PARMARTH IRON (P) LTD vs. ACIT,

ORDER PER R.K. PANDA, AM: and 2370/Del/2008 are cross appeals. The first one is filed by the assessee and the second one is filed by the Revenue and are directed against the order dated 24th March, 2008 of the CIT(A) Bareilly for assessment year 2004-05. filed by the Revenue is directed against the order dated 16th July, 2008 passed u/s 154/250 of the CIT(A), Bareilly for assessment year 2004- 05. For the sake of convenience, all these appeals were heard together and are being disposed of by this common order.

4. The Assessing Officer further noticed that the assessee received share application money of Rs.20 lakhs from three persons, namely, Nepostel (India) (P)

Ltd.- Rs.10 lakhs, Ria Marketing Services (P) Ltd. – Rs.5 lakhs, and Invish Finvest (P)

Ltd. – Rs.5 lakhs. On being asked by the Assessing Officer to produce the above parties for his examination, it was replied by the assessee that these persons being of means are busy in their social and official engagements cannot be produced today i.e., the date given by the Assessing Officer. However, it was requested that the genuineness may be verified from his end by issuing notices to them or by obtaining confirmations from them. The Assessing Officer, therefore, issued summons u/s 131 of the Act to the above three persons on 16.11.2006. The letter addressed to Ria Marketing Services Pvt. Ltd. was returned back by the Postal Authorities with the remarks “BANDH PADA HAI.” The other two persons neither attended in person nor sent any reply and the envelops were not received back. Therefore, the Assessing Officer assumed that these have been delivered to the persons addressed to In absence of any compliance from the above parties and observing that the assessee could not discharge the onus cast on him by proving the identity and creditworthiness of the share applicants and genuineness of the transactions, the Assessing Officer, invoking the provisions of section 68, made addition of Rs.20 lakhs to the total income of the assessee.

5. In appeal, the ld.CIT(A) gave part relief to the assessee. So far as the addition on account of unexplained investment in the factory building is concerned he sustained only an amount of Rs.1,18,54,248/- and deleted the balance amount. So far as the addition u/s 68 is concerned, the ld.CIT(A) confirmed the addition made by the Assessing Officer.

6. Aggrieved with such part relief given by the CIT(A), the assessee as well as the Revenue are in appeal before the Tribunal by raising the following grounds:-

“1. That the ld.CIT(A) has erred in law and facts of the case in deleting the addition of Rs.2,83,25,411/- on the ground that valuation officer inspected the building on 21.08.2006 and report was given as on 03.03.04 while some construction was also made between 01.04.2004 to 21.08.2006. The Assessing Officer has made addition of Rs.4,01,79,6591/- after considering the report of the valuation officer. Hence order of Assessing Officer may be restored.

2. the Assessing Officer has made addition to the tune of Rs.20,00,000/- as share application money in the three share holders after giving proper opportunity to the assessee co. as unexplained share application money. The ld.CIT(A) has deleted the addition in view of fact that the identity, genuineness and credit worthiness of the parties have been established. Hence the ld.CIT(A) has erred in law and facts of the case in deleting the addition.”

1. That having regard to the facts and circumstances of the case, Ld. CIT (A) has erred in law and on facts in not deleting in full the addition made by Ld. AO of Rs.4,01,79,659/- on account of alleged unexplained investment in the factory building that too without any basis, material or evidences and has further erred in sustaining the addition of Rs.1,18,54,248/- on this account.

