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Section 147 in The Income- Tax Act, 1995
The Income- Tax Act, 1995
Section 148 in The Income- Tax Act, 1995
Cit vs Sharwan Kumar Agarwal on 8 February, 2005
Section 69B in The Income- Tax Act, 1995

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Income Tax Appellate Tribunal - Delhi
Us Foods (P.) Ltd., vs Assessee on 14 August, 2008

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI 'H' BENCH BEFORE SHRI A.N. PAHUJA, AM AND SHRI C.M. GARG, JM

ITA no.3322/Del./2008

&

ITA no.3323/Del./2008

Assessment years: 2002-03 & 2003-04

M/s U.S. Foods (P) Ltd., Vs. Deputy CIT,Range-1, Delhi Road, Gajraula Moradabad (UP)

(GIR no.: U-101)

(Appellant) (Respondent)

ITA No.3244/Del./2008

&

ITA No.301/Del./2009

Assessment years: 2002-03& 2003-04

Deputy CIT,Range-1, Vs. M/s U.S. Foods (P) Ltd., Moradabad Delhi Road, Gajraula (UP)

(Appellant) (Respondent)

Assessee by Shri K. Sampath,AR

Revenue by Debjyoti Das, DR

Date of hearing 07-08-2012

Date of pronouncement 28 -09-2012

ORDER

A.N. Pahuja: - These cross appeals filed on 06.11.2008 by the assessee and 27th October, 2008 by the Revenue against an order dated 14.08.2008 of the ld.CIT(A)- Bareilly for the AY 2002-03 and filed on 06.11.2008 by the assessee and on 28th January, 2009 by the Revenue against an order dated 3rd October, 2008 of the ld. CIT(A)-Bareilly for the AY 2003-04, raise the following grounds:- ITA nos.3322&3244/Del./2008

2 ITA no.3323/Del./2008 &

ITA no. 301/Del./2009

IT A no.3322/Del./2008-AY 2002-03[Assessee]

1. "That the learned CIT(A) has erred in law and on facts in confirming the validity of notice issued u/s 147/148 of Income- tax Act, 1961.

2. That the learned CIT(A) has erred in law and on facts in confirming the addition of ``1,33,219/- made by the Assessing Officer u/s 69 of Income-tax Act, 1961."

IT A no.3244/Del./2008-AY 2002-03[Revenue]

1. "The CIT(A), bareilly has erred in law and under the circumstances of the case in allowing relief to the assessee at ``253.04 lakhs which was rightly added to the total income of the assessee on a/c of unexplained investment in the construction of factory building based on DVO's report.

2. The order of the Assessing Officer may be restored by setting aside the order of CIT(A), Bareilly.

3. Any other grounds of appeal, which may be taken during the course of appellate proceedings."

ITA no.3323/Del./2008-AY 2003-04[Assessee]

1. "That the learned CIT(A) has erred in law and on facts in confirming re-opening u/s 147/148 of Income-tax Act, as completed assessment u/s 143(3).

2. That the learned CIT(A) has erred in law and on facts that for re-opening of completed assessment u/s 143(3) was based on reasons to believe taking the basis of the report of the District Valuation Officer."

IT A no.301/Del./2009-AY 2003-04[Revenue]

1. "The CIT(A), Bareilly has erred in law and under the circumstances of the case in allowing relief to the assessee at ``37.83 lakhs which was rightly added to the total income of the assessee on a/c of unexplained investment in the construction of factory building.

ITA nos.3322&3244/Del./2008

3 ITA no.3323/Del./2008 &

ITA no. 301/Del./2009

2. The order of the Assessing Officer may be restored by setting aside the order of CIT(A), Bareilly.

3. Any other grounds of appeal, which may be taken during the course of appellate proceedings."

2. Adverting first to ground no.1 in the appeal of the assessee for the AY 2002-03, facts, in brief, as per relevant orders are that return declaring nil income filed on 31st August, 2002 by the assessee company incorporated on 10.9.2001, was processed u/s 143(1) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act').No profit and loss account was drawn for the year under consideration on the ground that the assessee did not commence any commercial activities and only capital work was in progress. Subsequently, a survey u/s 133A of the Act was conducted in the business premises of the assessee on 12.03.2003, where after a number of documents were impounded. Inter alia, it was noticed that the payments of ``77,007/- in September, 2001 and ``56,212/- in October, 2001 to labour were not accounted for in the books of the assessee while deposit of `4,97,040/- on 10.10.2001 & `8,00,000/- on 13.3.2002 in the current account no.786 with Prathma Bank also did not find place in the books of account. During the course of survey as well as in post survey proceedings, the assessee failed to establish the source of payment of ``1,33,219/- made to the labour nor the assessee produced any evidence regarding source of aforesaid deposits in current account as aforesaid. Accordingly, the AO recorded the following reasons in writing in terms of provisions of sec. 148(2) of the Act

" Assessee Company has been constituted w.e.f, 10/9/2001 by taking over assets and liabilities of M/s U.S. Foods , unit of M/s U.S, & Sons Gajraula. It is manufacturing unit of biscuits. Retrun showing nil income has been filed on 31/8/2002 along with auditors report dated 18/8/2002 in which it is clarified that company has not started commercial activities and capital works is under progress. Analysis of the documents filed with the return shows that only balance sheet has been prepared. P & L A/c has not been drawn on the plea that no business activities has been started. Return has been processed U/S 143(1) on 31/10/2002. Later on ITA nos.3322&3244/Del./2008

4 ITA no.3323/Del./2008 &

ITA no. 301/Del./2009

during the course of survey (Survey report dated 07/07/2003) conducted on 12/3/2003 it is noticed that following payments made to the labourers do not find place in the books of accounts:

Rs.77007/- in September 2001

Rs.56212/- in October 2001

Total: 1,33,219/-

Besides above it is also noticed that following deposits in Current Account No.786 with Prathma Bank also do not find place in the books of accounts.

1. ``4,97,040/- Deposit on 10/10/2001I

2. ``8,00,000/- Deposit on 13/3/2002

Total:``12,97,040/-

Assessee during the course of survey as well as post survey proceedings has failed to reconcile, or to prove the source of payments of Rs.133219/- made to the labourers as mentioned above. Similarly assessee has also failed to produce evidence regarding source of deposit in the current Account No 786 with Prathma Bank Gajraula as mentioned above; Analysis of documents enclosed with return of income suggest that source of investment in the assets has been disclosed but proof regarding genuineness of loans or deposits appearing in the balance sheet has not been enclosed with return income.

In view of above facts I have reason to believe that income at least to extent of Rs.133319/- relating to payment made to the labourers has been escaped to assessment."

