THE COMMISSIONER OF IT - III vs. M/S PRIME PROTEINS LTD

This appeal preferred by the revenue under Section 260A of the Income Tax Act, 1961 (in short, “the Act) against the order dated 18.11.2004, Annexure A.3, passed by the Income Tax Appellate ITAT, Chandigarh Bench, Chandigarh in ITA No.970/CHANDI/1998 (for brevity, “the ITAT) for the assessment year 1995-96, was admitted on 28.4.2006 to consider the following substantial questions of law:- i) Whether on the facts and in the circumstances of the case, the ITAT was right in law in accepting the denial of the assessee after a substantial gap of three years without recognizing the fact that the main person of the assessee company has admitted the cash transactions pertaining to the assessee company under section 132(4) during the course of search operations? ii)Whether on the facts and in the circumstances of the case, the ITAT was right in law in accepting the plea of the assessee that Shri Ashok Kumar, the eldest son of the senior Director of the assessee company, was a third person ignoring the fact that entries found in the papers seized from his possession represent accounted as well as unaccounted entries of the assessee company? iii)Whether on the facts and in the circumstances of the case, the ITAT was right in law in accepting the plea of the assessee that all the construction expenses of the building of Vanaspati plant are as per the books of account and rejecting the valuation report of the DVO in the light of the fact that seized material reflected a lot of unaccounted transactions of the assessee company?

Briefly, the facts as narrated in the appeal may be noticed. The respondent is a Limited company. It filed its return of income for the assessment year 1995-96 on 30.11.1995 showing nil income subject to carry forward of unabsorbed depreciation to the extent of Rs.3,44,470/-. Thereafter, the assessee filed revised return on 26.3.1996 declaring loss to be carried forward at Rs.1,81,18,105/- and unabsorbed depreciation for the assessment year in question to be carried forward at Rs.7,39,957/-. The Assessing Officer framed the assessment vide order dated 27.3.1998, Annexure A.1 by making addition of Rs.14,31,902/- on account of unaccounted money as per peak unexplained investment outside the books of account and on account of difference in valuation of property as determined by the District Valuation Officer (DVO) at Rs.17,74,242/-. Feeling aggrieved, the assessee preferred an appeal before the Commissioner of Income tax (Appeals) [CIT(A)]. Vide order dated 2.6.1998, Annexure A-2, the appeal was allowed and the additions made by the Assessing Officer were deleted. Aggrieved by the said order, the revenue filed second appeal before the ITAT. Vide order dated 18.11.2004, Annexure A-3, the ITAT upheld the order of the CIT(A) and dismissed the appeal of the revenue. Hence this appeal by the revenue.

In order to adjudicate the controversy, the following two issues require consideration:- i) Whether addition of Rs.14,31,902/- on account of peak unexplained investment made by the Assessing Officer was justified? ii) Whether addition of Rs.17,74,242/- on account of valuation of construction of Vanaspati Plant on the basis of report of DVO was legal and valid?

The CIT(A) while deleting the addition of `14,31,902/- on account of peak unexplained investment had recorded the following observations:- “The arguments of the appellant have been taken into account and the evidence gathered by the AO and reasoning given in the assessment order has also been considered. I am of the opinion that as Shri Ashok Goyal was only an authorised signatory for the bank at Delhi and not an employee of the appellant company or a director,it was necessary that the appellant should have been allowed to cross examine him before the evidence gathered from his house and his statement recorded could be considered for making this addition. In the absence of such cross examination, the law of natural justice has not been adhered to and such an evidence gathered cannot be made the basis for making this addition. On the other hand, the examination of the material gathered also indicates that no addition was actually called for. This is based on the close study of the accounts seized which apparently related to M/s PPL which could be the abbreviated name of the appellant. It was observed that each entry shown in these accounts has been counter balanced by either receipt or issue of cheques; for example; if the cheque had been received from a particular party then the cash had been shown to have been advanced to the concerned party. On the other hand wherever the cheques were issued to a particular party corresponding amount of cash had been recovered from the said party and these transactions had occurred almost simultaneously. The allegation of the AO was firstly that purchases had, in this manner, been inflated by the appellant as it had shown issue of the cheques for purchase but had received the cash from the said parties and no goods had been received. On the other hand, it must be understood that once purchases had been shown by the appellant the stock purchased had entered its stock register and thereafter either corresponding sales have been shown or the amount figured in the closing stock. Therefore if there would be any addition on account of bogus purchases, there would have to be a corresponding reduction in the sales/closing stock shown by the appellant. The net

