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Income Tax Appellate Tribunal, “D” BENCH, CHENNAI
Before: SHRI CHANDRA POOJARI & SHRI DUVVURU RL REDDY
आदेश /O R D E R
PER CHANDRA POOJARI, ACCOUNTANT MEMBER
This appeal filed by the assessee is directed against the order of the Commissioner of Income-tax (Appeals) dated 30.3.2017 for the assessment year 2010-11.
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The assessee has raised the following grounds :
“1. The order of the learned CIT(Appeals), Salem dt. 30.3.2017 in is opposed to the facts of the case and is not legally maintainable.
2. The learned CIT(A) is not justified in not following the order of ITAT in the case of Appellant for the Asst. Year 2011-12 in dt. 22.05.2015.
3. The appellant filed detailed written submissions dated 20.03.2017 in the course of appeal proceedings before the first appellate authority. The learned CIT(Appeals) is not justified in not considering all the submissions in its proper perspective.
4. The order of ITAT passed in the case of appellant for the Asst. Year 2011-12 squarely covers the issues both as to facts and legality for the year under appeal. In view of this factual position, the learned CIT(A) should have followed the order of ITAT a referred to above instead of taking a different view for the year under appeal.
5. Even assuming for a moment but not conceding that the action of CIT(A) in confirming the order of AO as correct, the learned CIT(A) should have given directions to the AO to adopt state PWD rates as against CPWD rates adopted by District Valuation Officer. The above direction was given in the case of appellant by the first appellate authority for the assessment year 2011-12.
6. In the written submission dt. 20.03.2017 filed before CIT(A), in para 7, detailed facts as to investment made by tenant namely by M/s. Jayasuriya Retail Venture Ltd. was brought on record along with documentary evidences. The learned CIT(A) is not justified in not giving any findings in his appellate order regarding the above factual position. If the above factor is taken into
- - 3 ITA 1012/Mds/17 account there is no scope for addition towards understatement in cost of construction and the entire addition should have been deleted.
7. In view of the above grounds and the other facts to be adduced at the time of hearing the appellant prays the addition of ₹ 3,29,21,079/- made by the assessing officer and sustained by CIT(A) may be deleted and justice rendered.”
Ground Nos. 2 to 4 is with regard to adoption of DVO’s report for the purpose of determining the cost of construction of a shopping complex so to frame assessment on that basis.
The facts of the case are that the assessee has constructed a commercial shopping complex at Salem Road, Namakkal during the period April, 2009 to September, 2010.
During the course of assessment proceedings the assessee has also furnished the following details regarding total investment made towards cost of construction of such commercial shopping complex: Amount ₹ Sl.No. Description 1. Investment made during the previous year 1,18,58,976 2009-10 2. Investment made during the previous year 32,35,800 2010-11 3. Total Investment on Construction 1,51,21,776
- - 4 ITA 1012/Mds/17 After going through the details, it is observed by the AO that the assessee has incurred 78.6% of the cost of construction during the FY 2009-10 and remaining cost of 21.4% during the FY 2010-2011. However, the assessee has not furnished any books of accounts, bills / vouchers in support of total cost claimed to have been invested towards construction of such building, before the AO. Therefore, the valuation was referred to the DVO. Since, the assessee did not substantiate his cost of construction with reference to the books of account and vouchers, the AO adopted the valuation of the DVO and estimated the cost of construction. Aggrieved, the assessee went in appeal before the CIT(Appeals).
During the course of appellate proceedings, the ld. AR has stated that the Tribunal, Chennai ‘C’ Bench, has allowed the appeal in entirety in assessee’s own case against the order passed by the CIT(Appeals) for the AY 2011-12, wherein it has been held that the AO cannot refer the matter to the valuation officer without rejecting the books of accounts.
