Court Rejects Tax Addition Based Solely on DVO Report, Upholds Tribunal's Decision

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Case Name:

Principal Commissioner of Income Tax Vs J. Upendra Construction (P.) Ltd. (High Court of Gujarat)

Tax Appeal No. 173 of 2015

Key Takeaways:

1. Additions to taxable income cannot be made solely based on a DVO's report.

2. The DVO's report is considered an opinion and requires additional tangible evidence to support reassessment.

3. The court upheld the Tribunal's decision to delete additions and penalties imposed by the Assessing Officer.

4. This judgment reinforces the importance of substantial evidence in tax reassessment cases.

Issue:

Can the Income Tax Department make additions to taxable income solely based on a District Valuation Officer's (DVO) report regarding the difference in construction costs?

Facts:

1. The case involved assessment years 2002-2003, 2003-2004, and 2004-2005.

2. The Assessing Officer initiated reassessment proceedings under Section 147 of the Income Tax Act.

3. The reassessment was based on a valuation report from the DVO obtained in the case of M/s. Manjusha Estate Pvt. Ltd., from whom the assessee had acquired the project.

4. The Assessing Officer made additions to the assessee's income based on the difference between the cost of construction determined by the DVO and that shown by the assessee.

5. The Commissioner of Income Tax (Appeals) confirmed the Assessing Officer's findings but deleted the penalty imposed under Section 271(1)(c) of the Income Tax Act.

Arguments:

1. Revenue's Argument:

- The Tribunal erred in allowing the appeals and deleting the additions.

- The assessee was given full opportunity and served with the DVO's report.

- The DVO's report can be considered as per the Supreme Court's decision in Assistant Commissioner of Income-Tax V/s. Dhariya Construction Co.

2. Assessee's Argument (implied):

- The reassessment was not valid as it was based solely on the DVO's report.

- There was no additional tangible material to support the reassessment.

Key Legal Precedents:

1. M/s. Manjusha Estate Pvt. Ltd. V/s. The Income Tax Officer (214 ITR 236):

The court held that reassessment based on a Valuation Officer's report obtained when no assessment proceedings were pending was not valid.

2. Assistant Commissioner of Income-Tax V/s. Dhariya Construction Co. (328 ITR 515 SC):

The Supreme Court observed that the DVO's report can be considered, subject to the Assessing Officer applying his mind.

Judgement:

1. The High Court dismissed the Revenue's appeals.

2. The court held that no addition can be made solely based on the DVO's report, which is considered only an opinion.

3. The court affirmed that except for the DVO's report, there was no further tangible material before the Assessing Officer.

4. The Tribunal's decision to delete the additions made by the Assessing Officer was upheld.

5. Consequently, the deletion of penalty under Section 271(1)(c) of the Income Tax Act was also upheld.

FAQs:

Q1: Can the Income Tax Department make additions based solely on a DVO's report?

A1: No, the court ruled that additions cannot be made solely based on a DVO's report without additional tangible evidence.

Q2: What is the legal status of a DVO's report in tax assessments?

A2: A DVO's report is considered an opinion and cannot be the sole basis for reassessment or additions to taxable income.

Q3: What impact does this judgment have on future tax assessments?

A3: This judgment emphasizes the need for substantial evidence beyond a DVO's report when making additions to taxable income or initiating reassessment proceedings.

Q4: Did the court completely disregard the DVO's report?

A4: No, the court acknowledged that a DVO's report can be considered, but it cannot be the sole basis for additions or reassessment without additional tangible evidence.

Q5: What happens to the penalty imposed under Section 271(1)(c) of the Income Tax Act in this case?

A5: The court upheld the deletion of the penalty, as it was a consequence of deleting the additions made by the Assessing Officer.

1. As the common question of law and facts arise in this group of appeals and as such, they are arising out of the impugned common judgment and order passed by the learned Income Tax Appellate Tribunal, Ahmedabad, ‘D’ Bench (hereinafter referred to as the ‘Tribunal’), however, with respect to the different assessment years and Tax Appeal No.175 of 2015 is arising out of the impugned judgment and order passed by the learned Tribunal deleting the penalty imposed under Section 271(1)(c) of the Income Tax Act with respect to the transaction for the aforesaid assessment years, all these appeals are decided and disposed of by this common order.

