Punjab & Haryana H.C : violation of the provisions contained in rule 46A of the Income-tax Rules, 1962

High Court Of Punjab And Haryana

CIT Vs. Om Overseas

Assessment Year : 2004-05

Section : 251,46A

Adarsh Kumar Goel And Ajay Kumar Mittal, JJ.

It Appeal Nos. 689, 697, 708 And 721 Of 2010

January 31, 2011

JUDGMENT

Adarsh Kumar Goel, J.-This order will dispose of I. T. A. Nos. 697, 689, 708 and 721 of 2010 as it has been stated by learned counsel for the Revenue that all the four appeals involve common questions.

2. I. T. A. No. 721 of 2010 has been preferred by the Revenue under section 260A of the Income-tax Act, 1961 (for short, “the Act”) against the order of the Income-tax Appellate Tribunal, Delhi Bench “B” New Delhi passed in I. T. A. No. 2726/Del/2009 dated January 29, 2010 for the assessment year 2004-05, claiming the following substantial questions of law :

“(i) Whether on the facts and circumstances of the case and in law, the learned Income-tax Appellate Tribunal was right in holding that the Commissioner of Income-tax (Appeals) had duly put all the objections and documents to all the parties for their comments, it cannot be said that there was violation of the provisions contained in rule 46A of the Income-tax Rules, 1962, despite the fact that opportunity was given by the Assessing Officer under section 142A(3) of the Income-tax Act, 1961 to the assessee during the course of assessment proceedings and any evidence if any or objections to the DVO’s report was to be submitted before the Assessing Officer which was not done and that the assessee was not eligible to produce new evidence for the first time before the Commissioner of Income-tax (Appeals) and also not appreciating the fact that there is no provision for a revised report under section 142A of the Income-tax Act, 1961 ?

(ii) Whether on the facts and circumstances of the case and in law, the learned Income-tax Appellate Tribunal was right in law in observing that there was no violation of rule 46A of the Income-tax Rules, 1962, despite the fact that none of the conditions prescribed under rule 46A were satisfied by the assessee for admission of additional evidence inasmuch as there was no occasion where (a) the Assessing Officer refused to admit the evidence, (b) or the assessee was prevented by sufficient cause from producing the evidence which was called upon to be produced by the Assessing Officer, (c) or the assessee was prevented by sufficient cause for producing before the Assessing Officer any evidence which is relevant to the ground of appeal, (d) or the Assessing Officer passed the assessment order without giving the assessee sufficient opportunity to adduce evidence relevant to any ground of appeal ?

(iii) Without prejudice to the above, whether on the facts and in the circumstances of the case, the learned Income-tax Appellate Tribunal is right in arriving at the conclusion that a sum of Rs. 91,30,355 on ‘Humidification plant’ and Rs. 1,20,01,718 under the head ‘Trenches’ considered by the DVO’s subsequent invalid report, be treated as investment and holding that the investment made in the building account under the head ‘Humidification plant’ and ‘Trenches’ considered for allowing relief to the assessee is completely ignoring the provision of section 142A of the Income-tax Act ?

(iv) Whether on the facts and in the circumstances of the case, the learned Income-tax Appellate Tribunal was justified in allowing deduction under section 80HHC on the face value of DEPB in the case where turnover exceeds Rs. 10 crores in view of the provisos (ii), (iii) and (iv) inserted by the Taxation Laws (Amendment) Act, 2005 with retrospective effect from April 1, 1998 ?

(v) Whether on the facts and in the circumstances of the case, the learned Income-tax Appellate Tribunal was justified in allowing deduction under section 80HHC in respect of the entire DEPB amount by incorporating the same in the computation of business profit under section 28(iiib) ?

(vi) Whether on the facts and in the circumstances of the case, the learned Income-tax Appellate Tribunal was justified in placing reliance upon the decision of the Income-tax Appellate Tribunal, Special Bench, Mumbai in the case of Topman Exports v. ITO [2009] 318 ITR (AT) 87 (Mumbai) dated August 11, 2009 despite the fact that the decision of the Mumbai Income-tax Appellate Tribunal Special Bench in the case of Topman Exports, supra has been reversed by the decision of the hon’ble Bombay High Court in the case of CIT v. Kalpataru Colours and Chemicals [2010] 328 ITR 451 (Bom.)?”