2. That having regard to the facts and circumstances of the case, Ld. CIT (A) has erred in law and on facts in not deleting in full the addition made by Ld. AO of Rs.4,01,79,659/- on the ground that Ld. AO has erred in law and on facts in making a reference to Ld. DVO u/s 142A that too without pointing out any defects in the books of account and without rejecting the books of account and has further erred in relying upon the report furnished by the ld. DVO and in any case valuation report supplied by the valuation officer being bad in law and against the facts and circumstances of the case. 3. That having regard to the facts and circumstances of the case, Ld. CIT (A) has erred in law and on facts in not reversing the action of Ld. AO in rejecting the books of accounts u/s 145(3) that too without any basis, material or evidences. 4. That in any case and in any view of the matter action of Ld. CIT(A) in not quashing the assessment order framed by Ld. AO u/s 144 that too without any basis, material or evidences. 5. That having regard to the facts and circumstances of the case, Ld. CIT (A) has erred in law and on facts in recording a contradictory finding that the books of accounts could not be produced completely as per the requirements of Ld. AO and some books of accounts were produced but they were not complete in all respect and that too without pointing out in what manner books were not complete in all respect and what were those records which could not be produced whereas Ld. CIT(A) has himself recorded in the other part of the order that books of accounts were produced and examined by Ld. AO on 13-02-2006. 5A That having regard to the facts and circumstances of the case, Ld. CIT (A) has erred in law and on facts in granting the rebate of self supervision @ 7.5% instead of 10% as claimed by the assessee company and has further erred in not granting the appropriate relief as sought by the assessee in this regard. 5B. That having regard to the facts and circumstances of the case, Ld. CIT (A) has erred in law and on facts in making arithmetical error in totaling at page 48 of the appeal order by making addition of Rs.4,60,856/- being the estimated cost of construction of RCC roof of the oil tank instead of deducting the same, 5

thus leading to double addition o1 Rs.9,21,712/- and has further erred in not granting the appropriate relief as sought by the assessee in this regard. 5C That having regard to the facts and circumstances of the case, Ld. CIT (A) has erred in law and on facts in not giving relief on account of over estimation of cost of construction of Compound Wall (Boundry Wall) and has further erred in not granting the appropriate relief as sought by the assessee in this regard.

5D That having regard to the facts and circumstances of the case, Ld. CIT (A) has erred in law and on facts in not accepting the rates of construction of under ground water tank at Rs.0.75 PL as shown by the registered valuer of the assessee company and has further erred in accepting the rates given by Ld. DVO at Rs.3.25 PL that too without and basis, material or evidences and has further erred in not granting the appropriate relief as sought by the assessee in this regard.

5E That having regard to the facts and circumstances of the case, Ld. CIT (A) has erred in law and on facts in not accepting the quantity of oil tank structure at 136 KL as shown by the registered valuer of the assessee company in its report on the basis of sanction obtained of the competent authority and has further erred in accepting the same at 1410 KL as shown by Ld. DVO in its report that too without any basis, material or evidences and has further erred in not granting the appropriate relief as sought by the assessee in this regard.

5F That having regard to the facts and circumstances of the case, Ld. CIT (A) has erred in law and on facts in not accepting the rates of construction of oil tank structure @ 2.10 PL as shown by the registered valuer in its report and has further erred in accepting the same @ 3.25 PL as shown by Ld. DVO in its report that too without any basis, material or evidences and has further erred in not granting the appropriate relief as sought by the assessee in this regard.

6. That the appellant craves the leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other.”

6.1 The Revenue has also filed the following grounds in wherein the CIT(A) has given further relief to the assessee in the 154 proceedings:-

Rebate on self-supervision. (i) 6

Cost of construction of under ground water tank. (ii)

2. Under the circumstances of the case whether Commissioner of Income Tax (Appeal), Bareilly was justified in invoking the provisions of section 154 of the I.T. Act-1961 to consider following issues again and providing relief to the assessee on account of:

Cost of construction of water tank;and. (i) Cost of construction of oil tank. (ii)

3. Under the circumstances of the case whether passing of order u/s 154 in respect of above mentioned issues would not amount to re-consideration of the issues already adjudicated upon originally?

4. Under the facts and circumstances of the case, the CIT(A) Bareilly has erred in law and facts in applying enhanced deduction for self supervision at the rate of 10% on the basis of some CPWD circular in suppression of his earlier findings of taking 7.5% deduction as reasonable after considering all facts and circumstances in his order dated 24/3/2008.

