1991-VIL-122-ITAT-HYD

Equivalent Citation: ITD 042, 466, TTJ 041, 149,

Income Tax Appellate Tribunal HYDERABAD

Date: 31.05.1991

SRI HARISANKAR CASHEW MANUFACTURING COMPANY.

Vs

INCOME-TAX OFFICER.

BENCH

Member(s)  : T. V. RAJAGOPALA RAO., CHANDER SINGH.

JUDGMENT

T. V. Rajagopala Rao J. M.--This is an appeal filed by the assessee against the order of the CIT, Visakhapatnam, dated 15th Feb., 1989 passed under section 263 of the IT Act, 1961.

2. The assessee is a registered firm engaged in manufacture and sale of cashew nuts. For assessment year 1985-86, for which the previous year ended by 31st March, 1985, the assessee-firm constructed a cinema house bearing the name of "Hari Shankar Picture Palace". The construction of the cinema house was stated to have commenced in September 1982 and completed in October 1984. In the assessment year 1985-86, the value of the cinema theatre was shown at Rs. 7,01,438. The assessment for 1985-86 was completed under section 143(1) by the ITO Srikakulam, by his assessment order dated 28th July, 1986. After the said assessment order was passed, without taking any action under section 143(2) or without obtaining any previous approval of the Dy. Commissioner for issuing notice, the ITO left the following note in his assessment record for 1985-86 :

" During the year of account, the assessee-firm has constructed a theatre known as Sri Hari Shankar Picture Palace, Kasibugga, Srikakulam Distt. The cost of construction of the said theatre was admitted at Rs. 11,98,219 (building Rs. 7,01,438, Machinery Rs. 3,53,181 and furniture Rs. 1,43,600). The cost of construction admitted by the assessee appears to be on low side having regard to the nature of the asset and other relevant circumstances. I am of the opinion that the fair market value of the asset exceeds the value of the asset as claimed by the assessee, by more than 25%. Hence, I feel that it is a fit case to refer to the Valuation Officer for ascertaining the correct valuation. "

He referred the question of valuation of Sri Hari Shankar Picture Palace, Kasibugga, to the opinion of the Valuation Cell. After obtaining the report of the Valuation Officer, wherein the cost of construction was estimated at Rs. 11,51,000, the ITO felt that the difference of Rs. 4,49,562 should be added to the income of the assessee under section 69 of the IT Act. For that purpose, he purported to have submitted proposals before the CIT, Visakhapatnam, to invoke the revisional jurisdiction under section 263. The following note is found recorded in the CITs file under date 20th Dec. 1988 :

" The ITO submitted proposals under section 263 for the assessment year 1985-86. The assessee-firm carried on business in cashew nuts. A cinema theatre was constructed by the assessee in the name of Hari Shankar Picture Palace. The assessment was, however, completed under section 143(1) on 28th July, 1986. On verification, it was noticed that the construction was commenced in September 1982 and completed in October 1984. The cost of construction was admitted by the assessee at Rs. 7,01,438. The ITO made a reference to the Valuation Cell, in response to which, the Valuation Officer estimated the cost of construction at Rs. 11,51,000 as against Rs. 7,01,438 admitted by the assessee. The ITO has now proposed to consider the difference of Rs. 4,49,562 under section 69 towards under-valuation of cost of construction. For orders to issue a notice under section 263. "

3. Subsequently, action under section 263 was initiated and a notice was sent to the assessee. The Authorised Representative on behalf of the assessee filed a statement before the learned CIT contending that the report of the Valuation Cell cannot be taken into account for purposes of holding that there was a difference in cost of construction. It was further contended that the Valuation Cell did not give any copy of its report or called for any explanation from the assessee in respect of items regarding which there was difference between the report of the Valuation Cell and the book value. The objections of the assessee were, however, found to be without force. The learned Commissioner found that the ITO's assessment order dated 28th July, 1986 under section 143(1) is erroneous in view of the fact that there is a difference of Rs. 4,49,562 in the cost of construction, which should have been considered by the ITO under section 69 of the IT Act, towards under-valuation. He, therefore, set aside the assessment and directed the ITO to redo the same in accordance with law and in the light of his observations made in his impugned order. As against the impugned order, the assessee came in second appeal before this Tribunal and thus the matter stands for our consideration.

