. ACIT, HISAR vs. M/S. PRAKASH INDUSTRIES LTD., HISAR

Brief facts are that assessment in this case was completed u/s 143(3) of the Act determining the total income at Rs. 18,59,45,860/- after making various additions of Rs.68,73,054/- and Rs.1,09,25,288/- on account of income from undisclosed sources. The case of the assessee company for valuation of factory building in respect of (i) Sponge Iron Division, Champa, (ii) Induction Furnace Division, Champa, (iii) Rolling Mill Division was referred to the District Valuation Officer (DVO), Income tax Department, Bhopal, (Land & Building). During the year the assessee company had shown the amounts of additions as under:-

i) Sponge Iron Division, Champa Rs. 12,95,399/- ii) Induction furnace Division, Champa Rs. 48,78,246/- iii) Rolling Mill Division Rs. 74,34,201/- Total Rs. 1,36,07,846/-

The DVO had determined the cost of construction and worked out the difference as per details given below:-

The appeal against the quantum was confirmed by the Ld. CIT (A) with the following observations:-

In the first appellate proceedings, the assessee contested the imposition of penalty from the legal angle and relied on a plethora of case laws for the propositions that in absence of other independent/corroborative evidence, addition on account of unexplained investment in cost of construction cannot be made on the basis of DVO’s report and that the addition to the income of the assessee based on the report of the Valuer was insufficient 4 Assessment Year 1996-97 for recording a finding of concealment of income/furnishing inaccurate particulars of income. The Ld. CIT (A) deleted the entire penalty and now the Department is in appeal before us.

The Ld. DR relied on the order of the AO and submitted that on the facts of the case as well as the legal position, the penalty was rightly imposed and as such, the order of the Ld. CIT (A) should be reversed.

The Ld. AR submitted that there was no material with the Assessing Officer to conclude that cost of construction shown by the assessee was not correct. He submitted that other than the DVO’s report, there was nothing on record to hold that any undisclosed investment was made in cost of construction at Champa and Picture Tube Plant, Pithampur. He submitted that mere fact that the addition was sustained in appeal was not sufficient to draw adverse inference against the assessee in the penalty proceedings. He further submitted that it was the primary duty of the then Assessing Officer to prove, prior to referring to the DVO that there was under- statement/concealment of income and only after this burden was discharged, addition could have been made on the basis of DVO’s report. In the present case, the burden was not discharged before 5 Assessment Year 1996-97 the reference was made to DVO. He also submitted that except for the report of DVO estimating the cost of construction, there was no material before the Assessing Officer to come to the conclusion that the assessee had concealed and/or furnished inaccurate particulars of income. He relied on the following judgments in support of his case -

The Ld. AR further submitted that there were bona fide reasons regarding why the estimate made by DVO should not have been adopted. He submitted that the DVO applied the CPWD rates, which were on the higher side and were generally applied to construction of Government of India and other Public Assessment Year 1996-97 Sector Organizations. Further, the CPWD rates were applied in respect of purchase of building material such as, steel, cement, bricks, sand concrete etc. whereas, the assessee had purchased the building material at highly competitive rates. Further, the assessee had purchased cement and steel in bulk directly from the manufacturing against ST forms, which in fact was completely overlooked by the DVO. As the Raipur area of Chhattisgarh is the hub of steel and cement industries and the assessee has purchased the cement and steel directly from the manufacturers in bulk quantities at very competitive rates.

The Ld. AR also argued that the DVO’s report is merely an opinion and hence no penalty was imposable on the difference in values. He submitted that where the addition is made only on the basis of such report with no other material on record, no addition and penalty thereon u/s 271(1)(c) of the Act is warranted. He placed reliance on the following judgments:

We have heard the rival submissions and perused the material on record. It is undisputed fact that the penalty has been imposed entirely on the basis of difference in value of the fixed assets as per the books of account of the assessee and the valuation arrived at by the DVO. It is also an undisputed fact that apart from the DVO’s report, the AO had no other independent evidence to counter the figures from the assessee’s books of account. It is also seen that while dealing with the assessee’s objections on the DVO’s report, the AO has relied only Assessment Year 1996-97 on the comments of the DVO in response to the assessee’s objections but has failed to give a final finding on the issue. Thus he has not dealt with the assessee’s objections properly. This might have served the Revenue’s purpose in the quantum proceedings but when it comes to imposition of penalty for furnishing of inaccurate particulars and/or concealment, utmost caution has to be exercised. The Department has not been able to substantiate as to how there has been furnishing of inaccurate particulars of income and/or concealment by the assessee when the AO has himself not brought any cogent material on record, apart from the DVO’s report, to justify the imposition of penalty. The Hon’ble High Court of Madras in CIT vs Apsara Talkies 15 Taxman 384 (Mad) has held that, “Penalty cannot be levied on the basis, merely of an estimate of cost of construction of a building built by an assessee with his funds. In the case before that High Court, an addition was made to the income returned on the score that the cost of construction as disclosed in the assessee's book was lower than the estimated cost of the building as rendered by a valuer. The learned Judges held that a mere estimate of cost cannot constitute material on which a finding of concealment can be rendered. In that case, some explanation had been offered by the assessee as to why the construction was at an economical cost. This explanation was not accepted by the ITO. The learned Judges held that even if the assessee's explanation were not acceptable, it would still require some further material to support the finding that the assessee had concealed its taxable income. We respectfully agree with this view. ’’ Similarly, a co-ordinate Bench of Delhi Tribunal has hled in DCIT vs. JMD Advisors (P) Ltd. 124 Assessment Year 1996-97 ITD 223 (Delhi Trib.), “…the valuation made by the DVO is an estimate which can be a basis for making addition to the income of the assessee for the purpose of assessment, but the same alone cannot be the basis to construe concealment for the purpose of imposing penalty under section 271(1)(c).”

As such, having regard to all the facts of the case as discussed above, we are of the view that considered from any angle, the penalty imposed by the Assessing Officer under section 271(1)(c) was not sustainable and the learned CIT(A) was fully justified in cancelling the same. The impugned order of the learned CIT (A) is, therefore, upheld dismissing this appeal filed by the revenue.

In the result the Appeal of the Department is dismissed. Order pronounced in the open court on 19th February, 2016.