A), the books of account ought to have been rejected before referring the case for valuation u/s 142A of the I.T.Act. The CIT(A) also held that the DVO and the Assessing Officer has not complied with the 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
ITA No.66-67/Coch/2017 & CO 16/C/2017. 14 M/s.Mfar Hotels & Resorts (P) Ltd. 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. Therefore an analysis of various judicial pronouncements, confirm that rejection of books of accounts is a pre-condition for referring to DVO for estimating the value of investments.
7.2 Section 142A has undergone substantial amendment vide Finance (No.2) Act, 2014 w.e.f 1.10.2014. As per the said amendment the reference to section 69, 69B etc .... had been removed and it has made as a general provision stating that Assessing Officer can refer to DVO to estimate the value of any asset, property or investment for the purpose of assessment. The sub section (2) of 142A states that the Assessing Officer may make a reference to DVO whether or not he is satisfied about correctness or completeness of the accounts of the assessee. Further the substituted provision requires the DVO to give an opportunity of being heard to the assessee and has to send a copy of the report to the assessee also. Moreover the Assessing Officer also has to give an opportunity of being heard to the assessee. It was contended by the learned AR that the amendment to section 142A vide Finance (No.2) Act, 2014 is only w.e.f 01.10.2014. According
ITA No.66-67/Coch/2017 & CO 16/C/2017. 15 M/s.Mfar Hotels & Resorts (P) Ltd. to the learned AR, since sub section (2) to section 142A is a new insertion it cannot be termed as having retrospective effect and the Act itself very clearly stated that the amended section is effective from 01.10.2014. Therefore this provision cannot be used for assessments relating to period prior to 2014. We notice that the ITAT Delhi Bench in the case of Westland Buildtech (P) Ltd. v. ITO Ward-18 (3), New Delhi (2016) 76 Taxman.com 142 (Delhi - Trib.) had occasion to consider the amendment to section 142A by the Finance Act, 2014. The finding of the Hon’ble Delhi Bench of the Tribunal 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".
ITA No.66-67/Coch/2017 & CO 16/C/2017. 16 M/s.Mfar Hotels & Resorts (P) Ltd. 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 142A of the I.T. Act with effect from 01.10.2014 will have application provided the assessment has not attained finality. The relevant finding of the Hon’ble Supreme Court (at page 131 of 393 ITR) in the case of Sunita Mansingha (supra) reads as follows:-
“………… In view of the fact that section 142A was inserted by the Finance (No.2) Act, 2004 (23 of 2004), with effect from November 15, 1972 and subsequently again substituted by the Finance Act, 2010 (14 of 2010), with effect from July 1, 2010 and the Finance (No.2) Act, 2014 (25 of 2014), with effect from October 1, 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.”
ITA No.66-67/Coch/2017 & CO 16/C/2017. 17 M/s.Mfar Hotels & Resorts (P) Ltd. 7.5 Admittedly, section 142A of the I.T.Act is a procedural provision and applies to pending assessments. In the instant case, the reference u/s 142A of the I.T.Act to the DVO was made on 06.12.2004 and the assessment was completed only vide order dated 30.03.2005. The assessment so completed vide order dated 30.03.2005 has not become final and conclusive because the appeal was filed by the Revenue and the same is being considered by the Tribunal. Therefore, going by the dictum laid down by the Hon’ble Supreme Court since the assessment has not attained finality, the amended provisions of section 142A of the I.T.Act (with effect from 01.10.2014) will have application to the facts of the instant case (since the above said provision is a procedural provision and not a substantive provision). The amended provisions, viz., section 142A(2) states that the Assessing Officer may make a reference to the DVO whether or not he is satisfied with the correctness and completeness of the accounts 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 (supra) 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
ITA No.66-67/Coch/2017 & CO 16/C/2017. 18 M/s.Mfar Hotels & Resorts (P) Ltd. 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 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.
In the result, the Revenue’s appeal is allowed for statistical purposes.
ITA No.66-67/Coch/2017 & CO 16/C/2017. 19 M/s.Mfar Hotels & Resorts (P) Ltd.
ITA No.66/Coch/2017
This appeal arises out of the order of the CIT(A) dated 29.12.2016. The CIT(A)’s order arises out of the order passed u/s 143 r.w.s. 147 of the I.T.Act. The assessment for assessment year 2002-2003 was reopened u/s 148 of the I.T.Act to bring to tax the excess depreciation allowed by the A.O. as well as make an addition u/s 69B based on the corrigendum issued by the Valuation Officer.
