PRAFULLA KUMAR GHOSH,MALDA vs. ITO,WARD-2, MALDA, MALDA

IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH “C”, KOLKATA [Before Shri Mahavir Singh, JM & Shri M.Balaganesh, AM] ITA No.686/Kol/2012 Assessment Year : 2006-07 (APPELLANT ) (RESPONDENT) Prafulla Kumar Ghosh -versus- I.T.O., Ward-2, Malda Malda (PAN:ADHPG 8048 C) For the Appellant : Shri K.M.Roy, FCA For the Respondent : Shri S.S.Alam, JCIT Date of Hearing : 10.09.2015. Date of Pronouncement : 18.09.2015. ORDER Per Shri M.Balaganesh, AM 1. This appeal of the assessee arises out of the order of the Learned CITA in Appeal No. 279/MLD/CIT(A)/JAL/08-09 dated 02.03.2012 for the Asst Year 2006-07 arising out of the order of the Learned Assessing officer framed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).

2.1. The brief facts of this issue is that the assessee filed his return of income together with the tax audit report in Form 3CB & 3CD and balance sheet and during the course of assessment proceedings had filed his books of accounts such as cash book, purchase register, sales register, details of names and address of the persons from whom paddy and gunny bags were purchased, subsidy details, bank statements, names and address of the sundry creditors, details of stocks and name and address of the parties from whom cash loan received etc, among others. On perusal of the balance sheet, the Learned AO found that during the assessment year under appeal, the assessee had invested a sum of Rs 19,45,680/- in his existing factory shed and

2 ITA No.686/Kol/2012 Prafulla Kumar Ghosh A.Yr.2006-07 reference was made to Department Valuation Officer (DVO) in terms of section 142A of the Act to determine the correct cost of construction of factory shed. The DVO determined the cost of construction at Rs. 21,51,929/- and the Learned AO proceeded to bring the difference in cost of construction amounting to Rs. 2,06,249 ( 2151929- 1945680) to tax u/s 69B of the Act which was also upheld by the Learned CITA. Aggrieved, the assessee is in appeal before us on the following ground:- “1. That the lower authorities have erred in facts and law in adding back Rs.206249.00 towards unexplained investment without appreciating that such amount is fully covered by the addition to the returned income by way of estimation and hence the addition needs to be telescoped.”

2.2. Shri. K.M.Roy, FCA , the Learned AR argued on behalf of the assessee and Shri.S.S.Alam, JCIT, the Learned DR argued on behalf of the revenue.

2.3. The Learned AR argued that the books of accounts were rejected by the Learned AO u/s 145(3) of the Act since the notices sent to certain parties from whom assessee had made purchases from farmers could not be served with statutory notices u/s 133(6) of the Act. He argued that admittedly the assessee had purchased paddy / gunny bags from farmers whose names and addresses are written by them in the purchase voucher based on the declaration given by the farmers and it is practically impossible to verify the veracity of the same from the farmers at the point of purchase of goods. The Learned AR further argued that the difference in the cost of construction of factory shed was only 10.6% with regard to the value reported in the books and value determined by the DVO and in any case, it is less than 15% and accordingly no addition need to be made on this account. He placed reliance on the decision of Karnataka High Court in the case of CIT vs Vasudev Construction reported in 363 ITR 247 (kar) in support of this contention. In response to this, the Learned DR vehemently supported the orders of the lower authorities.

2.4. We have heard the rival submissions and perused the materials available on record. We find that though the Learned AR stated the reasons before us for rejection of books of accounts by the Learned AO , he did not specifically object to the fact of

3 ITA No.686/Kol/2012 Prafulla Kumar Ghosh A.Yr.2006-07 rejection of books by the Learned AO. Hence the action of the Learned AO in rejecting the books of accounts and consequently resorting to make an estimate of net profit from business u/s 145(3) of the Act in the facts and circumstances of the case is upheld.

