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Facts
A survey was conducted at the assessee's premises, leading to the discovery of incriminating documents. The AO made additions based on seized diaries and a DVO report. The CIT(A) partly allowed the appeal, deleting one addition and confirming others.
Held
The Tribunal held that the addition made based on rough entries in seized diaries was baseless as no corroborative evidence was found and the dates in the diaries did not necessarily pertain to the assessment year. The addition based on the DVO report was deleted as the AO had not rejected the assessee's books of account before referring the matter to the DVO, which is a prerequisite as per Supreme Court judgments.
Key Issues
Whether additions made based on seized diaries without rejection of books are valid, and whether a reference to DVO is permissible without first rejecting the assessee's books of account.
Sections Cited
133A, 142A, 69, 69A, 2(24)(x), 36(1)(va), 143(3), 115BBE, 271AAC(1), 145(3), 148
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Income Tax Appellate Tribunal, LUCKNOW BENCH “B”, LUCKNOW
Before: SHRI. SUDHANSHU SRIVASTAVA & SHRI NIKHIL CHOUDHARY
Department against the order dated 14.11.2022 passed by the ld. Commissioner of Income Tax (Appeals), Kanpur – 4 [herein referred to as ‘CIT(A)] for Assessment Year 2019-20. The C.O. No.15/LKW/2023 has been preferred by the assessee.
2.0 The brief facts of the case are that a survey under section 133A of the Income Tax Act, 1961 (hereinafter called “the Act’) was carried out on 17.01.2019 at the premises of the assessee-company, wherein it runs a Super Specialty Hospital for Plastic and Allied Branches under the name ‘Sushrut Institute of Plastic Surgery’, wherefrom, certain incriminating documents were found and impounded. During the course of survey, the search party had found and impounded books marked as BK-8, BK-9, BK-10 and BBK-11 and statement of Dr. Sumit Malhotra was recorded under section 133A of the Act. Thereafter, the case of the assessee was selected for scrutiny. The assessee filed its return of income for the year under consideration on 24.09.2019, declaring a total income of Rs.8,94,590/-.
2.1 During the course of assessment proceedings, the AO noticed that the assessee had disclosed a total turnover of Rs.20,27,01,610/- and net profit of Rs.7,12,540/- as against the total turnover of Rs.19,14,12,892/- and loss of Rs.25,34,904/- shown in the immediately preceding year. Further, reference under section 142A of the Act was also made to the District Valuation Officer (DVO) to estimate the cost of construction of property of the assessee. The DVO, vide his report dated 04.06.2021, estimated the cost of investment made in the property No.29, Shahmeena Road, Lucknow during the financial year 2018-19 at Rs.1,04,22,900/-. Thereafter, the AO issued show cause notice dated 16.09.2021 to the assessee. In response to which, the assessee, vide reply dated 21.09.2021, submitted that its case was referred to the DVO who submitted his report on 04.06.2021 with estimated variance of cost of construction by Rs.6,92,900/- being 7.12% and that the said difference was acceptable in law and hence no addition could lawfully be made simply on the basis of report of the DVO when there was no corroborative evidence against the assessee for having made more investment than what was recorded in its audited books of account. After considering the reply furnished by the assessee, the AO held that the DVO in his valuation report has considered all the facts, bill vouchers etc. and had even allowed 7.5% deduction on account of self-supervision and therefore, the assessee's contention that there was no corroborative evidence against the assessee for having made the investment more than what was recorded in its books of account was not acceptable. The AO, accordingly, made an addition of Rs.6,92,900/- to the total income of the assessee under section 69 of the Act as unexplained investment.
2.2 Further, during the course of survey, statement on oath of Dr. Sumit Malhotra had been recorded, who had stated on oath that the entries in the impounded books, marked as BK-8, BK-9, BK-10 and BBK-11, were denomination of Notes. However, the AO worked out book-wise summary of the sum of the handwritten denominations at Rs.16,82,01,789/- and added the same also to the total income of the assessee under section 69A of the Act, treating the same as unexplained money of the assessee.