In this appeal the only challenge raised by the Revenue is with regard to the deletion made by the CIT(A) u/s 69B of the I.T.Act. The addition was made by the Assessing Officer u/s 143 r.w.s. 147 of the I.T.Act for the reason that subsequent to the assessment completed u/s 143(3) on 30.03.2005, the DVO vide his letter dated 23.09.2005 has given a corrigendum to the Valuation Report, wherein he had omitted to consider in the valuation report submitted earlier the cost of glazed tiles on dado walls in toilets measuring about 3,413 sqm. and costing Rs.11.95 lakhs. This addition was made u/s 69B of the I.T.Act, which is omitted in the earlier assessment order u/s 143(3) of the I.T.Act.
Since we have already held in ITA No.67/Coch/2017 that the issue of valuation is restored to the Assessing Officer, the addition of Rs.11.95 lakh is set aside and restored to the file of the Assessing Officer to consider the objections raised
ITA No.66-67/Coch/2017 & CO 16/C/2017. 20 M/s.Mfar Hotels & Resorts (P) Ltd. by the assessee as regards the valuation report submitted by the DVO. It is ordered accordingly.
CO No.16/Coch/2017 12. The cross objection filed by the assessee is only supporting the order of the CIT(A). Since we have already disposed of the appeal filed by the Revenue, the CO is dismissed as infructuous.
In the result, appeals filed by the Revenue are allowed for statistical purposes and the cross objection filed by the assessee is dismissed.
Order pronounced on this day of March, 2019.
---- Sd/- (Chandra Poojari) (George George K.) ACCOUNTANT MEMBER JUDICIAL MEMBER
Cochin ; Dated : March, 2019. Devdas*
Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. The CIT (A)-I, Kochi 4. The Pr.CIT-1 Kochi. 5. DR, ITAT, Cochin 6. Guard file.
BY ORDER,
(Asstt. Registrar) ITAT, Cochin
ITA No.66-67/Coch/2017 & CO 16/C/2017. 21 M/s.Mfar Hotels & Resorts (P) Ltd.
Per Chandra Poojari, AM : I have carefully perused learned Judicial Member’s 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.
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 behalf maintained by
the assessee, then only the question of referring to Valuation Officer for arriving
at correct value is to be followed. As rightly concluded by the learned First
Appellate Authority the assessee had got the books of accounts audited as per
the requirement of statute and also duly filed the tax audit report. The AO has
not identified any mistake / omission in any of these records and the only
reason put forward for reference is the difference between the value as per the
ITA No.66-67/Coch/2017 & CO 16/C/2017. 22 M/s.Mfar Hotels & Resorts (P) Ltd.
report of the approved valuer, who valued as per the requirements of lending
institutions and as recorded in the books of account.
Prior to 2014, in the absence of specific provision for reference to
Departmental Valuation Officer (DVO), for estimating the cost of construction of
a property/investment, the Assessing Officers (AO) were using the power of
summons u/s 131, survey u/s 133 and power of enquiry u/s 142(1). The use of
these powers by AO's for reference to DVO, were being questioned and the
various judicial forums and Hon'ble High Courts had taken conflicting views as
to the legitimacy of use of such powers. This had been put on rest based on the
judgment of Hon’ble Supreme Court in the case of Amiya Bala Paul v CIT 2003
(262 ITR 407), wherein the Apex Court has categorically concluded that there
no power to Assessing Officer for making reference to DVO for valuation of
investments for assessment purpose
Finance (No.2) Act, 2004 has inserted Section 142A as a new section,
with retrospective effect from 19th November 1972 to neutralise the decision of
Hon'ble Supreme Court in Amiya Bala Paul v CIT (supra). As per section 142A,
as introduced by Finance (No.2) Act, 2004 the Assessing Officer can refer to
Valuation Officer to make an estimate of value of any investment referred to in
Section 69 or Section 69B. Therefore, section 142A has given power to AO to
refer to the DVO for the purpose of estimating value of any investment for
making assessment subject to certain conditions.
ITA No.66-67/Coch/2017 & CO 16/C/2017. 23 M/s.Mfar Hotels & Resorts (P) Ltd.
