Ita/369/2007 Of The Commissioner Of Income Tax v. M/S Vasudev Construction

IN THB HIGH COURT OF KARNATAKA AT BANGALORE DATEKD THIS THE 30 DAY OF JANUARY 2014 PRESENT THERE HON'BLE MR.JUSTICE DILIP B.BHOSAL AN D THR HON'BLBE MR..JUSTICBK B.MANOHA ITA NO.369/2007 BBRHIWEE 1. The Commissioner of Income-Tax,Central Circle,C.R.Building, Queens Road,Bangalore.2. The Assistant Commissioner of Income-Tax,Central Circle,C.R.Building, Mangalore....Appellants(By Sri.K.V.Aravind, Advocate)AN):M/s.Vasudev Construction,Vasudev Towers, Main Road,Bantwal...Respondent(By Smt.Vani.H, Advocate) This ITA filed U/s.260-A of IT Act, 1961 arisingOUTot order.dated22-O9-JZOO6passed1nIT(SS)A.8/Bang/2003, tor the Block Assessment Period01-04-1989 to 28-01-2000, praying that this Hon’bleCourt may be pleased to: 1.formulate the substantial questions of lawstated therein,stated therein, 11.allow the appeal and set aside the orders.passedby theITAT,Bangalore|1n IT(SS)A.8/Bang/2003 dated 22-09-2006|confirming the order of the Appellate|Commissioner and confirm Order passed|by the Assistant Commissioner of Income|Tax, Central Circle, Mangalore, in the|interest of justice and equity. This appeal having been heard and reserved forpronouncement of Judgment this day,B.MANOHAR.Jaadelivered the following: JUDGMENT The revenue has preferred this appeal undersection 260-A of the Income Tax Act, 1961 (for short‘the Act’), being aggrieved by the order dated 22-9-2006.made in IT(SS)A No.186/Bang/2002 passed by theIncome Tax Appellate Tribunal, Bangalore Bench-B,(hereinafter referred to as ‘the Tribunal’ for short)whereby the Tribunal dismissed the appeal filed by the revenue and confirmed the order passed by theCommissioner of Income Tax (Appeals) (hereinafterreferred to as ‘First Appellate Authority’ for short),setting aside the order passed by the AssessingAuthority pertaining to the Block Period from 1-4-1989.to 28-1-2000. |The briet facts of the case are as follows:The respondent is a Partnership Firm, engaged inthebusinessoT|constructionoT|buildinganddevelopment of properties. The Firm came into.existence from 28-01-1998. A search was conducted on28-01-2000 under Section 132 of the Act in the!business premises and residence of the ManagingPartner of the respondent-Firm, Sri.Nagendra Baliga,who is a Jeweller by profession. During the search,certain documents like bills of material purchased,labour charges paid and the cheques relating to theassessee-Firm were found and seized. On the basis oft the said records, notice under Section 158-BD was.issued calling upon the respondent-Firm to file theirreturns for the Block Period from 01-04-1989 to |28-01-2000. The assessee-Firm filed return of income|on 30-11-2000 declaring ‘NIL’ income. On the basis ofthe said returns, a notice under Section 143(2) and142(1) of the Act was issued calling upon the assesseeto produce necessary documents. An authorized|representative of the assessee appeared and producedthe computerized books of accounts. As per the records.produced by the assessee, the assessee-Firm hadstarted constructing two buildings, i.e. Vasudev Towers—and Vasudev Plaza. Vasudev Towers was nearingcompletion and Vasudev Plaza was just started at thetime of search. The assessee contended that the'building is yet to be completed. The expenditureincurred for construction of the building has beenmentioned in the books of accounts. The authorized|representative of the company contended that they have incurredexpenditureoT|Rs.42,15,111/-.towardsconstruction of Vasudev Towers and Rs.4,49,386/-.towards Vasudev Plaza as on the date of search. The'|Assessing Officer in order to verify the expenditureincurred for the construction of buildings, referred thematter to the District Valuation Officer (for short ‘DVO’.The DVO submitted a report estimating the cost ofconstruction of two buildings at Rs.64,71,483/- and.Rs.4,72,426/- respectively. The Assessing Officertaking into consideration the difference of cost ofconstruction of the buildings as undisclosed income atRs.20,97,351/-and assessed to tax for the Blockassessment period by its order dated 28-06-2002. | 3.