2.3 The AO further noticed that the assessee had failed to deposit the sum of Rs.1,12,102/- deducted from the salary of its employees in respect of Provident Fund and ESI within the due date. The AO, treated the same as income of the assessee under section 2(24)(x) of the Act, on which deduction under section 36(1)(va) of the Act was disallowed and added to the total income of the assessee. The AO completed the assessment under section 143(3) of the Act, assessing the total income of the assessee at Rs.16,99,00,480/-.
2.4 The AO also invoked the provisions of section 115BBE of the Act and initiated penalty proceedings under section 271AAC(1) of the Act.
2.5 Aggrieved, the assessee preferred an appeal before the ld. CIT(A), who partly allowed the appeal of the assessee by deleting the addition of Rs.16,82,01,789/- made under section 69A of the Act and confirmed the other two additions, viz., Rs.6,92,900/- made under section 69 of the Act and Rs.1,12,102/- made under section 2(24)(x) of the Act.
2.6 Now, the Revenue has approached this Tribunal challenging the order of the ld. CIT(A) in deleting the addition of Rs.16,82,01,789/- made by the Assessing Officer and the assessee has filed Cross Objection challenging the order of the ld. CIT(A) in sustaining the addition of Rs.6,92,900/- made by the AO under section 69 of the Act.
2.7 The Revenue has raised the following grounds of appeal:
1. Whether on facts and circumstances of the case and in law. Ld. CIT (A)-IV. Kanpur has erred in deleting the addition of Rs.16,82,01,789/- made u/s 69A ignoring the fact that the same were made on the basis of rough entries found in these diaries admittedly maintained by the accountants at the premise of the assessee and were having the details of denomination of cash which represented day to day cash receipts of the hospital.
2. Whether on facts and circumstances of the case and in law, Ld. CIT (A)-IV, Kanpur has erred in deleting the addition of Rs.16,82,01,789/- made u/s 69A ignoring the admission made by one of the accountants that part entries appearing in one of these diaries were entered in the regular books of accounts which further corroborates the authenticity of the entries in these diaries.
3. That the order of the CIT(A) being erroneous in law and facts be set aside and order of the A.O. be restored. 4. That the appellant craves leave to add, alter, adduce or amend any ground or grounds on or before the date of hearing of appeal. 2.8 The assessee has raised the following grounds in its Cross-Objection:
1. Whether under facts and circumstances of the case the CIT(A) was legally correct in confirming the addition of Rs.6,92,900/- on the basis of DVO report without considering the additional ground that when the books of accounts were not rejected by the AO then he could not have referred the valuation to DVO thus violating the ratio of judgment in the case of Sangam Cinema 328 ITR 513 (SC).
2. Whether under facts and circumstances of the case the fact of the appellant is covered by the jurisdicition High Court decision in case of CIT-II, Lucknow vs M/s Lucknow Public Educational Society of 2007 vide order dated 17.03.2011 answered the following question:-"Whether the Hon'ble Tribunal Lucknow erred in Law in holding that for a reference to the valuation officer u/s 142A to be valid as it is necessary that Assessing Officer must first reject the books of accounts in terms of Section 145(3) of the Income Tax Act 1961" The judgment in the case of Bhawani Shankar Vyas (supra) also came up for consideration before the Supreme Court in the case of Sargam Cinema vs CIT (2010) 328 ITR 513 (SC), wherein the Supreme Court has held that the Assessing Authority cannot refer the matter to the Department at valuation officer without first rejecting the books of account. Once that be the law declared by the Supreme Court, it is not possible for us to consider the contention advanced on behalf of revenue. 3.0 The Ld. Sr. D.R., arguing with respect to the appeal filed by the Department, submitted that the Department was mainly challenging the deletion of addition of Rs.16,82,01,789/- by the Ld. First Appellate Authority. It was submitted that the impugned addition, made under section 69A of the Act, was made on the basis of rough entries found in the seized diaries BK-8, BK-9, BK-10 and BK-11 which were admittedly maintained by the Accountants at the premises of the assessee. The Ld. Sr. D.R. submitted that the addition was made after a survey was conducted in the premises of the assessee and that it was a settled law that any/all entry(ies) appearing in the impounded documents are to be taken as true. Our attention was drawn to pages 17 to 20 of the order of assessment, wherein, the AO had reproduced scanned copies of the seized documents and it was submitted that although the assessee had claimed that these entries pertained to rough working of collection of currency notes before being deposited in the bank accounts, the claim of the assessee was not to be believed because the assessee was trying to shift the onus on the Accountant of the assessee, namely Shri B. K. Rastogi, who had since retired and was not available for cross-examination. It was further submitted that the Accountant who