The Commissioner Of Income Tax, Karnal v. M/S Om Overseas, Shiv Nagar, Panipat

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH. ITA No.721 of 2010 Date of decision: 31.1.2011 The Commissioner of Income Tax, Karnal -----Appellant Vs. M/s Om Overseas, Shiv Nagar, Panipat ----Respondent CORAM:- HON'BLE MR JUSTICE ADARSH KUMAR GOELHON’BLE MR. JUSTICE AJAY KUMAR MITTAL Present:-Mr. Yogesh Putney, Sr.Standing Counsel for the revenue. Adarsh Kumar Goel,J. 1.This order will dispose of ITA Nos.697, 689, 708 and 721of 2010 as it has been stated by learned counsel for the revenue that allthe four appeals involve common questions. 2. ITA No.721 of 2010 has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (for short, ‘theAct’) against the order of the Income Tax Appellate Tribunal,Delhi bench ‘B’ New Delhi passed in ITA No.2726/Del/2009dated 29.1.2010 for the assessment year 2004-05, claimingfollowing substantial questions of law:- “i) Whether on the facts and circumstances of thecase and in law, the learned ITAT was right inholding that the CIT(A) had duly put all theobjections and documents to all the parties for theircomments, it cannot be said that there was violationof provisions contained in Rule 46A of the Income Tax Rules, 1962, despite the fact that opportunitywas given by the AO under section 142A(3) of theIncome Tax Act, 1961 to the assessee during thecourse of assessment proceedings and any evidenceif any or objections to the DVO’s report was to besubmitted before the AO which was not done andthat the assessee was not eligible to produce newevidence for the first time before the CIT(A) andalso not appreciating the fact that there is noprovision for a revised report under section 142Aof the Income Tax Act, 1961? ii) Whether on the facts and circumstances of thecase and in law, the learned ITAT was right in lawin observing that there was no violation of Rule46A of the Income Tax Rules, 1962, despite thefact that none of the conditions prescribed underrule 46A were satisfied by the assessee foradmission of additional evidence in as much asthere was no occasion where (a) the AO refused toadmit the evidence, (b) or the assessee wasprevented by sufficient cause from producing theevidence which was called upon to be produced bythe AO, (c) or the assessee was prevented bysufficient cause for producing before the AO anyevidence which is relevant to the ground of appeal,(d) or the AO passed the assessment order withoutgiving the assessee sufficient opportunity to adduceevidence relevant to any ground of appeal? iii) Without prejudice to the above, whether on thefacts and in the circumstances of the case, the learned ITAT is right in arriving at the conclusionthat a sum of Rs.91,30,355/- on ‘HumidificationPlant’ and Rs.1,20,01,718/- under the head‘Trenches’ considered by the DVO’s subsequentinvalid report, be treated as investment and holdingthat the investment made in the building accountunder the head ‘Humidification Plant’ and‘Trenches’ considered for allowing relief to theassessee is completely ignoring the provision ofsection 142A of the Income Tax Act? Iv) Whether on the facts and in the circumstancesof the case, the learned ITAT was justified inallowing deduction under section 80-HHC on theface value of DEPB in the case where turnoverexceeds Rs.10 crores in view of the proviso (ii),(iii) and (iv) inserted by the Taxation Law(Amendment) Act, 2005 with retrospective effectfrom 1.4.1998? v) Whether on the facts and in the circumstances ofthe case, the learned ITAT was justified in allowingdeduction under section 80HHC in respect ofentire DEPB amount by incorporating the same inthe computation of business profit under section 28(iiib)? vi) Whether on the facts and in the circumstancesof the case, the learned ITAT was justified inplacing reliance upon the decision of Income taxAppellate Tribunal, Special Bench, Mumbai in thecase of M/s Topman Exports v. ITO (2009) – TOIL v) Whether on the facts and in the circumstances ofthe case, the learned ITAT was justified in allowingdeduction under section 80HHC in respect ofentire DEPB amount by incorporating the same inthe computation of business profit under section 28(iiib)? vi) Whether on the facts and in the circumstancesof the case, the learned ITAT was justified inplacing reliance upon the decision of Income taxAppellate Tribunal, Special Bench, Mumbai in thecase of M/s Topman Exports v. ITO (2009) – TOIL 531 ITAT dated 1.8.2009 despite the fact that thedecision of the Mumbai ITAT Special Bench in thecase of Topman Export, supra has been reversed bythe decision of the Hon’ble Bombay High Court inthe case of CIT v. Kalpataru Colours and Chemical,2010 –TOIL- 482 HC-Mum?” 3. The assessee is an exporter deriving income frommanufacture and export of handloom goods. Dispute arose duringthe assessment proceedings as to the correct value of theconstruction of the factory and calculation of benefit under Section80HHC of the Act. The Assessing Officer referred the matter to theDistrict Valuation Officer (DVO) in whose opinion, cost ofconstruction was much higher than the cost