2.1 In terms of the aforesaid reasons, the AO issued a notice u/s 148 of the Act on 21.05.2005. In response, the assessee replied vide letter dated 17th June, 2005 that the return filed originally may be treated as return in response to notice u/s 148 of the Act. During the course of reassessment proceedings, since the assessee failed to substantiate the source of payment of ``77,007/- in September, 2001 and ``56,212/- in October, 2001, with any documentary evidence nor produced any voucher in support of claim nor the cash book included any expenses under the head labour, despite the fact that the assessee was allowed sufficient opportunity to examine the impounded books of account, the AO added the amount of `1,33,219[77007+56212] u/s 69 of the Act. ITA nos.3322&3244/Del./2008

5 ITA no.3323/Del./2008 &

ITA no. 301/Del./2009

2.2 Moreover, during the course of assessment proceedings for the AY 2003- 04, the AO made a reference to the valuation officer u/s 142A of the Act to ascertain the actual cost of the building disclosed by the assessee in schedule of its fixed assets. The DVO in his report dated 14th September, 2006 arrived at a total cost of ``5,48,09,000/- spread over the period of 01.04.2001 to 20.08.2006. The DVO did not give year wise break up of investment since the assessee failed to furnish relevant details before the DVO. Accordingly, the AO allocated the investment determined by the DVO in proportion to investment disclosed in the books of account as under:-

F.Y. Amount of % of investment Amount of Difference investment in each year w.r.t. prorate [In `lacs] disclosed in the total investment

books[In `lacs] investment determined by DVO[In `lacs]

2000-01 `26.88 15.70% 86.05 59.17 2001-02 `115.08 67.23% 368.48 253.40 2002-03 `17.15 10.03% 57.98 37.83 2003-04 nil nil nil nil 2004-05 Nil Nil nil nil 2005-06 `12.06 7.04% 38.58 26.52 Total 171.17 100.00% 548.09 376.92 Investment

2.3 On the basis of aforesaid allocation of cost determined by DVO, the AO show caused the assessee as to why the amount of ``2,53,04,000/- be not added by way of undisclosed investment in the AY 2002-03. In response, the assessee submitted a report of approved valuer and contended that no addition could be made merely on the basis of the report of the DVO. However, the AO did not accept the submissions of the assessee on the ground that their comments on valuation report of DVO were general in nature. The objection of the assessee regarding plinth area method adopted by DVO were not accepted , the approved valuer having followed the same method. Similarly, the objections raised by the assessee in para 2(b) to (h)of their reply, were not accepted in ITA nos.3322&3244/Del./2008

6 ITA no.3323/Del./2008 &

ITA no. 301/Del./2009

view of detailed working of DVO, adopting rates as per schedule of rates adopted by CPWD in various areas of UP while the assessee did not adduce any evidence that the DVO adopted plinth area rates as applicable in Delhi. The AO further pointed out that the assessee's valuer in his report reflected period of construction as FY1998-99 to 2002-03 while the assessee in his books of account reflected the period of construction from FY2000-01 to 2005-06. Moreover, the assessee's valuer did not place any material before the AO that plinth area rates based on UP PWD rates as applicable on 01.01.1992 were applicable for a singular type of building as against plinth area rates adopted by the DVO as approved by CBDT after adding cost of escalation on average index basis. The AO further pointed out that the assessee's architect adopted rate of `1700 per sq. meter for rooms having different ceiling height 3.1 mt. , 3.15 mt. and 3.35 mt., 3.45mt. and 3.20 mt. and did not allocate any amount in the cost of construction on account of preparation of detailed drawings, architect fees etc. Since the assessee did not submit the details and documents desired by DVO vide letter dated 27th April, 2006, 24th May, 2006 and 20th August, 2006, the AO while relying upon the report of the DVO added an amount of ``2,53,04,000/- in the year under consideration.

3. On appeal, the assessee questioned the validity of reopening of the assessment contending that since the assessee did not commence any production, there was no escapement of any income. It was further pointed out that the two sums of ``77,007/- and ``56,212/- by way of payment to labourers in September, and October, 2001 respectively did find place in the copy of cash account wherein sum of ``85,000/- appeared on 23rd September,2011 with the description salary& misc. expenses upto September, 2001. This amount included sum of ``77,007/- .As regards, sum of ``56,212/-, the assessee stated that this was included in the expenses as sundry creditors capital account and was part of the pre operative expenses to the tune of ``9,68,548.17 and these were considered in the AY 2003-04 and therefore, initiation of proceedings u/s 147 was not valid..

ITA nos.3322&3244/Del./2008

7 ITA no.3323/Del./2008 &

ITA no. 301/Del./2009

3.1 As regards, deposits of ``4,97,040/- and ``8 lacs in current account no.786, the assessee replied that these deposits were explained and no amount could be added. In the light of these submissions, ld. CIT(A) upheld the validity of reopening while relying upon decision in Bawa Abhay Singh Vs. DCIT (2001) 117 Taxman 12 (Del.) and Rakesh Agarwal Vs. ACIT (1996) 87 Taxman 306 (Delhi).

4. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A). At the outset, the ld. AR on behalf of the assessee contended that the assessment has been reopened while considering irrelevant material. The reasons recorded by the AO before reopening the assessment were not relevant. While referring to decision of Hon'ble Apex Court in CIT vs. Kelvinator of India Ltd.,320 ITR 561 (SC), the ld. AR argued that reasons must be based on relevant material. While carrying us through the decision reported in ITO vs. Lakhmani Mawaldas,103 ITR 437(SC), the ld. AR argued that since no income was generated nor any income generating activity was undertaken, the AO had no basis to reopen the assessment. The onus was on the AO to record proper reasons before reopening the assessment. There were no information regarding escapement of any income nor there was any rationale relation or link between formation of belief and material referred to in the reasons.

5. On the other hand, the ld. DR argued that sufficiency of reasons cannot be questioned at the stage of reopening; only rationale belief of the AO or his satisfaction is required to be recorded . The ld. DR while relying upon the decision in Raymond Woollen Mills Ltd. vs. ITO & Others,236 ITR 34 (SC) pointed out that the assessee did not explain the source of expenditure of ``77,700/- in September, 2001 and ``56,212/- in October, 2001 with any evidence. It was further pointed out that the assessee had taken over the existing business and the provisions of section 69C do not stipulate that the AO had to pin point source of income .While distinguishing the decision in Kelvinator ITA nos.3322&3244/Del./2008

8 ITA no.3323/Del./2008 &

ITA no. 301/Del./2009

of India Ltd (supra), the ld. DR pointed out that there was no change of opinion and this was only the first assessment. The onus was on the assessee to establish that the expenditure comprising aforesaid two amounts was recorded in the books, the ld. DR added

6. In his rejoinder, the ld. AR on behalf of the assessee reiterated that there was no nexus between the material and reasons recorded by the AO and both the items were in capital account and the assessee never claimed the aforesaid two amounts by way of expenditure; the entire amount had been capitalized in the books of account. The ld.AR added that onus was on the AO to establish that the conditions stipulated in section 69C of the Act were fulfilled.