5. Under the circumstances of the case the Commissioner of Income Tax (Appeal), Bareilly has erred in law in allowing relief to the assessee on account of over valuation of Compound wall by wrongly considering this issue again u/s 154 and allowing relief of Rs. 6,03,022/- to the assessee in wrong manner.

6. Under the circumstances of the case the Commissioner of Income Tax (Appeal), Bareilly has erred in law and on the facts in accepting the assessee’s statement regarding rate of construction of water tank by wrongly considering this issue again u/s 154 and directing the Assessing Office in wrongful manner to adopt the rate of underground water tank at 0.75 PL(adopted by registered valuer of assessee) as against the rate of 3.25PL (adopted by DVO in his report)

7. Under the circumstances of the case the Commissioner of Income Tax (Appeal Bareilly has erred in law and on the facts in accepting the rate of construction and capacity in respect of oil tank by wrongly considering this issue again u/s 154 and directing the Assessing Office in wrongful manner to adopt the measurement of 136KL taken by the registered valuer instead of 1410KL taken by the DVO and again directing the AO in wrongful manner to adopt the rates of oil tank structure at the rate of Rs. 2.10 PL(adopted by registered valuer of assessee) as against the rate of 3.25PL (adopted by DVO in his report).

8. Order of the Commissioner of Income Tax (Appeal), Bareilly dated: - 16- 09-08 may be set-a-side and that order of the Assessing Officer dated 26/12/2006 may be restored.

(i) CIT vs. Lucknow Public Educational Society (2011) 339 ITR 588 (All); (ii) CIT vs. Subhash Chandra Gupta (2014) 105 DTR 295 (All); (iii) CIT & Ors. Vs. Asha Chaurasia & Ors. (2017) 98 CCH 85 (All); (iv) Nirpal Singh vs. CIT (2013) 359 ITR 398 (P&H); (v) Pr. CIT vs. Sanjay Hiralal Thakkar (2016) 97 CCH 168 (Guj); and (vi) CIT vs. Vijaykumar D. Gupta (2014) 365 ITR 470 (Guj).

9. He accordingly submitted that since the Assessing Officer in the instant case has not rejected the books of account before referring the matter to the DVO, therefore, the same is not in accordance with the law. Referring to the order of the CIT(A), the ld.

counsel for the assessee drew the attention of the Bench to the findings given by the CIT(A) wherein he has categorically held that he finds merit in the arguments of the ld. counsel for the assessee that the action of the Assessing Officer in making reference to the DVO is not in accordance with the law. However, at the same time, the ld.CIT(A) deviated from his finding and upheld the action of the Assessing Officer on the ground that the assessee has not produced complete books of account for which the Assessing Officer could not examine and determine the detailed and correct cost of construction of the factory building. Referring to the various replies given by the assessee, he submitted that the assessee has produced all the relevant books of account including cash book, ledger, bills and vouchers, etc. and, therefore, the finding of the ld.CIT(A) is not correct.

