SRI. NARAYANARAO M. MORE,,BIDAR vs. ITO, BIDAR

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH “ C ” BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER I.T.A. Nos.959 to 964/Bang/2014 (Assessment Years : 2004-05 to 2009-10) Sri Narayanarao M More, The Income Tax Officer, Vs. H.No.8-9-270/A-62, Ward 1, Bidar. Gurunagar Colony, Bidar. PAN ASSPM 5328N Appellant Respondent.

Appellant By : S/Shri B.S. Balachandran & P. Dinesh, Advocates. Respondent By : Shri D.K. Jha, Addl. CIT (D.R) Date of Hearing : 29.08.2016. Date of Pronouncement : 31.8.2016. O R D E R Per Shri Vijay Pal Rao, J.M. : These appeals by the assessee are directed against the composite order dt.24.03.2014 of Commissioner of Income Tax (Appeals) for the Assessment Years 2004-05 to 2009-10. 2. Common grounds are raised by the assessee for the Assessment Year 2004-05 to 2008-09 except the amount of addition made in different assessment years. The grounds raised for the Assessment Year 2004-05 are as under : “ 1. The CIT (Appeals) grossly erred in dismissing the appeal without giving reasonable opportunity to the Appellant and therefore the order is not maintainable in the eye of law as the same is passed in violation of principles of natural justice.

2 ITA Nos.959 to 964/Bang/2014 Shri Narayana Rao M More 2. The CIT (Appeals) ought to have appreciated that there being no escapement of income within the meaning of Section 147, the reopening of assessment is bad in law. 3. The CIT (Appeals) ought to have appreciated that the assessment being reopened on the ground of cost of construction/valuation of residential house, the reopening is bad in the eye of law as settled by the Hori'ble Supreme Court in the case of (1) Sargarn Cinema vs. CIT (2010) 328 ITR 513 (SC) and (2) ACIT vs. Dhariya Construction Co (2010) 328 ITR 515 (SC) and therefore the consequent assessment order is not sustainable in the eye of law. 4. Without prejudice, the CIT (Appeals) ought to have appreciated t h a t the reopening of assessment was made on a mere change of opinion more so on the allegations of investment made by the Appellant and that there was no material whatsoever with the assessing officer to arrive at the conclusion that there was escapement of income and therefore the assessment order is not sustainable in the eye of law. 5. The CIT (Appeals) grossly erred in sustaining the addition with regard to the agricultural income when admittedly the assessee was having 5 acres of agricultural land and therefore the estimation of Rs.3,000 / - per acre by the assessing officer is highly unjustified. 6. The CIT (Appeals) grossly erred in sustaining the addition under the head "house-hold expenses" when in a place like the Appellant's village the cost of living is very less compared to a city. 7. Without prejudice, the CIT (Appeals) grossly erred in dismissing the appeal without giving a speaking order.

3 ITA Nos.959 to 964/Bang/2014 Shri Narayana Rao M More 8. The CIT (Appeals) erred in sustaining the interest charged under Section 2348 of the Act. 9. For these and other grounds that may be urged at the time of hearing of the appeal the appellant prays that the appeal may be allowed.”

4 ITA Nos.959 to 964/Bang/2014 Shri Narayana Rao M More In the meantime the Assessing Officer issued a notice under Section 148 of the Income Tax Act, 1961 (in short 'the Act') dt.29.3.2010 to Smt. Rukmini Bai, wife of the assessee on the ground that she has constructed a residential house during the F.Y. 2007-08 relevant to the Assessment Year 2008-09. Since there was no compliance of filing of return in response to notice under Section 148 of the Act by Smt. Rukmini Bai, the Assessing Officer made a reference for estimating the cost of investment under Section 142A of the Act to the Department Valuation Officer (DVO). After receiving the report of the valuation officer, the Assessing Officer reopened the assessment of the assessee by issuing a notice under Section 148 on 23.3.2011. The assessments were completed under Section 143(3) r.w.s. 147 of the Act vide order dt.28.12.2011. The assessee challenged the action of the Assessing Officer before the CIT (Appeals) but could not succeed. 6. Before the Tribunal, the learned Authorised Representative of the assessee has submitted that the assessments were reopened by the Assessing Officer on the basis of the DVO’s report and valuation therefore the reopening is not valid as the Assessing Officer has not applied his mind to form a belief that income assessable to tax has escaped assessment. He has further submitted that there was no other corroborative evidence or material with the Assessing Officer except the report of the DVO to reopen the assessment. In support of his contention, he has relied upon the decision in the case of ACIT Vs. Dhariya Construction Co. 328 ITR 550 (SC) and