After considering the submission of the ld. AR, the - - 5 ITA 1012/Mds/17 CIT(Appeals) observed that the ld. AR has simply relied on the order of the Tribunal in assessee’s own case without bringing any other inaccuracies in the assessment order. Further, the CIT(Appeals) observed that the assessee had not even filed the return of income in time. He has made a belated return of income for AY 2010-11 on 31.3.2011 returning total income of ₹2,09,600/- on estimation basis claiming benefit of sec.44AE of the Act and has claimed a refund of ₹ 19,100/-.
6.1 The CIT(Appeals) observed that the assessee has adopted delaying tactic and an un-cooperative attitude which has been narrated by the AO at several places in his order. According to the CIT(Appeals), such an attitude by the assessee will make it very difficult for the AO to arrive at true and correct income of the assessee. Therefore, the CIT(Appeals) observed that the AO is forced to adopt all the tools available to him including relying on the valuation report to arrive at true and correct income of the assessee. The AO has rejected the books of account of the assessee before adopting the valuation report and to that extent the order of the Tribunal has been complied with. The CIT(Appeals) observed that the facts of this - - 6 ITA 1012/Mds/17 assessment year are very different from the assessee’s own case during the AY 2011-12 and therefore, the benefits should not be given to the assessee following the order of the Tribunal based on facts of that assessment year. Against this, the assessee is in appeal before us.
We have heard both the parties and perused the material on record. Admittedly, this issue came for consideration before the Tribunal in assessee’s own case for the AY 2011-12 in ITA No.100/Mds/2015. The Tribunal vide its order dated 22.5.2015 held as under :
“8. We have heard both the parties perused the material on record. In this case the assessee admitted cost of construction of �1,55,74,158/- located at 196, Salem Main Road, Namakkal in the name of N.S.R. Mall. According to the Assessing Officer the cost admitted by assessee is very low on comparing with the building structure. The building comprised of basement/ground floor + 3 floors (5 floors). He had deputed an Inspector to visit and submit a report. The inspector submitted his report on 10.07.2013. According to him the cost of construction is about �4,50,00,000/-. Vide his letter dated 19.07.2013, the assessee objected the valuation report by the Inspector. The department vide letter dated 25.07.2013, referred the matter to the District Valuation Officer, Chennai as per the provisions of Sec. 142A of the Income
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Tax Act. Further he issued notice to the assessee on 18.09.2013 and the case was posted for hearing on 04.10.2013 by Assessing Officer. The assessee’s representative appeared before the Assessing Officer on 03.10.2013 along with cash flow statement, statement of affairs, capital account and name and address of the sundry creditors. The assessee at that point of time not produced books of accounts. Later the case was adjourned to 14.10.2013 by Assessing Officer. In meantime, the District Valuation Officer, Chennai gave a valuation report on 01.01.2014. He determined the cost of construction at �5,70,06,100/-. The assessee’s representative appeared before the Assessing Officer on 02.01.2014 and Assessing Officer gave a copy of the valuation report to him and Assessing Officer called for copy of building plan, building approval, copy of land deed and supporting evidences for cost of construction with break up. The assessee’s representative appeared on 21.01.2014 before the Assessing Officer and stated that assessee maintained books of accounts and bills/vouchers for the construction. However, he has not produced the same. Later, the assessee produced the books of accounts for cost of construction produced by the assessee's representative verified by the Assessing Officer. According to Assessing Officer, the assessee has not maintained the books of account and bills/vouchers properly. It was observed by Assessing Officer that the books of accounts are prepared at the time of assessment only with the available bills and most of the expenses are supported with self made bills/vouchers. Hence the books of account and bills/vouchers produced cost of construction building are rejected by Assessing Officer. Further, the Assessing Officer observed as follows:-
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1). While the assessee claims that almost all vouchers are produced, it is to be stated that the vouchers are available in respect of purchase of steel, cement, blue metal to some extent all the other vouchers are all self made and it is not corroborated. 2). Since it is not proved that the assessee engaged the services of an Architect, it is felt that to this extent relief can be given, which would amount to �. 6,47,465/- (The DVO has estimated the architect fee at 1 % only as against 2% mentioned by the assessee in his letter.
