Hon'ble Aditya Nath Mittal, J.
1. We have heard Shri P.K. Jain, Senior Advocate assisted by Shri Amitabh Agarwal for the assessee-appellant. Shri Dhananjai Awasthi appears for the respondents.
2. These Income Tax Appeals under Section 260-A of the Income Tax Act, 1961 (for short, the Act) arise out of a common judgment of the Income Tax Appellate Tribunal, Delhi Bench 'C', Delhi dated 2.7.2010 in ITA Nos. 3616 & 3617 (Del)/2004, and ITA Nos.3557 & 3556 (Del)/2004, relating to Assessment Years 1998-99 & 1999-2000.
3. In addition to the substantial questions of law framed in the appeals by the assessee-appellant, of which we find question no. 1 to be relevant for the purposes of the case, we have re-framed the questions of law on the request of learned counsel of assessee-appellant as follows:-
"1. Whether, the Income Tax Appellate Tribunal has failed to appreciate that the impugned assessment was framed without, neither satisfying the preconditions required for invoking the provisions contained in Section 147 of the Income Tax Act, 1961, nor complying with the statutory provisions contained in Section 148 of the Income Tax Act, 1961 and as such the instant assessment framed was wholly untenable and unsustainable in law?
2.Whether the opinion given by DVO perse is not an information for the purposes of re-opening an assessment for the purposes of Income Tax Act and the assessment can only be re-opened when the Assessing Officer has applied its mind to the information, if any, collected and must form a belief thereon?
3. Whether the Assessing Officer can refer the matter to DVO without the Books of Accounts being rejected and the opinion of DVO perse can be said to be an information for the purpose of re-opening of assessment under Section 147?
4. Brief facts giving rise to these two appeals are as follows.
Assessment Year 1998-99
5. For the assessment year 1998-99 the assessee filed the return on 31.3.1999 declaring 'nil' income. The assessment under Section 143 (3) of the Act was completed on 26.3.2001 at nil income, with Assessment Officer (A.O) mentioning that the assessee filed required details, information and documents and the books of account were examined. The factory building of the assessee at this stage was under construction and no business was carried out in the year.
6. The assessment was reopened with the reasons recorded on 10.1.2002, as follows:-
"During the course of assessment proceedings u/s 143 (3) for the year under consideration it was noticed that the assessee company has declared the investment on land and site development, building and civil work at Rs. 1,00,12,252/- for total quantity of earth work estimated at 6,75,000 cubic meter. This development of earth work was stated to be done through 1397 tractors. The AO considered this investment very low, hence he referred the matter to the valuation officer, New Delhi on 10.11.2000 for correct valuation of the investment made by the assessee company. The assessment was completed u/s 143 (3) on 26.03.2001 being time barring case with the finding that "after receiving the valuation report it will be examined thoroughly and in necessary, further action will be initiated." Now the valuation report has been received and the Valuation Officer vide his report No. DVO/ND/IT-48/2000-2001/202 dated 17.12.2001 has observed/commented as under:-
(i) The assessee has failed to supply the initial and final levels of the land where such enormous earth work of 6.75 lacs cubic meter has been done. The registered valuer's estimates submitted by the assessee of M/s Rajiv Jain & Associates have simply considered the average heights of earth work involved without any actual measurements at site, which can be done only from topographical charts of initial and final levels. In the absence of such details having been furnished by the assessee, the authenticity of such work is doubtful and cannot be verified at this end.
(ii) The contention of the assessee that no registration of tractor numbers is required by farmers in U.P. is wrong since it has been ascertained from U.P. transport authorities that registration numbers of tractors is must in U.P. In absence of tractor number having been supplied by the assessee, authenticity of development of 1397 tractors is also doubtful.
(iii) Further, no log books showing the details of deployment of tractors on day-to-day basis have been maintained by the assessee thereby raising a further doubt about such huge amount of earth work.
(iv) Though the quotation for earth work received by the assessee (as mentioned in letter dated 28.02.2001) was Rs. 39.50 per cubic meter, payment has been made by the assessee to tractor owners on hourly basis for reasons best known to the assessee.