“ I have carefully considered the written submissions made by AR, perused the assessment order and other material on records. It is observed that the main objection of the AR is that the action of AO to make a reference to the D.V.O is not in accordance with law and the facts of the case. According to him, even after the insertion of section 142A, it is a condition precedent for A.O. to give a finding that the books of account of the appellate are defective and the cost of construction can not be ascertained from such defective books of account. Such finding has to be based on material and proper reasoning. On the basis of these finding A.O. is required to first reject the books of account and only thereafter he gets the authority as per law to make any reference to the D.V.O for the ascertainment of correct amount of cost incurred by the appellant company. A.R. has argued repeatedly that this is a condition precedent to enable A.O. to assume jurisdiction to make reference to the D.V.O. He has relied upon plethora of decisions of various High Courts and the Income Tax Appellate Tribunal including the decisions from Hon’ble Allahabad High Court. I have considered the argument of A.R. and I have also gone through case laws relied upon by him. I find force in the arguments of A.R. It is clear from the assessment order that the Books of Accounts were produced and examined by A.O on 13-02-2006. During this period, the A.O. made the detailed examination of records of appellant Co. and no defect was pointed out by him and there was no such finding recorded in the assessment order that it was not possible for him to ascertain cost of construction from these books of account. The appellant is a company whose accounts have been audited and the auditors have not pointed out any defect. The A.O. made reference to DVO on 05-04- 2006 and before doing that A.O did not reach on the conclusion nor he recorded a finding that as per facts of the case it was not possible for him to ascertain the cost of construction on the basis of books of accounts other records maintained by the appellant Co.. The D.V.O’s report was received by the A.O. dated 14-09- 2006 in which the difference in cost of construction was point out by D.V.O. It was subsequently on the basis of D.V.O’s report only A.O. drew this inference that the books of accounts of the appellant Co. are not correct and complete. Even at this stage A.O. has not recorded any independent finding observing that the books of accounts and other records of the appellant Co. are defective in such a manner that the cost of construction could not be ascertained from these books and other records. He has merely stated that he was not satisfied about the correctness or completeness of the account of the appellant Co.. He has not given any reasons or the basis for showing his dissatisfaction about the correctness and completeness of accounts of the appellant Co. except that there was difference in cost of construction as shown by the appellant Co. and as estimated by the D.V.O through his report. Thus the action of A.O. in making reference to D.V.O is not in accordance with law for following two reasons namely:-

1. 1. He did not record a finding before making reference to D.V.O that books of account and other records of the appellant Co. produced before him were defective and it was not possible to ascertain the cost of construction from these books of accounts and other records, which was a condition precedent.

2. Even when subsequently A.O. has rejected the books of accounts he has not recorded his findings that as per facts of the case how the books were defective in such a manner that it was not possible to ascertain the cost of construction from the books of account and other records.

I have gone through various judgments also referred to by the AR. In many decisions such as 1. CIT vs. Meerut Cement Company (P) Ltd., supra, 150 Taxman 7 (Allahabad). Delivered on 19-04-05.

2. CIT Vs Hotel Joshi 242 ITR 478 (Raj)

it has been held that if the assessee maintained books of account in regular course of business and necessary entries related to the expenses incurred towards cost of construction are properly made in the books of accounts, they are produced for verification and their correctance is not doubted then these should be accepted and AO has no cause for making reference to DVO. Moreover the rejection of books of account is a condition precedent to reference to the DVO.

I intend to agree to the AR that after the insertion of section 142A of the I. T. Act by Finance Act 2004, the AO is bound to follow the law as per bounded by jurisdiction of High Court. Besides, if the value of an asset is determined and claimed by an assessee on the basis of regular books of accounts maintained for that purpose and not on the basis of registered valuers valuation report, the reference to the DVO by the AO is not proper. Section 55A of I.T. Act requires specially vide sub clause (ii) of clause (b) that the AO as to record the basis or reasons for making a reference to DVO for ascertaining the fair market value of asset having regard to the nature of the asset and other relevant circumstances. In the light of decision of CIT Vs Hotel Joshi as mentioned (Supra) it is also not necessary to accept the report of the DVO based on CPWD rates nor it is necessary to accept the report of the registered valuer based on PWD rates because the cost of construction varies from place to place depending upon local conditions. CPWD rates are based on Instruction No 1671 which says that data collected by Valuation Cell is in the nature of broad guidelines and in its application to individual case may vary on the facts on the particular case. The section 142A has been brought in statute with a view to put the controversy on rest as to whether the AO has at all power to make reference to the Valuation Officer or not u/s 55A of the I. T. Act. Now it is undoubtedly clear after the insertion of section 142A that the AO has the power as per law to make reference to the valuation after fulfilling the condition precedent. In my considered view though the assessee has maintained regular books of account but it is fact that the same could not be produced completely as per requirement of the AO. From the submissions made and the documents produced by the AR, it appears that some books of accounts were produced but they were not complete in all respects which did not help the A.O. in examining and determining the total and correct cost of construction of the factory building year wise. This prompted the AO to make a reference to the DVO to give his expert opinion. In my view there is no infirmity in making the reference by the AO to the Valuation Officer and no grievance arose to the appellant by merely making a reference to a Governmental authority, an expert on the subject. This ground of appeal fails.”

