M/S OM RUDRA PRIYA HOLIDAY RESORT PVT. LTD.,SAWAI MADHOPUR vs. PRINCIPAL COMMISSIONER OF INCOME TAX, KOTA

PER VIJAY PAL RAO, JM :

This appeal by the assessee is directed against the revision order dated 31st

January, 2018 of ld. Principal CIT, Kota passed under section 263 of the IT Act for

the assessment year 2013-14. The assessee has raised the following grounds :-

“ 1. Under the facts & circumstances of the case, the order passed by ld. CIT u/s 263 is illegal & bad in law.

2 ITA No. 416/JP/2018 M/s. Om Rudra Priya Holiday Resort Pvt. Ltd., Sawai Madhopur.

2013 declaring Nil income. The AO completed the scrutiny assessment under

section 143(3) on 14.03.2016 at Nil income by accepting the income declared by the

assessee in the return of income. Subsequently, on examination of assessment

record, the ld. Principal CIT considered that the assessment order was erroneous in

so far as it was prejudicial to the interest of the revenue on the issue of investment

in the fixed assets under the head Income from Business and Profession which was

declared and accepted at Rs. 2,20,03,275/- whereas the value of the same was

shown in the bank’s survey at Rs. 3.52 crores. The ld. Principal CIT has also made a reference to the Surveyor-cum-Valuer’s Certificate dated 2nd October, 2012 which

was with the bank for obtaining the loan for construction of the hotel building. Accordingly, a show cause notice under section 263 of the IT Act was issued on 22nd

September, 2017 whereby the assessee was called upon to explain as to why the

order passed by the AO should not be revised or cancelled on the issue of valuation

and investment made in the fixed assets. In response, the assessee filed its reply

dated 16.01.2018 and contended that the valuation report with the bank is not

based on the actual cost of construction but it was a projected or estimated cost of

construction at the time of applying the term loan for construction of the building,

therefore, the same cannot be considered as the actual value of cost of construction

3 ITA No. 416/JP/2018 M/s. Om Rudra Priya Holiday Resort Pvt. Ltd., Sawai Madhopur.

of the hotel building. The assessee also furnished the valuation report of the

Registered Valuer wherein the valuation of the hotel building was valued at Rs.

1,57,76,400/- as against the actual cost of construction recorded in the books of

account at Rs. 1,81,49,072/-. The assessee also contended that the AO passed the

order after conducting an enquiry and verification of the relevant record on the issue

of cost of construction. Therefore, once the A.O. was satisfied with the cost of

construction as recorded in the books of account, then the valuation report with the

bank for taking loan cannot be a basis for revision of the assessment order. The ld.

Principal CIT did not accept the contention of the assessee and held that the order

passed by the AO is erroneous and prejudicial to the interest of the revenue as the

AO failed to conduct the proper enquiry on the valuation of the cost of construction

and for not referring the matter to the Departmental Valuation Officer. Accordingly,

the assessment order was set aside with the direction to the AO to frame it denovo

after making proper enquiry and verification of the record and by referring the

matter to the DVO.

the Bank Manager the copy of loan application, project report and valuation report of the resort in question. The Bank Manager vide letter dated 11th September, 2015

furnished the necessary documents which included an application for sanction of the

term loan of Rs. 2.00 crores, project report showing the cost of hotel building, civil

work, kitchen equipment, linen and blankets as well as plant and machinery

estimated at Rs. 2.33 crores. The bank sanctioned the loan of Rs. 2.00 crore based

4 ITA No. 416/JP/2018 M/s. Om Rudra Priya Holiday Resort Pvt. Ltd., Sawai Madhopur.

on the report of estimated cost of the resort at Rs. 2.33 crores. The AO after

considering the material available on record and the fact that work completion and loan utilization certificate dated 2nd October, 2012 was also furnished by the bank

has accepted the cost of construction as recorded in the books of account at Rs.

1,81,49,000/-. The ld. A/R has further submitted that the assessee also furnished a

valuation report of registered valuer who has estimated the cost of construction of

the hotel building at Rs. 1,57,76,000/-, therefore, the cost of construction recorded

by the assessee in the books of account cannot be faulted with. Since the AO has

made specific investigation and enquiry on the issue and about the cost of

construction of the hotel building, the ld. Principal CIT cannot assume jurisdiction

under section 263 merely because the acceptance of the cost of construction by the

