1997-VIL-103-ITAT-HYD

Equivalent Citation: TTJ 057, 493,

Income Tax Appellate Tribunal HYDERABAD

Date: 17.01.1997

SRI VENKATRAJU MODERN BOILED & RAW RICE MILL.

Vs

ASSISTANT COMMISSIONER OF INCOME TAX & ORS.

BENCH

Member(s)  : A. VENKU REDDY.

JUDGMENT

Since a common issue arises for consideration in these cross appeals relating to asst. yrs. 1984-85 and 1985-86, they have been heard together for disposal by a consolidated order.

2. The sole common issue that arises for consideration in all these appeals pertains to the cost of construction of a rice mill and the consequent additions made under s. 69 of the IT Act, 1961, for the asst. yrs. 1984-85 and 1985-86.

3. Both sides agreed that ITA No. 2021/Hyd/1991, filed by the assessee for the asst. yr. 1985-86 has become infructuous. Originally, assessment for the asst. yr. 1985-86 was made under s. 144 of the IT Act. Aggrieved by it, the assessee carried the matter in appeal. The learned CIT(A) has set aside the assessment made under s.144 for the asst. yr. 1985-86 and directed it to be redone in accordance with law as indicated in the said order. Still aggrieved by it, the assessee preferred appeal contending that the learned CIT(A) ought to have annulled the ex parte assessment made under s. 144. During the pendency of the said appeal, assessment has been redone for the asst. yr. 1985-86 under s. 143(3) making certain additions under s. 69. Aggrieved by it, the assessee carried the matter in appeal. The learned CIT(A) granted part relief for the asst. yr. 1985-86. As against the said order of the CIT(A), the assessee filed ITA No. 546 and Department filed ITA No. 975/Hyd/1995. Since the ex parte assessment made under s. 144 having been set aside and the assessment for the asst. yr. 1985-86 having been redone under s. 143(3) r/w s. 250 and inasmuch as both Revenue and the assessee are in appeal before the Tribunal as against the part relief granted by the first appellate authority for the asst. yr. 1985- 86, we feel that ITA No. 2021/Hyd/1991 filed by the assessee which arises out of the ex parte assessment made under s. 144 for the asst. yr. 1985-86 has practically become infructuous. Accordingly, ITA No. 2021/Hyd/1991 filed by the assessee is dismissed.

4. Now let us take up the cross appeals ITA Nos. 545 and 546/Hyd/1995 filed by the assessee and ITA Nos. 974 and 975/Hyd/1995 filed by the Revenue for the asst. yrs. 1984-85 and 1985-86. These appeals arise out of the consolidated order, dt. 9th March, 1995 of the CIT(A), Visakhapatnam made for the asst. yrs. 1984-85 & 1985-86.

