THE COMMISSIONER OF INCOME TAX IV vs. LEGEND ESTATES PVT. LTD.

[ 348s 1 IN THE HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD THURSDAY, THE TWENry SIXTH DAY OF MARCH TWO THOUSAND AND TWENTY SIX PRESENT THE HON'BLE SRI JUSTICE P.SAM KOSHY AND THE HON'BLE SRI JUSTICE SUDDALA CHALAPATHI RAO lTTA.No. 47 OF 2013 Appeal under Section 260-4 of the lnmme-tax Act against the order dated 30-03-2012 in ITA No.1542lHl201O for Assessmenl year 2007-08 on the file of the lncome Tax Appellate Tribunal, Hyderabad, Bench 'A', Hyderabad. Between: The Commissioner of lncome Tax lV, Hyderabad AND ...AppellanURespondent Floor, Legend Apartments, Ra, ...RespondenUAppellant Counsel for the Appellant: Sri K. Sudhakar Reddy (Sr SC FOR INCOME TAX) Counsel for the Respondent: Smt K. Pabhabathi, counsel representing Sri K. Vasanth Kumar The Court delivered the following: JUDGMENT Legend Estates Pvt. Ltd., 6-3-1238, 6th Bhavan Road, Somajiguda, Hyderabad.

7 ( 1 o IN THE HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD THE HON'BLE SRI JUSTICE P.SAI4: KOSI{Y AND THE HON'BLE SRI JUSTICE SUDDALA CHALAPATHI RAO ITTA.No.47 of 2O13 Dt.z6 .03.2026 Between: The Commissioner of Income Tax-lV .... Appellant and kgend Estates Pvt. Ltd. ...Respondent JIIDGMENT: (Per the Hon'ble Srl .ftrsfice Sudd(,.la Chd.ldlrdhl R(ro) The instant appeal has been hled by the alrpellant/revenue assailing the order passed by the Incorne Tax Appellate Tribunal, Bench A', Hyderabad(for short 'ITAT') in ITA.No.1542/H/2OLO, dt.30.03.2012, for the assessment year 2OO7-O8. 2. The brief facts of the case are that the assessee is a company engaged in the business of building construction and development. For the assessment year 2OO7-O8, the assessee filed its return of income declaring a total income of F|s.1,78,23,580/-.

2 Further, a survey was conducted by the Income Tax authorities under Section 133A of the Income Tax Act, 1961 (for short 'the Act) on 23.08.2006, and in the said survey, it was revealed that the assessee had not maintained a day-to-day stock register, the cash payments made towards purchase of construction materials as being not verihable, and the particulars relating to labour charges were not properly mentioned, and however' ttre assessee had offered income @ 8oh of tJ:e turnover in the said return' Consequent thereto, the Assessing Offrcer, without recording any satisfaction, relerred the matter to the District Valuation Officer (DVO) under Section l42A of the Act for valuation of the properties so as to ascertain the proper value and the DVO' in his report, estimated the total cost of construction of 22 ptopetties at Rs.55,83,06,733 l-. 3. Further, a copy of the valuation report was furnished to the assessee alld :in explanation was sought as to, why the valuation as per the DVO report should not be adopted for the purpose of assessment, and after considering the objections submitted by the assessee, the Assessing Officer completed the assessment under Section 1a3(3) of the Act and made an addition under Section 69

3 of the Act treating the difference in valuation as unexplained income by apportioning the said difference arnong the assessment years 20O.1-{5 to 2OO8-O9, and for the assessmr:nt year 2OO748 the amount was determined at Rs.6,51,O1,056/-. 4. Aggrieved by the assessment order passed by the Assessing Oflicer, the assessee preferred an zippeal before the Commissioner of Income Tax (Appeals) (for short, "CIT(A)") ,nd by order, dt. 13.10.2010, the CIT(A), dismissed the appeal and confirmed tl:e assessment order passed b_v- the Assessing Oflicer. Further aggrieved, the assessee filed an appeal before th,: learned ITAT in ITA No.1542/H/2O|O and the learned ITAT, alter perusing the material available on record ancl considering the submissions made by both parties, allou'cd thc'appeal bv orcer dt.3o.03.2012 and set aside the addition made r-rnder Section 59 of the Income Tax Act by the Assessing Officcr as l)cr the DVO report 5. The said order passed br. thr: learned ITAT is challenged in the instant appeal by the Revcnuc. u'hich is adnritted to consider the following substantial question s o[ lau,: Whether on the facts and in the circumstances of tJ:e case, the Tribunal is correct in las'in holding tha: the reference by 1 ! I i I II t t