3). It is pertinent to mention here that the assessee has not maintained regular books of accounts. The accounts purportedly maintained for the construction (Construction A/c) by itself would not qualify as books of accounts per se and the question of making a reference to the Valuation Cell only after rejecting the books of accounts does not arise in this case as was held in the case of Sargam Cinema Vs. CIT (2011) 197 TAXMANN203 (SC) quoted by the assessee.
The assessee was then examined under oath u/s 131 by Assessing Officer on 27.02.2014 to question and verify the various aspects of the construction of the building. The assessee has stated that the construction work was carried out by him personally under the direct supervision of his father Shri. C. Rangasamy (Reply to Q. No. 8). According to Assessing Officer the registered valuer has given the break- up of the material usage by the assessee and certain glaring inconsistencies are noted in this Valuation Report. The registered valuer has not provided for the sand used whereas the assessee stated that 454 units of sand were used. Also the registered valuer has given the period of commencement and completion of building from April'2009 to March'2010 however the assessee stated that the period of commencement and completion of building from April'2009 to September'2010. There is also a difference in the - - 9 ITA 1012/Mds/17 constructed area which is shown at 53,331 sq.ft in the approved valuer's report as against an area of 57,347 sq.ft mentioned in the DVO's report. Thus, he rejected the valuation report from Registered valuer.
9. As seen from the above, the assessee has produced the books of accounts before the Assessing Officer. The Assessing Officer has rejected the books of accounts on the reason that the books of accounts were prepared by assessee at the stage of assessment and most of the expenses are supported by self made bills/vouche�. Hence, the books of accounts and bills/vouchers against the construction were rejected and reference was made to DVO u/s.142A of the Act.
The section 142A reads as follows:- “142A (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 of section 69B or the value of any bullion, jewellery or other valuable article referred to in section 69A or section 69B 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’’.
Under the provision of Section 142A(1), the Assessing Officer could refer the matter to DVO for ascertaining the cost of construction when the proceeding is pending before him. However, before referring to the DVO the Assessing Officer shall reject the books of accounts. Perusal of the assessment order shows that there is no reference to any material /evidence/ information on the basis of which it could be said that the cost of 10 - - ITA 1012/Mds/17
construction was shown by assessee was understand or anything above what was disclosed by assessee in the books of accounts. It is clear from the assessment order that the assessee had produced books of accounts to the Assessing Officer, the Assessing Officer rejected the books of accounts with reference to the cost of construction on the reason that expenditure are supported by self made vouchers/bills. We noticed that even before verifying the books of accounts maintained by the assessee and without pinpointing any defect in the books of accounts regarding cost of construction reference was made to the DVO for valuation. As seen from the assessment order and narrated in the earlier para of this order, the assessee has maintained books of accounts and produced the same before the Assessing Officer. According to the Assessing Officer books of accounts was prepared at the time of assessment only. Various expenditures are supported by self made vouchers. But the Assessing Officer has not found out any defect in the books/records/bills/etc. Without causing any defects in books regularly maintained and without rejecting the books u/s.145 of the Act, there is no reason to refer the matter to D.VO on the presumption that the cost /investment in construction is low. The Assessing Officer could reject the books of accounts in the following possible three situation. (a) Non-compliance with method of accounting in a consistent manner. (b) Non-compliance with accounting standards prescribed under section 145 of the Income Tax Act. (c) Accounts were maintained by an assessee, which were incomplete and incorrect.
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Section 145 gives the power to reject the books results and estimate the income in certain circumstances. As the Assessing Officer examines the accounts of an assessee, he has to consider the following questions:-
1. 1. Whether the assessee has regularly employed a method of accounting.
2. Even if regular adoption of a method of accounting is there, whether the annual profits can properly be deducted from method employed; 3. Whether the accounts are correctly maintained; and 4. Whether the accounts maintained are complete in the sense that there is no significant omission therein.