5. The assessee-appellant is a partnership firm consisting of 16 partners. It constructed a rice mill during the period from Feb., 1984 to Dec., 1984 falling within the asst. yrs. 1984-85 and 1985-86 at a village called Alikam in Srikakulam district of Andhra Pradesh. The admitted cost of construction as per books is Rs.9,08,580. In the first instance the assessee did not file returns for the asst. yrs. 1984-85 and 1985-86. It filed its return of income for the first time on 30th June, 1986 for the asst. yr. 1986-87 declaring a loss of Rs. 3,52,203. The AO made a reference on 13th Nov., 1987 to the Departmental valuation cell to give an estimate of the cost of construction of the rice mill in question. The valuation officer determined the cost of construction at Rs. 15,08,200 based on land and building method. The AO asked the assessee to reconcile the difference between the admitted cost and the cost estimated by the valuation cell. We get all this information from the assessment order, dt. 31st March, 1989 made for the asst. yr. 1986-87. The assessee filed a detailed explanation for the discrepancy, supported by the report of a registered valuer, who estimated the cost of construction at Rs. 9,05,300. The assessee contended before the AO that the difference arose mostly on account of the higher plinth area rates adopted by the valuation cell. The AO was not satisfied with that explanation. She felt that the partners of the assessee-firm must have invested more money in the construction of the rice mill than what has been disclosed in the accounts. The AO determined the unexplained investment in construction at Rs. 5,93,200 being the difference between the admitted cost and the cost estimated by the valuation cell. Inasmuch as the period of construction has spread over to two years, the AO apportioned the unexplained investment proportionately for the asst. yrs. 1986-87 and 1985-86. Accordingly, she completed the assessment for the asst. yr. 1986-87 making an addition of Rs. 2,24,450 and observing that the balance addition on account of unexplained investment should be considered for the asst. yr. 1985-86. On the appeal preferred by the assessee, the learned CIT(A) has set aside the assessment on the ground that the additions on account of unexplained investment should be considered for the asst. yrs. 1984-85 and 1985-86 only and not for asst. yr. 1986-87. Further, he has also set aside the ex parte assessment under s. 144 made for the asst. yr. 1985-86. Accordingly, the assessment for the asst. yr. 1984-85 was reopened and framed under s. 143(3) r/w s. 147. The period of construction covered by the asst. yr. 1984-85 was only two months while the period of construction covered by the asst. yr. 1985-86 was 9 months. The AO treated the difference between the admitted cost and the cost determined by the valuation cell (Rs. 5,99,620) as unexplained investment and apportioned it between the asst. yrs. 1984-85 and 1985-96 at Rs. 1,09,020 and Rs. 4,90,598 respectively. Thus, the AO framed the assessments for 1984-85 and 1985-86.

6. Aggrieved by the assessments the assessee carried the matter in appeal. The learned CIT(A) by his consolidated order, dt. 9th March, 1995, taking into consideration the cheap cost of labour and material at Alikam village where the mill was constructed, those to reduce the cost of construction by granting a part relief of Rs. 1,88,736. Thus, he determined the unexplained investment at Rs. 4,10,884, and spread it over to the asst. yrs. 1984-85 and 1985-86 at Rs. 74,706 and Rs. 3,36,178 respectively. Aggrieved by it, the assessee preferred appeals contending inter alia, that the learned CIT(A) ought to have deleted the entire addition made by the AO on account of unexplained investment for both the assessment years.

7. The learned counsel for the appellant-assessee contended vehemently that the assessee-firm maintained regular books of account regarding the construction of rice mill, that the entries in the said books of account pertaining to the cost of construction are fully supported by valid vouchers and bills regarding the materials purchased, etc., that the AO though perused the said books of account and vouchers could not find out even a single defect in them, that the cost of construction disclosed in the books of the assessee is also supported by the report of a registered valuer and that the AO without pointing out any defect or mistake in the books and without rejecting the books of account has no jurisdiction to resort to an estimate of cost of construction by relying on the report of the valuation cell and that, therefore, the additions made on account of unexplained investment for both the assessment years on the basis of the valuation report are not sustainable under law and, therefore, they have to be deleted. Nextly, he submits that the plinth area rates adopted by the valuation cell which are applicable to metropolitan cities are abnormally high and that the report of the registered valuer which is based on the local rates is more realistic and nearer to truth and that there is no reason as to why the report of the registered valuer should not be accepted. Lastly, he submitted that admittedly the assessee-firm which came into existence during the previous year relevant for the asst. yrs. 1984-85 and 1985-86 as the construction of the rice mill itself is not completed, that there was no opportunity or occasion at all for the assessee-firm to earn any unaccounted money during this period and for investing the same in construction and that if at all there is any unexplained investment in construction it may have to be considered in the hands of the individual partners only and not in the hands of the firm.

8. The learned Departmental Representative contended that though the AO has not specifically mentioned anywhere in the assessment order to the effect that he rejected the books, in fact he impliedly rejected the books and referred the question of valuation to the valuation cell, that the valuation officer made a scientific estimate of the cost of construction and determined the cost which is much higher than the admitted cost, that the assessee could not point out serious defects in the valuation report and, therefore, there are no valid grounds for rejecting the estimate of cost of the construction made by the Departmental Valuation Officer (DVO). Hence, he submits that the learned CIT(A) erred in granting part relief instead of upholding the entire addition. Lastly, he submits that the learned CIT(A) did not give any opportunity of being heard to the Valuation Officer and that in that view of the matter, the Tribunal may remit these appeals to the file of the CIT(A) with a direction to give an opportunity of being heard to the DVO and consider his submissions and then dispose of the appeals.