4. We have heard Sri Manmohan, learned Advocate for the assessee, and Sri Narasimha Rao, learned Departmental Representative. The learned Advocate for the assessee contended before us that the reference to the Valuation Cell was purported to have been made under section 131 of the IT Act. Section 131(1), as far as is necessary for our purpose, is as follows :

" The Assessing Officer ... shall, for the purposes of this Act, have the same powers as are vested in a court under the Code of Civil Procedure, 1908 (5 of 1908), when trying a suit in respect of the following matters, namely :

(a) discovery and inspection ;

(b) enforcing the attendance of any person, including any officer of a banking company and examining him on oath;

(c) compelling the production of books of account and other documents ; and

(d) issuing commissions. "

Even a court, while exercising the powers under the Code of Civil Procedure is entitled to issue a commission, etc., only during the course of a proceeding or trying a suit. When no suit is pending, the court is not entitled to issue any commission on its own. The same powers as are exercised by a court are vested in the ITO under section 131(1). The powers vested in the ITO under this provision are available only during the course of assessment proceedings. In the absence of any assessment proceeding pending before him, the ITO has no powers to exercise under this provision. In this case, the assessment under section 143(l) was over by 28th July, 1986. The said assessment was not activated or revived by issue of any sort of notice, by obtaining necessary sanction from the Dy. Commissioner, under section 143(2). In this case, it would appear that the ITO had referred the question of valuation to the Valuation Cell on his own without any provocation whatsoever and without any proceeding pending before him.

5. At this juncture, the learned counsel submitted that the provisions of section 263(1) giving revisional powers to the Commissioner should be examined. Under the said provision, the Commissioner may call for and examine the record of any proceeding under the IT Act, if he considers that order passed by the Assessing Officer is erroneous insofar as it is prejudicial to the interest of the Revenue, he may, after giving the assessee an opportunity of being heard and after making such enquiry as he deems necessary, pass such order thereon as the circumstances of the case justify. Under Explanation (b) to the said sub-section, "record" is defined to include and deemed always to have included all records relating to any proceeding under the IT Act available at the time of examination by the Commissioner. Before calling any document as record or as forming part of a record which the learned Commissioner is entitled to examine for invocation of his powers under section 263, that record should necessarily relate to any proceeding taken under the IT Act. A document or a record not relating to any proceeding cannot form part of "record" which the Commissioner is entitled to examine while invoking his revisionary powers. In this case, the valuation report dated 21st Nov., 1988 is a document which cannot form part of any proceeding under the IT Act. As already pointed out, the assessment under section 143(1) was over by 28th July, 1986. It was not revived by issuing any notice under section 143(2). In such a circumstance, the ITO has no authority to refer the question of valuation on his own to the Valuation Cell. A report which is obtained after the assessment proceeding was over, regarding valuation of a property, cannot be of any value, nor can such a report form part of record of any proceeding under the IT Act. Therefore, the valuation report is invalid. On the basis of such valuation report the Commissioner cannot invoke his revisional jurisdiction. The proposition that after the assessment is over no reference to the Valuation Officer can be made under section 16A of the Wealth-tax Act and such a reference would be invalid and the report would be non est in law, and also such a report cannot form the basis for reopening in a wealth-tax matter, is supported by a catena of decisions like the following :

Brig. B. Lall v. WTO [1981] 127 ITR 308 (Raj.), Smt. Uma Debi Jhawar v. WTO [1982] 136 ITR 662 (Cal.), CWT v. Master Kairas Tarapore [1987] 163 ITR 311 (Raj.), Smt. Bella Cajeton Travasso v. Third WTO [1987] 166 ITR 49 (Bom.) K.M. Ramdas Prabu v. First WTO [1987] 166 ITR 706 (Kar.), A. S. Suresh Shenoy v. WTO [1984] 149 ITR 65 (Ker.) and J.K.K. Natarajah v. WTO [1983] 142 ITR 804 (Mad.).