(v) Since the earth work involved in the development of site was enormous, it is not possible that the assessee had invited single quotation for Rs. 39.50 per cubic meter.
In the light of above comments, investments declared by the assessee on the development work are doubtful and are not acceptable to measurement.
2. As per terms and conditions of the IDBI, the company shall pay to IDBI up-front fee @ 1.05% of the amount sanctioned before or on execution of loan agreement. The company was sanctioned total loan of Rs. 8.5 crore by the IDBI on which total up-front fee has to be paid @ 1.05% which comes at Rs. 8,92,500/- but the assessee company has paid this fee at Rs. 12,50,000/-. Thus, the company has paid excess up-front fee by Rs. 3,75,500/-, which should be added in the income of the assessee company.
3. The share application money as on 31.03.1997 was at Rs. 16,66,000/- and as on 31.03.1998 was at Rs. 2,57,19,000/-. There is increase in the share application money by Rs. 1,10,59,000/- during the financial year 1997-98, but according to the copy of account filed for the share application money the increase comes to Rs. 1,11,49,000/-. Thus, there is a difference in increase in the share application money by Rs. 90,000/-
4. The details filed for share application money, the closing balance as on 31.03.1998 has been shown at Rs. 31,00,000/- which was the opening balance as on 01.04.1998. It is not explained how the closing balance as on 31.03.1998 has been shown at Rs. 2,57,19,000/- in the balance-sheet ending on 31.03.1998, which in the details/copy of account of share application money filed for A.Y 1998-99, the opening balance was shown at Rs. 31,00,000/-. There is a great difference in the closing balance of share application money as per balance sheet and as per copy of accounts/details filed which remained unexplained.
5. Therefore, I have reason to believe that assessee's income escaped from assessment. Action u/s 147 of the I.T. Act is taken. Issue notice u/s 148 of the I.T. Act, 1961."
7. The assessee filed a return under Section 148 on 12.2.2002 declaring 'nil' income. Thereafter, the assessment proceedings were initiated by issuing statutory notices under Section 143 (2) and 142 (1) of the Act. These proceedings were completed on 13.3.2003 determining the total income of the assessee at Rs. 18,624/- by disallowing the interest claimed by the assessee in respect of borrowed funds. The interest was considered as pre-operative expenditure and capitalized for consideration in subsequent years.
8. The assessee filed an appeal, which was partly allowed by CIT (A) on 28.5.2004. Aggrieved both the assessee as well as the revenue filed appeals before the Income Tax Appellate Tribunal.
Assessment Year 1999-2000
9. In respect of the assessment year 1999-2000 the assessee filed return on 31.3.2000 showing 'nil' income. The return was processed under Section 143 (1) of the Act on 4.7.2000. During the course of assessment proceedings for the assessment year 1998-99, the issue of valuation of property was referred to the District Valuation Officer of Income Tax Department, 3-Tolstoy Marg, New Delhi on 10.11.2000 for correct valuation of the property. The assessee had disclosed investment of Rs. 2,64,89,517/- in the land and construction of building. The Valuation Officer submitted the valuation report dated 27.12.2001. Thereafter on the basis of the valuation report dated 27.12.2001 proceedings under Section 147 were initiated to reopen the case for reassessment. The reasons have been quoted above in respect of assessment year 1998-99.
10. In respect of assessment year 1999-2000 the notice under Section 148 was issued on 10.1.2002, which was served on 16.1.2002. In compliance the assessee filed return of income on 12.2.2002 declaring 'nil' income, which was processed under Section 143 (1) on the same day. The assessee requested on 15.4.2002 to supply the copy of reasons for taking action under Section 148. A copy of the order recording the reasons was provided to the assessee. By a notice under Section 142 (1) dated 26.4.2002 the assessee company was required to justify the investment on land, site development, building and civil and other works. The objections were filed by the assessee on 15.5.2002 for taking action under Section 147 of the Act, which were rejected by the AO on 14.2.2003. The AO completed the assessment on the total income of Rs.27,95,440/- with an order to charge interest under Section 234-B and 234-C as per law and to issue notice, demand and challan as per I.T.N.S.-150. The AO also directed for issuance of penalty notice under Section 271 (1) (c) of the Act.