It is seen that the assessee had not pointed out any defects in the valuation report submitted by the DVO except stating that the state PWD rates is to be adopted as against the Central PWD rates adopted by DVO. We find this argument of the Learned AR having lot of force as this contention has been well accepted in favour of the assessee in the following decisions:- CIT vs Hotel Joshi reported in (2000) 242 ITR 478 (Raj) - “Held, that in a case where the value of the asset was claimed by the assessee on the basis of regular books of account maintained for the purpose of construction of the asset and not on the basis of the valuation of the registered valuer, it was not open to the Assessing officer to make a reference to the District Valuation Officer unless the Assessing Officer formed an opinion that having regard to the nature of the asset and other relevant circumstances it was necessary to do so. If an account of the expenses of the construction of the asset are maintained regularly and supported by vouchers there should be no reason not to accept the same for determining the cost of construction of the asset. The Assessing Officer was required to assess the value of the asset on appreciation of material before him. The cost of construction arrived at by the Tribunal was wholly based on relevant considerations and hence no referable question of law arose.”

CIT vs K.Jayakumar reported in (2013) 35 taxmann.com 179 (Madras HC) – “Section 69 of the Income-tax Act, 1961 - Unexplained investments [Immovable properties] - Assessment year 1998-99 - Assessee constructed a shopping cum residential complex - Assessing Officer on basis of valuation done by DVO, adopted CPWD rates and completed assessment, thereby making addition - Whether on considering geographical location, availability of work force and cost of materials, it is not proper to blindly go by CPWD rates for purpose of arriving at cost of construction unless there are similarities in rates of CPWD and State PWD - Held, yes - Whether, where DVO adopted CPWD rates for arriving at cost of construction of assessee's property and there was a substantial difference between CPWD rates and State PWD rates, matter was to be remitted back to Assessing Officer for working out cost of construction by taking State PWD rates - Held, yes [Para 4] [Matter remanded]” K Damodarswamy Naidu vs ACIT (1997) 59 ITD 510 (Mad) –

“Under section 16A when a reference is made to the Valuation Officer, the Valuation Officer values the property after giving notice to the assessee and giving opportunity to

4 ITA No.686/Kol/2012 Prafulla Kumar Ghosh A.Yr.2006-07 file any objection on behalf of the assessee. Nowhere in the Act or in the Rules it has been prescribed that only the CPWD rates are to be followed for the purpose of valuation of the properties. Local PWD rates which are based on local conditions differs from one State to another. It is also true that for the purpose of construction of a building the same cost cannot be incurred if one building is constructed in a metropolitan city like Bombay and the other building is constructed in a mofussil area. Therefore, if the Valuation Officer adopts the State PWD rate, which is a recognized rate by the State Government, for the purpose of valuing the property, it cannot be said to be erroneous. In the instant case, since both the assessee as well as the revenue submitted two different rates claiming to be State PWD rates, matter was to be remitted back to Commissioner (Appeals) to revalue the property after ascertaining and following the State PWD rates. Regarding concession on account of joint ownership of the premises by the assessees. Following the decision in J.K.K.Natarajah v. WTO [1990] 32 ITD 370 (Mad) where Tribunal had allowed same concession in a similar situation, the Assessing Officer was directed to give a deduction of 10 per cent in that regard.”

Modern Construction Development & Project Promotion vs ACIT reported in (1997) 63 ITD 235 (Cal) – “As per the lease agreement the assessee would be the indirect beneficiary as it not only recovered the cost as shown to the Municipality but also an additional amount for a period of 25 years, which was subject to further extension of lease. Hence, whether the assessee was the owner of the property or not was not directly relevant in considering the question of unexplained investment. As regards the legality of making an addition on the basis of the report of the DVO, the return filed by the assessee for the year in question was processed under section 143(1)(a) on 7-2-1992 which was reopened by issuing notice under section 143(2) and converted it into a scrutiny assessment. From 14-21992 till 31-3-1994, i.e. the date of assessment order, there was no remark in the order sheet to show that the books of account produced by the assessee contained defects or the cost of construction as recorded in the books was not supported by vouchers. The addition was not made mainly on the ground that the books and vouchers were not properly maintained but because there is huge/significant difference between the estimate made by the DVO and the cost of construction shown by the assessee. A careful reading of the order of the Commissioner (Appeals) as well as the order of the Assessing officer would made the matter explicitly clear that the Assessing officer had not called for the vouchers and did not point out any defects in the books maintained by the assessee wherein the cost of construction was recorded. In fact, at the time of making the reference to the Valuation Officer under section 131(1) (a), the Assessing Officer did not seem to have rejected the books of account maintained by the assessee and it was only at the time of making an assessment, in order to justify the addition to be made on the basis of the DVO’s report, it was observed that the assessee had not produced vouchers before the Valuation Officer. Even at that point of time, the Assessing Officer had never called for the books or vouchers in his independent right to look for the defects, if any, at this juncture. In order to refer the matter to the valuation cell, the Assessing Offi8cer should first point out the defects in the books maintained by the assessee. It is settled that when the

