Vildirect: IncomeTax-caselaws-1997-VIL-94-ITAT-

1997-VIL-94-ITAT-

Equivalent Citation: ITD 063, 235,

Income Tax Appellate Tribunal CALCUTTA

Date: 28.02.1997

MODERN CONSTRUCTION DEVELOPMENT AND PROJECT PROMOTION.

ASSISTANT COMMISSIONER OF INCOME-TAX.

BENCH

Member(s) : D. MANMOHAN., R. ACHARYA.

JUDGMENT

Per Shri D. Manmohan, JM --- This is an appeal filed at the instance of the assessee-firm and it relates to the assessment year 1991-92.

2. As per the revised grounds of appeal, assessee raised three grounds which, in substance, relate to only one issue i.e., with regard to the justification in adding a sum of Rs. 3,51,877 under the head ' Income from other sources '.

3. Brief facts in this regard are as under : By virtue of an agreement between Burdwan Municipality and the assessee, construction of a market complex known as ' Fancy Market Complex ' at Tinkonia, G.T. Road, was undertaken by the assessee. As per the Balance-sheet of the assessee-firm, in the accounting year, relevant to the assessment year 1991-92, a sum of Rs. 3,04,570 was shown as the construction expenditure during that period. In the course of framing an assessment, Assessing Officer referred the matter to the valuation officer. As per the report of the Dist. valuation officer (DVO), the amount invested during the year was estimated at Rs. 6,56,457. The difference between the actual investment shown by the assessee and the estimate made by the valuation cell works out to Rs. 3,51,887. In response to the show-cause notice issued by the Assessing Officer directing the assessee to explain as to why the difference should not be taken as unexplained investment in the construction of the market complex, assessee filed detailed reply contending, inter alia, that the Assessing Officer is not justified in obtaining an expert opinion of the Dist. valuation cell for determining the cost of construction by issuing summons under section 131(1)(d) of the Income-tax Act, 1961. However, the Assessing Officer was of the opinion that the reference to the valuation officer is proper as it helps the Assessing Officer in framing the assessment order on sound reasoning and without any bias/prejudice. As regards the registered valuer's report submitted by the assessee, Assessing Officer observed that the cost of construction determined by the Registered Valuer was simply based on the rates figuring in P.W.D. Manual whereas, the DVO has considered the cost of construction on the basis of plinth area rate of C.P.W.D. updated by the cost of index, which is more liable. It is also the case of the Assessing Officer that the registered valuer as well as the DVO have categorically mentioned that no detailed vouchers of the building materials and labour payments were produced by the assessee. Thus, by proceeding on the basis of the estimate made by the valuation cell, a sum of Rs. 3,51,877 was treated as unexplained investment.

4. Aggrieved, assessee contended before the Commissioner (Appeals) that as per the agreement between Burdwan Municipality (lessor) and the assessee (lessee), the construction has to be supervised by the engineers of the ' lessor ' and it would be governed by the P.W.D. rate schedule, apart from the fact that the assessee is not the owner of the commercial complex and hence it is not logical to think that the assessee has spent more than that shown on record. He further contended that the assessee would not be gainer by spending more, inasmuch as, the assessee (lessee) is allowed to recover the actual cost of construction as shown to the Municipality (lessor) and not more. It was also contended that the reference to the valuation officer is not in accordance with law, inasmuch as, the assessee has maintained proper books of account recording the construction cost and without pointing out any defect the Assessing Officer is not justified in relying upon the valuation report. In this regard, assessee relied upon the decision of the Hon'ble Calcutta High Court in the case of CIT v. Western Estates [1994] 209 ITR 343.

5. The submissions of the assessee were not accepted by the CIT(A). He observed that the agreement with the Burdwan Municipality and the clauses therein, need not be dealt in detail as this is not a real issue, because the only issue that needs attention is the amount invested by the assessee for the construction of the market complex. Admittedly, there is huge difference in the estimate of cost of construction as per the registered valuer and the value as per the DVO. CIT(A) further observed that both the registered valuer as well as the valuation officer have admitted that no detailed vouchers of the building materials purchased were produced by the assessee for determining the cost of construction. He, therefore, held that the Assessing Officer was, in the absence of vouchers, justified in referring the case to the valuation cell. He has further recorded his reasons to explain that the rate adopted by the valuation cell is preferable to that of the P.W.D. schedule of rates adopted by the registered valuer.