7. We have heard both the parties and gone through the facts of the case as also the decisions relied upon by both the sides. The issue raised in ground no.1 in the appeal of the assessee before us is as to whether the AO correctly assumed the jurisdiction in terms of provisions of sec. 147 of the Act on the basis of reasons recorded by him. Indisputably, the return declaring nil income filed by the assessee in this case was processed u/s 143(1) of the Act. In the assessment under section 143(1) of the Act inquiry relating to the income of an assessee is not made. Under section 147 of the Act, as substituted by the Direct Tax Laws (Amendment) Act, 1987, with effect from 1-4-1989, the only requirement for initiating proceeding is that the AO should have reason to believe that any income chargeable to tax, has escaped assessment. However, where an assessment has been made under sub-section (3) of section 143, the action is required to be taken within four years from the end of the relevant assessment year unless any income chargeable to tax has escaped assessment by reason of failure on the part of the assessee to make a return or to disclose fully and truly all material facts necessary for his assessment for that year. Explanation 1 provides that the production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the AO will not necessarily amount to disclosure within the ITA nos.3322&3244/Del./2008

9 ITA no.3323/Del./2008 &

ITA no. 301/Del./2009

meaning of the proviso to sec. 147 of the Act. Explanation 2(b) & (c), inter alia, stipulate deemed cases of income chargeable to tax escaping assessment where excessive deduction or relief has been claimed in the return. As already stated ,in the instant case, return was merely accepted u/s 143(1) of the Act . Thereafter, the AO initiated proceedings u/s 147 of the Act for the reasons that the expenses incurred to the extent of `77,007 in Sept,2001 i.e. the month of its incorporation and `56,212/- in October,2001, towards labour payment did not find place in the books of account nor the assessee during the survey proceedings or post survey proceedings substantiate the source of aforesaid expenditure as also an amount of ``4,97,040/-deposited on 10/10/2001 & ``8,00,000/- deposited on 13/3/2002 in current account with bank. In the reassessment proceedings, these deposits in current account were found to be explained while amount of expenses were added, the explanation of the assessee having not been accepted that amount of `77,007 was included in the amount of 85,000/- and the amount of `56,212/- was included in the expenses for the month of October,2001. Since on the basis of documents found during the course of survey, the sources of payments to labour were not apparent nor these amounts found place in the books of the assessee, the AO after recording the aforesaid reasons, issued a notice u/s 148 of the Act. As observed by the Hon'ble Apex Court in Calcutta Discount Company Ltd. vs. ITO,41 ITR 191(SC) that the expression " reason to believe " in section 147 of the Act postulates belief and the existence of reasons for that belief. The belief must be held in good faith : it cannot be merely a pretence. The expression does not mean a purely subjective satisfaction of the Income-tax Officer : the forum of decision as to the existence of reasons and the belief is not in the mind of the Income-tax Officer. If it be asserted that the Income-tax Officer had reason to believe that income had been under-assessed by reason of failure to disclose fully and truly the facts material for assessment, the existence of the belief and the reasons for the belief, but not the sufficiency of the reasons, will be justiciable. The expression therefore predicates that the Income-tax Officer holds the belief induced by the existence of reasons for holding such belief. It contemplates existence of reasons on which the belief is founded, and not ITA nos.3322&3244/Del./2008

10 ITA no.3323/Del./2008 &

ITA no. 301/Del./2009

merely a belief in the existence of reasons inducing the belief ; in other words, the Income-tax Officer must on information at his disposal believe that income has been under-assessed by reason of failure fully and truly to disclose all material facts necessary for assessment. Such a belief, be it said, may not be based on mere suspicion : it must be founded upon information." In the assessment made within the framework of the provisions of section 143(1) of the Act itself, the AO neither calls upon the assessee to appear personally nor seeks production of any document. The assessment is made on the basis of return only and without making any adjustments. There is no scrutiny at all. In these circumstances, if the conditions mentioned in section 147 of the Act are fulfilled, the jurisdiction can be validly exercised in such a case. From the documents found during the survey , the AO had the relevant material for forming the reasonable belief that the income had escaped assessment to tax, the payments to labour having not been recorded in the books of accounts found during the survey. We do not find any infirmity in the findings of the ld. CIT(A) in upholding reopening the assessment on that ground, so long as ingredients of provision of section 147/148 are fulfilled. Hon'ble Punjab and Haryana High Court in the case of Metal products of India Vs. CIT, 293 ITR 618 held that once the returns were processed under section 143(1) of the Act, proceedings under section 148 of the Act could be initiated. If the ingredients of section 147 of the Act are satisfied, there is no bar to initiation of proceedings under section 148 of the Act. In this connection, Hon'ble Supreme Court held in the case of ACIT Vs. Rajesh Jhaveri stock Brokers Pvt. Ltd.,291 ITR 500(SC) observed as under:

"The scope and effect of section 147 as substituted with effect from April 1, 1989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under section 147(a) two conditions were required to be satisfied: firstly the Assessing Officer must have reason to believe that income, profits or gains chargeable to income tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. ITA nos.3322&3244/Del./2008

11 ITA no.3323/Del./2008 &

ITA no. 301/Del./2009

Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under section 148 read with section 147(a). But under the substituted section 147 existence of only the first condition suffices. In other words if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is, however, to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to section 147. The case at hand is covered by the main provision and not the proviso.

So long as the ingredients of section 147 are fulfilled, the Assessing Officer is free to initiate proceeding under section 147 and failure to take steps under section 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings even when intimation under section 143(1) had been issued."

7.1 In Rajat Import Export India Pvt. Ltd.,Hon'ble jurisdictional High Court in their decision dated 18.1.2012in WP(C) no. 8341/2011 while adjudicating a similar issue of validity of reopening of assessment , observed as under: "The material before the Assessing Officer, in our opinion, is relevant and affords a live link or nexus to the formation of the prima facie belief that income chargeable to tax had escaped assessment in the assessee's hands. We are not at this stage concerned whether the material before the Assessing Officer is sufficient for the formation of the belief. What we are concerned at this stage is whether the material before the Assessing Officer is relevant for forming the prima facie belief that income chargeable to tax has escaped assessment. It is also well settled that at that stage, that is at the stage when reasons are recorded for reopening the assessment, the Assessing Officer is not required to build a fool proof or a fort-like case for making addition to the assessee's income; all that he is required at that stage is to form a prima facie opinion or belief that income has escaped assessment. The relevancy of the material before the Assessing Officer is to be judged only from that perspective and not from the perspective as to whether the material is sufficient or adequate to sustain the addition ultimately. That will be an aspect which the Assessing Officer will examine and decide in the course of the re-assessment proceedings after hearing the assessee in the manner required by law. These propositions are so well settled that they do not require citing of any authority." ITA nos.3322&3244/Del./2008

12 ITA no.3323/Del./2008 &

ITA no. 301/Del./2009

7.2 The ld. AR relied upon decision in Kelvinator of India Ltd.(supra) wherein while observing that the concept of "change of opinion" on the part of the Assessing Officer to reopen an assessment does not stand obliterated after the substitution of section 147 of the Act, by the Direct Tax Laws (Amendment) Acts, 1987 and 1989. , the Hon'ble Apex Court held that the AO has power to reopen an assessment, provided there is "tangible material" to come to the conclusion that there was escapement of income from assessment. In the instant case on the basis of documents found during the course of survey, the AO noticed that certain payments were not accounted for in the books of accounts nor during the survey or even during the post survey proceedings, the assessee furnished any cogent material, establishing that the aforesaid labour payments were accounted for in the books of the assessee. Thus, decision in Kelvinator of India Ltd.(supra) rather supports the Revenue. Reasons must have a link with the formation of the belief and that is established in the instant case. The ld. AR argued that reasons must be based on relevant material and relied upon decision in Lakhmani Mawaldas(supra). The evidence found during the course of survey that the aforesaid payments made to the labour were not accounted for in the books of the assessee, clearly established the reasons were based on relevant material. In our openion the reliance b the ld. AR on the decisions of Hon'ble Apex Court is totally misplaced. In the context of our discussion, we may refer to the decision of the Hon'ble Apex Court in the case of A. L. A. Firm v. CIT, 189 ITR 285. In this decision, even with respect to assessment proceedings which arose prior to the amendment in section 147 of the Act with effect from 1.4.1989, the Hon'ble Apex Court referring to large number of decisions on the point, accepted that for reopening of the assessment, the belief that the AO may form may be based on the information which may have been obtained even from the record of the original assessment from the investigation of the materials on record or the facts disclosed thereby or from other inquiry or research into the facts or law.