3. The assessee is an exporter deriving income from manufacture and export of handloom goods. Dispute arose during the assessment proceedings as to the correct value of the construction of the factory and calculation of benefit under section 80HHC of the Act. The Assessing Officer referred the matter to the District Valuation Officer (DVO) in whose opinion, cost of construction was much higher than the cost declared by the assessee in its books of account. Accordingly, the Assessing Officer made additions based on the report of the DVO. On appeal, the Commissioner of Income-tax (Appeals) sought a revised report in view of the objections of the assessee to the first report. This was done in exercise of power under rule 46A of the Income-tax Rules, 1962 (for short, “the rules”). In the revised report, the DVO reduced the estimated cost of construction given earlier taking into account the factor of self-supervision and self-procurement of material by the assessee. The DVO, however, did not accept the objections of the assessee under the heads “Humidification plant” and “Trenches”. The Commissioner of Income-tax (Appeals) accepted the revised report of the DVO against which cross-appeals were filed by the Revenue as well as the assessee. According to the Revenue, the Commissioner of Income-tax (Appeals) was not justified in seeking revised report and should have upheld the additions made by the Assessing Officer while according to the assessee, its objections to higher cost under the heads “Humidification plant” and “Trenches” should have been accepted and the cost reduced further and to that extent, the modified report should not have been accepted. The Tribunal dismissed the appeals filed by the Revenue and upheld the exercise of power by the Commissioner of Income-tax (Appeals) under rule 46A of the Rules and deleting of additions to the extent suggested in the revised report. The appeals of the assessee were allowed and the valuation report to the extent it rejected the objections of the assessee against taking of higher cost under the heads “Humidification plant” and “Trenches” was disapproved.

4. We have heard learned counsel for the Revenue.

Re : questions (i) to (iii)

5. The contentions raised on behalf of the Revenue are that in view of section 142A(3) of the Act, the Assessing Officer was entitled to call for a report and the Commissioner of Income-tax (Appeals) was not justified in invoking rule 46A of the Rules. The objections of the assessee under the heads “Humidification plant” and “Trenches” should not have been accepted as the DVO had duly considered the said objections and rejected the same.

6. A brief reference may be made to the findings recorded by the Tribunal to the extent relevant for the questions proposed :

“Issue of admitting additional evidence

23. In the present case, the Assessing Officer has completed the assessment and determined the difference in the cost of construction on the basis of the DVO’s report, which was obtained by the Assessing Officer by making a reference to the DVO under section 131(1)(d) of the Act. This action of the Assessing Officer to make a reference to the DVO under section 131(1)(d) to determine the cost of construction of the factory building has been upheld by the learned Commissioner of Income-tax (Appeals). The learned Commissioner of Income-tax (Appeals) in his order has observed that initially the Assessing Officer made a reference within the meaning of section 131(1)(d) but subsequently a reference under section 142A was made by the Assessing Officer and the DVO has furnished the valuation report in response to the reference made to him by the Assessing Officer under section 142A only. The learned Commissioner of Income-tax (Appeals) further observed that no objection was raised ever by the assessee before the Assessing Officer with regard to the Assessing Officer’s action in making a reference to the DVO for determination of the cost of factory building constructed by the assessee. Therefore, the learned Commissioner of Income-tax (Appeals) upheld the action of the Assessing Officer in making a reference to the DVO under section 142A by holding that the reference is proper and justified. In the light of the facts discussed just above, we are inclined to uphold the order of the learned Commissioner of Income-tax (Appeals) in holding that there is no irregularity in the reference made by the Assessing Officer to determine the cost of factory building under section 142A of the Act.