|The assessee being aggrieved by the order passedby the Assessing Authority preferred an appeal beforetheAppellateAuthority1nITANo.236/2002-03,contending that the order passed by the AssessingAuthority is contrary to law. The report submitted by the DVO is also contrary to law. The Appellate Authorityaiter considering the matter in detail held that thedifference between the valuation adopted by theassessee and the DVO was a matter of opinion basedupon which, the undisclosed income computed on suchopinion cannot be brought to tax in the block period. —Accordingly by its order dated 16-09-2002 allowed theappeal in part and set aside the order insofar as theblock assessment period is concerned. 4Being aggrieved by the order passed by theAppellate Authority, the assessee-Firm as well as therevenue preferred appeals before the Income TaxAppellate Tribunal, Bangalore in Appeal Nos.186/2002—and 8/2003. The Tribunal, after considering the matterin detail dismissed both the appeals filed by the revenueas well as the assessee-Firm upholding the order passedby the Appellate Authority. The Tribunal held that nomaterial was found during the search to indicate that the assessee has not recorded the expenses incurred onconstruction in the books of accounts. In the absence|of any seized materials addition cannot be made only onthe basis of the Valuation Officer’s report which is lessthan 195%, no addition can be made. Accordingly,dismissed the appeals by its order dated 22-09-2006. —Being aggrieved by the said order, the revenue haspreferred this appeal. 5ori.K.V.Aravind, learned counsel appearing for theappellant contended that the order passed by theTribunal as well as the First Appellate Authority iscontrary to law. The finding of the Tribunal that thedifference in the cost of construction of buildings asvalued by the DVO and the value accounted by theassessee is less than 15% is contrary to law. TheTribunal failed to appreciate that the percentage ofditference should be reckoned with reference to the'actual cost as per the assessee’s books and not after slvingeffectoT|telescopingthesuppressedsaleconsideration. The further finding of the AppellateAuthority that the difference in cost of constructionbasedOT)valuationreportshall|notconstituteundisclosed income as per Chapter-XIV-B is contrary tolaw. He relied upon a judgment reported in(2007) 159TAXMAN|258 (SC)in.theCaSECoT|MANISHMAHESHWARI v/s ASSISTANT COMMISSIONER OFINCOME TAX AND ANOTHER' and sought for allowingthe appeal. | 6.|On the other hand, Smt.Vani H, learned counselappearing for the assessee supported the order passedby the Tribunal as well as the Appellate Authority andcontended that the documents seized during the courseof search are not incriminating in nature, but they weremaintained in the normal course ot business. No’material was found at the time of search for initiatingproceedings under Section 158-BD of the Act. The 6.|On the other hand, Smt.Vani H, learned counselappearing for the assessee supported the order passedby the Tribunal as well as the Appellate Authority andcontended that the documents seized during the courseof search are not incriminating in nature, but they weremaintained in the normal course ot business. No’material was found at the time of search for initiatingproceedings under Section 158-BD of the Act. The difference of valuation cannot be a ground to initiateproceedings|underSection158-BD1.e. blockassessment period. In support of her contention, sherelied upon the judgment reported in(2010) 321 ITR362 (SC)1 in the case otASSISTANT COMMISSIONEROF INCOME TAX V/S HOTEL BLUE MOON; (2001) 247ITR 448 (Bombay)' in the case ot|COMMISSIONER OF'INCOME TAX v/s VINOD DANCHAND GHPDAWAT;(2007)2094ITR|1493(Detht1n the.CaSE€ot OMMVMISOFINCOMETAXv/sASHOKKHETRAPAL, and|(2009) 29 DTR 229 (GauhattiY in.the case of.COMMISSIONER OF INCOME OF TAX v/sBIMAL AUTO AGENCY-and sought for dismissal of theappeal. ToThe above appeal was admitted for considering thefollowing substantial questions of law: aWhether the Appellate Authorities werecorrect in setting aside the Block Assessment|based on the materiaql detected in the courseof search in the case of the partner who had| informed that undisclosed income had been|contributed