Court Rejects Tax Department's Valuation Without Rejecting Assessee's Books

Case Name**: Commissioner of Income Tax vs. Chohan Resorts

**Key Takeaways**:

1. The tax department cannot refer a matter to the DVO for valuation without first rejecting the assessee's books of account.

2. If books of account are maintained for construction costs, they must be rejected on legal grounds before seeking a DVO's valuation.

3. The court's decision reinforces the importance of following proper procedures in tax assessments.

**Issue**: 

Was the Income Tax Department justified in referring the matter to the Departmental Valuation Officer (DVO) for assessing the value of land and cost of construction of Chohan Resorts' building without first rejecting the assessee's books of account?

**Facts**:

1. Chohan Resorts filed a tax return for the assessment year 2007-08, declaring a total income of Rs. 2,010/-.

2. The balance sheet showed investments of Rs. 5,73,000/- in land and Rs. 47,43,576/- in building.

3. The Assessing Officer asked for details of investment sources, which the assessee failed to provide.

4. An Income Tax Inspector estimated the construction cost at Rs.one crore.

5. Due to the large difference, the Assessing Officer asked the DVO to determine the construction cost.

6. The DVO assessed the property value at Rs.1,02,54,500/-.

7. The Assessing Officer added Rs.55,10,924/- to the assessee's income under Section 69B (of Income Tax Act, 1961).

8. The assessee appealed, and the case eventually reached the Income Tax Appellate Tribunal.

**Arguments**:

Assessee's argument:

- The books of account were never rejected, so there was no basis for referring the matter to the DVO.

Revenue's argument:

- The department had the right to refer the matter to the DVO to determine the true value of the property, even without rejecting the books of account.

**Key Legal Precedents**:

The court relied on the Supreme Court's decision in Sargam Cinema v. CIT (2011) 241 CTR (SC) 179. In this case, the Supreme Court held that "the assessing authority could not have referred the matter to the DVO without the books of account being rejected." 

**Judgement**:

The court ruled in favor of the assessee, stating:

1. The Assessing Officer was not justified in referring the matter to the DVO without first rejecting the books of account.

2. Reliance on the DVO's report was misconceived.

3. The addition made by the Assessing Officer was deleted, and the returned income of the assessee was to be accepted.

The court emphasized that wherever books of account are maintained for construction costs, the matter can only be referred to the DVO after the books are rejected by the revenue on legal or justified grounds. 

**FAQs**:

Q1: Why was the tax department's action considered improper?

A: The tax department referred the matter to the DVO without first rejecting the assessee's books of account, which is a necessary step according to the court's ruling.

Q2: What should the tax department have done differently?

A: They should have first examined the assessee's books of account and, if found unsatisfactory, rejected them on legal grounds before seeking a valuation from the DVO.

Q3: Does this judgment apply to all cases of property valuation by the tax department?

A: This judgment specifically applies to cases where the assessee maintains books of account for construction costs. In such cases, these books must be rejected before seeking a DVO's valuation.

Q4: What is the significance of the Sargam Cinema case in this judgment?

A: The Sargam Cinema case established the principle that the assessing authority cannot refer a matter to the DVO without first rejecting the books of account, which was directly applied in this case.

Q5: What sections of the Income Tax Act were relevant in this case?

A: The judgment mentions Section 69B (of Income Tax Act, 1961) (for the addition made by the Assessing Officer), Section 145 (of Income Tax Act, 1961) (related to rejecting books of account), and Section 142A (of Income Tax Act, 1961) (regarding the DVO's valuation).

1. Delay in refiling the appeal is condoned.

2. This appeal has been filed by the revenue under Section 260A (of Income Tax Act, 1961) (in short “the Act”) against the order dated 13.6.2011 passed by the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar (hereinafter referred to as “the Tribunal”) in ITSA No.02 (ASR)/2011 (arising out of ITA Nos. 339(ASR)/2010 and 339(ASR)/ 2010) for the assessment year 2007-08, claiming the following substantial question of law:-

Whether on the facts and circumstances of the case, the Hon'ble Income Tax Appellate Tribunal is justified in holding “that the A.O. was not justified in referring the matter to the DVO without books of account being rejected and therefore, reliance placed on the report of the DVO was misconceived and the order of the lower authorities are liable to be set aside”, without appreciating that even when the books of the assessee may be not so incomplete, incorrect, concocted, inaccurate and/or untrue as to be rejected outright vis-a-vis the accounting of his various sources of income, the same books could still be sans the total amounts of undisclosed investments in a property; and without appreciating that in such a situation, it would not be necessary to reject the books of accounts u/s 145 (of Income Tax Act, 1961), for assessing the income of the assessee [by way of best judgment assessment, which is invariably an approximation and u/s 144 (of Income Tax Act, 1961), instead of u/s 143(3) (of Income Tax Act, 1961)], and yet it would be necessary to bring to the ambit of tax the undisclosed income, not recorded in the books, yet invested in a property, under the provisions of section 69 (of Income Tax Act, 1961) or 69B (of Income Tax Act, 1961); and also not appreciating that in these cases, the provisions of section 142A (of Income Tax Act, 1961) are the only means by which to bring to book the otherwise not recorded investments, by way of deeming of income; and also not appreciating that the plain interpretation of section 142A(1) (of Income Tax Act, 1961) also does not envisage any such essential and obligatory requirement of invocation of the provisions of section 145 (of Income Tax Act, 1961) so that the assessing officer can lean on the shoulders of the DVO for an expert estimation of a property on which he has genuine and reasonable reasons to believe that the investment in the property has not been fully disclosed in the books of the assessee and has thus an element of undisclosed income having been ploughed into it, which have to be assessed under the deeming provisions of Section 69 (of Income Tax Act, 1961) or 69B (of Income Tax Act, 1961)?