24. Having upheld the order of the learned Commissioner of Income-tax (Appeals) in sustaining the Assessing Officer’s action in making reference to the DVO under section 142A as proper and justified, we now proceed to decide the issue as to whether the DVO’s report is relevant to determine the cost of construction of the factory building. In the present case, the DVO determined the cost of construction at Rs. 10,46,80,683 spreading over the period beginning from the assessment years 2000-01 to 2006-07. This report was originally submitted by the DVO to the Assessing Officer vide letter dated December 9, 2006 just before the completion of the assessment made on December 27, 2006 for the assessment year 2004-05. The Assessing Officer has completed the assessment on the basis of the DVO’s report and by stating that the assessee has failed to file any objection against the value determined by the DVO. However, during the course of the appellate proceedings, the assessee submitted a detailed objection to the valuation report submitted by the DVO. The assessee also submitted the report from the registered valuer before the learned Commissioner of Income-tax (Appeals). The assessee’s objections with the copy of the valuation report submitted by the assessee were duly forwarded by the learned Commissioner of Income-tax (Appeals) to the Assessing Officer as well as to the DVO for their comments. There were a series of reports submitted by the Assessing Officer as well as by the DVO who originally valued the property. Each and every report of the Assessing Officer as well as the DVO was given to the assessee for its comments, and similarly the objections submitted by the assessee were also furnished to the Assessing Officer as well as to the DVO. Therefore all the particulars or the reports or objections collected during the course of appellate proceedings were duly put to all the parties for their comments and objections and therefore it cannot be said that there was a violation of the provisions contained in rule 46A(3) of the Act.

Upholding of the objections of the assessee against the report

28. Now we shall come to decide about the amount towards the cost of factory building declared by the assessee in its books of account so as to find out as to whether there exists any difference between the value determined by the DVO and the value disclosed by the assessee in its books. At this stage, it is pertinent to note that the Assessing Officer has himself referred the matter to the DVO to make the value of the property. During the appellate proceedings, the learned Commissioner of Income-tax (Appeals) also obtained various clarifications and explanations with regard to the cost of construction determined by the DVO as well as the cost declared by the assessee in its books of account. After a series of round of remand reports or clarifications submitted by the Assessing Officer, the DVO as well as the present DVO and the assessee, the DVO modified his valuation report vide letter dated December 22, 2008, which was confirmed by the earlier DVO, Chandigarh vide his letter dated January 9, 2009. The DVO also clarified the position about the expenditure incurred under the two heads i.e. ‘Humidification plant’ and ‘Trenches’ vide letter dated February 11, 2009. The DVO has finally submitted the report vide letter dated February 22, 2008 confirmed by another DVO vide letter dated January 9, 2009 and further clarified the position vide letter dated February 11, 2009. After considering all the materials and the evidence produced by the assessee as well as after making physical inspection of the building, the learned Commissioner of Income-tax (Appeals) has ignored the DVO’s report to a certain extent in so far as it concerned the expenditure incurred by the assessee on ‘Humidification plant and ‘Trenches’ and recorded the same in the books of account under a different head. The DVO is of the opinion that the valuation determined by him at Rs. 9,70,23,300 includes all such expenses incurred by the assessee on ‘Humidification plant’ and ‘Trenches’, which was separately booked under a different head. Therefore, the DVO was of the opinion that the expenses incurred towards ‘Humidification plant’ and ‘Trenches’ by the assessee are to be included in the total cost of construction declared by the assessee. In the manner, the DVO found that the assessee had declared the cost of construction of the factory building in respect of which a valuation report has been submitted by the Valuation Officer at Rs. 9,69,51,534. While determining the cost of construction shown by the assessee in the books of account, the DVO has also taken into account the expenditure already declared by the assessee in the books of account up to November 2, 2006, i.e., the date of physical inspection made by the DVO. The DVO, Mr. A.K. Sharma has considered the expenditure amounting to Rs. 80,45,110 incurred by the assessee from April 1, 2006 to November 2006 while determining the total investment declared by the assessee vis-a-vis the assessed value as per annexure IV of his comment dated December 22, 2008 ; which was confirmed by Shri S.N. Vemra, DVO, Chandigarh vide his letter dated January 9, 2009. The learned Commissioner of Income-tax (Appeals) has also accepted this position that a sum of Rs. 80,45,110 has been incurred by the assessee from April 1, 2006 to November 2006 and has accordingly given the benefit thereof to the assessee. The DVO while determining the cost of construction declared by the assessee in the books of account has also taken into account the expenditure incurred on trenches and humidification plant to the extent of Rs. 2,06,78,902 in financial year 2004-05 and Rs. 4,53,171 in financial year 2005-06 out of which a sum of Rs. 91,30,355 was booked under the head ‘Humidification plant’ and Rs. 1,20,01,718 under the head ‘Trenches’. However, the expenditure incurred on humidification plant and trenches has been accepted by the learned Commissioner of Income-tax (Appeals) only to the extent of Rs.52,66,691 by saying that only the amount of Rs. 52,66,691 comprising of two items, i.e., Rs. 34,45,090 and Rs. 18,21,601 can only be included in the cost of construction. However, the learned Commissioner of Income-tax (Appeals) has not brought any material on record to say and establish that the revised cost determined by the DVO was defective and thus, it should not be accepted. It is a case where the factory building was physically inspected by the DVO, who has estimated the cost of construction of all the items to the factory building. Merely because, certain expenditure incurred by the assessee towards, construction of the factory building, in respect of which the value has been determined by the DVO, has been shown under different heads in the books of account that by itself cannot be a ground to ignore the expenditure incurred by the assessee towards construction of the factory building when the DVO was of the opinion that the expenditure incurred towards humidification plant and trenches are also included in the cost of construction estimated by him. The learned Commissioner of Income-tax (Appeals)’s action in not accepting the DVO’s revised estimate furnished vide letter dated December 22, 2008 and confirmed by another DVO vide letter dated January 9, 2009, is not based on any adequate material and evidence. When the matter was examined and considered by the expert to whom the reference was made by the Department itself, it is not for the Department to ignore the comments and finding given by the DVO with regard to the cost of construction estimated by him vis-a-vis the cost of construction shown by the assessee in the books. In this view of the matter, we therefore hold that as against Rs. 52,66,691 adopted by the learned Commissioner of Income-tax (Appeals) on account of investment on trenches and humidification plant the amount of Rs. 2,06,78,902 and Rs. 14,53,171 should be taken into account as so accepted by both the DVO’s in their respective reports dated December 22, 2008 and January 9, 2009 respectively. In this view of the matter, the total investment declared by the assessee is to be taken at Rs. 9,69,51,534 as accepted and determined by the DVO in their final report.