2. At the outset, it is required to be noted that the dispute is with respect to the assessment years 2002-2003, 2003-2004 and 2004-2005. That the assessee filed return of income for the aforesaid assessment years. That the Assessing Officer framed assessment and passed assessment orders under Section 143(3) of the I.T. Act (for A.Y.2002-2003), under Section 143(3) of the I.T. Act (for A.Y.2003-2004) and under Section 143(3) of the I.T. Act (for A.Y.2004-2005). That the Assessing Officer initiated the reassessment proceedings under Section 147 of the I.T. Act for the assessment years under consideration solely relying upon and/or based on the valuation report obtained by the Department from the District Valuation Officer, Income Tax Department, obtained in case of one M/s.Manjusha Estate Pvt. Ltd. from whom, the assessee got the project transferred. That the Assessing Officer passed the respective reassessment orders and reassessed the cost of construction and directed to make addition on account of the difference in the cost of construction as under:-

Sr.No. Period of Construction (P.Y.)

Expenditure as stated by the Assessee

Assessed Cost of Construction

Difference

1. 2002-2003 89,68,627/- 1,31,46,163/- 41,77,536/-

2. 2003-2004 12,94,426/- 19,16,110/- 6,21,684/-

3. 2004-2005 2,06,622/- 3,10,732/- 1,04,110/-

2.1. Feeling aggrieved and dissatisfied with the respective assessment orders in making the aforesaid addition on account of difference in the cost of construction, the assessee preferred appeals before the learned CIT(A) and the learned CIT(A) dismissed the said appeals confirming the findings recorded by the Assessing Officer on the ground that the DVO while valuating the property had made detailed observations and also considered the submissions made by the assessee on the report of the DVO. However, the learned CIT(A) deleted the penalty imposed under Section 271(1)(c) of the I.T. Act.

2.2. Feeling aggrieved and dissatisfied with the respective orders passed by the learned CIT(A) in dismissing the respective appeals preferred by the assessee, the assessee preferred appeals before the learned Tribunal challenging the aforesaid additions as well as reopening of the assessment proceedings under Section 147 of the Act. That the Revenue also preferred appeal before the learned Tribunal being ITA No.2253/Ahd/2012 for A.Y. 2003-2004 challenging the order passed by the learned CIT(A) deleting penalty under Section 271(1)(c) of the I.T. Act. That by impugned common judgment and order, the learned Tribunal has allowed the appeals preferred by the assessee and has deleted the additions made by the Assessing Officer confirmed by the learned CIT(A) and also dismissed the appeal preferred by the Revenue which was filed against the order passed by the learned CIT(A) deleting the penalty under Section 271(1)(c) of the I.T. Act.

2.3. Feeling aggrieved and dissatisfied with the impugned common judgment and order passed by the learned Tribunal passed in ITA Nos.2532 to 2534/Ahd/2009 as well as in ITA No.2253/Ahd/2012, the Revenue has preferred the present tax appeals.

2.4. In Tax Appeal No.173 of 2015, the Revenue has proposed the following substantial questions of law:-

“(A) Whether, on facts and in circumstances of the case, the Appellate Tribunal has substantially erred in cancelling the notice issued u/s 148 of the Act issued by AO following the provisions available as per explanation 2(b) given below section 147 of the Income Tax Act?

(B) Whether the Appellate Tribunal has substantially erred in deleting the addition of Rs.2,85,362/- for assessment year 2002-03 as unexplained investment being the difference in cost of construction?”

2.5. In Tax Appeal No.174 of 2015, the Revenue has proposed the following substantial questions of law:-

“(A) Whether, on facts and in circumstances of the case, the Appellate Tribunal has substantially erred in cancelling the notice issued u/s 148 of the Act issued by AO following the provisions available as per explanation 2(c)(iii) and explanation 2(c)(iv) given below section 147 of the Income Tax Act?

(B) Whether the Appellate Tribunal has substantially erred in deleting the addition of Rs.41,77,536/- for assessment year 2003-04 as unexplained investment being the difference in cost of construction?”

2.6. In Tax Appeal No.175 of 2015, the Revenue has proposed the following substantial question of law:-

“Whether the Appellate Tribunal has substantially erred in cancelling the notice issued u/s 148 of the Act by AO and deleting penalty amounting to Rs.15,35,245/- levied by Assessing Officer u/s 271(1) (c) of the I T Act?”