was currently working with the assessee, i.e., Shri Abhishek Mishra could explain only some of the entries as appearing in the seized documents but could not explain the entire set of entries. The Ld. Sr. D.R. submitted that the reply of the assessee that entries pertained to rough working of denomination of currency notes was not to be believed and the Ld. First Appellate Authority had hugely erred in accepting this claim of the assessee and in deleting the impugned addition. The Ld. Sr. D.R. further submitted that even in response to question No.36 in the statement of Dr. Sumit Malhotra recorded on 27.03.2019, it was admitted that there might be some differences in the entries appearing in the seized material and the entries appearing in the cash book for the reason that the entries in the seized documents were made shift-wise, whereas, the cash book showed consolidated figure of collections made during the year. It was submitted that the Ld. First Appellate Authority had ignored these basic observations and findings of the AO even though the assessee had failed to reconcile the differences. The Ld. Sr. D.R. further submitted that the Ld. First Appellate Authority had grossly erred in deleting the addition by simply observing that the AO had indulged in a serious error of presumption. The Ld. Sr. D.R. prayed that the order of the Ld. First Appellate Authority on the issue be reversed and that of the AO be restored.
4.0 In response, the Ld. Authorized Representative for the assessee (Ld. A.R.) submitted that it is again being reiterated that the seized documents BK-8, BK-9, BK-10 and BK-11 were mere rough workings of denomination of currency notes against cash receipts by the assessee and the same were duly recorded in the books of account. It was also submitted that these entries pertained to more than one year and, therefore, on this account also, the addition made by the AO was wrong on facts. The Ld. A.R., inviting our attention to page 108 of the paper book, submitted that at page one of the diary marked as BK-9, date 14.06.2017 is written and, thus, it pertains to assessment year 2018-19 and not the captioned assessment year. The Ld. A.R. further inviting our attention to page 110 of the paper book, submitted that page 15 of the diary marked as BK-10 contains date-wise notings of daily cash book from 07.05.2018 to 19.05.2018 which pertains to assessment year 2019-20 and the same has been accepted by the Department to be reconciling with daily cash book maintained by the assessee. The Ld. A.R. also submitted that the diary marked as BK-8 appearing at page 75 of the paper book contains denomination of SBN currency of Rs.1000/-, totaling to Rs.2.00 crores, which pertains to assessment year 2017-18, i.e., the period of demonetization declared by the Government of India. The Ld. A.R. submitted that in this view of the matter, the noting of denomination of currency in the diaries marked as BK-8, BK-9, BK-10 and BBK- 11 are only rough workings against cash receipts, which are already incorporated in the books of account and pertain to three assessment years 2017-18, 2018-19 and 2019-20 wherein the total cash receipts in all the three years comes to Rs.38,30,88,696/- which was much more than the total of the notings in diaries marked as BK-8, BK-9, BK-10 and BK-11, amounting to Rs.16,82,01,789/-. The Ld. A.R. has also furnished before us the details of year-wise cash receipts and deposits for the period (financial years) 2016-17 to 2018-19, which are as under:
Financial Total Cash Cash deposit in Year Receipts in bank in Rupees
Rupees 2016-17 13,71,99,707 10,70,40,500 2017-18 13,14,39,408 10,42,74,000 2018-19 11,44,49,581 10,30,34,000 Total 38,30,88,696 31,43,48,500 4.1 The Ld. A.R. submitted that the AO had made the impugned addition purely on the basis of presumption and that he had failed to bring on record any corroborative evidence to establish that the rough working made by the assessee in the diaries marked as BK-8, BK-9, BK-10 and BK-11 were the income of the assessee. The Ld. A.R. further submitted that the AO had also failed to establish the application of such huge cash receipts in assessment year 2019-20, alleged to be unaccounted with the parallel application of fund or investment in some undisclosed asset, whereas the addition on estimation of valuation of Hospital on the basis of DVO’s report, only resulted in addition of Rs.6,92,900/- being difference of 7.12% within the tolerance limit of 10%. The Ld. A.R., placing reliance on the findings of the Ld. CIT(A), submitted that Ld. CIT(A) had righty deleted the addition of Rs.16,82,01,789/- after recording detailed observations after having gone through all the facts and circumstances of the case and, therefore, no interference is called for in the order of the ld. CIT(A) on this issue. The Ld. A.R. further submitted that it is also to be noted that no cash was found or seized during the course of search and further no co- relation had been established by the AO between the seized material and the addition made and that the addition had been made merely on the basis of dumb documents. It was submitted that the ld. CIT(A) had rightly deleted the impugned addition and, therefore, the same should be upheld.