5 ITA No.686/Kol/2012 Prafulla Kumar Ghosh A.Yr.2006-07 assessee maintains accounts regularly, addition cannot be made on the basis of the report of the DVO without pointing out any defects in the books. From various judgments the proposition would emerge that (a) for the purpose of making an addition towards unexplained investment, the Assessing Officer was under legal obligation to verify the books and vouchers maintained by the assessee in support of the cost of construction shown by him and points out specific defects ; (b) upon rejection of the books or upon pointing out defects, the Assessing officer if so required; and (c) when the assessee produces registered valuer’s report based on the State P.W.D. rates, it could not be simply rejected without giving cogent reasons. In the instant case, the valuation made by the registered valuer was based on the P.W.D. rate schedule and it was not the case of the department that proper cost of construction could not be ascertained by adopting the P/.W.D. rate schedule, though a case was made out by the revenue that the basis adopted by CPWD rate was superior to that of the method followed by the registered valuer. From the order-sheet of the Assessing Officer as well as the assessment order, it could be seen that the reference to the Valuation Officer was made without pointing out any defects in the books of accounts maintained by the assessee. The observation of the Assessing Officer that vouchers were not produced by the assessee before the valuation cell could not support the case of the revenue to justify the reference to the Valuation Officer, in as much as, invalid reference could not be validated by subsequent observation of the Assessing Officer that the books maintained by the assessee could not be relied upon for want of proper vouchers. Further, the stand of the assessee was that the Assessing Officer had never asked for any details or pointed out any defects, could not be brushed aside, on a perusal of the order-sheet entries. Therefore, the Assessing Officer was not justified in making an addition merely on the basis of the valuation report of D.V.O.” DCIT vs Smt.C.K.Sumathy reported in (2011) 44 SOT 65 (Chennai) – “Section 69 of the Income-tax Act, 1961 - Unexplained investments - Assessment year 2006-07 - Assessee, a civil contractor, had constructed a kalyanamandapam and shopping complex - Cost of construction had been admitted by assessee at Rs. 84,69,000 on basis of valuation report from an approved valuer - Assessing Officer referred matter to DVO, who submitted his valuation report wherein cost of construction was estimated at Rs. 1.11 crores - Accordingly, after giving 10 per cent rebate for self- supervision, Assessing Officer adopted cost of construction at Rs. 1,02,77,894 - On appeal, Commissioner (Appeals) held that since property was located in a mofussil area, PWD rate was more appropriate than CPWD rates for valuation - He, thus, directed Assessing Officer to provide deduction of 15 per cent on net value arrived, i.e., 15 per cent of Rs. 1,02,77,894 - Whether since PWD rates were applicable in case of valuation of property situated in a mofussil area, 15 per cent deduction apart from deduction towards self-supervision was rightly given for matching cost of construction estimated on basis of CPWD rates with PWD rates - Held, yes”

2.5. We find that the reliance placed by the Learned AR on the decision of Karnataka High Court in the case of CIT vs Vasudev Construction reported in 363 ITR 247 (Kar) to support his ground that no addition could be made based on DVO report in the instant case will be of no use that as the Hon’ble High Court had only made a passing