7.3 There is no dispute between the two parties that action under section 147 has been taken under the new procedure within four years by the Assessing ITA nos.3322&3244/Del./2008

13 ITA no.3323/Del./2008 &

ITA no. 301/Del./2009

Officer. The power to initiate action under section 147 within four years of the end of the relevant assessment year would be attracted in a case where the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment. The words "reason to believe" cannot mean that the Assessing Officer should have finally ascertained the facts by legal evidence. If the Assessing Officer has a cause to believe that income had escaped assessment, he can be said to have a reason to believe that the income had escaped assessment. Obviously the belief should be a bona fide belief held by the assessee. The Hon'ble Gujarat High Court has construed the expression "reason to believe" in their decision in the case of Praful Chunilal Patel v. M. J. Makwana, Asst. CIT [1999] 236 ITR 832. At page 841 their Lordships observed:

"The function of the Assessing Officer is to administer the Act with solicitude for public treasury and with fairness to the tax payers. He is necessarily armed with great powers. Up to four. years an assessment is open to his unreserved consideration on his formation of the requisite belief. If he has such reason, he has the power, and we may add that it is his duty to reopen the door and demand the amount legally owing. His formation of belief is not a judicial decision, but an administrative decision. It does not determine anything at this initial stage, but the Assessing Officer has a duty to proceed so as to obtain what the tax payer was always bound to pay if the increase is justified at all. The decision to initiate the proceedings is not to be preceded by any judicial or quasi-judicial enquiry. His reasoning may be the result of official information or his own investigation or may come from anv source that he considers reliable. His reason is not to be judged by a court by the standard of what the ideal man would think. He is the actual man trusted by the Legislature and charged with the duty of forming of a belief, for the mere purpose of determining whether he should proceed to collect what is strictly due by law, and no other authority can substitute its standard of sufficient reason in the circumstances, or his opinion or belief for his. Unless the ground of material on which his belief is based, is found to be so irrational as not to be worthy of being called a reason by any honest man his conclusion that it constitutes a sufficient reason, cannot be overridden."

7.4 It is well settled that at the time of issue of notice under section 148, it is only the relevancy of the reasons that can be looked into and not the sufficiency [S. Narayanappa v. CIT [1967] 63 ITR 219 (SC)]. In the instant case before us, we are satisfied that the material before the AO found during the course of ITA nos.3322&3244/Del./2008

14 ITA no.3323/Del./2008 &

ITA no. 301/Del./2009

survey had a rational connection or live link with the formation of the belief that income chargeable to tax has escaped assessment in the assessee's case. The belief was bona fide held, it was not a pretence. The material gave rise to "reason to believe" that income chargeable to tax has escaped assessment in the assessee's case.

8. Applying the aforesaid principles in the back drop of facts and circumstances of the case in hand, especially when the labour payments of ``77,007 in Sept,2001 and ``56,212/- in October,2001 did not find place in the books of account of the assessee nor the assessee during the survey proceedings or post survey proceedings substantiated the source of aforesaid payments, we are of the considered view that the requisite conditions for initiating action under section 147 are clearly satisfied and the proceedings have been validly initiated by the Assessing Officer. In the light of aforesaid decisions of Hon'ble Supreme Court and jurisdictional High Court since the AO has reopened the assessment after duly recording the reasons, we have no hesitation in upholding the reopening of assessment. It is settled law that once proceedings u/s 147 are taken to be validly initiated, the jurisdiction of the AO cannot be confined only to that portion of income which is mentioned in the reasons but to entire income that had escaped assessment during the year. Therefore, ground no.1 in the appeal of the assessee is dismissed.

9. Ground no.2 in the appeal of the assessee relates to addition of ``1,33,219/- u/s 69 of the Act. Since the assessee failed to establish with any documentary evidence the source of payment of ``77,007/- in September, 2001 and ``56,212/- in October, 2001 to labour, while the assessee was allowed sufficient opportunity to examine the impounded books of account, the AO added the amount u/s 69 of the Act.

10. On appeal, the ld. CIT(A) upheld the findings of the AO in the following terms:-

ITA nos.3322&3244/Del./2008

15 ITA no.3323/Del./2008 &

ITA no. 301/Del./2009

"It is observed that the AR has submitted similar explanation as already given during asstt. proceedings before the AO. No bill or vouchers were produced before me to show that Rs.77007/- was a part of expanses of Rs.85000/- No where such narration has been mentioned in detail of expenses incurred in Sep. or Oct. 2001.

As regards addition of Rs.56,212/- the argument advanced is that it is part of expenses incurred in Oct 2001 and included in sundry creditor capital a/c & part of preoperative expenses. However no supporting proof to substantiate this contention was furnished. There is no head of expenses for month of Oct 2001 which can be said to have included in Rs.56,212/-. In absence of any plausible explanation, I have no option to sustain these addition (Rs.133219/-). The ground of appeal fails."

11 The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld. AR on behalf of the assessee reiterated their submissions before the lower authorities while the ld. DR supported the findings of the ld. CIT(A). The ld. DR contended that first reply by the assessee in response to notice questionnaire was submitted on 18th December, 2006.While disputing the contention of the ld. AR that since documents were with AO, the assessee could not explain the aforesaid two amounts, the ld. DR pointed out while referring to pages 10 to 11 of the paper book that the assessee had obtained inspection of the impounded documents and accounts. Even then the assessee did not furnish any evidence, the ld. DR added. While invoking provision of section 68 and 69 of the Act, distinction between capital and revenue is irrelevant. Therefore, addition was rightly sustained by the ld. CIT(A), the ld. DR argued.

12. We have heard both the parties and gone through the facts of the case. Indisputably, the assessee did not furnish any explanation during the course of survey nor submitted any documentary evidence that the aforesaid two sums of ``77,007/- and `56,212/- were recorded in the books of account. During the course of reassessment proceedings, the assessee explained that amount of ``77,007/- was included in the expenses of `85,000/- shown on 23rd September, ITA nos.3322&3244/Del./2008

16 ITA no.3323/Del./2008 &

ITA no. 301/Del./2009

2001 under the head sundry creditors expenses, salary and misc. expenses upto September, 2001. Likewise, amount of ``56,212/- was stated to have been included in the expenses capitalized. However, the assessee did not submit any break up of the amount nor any bills and vouchers were produced to substantiate their claim. The ld. CIT(A) found that no bills or vouchers were produced before the AO or him. In these circumstances, the ld. CIT(A) upheld the findings of AO. The ld. AR did nothing to improve upon the situation even before us, In the absence of any basis ,especially when the ld. AR did not place before us any material, substantiating the source of aforesaid two labour payments, we are not inclined to interfere. Therefore, ground no.2 in the appeal of the assessee is dismissed.

