Karnataka H.C : The valuation arrived at in respect of Vasudev Building by the District Valuation Officer was a mere opinion and the same cannot be taken in to account for the purpose of bringing the difference in the valuation of the building as the undisclosed income for the Block Period without actually examining the correctness of the finding recorded by the Valuation Officer

High Court Of Karnataka

CIT, Central Circle vs. Vasudev Construction

Block Period : 1-4-1989 To 28-1-2000

Section : 158BB

Dilip B. Bhosale And B. Manohar, JJ.

IT Appeal No. 369 Of 2007

January  30, 2014

JUDGMENT

B. Manohar, J. – The revenue has preferred this appeal under Section 260-A of the Income Tax Act, 1961 (for short ‘the Act’), being aggrieved by the order dated 22-9-2006 made in IT(SS)A No.186/Bang/2002 passed by the Income Tax Appellate Tribunal, Bangalore Bench-B, (hereinafter referred to as ‘the Tribunal’ for short) whereby the Tribunal dismissed the appeal filed by the revenue and confirmed the order passed by the Commissioner of Income Tax (Appeals) (hereinafter referred to as ‘First Appellate Authority’ for short), setting aside the order passed by the Assessing Authority pertaining to the Block Period from 1-4-1989 to 28-1-2000.

2. The brief facts of the case are as follows:

The respondent is a Partnership Firm, engaged in the business of construction of building and development of properties. The Firm came into existence from 28-01-1998. A search was conducted on 28-01-2000 under Section 132 of the Act in the business premises and residence of the Managing Partner of the respondent-Firm, Sri. Nagendra Baliga, who is a Jeweller by profession. During the search, certain documents like bills of material purchased, labour charges paid and the cheques relating to the assessee-Firm were found and seized. On the basis of the said records, notice under Section 158-BD was issued calling upon the respondent-Firm to file their returns for the Block Period from 01-04-1989 to 28-01-2000. The assessee-Firm filed return of income on 30-11-2000 declaring ‘NIL’ income. On the basis of the said returns, a notice under Section 143(2) and 142(1) of the Act was issued calling upon the assessee to produce necessary documents. An authorized representative of the assessee appeared and produced the computerized books of account. As per the records produced by the assessee, the assessee-Firm had started constructing two buildings, i.e. Vasudev Towers and Vasudev Plaza. Vasudev Towers was nearing completion and Vasudev Plaza was just started at the time of search. The assessee contended that the building is yet to be completed. The expenditure incurred for construction of the building has been mentioned in the books of account. The authorized representative of the company contended that they have incurred expenditure of Rs.42,15,111/- towards construction of Vasudev Towers and Rs. 4,49,386/- towards Vasudev Plaza as on the date of search. The Assessing Officer in order to verify the expenditure incurred for the construction of buildings, referred the matter to the District Valuation Officer (for short ‘DVO’). The DVO submitted a report estimating the cost of construction of two buildings at Rs.64,71,483/- and Rs.4,72,426/- respectively. The Assessing Officer taking into consideration the difference of cost of construction of the buildings as undisclosed income at Rs. 20,97,351/-and assessed to tax for the Block assessment period by its order dated 28-06-2002.

3. The assessee being aggrieved by the order passed by the Assessing Authority preferred an appeal before the Appellate Authority in ITA No.236/2002-03, contending that the order passed by the Assessing Authority is contrary to law. The report submitted by the DVO is also contrary to law. The Appellate Authority after considering the matter in detail held that the difference between the valuation adopted by the assessee and the DVO was a matter of opinion based upon which, the undisclosed income computed on such opinion cannot be brought to tax in the block period. Accordingly by its order dated 16-09-2002 allowed the appeal in part and set aside the order insofar as the block assessment period is concerned.

4. Being aggrieved by the order passed by the Appellate Authority, the assessee-Firm as well as the revenue preferred appeals before the Income Tax Appellate Tribunal, Bangalore in Appeal Nos. 186/2002 and 8/2003. The Tribunal, after considering the matter in detail dismissed both the appeals filed by the revenue as well as the assessee-Firm upholding the order passed by the Appellate Authority. The Tribunal held that no material was found during the search to indicate that the assessee has not recorded the expenses incurred on construction in the books of accounts. In the absence of any seized materials addition cannot be made only on the basis of the Valuation Officer’s report which is less than 15%, no addition can be made. Accordingly, dismissed the appeals by its order dated 22-09-2006. Being aggrieved by the said order, the revenue has preferred this appeal.

