Rejection of Books of Account is a Precondition for making Reference to the DVO: ITAT

The assessee is a private limited company and had set up a new hospital. A survey u/s 133A of the Income Tax Act was conducted on the premises of the assessee. During the course of survey proceedings, a copy of the valuation report was found and impounded, wherein the investment in the said hospital building at Rs. 5,13,84,900. However, as per the balance sheet the investment in the building is shown at Rs. 3,18,25,554. The MD admitted that there may be some differences in the value of the building and to account for any such differences and any other differences in the account, he offered an additional income of Rs.50 lakh in the hands of the assessee for the assessment year 2012-2013.

The District Valuation Officer had furnished his report, as per which the cost of construction has been valued at Rs. 6,21,68,000. As per the balance sheet, the cost of investment in the building was accounted for by the assessee at Rs. 4,61,73,569. Hence, the difference in the investment of Rs.1,59,94,431 was added by the A.O. after reducing the offer of MD of Rs.50 lakh for the assessment years 2013-2014 between the assessment years 2009-2010 and 2012-2013 in equal proportion (i.e. Rs.1,09,94,431 / 4 = 27,48,607).

Appeal before CIT(A): Aggrieved by the order of assessment, the assessee filed appeals before the first appellate authority. The CIT(A) confirmed the view of the Assessing Officer.

Appeal before ITAT: Aggrieved by the order of the CIT(A), the assessee has filed these appeals before the Tribunal. The tribunal held that the assessee maintained proper books of accounts along with bills and vouchers in support of the investment in the cost of construction of the hospital building in the ordinary course of business, which CIT(A) failed to appreciate. It relied on the case of M/s. Shetty Constructions v. ACIT after considering various amendments to section 142A of the I.T.Act and judicial pronouncements on the issue held that rejection of books of account is a precondition for making reference to the DVO. We hold that reference to the DVO in the present case is illegal, hence, additions based on the DVO report are deleted. The tribunal had deleted the addition on the basis of a preliminary issue.

The return of income was filed, wherein the assessee did not disclose Rs.50 lakh thereby retracting the declaration of the MD of the assessee-company. The value of the hospital building as per the DVO’s report was determined at Rs. 6,21,68,000 instead of Rs. 4,61,73,596 as per the books of account of the assessee. Therefore, there is a difference of Rs. 1,59,94,431.

The rejection of the DVO’s report on preliminary objection does not mean the value found therein is totally incorrect. This fact is reinforced by the MD in the sworn statement recorded on two different dates wherein he admitted that there may be some difference in the expenditure incurred in the building with the cost recorded in the books of account. Therefore, based on the declaration of the MD on two different dates, the tribunal confirm the addition of Rs.50 lakh for this assessment year. Moreover, the tribunal found that in spite of the addition of Rs.50 lakh, there is no tax liability for the assessment year 2013-2014. The other grounds on merits /demerits on the basis of the valuation report were not adjudicated.