by him in putting up Vasudev|Towers which building on being valued by the|District Valuation Officer, disclosed that therewas difference in the cost of construction from|that which has been declared which had|been brought to tax in the block period|correctly by the Assessing Officer P| 2. Whether the Appellate authorities were|correct in proceeding to hold_ thatthevaluation arrived at in respect of Vasudev|Building by the District Valuation Officer wasa mere opinion and the same cannot be taken|in to account for the purpose of bringing the|difference in the valuation of the building as|the undisclosed income for the Block Period|without actually examining the correctness ofthe finding recorded by the Valuation Officer ? Oo.Whether the Appellate Authorities werecorrect in failing to take into account the|search proceedings initiated in the case ofori. NagendraBaligaweredisclosuresregarding the valuation of Vasudev Building|were made and the order of the Tribunalmade in that case in subject matter of an|appeal before the Hon'ble High Court ? 8.|We have carefully considered the argumentsaddressed by the learned counsel for the parties andperused the orders impugned in the appeal. OQ The records clearly disclose that search wasconducted in the residence and business premises ofsri.Nagendra Baliga, who is one of the partners ofrespondent-Firm. During the course of search, the saidNagendra Baliga made a statement that he has investeda sum of Rs.65,00,000/- for construction of thebuildings. On the basis of bills of materials purchased,labour charges paid, cheques relating to the assessee-Firm found during the search, a notice was issuedunder Section 158-BD calling upon the assessee to filethe return of undisclosed income for the block period01-04-1989 to 28-01-2000. £=The assessee filed NILreturns. Thereafter, a notice was issued under Section|143(2) and 142(1) of the Act. The construction of thebuildings by the assessee—Firm was referred to the DVO,for valuation under Section 133(6) of the Act and forestimating the cost of construction of two buildings. —The DVO submitted a report on 19-04-2002. =Therewas difference in valuation by the assessee-Firm and the Valuator to an extent of Rs.20,97,391/-. Theassessee-Firm filed objections to the report of the DVO. —Comments were called for from the DVO. The DVO byhis further report dated 12-09-2002 rectified certainmistakes and gave certain benefits to the assessee andhe had not offered any comments for some objections.In view of that, the Assessing Officer added the saidsum of Rs.20,97,351/- to the undisclosed income andassessed for tax. the Valuator to an extent of Rs.20,97,391/-. Theassessee-Firm filed objections to the report of the DVO. —Comments were called for from the DVO. The DVO byhis further report dated 12-09-2002 rectified certainmistakes and gave certain benefits to the assessee andhe had not offered any comments for some objections.In view of that, the Assessing Officer added the saidsum of Rs.20,97,351/- to the undisclosed income andassessed for tax. 10.|The records further disclose that during thecourse of search, no incriminating documents weretraced. However, certain documents lke bills of|materials purchased, labour charges paid and somecheques issued by the Firm were seized. The assessee-|Firm has only two partners i.e. Nagendra Baliga and hiswife. Construction of two buildings is the maidenproject of the assessee-Firm. As on the date of search,the building was not completed and there was no income from the building. There was no positivecomments from the DVO with regard to suppression ofmaterial facts by the assessee which would amount toundisclosed income. The Managing Partner of the Firmis primarily a Jeweller by profession, constituted a Firmto take up the work of construction of the buildings. —The difference in the cost of construction cannot|constitute undisclosed income for the block period. Onverification of the revised report submitted by the DVO,the differences between the valuation of the assessee-Firm and the DVO is less than 15%. There is no'sSpecific finding by the Assessing Officer with regard toany concealment. Further, there was