For the proposition that unless a proceeding is pending before the ITO, his powers under section 131 of the IT Act cannot be invoked, the Bombay High Court decision in Jamnadas Madhavji & Co. v. J.B. Panchal, ITO [1986] 162 ITR 331 and the Calcutta High Court decision in ITO v. James Joseph O'Gorman 1989 Tax LR 871, were sought to be relied upon. For the proposition that unless a proceeding is pending, the valuation report obtained would not be of any value under section 55A of the IT Act, the decision of the Calcutta High Court reported as Reliance Jute & Industries Ltd. v. ITO [1984] 150 ITR 643 was sought to be relied upon.

6. The learned departmental representative vehemently argued in support of the order of the CIT.

7. We have considered the respective arguments advanced on both sides. We are inclined to agree with the arguments advanced by Sri Manmohan, learned Advocate for the assessee, especially when he argued that the valuation report dated 21st Nov., 1988 does not form part of any proceeding before the ITO and, therefore, cannot form the basis for exercising revisionary powers under section 263 by the CIT. We are also one with him when he argued that the said report of the Valuation Officer cannot be considered to be forming part of the record which the Commissioner is entitled to examine to invoke jurisdiction under section 263, since the same does not relate to any proceeding under the IT Act. We further agree with his contention that for invoking powers under section 131, a valid proceeding should be pending before the ITO and in this connection, we have gone through the Bombay High Court decisions in Jamandas Madhavji & Co.'s case. In the facts of that case, the assessments for assessment years 1972-73 and 1973-74 were completed long back. For assessment year 1974-75, the proceedings became time barred in March 1977. Subsequent to March 1977, the ITO issued a notice under section 131 calling upon the assessee to furnish information, documents and books of account on various points specified therein, in respect of the previous years relevant to assessment years 1972-73 to 1974-75. The validity of such notice was questioned. On a writ petition filed before the Bombay High Court, it was held as per head note at page 332 as follows:

" (i) that no proceeding was pending when the Income-tax Officer issued the impugned summons and, therefore, the summons was liable to be quashed;

(ii) that the reasons for issuing the summons as stated by the ITO in his letter of 30th Oct., 1980, was to investigate whether the assessment for the assessment years 1972-73 to 1974-75 should be reopened under section 147. It was for the ITO to first decide whether he had reason to believe that income had escaped assessment. Only if he decided that question in the affirmative, could he initiate proceedings under section 147 and only thereupon could he become entitled to invoke section 131(1). Therefore, the impugned summons was liable to be quashed. "

Speaking about the ambit and scope of section 131(1) of the IT Act, 1961, the Calcutta High Court in ITO v. James Joseph O'Gorman 1989 Tax LR 371, held the following as per head note:

" Persons as mentioned in section 131(1) are vested with powers of a court as provided under the Code of Civil Procedure. Order 11 of the Code of Civil Procedure empowers a court of discovery and inspection under various rules of the Order and those Rules are only applicable and could be exercised by a Court in a pending suit. Under the circumstances when similar powers have been given to the authorities concerned, as mentioned in section 131(1) of the Income-tax Act, as it has been given under the Code of Civil Procedure to a Court, unless there was a proceeding pending before the authorities concerned, no such power could be exercised under section 131 .... Therefore, the notice issued by ITO when proceeding was not pending before him is without jurisdiction. "

8. In view of the various authorities cited on behalf of the assessee, it is easy for us to hold that the reference to the Valuation Officer and the valuation report dated 21st Nov. 1988 much later than the closure of the assessment proceeding by passing assessment order under section 143(1) on 28th July, 1986 itself, are invalid and cannot form part of record of a proceeding before the ITO and, therefore, cannot be taken support of by the CIT for issuing notice and exercising his jurisdiction under section 263 of the IT Act. It is needless for us to quote the ratio of the several decisions cited for the proposition that valuation report obtained subsequent to the closure of a proceeding cannot form the basis of reopening under section 17 of the WT Act. In our opinion, the ratio of the cases, decided under the WT Act can equally apply to income-tax proceedings also. Therefore, we find sufficient force in these contentions of the assessee and we are of the opinion that since the valuation report dated 21st Nov., 1988 has been made the basis for issue of notice under section 263, the order of the CIT cannot be allowed to stand. Hence, the appeal filed by the assessee is allowed. The order of the CIT under section 263 is set aside and consequently the assessment order framed under section 143(1) dated 28th July, 1986 stands restored

 

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