5 ITA Nos.959 to 964/Bang/2014 Shri Narayana Rao M More submitted that the Hon'ble Supreme Court while confirming the decision of Hon'ble High Court has held that the opinion of the DVO per se not an information for the purpose of reopening of assessment under Section 147 of the Act. The Assessing Officer has to apply his mind to the information if any collected and must form the belief thereon. He has also relied upon the decision of the Hon'ble jurisdictional High Court in the case of Sri S.S. Jyothi Prakash Vs. ACIT 240 Taxman 741 (Kar) and submitted that the Hon'ble High Court has held that the primary burden to prove the under statement or concealment of income by way of unexplained investment is on the revenue and it is only when such burden is discharged it would be permissible to rely upon the valuation given by the DVO. Thus the learned Authorised Representative has submitted that when the report of the DVO cannot be a basis of addition then the same cannot be a basis for reopening. He has pleaded that the reopening for the Assessment Years 2004-05 to 2008-09 is bad in law and may be quashed. The learned Authorised Representative has further contended that the reopening is otherwise not sustainable when the Assessing Officer has not made any addition on account of unexplained investment in the residential house but the addition has been made at the time of framing the assessment on account of unexplained credit in the capital account. Therefore when the Assessing Officer himself has not made any addition on the issue of reopening of assessment then the other addition made by the Assessing Officer is not sustainable.

6 ITA Nos.959 to 964/Bang/2014 Shri Narayana Rao M More 7. On the other hand, the learned Departmental Representative has submitted that the assessee did not file any return of income for these assessment years and only on 20.12.2010 the return was filed therefore when the Assessing Officer conducted an enquiry regarding the investment in construction of the residential house it was found that the assessee has made the said investment. The report of the DVO as well as the stand taken by the wife of the assessee that the investigation was made by the Assessee constitute a valid material for reopening of the assessment. He has further contended that it is only during the investigation made by the Assessing Officer in the case of wife of the assessee, this information came to the knowledge of the Assessing Officer that the assessee has made the investment in the construction of residential house. Accordingly the information gathered by the Assessing Officer during the enquiry and investigation in the case of wife of the assessee constitute a tangible material for reopening of the assessment of the assessee. 8. I have considered the rival submissions as well as the relevant material on record. The reason recorded by the Assessing Officer for all these five assessment years are common which reads as under : “ Shri Narayanrao M More H.No.8-9-270/A-62, Guru Nagar Colony, Bidar. PAN : ASPPM 5328N Asst. Year : 2007-08. A Notice u/s. 148 was issued and served on the assessee's wife Smt. Rukmini Narayanrao More on 29/03/2010, on the ground that Smt Rukmini Narayanrao More has constructed a residential house at H.No. 8-9-270/A-62,

7 ITA Nos.959 to 964/Bang/2014 Shri Narayana Rao M More Gutunagar Colony, Bidar. Vide this office Notice u/s 148 dtd: 29/03/2010, Smt. Rukminibai N More was to deliver a return of income in the prescribed form within 31 days from the date of receipt of the notice. There had been no compliance. A Reference Proforma was issued for estimating the cost of investment under section 142(A) of the Income - tax Act 1961 addressed to The Assistant Valuation Officer., I.T.Dept., Hubli to evaluate the cost of investment in construction of the above said residential house. The Valuation Officer Valued the residential house at Rs. 41,40,4001-. During the course of Valuation the assessee did not submit the necessary required documentary evidences. Based on the time period taken for construction and other factors like the general engineering practice etc., the year wise cost of investment has been apportioned by the Valuation Officer as under:

During the F.Y. 2003-04 8.00% amounting to Rs.3,31,232. During the F.Y. 2004-05 23.00% amounting to Rs.9,52,292.