5.0 With respect to the assessee’s Cross Objection, it was submitted by the Ld. A.R. that the assessee’s Cross Objection challenges the confirmation of addition of Rs.6,92,900/- on the basis of the report of the Departmental Valuation Officer (DVO) without considering the fact that the books of account were not rejected by the AO and further the difference between the value of investment in property as disclosed by the assessee and the value as computed by the DVO was within the range of permissible 10% variation. It was further argued that the Hon'ble Jurisdictional High Court in the case of CIT-II, Lucknow vs. M/s Lucknow Public Educational Society in vide order dated 17.03.2011 had categorically held that for the purpose of making a valid reference to the Valuation Officer under section 142A of the Act, it was necessary for the AO to reject the books of account in terms of section 145(3) of the Act. It was submitted that the Hon'ble Jurisdictional High Court in the case of M/s Lucknow Public Educational Society (supra) had followed the judgment of the Hon'ble Apex Court in the case of Sargam Cinema vs. CIT reported in [2010] 328 ITR 513 (SC), wherein, the Hon'ble Apex Court had held that the AO cannot refer the matter to the Departmental Valuation Officer without first rejecting the books of account. It was submitted by the Ld. A.R. that in view of the above said judicial precedents, the value disclosed by the assessee should have been taken to be the correct value by the AO and that of the DVO should have been ignored.
6.0 Per contra, the Ld. Sr. D.R. placed reliance on the order of the Ld. First Appellate Authority and the observations of the AO on the issue and submitted that the Cross Objection of the assessee be dismissed.
7.0 We have heard the rival submissions and have also perused the material on record. First of all, we take up the Department’s appeal for our consideration. It is seen that a survey was conducted under section 133A of the Act on the assessee on 17.09.2019 and statements of Dr Sumit Malhotra were recorded during the course of survey on 17.09.2019 and 18.09.2019 along with statements of the Accountants of the assessee, namely Shri R. K. Mishra and Shri Abhishek Mishra. Subsequently, during the course of post-search proceedings in the case of Dr. M.C. Sharma and SPM Hospital and Trauma Centre, statements of Dr. Sumit Malhotra under section 132(4) of the Act were also recorded on 27.03.2019, 04.04.2019 and 16.04.2019. Also statement of Shri R. K. Mishra was recorded on 03.04.2019 under section 132(4) of the Act and statement of Shri Abhishek Mishra was recorded under section 132(4) of the Act on 05.04.2019. A perusal of the statements recorded under section 133A of the Act as well as under section 132(4) of the Act shows that these persons had categorically stated in their statements that the seized diaries BK-8, BK-9, BK-10 and BK-11 contained denominations of currencies noted down by the Accountant vis- à-vis cash deposited in the bank account and that the cash receipts were properly recorded in the books of account. It is apparent that the AO proceeded to make the impugned addition based on these seized diaries without even rejecting the books of account which gives credence to the assessee’s claim that the impugned addition had been made without considering the explanation offered and factual position. A perusal of the impugned assessment order shows that the AO has worked out the addition to be made under section 69A of the Act at Rs.16,82,01,789/- being unaccounted cash receipts, whereas it had been demonstrated before the AO that out of total receipts of Rs.19,83,25,254/- during the year, Rs.11,44,49,581/- were received out of which Rs.10,30,34,000/- had been deposited in the bank account. It is also seen from a perusal of the paper book that the seized diary BK-9 mentions the date 14.06.2017 and, thus, apparently the cash added to the income in the captioned year pertains to assessment year 2018-19. Thus, evidently the AO has proceeded on mere assumption that the notings in these diaries were unaccounted cash for the captioned assessment year without even considering the dates mentioned alongside. It is also to be seen that the seized diary BK-8 contains notings