6. Further aggrieved, assessee is in appeal before us. Ld. counsel for the assessee contended before us that the commercial complex is constructed by the assessee as per the agreement between Burdwan Municipality and the assessee-firm. He further submitted that upon construction of the property, the commercial complex becomes the property of the Municipality and the limited right that the assessee had, in his capacity as lessee, is to recover the cost of construction and hence the assessee cannot be said to be a gainer by investing unaccounted for money. The main thrust of the argument of the ld. counsel is that the assessee not being the owner of the property, there cannot be a question of unaccounted investment in such property. He has taken us through various clauses in the agreement in support of his aforesaid submission. Ld. counsel further submitted that the books were maintained regularly and all the expenditure were properly recorded in the books and hence the Assessing Officer is not justified in referring the matter to the valuation officer as regards the probable cost of construction, without pointing out any specific defect in the books of account. Ld. counsel further pointed out with the help of the order of the CIT(A), that several misc. disallowances were made by the Assessing Officer on account of alleged unvouched and unverifiable expenses but the same were deleted by the CIT(A) in view of the fact that no specific item of unvouched expenditure was pointed out by the Assessing Officer. The ld. counsel contended that the construction was strictly in accordance with the agreement and subject to the supervision of the engineers of the municipality and hence the cost of construction, as shown by the assessee, cannot be disputed without any valid material evidence and without pointing out any specific defect. ld. counsel filed two paper books. For the sake of convenience, paper book consisting of 144 pages is hereby referred to as Paper Book No. 1 and the paper book consisting of 33 pages will hereby be referred to as Paper Book No. 2. The ld. counsel invited our attention to page 1 of the Paper Book No. 2 and submitted that the Assessing Officer, at no stage, has called for the specific details of the cost of construction, though books were produced and examined, as could be seen from the order-sheet entries. It is the case of the ld. counsel for the assessee that the reference to the valuation officer was made in a routine manner, as could be seen from the order-sheet entries but because the estimate as made by the valuation officer is higher than the value shown by the assessee, to justify the addition on the basis of the valuation report, the Assessing Officer has made general observation that the assessee did not maintain complete vouchers. He thus sought to highlight that the Assessing Officer has never called for any information and never found any specific defect in the books of account and hence, the reference to the valuation officer is bad in law and the vague observation, in order to justify the addition on the basis of the valuation report, does not call for acceptance. In this regard he has relied upon the following cases :

(a) CIT v. Sheikhar Chand & Sons [1990] 186 ITR 269 (All.),

(b) Jaswant Rai v. CWT [1977] 107 ITR 477 (Punj. & Har.),

(d) CIT v. Western Estates [1994] 209 ITR 343 (Cal.),

(e) Dhirajlal Girdharilal v. CIT [1954] 26 ITR 736 (SC),

(f) CM. Francis & Co. (P.) Ltd. v. CIT [1970] 77 ITR 449 (Ker.),

(g) Shekhar Chand Jain & Sons v. IAC 32 TTJ (Delhi) 570,

(h) ITO v. Tek Chand [1995] 52 ITD 197 (Jp.),

(i) Nishant Housing Development (P.) Ltd. v. ACIT [1995] 52 ITD 103 (Pat.),

(j) Supdt. of Taxes v. Omkarmal Nathmal Trust AIR 1975 SC 2065,

(k) Smt. Uma Devi Jhawar v. ITO 126 [1995] Taxation 452 (Cal.),

(l) Godhumal Kewalram v. ITO [IT Appeal No. 255 (All.) of 1971-72].