Even after insertion of section 142A of the I.T.Act, 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 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 of the view that the computation of taxable income cannot be based on the books of accounts of the assessee he can reject the books of accounts and proceed to estimate the taxable income of the assessee. The question of making an estimate of the value of any investment referred to in section 69 of the Act would arise only when the Assessing Officer finds that the assessee has made investments which are not recorded in the books of accounts maintained by him. On a conjoint reading of the provisions of section 69 and section 142A of the Act, it appears that for the purpose of resorting to the provisions of the Act 142A of the Act, the Assessing Officer would first be required to record a satisfaction that the assessee had made investments which are not recorded in the books of accounts. As a necessary corollary, he would
ITA No.66-67/Coch/2017 & CO 16/C/2017. 24 M/s.Mfar Hotels & Resorts (P) Ltd.
then reject the books of account as not reflecting the correct position and then proceed to make assessment on the basis of estimation for which purpose he can resort to the provisions of section 142A of the Act and make a reference to the Valuation Officer for estimating the value of such investments. Thus on a plain reading of section 142A of the Act, it is apparent that the question of estimating the value of any investment would arise only when the books of accounts are not reliable. Accordingly the Assessing Officer would first be required to reject the books of accounts before making a reference to the valuation officer. The rejection of books of accounts should precede the reference to the Valuation Officer". 6. Section 142A of the I.T.Act was substituted vide Finance (No.2) Act,
2014 w.e.f 1.10.2014. As per the said substitution the reference to section 69,
69B etc .... had been removed and it has made as a general provision stating
that Assessing Officer can refer to DVO to estimate the value of any asset,
property or investment for the purpose of assessment. The sub section (2) of
142A of the I.T.Act states that the Assessing Officer may make a reference to
DVO whether or not he is satisfied about correctness or completeness of the
accounts of the assessee. The ITAT Delhi Bench in the case of Westland
Buildtech (P) Ltd. v. ITO Ward-18 (3), New Delhi (2016) 76 Taxman.com 142
(Delhi - Trib.) had occasion to consider the amendment to section 142A of the
I.T.Act by the Finance Act, 2014. The finding of the Hon’ble Delhi Bench of the
Tribunal 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).
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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".
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 in 328 ITR 513 is valid for all
assessment years prior to 01.10.2014, till the section is amended to neutralize
the decision of the Apex Court.
The Hon’ble High Court of Gujarat in the case of Principal Commissioner of
Income Tax v. Sanjay Hiralal Thakkar (Tax Appeal Nos.832 and 837 of 2016 -
judgment dated 21.12.2016) had held that the reference to DVO without
rejecting the books of account by the Assessing Officer would make the
assessment void. The division bench quashed the assessment proceedings which
are based on the report of DVO and clarified that AO cannot make a reference to
DVO under the provisions of the Act without rejecting the books of accounts. The
division bench noted that the Tribunal relied upon the decision of the Hon’ble
Supreme Court in the case of Sargam Cinema v. CIT and held that before making
a reference to DVO u/s 142A of the I.T.Act, if the Assessing Officer has not
rejected the books of account the reference u/s 142A of the I.T.Act itself was
bad in law and therefore DVO’s report cannot be the basis of addition. The
Hon’ble High Court, after taking notice of substitution of section 142A of the
I.T.Act with effect from 1.10.2014, held that “it is true that subsequently there is
an amendment to section 142A of the Act, however considering the provisions of
law prevailing at the relevant time under consideration, before making reference
to DVO the Assessing Officer was required to reject the books of accounts.”
ITA No.66-67/Coch/2017 & CO 16/C/2017. 26 M/s.Mfar Hotels & Resorts (P) Ltd.
The Agra Bench of the Tribunal in the case of Sanjeev Parashar Aligra v.
ITO [ITA No.230/Agra/2016 – order dated 07.12.2017), after referring to the
judgment of the Gujarat High Court in the case of Goodluck Automobiles (P)
Ltd. v. ACIT (supra) and the judgment of the Hon’ble Supreme Court in the case
of Sargam Cinema (supra), held that the reference made by the Assessing
Officer under section 142A of the I.T.Act without rejection of books of account is
invalid. It is further held by the Tribunal that “there is no merit in the
Department’s content that extent of section 142A is applicable retrospectively.
The section has specifically being made applicable by legislature itself w.e.f.
01.10.2014 and so it cannot be said to operate retrospectively”.