6 ITA No.686/Kol/2012 Prafulla Kumar Ghosh A.Yr.2006-07 reference to the fact that the difference in the cost of construction between DVO and that reported in the books was less than 15%. No finding independently had been given by the Karnataka High Court in this regard so as to become a binding precedent. Moreover, this observation was also made by the Hon’ble Karnataka High Court in the context of block assessment proceedings u/s 158BD of the Act , more specifically to the fact as to whether the DVO report could be considered as a search material for making an addition to undisclosed income under Chapter XIVB of the Act. At the best, it could only be considered as an Obiter dicta and not ratio decidendi. It is well settled that an Obiter dicta of Supreme Court becomes a binding precedent on all lower authorities. And an Obiter of Jurisdictional High Court is binding on the lower authorities of that station. In the instant case, the Obiter of Karnataka High Court would not become a binding precedent for Kolkata Tribunal. Hence we are not inclined to accede to the view of the Learned AR that the difference in cost of construction is only less than 15% and hence no addition needs to be made. If this proposition of the Learned AR is to be accepted, then the provisions of section 142A of the Act would become redundant. Under the provisions of section 142A(2) of the Act, the Learned AO is empowered to make a reference to DVO whether or not he is satisfied about the correctness or completeness of the accounts of the assessee. In the instant case, we have already held hereinabove that the action of the Learned AO in rejecting the books of accounts is upheld as the same is done with cogent reasons by the learned AO and not objected by the learned AR for resorting to estimate the net profit of assessee for determining business income. The Hon’ble Apex Court in the case of Sargam Cinema vs CIT reported in (2010) 328 ITR 513 (SC) had held that reference to DVO could be made only after rejection of the books of accounts by the Learned AO.

2.6. Sec. 69B could be used even if business income is estimated as they do not come under any specific heads of income. Reliance in this regard is placed on the decision of Hon’ble Gujarat High Court in the case of Fakir Mohammed Haji Hassan vs CIT reported in 247 ITR 290.

7 ITA No.686/Kol/2012 Prafulla Kumar Ghosh A.Yr.2006-07 “7. It is, therefore, clear that, when the investment in or acquisition of gold, which was recovered from the assessee was not recorded in the books of accounts and the assessee offered no explanation about the nature and source of such investment or acquisition and the value of such gold was not recorded in the books of accounts, nor the nature and source of its acquisition explained, there could arise no question of treating the value of such gold, which was deemed to be the income of the assessee, as a deductible trading loss on its confiscation, because, such deemed income did not fall under the head of income "profits, and gains of business or profession". 8. In our opinion, therefore, the Tribunal was perfectly right in holding that the value of the gold was liable to be included in the income of the assessee as the source of investment in the gold or of its acquisition was not explained and that the assessee was not entitled to claim that the value of the gold should be allowed as a deduction from his income.” 2.7. In view of the aforesaid facts and circumstances, provisions of the Act and judicial precedents relied upon, we are not inclined to interfere with the decision of the Learned CITA on this ground except directing the Learned AO to adopt the state PWD rates for the purpose of valuing the factory shed of the assessee and bring to tax the difference , if any, as against the reported construction cost of Rs. 19,45,680/- by the asesssee. Accordingly, the ground raised by the assessee in this regard is partly allowed.

3.1. The brief facts of this issue is that the assessee was in receipt of insurance claim to the tune of Rs. 51,487/- ; Interest subsidy of Rs. 3,53,707/- ; PF deducted of Rs. 11,094/- and interest on FD of Rs. 72,355/- and the same were duly offered to tax by the assesssee in the return of income based on the entries in the books of accounts. The Learned rejected the books of accounts and proceeded to determine the business income u/s 145(3) of the Act on an estimated basis. Accordingly, the Learned AO determined the net profit from business @ 2% of turnover amounting to Rs. 4,01,930/- and also added the aforesaid four receipts separately in the assessment. On first

8 ITA No.686/Kol/2012 Prafulla Kumar Ghosh A.Yr.2006-07 appeal, the said additions were upheld by the Learned CITA. Aggrieved, the assessee is in appeal before us on the following ground:- “2. That the lower authorities have erred in facts and law a separately adding back in insurance claim received subsidy PF deducted and interest on FD without appreciating that these are all business income which is already deemed to have been included within the ambit of estimated net profit.”

3.2. The Learned AR argued that since the business income has been computed on an estimated basis @ 2% of turnover in terms of section 145(3) of the Act by rejecting the books of accounts, no separate addition need to be made for the aforesaid four items as they are part and parcel of business receipts only. In response to this, the Learned DR vehemently supported the orders of the lower authorities.