AO was not agreed to by the ld. Principal CIT. Further, the whole basis of invoking

the provisions of section 263 is the project report filed with the bank at the time of

taking the loan of Rs. 2.00 crores which was also part of the assessment record as

the AO himself has called for all these documents during the assessment

proceedings. Hence, it is not a case of lack of enquiry but the AO after proper

enquiry was satisfied with the cost of construction of the hotel building. The ld. A/R

has further contended that the ld. Principal CIT has invoked the provisions of section

263 only to meet the objection of the audit party and, therefore, the audit note

cannot be a basis of invoking the provisions of section 263. In support of his

contention, he has relied upon the following decisions :-

CIT vs. Sohana Woollen Mills (2007) 296 ITR 238 (P&H)

5 ITA No. 416/JP/2018 M/s. Om Rudra Priya Holiday Resort Pvt. Ltd., Sawai Madhopur.

Sarlaben Bhansali Charities Trust vs. CIT (E) (2017) 51 CCH 464 (Kol. Trib.)

Surinder Kumar Jain vs. ITO (2016) 48 CCH 158 (Del. Trib.)

Dashmesh Motors Muktsar vs. PCIT (2016) 47 CCH 506 (Asr. Trib.)

difference in the valuation as shown in the Project Report at the time of applying the

loan from the bank and the valuation recorded in the books of account, therefore, it

was incumbent upon the AO to conduct a proper enquiry on the issue which was not

done by the AO. The AO has accepted the claim of the assessee despite the fact

that a huge variance in the cost of construction of the building shown in the different

reports including the valuation report, project report and value shown in the books

of account. Therefore, when the assessee’s own record and documents are showing

different valuations of cost of construction of the hotel building, then the claim of

the assessee cannot be accepted without proper enquiry and getting the correct

valuation of construction of the hotel building from the DVO. The ld. CIT D/R has

submitted that the assessee cannot be allowed to take the benefit of a higher

valuation at the time of taking loan and then suppressed the same in the books of

accounts for avoiding the tax liability. In support of his contention he has relied

upon the decision of Hon’ble Calcutta High Court in the case of Binod Kumar

Agarwala vs. CIT, 257 Taxman 58 (Cal.). He has also relied upon the decisions of

Hon’ble Madras High Court in the case of M/s. Coimbatore Spinning & Weaving Co.

Ltd. vs. CIT, 95 ITR 375 (Mad.) and Hon’ble Gauhati High Court in the case of

6 ITA No. 416/JP/2018 M/s. Om Rudra Priya Holiday Resort Pvt. Ltd., Sawai Madhopur.

Dhansiram Agarwalla vs. CIT, 201 ITR 192 (Gau.). Thus the ld. D/R has submitted

that once the AO has failed to conduct a proper enquiry on the issue, then it renders

the order passed by the AO erroneous in so far as it is prejudicial to the interest of

the revenue. The ld. Principal CIT was justified in invoking the provisions of section

263 when there is a tangible material showing that the assessee understated the

cost of construction in the books of accounts.

record. Since the assessee has constructed the resort in question and has not

shown any income during the year under consideration, therefore, the limited

scrutiny during the assessment proceedings was only with respect to the cost of

construction/investment made in the fixed assets by the assessee. The AO during the course of assessment proceedings had issued a query letter dated 3rd March,

2015 wherein various queries were raised including the details of additions of

Rs.2,20,03,275/- as per the schedule of fixed assets of the Audit Report and copy of

the supporting books and vouchers for acquisition of the fixed assets was also called

from the assessee. The AO has also asked the assessee to furnish the valuation

report in support of the cost of construction as shown in the books of account. In response, the assessee produced the valuation report dated 14th May, 2013. The AO

has also called for the relevant documents submitted with the Baroda Rajasthan

Gramin Bank including application form and other record in the shape of Project

Report for availing the term loan for construction of the hotel building. All these

records were supplied by the Bank to the AO along with the sanction letter dated 26th July, 2011 whereby a loan of Rs. 2.00 crores was sanctioned by the bank for

7 ITA No. 416/JP/2018 M/s. Om Rudra Priya Holiday Resort Pvt. Ltd., Sawai Madhopur.

construction of the hotel building. Thus it is clear that at the time of applying for

term loan, the assessee furnished the estimated and projected cost of construction

of the hotel building for a total cost of Rs. 3.52 crores whereas the assessee has

shown the fixed assets in the Balance Sheet as on 31.03.2013 at Rs. 2,69,26,206/-.

This project report submitted with the bank was an estimated cost of the hotel

building to be incurred in future and was not based on the valuation of any existing

assets of the assessee. Therefore, the said project report cannot constitute actual

cost of construction once the assessee has recorded the actual cost of construction

in the books of accounts which was duly verified by the AO along with the report of

the registered valuer. The AO has also examined all these documents including the

project report wherein the total cost of the project was shown at Rs. 3.52 crores as

against value of fixed assets shown in the Balance Sheet at Rs. 2.69 crores and after

considering the explanation of the assessee as well as the relevant valuation report,

the AO was satisfied with the cost of fixed assets as shown in the Balance Sheet.