The order of CIT(A) was upheld by the ITAT. Learned counsel for the revenue, however, sought to challenge the aforesaid finding but was unable to make any meaningful effort except to submit that the CIT(A) as well as the ITAT had erred in deleting the same. A perusal of the aforesaid findings clearly shows that the amounts which were added by the Assessing Officer were infact counter balanced by either receipts or issue of cheques. Further, the Assessing Officer during appellate proceedings was unable to point out any instance where it could lead to the conclusion that there had been suppression of income in the form of bogus purchases or suppressed sales. In other words, the genuineness of the parties was not in dispute and once that was so, no error could be found in the findings recorded by the CIT(A) and the ITAT. Accordingly, Question Nos.(i) & (ii) are answered against the revenue.

Taking up the issue of valuation of the building constructed for Vanaspati plant, it may be noticed that it is trite law that where an assessee is maintaining books of account and unless genuineness of books of account is doubted, the addition on the basis of the report of the DVO cannot be made. Rajasthan High Court delving into similar issue in Commissioner of Income Tax v. Pratap Singh Amro Singh Rajender Singh (1993) 200 ITR 788 had held as under:- “We have considered the matter. In respect of the investment which is made in the property, there can be only two methods to find out the correct position (i) when proper books of account are maintained, and (ii) valuation report. If the assessee has maintained proper books of account and all details are mentioned in such books of account, which are duly supported by vouchers and no defects are pointed out and the books are not rejected, the figures shown therein have to be followed. The valuation report can be taken into consideration only when the books of account are not reliable or are not supported by proper vouchers or the income tax Officer is of the opinion that no reliance can be placed on such books of account. It is true that the Income Tax Officer has no option but to rely on the valuation report, which is a document prepared by an expert and is admissible, but there must be a finding by the Income- tax officer that the books of account maintained by the assessee are defective or are not reliable. There may be a marginal difference in the actual investment and the report of the Valuation Officer for a number of reasons as the valuation report is prepared on the basis of norms prescribed by the CPWD for the construction of buildings and the difference may be with regard to quality of the materials, etc. The Income Tax Officer could have examined the matter in detail with regard to the books of account in order to say that the books are not reliable. Simply because the valuation report is of a higher amount, the books cannot be said to be unreliable unless, by a deeper probe, any defect is found in the maintenance of the books of account. The Tribunal was, therefore, justified in deleting the addition of Rs.55,780/-.”

The Hon'ble Apex Court in Sargam Cinema v. Commissioner of Income Tax, (2010) 328 ITR 513 laid down as under:- “4. 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.”

Adverting to the findings of the Tribunal, it was recorded that there was no undervaluation by the assessee. Further, the books of account of the assessee had not been rejected. It was only by reference to the DVO that the addition was sought to be sustained. The relevant findings of the Tribunal are reproduced herein below:- “29. We have heard both the parties and carefully gone through the material available on record and the decisions cited were duly considered at the time of hearing. In the instant case,it is an admitted position that the assessee was maintaining proper books of account/record of cost of construction of building in question. It is also not in dispute that the Assessing Officer has not rejected the books of account maintained by the assessee. In other words, the Assessing Officer had not pointed out any discrepancy in the books of account maintained by the assessee. It was claimed that all the expenses incurred by the assessee were duly supported by bills and vouchers. In those circumstances the Assessing Officer was not justified in referring the matter to the valuation cell particularly when he had failed to point out any material defect in the books of account maintained by the assessee.” Learned counsel for the revenue was unable to demonstrate that there existed some defect or fault in the findings recorded by the Tribunal. Question No. (iii) is also answered against the revenue.

The appeal is, accordingly, dismissed.