13. Adverting now to ground no.1 in the appeal of the Revenue, relating to addition made by the AO on the basis of report of DVO, the assessee contended before the ld. CIT(A) that since no reference was made u/s 142A to the DVO for the year under consideration i.e.AY 2002-03, no addition could be made u/s 69 of the Act. In this connection, the ld. AR relied upon a number of decisions . In the light of submissions made by the assessee, the ld. CIT(A) after having a remand report from the AO and in the light of decisions and in ACIT Vs. C. Subba Reddy 2005 Tax LR 373 (Mad.); Smt. Amiya Bala Paul Vs. CIT (2003) 262 ITR 407/130 Taxman 511; CIT Vs. Ganesh Rice Mills (2005) 145 Taxman 452 (P & H), deleted the addition, holding as under:- "Moreover it is also on record, the appellant company was not in existence till 10-9-2001 and in the remaining 7 months also of FY 2001-02 the production could not be commenced as discussed by AO in asstt. order for A Y 2003-04,& admitted also in his remand report furnished during appellant proceedings before me. As regards sources of investment, the AO has not commented any thing adversely on the available funds as shown by the assessee i.e. share capital, and loans ( both secured& un secured). On the contrary he has not drawn adverse inference in regard to investment shown by the appellant co. in building and related structures i.e. Rs.115.08 lakhs.

Thus in absence of any cogent material, supporting proof and documentary evidence to corroborate the same, the addition of ITA nos.3322&3244/Del./2008

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ITA no. 301/Del./2009

Rs.253,04,000/- on the ground of unexplained investment cannot be sustained. I have no option but to delete the same. Appellant gets relief accordingly. However, the A.O. is directed to examine the feasibility of taking action in the case of M/s U.S. Sons as per law regarding investment made in the factory building and related structures in the period prior to 10- 9-2001."

14. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld DR pointed out that the assessee took over the business of U.S. Foods as a going concern. While referring to the findings of the ld. CIT(A) in the impugned order, the ld. DR submitted that in fact, there were no extra items nor any basis have been given by the ld. CIT(A) for his findings in the impugned order. How circulars are relevant; the ld. CIT(A) has not elaborated as to how any deduction for supervision can be given.

15. On the other hand, the ld. AR on behalf of the assessee submitted that no reference was made to DVO in the year under consideration and thus, addition made by the AO on the basis of reference made in the AY 2003-04 is not valid. While referring to decision in CIT vs. Roshan Lal Seth,178 ITR660(P&H.), the ld. AR pointed out that circulars referred in the DVO's report were Wealth Tax Circulars and calculations based on Wealth Tax circulars could not form the basis for determining the cost of construction. While inviting our attention to decision in CIT vs. Raj Kumar,182ITR 436(All.) & CIT vs. Iqbal Hussain,320 ITR 142(All.), the ld. AR pointed out that rates for building constructed in UP have to be adopted as per U.P. PWD rates and not CPWD rates. The books of accounts were not rejected nor any investment was recorded outside the books while the AO did not give any basis to make the said addition. In nutshell, the ld. AR relied upon decision of the ld. CIT(A).

16. In his rejoinder, the ld. DR submitted that while invoking provision of section 68 and 69 of the Act, distinction between capital and revenue is irrelevant. In the light of decision in Bawa Abhay Singh Vs. DCIT (2001) 17 Taxman 12 (Delhi), the ld. DR vehemently argued that while making addition on ITA nos.3322&3244/Del./2008

18 ITA no.3323/Del./2008 &

ITA no. 301/Del./2009

the basis of report of DVO , books of accounts need not be rejected. There is no such pre condition of rejection of books of account while making reference to DVO u/s 142A of the Act and this section applied to proceedings u/s 133A of the Act. .Inter alia, the ld. DR referred to the decision in Income-tax Officer Vs. Rajeshwar Nath Gupta in ITA no. 4295/Del./2005.

17. We have heard both the parties and gone through the facts of the case as also the decisions relied upon by both the sides. The issue before us is as to whether on the basis of reference made by the AO to DVO u/s 142A of the Act in the AY 2003-04, the AO was justified in making addition on the basis of report of the DVO. Prior to insertion of Sec. 142A by Finance (No.2) Act, 2004 with retrospective effect from 15th Nov. 1972, a reference to DVO in assessment proceedings other than as permissible under s. 55A was held to be invalid as held by Hon'ble Apex Court in Smt. Amiya Bala Paul vs. CIT, 262 ITR 407 (SC). Under sec. 142A, a reference can be made for assessment or reassessment where an estimate of value of any investment referred to in s. 69 or s. 69B or the value of any bullion, jewellery or other valuable articles referred in s. 69A or 69B is required to be made. The AO may require the DVO to make an estimate of such value and report the same to him. In the instant case, during the course of survey on 12.3.2003 in the premises of the assessee, two payments of `77,007 in September,2001 & `56,212/- on October,2001 to labour did not find place in the regular books of accounts of the assessee. However, reference to DVO was not made in the reassessment proceedings for the AY 2002-03;rather reference was made on 21.2.2006 during the pendency of assessment proceedings for the AY2003-04. A mere glance at the assessment order reveals that there is no reference to any material/evidence/information on the basis of which it could be said that the cost of construction shown by assessee was understated or anything above what was disclosed by assessee except the aforesaid two labour payments in the AY 2002-03. In terms of provisions of sec.142A of the Act, reference to DVO can be made only when a requirement is felt by the AO for making such reference and such a requirement would arise or could be felt only ITA nos.3322&3244/Del./2008

19 ITA no.3323/Del./2008 &

ITA no. 301/Del./2009

when there is some material with the AO to show that whatever estimate assessee has shown is not correct or not reliable. The use of word 'require' is not superfluous but signifies a definite meaning whereby some preliminary formation of mind on objective basis by the AO is necessary, which requires him to make a reference to the DVO u/s 142A. The burden is on the Revenue to prove that the real investment exceeds the investment shown by the assessee and that burden has to be discharged objectively. There is nothing in the assessment order for the AY 2003-04 nor the ld. DR brought to our notice any material, suggesting that the assessee paid any amount over and above the declared consideration so as to warrant reference u/s 142A in the proceedings for the AY 2003-04. No such evidence has been placed before us that the AO formed opinion on the basis of material found during the course of survey, which enabled him to make a reference u/s 142A of the Act nor even the books of accounts have been rejected. The assessee did not divulge any information to the DVO despite notice dated 27.4.2006,24.5.2006 & 20.8.2006 as mentioned by the DVO in para 3.1 & 3.2 of his report dated 12.9.2006 nor the DVO commented on the accounts of the assessee for any of the years since 1.4.2001 to 20.8.2006 nor the assessee submitted report of registered valuer before the DVO. Accordingly, the DVO worked out total cost of construction during the period at `5,48,08,565/-. The DVO did not work out yearwise cost of construction; it is only the AO, who attributed the cost worked out by the DVO in the ratio of cost of construction debited by the assessee in its books of account for the relevant years. The DVO in his report adopted the construction period 1.4.2001 onwards while the registered valuer in his report reflected the period 1998-99 to 2002-03 and valued the property as on 31.3.2003 at 1,43,30,307/-. The ld. CIT(A) in his order for the AY 2001-02,annulled the assessment, the company having been incorporated on 10.9.2001. The ld. CIT(A) in the year under consideration found that the AO did not comment adversely on the investment shown by the assessee in building and related structures at `115.08 lacs and accordingly, in the absence of any cogent material, supporting proof and documentary evidence, deleted the addition. The AO did not appear to have confronted the report of ITA nos.3322&3244/Del./2008