4 6 the assessing officer to the District Valuation OIIicer seeking valuation of the properties as bad and unwarranted and the said report .".r.roi be relied upon in the assessment proceeding? Heard Sri Sudhakar Reddy, learned Senior Standing Counsel for appellant-Revenue ald Smt K.Pabhabathi, learned counsel representing M.K.Vasanth Kumar, learned counsel for respondent-assessee 7. The learned Senior Standing Counsel Sri K.Sudhakar Reddy, contended that the assessee had not properly maintained its books of accounts, such as, the cost of material like sand, steel and other relevant merterials, rvhich were not properly accounted for and also the payments made towards labour contracts, which were significantly undervalued, and in view of these discrepancies, the Assessing Officer invoked the provisions of Section l42A of tl:,e Act, and referred the matter to the DVO for valuation of the cost of construction relating to 22 ptoperties, who had conducted a detailed inspection and upon enquiry, submitted a report on t4.o9.2009. 8. It is further contended by the learned Senior Standing Counsel that as per the report of the DVO, the cost of construction

-! 5 of 22 properties was estimated at Rs.55,83,05,733 l-, whereas the assessee had shown only Rs.38,58,53,6621- and the difference of two amounts was Rs. 17,24,53,L3I 1-' which wasr apportioned for five assessment years and the unexplair: ed expenditure attributable to the assessment yeaJ- 2OO7 -O8 u'as calculated at Rs.6,51,01,056/-. 9. karned Senior Standing Counsel would further contend that the Assessing officer was empowered under Section l42A of the Act to refer the same for matter to the DVO, where the expenditure towards construction appeared to be undervalued' Further, it is contended that the said valuatior report was duly served upon tJre assessee and after considering tJre objections frled by the assessee, the differential tax was frnalized, but, however, as the construction activities relating to th,e 22 prorrerties was spread over for live years, the differential amount was spread over proportionately among those hve years and the addition of Rs.6,51,01,056/-was made for the assessment "'ear 2007-08' As such, ttre Assessing Officer followed the due procedure contemplated under the provisions of the Act imd there was no violation of statutory rights or principles of natural justice.

6 10. Learned senior standing counsel furtrrer iontended trrat the learned ITAT grossly erred in hotding that in th" "b"err"" of rejection of books of accounts under Section 145 of the Act, reference to DVo was not justirred and is perverse. The finding of the learned ITAT that the assessee has regularly maintained books of accounts and supporting records relating to materials such as cement, steel, bricks, sand, wood, sanitar5z wares, labour cost, etc. is untenable and that as the books reflected undervaluation of expenditure, the reference to the DVO is justifred, and therefore the learned ITAT's conclusion that no addition could be made without rejecting the books of accounts under Section 145 of the Act, was unsustainable. 11. In support of the aforesaid submissions, learned Standing Counsel has placed reliance on the decision of a Division Bench of this Court in Bharathi Cement Corporation pfi. LTd. a. The Commissioner of Income Tax-IIt, rvherein it was held that tl.e assessing authority is empowered uncler Section l42A to seek a valuation report before taking a linal decision regarding reassessment and valuation of investments. The Court observed 1 WP.No.626O ot 2012, dt.2O.06.2Ot2

f ) 7 that once a frnal decision is taken, the assessee is. at liberty to avail appropriate legal remedies, and accordingll" dismissed the appeal of the assessee as premature ' The relevant portion of the judgment is extracted hereunder: "Further fhis is a ca.se ulere th'e assessin'7 authoity has merelg issued a notice earlier to the' petitioner calling for certain informatton regarding ualuttion of the plant, but subsequentlg referred the matter to the fourth respondent i.nluatton officer in order to take a decision in th-e matter. The third. respondent is get to take a decision and p@ss a final order regarding re- assessment and about th'e ualuation of the inuestment in question and te inaA rest his decision on uarious factors arLd hauing regard' to the language of Section 142A(1) it can be said thnt le has that poruer' Once a decision is taken bg the third' respondent in this matter and if it goes against the petitioner, it is alwags open for tle petttioner to tpork out its remedies Thus the u-trit petition can be said to be premature" ' 12. t earned Standing Counsel further piace<l reliance on the decisionoftheHon,bleHighCourtofPun.lab&Haryalaat Chandigarh in Dr.Roghuaendra Singh u' (-'ommtsstoner oJ ,i5