regarding denominations of Specified Bank Notes of Rs.1,000/-, totaling to around Rs.2 crores which obviously pertained to assessment year 2017-18, i.e., the period in which demonetization was effected by the Government of India. However, this amount has also been included in the impugned addition. Copies of the replies submitted before the AO on various dates have been filed in the form of paper book before us and in answer to specific query regarding notings in BK-8 to BK-11, the assessee has specifically mentioned that these diaries depict only rough notings or workings by the Accountants. It had been further mentioned before the AO that the assessee-company ran a Medical Shop in the premises of the hospital 24/7 which required rotation of staff every eight hours and every Cashier of the shift was directed to ensure that the cash was safely handed over to the Accounting Department of the assessee. It was further submitted before the AO that since the Accounting Department worked only from 10AM to 5PM, the Cashier of each shift would make details of the cash collected during his/her shift and hand the same over to the Accounting Department where the Accounting Department would segregate the currency so collected into different denominations and enter the figures in the diaries (later seized) and then enter the same into the books of account.
7.1 However, the AO simply rejected the explanation offered by mentioning that the same was hard to believe. At this juncture, it will be worthwhile to reproduce the findings of the Ld. First Appellate Authority while deleting the impugned addition, which are as under:
“6.11 I have carefully perused the notings of impounded annexures BK-8 to BK-11, some pages of which are also produced in the assessment order. It has been found that the dates are not mentioned in all the pages, from the notings in these impounded material, it cannot be concluded that the same relate to the cash receipts of a particular day. Since in these pages only the details of denomination of notes and their totaling is mentioned, it is possible that before sending the cash to the bank, the rough working has been done to compute the cash amount and hence the same is reflected in these pages. There is force in the submission of the Ld. AR that multiplicity of cash of various dates cannot be ruled out as also the period to which such cash receipts belong spans in more than one year. Further the AO has not been able to correlate and compare day wise cash receipts reflected in these pages with the books of accounts (cash book) and then find out the difference which was unaccounted. Thus it is clear that AO has indulged in a serious error of presumption that these pages contain day wise cash receipts, though as was claimed by the directors and accountants right from the stage of survey proceedings that the same is not the case. From the above table it can be seen that in FY 2017-18 & 2018-19, the appellant has received cash of Rs.13,14,39,408/- and Rs.11,44,49,581/-, thus totaling to Rs.24,58,88,989/- and this amount is more than Rs.16,82,01,789/- which is sum total of BK-08 to BK-11. Thus after demonetization year i.e. 31.03.2017, total cash receipts shown by appellant are much more than the cash receipts found in these impounded material. Therefore the conclusion of Ld. AO that the entire amount reflected in these impounded annexures was unaccounted is baseless and hence the same is hereby discarded. 6.12 Looking to the facts and circumstances of the case addition of Rs.16,82,01,789/-made u/s 69A of IT Act is hereby deleted.”
7.2 A perusal of the above extract from the order of the Ld. First Appellate Authority shows that the Ld. First Appellate Authority has given relief to the assessee by making the following observations:
(1) Dates were not mentioned on all of the seized material. Therefore, it could not be concluded that the same related to cash receipts of a particular date or particular assessment year.
(2) The AO was not able to co-relate and compare the seized material with the Cash Book and then point out the difference which could be considered as unaccounted.
(3) The total cash receipts declared by the assessee were more than the amount stated in the impounded material.