5. Sri. K.V. Aravind, learned counsel appearing for the appellant contended that the order passed by the Tribunal as well as the First Appellate Authority is contrary to law. The finding of the Tribunal that the difference in the cost of construction of buildings as valued by the DVO and the value accounted by the assessee is less than 15% is contrary to law. The Tribunal failed to appreciate that the percentage of difference should be reckoned with reference to the actual cost as per the assessee’s books and not after giving effect of telescoping the suppressed sale consideration. The further finding of the Appellate Authority that the difference in cost of construction based on valuation report shall not constitute undisclosed income as per Chapter-XIV-B is contrary to law. He relied upon a judgment reported in the case of Manish Maheshwari v. Asstt. CIT [2007] 289 ITR 341/139 Taxman 258 (SC) and sought for allowing the appeal.

6. On the other hand, Smt. Vani H, learned counsel appearing for the assessee supported the order passed by the Tribunal as well as the Appellate Authority and contended that the documents seized during the course of search are not incriminating in nature, but they were maintained in the normal course of business. No material was found at the time of search for initiating proceedings under Section 158-BD of the Act. The difference of valuation cannot be a ground to initiate proceedings under Section 158-BD i.e. block assessment period. In support of her contention, she relied upon the judgment reported in the case of Asstt. CIT v. Hotel Blue Moon [2010] 321 ITR 362/188 Taxman 113 (SC) in the case of CIT v. Vinod Danchand Ghodawat [2001] 247 ITR 448/114 Taxman 90 (Bom.) in the case of CIT v. Ashok Khetrapal [2007] 294 ITR 143 (Delhi) in the case of CIT v. Bimal Auto Agency [2009] 314 ITR 191 (Gauhati) and sought for dismissal of the appeal.

7. The above appeal was admitted for considering the following substantial questions of law:

“1. Whether the Appellate Authorities were correct in setting aside the Block Assessment based on the material detected in the course of search in the case of the partner who had informed that undisclosed income had been contributed by him in putting up Vasudev Towers which building on being valued by the District Valuation Officer, disclosed that there was difference in the cost of construction from that which has been declared which had been brought to tax in the blocks-period correctly by the Assessing Officer ?

2. Whether the Appellate authorities were correct in proceeding to hold that the valuation arrived at in respect of Vasudev Building by the District Valuation Officer was a mere opinion and the same cannot be taken in to account for the purpose of bringing the difference in the valuation of the building as the undisclosed income for the Block Period without actually examining the correctness of the finding recorded by the Valuation Officer ?

3. Whether the Appellate Authorities were correct in failing to take into account the search proceedings initiated in the case of Sri. Nagendra Baliga were disclosures regarding the valuation of Vasudev Building were made and the order of the Tribunal made in that case in subject matter of an appeal before the Hon’ble High Court ?”

8. We have carefully considered the arguments addressed by the learned counsel for the parties and perused the orders impugned in the appeal.

9. The records clearly disclose that search was conducted in the residence and business premises of Sri. Nagendra Baliga, who is one of the partners of respondent-Firm. During the course of search, the said Nagendra Baliga made a statement that he has invested a sum of Rs.65,00,000/- for construction of the buildings. On the basis of bills of materials purchased, labour charges paid, cheques relating to the assessee-Firm found during the search, a notice was issued under Section 158-BD calling upon the assessee to file the return of undisclosed income for the block period 01-04-1989 to 28-01-2000. The assessee filed NIL returns. Thereafter, a notice was issued under Section 143(2) and 142(1) of the Act. The construction of the buildings by the assessee-Firm was referred to the DVO, for valuation under Section 133(6) of the Act and for estimating the cost of construction of two buildings. The DVO submitted a report on 15-04-2002. There was difference in valuation by the assessee-Firm and the Valuator to an extent of Rs.20,97,351/-. The assessee-Firm filed objections to the report of the DVO. Comments were called for from the DVO. The DVO by his further report dated 12-09-2002 rectified certain mistakes and gave certain benefits to the assessee and he had not offered any comments for some objections. In view of that, the Assessing Officer added the said sum of Rs.20,97,351/- to the undisclosed income and assessed for tax.