= 8 Income Tasc, centrar c,rrcre, Lud.hiano,2 wherein it was herd that as the variance between the declared cost and the valuation exceeded the permissible marginal limit of l5o/o, the Tribunal was justified in sustaining addition on account of unexplained rnvestment in the construction of the hospital building. The relevant portion of the judgment is extracted hereunder: i3. Drawing a clue from the aforementioned judgments, the learned Standing Counsel contended that the authorities have rightly invoked Section L42A of the Act and after obtaining the valuation report from the DVO, and after giving an opportunit5r to the assessee to submit objections and by considering the said objections, made the addition under Section 69 of the Act, which is proper, tenable and therefore, the findings arrived by the learned ITAT in alowing the appear of the assessee are erroneous and the impugned order is liable to be set aside. 14. Per contra, learned counsel for the respondent/assessee contended that the Assessing Officer had not rejected the books of accounts under Section 145 of the Act, and once the books of accounts were accepted and no defects rvere pointed out in the 2 ITA.No.806 of 2OtO, dt.t}.LO.2OtS.?

'r+ 9 bills, merely on the presumption that the cost of construction disclosed by the assessee is low, is not justifrr:d, as such, no addition can be made on the basis of DVO's report without rejection of the books of accounts, ald as such, reference under Section l42A of the Act for valuation was beyoncl the jurisdiction of the assessing authority and the said report czrnnot be a basis for arriving at a conclusion for addition under Section 69 of the Act. 15. [rarned counsel for the respondent-assess€ e has supported the frndings of the learned ITAT and submitted that the power under Sectiorr l42A of the Act cah be exerciserl only when the Assessing Officer frnds. it necessarJr to determine the value of the investment and such requirement must arisr: from material available on record indicating that the estimate shown by' the assessee is incorrect or unreliable, as the term 'require' used in Section l42A of the Act is not superfluous but signifies a definite meaning whereby some prel.iminary formation of mind b-v- the assessing officer is necessary which require him to make a reference to the DVO under section 142A. Leareed counsel also placed reliance on the CBDT Circular issuei by the Board

10 Circular, whereby the word 'expenditure' as well as section.69 of the Act, were omitted from the ambit of Section l42A of the Act. 16. Learned counsel for the respondent/assessee has placed reliance on the judgment of a Division Bench of Hon'ble High Court of Delhi in CIT a. Aar Pee Apartment P. Ltds wherein tl.e principle laid down by the Honble Supreme Court in Amiga Bala Paul as Commlssioner Of Incorne Tox" Shltlong+, was followed and observed that the power under Section l42A permits the Assessing Officer to obtain a valuation report only for determining the value of investments or asSets referred to in Sections 69, 69A, or 698 of tJ,.e Act, and does not extend to estimating unexplained expenditure under Section 69C. the relevar-rt portion of the judgment is under: "9. It is clear from the reading of sub-s (1) of this proui-sion that it enables the AO to get the ualuation done from tle Valuation Offier in certain speciftc tgpes of cases. Tltese ttould be the cases uh.erein an estimate of the ualue of ong inuestment referred to in s. 69 or 698 or the ualue of ong bullion, jewellery or otler uoluable article refened to in s. 69A or 698 is reqired. There is no mention about s- 69C of the Act. As is cLear from tLe aboue, s.69A deaLs utith unexplained 3 (2009) 319 ITR 276 (Delhi) 4 (2OO3l ra2 CTR (SC) 4E9

a 11 moneA. Sec. 698 likewise relates to tLE amount of inuestm-ent, etc., nnt fullg disclosed tLe booiks of account. Ott t?e other hand, tte proui.sion relates to unexplained expenditure in s.69C. 16. From th.e reading of sub-s.(l) of s.142A, it is clear thot the Legislature rekrred to th.e prouision s of s.69, 69A and 698 but specificallg excluded s.69C. The pinciple of causus omissus becomes applicable in a situation like thi.s. What is not included bg thp Legislohtre and rather specificallg excluded, cannot be inarporated by the Court tlvough tte process of interpretation. The onlg remedA is to amend the prouisions. It is rtot the function of the Court to legi.slate or to plug tLe loopLnles in lau. 17. In the present ca,se, except the report o.," the DVO on uthich the AO relied upon, there utas nothing on record to suggest that tLrcre uras anA other euid-ene to Cisbelbue the expenditure shown bg fhe assessee. In fact, during t?te course of arguments, leorned counsel for tle crssessee produced the assessmenl order uhich clearlg demonstra:es that the expenditure shoutn by the assessee from tle time,, uhen it utas an ongoing project, tuos examined and accepted by the AO". 17. [,earned counsel for the respondent/assess€re further placed reliarce on the judgment of the Hon'ble Supreme Court in Sargam Cinema u. CITs, wherein it was held thet the Assessing Authority cannot refer the matter to the Valuatiorr Officer vr,ithout 5 20 IO TAXPUB(DT) 0893 SC '!al