There is no dispute that the project report produced by the assessee before the

bank at the time of taking the loan for the purpose of construction of hotel building

was only a projected estimated of the cost and not the actual cost of construction

incurred by the assessee. The assets must be shown in the books as per the actual

cost of acquisition and not on the projected cost of acquisition. The decision as

relied upon the ld. CIT D/R in the case of Bonod Kumar Agarwala vs. CIT (supra) is

on the aspect of two sets of books of account/financial statements – one was

presented before the bank for taking the credit facility and having inflated value and

another was produced before the AO for the purpose of income-tax. The assessee

8 ITA No. 416/JP/2018 M/s. Om Rudra Priya Holiday Resort Pvt. Ltd., Sawai Madhopur.

took the plea in the said case that the Balance Sheet produced before the bank for

taking the loan does not reflect true financial position of the assessee and, therefore,

not relevant. However, the Hon’ble High Court while dismissing the appeal of the

assessee confirmed the order of the Tribunal by holding that the assessee cannot be

permitted to take the benefit of the financial statements produced before the bank

showing an attractive financial position for taking the loan and then prepare a

different Balance Sheet and financial statement for the purpose of income tax. In

the case in hand, it is not the case of two sets of financial statements prepared by

the assessee, one for taking the loan and another for the purpose of income tax and

other accounting purposes. Therefore, in our opinion, the decision relied upon by

the ld. CIT D/R is not applicable in the facts of the present case where only the

project cost of construction of the building was produced before the bank for the

purpose of taking the loan for construction of the hotel building. The building was

constructed subsequently and the assessee has recorded the cost of construction as

per the actual expenditure incurred for the purpose of acquiring the fixed assets.

any investigation or enquiry on an issue, then it would be erroneous so far as it is

prejudicial to the interest of the revenue on the ground of lack of enquiry. In the

case in hand, admittedly, it is not a complete lack of enquiry on the part of the AO

rather the AO has conducted a detailed enquiry on this issue and called for all the

relevant records from the bank for the purpose of examining the cost of construction

of the hotel building. It may be a case of inadequate enquiry so far as not referring

the matter to the DVO. However, it is not mandatory for the AO to refer the

9 ITA No. 416/JP/2018 M/s. Om Rudra Priya Holiday Resort Pvt. Ltd., Sawai Madhopur.

valuation to the DVO once the AO was satisfied with the cost of construction and

cost of fixed assets as recorded in the books of account. Further, even if the Pr.

Commissioner found that the decision of the AO accepting the cost of

construction/cost of fixed assets is contrary to the facts or otherwise not permissible

as per the provisions of the Act, then the order of the AO could have been reversed

by giving a concluding finding on the issue. The Pr. Commissioner has set aside the

impugned order only for the purpose of referring the same to the DVO. Therefore,

the Pr. CIT was also not sure about the correctness of the cost of construction or

cost of fixed assets either shown in the project report or recorded in the books of

account. Accordingly, in the facts and circumstances of the case when it is not a

case of lack of enquiry but the AO has taken a view by accepting the cost of fixed

assets as recorded in the books of account which were also supported by the

valuation report, then the order of the AO cannot be held to be erroneous on the

ground of lack of enquiry. It is settled proposition of law that if the AO has taken

one of the possible views then the Pr. CIT cannot be permitted to invoke the

provisions of section 263 simply because he does not agree with the view taken by

the AO. In this case it is all matter of possibilities about the correctness of the claim

but once nothing has been brought on record to show that the cost of fixed assets

as recorded in the books of account is not the actual cost of the assets or the

assessee has completely failed to produce the supporting evidence then the

acceptance of cost of fixed assets by the AO cannot be held to be erroneous leading

to invocation of provisions of section 263 of the IT Act. Accordingly, in the facts and

10 ITA No. 416/JP/2018 M/s. Om Rudra Priya Holiday Resort Pvt. Ltd., Sawai Madhopur.

circumstances of the case, we set aside the impugned revision order passed under

section 263 of the Act.

Order is pronounced in the open court on 20/12/2018.

Sd/- Sd/- (foØe flag ;kno) (fot; iky jkWo ½ (VIKRAM SINGH YADAV ) (VIJAY PAL RAO) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member

Jaipur Dated:- 20/12/2018. Das/

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