C I T vs. SHIVALIK LOHA MILLS LTD.

This order shall dispose of ITA Nos.80 and 81 of 2008 as according to the learned counsel for the revenue, identical question of law and facts are involved in both the cases. However, the facts are being extracted from ITA No.80 of 2008. 2. ITA No.80 of 2008 has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 31.5.2006, Annexure A.III passed by the Income Tax Appellate Tribunal, Chandigarh Bench 'A', Chandigarh in ITA No.377/CHANDI/2004 and ITA No.716/CHANDI/2004 for the assessment year 1993-94, claiming following substantial question of law:- “Whether on the facts and in law, the Hon'ble Income Tax Appellate Tribunal was justified in treating the reopening of assessment on the basis of report from District Valuation Officer under Section 147 as invalid?”

Briefly the facts as narrated in the appeal may be noticed. The assessee is a company. It filed its return of income for the assessment year 1993-94 on 3.12.1993 declaring net loss of `66,826/- which was processed under Section 143(1)(a) of the Act on 25.3.1994. Thereafter, the case was reopened by issue of notice under Section 148 of the Act as the assessee had made undisclosed investment in the construction of property named 'Kismat Complex'. As per report of District Valuation Officer (DVO), the cost of construction during the year in question comes to ` 20,09,199/- as against the cost of construction shown by the assessee in the books of accounts at `15,33,816/-. Thus, there was a difference of ` 4,75,383/- in the cost of construction shown by the assessee in the books of account. Assessment was framed under Section 143(3) read with Section 147 of the Act on 28.3.2002, Annexure A.1 at `14,60,111/- after making additions/disallowances amounting to ` 15,26,937/- including addition of `4,75,383/- on account of unexplained cost of construction. Aggrieved by the order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated 19.1.2004, Annexure A.II, the CIT(A) deleted the addition made on the basis of DVO's report on account of unexplained cost of construction. He, however, confirmed the action of the Assessing Officer in reopening of assessment proceedings as valid and dismissed the appeal of the assessee on this ground. The revenue filed appeal before the Tribunal against the order of CIT(A) on the issue of deletion of addition amounting to ` 4,75,383/- made on account of unexplained cost of construction on 'Kismat' Complex whereas the assessee filed appeal before the Tribunal on the issue of reopening of assessment under Sections 147/148 of the Act. Vide order dated 31.5.2006, Annexure A.III, the Tribunal treated the reopening of assessment on the basis of DVO's report as invalid and dismissed the appeal of the revenue regarding additions made by the Assessing Officer with the view that those additions were made by the Assessing officer only after reopening which had been held to be invalid. The appeal filed by the assessee was allowed. Aggrieved thereby, the revenue has filed the present appeals.

We have heard learned counsel for the revenue and perused the record.

Learned counsel for the revenue submitted that the Tribunal was in error in setting aside the re-assessment proceedings by holding that notice under Section 147/148 of the Act was invalid. The Assessing Officer had issued the notice for re-assessment on the ground that the income had escaped assessment as the DVO's report clearly showed that there was investment which was unexplained as the same was in excess of cost of construction shown by the assessee in his books of account. It was urged that as per the report of the DVO, the cost of construction was ` 20,09,199/- whereas the amount shown in the books of account was ` 15,33,816/-. The difference of `4,75,383/- was to be assessed as unexplained investment.

After hearing learned counsel for the revenue, we do not find any merit in these appeals.

The Tribunal while holding that the reassessment proceedings were not voluntarily initiated, recorded as under:- “5. We have considered the rival submissions and carefully gone through the material available on record. In the present case it is not in dispute that the Assessing Officer reopened the assessment on the basis of report of the V.O. The reasons recorded by the Assessing Officer for issuing the notice under Section 148 were following: 'The Assistant Director of Income Tax (Inv.-I) Ludhiana vide his letter No.ADIT (Inv.-I)/Ludhiana/94-95/1560 dated 4.4.95 has passed on the information to its office that the above named company has constructed commercial property No.101 known as 'Kismat Complex' at GT Road, Miller Ganj, Ludhiana and the cost of construction has been estimated at ` 60,71,138/- upto the Financial year 1994-95. The company has shown cost of construction in its books at ` 15,33,816/- as against the total cost estimated at ` 20,09,199 for the Assessment year 1993-94. The assessment for the Assessment year 1993-94 has been made under section 143(1) on total of ` 66,826/- vide order dated 25.3. 94. I have, therefore, reason to believe that income to the extent of `4,75,383/- chargeable to tax has escaped assessment for the Assessment year 1993-94. Issue notice under Section 148 of IT Act, 1961'. From the above, it would be clear that the sole basis for reopening the assessment by the Assessing officer was the cost of construction estimated on the basis of the DVO's report. It is also not in dispute that the Assessing Officer processed the return under Section 143(1) (a) of IT Act.