:I 72 the Books of account being first rejected. The Hopble Supreme Court observed as under: 'In tle present use, ue find that the Tribunal d,ecid_ed the matter rightlg in fauour o;[ tfte assess ee inasmuch as the Tribunal cam.e to th.e conclusion that the assessing authoity couLd not Lraue refered the matter to tlrc Departmental Valuation Offier(DVO) utthout the books of account being rejected. In the present case, a categoical finding is recorded bg the Tribunal that tlle books tuere neuer rejected. This aspect has not been consid_ered. bg the High Court. In tLe circum.stanes, reliance ploced. on the report of tLLe DVO uas misconceiued". 18. By drawing clue from the aforesaid judgments, learned counsel for the assessee contended that basic requirement for referring Section r42A of Act is that Assessing of'cer must l-rrst examine the books of accounts and then alter recording categorical finding and if the books of accounts are reiected, thereafter, a reference can be made to the Valtration Officer for determining the cost of construction and since this procedure was not followed in the instant case, the learned ITAT q,as justified in allowing the appeal of the assessee and thus, contended that the appea,l is devoid of merits and is liable to be dismissed.

13 19. We luue gioen eantest conslderatlon to. tlre submisston oJ tlu learned. counsel dlrpedrtng on elther side and perrrsed. the record. 20. The main question that falls for consideration is, whether in the absence of rejection of books of accounts, the Assessing Offrcer was justified in referring the properties of the assessee to the DVo for ascertaining the varuation of the properties under Section r42A of the Act and whether the findinlls arrived by the learned ITAT, are proper and legally sustainable. 2L For better understanding of the case, Section l42A of the Act is extracted hereunder: "142A. - Estimate bg Valuation Officer in certain cases. frtserted bg Act 23 of 2004, Section 34 (tu.r.e.f. 15.11 1922).] (1) For the purposes of moking an a.sse.ssment or re-assessment under this Act, ttLrcre an estimote of the ualue of ang inuestment referred. to in section 69 or section 69 8 .or th.e ualue of any bullion, jetue ery or oth.er uaLuable article refered to in section 69-A or ic:tion 69_8 is required to be mode, the Assessingr Offtcer mctg require tLLe Valuation Offtcer to make an estimite of alch uatue and report the same to him. (2) The Valuation Officer to wtam a relerence i.s made under sub-section (1) slnll, for the ptposes of dealing uith such reference, ltaue ait the poieri that lw hos under section 3B-A of the Wealth_tax AA, |SSZ 1ZZ oy 19s7).

Hr L4 (s) * ,::y: of^tp report from the latuation Offier, fhe Assessing Offier'mag, after giuins the assessee an oppo,luntta o! beary n"iia, tLrc iito oi.oiit such report in making "".L ^"r!"-"rior"r"-o"r"r"^"nt, prouided that nothing nntained in this section sha, applg in respect oy an as{essrneit-ioL-on or before the soth daa of September, zoii+,*iii *rur" such assessmen, has become fatal ond. qncluiiu. on or before tLnt .date, exept -in. ";." ;i;'o*'111o.".r._"nr o required to be mod.e in aeord.arrce-*ttn'if* proui.sions of section l S3_A. Explanation. _ In this sgdion, ,,Valuation Offtcer,, hrrs th.e same meaning_ as in aauie'' 6j ,iZ'"o*^ 2 of the Weatth-tox Act, tgSZ (27 of lSiij."''' -' '" 22. Thus, Section L42A of the Act provides that for the purpose of making an assessment or reassessment, the Assessing Officer may require the Valuation Officer to estimate the value of any investment referred to in Sections 69 or 69El, or the value of any bullion, jewellery or other valuable article referred to in Sections 69,.{ or 698, and to submit a report for the purpose of such assessment 23. In the instant case, the primary grievance of the Assessing Officer is that the assessee had under_declared the cost of material, such as, sand, steel, labour contract, etc., in the books of accounts, but however, while making reference to the DVO, the Assessing oflicer neither rejected the books of accounts nor i t t E