3. Put shortly, the facts for adjudication of the present appeal are that the assessee filed its return of income on 6.8.2007 for the assessment year 2007-08 declaring a total income of Rs.2010/-. Its case was taken up for scrutiny. The Assessing Officer found that in the balance sheet filed along with the return, the assessee had shown investment of Rs.5,73,000/- in the land account and Rs.47,43,576/- in the building account. The Assessing Officer issued notice under Section 142(1) (of Income Tax Act, 1961) asking the assessee to furnish the details of sources of investments but the assessee failed to furnish the requisite information. The Income Tax Inspector was asked to make the enquiries to ascertain the value of the land and cost of construction of building of Chohan Resorts who vide report dated 13.5.2009 estimated the cost of construction at Rs.one crore. Since the difference between the cost of building declared by the assessee and that as estimated by the Inspector was very large, the Assessing Officer asked the Departmental Valuation Officer (DVO) to determine the cost of the construction. The DVO assessed the cost of the property at Rs.1,02,54,500/-. A copy of the report was also sent to the assessee on 7.10.2009 for its objections, if any. The assessee vide its letters dated 30.11.2009 and 2.12.2009 furnished the copy of its building account as per its books of account along with the copies of bills of items used in the building and vouchers on account of labour paid. The assessee also offered its comments on the DVO's report and raised the objections against the same. The Assessing Officer vide order dated 24.12.2009 (Annexure A-1) added ` 55,10,924/- being the difference determined by the DVO in respect of M/s Chohan Resorts and the cost declared by the assessee under Section 69B (of Income Tax Act, 1961) and the total income of the assessee was assessed at ` 55,12,930/-. Feeling aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [in short “the CIT(A)”]. The CIT (A) vide order dated 2.7.2010 (Annexure A-2) confirmed the addition made by the Assessing Officer. Being dissatisfied, the assessee filed an appeal against the order of the CIT(A) before the Tribunal who vide order dated 13.6.2011 (Annexure A-3), deleted the addition made by the Assessing Officer and upheld by the CIT(A) and directed the Assessing Officer to accept the returned income of the assessee. Hence, the present appeal by the revenue.

4. We have heard the learned counsel for the appellant.

5. The point for consideration in the present appeal is whether the revenue was justified in referring the matter to the DVO for assessing the value of land and cost of construction of building of Chohan Resorts. The Tribunal relying upon the decision of the Hon'ble Apex Court in Sargam Cinema v. CIT (2011) 241 CTR (SC) 179 held that the books of account maintained by the assessee were never rejected and, thus, there was no occasion for the department to refer the matter to the DVO. The relevant findings recorded by the Tribunal read thus:-

“9.2. In view of the facts and the circumstances of the present case, we hold that the AO was not justified in referring the matter to the DVO without books of account being rejected and, therefore, reliance placed on the report of the DVO was misconceived and the orders of the lower authorities are liable to be set aside. While taking such a view, we are fortified by the decision of the Hon'ble Supreme Court in the case of Sargam Cinema Vs. CIT (2011) 241 CTR (SC) 179, wherein the Hon'ble Supreme Court held as under:-

“4. In the present case, we find that the Tribunal decided the matter rightly in favour of the assessee in as much as the Tribunal came to the conclusion that the assessing authority could not have referred the matter to the DVO without the books of account being rejected. In the present case, a categorical finding is recorded by the Tribunal that the books were never rejected. This aspect has not been considered by the High Court. In circumstances, reliance placed on the report of the DVO was misconceived.”

9.3 From the above judgment, it is clear that the Hon'ble Supreme Court has ruled that without the books of account being rejected, reference made to the DVO was not tenable. Respectfully following the judgment of the Hon'ble Supreme Court in the case of Sargam Cinema Vs. CIT (supra), we hold that no addition can be made on the basis of report of the DVO without the books of account being rejected, wherein every expenditure relating to the construction is recorded and those books of account have not been rejected by the A.O. under Section 145 (of Income Tax Act, 1961). Consequently, we delete the impugned addition and direct the AO to accept the returned income.”

6. Learned counsel for the revenue was unable to justify that when the books of account in respect of cost of construction have been maintained by the assessee and the same were not rejected, how the matter could be referred to the DVO for assessing the value. Wherever the books of account are maintained with respect to the cost of construction, the matter can be referred to the DVO after the books of account are rejected by the revenue on some legal or justified basis. In the absence of the same, the reference to the DVO cannot be upheld.

7. In view of the above, we do not find any substance in the

appeal. No question of law arises in this appeal for consideration of this Court. Dismissed.

(AJAY KUMAR MITTAL)

JUDGE

July 10, 2012 (G.S. SANDHAWALIA)

gbs JUDGE