no material|found during the search indicating that there wereexpenses incurred on construction by the assessee thatwere not recorded in the books of accounts. In the'!absence of any seized material and solely on the basis ofthe report of the DVO, there cannot be any finding withregard to the undisclosed income. No material has been found at the time of search for initiating proceedingsunder Section 158-BD of the Act. Solely on the basis ofthe Valuation report, block assessment cannot be made. —Further, it is relevant to mention that the assessee-Firmcame into existence on 28-01-1998. The Firm does not|have its own income. The Managing Partner of theassessee-Firm is a jeweler by profession. His incomewas assessed and tax has been levied. Hence, it is not)open to the appellant to tax once again in the guise ofundisclosed income. The order passed by the AssessingOfficer is contrary to the law laid down by the Hon’bleSupreme Court in the cases referred to above by theadvocate appearing for the respondent. The Hon’bleSupreme Court in a judgment reported in(2010) 321ITR 332 (SC) (supra)has clearly held that theundisclosed income unearthed as a result of search. ©The scope and its ambit is limited in that sense tomaterials unearthed during the search. Paragraph 12of the judgment reads as under: “ChapterXIV-B|provides|foranassessmentof|the|undisclosedincomeunearthed as a result of search withoutaffecting the regular assessment made or to|be made. Search is the sine qua non for the|block assessment. The special provisions are.devised to operate in the distinct field of|undisclosedincome|and|areclearlyin.addition to the regular assessments covering|the previous years falling in the block period. |The special procedure of Chapter xXIV-B 1sintended to provide a mode of assessment of|undisclosed income, which has been detectedas a result of search. It is not intended to be|substituted for regular assessment. Its scopeand ambit is limited in that sense of materials|unearthed during search. It is in addition to|the regular assessment already done or to be|done. The assessment for the block period|can only be made on the basis of evidence|found as a result of search or requisition ofbooks of account or documents and such|othermaterialsOYinformationasareavailablewiththe|AssessingOfficer.Therefore, the income assessable in _ blocassessment under Chapter xXIV-B is_ thincome|not|disclosedbut|foundand.determined as the result of search under|section 132 or requisition under Section 132Aof the Act. Further, in a judgment reported in |(2009)29 DTR 229(supra), the Gauhati High Court held that, the report of|DVQO does not constitute a material or information to the search. Paragraph 13 of the judgment reads asunder: M888Admittedly, no evidence or materials|was discovered in the course of the search of thepremises of the group to which the assesseebelongs. The undisclosed income insofar as thebuilding is concerned was solely made on the basisof the report of DVO as obtained by the searchparty. The report of the DVO does not constitutematerials or information relatable to the search.Such a view have been recorded in the judgmentsof the Madhya Pradesh High Court in CIT v/sKhushlal Chand Nirmal Kumar (supra) and DelhiHigh Court in CIT v/s Manoj Jain (supra) and CITv/s Ashok Khetrapal (supra). While expressing ourrespectful agreement with the said views, it has tobe held that the determination of undisclosedincome of Rs.40,04,369/- in respect of the buildingin question being solely on the basis of the report ofthe DVO was rightly interfered with by the learnedTribunal. The said conclusion of the learnedTribunal, therefore, will not be open to interference. | 11.)The Appellate Authority as well as the Tribunalalter considering the matter in detail corrected themistake committed by the Assessing Officer. We find,no infirmity or irregularity in the order passed by theAppellate Authority and the Tribunal. Hence, appealfiled by the revenue is liable to be dismissed. The substantial questions of law framed in this appeal are held against the revenue. Accordingly, we pass the following: ORDER| The appeal is dismissed. sd/- JUDGE od/-| JUDGE. _* | mp