11. The CIT (A) partly allowed the appeal. Relying upon the assessment order of the year 1998-99, he held that the alleged siphoning of the funds by the director Shri Nidhish Prakash as individual could not be assessed in his hands. For the assessment year 1998-99 the addition of Rs. 33,04,232/- on account of alleged siphoning was deleted, and similarly for the assessment year 1999-2000, it was held that the amount of Rs. 1,48,29,539/- cannot be assessed in his hands. On the remaining questions the appeal was dismissed.
12. The Tribunal in its common judgment dated 2.7.2010 on the validity of the reopening of the assessment taken as ground no.1 held that the assessee had not carried out any business activity in the relevant year. It was engaged in land development to set up the factory. The AO was not satisfied with the quantum of expenditure and therefore, in the course of original assessment he referred the matter to DVO for estimating the expenditure. The Tribunal found that the report of the DVO was not received till the completion of the assessment. The AO thus made an office note on the assessment order to the effect that appropriate action shall be taken after the receipt of the valuation report and therefore, it cannot be said that in the absence of full evidence he did not apply his mind properly on the issue. In para 5.2 of the order of the Tribunal it is observed that the DVO's report was received on or about 27.12.2001. The Tribunal agreed that the letter of DVO did not contain the views of the DVO in respect of quantification of the expenditure. He had only expressed doubts over the topographical chart of the site and the methods of getting the work done. He did not put any figure of the expenditure in his letter. His observations related to the enormity in the land development work involving 6.75 lakh cubic meter of earth filling, which was got done without calling for quotation; the work was entrusted to various truck owners, who were not paid on the basis of cubic meter of earth, but on per-day basis. The assessee was also not able to furnish the registration numbers of the trucks on the ground that such registration is not required by the farmers in UP. The assumption was found to be wrong. The DVO thus concluded that the expenditure shown in the books is not verifiable and was doubtful.
13. The Tribunal found that Section 147 regarding "income escaping assessment" precedes with the words "if the Assessing Officer has reason to believe". The Tribunal referred to the amendment made in section 142-A in Income Tax Act by Finance (No.2) Act, 2004 retrospectively w.e.f. 15.11.1972 providing under sub-section (1) that where an estimate of the value of any investment is required to be made, the AO may require the valuation officer to make such an estimate and report the same to him. Such a report may be used for making an assessment or a reassessment under the Act. He found that the decision in the case of Amiya Bala Paul vs. CIT (2003) 262 ITR 407 stands superseded by this retrospective amendment as the valuation officer has been empowered to make valuation of any investment and since the notice under Section 148 was issued prior to expiry of four years from the end of assessment, the AO was justified to take action on the basis of the opinion of DVO.
14. Shri P.K. Jain appearing for the assessee-appellant has relied upon the Supreme Court judgments in Sargam Cinema vs. Commissioner of Income Tax (2010) 328 ITR 513 (SC). The short judgment of the Supreme Court has crystalised the principle of law that the assessing authority cannot refer the matter to DVO without rejecting the books of account is quoted as below:-
"1. Delay condoned.
2. Leave granted.
3. By consent, the matter is taken up for final hearing.
4. 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.
5. 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.
6. Civil appeal is allowed. No order as to costs."
15. The judgment in Sargam Cinema vs. Commissioner of Income Tax (supra) has been followed by the Delhi High Court in Commissioner of Income Tax v. Mahesh Kumar, ITA 1192/2010 decided on August 20, 2010 as well as by this Court in Commissioner of Income Tax-II, Agra vs. M/s Satkar Chitralaya Pvt. Ltd (Income Tax Appeal No. 566 of 2009) decided on 5.4.2011.
16. Shri P.K. Jain has also relied upon the judgment of Supreme Court in Assistant Commissioner of Income Tax, Gujarat v. M/s Dhariya Construction Company (Civil Appeal No. 9468/2003) decided on February 16, 2010 in which it was held that the opinion given by the District Valuation Officer per se is not an information for the purpose of reopening assessment under Section 147 of the Income Tax Act, 1961. The AO has to apply his mind to the information, if any, collected and must form a belief thereon.