3.3. We have heard the rival submissions and perused the materials available on record. It is seen that the Learned AO having resorted to make estimate of business income computed @ 2% of total turnover at Rs. 4,01,930/- ought not to have made any separate addition towards insurance claim of Rs. 51,487/- ; interest subsidy of Rs. 3,53,707/- ; PF deducted of Rs. 11,094/- as they are part and parcel of business receipts. We hold that once the business income is determined on estimated basis, any further addition towards business income would only get telescoped with the net profit already determined on estimated basis. The assessment of income under presumptive basis u/s 44AD is similar to the income determined on an estimated basis by the AO after rejecting the books of account of the assessee. Once the books are rejected the doors of the AO are closed for looking after other provisions of the Act which are relevant for determining the business income of the assessee, unless or otherwise specifically provided in the provisions of section 44AD of the Act itself such as allowance of interest and remuneration to partners in the case of a partnership firm. Reliance is placed in this regard on the decision of Hon’ble Andhra Pradesh High Court in the case of Indwell Constructions vs CIT reported in 232 ITR 776 (AP), wherein Lordships had held as under :- “The pattern of assessment under the Income-tax Act, 1961, is given by section 29 which states that the income from profits and gains of business shall be computed in accordance with the provisions contained in sections 30 to 43D of the Act. Section 40provides for certain disallowances in certain cases notwithstanding that those amounts are allowed

9 ITA No.686/Kol/2012 Prafulla Kumar Ghosh A.Yr.2006-07 generally under other sections. The computation under section 29 is to bemade under section 145 on the basis of the books regularly maintained by the assessee.If those books are not correct or complete, the Income-tax Officer may reject thosebooks and estimate the income to the best of his judgment. When such an estimate ismade, it is in substitution of the income that is to be computed under section 29. In otherwords all the deductions which are referred to under section 29 are deemed to have been taken into account while making such an estimate. This will also mean that the embargo placed in section 40 is also taken into account.”

As far as the interest on FD of Rs 72,355/- is concerned, we hold that the same is to be assessed as income from other sources. Reliance in this regard is placed on the decision of the Hon’ble Apex Court in the case of Liberty India vs CIT reported in (2009) 317 ITR 218 (SC) and also Pandian Chemicals case reported in 262 ITR 278 (SC).

Accordingly, the ground no.2 raised by the assessee is partly allowed.

4.1. The brief facts of this issue is that the assessee had filed the cash book during the course of assessment proceedings wherein certain monies were shown to have been received by the assessee to the tune of Rs. 80,40,000/-. The assessee when questioned about the veracity of the said receipts by the Learned AO produced a list of 453 persons from whom the amount was received. The Learned AO proceeded to make an addition u/s 68 of the Act to the tune of Rs. 80,40,000/- disbelieving the explanation of the assessee which was upheld by the Learned CITA after giving partial relief to the assessee. Aggrieved, the assessee is in appeal before us on the following grounds:- “3. That the addition towards cash credit is arbitrary in view of the fact that the appellant is not maintaining any credible books of accounts and as such having once rejected the books of account, no cognizance can be taken of the entries therein. 4. That the addition towards cash credit, without prejudice to the above ground, cannot extent, to genuine trade advances which has been repaid beyond doubt.”

10 ITA No.686/Kol/2012 Prafulla Kumar Ghosh A.Yr.2006-07 4.2. The Learned AR argued that once the business income is estimated u/s 145(3) of the Act by the Learned AO by rejecting the books of accounts , then no separate addition could be made by the Learned AO. He further argued that the assessee was in receipt of funds from 453 persons to the tune of Rs. 80,40,000/- and the same were also repaid by the assessee during the assessment year under appeal. He further argued that the monies were only received only in the nature of trade advances and are shown as sundry parties in the books. Accordingly he pleaded for deletion of this disallowance. In response to this, the Learned DR stated that the subject mentioned receipts are not trade advances and are only loan creditors and argued that certain verifications were carried out with some persons by the Learned AO who had denied the transactions with the assessee. He also stated that during the course of hearing before the first appellate authority, the assessee himself had agreed for an addition of Rs. 7,49,000/- in respect of 37 persons whose genuinity could not be proved by the assessee. Accordingly he vehemently supported the orders of the lower authorities.