declared by theassessee in its books of accounts. Accordingly, the AssessingOfficer made additions based on the report of the DVO. On appeal,the CIT(A) sought a revised report in view of objections of theassessee to the first report. This was done in exercise of powerunder Rule 46A of the Income Tax Rules, 1962 (for short, ‘therules’). In the revised report, the DVO reduced the estimated costof construction given earlier taking into account the factor of selfsupervision and self procurement of material by the assessee. TheDVO, however, did not accept the objections of the assessee underthe heads ‘Humidification Plant’ and ‘Trenches’. The CIT(A)accepted the revised report of the DVO against which crossappeals were filed by the revenue as well as the assessee. According to the revenue, the CIT(A) was not justified in seekingrevised report and should have upheld the additions made by theAssessing Officer while according to the assessee, its objections tohigher cost under the heads ‘Humidification Plant’ and ‘Trenches’should have been accepted and cost reduced further and to thatextent, the modified report should not have been accepted. TheTribunal dismissed the appeals filed by the revenue and upheld theexercise of power by CIT(A) under Rule 46A of the Rules anddeleting of additions to the extent suggested in the revised report.The appeals of the assessee were allowed and valuation report tothe extent it rejected the objections of the assessee against takingof higher cost under the heads ‘Humidification Plant’ and‘Trenches’ was disapproved. 4.We have heard learned counsel for the revenue.Re: questions (i) to (iii) 5.Contentions raised on behalf of the revenue are that inview of section 142A (3) of the Act, the Assessing officer wasentitled to call for a report and the CIT(A) was not justified ininvoking Rule 46A of the rules. The objections of the assesseeunder the heads ‘Humidification Plant’ and ‘Trenches’ should nothave been accepted as the DVO had duly considered the saidobjections and rejected the same. 6.A brief reference may be made to the finding recordedby the Tribunal to the extent relevant for the questions proposed:- Issue of admitting additional evidence 4.We have heard learned counsel for the revenue.Re: questions (i) to (iii) 5.Contentions raised on behalf of the revenue are that inview of section 142A (3) of the Act, the Assessing officer wasentitled to call for a report and the CIT(A) was not justified ininvoking Rule 46A of the rules. The objections of the assesseeunder the heads ‘Humidification Plant’ and ‘Trenches’ should nothave been accepted as the DVO had duly considered the saidobjections and rejected the same. 6.A brief reference may be made to the finding recordedby the Tribunal to the extent relevant for the questions proposed:- Issue of admitting additional evidence “23. In the present case, the AO has completed theassessment and determined the difference in thecost of construction on the basis of DVO’s report,which was obtained by the AO by making areference to DVO under section 131(1)(d) of theAct. This action of the AO to make a reference toDVO under section 131(1)(d) to determine thecost of construction of factory building has beenupheld by the learned CIT(A). The learned CIT(A) in his order has observed that initially the AOmade a reference within the meaning of section131(1)(d) but subsequently a reference undersection 142A was made by the AO and the DVOhas furnished the valuation report in response tothe reference made to him by the AO undersection 142A only. The learned CIT(A) furtherobserved that no objection was raised ever by theassessee before the AO with regard to the AO’saction in making a reference to DVO fordetermination of the cost of factory buildingconstructed by the assessee. Therefore, the learnedCIT(A) upheld the action of AO in making areference to DVO under section 142A by holdingthat the reference is proper and justified. In thelight of the facts discussed just above, we areinclined to uphold the order of learned CIT(A) inholding that there is no irregularity in thereference made by the AO to determine the cost offactory building under section 142A of the Act. 24. Having upheld the order of learned CIT(A) insustaining the AO’s action in making reference toDVO under section 142A as proper and justified,we now proceed to decide the issue as to whetherthe DVO’s report is relevant to determine the costof construction of factory building. In the presentcase, the DVO determined the cost of constructionat Rs.10,46,80,683/- spreading over the periodbeginning from assessment years 2000-01 to2006-07. This report was originally submitted bythe DVO to the AO vide letter dated 9.12.2006just before the completion of the assessment madeon 27.12.2006 for the assessment year 2004-05.The AO has completed the assessment on thebasis of DVO’s report and by stating that theassessee has failed to file any objection againstthe value determined by the DVO. However,during the course of the appellate proceedings, theassessee submitted a detailed objection to thevaluation report submitted by the