(4) The conclusion of the AO that the entire amount reflected in the impounded material was unaccounted is baseless and was based on serious error of presumption.
7.3 During the course of arguments before us, the Department could not point out any perversity in the aforesaid observations of the Ld. First Appellate Authority. The Ld. A.R. has reproduced a chart in the written submissions filed on behalf of the assessee and has also been reproduced by us in the preceding paragraph No.4.0, wherein total cash receipts for assessment years 2015-16 to 2019-20 have been tabulated as well as the cash deposited in bank account has also been tabulated. It is very much apparent that major receipts of the assessee were in cash in the past assessment years and also that the major portion of cash so collected was deposited in the bank account of the assessee. A perusal of the paper book also shows that in BK-9 (seized material), the date mentioned is 14.06.2017 and, therefore, by no stretch of imagination can the figure mentioned in BK-9 be brought to tax in the captioned assessment year.
7.4 It is also to be noted that no cash was found and impounded during the course of survey which could point out that the assessee was in the practice of keeping cash in hand outside the books of account. It is also seen at page 52 of the paper book that the assessee had submitted a cash reconciliation statement for the captioned assessment year, wherein the opening cash in hand as on the first day of the financial year is taken and the cash receipts during the year have been added and cash deposits in the bank account and the cash expenditures during the year have been deducted therefrom, giving the balance figure as the closing cash in hand as on 31st March, 2019, which tallies with the cash in hand as declared in the balance sheet filed by the assessee. No defect has been pointed out by the AO in this regard. Apart from this, the assessee had also filed a summarized version of the cash book from assessment year 2015-16 to assessment year 2019-20 before the AO. These had also been taken on record and no defect has been pointed out by the AO in these set of documents also. Thus, apparently the AO has proceeded to add back the impugned amount without there being any cogent evidence to justify the same. In such a situation and keeping in mind the observations of the Ld. First Appellate Authority, which could not be refuted by the ld. D.R., we have no option but to uphold the findings of the Ld. First Appellate Authority on this issue. Accordingly, we dismiss the grounds raised by the Department and uphold the findings arrived at by the Ld. First Appellate Authority.
8.0 Coming to the grounds raised by the assessee in the Cross Objection, the grievance of the assessee pertains to the act of the Ld. First Appellate Authority in confirming the addition of Rs.6,92,900/- on the basis of the DVO’s report. It is seen that the Hon'ble Jurisdictional High Court has held in the case of CIT- II, Lucknow vs. M/s Lucknow Public Educational Society (supra) that the AO cannot refer the matter to the DVO without first rejecting the books of account. In the present case before us, admittedly, the books of account were not rejected by the AO. Therefore, given the law laid down by the Hon'ble Apex Court in the case of Sargam Cinema vs. CIT (supra), the AO could not have proceeded to adopt the value as per the report of the DVO without first rejecting the books of account.
8.1 It will be worthwhile to reproduce the relevant portion from the judgement rendered by the Hon'ble jurisdictional High Court in the case of CIT-II, Lucknow vs. M/s Lucknow Public Educational Society (supra), wherein, the Hon'ble Jurisdictional High Court has discussed at length the judgments of various Hon'ble High Courts as well as the Hon'ble Apex Court before reaching the conclusion that the AO could not refer the matter to the DVO without first rejecting the books of account:
“To correctly appreciate the issue, we may gainfully reproduce Section 142A of the Act, which reads as under:-
"142A - Estimate by Valuation Officer in certain cases.- (1) For the purposes of making an assessment or reassessment under this Act, where an estimate of the value of any investment referred to in Section 69 or Section 69B or the value of any bullion, jewelery or other valuable article referred to in Section 69A or Section 69B or fair market value of any property referred to in sub-section (2) of Section 56 is required to be made, the Assessing Officer may require the Valuation Officer to make an estimate of such value and report the same to him.
(2) The Valuation Officer to whom a reference is made under sub-section (1) shall, for the purposes of dealing with such reference, have all the powers that he has under Section 38A of the Wealth Tax Act, 1957 (27 of 1957).