20 ITA no.3323/Del./2008 &

ITA no. 301/Del./2009

registered valuer to the DVO nor adduced any reasons as to why the report of registered valuer submitted by the assessee was faulty nor even crystallized the exact period of construction and nor even rejected the books or identified any investment outside the books. In these circumstances, there is no apparent basis to negate the findings of the ld. CIT(A). Here ,we may point out that a co- ordinate Bench in the case of ITO vs. Rajeshwar Nath Gupta in their decision dated 4.5.2008 in ITA no. 4295/Del./2005,relied upon by the ld. DR, in the context of provisions of sec. 142A of the Act, held as follows: "15. A perusal of the aforesaid provisions shows that section 142A is attracted, inter alia, where the assessee is found to have made investment outside the books of account or where any such investment made by him is not fully disclosed in the books of account. The condition precedent for making the reference by invoking the provisions of section 142A thus is that there should be something on record to show that the assessee in the first place has made such investment outside the books or the investment so made by him is not fully disclosed in the books of account and once this condition is satisfied, the quantum of such investment made can be ascertained by the Assessing Officer by making a reference under section 142A in order to make the addition under section 69 or 69B, whichever is applicable. In the present case, the relevant property was purchased by the assessee during the year under consideration for Rs. 15 lakhs and the amount of the said consideration was paid out of its disclosed sources as accepted even by the Assessing Officer in the reassessment. A perusal of the assessment order, however, shows that there was no reference whatsoever made by the Assessing Officer to any material/evidence/ information on the basis of which it could be said that the said consideration shown by the assessee was understated and that anything above what was disclosed by the assessee had actually been paid as consideration. The condition precedent for making a reference to the DVO by invoking the provisions of section 142A thus was not satisfied in the present case and neither the said reference nor the addition made on the basis of report obtained from the DVO in response to the said reference, in our opinion, was sustainable in law as rightly held by the learned Commissioner of Income-tax (Appeals). In the case of Subhash Chand Chopra v. Asst. CIT [2005] 92 TTJ 1087, this Bench of the Tribunal has held that no material or evidence having been recovered during the course of search showing investment in construction, the Assessing Officer was not competent to make a reference to the DVO under section 142A and to make addition on that basis.

In the case of K.P. Varghese v. ITO [1981] 131 ITR 597 cited by learned counsel for the assessee, the hon'ble Supreme Court had an occasion to consider a similar aspect in the context of computation of capital gains and it was held by their Lordships that the burden to prove that the consideration for the transfer of a capital asset has been understated by the assessee or in other words the full value of consideration in ITA nos.3322&3244/Del./2008

21 ITA no.3323/Del./2008 &

ITA no. 301/Del./2009

respect of the transfer is shown at a lesser figure than that actually received by the assessee as alleged, is on the Revenue. Following the said decision of the hon'ble Supreme Court in the case of K.P. Varghese v. ITO [1981] 131 ITR 597, the hon'ble High Court of Delhi has held in the case of CIT v. Gulshan Kumar [2002] 257 ITR 703 that there being no material on record to show that the sale consideration was understated or that the assessee had received anything directly or indirectly over and above the declared value of the shares, the addition made on account of deemed capital gains was not sustainable."

17.1 Following the aforesaid decision, a similar view was taken in Smt. Seema Gupta Vs. DCIT, in ITA no. 1619/Del./2008 & DCIT Vs. Smt. Baleshwari Devi in ITA nos. 1618&1775/Del./2008. Another co-ordinate Bench in their decision dated 28.1.2011 in Devinder Kumar in ITA no.1141/del./2011 held that a reference u/s 142A of the Act is invalid in the absence of any material found during the course of search. It was held by the Bench as under:

"29. In view of the preceding discussion, the ld. CIT(A) has clearly erred in holding that the AO was within his jurisdiction to invoke the provisions of section 142A of the Actiin this case. There is no denying the fact that the AO can seek the help of a specialist to determine the correct value. However, as discussed hereinbefore, the primary condition of section 69B needs to be met first, so as to enable the invocation of section 142A of theAct. To reiterate, the AO can make a reference to the Departmental Valuation Officer, 'for the purpose of making assessment or reassessment'only where the assessee has 'made investment which are not fully disclosed in the books of account'. Sans the fulfillment of this condition of section 69B, section 142A cannot be taken recourse to, particularly when after the phrase 'for the purpose of making an assessment or reassessment under this Act', it has been enacted that 'where an estimate of the value of any investment referred to in section 69B..........is required to be made'. Since section 69B envisages only value of investment not fully recorded in thebooks of account to be deemed to be the assessee's income, where there is no finding that the investment made by the assessee does not stand fully recorded in the books of account, obviously, the value of such investment would not require to be estimated, as such value cannot be deemed to be the income of the assessee and it is, therefore, that the provisions of section 142A cannot be invoked in such a case.

30. The ld. CIT(A) has further erred in observing to the effect that since section 142A only refers to 'for the purpose of making assessment or reassessment', the AO can requisition the Departmental Valuation Officer to estimate the value of the property and hence, before making such a reference, understatement of purchase consideration is not required to be established. There is no question of the ITA nos.3322&3244/Del./2008

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ITA no. 301/Del./2009

understatement of purchase consideration requiring to be established before making the reference. Rather, the requirement is that the AO be in possession of some material showing that the investment was not fully disclosed in the books. As held in 'M/s. Rajeshwar Nath Gupta, HUF' (supra), it is only then that the question of ascertaining such investment by making a reference u/s 142 A, would crop up. Moreover, it cannot be gainsaid that 'K.P.Varghese'(supra), still holds the field and the onus of the Department to prove understatement of sale consideration, has not been discharged in this case."

17.2 In the instant case, the AO did not point out any defect in the books of accounts except the aforesaid two labour payments, which were not accounted for in the books and for which separate additions have been made. Apart from the valuation report of DVO, no other corroborative evidence suggesting undisclosed investment has been brought to our notice by the Revenue. Even in the report DVO, it has no where been suggested that investment to the extent of amount of `2,53,04,000/- added by the AO, actually related to the year under consideration nor even the period construction is crystallized in the report of DVO or by the AO. It is well settled that the primary burden of proof to establish understatement or concealment of income is on the Revenue and it is only when such burden is discharged that it would be permissible to rely upon the valuation report of the DVO. [K.P. Varghese vs. ITO,131 ITR 597(SC); CIT vs. Smt. Shakuntala Devi, 224 CTR (Del) 79 ; CIT vs. Manoj Jain (2006) 200 CTR (Del) 327].In any case, the opinion of the DVO, per se, is not an information and cannot be relied upon without the books of account being rejected - which has not been done in the present case. In this connection, Hon'ble Supreme Court in their decision dated 19th Oct., 2009 in Civil Appeal No. 6973 of 2009 in Sargam Cinema v. CIT,328 ITR 513(SC) have held as under:

"Delay condoned. Leave granted.

By consent, the matter is taken up for final hearing. ITA nos.3322&3244/Del./2008

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In the present case, we find that the Tribunal decided the matter rightly in favour of the assessee inasmuch as the Tribunal came to the conclusion that the assessing authority could not have referred the matter to the Departmental Valuation Officer (DVO) without the books of account being rejected. In the present case, a categorical finding is recorded by the Tribunal that the books were never rejected. This aspect has not been considered by the High Court. In the circumstances, reliance placed on the report of the DVO was misconceived.

For the above reasons, the impugned judgment of the High Court is set aside and the order passed by the Tribunal stands restored to the file. Accordingly, the assessee succeeds."