;! 15 pointed out any defects in them, for all the yeeu:s, and on the contrary, it is an admitted fact that the assessee had maintained books of accounts regularly, along with supp,orting records, relating to the material purchased and used in the construction of the said 22 properties. 24. A careful reading of Section 142A indicates that the power to refer a matter to the Valuation Officer can be exercised only for the purpose of making assessment or re-arlsessment and tJrerefore, such reference must be made durinp; the course of assessment proceedings when the Assessing ()fficer frnds it necessary, based on available material, to deternrine the correct value of an investment, which would categoricalll' mean that the process of assessment is initiated and the word tnrJcing' should be presumed to be associated with the assessment or reassessment for reference under Section l42A of the Act 25. Hence, invoking powers under Section l42A is after initiation of assessment proceedings and referencr: to DVO under Section l42A can be made only when a requirement is felt by the Assessing Officer lor making such reference, whe.n there is some

i rl 76 not called for was done in correct and not assessment or the process of materiar with t,.e Assessing oflicer to show that whatever the estimate the assessee has sh6wn is not at all. 26' AIso' the view that a reference ,nder sectio n 742Aof the Act can be made only during the course of assessment and reassessment and not for the pu{pose of initiating such proceedings, which is fortified by the judgment of the Honble Division Bench of 'Ahmadabad High court in tlmiga co-operatire Housing Societg Ld. a IT@, wherein it was held that the powers under Section l42A emporvers the Assessing OIficer to require the Valuation Officer for making the estimate of the value of any asset providecl the Assessing Officer required the s of making rhe assessment or reass'el;:;* sarne for the purpose 27. The provision under Section 142 of the Act does not empower the Assessing otficer to refer the matter to the DVo for gathering information for reopening of assessment. In the present reliable case, the valuation report was reassessment proceeding, but reopening of assessment. Thus, thc action of the Assessing Officer 6 (2oOS) 94 TTJ 392 {AHD)

17 in referring the matter to the DVO and relying upon the valuation report of current assets in one assessment year aed disturbing the concluded assessments of other assessment vears is untenable and perverse. 28. Furthermore, it is trite law that where the books of accounts are neither rejected nor found to be defectivr:, the Assessing Oflicer cannot solely rely on the DVO's report to make additions by invoking Section I42A of the Act to its benr:ht and the said principle has been clearly laid down by the llon'ble Supreme Court in Sargam Clnema's case(supra) and by the Division Benph of tlre Hon'ble High Court of Delhi in Aar Pee Apantments P. Ltd's case(supra). 29. In view of the above legal position and in the factual matrix of the case, we are of the considered view that :he learned ITAT has correcfly appreciated the facts and law in pr.oper perspective and the appellant/Revenue has failed to establisL. any substantial ground warranting interference of this Court with the well- reasoned order of the learned ITAT. Thus. the substantial question of law is answered against the appellant/Revenue and in

ii tl i 18 stand closed. SDI- N.CHANDRA SEKHAR .DEPUW REGISTRAR //TRUE COPY// One Fair Copy to the HON'BLE SRI JUSTICE P.SAM KOSHY (For His Lordship's kind Perusal) One Fair Copy to the HON'BLE SRI JUSTICE SUDDALA CHALAPATHI RAO (For His Lordship's kind Perusal) To, 1. The lncome Tax Appellate Tribunal, Hyderabad, Bench 'A', Hyderabad. 2 One CC to Sri K. Sudhakar Reddy (Sr SC FOR INCOI/IE TAX) IOPUC] 3. One CC to Sri K. Vasanth Kumar, Advocate [OPUC] 4. '1 'l LR Copies 5. The Under Secretary, union of lndia Ministry of Law, Justice and company Affairs, New Delhi 6. The Secretary, Telangana Advocates Association Library, High Court for the State of Telangana, High Court Buildings at Hyderabad. 7. Two CD Copies KAM/PSL favour of the respondent/assessee, and the appeat is devoid of merit and is liable to be dismissed. 30. Accordingly, the Appear is dismissed by conlirming the order passed by the learned ITAT in dt.30.03.2012. ITA.No.1542lrr/2oto, As a sequel, miscellaneolrs applications pending if any, shall M. li SECTION OFFICER

HIGH COURT DATED: 2610312026 JUDGMENT lTTA.No.47 of 2013 1LLA,v r ) JIt- G ..,iS c\l += \ *oulrl)A o * oJ H9 DISMISSING THE ITTA 4 \% \li