7. On the other hand, ld. departmental representative submitted that though the assessee is not the owner of the property, it is entitled to be benefited on account of superior construction, by virtue of the lease agreement, and hence it can be said to be an interested party in the construction work. He has referred to several clauses in the lease deed to impress upon us that the assessee would be benefited by making a quality construction as it is entitled to recover not only the cost of construction but also some additional amount. As regards the decision of the Hon'ble Calcutta High Court in Western Estates' case ld. departmental representative contended that the decision revolves round the facts of that case and it has no application to the instant case on hand. Ld. departmental representative further submitted that though the Assessing Officer has not mentioned the fact that he is rejecting the books, but he has observed that the assessee did not produce any vouchers and hence he is justified in referring the matter to the valuation officer. Joining the issue, ld. counsel for the assessee contended that as could be seen from page 123 of paper book No. 1, Assessing Officer has never called for vouchers or rejected the books maintained by the assessee before referring the matter to the valuation officer. He further submitted that the registered valuer never mentioned that the vouchers are not available but on the other hand, as could be seen from paper book No. 1 (pages 125 to 130 at page 129), he was of the opinion that verification of individual vouchers of material and labours was not necessary in the method adopted by him as cost of different items of works as also the basic rates of different materials and labour are specified in the State P.W.D. Schedule of rates, according to which, cost of construction was evaluated. He further pointed out to us that the registered valuer, in the objection, mentioned that the reason for the difference in the rate adopted by the valuation cell could not be ascertained as no detailed measurement has been given in the report of valuation cell. It was further stated therein (registered valuer's report), vide page 128 of the paper book No. 1, that the cost worked out by him is on quantities of different items of work and not based on plinth area or covered area. Ld. counsel mainly stressed upon the facts that the question of production of vouchers never cropped up before the authorities as the addition was not mainly based upon the verification of books but only because of the estimate made by the DVO. He further submitted that all vouchers were produced and in the absence of any specific defect pointed out in the books and vouchers produced by the assessee, the Assessing Officer is not justified in making addition on the basis of the DVO's report.

8. We have carefully considered the rival submissions and perused the records. At the outset, we may mention that the question as to whether the assessee is the owner of the property or not, in considering the question of unexplained investment, is not directly relevant. At any rate, we find from the lease agreement that the assessee would be indirect beneficiary as it not only recovers the cost as shown to the Municipality but also an additional amount for a period of 25 years, which is subject to further extension of lease. We are, therefore, not impressed with the arguments of the ld. counsel for the assessee in that regard.

9. As regards the legality of making an addition on the basis of the report of the DVO, we find substantial force in the contentions of the ld. counsel for the assessee for the following reasons. As could be seen from the order-sheet entry, the return filed by the assessee for the assessment year 1991-92 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 14-2-1992 till 31-3-1994 (date of assessment order), there is 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. In fact, it was noted in the order sheet on 28-1-1993, which is reproduced hereinbelow for the sake of convenience :

" Sri R.K. Dev, Advocate, A/R appears with Sri Indrajit Jash, accountant, appear and produces books of account which are examined. The assessee-firm owns a six storeyed building which has been given on rent to various parties, such as businessmen, offices etc. The construction of the building has been almost completed during the year under consideration. The valuation of the (sic) had been referred to the Departmental valuation officer who has submitted his report. As per the valuation officer the cost of construction made by the assessee during the year is Rs. 6,56,447. As per valuation determined by the registered valuer as submitted by the assessee is Rs. 3,10,510. The A/R is asked to show cause as to why the valuation made by the Departmental Valuer will not be taken in consideration in completing the assessment. . . ."

From the record we find that the reference was made by the Assessing Officer to the valuation officer by a letter dated 17-7-1990. We also find from a reading of the assessment order that 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. The following observation of the Assessing Officer would clearly depict our viewpoint :

" There is no contravention of the law in obtaining expert opinion of the DVO, valuation cell, in determining the actual cost of construction by issuing commission under section 131(1)(d) of the Income-tax Act, 1961. This act on the part of the Assessing Officer may be termed as proper, legal and justified. Such act rather helps the Assessing Officer in framing the assessment order on sound reasoning and without any bias/prejudice whatsoever. He (registered valuer) determined the cost of construction simply on the basis of PWD manual and without consulting the papers relating to the purchase of building materials and labour charges incurred. Incidentally, it may be mentioned that the assessee did not produce any supporting vouchers regarding purchase of building materials and labour payments at any stage of hearing before the Assessing Officer."