During the F.Y. 2005-06 23.00% amounting to Rs.9,52,292.

During the F.Y. 2006-07 23.00% amounting to Rs.9,52,292. During the F.Y. 2007-08 23.00% amounting to Rs.9,52,292. Total : Rs.41,40,400.

Due to non compliance by the assessee to this office letters/notices, a proposal was sent on 07/12/2010 stating that the residential house has been valued at Rs.41,40,400/- by the Dept., and the year wise breakup was narrated and one more opportunity was given to furnish the details on or before 20/12/2010, failing which it will be presumed that the assessee has no valid details

8 ITA Nos.959 to 964/Bang/2014 Shri Narayana Rao M More to furnish before the undersigned. It was also narrated that the entire year wise investment will be treated as unexplained. Investment of the concerned assessment year and the assessments will be concluded without further notice. In compliance to the proposal dtd 071l2/20 10, the assessee filed a letter stating that the entire investment in construction of residential house was made by her husband Shri Narayanrao More, but the property stands in her name. A sworn statement of Smt. Rukmini Bai was recorded to that effect. I have therefore, a reason to believe that the investments made by the assessee Shri Narayanrao More for the F/Y 2006-07 relevant A/Y 2007-08 of Rs.9,52,2921- chargeable to tax has escaped assessment within the meaning defined in section 147 of the LT. Act 1961. I therefore, find it a fit case for issue of notice u/s.148. Issue notice u/s.148 of the Income Tax Act, 1961. ” It is manifest form the reasons recorded by the Assessing Officer that a notice under Section 148 was issued on the wife of the assessee on 29.3.2010 on the ground that she has constructed a residential house. The Assessing Officer then referred the issue of estimating the cost of investment under Section 142(A) of the Act to the DVO. The DVO in its report has stated that the investment in the residential house of Rs.41,40,400 was made during various financial years from 2003-04 to 2007-08. On the basis of the said report, the Assessing Officer has reopened these five assessment years of the assessee. It is clear from the reasons recorded by the Assessing Officer that apart from report of the DVO, there is no other material or corroborative

9 ITA Nos.959 to 964/Bang/2014 Shri Narayana Rao M More evidence to show that the alleged investment was made by the assessee in the residential house during all these assessment years. It is pertinent to note that the Assessing Officer has presumed the investment of each year based on the DVO’s report without referring any other documents or evidence to indicate that the construction of the property started in the FY 2003-04 and it continued up to FY 2007-08 relevant to the assessment years 2004-05 to 2008-09. Therefore except the report of the DVO there is no other material either referred in the reasons recorded or it was available with the DVO. There is nothing in the reasons recorded as what is the basis of the DVO’s report to say that the assessee has made the investment in the residential house during all these years and to the extent of the amount as alleged in the DVO’s report. Therefore the reasons recorded by the Assessing Officer for reopening of the assessment clearly reveals that the reopening is based on the DVO’s report. The Hon'ble Supreme Court in the case of ACIT Vs. Dhariya Construction Co. (supra) while confirming the judgment of Hon'ble Gujarat High Court dt.6.11.2001 in TA No.310/2001 has held as under : “ 1. Having examined the record, we find that in this case, the Department sought reopening of the assessment based on the opinion given by the District Valuation Officer (DVO). The opinion of the DVO per se is not an information for the purposes of reopening assessment under Section 147 of the Income Tax Act, 1961. The Assessing Officer has to apply his mind to the information, if any, collected and must form a belief thereon. In the circumstances, there is no merit in the civil appeal. The Department was not entitled to reopen the assessment.” Thus it is settled proposition of law that the information of the DVO per se is not an information for the purpose of reopening of assessment under Section 147 of the Act.