(3) On receipt of the report from the Valuation Officer, the Assessing Officer may, after giving the assessee an opportunity of being heard, take into account such report in making such assessment or re-assessment:
Provided that nothing contained in this section shall apply in respect of an assessment made on or before the 30th day of September, 2004, and where such assessment has become final and conclusive on or before that date, except in cases where a reassessment is required to be made in accordance with the provisions of section 153A.
Explanation.-- In this section, "Valuation Officer" has the same meaning as in clause (r) of section 2 of the Wealth-tax Act, 1957 (27 of 1957)."
The Section was inserted by the Finance (No.2) Act, 2004 with effect from 15.11.1972 to confer power on the Assessing Officer, to refer the matter to the Valuation Officer which earlier had not been conferred.
Earlier, there was a provision being Section 55A to ascertain the fair market value of a capital asset for the purposes of Chapter IV. The issue as whether the Valuation Officer under Section 55A of the Act could be appointed for valuation of an asset if in the opinion of the Assessing Officer the amount expected in making the investment exceeds the amount recorded on the books. The issue of referring to the Valuation Officer, came up for consideration before the Supreme Court in the case of Amiya Bala Paul Vs. Commissioner of Income Tax, Shillong, (2003) 262 ITR 407 (SC). The Supreme Court, after considering the scope and ambit of Section 55A of the Act, was pleased to hold that it would not apply to proceedings under Section 69B of the Act. Apparently, it appears that Section 142A of the Act was introduced to cover this omission.
The question before us is whether the Tribunal was right in taking a view that in the absence of rejecting the books of accounts which are audited, the Assessing Officer cannot resort to estimation. Reference has been made to some authorities, which we shall now refer to.
In K.K. Seshaiyer Vs. Commissioner of Income Tax, (2000) 246 ITR 351 (Mad), the case before the Madras High Court was in respect of the Assessment Year 1978-79 before Section 142A was introduced. The issue referred for consideration was whether the Tribunal was right in ignoring the valuation of the house property submitted by the assessee and instead adopting a sum as the valuation of the property by calling for a report of the District Valuation Officer? The learned Madras High Court held that in the absence of the Tribunal recording that the books of account maintained by the assessee are not credible, it would not be open to call for a report of the District Valuation Officer.
In Commissioner of Income Tax Vs. Star Builders, [2007] 294 ITR 338 (Guj), the question before the Gujarat High Court was whether the Tribunal was right in deleting the addition made under Section 69A of the Act based on the report of the Valuation Officer? Reliance was placed on the judgment of the Supreme Court in Amiya Bala Paul (supra) to hold that reference can be made to the Valuation Officer for the purpose of Section 55 (A), 131, 133 (6) and 142 (2) and not for the purpose of finding out the cost.
Next, we come to the judgment of the Rajasthan High Court in the case of Commissioner of Income Tax Vs. Hotel Joshi, (2000) 242 ITR 478 (Raj). This was a case in respect of Assessment Years 1980-81 to 1985-86 before introduction of Section 142A. In the said case, the assessee had constructed a hotel building for which he had maintained regular books of account. All the amounts were vouched except some amount which was not supported by vouchers. During the course of the assessment proceedings, the assessee also filed the report of a registered valuer, who had estimated the cost of the building. The Assessing Officer, however, estimated the cost based upon the report of the Departmental Valuation Officer and, consequently, made an addition. In appeal preferred by the assessee, the CIT (A) held that the report of the Departmental Valuation Officer submitted by the assessee has been more authentic. However, the CIT (A) held that the Assessing Officer was justified in rejecting the cost of construction as shown in the books of account maintained by the assessee. The CIT (A) further held that the reference made both under Sections
16A of the Wealth Tax Act and Section 55A of the Act was unauthorised and that the report given by the Department Valuation Officer, being technical in nature, can serve as a guide for determining the actual cost of construction. Appeals were filed both by the assessee and the revenue (department) before the Tribunal. The Tribunal held that if the books of account do not show any serious infirmity, that should be accepted. The assessee, in the said case, had procured the report of the registered valuer and, therefore, the Tribunal directed the same to be accepted. This order was the subject matter in appeal before the Rajasthan High Court. The High Court thereon proceeded to hold that it would be unfair and against the public policy to proceed on the assumption that the assessee is dishonest and he must have submitted an incorrect account of expenses. The Court further held that in case the assessee had not maintained the regular books of account of construction and relied upon the reports of the registered valuer, it would be open for the Assessing Officer to refer to the Departmental Valuation Officer for valuation of the asset. The Court then proceeded to hold that a reference to the Departmental Valuation Officer would arise only in a case where the Assessing Officer was not satisfied with the accounts of construction produced by the assessee or where such account was kept and the assessee relied on the valuation report of the registered valuer.