1 Hon'ble Jurisdictional High Court in the case of Grover Nursing Home V.ITO and others (supra) has held as under:- 'That even though the report of the DVO cannot be made the sole basis for initiating action under section 147 read with Section 148, it can certainly be considered with other facts for forming the belief that the income of the assessee had escaped assessment.' In the present case as we have already mentioned in the former part of this order that the sole basis with the Assessing officer for reopening assessment was, the DVO's report. Only on the basis of report of the DVO, the Assessing Officer opined that he had reason to believe that the income of the assessee escaped assessment. It is well settled that the DVO's report at the best could be a fair opinion of an expert, however, it cannot be considered as conclusive evidence to establish the actual cost of construction. Therefore, solely on the basis of DVO's report one cannot come to the conclusion that the income had escaped assessment until and unless any other related evidence is brought on record to substantiate that the assessee incurred more expenses on account of cost of construction than those which had been declared/disclosed by him. However, in the present case apart from the report of the DVO nothing has been brought on record to substantiate that the assessee invested more money than the investment declared by it.

2 Similarly the Hon'ble Jurisdictional High Court in the case of CIT v. Smt.Usha Mathur (2001) 252 ITR 179 had held - 'that when the assessment was made under section 143(1)(a), reopening on the basis of valuation cell's report could not be made and no addition could have been made which amounts to review of the earlier order'.

3 Hon'ble Madhya Pradesh High Court on a similar issue in the case of CIT v. S.R. Construction, (2002) 257 ITR 503 has held as under:- 'that the Assessing officer had considered the valuation put by the assessee and accepted it on the basis of the account books and other relevant document produced by the assessee. The Assessing Officer had found no defect. Therefore, the action taken by the Assessing Officer for re-assessment on the basis of subsequent material collected by the V.O. was not justified. Though the Assessing Officer raised the objection that certain construction was suppressed, no categorical finding was recorded in the order of assessment in this regard as to how much construction was made by the assessee and how much by the purchaser. Therefore, in the absence of such finding, the additions made on reopening of assessment by the Assessing Officer were not justified.' In the present case also the basis for reopening assessment by the Assessing Officer was only the report of the V.O. which could not be considered as conclusive evidence to reopen the assessment. In the present case the Assessing Officer had not given any finding while issuing notice under section 148 of IT Act that the books of account maintained by the assessee were not reliable or supported by proper vouchers and that no reliance could be placed on such books of account. Therefore, simply relying on the valuation report of the DVO, the reopening cannot be held to be valid.”

Further, it was not disputed by the counsel for the revenue that the books of account produced by the assessee were never rejected. The Apex Court in Sargam Cinema v. Commissioner of Income Tax, (2010) 328 ITR 513 held that the assessing authority could not have referred the matter to the DVO when there was no rejection of books of account maintained by the assessee. It was observed as under:- “In the present case, we find that the Tribunal decided the matter rightly in favour of the assessee inasmuch as the Tribunal came to the conclusion that the assessing authority could not have referred the matter to the Departmental Valuation Officer (DVO) without the books of account being rejected. In the present case, a categorical finding is recorded by the Tribunal that the books were never rejected. This aspect has not been considered by the High Court. In the circumstances, reliance placed on the report of the DVO was misconceived.”

In view of the above, the substantial question of law is answered against the revenue and in favour of the assessee. Accordingly, both the appeals are dismissed. (Ajay Kumar Mittal) Judge October 11, 2012 (Gurmeet Singh Sandhawalia) 'gs' Judge