13. From the various replies given by the assessee during the course of assessment proceedings vis-à-vis a perusal of the findings given by the CIT(A) shows that the Assessing Officer in the instant case has not rejected the books of account before making a reference to the DVO on 5th April, 2006. We find the Hon'ble Allahabad High Court in the case of Lucknow Public Educational Society (supra) has held that u/s 142A(1) the assessing authority cannot refer the matter to the DVO without first rejecting the books of account. Relevant observation of the Hon'ble High Court at para 18 to 20 of the order read as under:-

“18. 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.

20. For the aforesaid reasons, the questions of law as framed would not arise and, consequently, all the appeals are dismissed.”

"Whether the Hon'ble ITAT has erred in law as well as in the facts and circumstances of the case in holding that the books of account has to be rejected before referring to the D.V.O. u/s 142A and ignoring the decision in case of Bharathi Cement Corporation Ltd. Vs. CIT - 253 CTR 98 (AP) and the decision rendered by the division bench of Uttrakhand High Court in Case of CIT Vs. Bhavani Shankar Vyas - 311 ITR 8 (Uttrakhand)."

14.1 The Hon'ble High Court decided the issue in favour of the assessee and against the Revenue by observing as under:-

“4. Learned counsel for the parties, at the outset, stated that question raised in these appeals is squarely covered by judgment dated 25.01.2017 passed by this Court in Commissioner of Income Tax, (Central) Lucknow Vs. Shri Udai Chand Chaurasia Shri Ram Road Lucknow (Income Tax Appeal No. 25 of 2015), alongwith other connected matters, which reads as under:

"1. Heard Mr. Sidharth Dhaon, learned counsel for Revenue and Sri Abhinav Mehrotra, learned counsel appearing for Assessees in all these appeals and perused the record.

3. Substantial question of law formulated in these appeals reads as under:-

"Whether the Hon'ble ITAT has erred in law as well as in the facts and circumstances of the case in holding that the books of account has to be rejected before referring to the D.V.O. u/s 142A and ignoring the decision in case of Bharathi Cement Corporation Ltd. Vs. CIT - 253 CTR 98 (AP) and the decision rendered by the division bench of Uttrakhand High Court in case of CIT Vs. Bhavani Shankar Vyas - 311 ITR 8 (Uttrakhand)."

We find the Assessing Officer, at page 3 of the order has mentioned as under:-

“On 13.02.2006 assessee filed a written reply. Books of Accounts produced and examined with.”

16.1 Similarly, the Assessing Officer at page 5 of the order has observed as under:-

“Assessee has filed written replies to the queries raised in various dates. In view of written replies filed and details produced, the manufacturing and trading results disclosed are not disturbed.”

by the assessee are accordingly allowed on this issue and the grounds raised by the Revenue are dismissed.

19. Now, coming to the second issue i.e., the addition u/s 68 is concerned, we find the Assessing Officer, in the instant case, made addition of Rs.20 lakhs being share application money received by the assessee from the three persons named earlier on the ground that the assessee failed to produce the above parties for his examination and the letters issued to the above three parties were not complied with since one letter was returned unserved and the other two parties did not respond. It is the submission of the ld. counsel for the assessee that proper opportunity was not granted to the assessee and, therefore, he has no objection if the matter is restored to the file of the Assessing Officer with a direction to give one final opportunity to the assessee to substantiate with evidence to his satisfaction regarding the identity and credit worthiness of the share applicants and the genuineness of the transaction.