COMMISSIONER OF INCOME TAX vs. M/S MEGHA JEWELLS PVT LTD

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 485 / 2009 Commissioner Of Income Tax, Jaipur-III, Jaipur. ----Appellant Versus M/s. Megha Jewells Pvt. Ltd. F-57, Gems and Jewellery Zone, Sitapura Industrial Area, Jaipur. ----Respondent _____________________________________________________ For Appellant(s) : Mr. Daksh Pareek for Mr. Sameer Jain For Respondent(s) : Mr. N.L. Agarwal _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Judgment 07/11/2017 1. By way of this appeal, the appellant has assailed the judgment and order of the tribunal whereby tribunal has dismissed the appeal preferred by the department and modified the order of CIT(A). 2. This court while admitting the appeal on 18.11.2009 framed following substantial questions of law:- “(1) Whether the learned ITAT being a last fact finding body has erred in law and on facts in deleting, addition of Rs.99,04,578/- towards construction of factory as unexplained investment on the basis of Valuation Officer’s report given u/s 142A when the same was not rebutted by any evidence, document during the course of assessment before the Assessing Officer? (2) Whether the learned ITAT was justified on facts and in law, in observing that AO was not justified in giving the directions to examine the issue in the hands of

(2 of 9) [ITA-485/2009] Directions which were issued properly under the facts of the case?” 3. The facts of the case are that the assessee is a private limited company and was incorporated on 7.8.2003, as per the Certificate of Incorporation. There was no business activity of the assessee company during the year under consideration. The return of income was filed on 30.10.2004 declaring total income at Rs. NIL. The AO has noted in para 3 of the assessment order that the company had declared a share capital of Rs.1,03,50,000/- and unsecured loans of Rs.30,30,263/- in the balance sheet. The company had also declared the fixed assets of Rs.1,13,58,159/- which included land and building amounting to Rs.26,05,248/- and Rs.85,91,261/- respectively. 4. Counsel for the appellant has taken us to the order of the AO wherein it has been observed as under:- “4. In this case, the case was also referred to the Valuation Officer on 27.2.2006 u/s 142A for valuation of property. The property was valued by the D.V.O. The valuation report dated 15.12.2006 was received with the following comments of the DVO: "Having considered the evidence produced by the assessee and having taken into consideration all relevant material gathered, the cost of construction of subject building known as M/s. Mega Jewels(P) Ltd., F-57 & 58, EPIP, Gems and Jewellery, Sitapura Industrial Area, Jaipur is estimated as detailed in annexures and year-wise estimate cost is given below: Cost of construction of the Building F.Y. Declared by the assessee Estimate by this office 2003-04 72,94,742.00 1,71,81,818.00

(3 of 9) [ITA-485/2009] 2004-05 12,96,519.00 30,53,782.00 Total 85,91,261.00 2,02,35,6000.00 Land Value (F-57 and F-58) 2003-04 26,05,248.00 26,22,750.00

21,00,750.00 (as per details given

by the assessee) The above estimated costs does not includes the cost of- 1. All plant and machinery, designing equipment, generator set, transformer, air cooling system with denting and grills, fire fighting equipment, godrej vaults (safe), window air conditions, AC, water treatment plant, EPABX, CCTV, computers, Debenture and strong room door, security systems, furniture and fixtures, H.R. system, Tube wells with pumps, water pump control machines. 2. The above land values does not includes the expenditure on egistration fees, stamp duty, transfer charges and other expenditure incurred towards it. 3. As per the details submitted, expenditure to the tune of Rs.9,32,399/- has been shown towards electrical fittings which has not been considered towards the declared cost by the assessee." As per the report of the District Valuation Officer, there is a difference of Rs.98,87,076/- in the cost of construction of building in the F.Y. 2003-04. Likewise, there is a difference of Rs.17,502/- in the valuation of land in the F.Y. 2003-04. In compliance to the above, the AR of the assessee vide his letter dated 25.12.2006 has stated that-"Both the directors of the company viz. Shri Siddik Hussain and Smt. Rabia Bi Shaikh had left for Haj Pilgrimage on 15th December, 2006 and they are expected to be back on 8th January, 2007. Due to the strict conditions applicable at Mecca, it has not been possible to contact both the directors, it is not possible to furnish any reply as only directors are the authorized persons in case of