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 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
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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 that section 142A of the I.T.Act is a procedural section
and applies to the pending proceedings. In other words, the law on the date of
referring the case to the Valuation Officer u/s 142A of the I.T.Act has to be
applied. In this case, the Assessing Officer referred for valuation u/s 142A of the
I.T.Act on 06.12.2004. The law that is applicable as on 06.12.2004 is a provision
prior to its insertion of section 142A with effect from 01.10.2014. Therefore,
going by the judgment of the Hon’ble Apex Court in the case of Sargam Cinema
(supra), which was in force at the relevant time states that it is mandatory that
the books of account need to be rejected prior to referring the case for valuation
u/s 142A of the I.T.Act. Therefore, I am of the view that CIT(A) is justified in
deciding the case in favour of the assessee in both the appeals. Hence, both the
appeals of Revenue are dismissed.
CO No.16/Coch/2017 : Asst.Year 2002-2003 11. Since I have dismissed the Revenue’s appeal in ITA No.66/Coch/2017, the
Cross Objection filed by the assessee in CO No.16/Coch/2017 is in support of the
order of the CIT(A) is also dismissed, as infructuous. Sd/- (Chandra Poojari) Accountant Member Cochin : Date : 20th March, 2019
ITA No.66-67/Coch/2017 & CO 16/C/2017. 28 M/s.Mfar Hotels & Resorts (P) Ltd. Income Tax Appellate Tribunal, Cochin Bench Cochin
M/s.Mfar Hotels & Resorts (P) Ltd (earlier known as M/s.MFAR Hotels Limited) ITA No.66 & 67/Coch/2017 & CO No.16/Coch/2017 Asst. Year 2002-2003
Since there is a difference of opinion between the Members on the issue, the following question is referred to the Hon’ble President, Income Tax Appellate Tribunal, for a decision to be rendered by a Third Member.
“(1) Whether on the facts and circumstances of the case, whether rejection of books of account is condition precedent for reference u/s 142A of the I.T.Act?
(2) Whether section 142A of the I.T.Act substituted w.e.f. 01.10.2014 by Finance (No.2) Act, 2014 has application to the facts of the instant case?
Sd/- Sd/- (George George K) (Chandra Poojari) Judicial Member Accountant Member Dated : 20th March, 2019.
ITA No.66-67/Coch/2017 & CO 16/C/2017. 29 M/s.Mfar Hotels & Resorts (P) Ltd.
IN THE INCOME TAX APPELLATE TRIBUNAL THIRD MEMBER BENCH : COCHIN
BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT, AS THIRD MEMBER
ITA Nos.66 & 67/COCH/2017
Assessment year : 2002-03
The Asst. Commissioner of Income-tax, Vs. M/s Mfar Hotels & Resorts (P) Corporate Circle-1(2), Ltd., Kochi. (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., Vs. The Asst. Commissioner of (Earlier known as MFAR Hotels Ltd., Income-tax, N.H Bypass, Kundanoor Junction, Corporate Circle-1(2), Maradu P.O, Kochi-682 034. Kochi.
PAN – AABCM 9267 F 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 : 04.09.2019
ITA No.66-67/Coch/2017 & CO 16/C/2017. 30 M/s.Mfar Hotels & Resorts (P) Ltd.
O R D E R
PER N.V. VASUDEVAN, VICE PRESIDENT
The above appeals by the revenue and cross objection of the Assessee for AY 2002-03, came to be heard by the Division Bench. There was difference of opinion between the members constituting the division Bench. The Hon’ble President in exercise of his powers u/s.255(4) of the Income Tax Act, 1961 (Act) has nominated me as a third member. The members of the Division Bench have agreed on the following two questions as the questions which will project the difference of opinion between the members constituting the Division Bench. 1. Whether on the facts and circumstances of the case, whether rejection of books of account is condition precedent for reference u/s.142A of the I.T.Act? 2. Whether section 142A of the I.T.Act substituted w.e.f.1.10.2014 by the Finance (No.2) Act, 2014 has application to the facts of the instant case?
The facts and circumstances under which the aforesaid questions came to be referred for decision of a third member are that 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 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 the assessee had completed construction of hotel building during the previous year relevant to the concerned assessment year. The cost of construction as per the books of account of the assessee was Rs.34,47,9 1,568. In support of the cost of construction, the assessee had filed valuation report from the Approved Valuer and Chartered Engineer. In the said report submitted by the Approved Valuer and Chartered Engineer, the cost of investment was estimated at Rs.33,45,33,333. The Assessing Officer was of the view that since the approved valuer's report showed less of investment than the value admitted by the assessee in its books of account, it was necessary to determine the
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correct value of investment and for the above said purpose, the case was referred to the Departmental Valuation Officer (DVO) u/s 142A of the Act. As per the DVO's valuation report received by the Assessing Officer on 23.03.2005, the cost of construction was determined at Rs.36,94,66,000/.”