10 ITA Nos.959 to 964/Bang/2014 Shri Narayana Rao M More It is mandatory requirement that the Assessing Officer has to apply his mind to the information if any collected and must form the belief thereupon. the Hon'ble jurisdictional High Court in the case of S.S. Jyothi Prakash Vs. ACIT (supra) while dealing with an issue of addition made on the basis of DVO’s report has held in paras 14 to 18 as under : “ 14. The aforesaid shows that the primary burden to prove the understatement or concealment of the income by way of unexplained investment is on the revenue and it is only when such burden is discharged, it would be permissible to rely upon the valuation given by the District Valuation Officer. Further, it was also held that if there was no evidence or material in possession to come to the conclusion that the assessee had paid extra consideration over and above what was stated in the sale deed, the District Valuation Officer’s report cannot be a sole basis for assessment of the income. It was further held that opinion of the District Valuation Officer per se was not sufficient and the other corroborative evidence was required. 15. We may also refer to the subsequent decision of the High Court of Delhi in case of Commissioner of Income Tax vs Sadhna Gupta reported in (2013) 352 ITR 0595, wherein once again similar question came up for consideration to examine as to whether the Tribunal committed an error in not relying upon the District Valuation Officer’s Report under Section 142A and thereby deleting addition of the income based on the said report. The High Court of Delhi after considering the aforesaid question, observed at para Nos. 4 and 5 as under:- “4. Only point to be considered is whether the valuation rendered by the DVO is to be taken into account or not. It has been argued by the learned counsel for the revenue that the assessing officer was justified in referring the matter to the DVO for an opinion with regard to the fair market value of the property and once that opinion has been rendered, the same has to be taken into account and if that were to be so, the addition of 2,81,83,000/- would be fully justified. Consequently, it was submitted by the learned counsel for the revenue that the Tribunal had erred in deleting the addition. On the other hand the learned counsel for the respondent referred to a Division Bench decision of this Court in the case of CIT v. Shri Puneet Sabharwal: (2011) 338 ITR 485. In that decision a specific question had been raised as to whether the Income Tax Appellate Tribunal was right in holding that notwithstanding the report of the DVO the revenue had to prove that the assessee had received extra consideration over and above the declared value of the same. That question was answered by this Court in favour of the assessee and against the revenue. The Division Bench in the case of Shri Puneet

11 ITA Nos.959 to 964/Bang/2014 Shri Narayana Rao M More Sabharwal (supra) had also placed reliance on the decision of Supreme Court in K.P. VARGHESE (supra) as also on another decision of a Division Bench of this Court in CIT v.Smt. Suraj Devi: (2010) 328 ITR 604 (Delhi) wherein this Court held that the primary burden of proof with regard to concealment of income was on the revenue and it was only when the said burden was discharged that reliance could be placed on the valuation report of the DVO. There are several other decisions of this Court in the same vein. One such case being the case of CIT v. Vinod Singhal: (ITANo.482/2010 decided on 05.05.2010) where, again, reliance was placed on the very same decision of the Supreme Court in K.P.Varghese (supra) and also on a decision of this Court in CIT v. Smt. Shakuntala Devi: (2009) 316 ITR 46. It was observed that there must be a finding that the assessee had received an amount over and above the consideration stated in the sale deed and for this the primary burden was cast on the revenue. It is only when this burden is discharged by the revenue that it would be permissible to rely upon the value as given in the valuation report of the DVO. 5. The law seems to be well settled that unless and until there is some other evidence to indicate that extra consideration had flowed in the transaction of purchase of property, the report of the DVO cannot form the basis of any addition on the part of the revenue. In the present case there is no evidence other than the report of the DVO and, therefore, the same cannot be relied upon for making an addition. In these circumstances, the question which has been framed is decided in favour of the assessee and against the revenue. The appeal is dismissed.” 16. The aforesaid shows that it was observed that the law is well settled that unless and until there is some other evidence to indicate that extra consideration had flowed in the transaction of purchase of property, the report of DVO cannot form basis of any addition on the part of the revenue. Since in the said case there was no evidence other than the report of DVO, it could not be relied upon for making addition. The question was decided in favour of the assessee against revenue and the appeal of the revenue was dismissed. 17. We need not burden our judgment with other case-laws, since in our view the aforesaid two decisions of the High Court of Delhi throws light on the settled legal position for the purpose invoking power under Section 69 of the Act. 18. Examining the matter further on facts, in the present case, it appears that it is not a case of the revenue that there was any independent or corroborative material for consideration paid or received in addition to than mentioned in the sale deed. The basis of the addition is only valuation report of the District Registrar under the Stamp Act and the Departmental valuer. As such, there is no independent material which had come on record for such purpose. The payment of additional stamp duty may be on the basis of the valuation of the valuer of the stamp Act authority but same ipso