If the answers to all the above four questions are in affirmative, then assessee’s profits are to be computed on the basis of his accounts. In such case, neither the first proviso to section 145(1) nor section 145(2) can be invoked.
In the findings on question Nos.1, 3 and 4 are in affirmative, but finding in question No.2 is negative, first proviso to section 145(1) comes in and computation has to be made on such basis and in such manner as Assessing Officer, may determine.
If the findings on question No.1, 3 or 4 is in negative section 145(2) applies and Assessing Officer, may make a best judgment in manner provided for in section 144’’.
It is evident from the assessment order that the Assessing Officer was not in dispute with the method of accounting followed by the assessee or compliance with the accounting standards prescribed
12 - - ITA 1012/Mds/17 under the Income Tax Act. The only dispute, which made him invoke section 142A was the assumption that the assessee’s expenditure were supported by self made vouchers. However, he could not substantiate anything to prove that its accounts were incomplete and incorrect.
In our opinion, the Assessing Officer prejudged the issue as cost of construction declared by assessee is very low as on that reason he referred the valuation of construction to DVO which clearly show that there is no proper appreciation of the facts of the case. It was brought to our notice that the assessee has produced books of accounts, bills/vouchers showing cost of construction. According to Assessing Officer certain expenditure of the assessee were supported by self made vouchers. The assessee also produced details of loan availed/source for cash deposits, copy of land deed and break up details on cost of construction. The Assessing Officer also agreed that the assessee had undertaken construction of skeletal superstructure of the building and interior work of the building was entirely done by the tenant (flooring tiles, air conditioning, wood partitions, false ceiling, electrical wiring, internal painting, genset installation). However, the Assessing Officer has not ready to accept the same on the reason that certain expenditure were self made vouchers. In our opinion, in this line of business activity of civil construction, certain items of expenditure to a small and reasonable extent may not be supported with proper external evidence i.e. certain labour payments and purchase of materials such as bricks, sand etc., Undoubtedly, such items would be well within the acceptable limits of reasonableness. Anyhow, such items of expenditure would be well supported by self made vouchers. It be appreciated that such 13 - - ITA 1012/Mds/17
type of expenditure would be acceptable at the threshold on the basis of reasonableness. It is imperative to incur such expenditure and the same cannot be disputed by the Assessing Authorities. Test of reasonableness has been widely accepted in various judicial pronouncements for allowability of such expenditure in the hands of assessee. The learned Assessing Officer ignoring this basic approach of judicious evaluation projected the same issue as a warranting reason for rejection of book results. In such a scenario, if the learned Assessing Officer is in dispute with any particular item of expenditure as unverifiable, the same item should have been considered as specific addition in assessment. The general comment of the Assessing Officer clearly demonstrates that he could not quantify any specific expenditure as unverifiable which warrants for reference to the DVO. Inaction on the part of Assessing Officer to specifically quantify unverifiable expenditure for a specific addition in the assessment cannot empower such an Assessing Officer to resort to rejection of book results so as to invoke the provisions of Section 142A or 145. This particular reason relied upon by the Assessing Officer for rejecting the books is legally unsustainable as the same is not establishing any incompleteness or incorrectness of assessee’s accounts rather than he is preoccupied with a view that the cost of construction disclosed by the assessee is very low. Judicial precedence is categorically in favour of an assessee in this context by holding that such actions of Assessing Officers were held to be legally untenable. Absence of vouchers or the supporting evidence in respect of a particular item of expenditure cannot by itself empower an Assessing Officer to invoke provision of Section 142A or 145 of the Act in rejecting the books of account. In our opinion, rejection of books cannot be restored to simply on the basis of 14 - - ITA 1012/Mds/17 absence of some vouchers and failure to produce the same by the assessee. In other words, any such situation should only warrant a specific addition by the Assessing Officer if he comes to a conclusion that such expenditure had not been incurred or not verifiable. Instead of