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).
The CIT(A) held that the A.O. was not justified in referring the issue to the Valuation Officer u/s 142A of the Act without rejecting the books of account of the assessee. Accordingly, the CIT(A) concluded that the addition made u/s 69B of the Act was not justified.
Against the orders of the CIT(A), the revenue filed appeals before the Tribunal. The Assessee filed CO in the appeal by the revenue against the order of CIT(A) in the appeal against the order of the AO u/s.143(3) dated 30.3.2015. This how the two appeals by the revenue against the orders of the CIT(A) came to be filed before the Tribunal.
The Division Bench heard the appeals as well as the CO of the Assessee. The learned JM in his order did not dispute the legal position that without rejecting books of accounts maintained by an Assessee evidencing incurring of
ITA No.66-67/Coch/2017 & CO 16/C/2017. 32 M/s.Mfar Hotels & Resorts (P) Ltd.
expenses for construction of the hotel building, no valid reference can be made to a DVO. He also held that any addition made on the basis of DVO’s report without a valid reference by the AO u/s.142A of the Act cannot be sustained. These findings are recorded by the learned JM in para 7.1 of his order. He however was of the view that Finance (No.2) Act, 2014 substituted the existing Sec.142A by inserting a new Sec.142A of the Act with effect from 1.10.2014. The purpose of the aforesaid substituted section 142A was to provide that the Assessing Officer may, for the purposes of assessment or reassessment, require the assistance of a Valuation Officer to estimate the value, including fair market value, of any asset, property or investment and submit the report to him. The Assessing Officer may make a reference to the Valuation Officer whether or not he is satisfied about the correctness or completeness of the accounts of the assessee. The learned JM also noticed that the ITAT Delhi Bench in the case of Westland Buildtech (P) Ltd. Vs. ITO (2016) 76 Taxmann.com 142(Delhi-Trib.) has held that the aforesaid substituted Sec.142A of the Act was prospective and that for the period prior to 1.10.2014, the law as declared by the Hon’ble Supreme Court in the case of Sargam Cinemas 328 ITR 513 (SC) would apply and therefore no valid reference can be made to a DVO and any addition made on the basis of DVO’s report without a valid reference by the AO u/s.142A of the Act cannot be sustained. After concluding as above, the learned JM in para 7.4 of his order however made a reference to a decision of the 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. “
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
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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 investment in construction of hotel building on the basis of objections to the DVO’s report by the Assessee should be looked into and therefore the issue of valuation was set aside to the AO for fresh consideration. The following were the relevant observations of the learned JM: “7.5 Admittedly, section 142A of the I.T.Act is a procedural provision and applies to pending assessments. In the instant case, the reference u/s 142A of the I.T.Act to the DVO was made on 06.12.2004 and the assessment was completed only vide order dated 30.03.2005. The assessment so completed vide order dated 30.03.2005 has not become final and conclusive because the appeal was filed by the Revenue and the same is being considered by the Tribunal. Therefore, going by the dictum laid down by the Hon'ble Supreme Court since the assessment has not attained finality, the amended provisions of section 142A of the I.T.Act (with effect from 01.10.2014) will have application to the facts of the instant case (since the above said provision is a procedural provision and not a substantive provision). The amended provisions, viz., section 142A(2) states that the Assessing Officer may make a reference to the DVO whether or not he is satisfied with the correctness and completeness of the accounts 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 (supra) 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. 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.
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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.
The learned AM however did not agree with the aforesaid observations of the learned JM and he took the following view:
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 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 IM, 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 JTR 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 that section 142A of the I.T.Act is a procedural section and applies to the pending proceedings. In other words, the law on the date of referring the case to the Valuation Officer u/s 142A of the I.T.Act has to be applied. In this case, the Assessing Officer referred for valuation u/s 142A of the I.T.Act on 06.12.2004. The law that is applicable as on 06.12.2004 is a provision prior to its insertion of section 142A with effect from 01.10.2014. Therefore, going by the judgment of the Hon'ble Apex Court in the case of Sargam Cinema (supra), which was in force at the relevant time states that it is mandatory that the books of account need to be rejected prior to referring the case for valuation u/s 142A of the I.T.Act. Therefore, I am of the view that CIT(A) is justified in deciding the case in favour of the assessee in both the appeals. Hence, both the appeals of Revenue are dismissed.