(4 of 9) [ITA-485/2009] a company to give the necessary explanation. The valuation of a property is a highly technical matter and so far as the report of the valuation officer is concerned, necessary comments can be made only when a technical expert is consulted. In the absence of both the directors of the company, it is not possible to approach or appoint or consult any technical

person

furnish objections/comments to the valuation report." The reply of the assessee has been considered and not acceptable, as neither the assessee nor his authorized representative could furnish any satisfactory reply or submission in support of his claim for valuation of construction of building and value of land. Therefore, the difference in the cost of construction of building, and valuation of land of

Rs.98,87,076/-

and

Rs.17,502/-, respectively, as per DVO's report during the year under consideration, is added to the income of the assessee treating it as unexplained investment. 5. Taking into account the construction which was carried out, it was treated as unexplained investment, therefore, addition was made to the tune of Rs.99,04,578/- and also issued notice u/s 27(1)(c) of the Income Tax Act, 1961. 6. The assessee preferred an appeal before CIT(A) where CIT(A) has held as under:- “3. I have carefully considered the facts of the case and submissions of ld. AR. On perusal of the records, I find that the AO had issued letter dt. 19.12.2006 giving opportunity to the assessee to explain the difference in the value of the land and building , as per the report of DVO and as declared by the assessee. It is seen that the assessee was to give his submissions

26.12.2006

and, therefore, the assessee had been given time of 7 days to respond to the show case letter dt. 19.12.2006. However, the assessee, because of his own reasons, i.e.

(5 of 9) [ITA-485/2009] both the Directors of the company had gone out of the company for Haj Pilgrimage, could not furnish necessary explanation before the AO. Further, it is observed that the assessee informed the AO that the Directors were expected to return on or after 8.1.2007. However, as the AO was bound to complete the assessment before 31.12.2006, he could not have granted that much time to the assessee. Therefore, on these facts, it cannot be said that the AO had not given adequate opportunity to the assessee. In this regard, it may be relevant to mention that during the appellate proceedings, the ld. AR of the assessee filed application for admission of additional evidence under Rule 46A, on the ground that the necessary explanation and supporting evidence to show cause letter, dt. 19.12.2006 of the AO could not be given at the time of assessment proceedings because the appellant was prevented by sufficient cause from producing the same before the AO. After due consideration and obtaining the comments of the AO, the request of ld. AR for admission of the said additional evidences, under Rule 46A, was found acceptable. Accordingly, the ld. AR of the assessee was given opportunity to submit explanation and supporting evidences with reference to the difference in the value of land and building, as per the valuation report of the DVO and as shown by the assessee. Consequently, this ground of appeal is to be treated as partly allowed. 4.3 I have carefully considered the facts of the case and submissions of the ld. AR. I have also perused the case laws relied upon by the ld. AR in support of his contentions raised with reference to the grounds of appeal. On perusal of the records and the assessment order, it is seen that there is no dispute regarding the fact that the appellant company was incorporated on 7.8.2003 and that during financial year 2003-04, relevant to the assessment year under consideration of this appeal, the Company had not commenced its business. Therefore, I find merit in the argument of the ld. AR that since the business of the company had not

(6 of 9) [ITA-485/2009] been started during the year under consideration, the company was not having any income/source for making any unexplained investment for the purchase of land or construction of the building. I also find substance in the further agreement of the ld. AR that, therefore, if any addition was to be made, on account of the difference in the value of the land and building, the same could have been made only in the hands of the Directors and not in the hands of the appellant company. I find that this view is directly supported by the decision of Hon’ble Supreme Court in the case of CIT vs. Smt. P.K. Noor Jahan (supra) relied upon by the ld. AR accordingly, it is held that the AO was not justified in making the impugned addition, as unexplained investment, in the hands of the appellant company. However, it is pertinent to mention here that the AO is free to examine the possibility

the

addition

of aforementioned unexplained investment, on account of difference in the value of the land and building as per the report of DVO and as shown in the books of account by the assessee, in the hands of the directors/promoters of the appellant company. Consequently, this ground of appeal is allowed.” 7. The Tribunal further while considering the case observed as under:- 2. We have heard the parties. The brief facts of the case are tht the assessee is a private limited company and was incorporated on 7.8.2003, as per the Certificate of Incorporation. There was no business activity of the assessee company duing the year under consideration. The return of income was filed on 30.10.2004 declaring total income at Rs. NIL. The AO has noted in para 3 of the assessment order that the company had declared a share capital of Rs.1,03,50,000/- and unsecured loans of Rs.30,30,263/- in the balance sheet. The company had also declared the fixed assets of Rs.1,13,58,159/-, which included land and building amounting to Rs.26,05,248/- and

