MOUNT VIEW CLUB & RESORTS P. LTD,NAVI MUMBAI vs. ITO 10(3)(4), MUMBAI

The preliminary ground/objection raised by the assessee for the assessment year 2005-06 in its appeal in ground No. 1 & 2 is as under:

Apart from the above ground, the assessee also challenged the order of the Ld. CIT(A) stating that the CIT(A) erred in confirming the Assessing Officer’s action of making addition of Rs. 6,18,011/- by adjudicating the issues which were not a subject matter of the order u/s. 263 of the Act. At the time of hearing, the Ld. Counsel for the assessee submits that this ground is not pressed, hence this ground raised by the assessee is dismissed as not pressed.

Brief facts are that the assessee is a Private Limited Company engaged in the business activities of Club house & resort and provides recreation facilities of club house, restaurant, swimming pool, indoor games, joyride and entertainments. The assessee filed its

The assessee preferred an appeal before the Ld. CIT(A) and the CIT(A) sustained the reopening of assessments and also the reference to valuation cell by the Assessing Officer and the additions made consequent to the reference to Valuation cell and based on revaluation report.

The Ld. Counsel for the assessee in so far as the issue of reference made to valuation cell for estimating the cost of construction without rejection of books of accounts is concerned, submits that the Assessee Company started construction of the new building during the financial year 2002-03 and the construction work was completed in financial year 2007-08. He submits that the cost of construction of the building was duly disclosed in the accounts of the assessee company, the break up of the year-wise construction expenses, interest other charges are as follows:-

The Ld. Counsel placing reliance on the Apex Court decision in the case of Sargam Cinema Vs. Commissioner of Income Tax in [328 ITR 513] submits that the Hon’ble Supreme Court held that "the

In so far as the reopening of assessments u/s. 147 of the Act for the assessment years 2003-04 & 2004-05 are concerned, the Ld. Counsel for the assessee submits that for A. Y. 2003-04 the return of income was filed on 2.9. 2003 along with duly Audited Accounts. The said accounts duly disclose cost of construction of the new building. The said return of income was processed u/s. 143(1) of the Act. The Assessing Officer issued notice dated 29.3.2010 u/s.148 of the Act. The Assessee immediately objected the reopening and asked for the copy of the reasons recorded.

The Ld. Counsel submits that the assessee vide his letter dated 26.08.2010 objected the reassessment proceedings and submitted that for invoking provisions of section 142A of the Act, the first requirement is where an estimate value of any investment referred to in section 69 or section 69A or section 69B of the Act is required to be made, the assessing officer may in his discretion require the valuation officer to make estimate of such value, but the opening portion of sub-section 1 of section 142A of the Act stipulates that the A.0 can undertake such an exercise only for the purpose of making an assessment or re-assessment under the Act. However on the date on which reference was made to the Valuation Officer, no assessment or reassessment was pending for A. Y. 2003-04 and 2004-05. It was submitted that reasons recorded by the A. O. categorically show that there is nothing to indicate therein to establish that the cost of construction has not been disclosed fully or truly by the assessee, which constitute a material fact necessary for the assessment.

The Ld. Counsel submits that the Assessing Officer without disposing the Assessee's objection for reopening of the Assessment proceeded with the assessment proceedings and in the assessment order, observed that the objections of the Assessee are not tenable for the reasons mentioned in para 3 of the Assessment Order.

The Ld. Counsel submits that in the case of The Income Tax Officer, Lucknow Vs. Vijeta Educational Society [118 ITD 382), it was held that the provisions of Section 142A cannot be read in isolation to Section 145 in other words if the books of accounts are found to be correct and complete then the addition on account of difference in costs of construction cannot be made even if the report is obtained within Section 142A from D.V.O. It is because the use of the report of the D.V.O. obtained U/s.142A is not mandatory but it is discretionary. Accordingly, reference to the D.V.O. is invalid and assessment and re- assessment framed thereunder will be also invalid.

It is submitted that the CIT(A) in his order dated 16.11.2010 has rejected assessee's basic objection that assessment cannot be reopened without rejecting Books Of Accounts on the ground that his predecessor in his order for the AY 2005-06 dated 24.09.2009

It is submitted that the report of the Department Valuation Officer cannot be a basis for reopening of the assessment because valuation cannot be an arithmetical appreciation of the material used for construction nor the expenses incurred by the Assessee in that regard, as variations are bound to be there and therefore, reopening of the assessment only on the basis of D.V.Os. report is not permissible and therefore, reopening of the assessment for A.Y. 2003-04 is bad in law.