CO No.16/Coch/2017 Asst.Year 2002-2003
Since I have dismissed the Revenue's appeal in ITA No.66/Coch/2017, the Cross Objection filed by the assessee in CO No.16/Coch/2017 is in support of the order of the CIT(A) is also dismissed, as infructuous.”
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I have heard the submissions of the learned counsel for the Assessee and the learned DR and their submissions were identical to the view of the Learned AM and Learned JM respectively.
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.
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 enabling the Assessing Officers to make reference to Valuation Officer for the purposes of making an assessment or reassessment under the Act.
Sec.142A inserted by the Finance (No. 2) Act, 2004, w.r.e.f. 15-11-1972 and as amended by the Finance Act, 2010, w.e.f. 1-7-2010, read as under :
‘142A. Estimate by Valuation Officer in certain cases.—(1) For the purposes of making an assessment or reassessment under this Act, 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 section 69B or fair market value of any property referred to in sub-section (2) of section 56 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.
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(2) The Valuation Officer to whom a reference is made under sub-section (1) shall, for the purposes of dealing with such reference, have all the powers that he has under section 38A of the Wealth-tax Act, 1957 (27 of 1957). (3) 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 such assessment or reassessment: Provided that nothing contained in this section shall apply in respect of an assessment made on or before the 30th day of September, 2004, and where such assessment has become final and conclusive on or before that date, except in cases where a reassessment is required to be made in accordance with the provisions of section 153A. Explanation.—In this section, "Valuation Officer" has the same meaning as in clause (r) of section 2 of the Wealth-tax Act, 1957 (27 of 1957)."
In Circular No.5 of 2005 dated 15.7.2005 issued by the CBDT, the insertion of the aforesaid section has been explained thus:
“Clarificatory amendments regarding estimates by Valuation Officer in certain cases
The existing provisions of section 131 provide that the Assessing Officer shall have the same powers as are vested in a Court under the Code of Civil Procedure, 1908, when trying a suit. One such power which has been provided in clause (d) of sub-section (1) of section 131, is the power to issue commissions. Section 75 of CPC and order XXVI of the Schedule thereto lays down the power of "issuing commission", 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.
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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 section 69B is required to be made for the purposes of making any assessment or re-assessment, the Assessing Officer may require the Valuation Officer to make an estimate of the same and report to the Assessing Officer.
Sub-section (2) of the new section provides that the Valuation Officer to whom such a reference is made under sub-section (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.
Sub-section (3) of the new section provides that 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 such assessment or re-assessment.
It has been provided in the proviso to the new section that the provisions of the same shall not apply in respect of an assessment made on or before the 30th day of September, 2004 and where such assessment has become final and conclusive on or before that date, except in cases where a reassessment is required to be made in accordance with the provisions of section 153A.
This amendment takes effect retrospectively from 15th November, 1972.”
The Finance Act, 2010 inserted the words “or fair market value of any property referred to in sub-section (2) of section 56 is required to be made”. This amendment is insignificant as far as the present appeal is concerned.
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.
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By the Finance (No.2) Act, 2014 substituted the existing Sec.142A by inserting a new Sec.142A of the Act with effect from 1.10.2014, which reads thus:
“Estimation of value of assets by Valuation Officer. 142A. (1) The Assessing Officer may, for the purposes of assessment or reassessment, make a reference to a Valuation Officer to estimate the value, including fair market 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 months from the end of the month in which a reference is made under sub-section (1). (7) The Assessing Officer may, on receipt of the report from the Valuation Officer, and after giving the assessee an opportunity of being heard, take into account such report in making the assessment or reassessment. Explanation.—In this section, "Valuation Officer" has the same meaning as in clause (r) of section 2 of the Wealth-tax Act, 1957 (27 of 1957).”
In Circular No.1 of 2015 dated 21.1.2015 issued by the CBDT, the reasons for substitution of new Sec.142A in place of the earlier Sec.142A of the Act has been explained thus:
“43. Estimate of value of assets by Valuation Officer and time limit for completion of assessments where reference made
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43.1 The provisions contained in section 142A of the Income-tax Act, before its amendment by the Act, provided that the Assessing Officer may, for the purpose of making an assessment or reassessment, require the Valuation Officer to make an estimate of the value of any investment, any bullion, jewellery or fair market value of any property. On receipt of the report of the Valuation Officer, the Assessing Officer may after giving the assessee an opportunity of being heard take into account such report for the purposes of assessment or reassessment.