12 ITA Nos.959 to 964/Bang/2014 Shri Narayana Rao M More facto cannot be said to be a valid ground to initiate the proceedings under Section 69 of the Act or to invoke power under Section 69 of the Act on the premise that additional consideration was paid or received. Further, if such could not be the basis, subsequent valuation report would also not a ground. In the absence of any independent material, the report of the valuer could not be the basis for making addition. Under such circumstances, we find that the addition made by the Assessing Officer and further modified by the CIT (Appeal) as well as by the Tribunal cannot be sustained.” The Hon'ble High Court has reiterated the settled principle of law that unless and until there is some other evidence to indicate that extra consideration had flown in the transaction of purchase of property, the DVO report cannot form the basis of any addition on the part of the revenue. In the case on hand apart from the DVO’s report there is no other evidence to indicate that the assessee has invested in the residential property during all these years as alleged in the DVO’s report. Therefore the same cannot be the basis of reopening of the assessment until and unless an independent corroborative material is available with the Assessing Officer to form the belief that the income assessable to tax being the investment made in the residential house during all these years has escaped assessment. In view of the above facts and circumstances of the case as well as the decisions of Hon'ble Supreme Court as well as Hon'ble High Court cited supra, I am of the considered opinion that the reopening on the basis of the DVO’s report is not valid for the assessment years 2004-05 to 2008- 09 and therefore the same is liable to be quashed. 9. As regards the contention of the learned Authorised Representative that the Assessing Officer has not made any addition on account of unexplained investment

13 ITA Nos.959 to 964/Bang/2014 Shri Narayana Rao M More in construction of residential house while framing the reassessment it is noted that for all these assessment years, the Assessing Officer has made addition on account of unexplained credits in capital account and there is no addition on account of unexplained investment in residential house. Thus it is clear from the reassessment order that instead of making addition under Section 69 of the Act being the reason for reopening of assessment, the Assessing Officer himself has changed his mind and made the addition only on account of unexplained credit in the capital account. Therefore the basis of reopening itself was not found to be correct reason making any addition of income or reassessment of income when the Assessing Officer has finally framed the reassessment order. The Hon'ble Bombay High Court in the case of CIT Vs. Jet Airways (I) Ltd. 331 ITR 236 has held that the condition precedent to exercise on the jurisdiction under Section 147 is the forming of reason to believe by the Assessing Officer that income chargeable to tax has escaped assessment and subsequently if the Assessing Officer found that as a matter of fact the same is not escaped assessment, it is not open to him independently to assess some other income as held in paras 22 & 23 as under :

“ 22. Explanation 3 lifts the embargo, which was inserted by judicial interpretation, on the making of an assessment or reassessment on grounds other than those on the basis of which a notice was issued under s. 148 setting out the reasons for the belief that income had escaped assessment. Those judicial decisions had held that when the assessment was sought to be reopened on the ground that income had escaped assessment on a certain issue, the AO could not make an assessment or reassessment on another issue which came to his notice during the proceedings. This interpretation will no longer hold the field after the insertion of Expln. 3 by the Finance Act (No. 2) of 2009. However, Expln. 3 does not and cannot override the necessity of fulfilling the conditions

14 ITA Nos.959 to 964/Bang/2014 Shri Narayana Rao M More set out in the substantive part of s. 147. An Explanation to a statutory provision is intended to explain its contents and cannot be construed to override it or render the substance and core nugatory. Sec. 147 has this effect that the AO has to assess or reassess the income ("such income") which escaped assessment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which, comes to his notice during the course of the proceedings. However, if after issuing a notice under s. 148, he accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him independently to assess some other income. If he intends to do so, a fresh notice under s. 148 would be necessary, the legality of which would be tested in the event of a challenge by the assessee. 23. We have approached the issue of interpretation that has arisen for decision in these appeals, both as a matter of first principle, based on the language used in s. 147(1) and on the basis of the precedent on the subject. We agree with the submissions which has been urged on behalf of the assessee that s. 147(1) as it stands postulates that upon the formation of a reason to believe that income chargeable to tax has escaped assessment for any assessment year, the AO may assess or reassess such income "and also" any other income chargeable to tax which comes to his notice subsequently during the proceedings as having escaped assessment. The words "and also" are used in a cumulative and conjunctive sense. To read these words as being in the alternative would be to rewrite the language used by Parliament. Our view has been supported by the background which led to the insertion of Expln. 3 to s. 147. Parliament must be regarded as being aware of the interpretation that was placed on the words "and also" by the Rajasthan High Court in Shri Ram Singh (supra). Parliament has not taken away the basis of that decision. While it is open to Parliament, having regard to the plenitude of its legislative powers to do so, the provisions of s. 147(1) as they stood after the amendment of 1st April, 1989 continue to hold the field.”