2.7. In Tax Appeal No.176 of 2015, the Revenue has proposed the following substantial questions of law:-

“(A) Whether, on facts and in circumstances of the case, the Appellate Tribunal has substantially erred in cancelling the notice issued u/s 148 of the Act issued by AO following the provisions available as per explanation 2(b) given below section 147 of the Income Tax Act?

(B) Whether the Appellate Tribunal has substantially erred in deleting the addition of Rs.6,21,684/- for assessment year 2004-05 as unexplained investment being the difference in cost of construction?”

3. Shri M.R. Bhatt, learned counsel appearing for the Revenue has vehemently submitted that the learned Tribunal has materially erred in allowing the respective appeals and deleting the additions on account of difference in the cost of construction made by the Assessing Officer.

3.1. It is submitted by Shri Bhatt, learned counsel appearing for the Revenue that the learned Tribunal has materially erred in relying upon the decision of this Court in the case of M/s.Manjusha Estate Pvt.Ltd. V/s. The Income Tax Officer reported in 214 ITR 236. It is submitted that the learned Tribunal has not properly appreciated the fact that in the case of M/s.Manjusha Estate Pvt.Ltd. (supra) before the Division Bench of this Court, it was found that when the valuation report of the Valuation Officer was obtained by the Assessing Officer, there was no assessment proceedings pending and it was held that the reassessment on the basis of the report of the Valuation Officer was not valid.

3.2. It is submitted that in the present case, as such, the fullest opportunity was given to the assessee by the Assessing Officer and even the assessee was also served with the DVO's report.

3.3. It is submitted by Shri Bhatt, learned counsel appearing for the Revenue that the learned Tribunal has materially erred in observing that on the basis of the DVO's report alone, the Assessing Officer was not justified in initiating the reassessment proceedings.

3.4 It is further submitted by Shri Bhatt, learned counsel appearing for the Revenue that even in the case of Assistant Commissioner of Income-Tax V/s. Dhariya Construction Co. reported in 328 ITR 515 (SC), the Hon'ble Supreme Court has observed that the DVO's report can be considered, however, subject to Assessing Officer applying his mind. It is submitted that, therefore, the learned Tribunal has materially erred in holding the reassessment proceedings not valid and in deleting the additions made by the Assessing Officer on account of difference in the cost of construction which was based upon the DVO's report.

3.5. Making the above submissions, it is requested to admit/allow the present appeals.

4. Heard Shri Bhatt, learned counsel appearing for the Revenue at length. We have considered and gone through the orders passed by the Assessing Officer; learned CIT(A) as well as the learned Tribunal.

4.1. At the outset, it is required to be noted that in the present case, the Assessing Officer made additions with respect to the difference in the cost of construction based upon and/or relying upon the DVO's report in the case of one M/s.Manjusha Estate Pvt.Ltd. from whom, the assessee subsequently got the project. It is true that in the present case, copy of the DVO's report was furnished to the assessee during the reassessment proceedings. However, it is required to be noted that except the DVO's report, there was no further tangible material before the Assessing Officer. Therefore, solely on the basis of the DVO's report which, as per the catena of decisions of the Hon'ble Supreme Court as well as this Court, can be said to be the opinion of the DVO only, no addition can be made with respect to difference between the cost of construction determined by the DVO and shown by the assessee.

5. Under the circumstances and in the facts and circumstances of the case, it cannot be said that the learned Tribunal has committed any error in deleting the additions made by the Assessing Officer on account of difference of the cost of construction which was solely based upon the DVO's report.

5.1. Under the circumstances, no interference of this Court is called for and the present appeals deserve to be dismissed as no question of law, much less, any substantial question of law arises in the present appeals. Once the addition made by Assessing Officer is deleted, the necessary consequences would be to delete the penalty imposed under Section 271(1) (c) of the Act.

6. Under the circumstances, the appeals against the impugned common judgment and order passed by the learned Tribunal in dismissing the appeals preferred by the Revenue and confirming the order passed by the CIT(A) deleting the penalty under Section 271(1)(c) of the Act also deserve to be dismissed.

7. In view of the above and for the reasons stated above, all these appeals fail and deserve to be dismissed and accordingly dismissed. No costs.

(M.R.SHAH, J.)

(S.H.VORA, J.)