29. In the light of the discussion made above, we, therefore, hold as under :

(i) The cost of construction declared by the assessee in the books is to be taken at Rs. 9,69,51,534 ;

(ii) The cost of construction as estimated by the DVO is to be taken at Rs. 9,70,23,300.

The difference between the cost declared by the assessee and the cost estimated by the DVO is very nominal being Rs. 71,766 (Rs.9,70,23,300 Rs. 9,69,51,534) only.

30. This difference can be due to the difference of the opinion and even this difference can be ignored in the light of the fact that the deduction on account of self-supervision allowed by the DVO and by the learned Commissioner of Income-tax (Appeals) at 7.5 per cent is found to be on the lower side as in most of the cases cited by the assessee the deduction in that respect has been allowed at 10 per cent. In this view of the matter the difference of Rs. 71,766 as worked out above is not liable to be treated as undisclosed investment of the assessee. For the reasons given above, we, therefore, hold that no addition on account of investment in construction of factory building is called for and whatever addition sustained by the learned Commissioner of Income-tax (Appeals) in various assessment years are deleted. Therefore, the grounds raised by the assessee with regard to the addition on account of undisclosed investment in the factory building are allowed and that of the Revenue are dismissed.”

7. In our view, questions (i) to (iii) cannot be held to be substantial questions of law. The Tribunal rightly upheld the finding of the Commissioner of Income-tax (Appeals) for admitting additional evidence under rule 46A and giving the assessee the benefit as per the revised report. The Tribunal correctly appreciated the material on record for upholding the objections of the assessee under the heads “Humidification plant” and “Trenches” and deleting the additions to that extent. The finding so recorded is a finding of fact and is not shown, in any manner, to be perverse.

Re : Questions (iv) to (vi)

8. As regards proposed questions (iv), (v) and (vi), it was submitted that the matter is covered by earlier order of this court CIT v. F. C. Sondhi and Co. (P) Ltd. [2011] 334 ITR 141 (P&H), remanding these issues for fresh decision to the Tribunal. In view of the earlier order of this court, the matter is remanded to the Tribunal for fresh decision on the issue involved in the said questions. If the assessee is aggrieved by this order, it will be at liberty to move this court.

9. The appeals are disposed of accordingly.

[Citation : 334 ITR 202]

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