17. In the present case, we find that the assessee filed a return for the assessment year 1998-99 on 31.3.1999. For the assessment year 1998-2000 the return was filed on 31.3.2000 along with the copies of balance sheet and pre-operative expenditure. The assessment in respect of the assessment year 1998-99 was completed on 26.3.2001 at 'nil' income. The return was processed under Section 143 (1) on 4.3.2000. At this stage the factory building of the assessee was under construction. By this time no manufacturing activity and no business had been carried out. The AO referred the matter to District Valuation Officer of Income Tax Department, 3-Tolstoy Marg, New Delhi on 10.11.2000, mechanically for correct valuation of the property. This report did not provide any figure or even a rough estimate quantifying the expenditure. The DVO had only referred to some lacuna in the methodology of getting the work done. He expressed his doubts on the expenditure on the ground that the height of the levels, for which the earth filling work was done, was not provided; the work was done without calling for single quotation; the truck owners were not paid on cubic meter basis and concluded that the expenditure shown in the books was not verifiable. According to DVO, the investment shown was doubtful and were not acceptable to measurements. It is on this information, that the AO reopened the assessment and recorded his reasons on 10.1.2002, in which he relied upon the report dated 27.12.2001 and served notices from the assessee under Section 148 to which the objections were filed and were rejected. The DVO sought time for valuation vide letter dated 20.2.2002. He sought details from the assessee. The final report of DVO quantifying the expenditure was received much later on 17.3.2003, and the assessment was despatched on 21.5.2003. There is nothing to show that the final report of DVO was served on the assessee and thus it is observed in the order of CIT (A) dated 28.5.2004 for Assessment Year 1988-99 "The District Valuation Officer has submitted the final report to the Assessing Officer vide report dated 13.3.2003. In the report the District Valuation Officer has estimated the total earthwork at Rs. 25547064.00. This valuation report has been deliberately, for the reasons best known to the Assessing Officer, kept outside the records. The valuation report was received by the Assessing Officer on 17.3.2003 and the assessment order was dispatched on 21.3.2003."
18. From the facts given in the orders of the Income tax authorities, and the Income Tax Appellate Tribunal, it is clear that the opinion of the AO for reassessment under Section 147, was based upon the report of the DVO dated 27.12.2001. Firstly the AO could not have referred the matter to DVO unless he had any doubts over the expenditure after examining the account books of the assessee, and on which he had rejected the accounts. The reference to DVO under Section 142-A is not to make a fishing and roving enquiry into the expenditure in constructions. The AO is not authorised to call for the report of DVO unless he forms an opinion that he cannot rely on the assessee's accounts and rejects the accounts books. In the present case, the accounts book were not rejected. The reference was made to DVO only for the purposes of ascertaining the expenditure on the earth work. The enormity of the earth work, by itself, without any other material on record, could not be a ground to make a reference to DVO. We are of the view, that the incomplete report of the DVO on the basis of which the assessment was reopened and for which the reasons were recorded on 10.1.2002 could not be accepted as the material on the basis of which the AO could have formed belief that the assessee-company had not truly disclosed the expenditure of earthwork. The DVO had only raised doubts on the methodology adopted by the assessee for valuation of the earth work. The AO acted casually in discharging his functions.
19. On the other reasons given by the AO, we find that the entire material of the receipt of the share application money was disclosed in the accounts books, which were accepted and the assessments were finalised and thus the same material, namely the payment of up-front fees and the receipt of the share application money, could not be a ground to reopen the assessment. We also find that the AO did not call the assessee-company to explain the difference of Rs.3,75,500/- as up-front fees to IDBI for sanction of loan of Rs. 8.5 crores; the difference of Rs. 90,000/- only in the share application money of Rs.2,57,19,000/-; the issuance of notice under Section 148 without calling for the explanation of the assessee on these grounds, and on the material, which was already disclosed to him, on the basis of which he had completed the assessment, could not be the grounds for reopening the assessment.
20. For the aforesaid reasons, we are of the view that the AO committed gross error of law in reopening the assessment under Section 147 of the Act.
21. Both the Income Tax Appeals are allowed. The questions of law are decided in favour of the assessee-appellant and against the revenue. The department will proceed accordingly.
Dt.16.10.2012 RKP/