Accordingly, the reassessment of these five years is also not sustainable when the Assessing Officer has not made any addition of income on account of unexplained investment but made some other addition. In view of the above discussion, the reassessment for the Assessment Years 2004-05 to 2008-09 is not sustainable.

15 ITA Nos.959 to 964/Bang/2014 Shri Narayana Rao M More 10. Since the reopening itself is quashed therefore I do not propose to go into the merits of the other additions made in the reassessment. 11. For the Assessment Year 2009-10, the Assessing Officer has framed assessment under Section 143(3) of the Act. The assessee filed his return of income on 20.12.2010 declaring income from rent of Rs.1,40,000 and income from agriculture of Rs.65,200. The Assessing Officer found that the assessee has credited his capital account of Rs.1,80,000 as sale of gold and insurance of Rs.51,244. The Assessing Officer allowed an amount of Rs.10,000 from sale of gold as shown in the balance sheet as on 31.3.2004 and the balance amount of Rs.1,70,000 was assessed by disallowing the claim of Long Term Capital Gains. Similarly the Assessing Officer has also disallowed the claim of agriculture income to the extent of Rs.50,200 and added the same as ‘income from other sources.’ Apart from this, the Assessing Officer has made an addition of Rs.1 lakh on account of short drawings for household expenses. 12. The learned Authorised Representative of the assessee has submitted that the assessee was not given a proper opportunity to explain the source of income before the Assessing Officer has made all these additions. Further when the assessee has declared a sum of Rs.1,80,000 on account of LTCG, the same cannot be added to the income of the assessee without giving the credit of the capital gain tax. The Assessing Officer has taken the value of gold as on 31.3.2004 instead of the Fair Market Price as on the date of sale.

16 ITA Nos.959 to 964/Bang/2014 Shri Narayana Rao M More 13. On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below and submitted that the Assessing Officer has given sufficient opportunity to the assessee by issuing various letters and notices under Section 143(2) and 142(1) of the Act. Since there is no compliance on the part of the assessee therefore the Assessing Officer has made disallowance. 14. Having considered the rival submissions as well as relevant material on record, it is noted that the assessee has shown the credit in his capital account of Rs.1,80,000 as sale of gold and insurance of Rs.51,244. The Assessing Officer made the addition by allowing only Rs.10,000 as value of the gold as on the date of sale and consequently the balance amount of Rs.1,70,000 was brought to tax which was claimed by the assessee as LTCG. It is apparent from the record that the Assessing Officer has not conducted a proper enquiry to find out actual market value of the gold and further whether the assessee has offered to tax the LTCG of Rs.1,80,000. It is manifest from the assessment order that the Assessing Officer has made these additions purely on the basis of estimate and without conducting any enquiry about the actual amount realized by the assessee from these transactions. Accordingly in the facts and circumstances of the case, the matter is set aside to the record of the Assessing Officer for conducting a proper enquiry and giving an opportunity of being heard to the assessee and then decide the matter as per law.

17 ITA Nos.959 to 964/Bang/2014 Shri Narayana Rao M More 14. In the result, the appeals for the Assessment Years 2004-05 to 2008-09 are allowed and the appeal for the Assessment Year 2009-10 is allowed for statistical purpose. Order pronounced in the open court on 31st day of Aug., 2016.

Sd/- (VIJAY PAL RAO) JUDICIAL MEMBER *Reddy gp Copy to : 1. Appellant 2. Respondent 3. C.I.T. 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard File. By Order

Asst. Registrar, ITAT, Bangalore