We also find that the Commissioner (Appeals) has rejected the contention of the assessee on the ground that no detailed vouchers of building materials were produced by the assessee either before the registered valuer or before the DVO. A careful reading of the order of the Commissioner (Appeals) as well as the order of the Assessing Officer would make the matter explicitly clear that the Assessing Officer has 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)(d) of the Act, 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 has not produced vouchers before the valuation officer. Even at that point of time, the Assessing Officer has never called for the books or vouchers in his independent right to look for the defects, if any, at this juncture. It may be relevant, at this point to analyse the judicial precedents on this subject-matter. In the case of Sri Har Sarup Cold Storage & General Mills v. ITO [1988] 27 ITD 1 (Delhi) (TM), the Tribunal (as per head note) observed as under :

" By reading section 69 and 143(3) together, it is imperative that the ITO must, rather he had a statutory duty, to examine the evidence produced by the assessee in support of his cost of construction, namely, the books of account, record a finding about the falsity or unrealiability, not just by expressing a capricious view but by pointing out flaws in the evidence, if any it was only after the evidence was rejected that the ITO would get the power to estimate the cost of construction. It was at that point of time that he could rely upon the report of the valuation officer."

10. In the case of CIT v. Pratapsingh Amrosingh Rajendra Singh and Deepak Kumar [1993] 200 ITR 788 (Raj.), their Lordships observed as under :

" Simply because the valuation report was of a higher amount, the books could not be said to be unreliable, unless, by a deeper probe, any defect is found in the maintenance of the books of account."

The facts in the aforesaid case are very interesting. During the relevant Period, assessee made certain additions and alterations of a cinema building. Books of account were maintained. ITO referred the matter to the valuation officer and the assessee was confronted based on the report. According to the Assessing Officer, books of account are not true and correct as the estimate made by the valuation cell shows higher figure compared to the figure shown in the books. AAC gave a marginal relief and the matter was further agitated before the Tribunal. The Tribunal held that a reference to the valuation cell could not be made without showing that the expenditure recorded in the books did not represent true expenditure or that the assessee had failed to record fully and completely the expenditure actually incurred. The Tribunal further observed that " in our view, the reference to the valuation cell was not justified ". Aforesaid order of the Tribunal was confirmed by the Hon'ble High Court.

11. On analysing the aforesaid judgment, we find that in order to refer the matter to the valuation cell, the Assessing Officer should first point out the defects in the books maintained by the assessee. In the following decisions it was held that when the assessee maintained accounts regularly, addition cannot be made on the basis of the report of the DVO without pointing out any defects in the books :

(a) Sheikhar Chand & Sons' case

(b) Western Estate's case

(d) Shekhar Chand Jain & Son's case

(e) Tek Chand's case

(f) Nishant Housing Development (P.) Ltd.'s case

(g) Smt. Uma Devi Jhawar's case.

12. From the aforesaid judgment the following proposition would emerge :

(a) For the purpose of making an addition, towards unexplained investment, the Assessing Officer is under legal obligation to verify the books and vouchers maintained by the assessee in support of the cost of construction shown by him and point out specific defects ;

(b) Upon rejection of the books or upon pointing out defects, the Assessing Officer would acquire the right to refer the matter to the valuation officer, if so required ; and

(c) When the assessee produces registered valuer's report based on the State P.W.D. rates, it cannot be simply rejected without giving cogent reasons.

13. Admittedly, the valuation made by the registered valuer is based on the P.W.D. rate schedule and it is not the case of the department that proper cost of construction cannot 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 is 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 account maintained by the assessee. The observation of the Assessing Officer that vouchers were not produced by the assessee before the valuation cell cannot, in our opinion, support the case of the revenue to justify the reference to the valuation officer, inasmuch as, invalid reference cannot be validated by subsequent observation of the Assessing Officer that the books maintained by the assessee cannot be relied upon for want of proper vouchers. We may also incidentally point out that the stand of the assessee before us that the Assessing Officer has never asked for any details or pointed out any defects, cannot be brushed aside, on a perusal of the order-sheet entries. By respectfully following the judgments cited, we are of the opinion that the Assessing Officer is not justified in making an addition merely on the basis of the valuation report of DVO. We, therefore direct the Assessing Officer to delete the addition of a sum of Rs. 3,51,877.

14. In the result, the appeal filed by the assessee is allowed.

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