18. Earlier also similar view was taken in CIT v. Pratapsingh Amrosingh Rajendra Singh and Deepak Kumar, 200 ITR 788(Rajasthan) and CIT vs. Meerut Cement Co.(P) Ltd. (2006) 202 CTR (All) 506. Recently, Hon'ble Delhi High Court in CIT v. Bajrang Lal Bansal,335 ITR 572(Del.) have also concluded in similar terms. In the case under consideration, indisputably, books of accounts have not been rejected. No doubt, if books of account have been properly maintained wherein all details have been recorded by the assessee duly supported by vouchers/documents and no defects are pointed out and the books are not rejected, the result shown by them is bound to be accepted. Needless to reiterate that two labour payments not reflected in the books have separately been added. Apart from these, in the case under consideration , there is no cogent or tangible material or evidence much less any incriminating evidence to come to a conclusion that the assessee spent more than what they claimed for the relevant investment in the building while even period of construction is not crystallized..In these circumstances , we do not find any infirmity in the findings of the ld. CIT(A),deleting the addition made by the AO on the basis of report of the DVO. Therefore, ground no. 1 in the appeal of the Revenue for the AY 2002-03 is dismissed.

ITA nos.3322&3244/Del./2008

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19. Now adverting to grounds raised in the appeal of the assessee relating to validity of reopening of the assessment on the basis of report of DVO for the AY 2003-04, the original assessment in this case was completed on a loss of `31,70,171/- vide order dated 31.3.2006 u/s 143(3) of the Act. On the basis of report of the DVO , the AO issued a notice u/s 148 of the Act on 6.12.2006 on the ground that an amount of `37.83 lacs had escaped assessment.. The reasons recorded by the AO on 24.11.2006 in terms of provisions of sec. 148(2) of the Act read as under:-

"Regular assessment in this case had been completed vide order U/s 143(3) of the IT Act-1961 dated 30/312006. During the course of completion of the said assessment, it was found that the said year was the first year of the commencement of the business of the assessee company. The assessee company capitalized all the pre-operative operational expenses towards the fixed assets. A reference to the valuation cell (Valuation Officer at Lucknow) to find out the actual cost of the building with reference to the 'value of the said asset disclosed by the assessee in the schedule of its fixed asset. Desired report has now been received from the District Valuation Officer vide his letter F. No.: II85/DVO/KNP/ITD/06D71281 dated 14/812U06 which is placed on record. As per the valuation done by the D.V.O, total investment has been arrived at Rs.5,48.09.000/ - which is spanned over the period 1st April-2001 to 20th Aug.- 2006. On a further perusal of the details appearing in the said valuation report it is noticed that the year wise break up of investment valued by the D.V.O. has not been given. Looking to this fact, case records of the assessee had been perused accordingly it has been found that in the books of the assessee company investment has been disclosed during each financial year respectively as per details given hereunder:

Financial Year Relevant Amount of % of invest- Assessment Year investment ment in each disclosed year w.r.t. the

total investment

2000-01 2001-02 Rs. 26.88 lakhs 15.70% 2001-02 2002-03 Rs,115.08 Lakhs 67.23% 2002-03 2003-04 Rs.17.15 lakhs 10.03% 2003-04 2004-05 Nil Nil 2004-05 2005-06 NIL NIL 2005-06 2006-07 Rs.12.06 Lakhs 7.04% ITA nos.3322&3244/Del./2008

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Total investment Rs.171.17 Lakhs 100.00%

Looking to the fact that year wise amount of investment valued by the D.V.O. are not available, the most appropriate method in arriving at the year wise amount of investment will be to calculate the same after applying the prorate % as worked out above. Accordingly year wise investment as valued by the D,V.O. comes as under:

Financial Year Relevant Amount of Prorat % of invest Assessment Year investment ment in each Disclosed year w.r.t, the

total investment

2000-01 2001-02 Rs,86,05 Lakhs 15.70% 2001-02 2002-03 Rs, 368.18 Lakhs 67.23% 2002-03 2003-04 Rs.54.98 lakhs 10.03% 2003-04 2004-05 NIL NIL 2004-05 2005-06 NIL NIL 2005-06 2006-07 Rs,38.58 Lakhs 7,04% Total investment Rs.548.09 Lakhs 100,00%

On the basis of the valuation done by the DVO as arrived at above, it is hereby seen that the assessee has suppressed the amount of investment made by it in each of the year as mentioned above by the following amount respectively: Financial Year Relevant Amount of investment Assessment Year Amount of investment Lesser disclosed in

The books of account

2000-01 2001-02 Rs. 59.17 Lakhs 2001-02 2002-03 RS.253.40 Lakhs 2002-03 2003-04 Rs. 37.83 Lakhs 2003-04 2004-05 NIL 2004-05 2005-06 NIL 2005-06 2006-07 Rs. 26.52 Lakhs Total investment Rs.376.82 Lakhs

In view of the facts as discussed above. it is apparent that the assessee has disclosed year wise value of the investment made by it in the building account short by the amount as arrived at above. Therefore, these amounts are liable to be assessed as an income of the relevant financial year in which such excess investment made by the assessee is found. Thus I have reasons to believe that income of the assessee for the following assessment year(s) has escaped assessment by the minimum amount as mentiol1ed against it as below: Assessment Amount of Income ITA nos.3322&3244/Del./2008

26 ITA no.3323/Del./2008 &

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Year which has escaped assessment

2001-02 Rs.59.17 Lakhs 2002-03 Rs.253.40 Lakhs 2003-04 Rs.37.83 Lakhs

Assessee's case for each of the above assessment year is squarely covered under the following provisions:

Assessment

Year

2001-02 Clause [a] below Explanation 2 to Section 147 2002-03 Clause [a] below Explanation 2 to Section 147 2003-04 Clause [c] below Explanation 2 to Section 147 1- Provisions of section 151(1) of the IT Act-19BI are not applicable in the assessee's case for the assessment year 2003-04.

2- Provisions of section 151(2) are not applicable in the assessee's case for the assessment year 2002-03.

3- Provisions of section 151(2) are squarely applicable in the asessee's case for the assessment year 2001-02."

19.1 In the light of report of DVO, the AO completed the reassessment vide order u/s 148/143(3) of the Act, adding unexplained investment of `37.83 lacs and determined loss of `11,39,171/-.

20. On appeal, the assessee questioned the validity of reopening of the assessment on the basis of report of DVO. However, the ld. CIT(A) upheld the validity of reopening, holding as under:-

"I have carefully considered the matter, perused the asst order, written submission & other material on record. In my considered view, the action of A.O. to reopen astt. proceedings, on the basis of DVO report was perfectly valid & in order. The valuation cell of deptt. is specialized cell within the c1eptt manned by Expert Engineers on the subject. Their report indicating undervaluation or cost if any, has to be honored by the A.O, at least for initiating the proceedings. In my view, the A.O. had sufficient ground forming his ITA nos.3322&3244/Del./2008

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'reason to believe' for issuance of notice u/s 148. The grounds of appeal are accordingly rejected."