43.2 Section 142A of the Income-tax Act does not envisage rejection of books of account as a pre-condition for reference to the Valuation Officer for estimation of the value of any investment or property. Further, the said section 142A does not provide for any time limit for furnishing of the report by the Valuation Officer.
43.3 Accordingly, section 142A has been substituted so as to provide that the Assessing Officer may, for the purposes of assessment or reassessment, require the assistance of a Valuation Officer to estimate the value, including fair market value, of any asset, property or investment and submit the report to him. The Assessing Officer may make a reference to the Valuation Officer whether or not he is satisfied about the correctness or completeness of the accounts of the assessee. The Valuation Officer, shall, for the purpose of estimating the value of the asset, property or investment, have all the powers of section 38A of the Wealth-tax Act, 1957. The Valuation Officer is required to estimate the value of the asset, property or investment after 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 co- operate 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.
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43.6 Applicability:- These amendments take effect from 1st October, 2014.”
It can be seen from the aforesaid history of Sec.142A, that the original provisions were introduced for the purpose of enabling 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. The power was given to make a reference to the Valuation Officer purpose for the purposes of making an assessment or reassessment under this Act, (i) where an estimate of the value of any investment referred to in section 69 or section 69B or (ii) the value of any bullion, jewellery or other valuable article referred to in section 69A or section 69B or (iii) fair market value of any property referred to in sub-section (2) of section 56 is required to be made. Because the law was retrospective in its operation, the legislature wanted to safeguard concluded assessments being reopened and therefore by proviso to Sec.142A(3) of the Act, it was Provided that nothing contained in section 142A shall apply in respect of an assessment made on or before the 30th day of September, 2004, and where such assessment has become final and conclusive on or before that date.
There is unanimity of opinion between the Hon’ble Judicial Member and the Hon’ble Accountant Member regarding the power of the AO to make a reference to the DVO without a 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. This is clear from the observations of the Hon’ble Judicial member in paragraph 7.1 to 7.3 of his order. The Hon’ble Judicial Member however has placed reliance on the proviso to Sec.142A(3) of the Act as explained by the Hon’ble Supreme Court in the case of CIT Vs. Sunita Mansingha 393 ITR 121 (SC). The said proviso is applicable to the present case but that will only be limited to the power of the AO to make a reference to the DVO. The reference in the present case was by the AO to the DVO on 6.12.2004 and therefore the reference to the DVO was valid and not hit by the decision rendered by the Hon’ble Supreme Court in the case of Amiya Bala Paul (supra). By virtue of the aforesaid insertion of Sec.142A, the decision in the case of Amiya Bala Paul (Supra) rendered by the Hon’ble Supreme Court
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no longer 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.
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 were that during the search conducted at residence of the assessee, the Assessing Officer found that the assessee had half share in a firm and a farm house-cum-swimming pool was constructed by the firm. The Assessing Officer referred the properties, namely, residential house as well as farm house to the DVO for evaluating cost of construction and in turn the cost of the properties was determined at higher figure as against the cost declared by the firm as cost of construction. Accordingly, the Assessing Officer made addition of difference as income from undisclosed sources as investment in cost of construction of the properties. The Tribunal set aside the additions made by the Assessing Officer. On further appeal by the Revenue, the Rajasthan High Court held that it is well-settled that for the purpose of finding cost of construction, for the purpose of making assessment under the Act, no reference can be made to the DVO under section 55A and no addition can be made on the basis of report submitted by the DVO on such reference as per the law profounded by the Supreme Court in Smt. Amiya Bala Paul v. CIT 262 ITR 407(SC). On further appeal by the Revenue the Hon’ble Supreme Court held
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that 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. It is clear from the facts of the case before the Hon’ble Supreme Court that the Hon’ble Supreme Court was clearly referring to the provisions of Sec.142A of the Act inserted by the Finance (No.2) Act, 2004 w.r.e.f from 15.11.1972. In the present case the law applicable to these appeals are the provisions of Sec.142A of the Act as amended by the finance Act, 2004 and if that be so, the reference to the DVO is invalid as there was no defects in the books of accounts of the Assessee pointed out by the AO before making reference to DVO. The aforesaid observations 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 pre- condition 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 retrospective in operation nor were pending proceedings saved as was done when Sec.142A was inserted by the Finance (No.2) Act, 2004 w.r.e.f. from 15.11.1972. It cannot also be said that Sec.142A as inserted by the
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Finance Act, 2014 has retrospective effect. Therefore, I am of the view that the reference to DVO in the present case is invalid because as held by the Hon’ble Supreme Court in the case of Sargam Cinemas Vs. CIT 262 ITR 513 (SC) rejection of books of accounts is a pre-condition for making a reference to DVO and there was admittedly no such rejection of books of accounts. I also find that the value as declared by the Assessee in its books of accounts was much higher than the value as was estimated by the Registered Valuer in the report filed by the Assessee and therefore there was no occasion to draw any inference that investment in construction as recorded in the books of accounts was less calling for any addition u/s.69B of the Act.