10. The records further disclose that during the course of search, no incriminating documents were traced. However, certain documents like bills of materials purchased, labour charges paid and some cheques issued by the Firm were seized. The assessee-Firm has only two partners i.e. Nagendra Baliga and his wife. Construction of two buildings is the maiden project of the assessee-Firm. As on the date of search, the building was not completed and there was no income from the building. There was no positive comments from the DVO with regard to suppression of material facts by the assessee which would amount to undisclosed income. The Managing Partner of the Firm is primarily a Jeweller by profession, constituted a Firm to take up the work of construction of the buildings. The difference in the cost of construction cannot constitute undisclosed income for the block period. On verification of the revised report submitted by the DVO, the differences between the valuation of the assessee-Firm and the DVO is less than 15%. There is no specific finding by the Assessing Officer with regard to any concealment. Further, there was no material found during the search indicating that there were expenses incurred on construction by the assessee that were not recorded in the books of accounts. In the absence of any seized material and solely on the basis of the report of the DVO, there cannot be any finding with regard to the undisclosed income. No material has been found at the time of search for initiating proceedings under Section 158-BD of the Act. Solely on the basis of the Valuation report, block assessment cannot be made. Further, it is relevant to mention that the assessee-Firm came into existence on 28-01-1998. The Firm does not have its own income. The Managing Partner of the assessee-Firm is a jeweller by profession. His income was assessed and tax has been levied. Hence, it is not open to the appellant to tax once again in the guise of undisclosed income. The order passed by the Assessing Officer is contrary to the law laid down by the Hon’ble Supreme Court in the cases referred to above by the advocate appearing for the respondent. The Hon’ble Supreme Court in a judgment reported in Hotel Blue Moon (supra) has clearly held that the undisclosed income unearthed as a result of search. The scope and its ambit is limited in that sense to materials unearthed during the search. Paragraph 12 of the judgment reads as under:

“Chapter XIV-B provides for an assessment of the undisclosed income unearthed as a result of search without affecting the regular assessment made or to be made. Search is the sine qua non for the block assessment. The special provisions are devised to operate in the distinct field of undisclosed income and are clearly in addition to the regular assessments covering the previous years falling in the block period. The special procedure of Chapter XIV-B is intended to provide a mode of assessment of undisclosed income, which has been detected as a result of search. It is not intended to be substituted for regular assessment. Its scope and ambit is limited in that sense of materials unearthed during search. It is in addition to the regular assessment already done or to be done. The assessment for the block period can only be made on the basis of evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with the Assessing Officer. Therefore, the income assessable in block assessment under Chapter XIV-B is the income not disclosed but found and determined as the result of search under section 132 or requisition under Section 132A of the Act.”

Further, in a judgment reported in Bimal Auto Agency (supra), the Gauhati High Court held that, the report of DVO does not constitute a material or information to the search. Paragraph 13 of the judgment reads as under:

“……. Admittedly, no evidence or materials was discovered in the course of the search of the premises of the group to which the assessee belongs. The undisclosed income insofar as the building is concerned was solely made on the basis of the report of DVO as obtained by the search party. The report of the DVO does not constitute materials or information relatable to the search. Such a view have been recorded in the judgments of the Madhya Pradesh High Court in CIT v. Khushlal Chand Nirmal Kumar (supra) and Delhi High Court in CIT v. Manoj Jain (supra) and CIT v. Ashok Khetrapal (supra). While expressing our respectful agreement with the said views, it has to be held that the determination of undisclosed income of Rs. 40,04,359/- in respect of the building in question being solely on the basis of the report of the DVO was rightly interfered with by the learned Tribunal. The said conclusion of the learned Tribunal, therefore, will not be open to interference.”

11. The Appellate Authority as well as the Tribunal after considering the matter in detail corrected the mistake committed by the Assessing Officer. We find, no infirmity or irregularity in the order passed by the Appellate Authority and the Tribunal. Hence, appeal filed by the revenue is liable to be dismissed. The substantial questions of law framed in this appeal are held against the revenue. Accordingly, we pass the following:

ORDER

The appeal is dismissed.

 

[Citation : 363 ITR 247]