(7 of 9) [ITA-485/2009] Rs.85,91,261/- respectively. The AO has also observed that it was the first year of the company and it had not commenced any business in the year under consideration. Further, in para 4 of the assessment order, it is observed that the AO referred the valuation of the said property under section 142A to the DVO on 27.2.2006. The report of the DVO, dated 15.12.2006, was received by the AO and the AO found the following differences in the value of the land and building, as valued by the DVO and as declared by the assessee in the books of accounts. COST OF CONSTRUCTION OF THE BUILDING F.Y. Declared by the assessee Estimated by DVO 2003-04 72,94,742/- 1,71,81,818/- 2004-05 12,96,519/- 30,53,782/- Total 85,91,261/- 2,02,35,6000/- Land value 2003-04 26,05,248/- 26,22,750/- In view of the above, as there was a difference of Rs.98,87,076/- in the cost of construction of the building and of Rs.17,502/- in the value of the land in the financial year 2003-04, the AO issued a show cause letter dated 19.12.2006 to the assessee to explain as to why the said difference in the cost of onstruction of the building and the land should not be treated as undisclosed investment and added to the total income. In response, the ld. AR of the assessee vide letter dated 25.12.2006 stated that both the Directors of the company had left for Haj Pilagrimage on 15.12.2006 and were expected to return on or after 8.1.2007. It was also mentioned that it was not possible to contact them and that they were the only authorized persons to furnish necessary explanation on behalf of the company in that regard. However, the AO did not find the reply acceptable and the difference in the cost of construction of building and valuation of land of Rs.98,87,076/-

and

Rs.17,502/-, respectively, was added to the income of the assessee, treating the same as its unexplained investment.

(8 of 9) [ITA-485/2009] 4. We have heard the rival contentions and perused the facts of the case. It has been argued by the ld. Counsel for the assessee that the assessee is maintaining the complete records of construction expenses incurred for construction of the building. The said submission has also been made before the ld. CIT(A) as appearing at page 6 in his order. No defect has been pointed out in the same by any of the authorities below. Therefore, in such circumstances and facts of the case, there appears to be no reason to refer the matter to the DVO and especially when the assessee is not having any income during the year and has not started the business during the impugned year. Therefore, in such circumstances and facts of the case, the AO was not justified in referring the matter to the DVO and was further not justified in making any addition on this account. The ld. CIT(A) has rightly deleted the addition but the ld. CIT(A) is not justified in giving the direction to examine the issue in the hands of the director in view of our findings hereinbefore. Thus the Solitary Ground of the Revenue is dismissed and the Ground No.1 and 2 of the C.O. of the assessee are allowed. 8. Counsel for the appellant has made an endavour to argue that the tribunal has committed serious error in allowing the appeal of the assessee on the ground that the matter was wrongly referred to Department Valuation Officer and has not considered the ground on which unexplained investment was made by the assessee for which the AO has given cogent reasons in para no.4 as reproduced hereinabove. 9. Counsel for the respondent has supported the order of the tribunal as well as CIT(A) and contended that in view of the observations made by the CIT(A) and tribunal in para no.4.2, the appeal deserves to be dismissed. 10. We have heard counsel for the parties.

(9 of 9) [ITA-485/2009] 11. It has come on record that before passing the order, Director of the company was not available and time was sought time. However, they have returned only on 8.1.2007 and the matter was concluded without giving proper opportunity to the assessee. 12. In that view of the matter, as observed hereinabove in para no.3.5, explanation tendered under Rule 46A was found to be satisfactory. Therefore, the report of DVO was not considered valid and the same was not found acceptable in view of the explanation tendered by the assessee and others. 13. While considering the observations of the tribunal in para no.4.3, we are of the considered opinion that the tribunal has given cogent reasons while passing the impugned judgment. 14. We are in complete agreement with the view taken by the tribunal. No case is made out. 15. In that view of the matter, both the issues are answered in favour of the assessee and against the department. 16. The appeal stands dismissed. (VIJAY KUMAR VYAS)J. (K.S. JHAVERI)J. Brijesh 39.