21. The assessee is now in appeal before us against the validity of reopening upheld by learned CIT(A).The ld. AR on behalf of the assessee vehemently argued that the AO was not justified in reopening the assessment on the basis of report of DVO and relied upon decisions in CIT vs. Roshan Lal Seth,178 ITR 660(P&H);CIT vs. Raj Kumar,182 ITR 436(All.);CIT vs. Suresh Kumar,275 ITR 253(P&H);CIT vs. VT Rajendran,288 ITR 312(Mad.);CIT vs. K.Rajapandian,311 ITR 477(Mad.);Fusion Electronics (P) Ltd. vs. CIT,9 taxmann.com 189(All.).On the other hand, the ld. DR supported the order of the ld. CIT(A) while relying upon decisions in DCIT vs.JMD Advisors (P) Ltd.,124 ITD 223(Del.);Bawa Abhai Singh vs. DCIT,117 Taxman 12(Del.);Yash Raj Films Pvt. Ltd. vs. ACIT,2011-TIOL-660-HC-MUM-IT;Smt. Shashi Jain vs.ITO,228 ITR 682(all.);CWT vs. V Cleetus,83 Taxman 37(Ker.)CIT vs. Bhawani Shankar Vyas,185 Taxman 352(Uttarakhand);MS VT,62 taxman 3(Kar.) & Dr. Karni Singhji of Bikaner vs. DCIT,112 Taxman 9(Del.).

22. We have heard both the parties and gone through the facts of the case as also the aforesaid decisions replied upon by both the sides. Indisputably, the assessment has been reopened only on the basis of estimate of cost of construction of the building in the DVO's report dated 14.9.2006 subsequent to completion of original assessment u/s 143 (3) of the Act on 31.3.2006. The condition precedent for assumption of jurisdiction under s. 147 of the Act is reason to believe of the AO. If that is so, then a report of a valuer cannot substitute the words "reason to believe" of the ITO. An opinion of a third person cannot be "a reason to believe" of the AO. It is the AO who has to assert on materials available that he has reason to believe that any income chargeable to tax has escaped assessment or that the same was due to the fact that the assessee failed to disclose his income truly and fully. The reason to believe of an AO cannot be substituted by an opinion of a valuer. An opinion of a valuer cannot form a ground for reason to believe that the assessee had failed to disclose his ITA nos.3322&3244/Del./2008

28 ITA no.3323/Del./2008 &

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income fully and truly within the meaning of s. 147 of the Act. The primary facts relating to the construction of the building from year to year were fully and truly disclosed by the assessee and the AO has not pointed out any defects in the books. The ld. CIT(A) in the impugned order observed that in absence of any cogent material, supporting proof and documentary evidences to corroborate the same, the addition of Rs.37.83 lakhs on the ground of unexplained investment cannot be sustained. Explanation 1 to s. 147 of the Act is relevant if the facts disclosed require further elucidation. In construction work, the valuation during the progress of the work, if done by a third person or valuer, could only be a guess or estimate. Where the assessee had given out the cost incurred towards the progress of construction made during the year of assessment and there were no materials before the AO to challenge the same except an opinion of a valuer, the same is not permissible in law. A mere glance at the assessment order reveals that there is no reference to any material/evidence/information on the basis of which it could be said that the cost of construction shown by assessee was understated or anything above what was disclosed by assessee. Hon'ble Apex Court in CIT v/s Dhariya Construction Co (2010) 328 ITR 515 (SC) held that the opinion of the DVO per se is not an information for the purposes of reopening assessment under section 147 of the Income-tax Act, 1961. Hon'ble Apex Court observed as under:

"1. Having examined the record, we find that in this case, the Department sought reopening of the assessment based on the opinion given by the District Valuation Officer (DVO). The opinion of the DVO per se is not an information for the purposes of reopening assessment under section 147 of the Income-tax Act, 1961. The Assessing Officer has to apply his mind to the information, if any, collected and must form a belief thereon. In the circumstances, there is no merit in the civil appeal. The Department was not entitled to reopen the assessment."

22.1 Hon'ble Punjab & Haryana High Court in Vidya Sagar vs. CIT,277 ITR 120 (P & H) held that reopening of assessment on the basis of subsequent report of DVO showing cost of construction on the higher side was invalid. In Smt. ITA nos.3322&3244/Del./2008

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Tarawati Debi Agarwal v. ITO [1986] 162 ITR 606, a learned Single Judge of the Hon'ble Calcutta High Court quashed the notice under section 147(a) of the Act while observing that valuation was always a question of opinion and unless there was a clear finding on the basis of the material that the assessee had invested in the construction more than what had been shown by her in the course of assessment proceedings, the Income-tax Officer could not proceed merely on the basis of the valuation report of the departmental valuer. A similar view was taken in Abdul Majid v. ITO [1989] 178 ITR 616[MP]; Sardar Kehar Singh v. CIT [1992] 195 ITR 769[Rajasthan]; CIT v. Smt. Usha Mathur [2001] 252 ITR 179 (Punj. & Har.);Smt. Amala Das v. CIT [1984] 146 ITR 216 (Punj. & Har.); and Suresh Kumar L/H Siri Ram(supra)., CIT vs V.T. Rajendran (2007) ,288 ITR 312 (Mad), CIT vs K. Rajapandian (2009) 311 ITR 477 (Mad) In CIT vs. Bajrang Lal bansal,335 ITR 572(Del.) ,Hon'ble Delhi High Court held that the opinion of the DVO, per se, is not an information and cannot be relied upon without the books of account being rejected, which has not been done in the present case. Moreover, in the present case, no evidence much less incriminating evidence was found as a result of the survey to suggest that the assessee had made any payment over and above the consideration mentioned in the return of the assessee.In view decision of the Hon'ble Apex Court in Dhariya Construction Co.(supra), reliance placed by the ld. DR on the decisions of various High Courts, which were rendered on their own peculiar facts, is totally misplaced

23. In the light of view taken by the Hon'ble Apex Court in Dhariya Construction Co.(supra) and by the Hon'ble jurisdictional High Court in their aforecited decisions, especially when the ld. DR did not place any material before us so as to enable us to take a different view in the matter, we have no alternative but to vacate the findings of the ld. CIT(A). In view thereof, we are of the opinion that the very initiation of proceedings under section 147 of the Act stands vitiated and as such cannot be sustained, the ingredients of section 147 having not been fulfilled. It is well-settled that if a notice under section 148 of the Act has ITA nos.3322&3244/Del./2008

30 ITA no.3323/Del./2008 &

ITA no. 301/Del./2009

been issued without the jurisdictional foundation u/s 147 of the Act being available to the AO, the notice and the subsequent proceedings will be without jurisdiction and thus, liable to be struck down . Therefore, the reassessment order is quashed and consequently, ground nos.1& 2 in the appeal of the assessee are allowed. As a corollary, grounds raised in the appeal of the Revenue do not survive for our adjudication and are , therefore, treated as infructuous.

24. Ground no.2 in the appeal of Revenue for the AY 2002-03 being general in nature, does not require any separate adjudication while no additional ground having been raised before us in terms of residuary ground no.3 in the appeal, accordingly, these grounds are dismissed.

25. No other plea or argument was made before us

26. In the result, appeal of the assessee in the AY 2002-03 is dismissed while in the AY 2003-04 is allowed and the appeals of the Revenue in the AYs 2002-03 & 2003-04 are dismissed.

Order pronounced in open Court

Sd/- Sd/- (C.M. GARG) (A.N. PAHUJA) JUDICIAL MEMBER ACCOUNTANT MEMBER

Copy of the Order forwarded to:-

1. Assessee

2. Deputy CIT,Range-1,Moradabad

3. CIT concerned.

4. CIT(Appeals), Bareilly.

5. DR, ITAT,'H' Bench, New Delhi

6. Guard File.

By Order,

Deputy/Asstt.Registrar

ITAT, Delhi