9. In reply, the learned counsel for the appellant-assessee submitted that when the reference to valuation cell itself without first rejecting the books was not valid, the question of considering the report of valuation cell and giving an opportunity of being heard to the Valuation Officer regarding his estimate of the cost and all that do not arise at all. He submits that the AO has not built up any foundation at all for resorting to an estimate without first rejecting the books of account by pointing out any serious defect or deficiency in the books and that under those circumstances there is no other alternative except to accept the admitted cost reflected in the books and supported by vouchers as well as by the report of the registered valuer.

10. We have duly considered the rival submissions. The rice mill was constructed during the period 19th Nov., 1983 to December, 1984. However, the assessee did not file any return of income for the asst. yrs. 1984-85 or for 1985-86. For the first time, it filed its return of income for the asst. yr. 1986-87 declaring a loss of Rs. 3,62,203 on the ground that it commenced production for the first time during this assessment year. In the said assessment proceedings relevant to the asst. yr. 1986-87, the issue pertaining to the cost of construction of the rice mill in question came up for consideration for the first time. In the said assessment proceedings, the assessee produced the books of account, bills and vouchers maintained by it. It is the contention of the assessee from the very beginning that it maintained regular books of accounts supported by bills and vouchers in respect of the construction of the rice mill and that it produced all its books of account, bills, vouchers, etc., before the AO who first framed the assessment for the asst. yr. 1986-87. The cost of construction of the mill as per the assessee's books is Rs. 9,14,000. The AO who had the benefit of perusing the books of account, bills, vouchers, etc., produced by the assessee did not point out any mistake or defect in the books. Nowhere, in the assessment order there is any mention made to the effect that the quantities of materials purchased and utilised in the construction were very low or the prices of materials purchased and the cost of labour utilised were shown at low figures. There is no indication at all in any of the assessment orders that the books of account maintained by the assessee in respect of construction are defective and it is not possible to rely upon the said books for arriving at the correct cost of construction of the rice mill. No such finding was given by the AO. Nowhere in the assessment order, there is any observation made by the AO to the effect that the books are defective and are, therefore, unreliable and are rejected. Without considering the books and the vouchers and bills filed in support of the entries contained in the books, the AO chose to make a reference to the valuation cell straightaway and obtained a report from the valuation cell regarding the cost of construction and then treated the difference between the admitted cost and the cost determined by the valuation cell as unexplained investment and made the impugned addition. Books of account constitutes the primary evidence. When an assessee maintains regular books of account supported by valid bills and vouchers, some valid reason must be given by the AO for rejecting the cost of construction reflected in the said books and for resorting to an estimate of cost of construction. The first step is consideration of the books of account. The next step of resorting to an estimate comes in only after the books are rejected. Without first rejecting the books the AO cannot straightaway jump to the next step of making an estimate. It is not a proper procedure to first obtain a report from the valuation cell and then inform the assessee that the admitted cost is lower than the cost determined by the valuation cell and the difference would be treated as unexplained investment. First of all, the AO should make a genuine effort to find out valid reasons for not accepting the cost reflected in the books of account regularly maintained by the assessee. In case any serious mistake, defect or deficiency is found in the books and the assessee is unable to explain the said mistake or defect, then the AO is at liberty to reject the books on the ground that they are unreliable or on the ground that it is not possible to arrive at a correct figure of cost of construction from the material available in those books. Instead of doing all that exercise, it is not open to the AO to straightaway make a reference to the valuation cell and place implicit reliance on it rejecting the cost reflected in the books, which is supported by bills and vouchers and also by the report of a registered valuer.