Now, we come to a judgment of the Uttarakhand High Court in the case of the Commissioner of Income Tax & Anr. Vs. Bhawani Shankar Vyas, [(2009) 311 ITR 8 (Uttarakhand).
The question before the High Court was whether the Income Tax Appellate Tribunal was justified in holding that without rejecting the books of account, the Assessing Officer was not justified in making reference to the Departmental Valuation Officer, ignoring the retrospective effect of the provisions of Section 142A of the Act? Section 142A was inserted by the Finance Act, 2004 with retrospective effect from November 15, 1972. The High Court, after considering various judgments, was of the view that the Income Tax Appellate Tribunal was not justified in holding that without rejecting the books of account, the Assessing Officer was not empowered in making reference to the Departmental Valuation Officer. The Court proceeded to hold that it was not mandatory for the Assessing Officer to reject the books of account first before making reference under Section 131 (1) (d) of the Act or calling for a report of the valuer under Section 142A of the Act.
Our attention was also invited to a judgment of this Court in the case of Sunder Carpet Industries Vs. Income Tax Officer & Anr., [(2010) 324 ITR 417 (All)]. On the consideration of this judgment, we find that the question framed for consideration was whether the notice issued under Section 142A and under Section 148 of the Act can be quashed? It is in this context that the Court had examined the case whether there was material on record to arrive at a belief that there was escaped assessment. The Court proceeded to hold that the investment made in the constructions of the building, if not recorded in the books of account, falls under Section 69 of the Act. It disagreed with the decision of the Delhi High
Court in the case of CIT Vs. Aar Pee Apartments P. Ltd., [2009] 319 ITR 276, and was of the view that the reference made to the Departmental Valuation Cell for the purposes of determination of the investment in the construction of building cannot be said to be without the authority of law.
Reference was also made to an unreported judgment in the case of the Commissioner of Income Tax-I, Aayakar Bhawan, Lucknow Vs. M/s. Rohtas Projects Ltd., Income Tax Appeal No. 26 of 2006, decided on 23.02.2006. In the said case, the Court found that the Tribunal had not considered the provisions of Section 142A of the Act which was introduced by Finance Act No. 2 of 2004 with retrospective effect. This again really has not answered the issue.
The issue for consideration is, whether the Assessing Officer, under Section 142A (1), can refer a matter to the Valuation Officer, for the purpose of making an estimate of such value. Under sub-section (3) of Section 142A, it is provided that on receipt of the report of the Valuation Officer, the Assessing Officer may, after giving the assessee an opportunity of being heard, take into account such report in making such assessment or reassessment. Would the language of Section 142A mean that before proceeding to call for a report of the Valuation Officer, the books of accounts must be rejected.
The judgment in Bhawani Shankar Vyas (supra) also came up for consideration before the Supreme Court in the case of Sargam Cinema Vs. Commissioner of Income -Tax, [2010] 328 ITR 513 (SC)], wherein the Supreme Court has held that the Assessing Authority cannot refer the matter to the Departmental Valuation Officer without first rejecting the books of account. Once that be the law as declared by the Supreme Court, it is not possible for us to consider the contention advanced on behalf of the revenue.”
8.2 Respectfully following the above, we allow the grounds of Cross Objection of the assessee and direct the AO to delete the addition on account of difference between the valuation as per the assessee and as per the DVO’s Report.
9.0 In the final result, the appeal of the Department stands dismissed whereas the Cross Objection of the assessee stands allowed.
Order pronounced in the open Court on 31/07/2025.