I therefore concur with the view of the learned AM. The matter will now be placed before the Division Bench to give effect to the opinion of the majority.
Order pronounced in the open court on 04th September, 2019.
- /- Sd/- ( N.V. VASUDEVAN) Vice President Bangalore, Dated, the 04th September, 2019 / vms /
Copy to:
The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file
By order
Asst. Registrar, ITAT, Bangalore
ITA No.66-67/Coch/2017 & CO 16/C/2017. 44 M/s.Mfar Hotels & Resorts (P) Ltd. IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN
Before Shri Chandra Poojari, AM & Shri George George K, JM
ITA No.66/Coch/2017 : Asst.Year 2002-2003 ITA No.67/Coch/2017 : Asst.Year 2002-2003
The Asst.Commissioner of M/s.Mfar Hotels & Income-tax, Vs. Resorts (P) Limited Corporate Circle 1(2) (Earlier known as MFAR Kochi. Hotels Limited) N.H.Bypass, Kundanoor Junction, Maradu P.O. Kochi – 682 034. PAN : AABCM9267F. (Appellant) (Respondent) CO No.16/Coch/2017 : Asst.Year 2002-2003 (Arising out of ITA No.66/Coch/2017)
M/s.Mfar Hotels & Resorts The Asst.Commissioner of (P) Limited Vs. Income-tax, (Earlier known as MFAR Corporate Circle 1(2) Hotels Limited) Kochi. N.H.Bypass, Kundanoor Junction, Maradu P.O. Kochi – 682 034. (Cross Objector) (Respondent)
Revenue by : Smt.A.S.Bindhu, Sr.DR Assessee by : Sri. K.T.Mohanan
Date of Pronouncement : 20.09.2019 Date of Hearing : 20.09.2019
O R D E R
Per Chandra Poojari, AM :
ITA No.66-67/Coch/2017 & CO 16/C/2017. 45 M/s.Mfar Hotels & Resorts (P) Ltd. As there was a difference of opinion between the Members in respect of the aforesaid appeals and cross objection, the Members referred the following question for consideration by a Third Member.
“(1) Whether on the facts and circumstances of the case, whether rejection of books of account is condition precedent for reference u/s 142A of the I.T.Act?
(2) Whether section 142A of the I.T.Act substituted w.e.f. 01.10.2014 by Finance (No.2) Act, 2014 has application to the facts of the instant case?
The Hon’ble President has nominated Shri N.V.Vasudevan, Vice-President for a decision as Third Member on the point of difference between the members constituting the Division Bench. The Third Member vide his order dated 04th September, 2019, by agreeing with the view taken by the Accountant Member, decided the issue in favour of the assessee and against the Revenue.
In view of the majority opinion, the order of the CIT(A) is upheld and the appeal filed by the Revenue is dismissed. It is ordered accordingly.
Since we have dismissed the Revenue’s appeals, the cross objection filed by the assessee, which is in support of the order of the CIT(A), becomes infructuous and the same is dismissed as infructuous.
In the result, the appeals filed by the Revenue and the cross objection filed by the assessee are dismissed.
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Order pronounced on this 20th day of September, 2019.
Sd/- Sd/- (George George K) (Chandra Poojari) JUDICIAL MEMBER ACCOUNTANT MEMBER
Cochin ; Dated : 20th September, 2019. Devdas*
Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. The CIT (A)-I, Kochi 4. The Pr.CIT-1 Kochi. 5. DR, ITAT, Cochin 6. Guard file.
BY ORDER,
(Asstt. Registrar) ITAT, Cochin