It is submitted that admitably CIT(A) has passed the order on 24.07.2009 while reference to the valuation was on 6.11. 2007. Therefore subsequent observation can substantiate the reference made on 6.11.2007. It is further submitted that prior to making a reference to valuation cell on 6.11.2007, AO has not ascertained as to what is the defect in the cost of construction as disclosed by the assessee in his return of income. Further, after making the said reference, assessment was completed on 17.12.2007. In the said assessment order, there is no iota of evidence to show that books of accounts are defective and the cost of construction as shown in the books of accounts is not true cost of construction. In other words, while making the said assessment, AO has not pointed out any defects as contemplated by Sec 145 (2).

It is therefore submitted that reference to the valuation officer u/s 142A is invalid and therefore the reopening based on the said valuation officer's report is also void ab-initio and the said proposition is supported by the Apex Court in the decision in the case of Asst. Commissioner of Income Tax Vs. Dhariya Construction Co. [328 ITR 515) wherein it was held that "the Opinion of the D.V.O. per se is not an information for the purpose of the reopening of the assessment U/s.147 of the Income Tax Act, 1961.

The Ld. Departmental Representative vehemently supports the orders of the lower authorities. He further submits that there is no separate mention of rejection of books of accounts in the assessment order. The assessments were made based on the valuation report which is a material evidence therefore, the Assessing Officer is justified in reopening the assessments.

Heard both sides, perused the material available on record and the decision relied on by the Ld. Counsel. In this case reopening of assessments for the assessment years 2003-04 and 2004-05 got triggered based on the assessment proceedings for the assessment year 2005-06 and the valuation report of the District Valuation Officer on the construction of the property by the assessee at Vinegaon Village, Raigad District . The assessee filed return of income for assessment year 2005-06 on 30.10.2005 declaring Nil income. In the course of assessment proceedings by letter dated 23.2.2007, the Assessing Officer made a reference to the District Valuation Officer for the cost of construction of the property situated at Vinegaon, Raigad District. The assessment was completed on 17.12.2005 u/s. 143(3) of the Act treated the income of the assessee as income from house property as against income from business reported. By the date of completion of assessment i.e. 17.12.2007, the Assessing Officer did not receive the Valuation report from the District Valuation Officer. The said report dated 21.8.2008 was received by the Assessing Officer after completion of assessment.

Based on the valuation report, the Assessing Officer reopened the assessment of the assessee for the assessment years 2003-04 and 2004-05 and made addition u/s. 69B of the Act towards unexplained investment in the property being the difference in the valuor’s report and the cost of construction reported in the books of accounts. In so far as the assessment year 2006-07 is concerned, the Assessing Officer apart from treating the income referred income from the property as income from house property disallowed depreciation on the building is not a business asset. He also made addition u/s. 69 of the Act being the difference between the cost of construction estimated by the Valuation Officer and the cost recorded by the assessee in the books of accounts.

The preliminary objection of the assessee is without rejection of books of accounts reference to Valuation Officer is bad in law. In so far as assessment years 2003-04 and 2004-05, the preliminary objection is that the reopening of assessment for the reason that assessments were reopened only based on the Valuation report without pointing out any defects in the books of accounts. We find considerable force in the submission of the Ld. Counsel for the

Coming to the assessment year 2006-07, the Ld. Counsel for the assessee submits that ground No. 1 & 2 raised by the assessee challenging the order of the Ld. CIT(A) in assessing the rental income as income from house property and the claim of depreciation. It is submitted that these issues are decided against the assessee by the

In so far as the grounds raised in respect of the action of the Ld. CIT(A) in confirming the Assessing Officer’s action of referring the matter to the valuation cell without rejecting the books of accounts, we have already held that reference is bad in law in the preceding paragraphs. The decision applies mutatis mutandis to the appeal for this assessment year also. Thus, we allow the ground of appeal on this issue and direct the Assessing Officer to delete the addition made u/s. 69 in respect of cost of construction.

In the result, the appeals filed by the assessee for assessment years 2003-04 and 2004-05 are allowed and the appeals for the assessment years 2005-06 and 2006-07 are partly allowed.