4.3. We have heard the rival submissions. We find that the assessee during the first appellate proceedings had accepted for the addition of Rs. 7,49,000/- out of Rs. 80,40,000/-. We also find that certain reliefs have been already granted by the Learned CITA in respect of some parties from whom monies have been received by the assessee. But the crucial point to be adjudicated herein is whether the Learned AO having rejected the books of accounts and proceeding to determine the net profit from business on an estimated basis u/s 145(3) of the Act, could again get into the same cash book for finding out these cash credit entries for making an independent addition. Admittedly, the addition of Rs. 80,40,000/- has been made by the Learned AO by looking at the cash book filed by the assessee comprising of receipts from 453 pesons. We also find that the said monies are not lying as outstanding at the end of the year as on 31.3.2006 (i.e the assessment year 2006-07 under appeal) in the balance sheet filed by the assessee. We hold that once the books of accounts are rejected by the Learned AO, his hands are completely tied and he cannot get into the same books of accounts (in the instant case ‘cash book’) for making a separate addition. We are not extending a proposition here that once the business income is

11 ITA No.686/Kol/2012 Prafulla Kumar Ghosh A.Yr.2006-07 estimated after rejection of books of accounts, no addition could be separately made u/s 68 of the Act. We are of the opinion that the said addition could be made only when there is an external source from where the data / information is available with the Learned AO to make an addition such as amounts outstanding in the balance sheet filed by the assessee for which no satisfactory explanation is given to the Learned AO. We would like to state that the Learned AO having rejected the books of accounts had to do it in full and not in piecemeal. It would be pertinent to get into the judgement of the Pune Tribunal rendered in the case of Chander Mohan Mehta vs ACIT reported in (1999) 71 ITD 245 (Pune) which in turn relied on the decision of apex court, wherein it was held that :- Firstly, it was contended by the AO that statement of the assessee recorded u/s 131 should be either accepted or rejected in toto unless there is material on the record to prove the contrary. According to him, if the statement of the assessee to the effect that he was carrying on money lending business and certain amounts were advanced by way of loan aggregating to Rs 89 lacs as mentioned in the loose paper is accepted, then as a corollary, the other part of statements to the effect that he had borrowed the amounts from different persons as mentioned in the loose paper should also be accepted. In support of this contention, he relied on the decision of the Supreme Court in the case of Mahendra Manilal Nanavati vs Sushila Mahendra Nanavati AIR 1965 SC 364 and various other tribunal decisions mentioned below:-

ITO vs Ghanshyambhai R.Thakkar (1996) 56 TTJ (Ahd.) 460 Ashwani Kumar vs ITO (1991) 39 ITD 183 (Del) Kishanchand Sobhrajmal vs ACIT (1992) 41 ITD 97 (Jaipur) Devilal Gherilal Shah vs DCIT (1995) 127 CTR (Trib.) (Ahd.) 135

Though the aforesaid decision was rendered in the context of credence of the seized document in the form of loose paper and its usage thereon in the search assessment proceedings, the analogy could be drawn from the aforesaid case to the facts of the instant case to the limited extent that if the Learned AO wants to reject the books of accounts , he should do it in toto and not reject the entire books of accounts except the cash book filed by the assessee.

In view of the aforesaid facts and circumstances and judicial precedent relied upon hereinabove, we hold that the Learned AO is not right in making an addition towards

12 ITA No.686/Kol/2012 Prafulla Kumar Ghosh A.Yr.2006-07 cash credit u/s 68 of the Act. Accordingly, the ground nos. 3 & 4 raised by the assessee are allowed.

In the result, the appeal of the assessee is partly allowed.

Order pronounced in the court on 18.09.2015.

Sd/- Sd/- [Mahavir Singh] [M.Balaganesh] Judicial Member Accountant Member Date: 18.09.2015. R.G.(.P.S.) Copy of the order forwarded to: 1. Prafulla Kumar Ghosh, Narayanpur, Malda-732101. 2 The I.T.O., Ward-2, Malda. 3. The CIT-Jalpaiguri, 4. The CIT(A)-Jalpaiguri. 5. DR, Kolkata Benches, Kolkata True Copy, By order,

Deputy /Asst. Registrar, ITAT, Kolkata Benches