DVO. Theassessee also submitted the report from registeredvaluer before the learned CIT(A). The assessee’sobjection with the copy of valuation reportsubmitted by the assessee were duly forwarded bythe learned CIT(A) to the AO as well as to theDVO for their comments. There were series ofreport submitted by the AO as well s by the DVOwho originally valued the property. Each andevery report o the AO as well as the DVO weregiven to the assessee for his comments, andsimilarly the objections submitted by the assesseewere also furnished to the AO as well as to the DVO. Therefore all the particulars or the reportsor objections collected during the course ofappellate proceedings were duly put to all theparties for their comments and objections andtherefore it cannot be said that there was avaluation of the provisions contained in rule 46A(3) of the Act. Upholding of objections of the assessee againstthe report. DVO. Therefore all the particulars or the reportsor objections collected during the course ofappellate proceedings were duly put to all theparties for their comments and objections andtherefore it cannot be said that there was avaluation of the provisions contained in rule 46A(3) of the Act. Upholding of objections of the assessee againstthe report. 28. Now we shall come to decide about amounttowards cost of factory building declared by theassessee in its books of account so as to find outas to whether there exist in difference between thevalue determined by the DVO and the valuedisclosed by the assessee in its books. At thisstage, it is pertinent to note that the AO hashimself referred the matter to DVO to make thevalue of the property. During the appellateproceedings, the learned CIT(A) also obtainedvarious clarifications and explanations with regardto the cost of construction determined by the DVOas well as the cost declared by the assessee in itsbooks of account. After series of round of remandreport or clarification submitted by the AO, DVOas well as the present DVO and the assessee, theDVO modified his valuation report vide letterdated 22.12.2008 which was confirmed by theearlier DVO, Chandigarh vide his letter dated9.1.2009. The DVO also clarified the positionabout the expenditure incurred under the twoheads i.e. ‘Humidification Plant’ and ‘Trenches’ vide letter dated 11.2.2009. The DVO has finallysubmitted the report vide letter dated 22.2.2008confirmed by another DVO vide letter dated9.1.2009 and further clarified the position videletter dated 11.2.2009. After considering all thematerials and the evidences produced by theassessee as well as after making physicalinspection of the building. The learned CIT(A)has ignored the DVO’s report to certain extent inso far as its concerned about the expenditureincurred by the assessee on ‘Humidification Plantand ‘Trenches’ and recorded the same in thebooks of account under the different head. TheDVO is of the opinion that the valuationdetermined by him at Rs.9,70,23,300/- includes allsuch expenses incurred by the assessee on‘Humidification Plant’ and ‘Trenches’, which wasseparately books under the different head.Therefore, the DVO was of the opinion that theexpenses incurred towards’ Humidification Plant’and ‘Trenches’ by the assessee is to be includedinto the total cost of construction declared by theassessee. In the manner, the DVO found that theassessee had declared the cost of construction ofthe factory building in respect of which avaluation report has been submitted by thevaluation officer at Rs.9,69,51,534/-. Whiledetermining the cost of construction shown by theassessee in the books of account, the DVO hasalso taken into account the expenditure alreadydeclared by the assessee in the books of accountupto 2.11.2006 i.e., the date of physical inspection made by the DVO. The DVO, Mr. AK Sharma hasconsidered the expenditure amounting toRs.80,45,110/- incurred by the assessee from1.4.2006 to November 2006 while determining thetotal investment declared by the assessee vis a visassessed value as per Annexure IV of hiscomment dated 22.12.2008; which was confirmedby Shri SN Vemra, DVO, Chandigarh vide hisletter dated 9.1.20-09. The learned CIT(A) hasalso accepted this position that sum ofRs.80,45,110/- has been incurred by the assesseefrom 1.4.2006 to November 2006 and hasaccordingly given the benefit thereof to theassessee. The DVO while determining the cost ofconstruction declared by the assessee in the booksof account has also taken into account theexpenditure incurred on trenches andhumidification plant to the extent ofRs.2,06,78,902/- in financial years 2004-05 andRs.4,53,171/- in financial year 2005-06 out ofwhich sum of Rs.91,30,355/- were booked underthe head ‘Humidification Plant’ andRs.1,20,01,718/- under the head ‘Trenches’.However, the expenditure incurred onhumidification and trenches has been accepted bythe learned CIT(A) only to the extent ofRs.52,66,691/- by saying that only the amount ofRs.52,66,691/- comprising of two items i.e.Rs.34,45,090/- and Rs.18,21,601/- can only beincluded in the cost of construction. However, thelearned CIT(A) has not brought any material