11. At this stage it would be relevant to refer to the decision of the Tribunal, Delhi 'C' Bench in the case of Harsarup Cold Storage & General Mills vs. ITO 27 ITD 1 (TM). In that case also, the crucial question that arose for consideration before the Tribunal was whether the AO without finding defects or mistakes in the books and without rejecting the books can resort to an estimate of cost of construction basing on the report of the valuation cell. The Tribunal held in that case that the ITO not having pointed out any defects in the account books should not have rejected the accounted version and should not have made an addition based on the report of the valuation cell regarding the cost of construction. The Tribunal while upholding that maintenance of books of account and recording of investments in those books of accounts being compulsory as per the legislative mandate, it is not open to the ITO to ignore the evidence provided by the entries in the said books of account without pointing out any defects in the books and go only by the valuation report given by the Valuation Officer, held as follows:

"When the ITO looks into an evidence he must record his observation as to the reliability, authenticity and correctness of the evidence. It becomes, therefore, imperative by reading ss. 69 and 143(3) together, that the ITO must, rather he has a statutory duty to examine the evidence produced by the assessee in support of his cost of construction, viz., the books of account, record a finding about the falsity or unreliability not just by expressing a capricious view, but by pointing out evidence, material and flaws in the evidence, if any. It is only after the evidence is rejected, the ITO will get the power to estimate the cost of construction. It is at that point of time that he can rely upon the report of the Valuation Officer."

In the case on hand also, the AO without pointing out any defect whatsoever in the books maintained by the assessee chose to ignore the evidence provided by the entries in the said books and straightaway relied on the valuation report for making an estimate of cost of construction, such a procedure was condemned by the Tribunal in the aforementioned case of Harsarup Cold Storage & General Mills.

12. The Rajasthan High Court in the case of CIT vs. Pratap Singh, Amrosh Singh, Rajinder Singh (1993) 200 ITR 788 (Raj) also took the view that the valuation report can be taken into consideration only when the books of account are not reliable or are not supported by proper vouchers or the AO is of the opinion that no reliance can be placed on such books of account. In that connection, the Rajasthan High Court held as follows:

"In respect of the investment which is made in the property there can be only two methods to find out the correct position (one, when proper books of account are maintained and two, valuation report). If the assessee has maintained proper books of account and all details are mentioned in such books of account which are duly supported by vouchers and no defects are pointed out and the books are not rejected, the figures shown therein have to be followed. The valuation report can be taken into consideration only when the books of account are not reliable or are not supported by proper vouchers or the ITO is of the opinion, that no reliance can be placed on such books of account. It is true that the ITO has no option but to rely on the valuation report which is a document prepared by an expert and is admissible but there must be a finding by the ITO that the books maintained by the assessee are defective or are not reliable."

The ratio of the aforementioned decision of the Rajasthan High Court also covers the facts on hand. In the case on hand also, though the assessee maintained regular books of account supported by valid vouchers, the AO could not reject the said books on any ground whatsoever. He simply ignored them and resorted to an estimate on the mere ground that the cost reflected in the books. The very step taken by the AO for resorting to an estimate of cost itself lacks valid foundation in the absence of initial rejection of books by showing valid reasons. There is nothing like implied rejection of books under law. Simply because the valuation report discloses a higher figure, the books cannot be said to be unreliable unless by a deeper probe any defect is found in the maintenance of the books of account.

13. In that view of the matter, we are unable to sustain any part of the addition sustained by the first appellate authority towards unexplained investment in the construction of the rice mill. On this ground alone, the impugned addition sustained by the first appellate authority is liable to be deleted. In that view of the matter, the question of remitting the appeals to the first appellate authority for giving an opportunity of being heard to the Valuation Officer regarding the rates adopted by him, etc., does not arise at all. Applying the ratio of the decision of the Tribunal reported in 27 ITD 1(TM) and the decision of the Rajasthan High Court reported in (1993) 200 ITR 788 (Raj) we hereby delete the impugned addition made under s. 69 of the IT Act towards unexplained investment in construction for both the assessment years under consideration.

14. In the result, ITA Nos. 545 and 546/Hyd/1995 filed by the assessee are allowed and ITA Nos. 974 and 975/Hyd/1995 filed by the Revenue are dismissed.

 

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