adopting this accepted approach if an Assessing Officer resorts to a convenient approach of rejecting the books in total before examining the same and referring the matter to DVO and such action would be illegal against the tenets of law. In our opinion, on account of mere absence of vouchers to substantiate entries for the accounts, account in total cannot be rejected. In this scenario a very general finding made by the Assessing Officer without any specific focus on any particular item of expenditure, entire accounts cannot be rejected under Section 145(3). Action of the Assessing Officer clearly demonstrates that he could not gather any details or find any irregularity in maintenance of the books so as to justify rejection of books in toto. It was also established beyond doubt that Assessing Officer could not quantify any specific amount of expenditure for disallowance. Absence of some of the vouchers or self made vouchers was projected as a reason for rejection of books. If at all there was any lapse on the part of the assessee in respect of maintaining vouchers of a particular item of expenditure, the same may warrant, at the most a specific addition and nothing beyond that. A minor irregularity cannot be blown out of proportion to resort a convenient approach of the rejection of the book results so as to refer the matter to DVO. In view of the same, the reasoning offered by the Assessing Officer for rejecting the books as legally unsustainable proposition. Even on this issue, the learned Assessing Officer would have resorted to a more specific approach of identifying such expenditure, which are not 15 - - ITA 1012/Mds/17 acceptable and are on the higher side for disallowance instead of rejecting book results in toto. Courts have repeatedly held that reasonableness of the expenditure should be judged from the view point of the business carried on by the assessee and not from the view point of the revenue authorities.
Thus in our opinion, in this case the assessee maintained books of accounts and duly furnished before the Assessing Officer and he has not appreciated the same and only on presumption that cost of construction was very low, he referred the matter to DVO without properly rejecting the books of accounts maintained by the assessee. In our opinion, reference to DVO u/s.142A(3) of the Act could be made when books of accounts are rejected by pinpointing defect therein. In other words, if the books of accounts are found to be correct and complete in all respect and no defect is pointed out therein and the cost of construction of building is recorded therein, addition referred u/s.142A (2) is not appropriate. Accordingly, we are of the considered view that in the present case when the Assessing Officer has not rejected the books of account by pin pointing any defects in the books of account reference to the DVO is not valid and, therefore, DVO’s report could not be utilized for framing assessment even if such a report is considered to be obtained u/s.142A of the Act. Since reference to DVO being held as invalid, the assessment thereafter based on that DVO report also be invalid. This view of our is fortified by following precedents:- (i) DCIT vs. Satish Cold Storage 36 ITR (Tribunal) 435 (Lucknow) wherein held that Assessing Officer could not refer the matter to DVO without books of account being rejected.
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(ii) Sargam Cinema vs. CIT (328 ITR 513)(SC) wherein held that reference to DVO was made without rejecting the books of account, the reference to the D.V.O. itself is bad in law.
Accordingly, we are inclined to allow the appeal of the assessee.
In the result, the appeal of the assessee in is allowed.
We find that the AO also in this assessment year relied on the same valuation report, which was considered as invalid by the Tribunal for the purpose of framing assessment for the assessment year 2011-12. When the Tribunal considered the said valuation report as invalid for the purpose of assessment year 2011-12, how it could be considered as valid so as to ascertain the cost of construction and to make addition as unexplained investment for the assessment year 2010-11. The DVO’s report cannot be obtained before the commencement of the assessment proceedings and also before rejection of books of account of the assessee. Being so, in our opinion, the assessment framed, on the basis of such invalid DVO’s report is bad in law. Accordingly, we quash the assessment order for this assessment year also as discussed by the Tribunal in earlier
17 - - ITA 1012/Mds/17 occasion in its order cited supra. Since, we have quashed the assessment order itself for the assessment year under consideration, we refrain from going to the other grounds of appeal raised by the assessee for this assessment year..
In the result, the appeal of the assessee is allowed.
Order pronounced on 12th July, 2017 at Chennai.