onrecord to say and establish that the revised cost determined by the DVO was defective and thus, itshould not be accepted. It is the case where thefactory building was physical inspected by theDVO, who has estimated the cost of constructionof all the items to the factory building. Merebecause, certain expenditure incurred by theassessee towards, construction of the factorybuilding, in respect of which the value has beendetermined by the DVO, has been shown underdifferent heads in the books of account that byitself cannot be a ground to ignore theexpenditures incurred by the assessee towardsconstruction of factory building when the DVOwas of the opinion that the expenditure incurredtowards humidification plant and trenches are alsoincluded in the cost of construction estimated byhim. The learned CIT(A)’s action in not acceptingthe DVO’s revised estimate furnished vide letterdated 22.12.2008 and confirmed by another DVOvide letter dated 9.1.2008 is not based on anyadequate material and evidences, when the matterwas examined and considered by the expert whomthe reference was made by the department itself, itis not for the department to ignore the commentsand finding given by the DVO with regard to thecost of construction estimated by him vis a vis thecost of construction shown by the assessee in thebooks. In this view of the matter, we thereforehold that as against Rs.52,66,.691/- adopted bythe learned CIT(A) on account of investment ontrenches and humidification the amount ofRs.2,06,78,902/- and Rs.l4,53,171/- should be taken into account as so accepted by both theDVO’s in their respective report dated 22.12.2008and 9.1.2009 respectively. In this view of thematter, the total investment declared by theassessee is to be taken at Rs.9,69,51,534/- asaccepted and determined by the DVO in their finalreport. 29. In the light of the discussion made above, we,therefore, hold as under:- i) Cost of construction declared by the assessee inthe books is to be taken at Rs.9,69,51,534/-; ii) Cost of construction as estimated by the DVOis to be taken at Rs.9,70,23,300/-. The difference between the cost declared by theassessee and the cost estimated by the DVO isvery nominal being Rs.71,766/- (Rs.9,70,23,300/-- Rs.9,69,51,534/-) only. 30. This difference can be due to the difference of taken into account as so accepted by both theDVO’s in their respective report dated 22.12.2008and 9.1.2009 respectively. In this view of thematter, the total investment declared by theassessee is to be taken at Rs.9,69,51,534/- asaccepted and determined by the DVO in their finalreport. 29. In the light of the discussion made above, we,therefore, hold as under:- i) Cost of construction declared by the assessee inthe books is to be taken at Rs.9,69,51,534/-; ii) Cost of construction as estimated by the DVOis to be taken at Rs.9,70,23,300/-. The difference between the cost declared by theassessee and the cost estimated by the DVO isvery nominal being Rs.71,766/- (Rs.9,70,23,300/-- Rs.9,69,51,534/-) only. 30. This difference can be due to the difference of the opinion and even this difference can beignored in the light of the fact that the deductionon account of self supervision allowed by theDVO and by the learned CIT(A) at 7.5% is foundto be on lower side as in most of the cases cited bythe assessee the deduction in that respect has beenallowed at 10%. In this view of the matter thedifference of Rs.71,766/- as worked out above isnot liable to be treated as undisclosed investmentof the assessee. For the reasons given above, we,therefore, hold that no addition of account forinvestment in construction of factory building iscalled for and whatever addition sustained by thelearned CIT(A) in various assessment years are deleted. Therefore, the grounds raised by theassessed with regard to the addition on account ofundisclosed investment in factory building areallowed and that of the revenue are dismissed.” 7. In our view, Questions (i) to (iii) cannot be held to besubstantial questions of law. The Tribunal rightly upheld thefinding of the CIT(A) for admitting additional evidence under Rule46A and giving the assessee the benefit as per the revised report.The Tribunal correctly appreciated the material on record forupholding the objections of the assessee under the heads‘Humidification Plant’ and ‘Trenches’ and deleting the additions tothat extent. The finding so recorded is a finding of fact and is notshown, in any manner, to be perverse. Re: Questions (iv) to (vi) 8.As regards proposed Questions (iv), (v) and (vi), it wassubmitted that the matter is covered by earlier order of this Courtdated 16.8.2010 in ITA No.299 of 2010, CIT v. M/s F.C.Sondhiand Company (P) Limited, remanding these issues for freshdecision to the Tribunal. In view of earlier order of this Court, thematter is remanded to the Tribunal for fresh decision on the issueinvolved in the said questions. If the assessee is aggrieved by thisorder, it will be at liberty to move this Court. 9.The appeals are disposed of accordingly. January 31, 2011‘gs’ (Adarsh Kumar Goel) Judge (Ajay Kumar Mittal) Judge