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If valuation of fixed assets is not doubtful, then it is mandatory for AO to complete its investigation by referring the issue to DVO: HC

2019-TIOL-1491-HC-RAJ-IT

IN THE HIGH COURT OF RAJASTHAN

AT JAIPUR

DB Income Tax Appeal No.46/2019

PRINCIPAL COMMISSIONER OF INCOME TAX, KOTA

Vs

M/s OM RUDRA PRIYA HOLIDAY RESORT PVT LTD

Mohammad Rafiq & Narendra Singh Dhaddha, JJ

Dated: July 01, 2019

Appellant Rep by: Ms Parinitoo Jain
Respondent Rep by: 
None

Income Tax – Section 263

Keywords – Cost of construction – Valuation of fixed assets – Valuation report

THE assessee is engaged in the business of hotel following mercantile system of accounting. The return for the relevant AY was assessed u/s 143(3) whereby the total income was assessed at nil. Subsequently, the original assessment was reopened on the grounds that there were inconsistencies in valuation of assessee’s investment in fixed assets as declared by the assessee and the valuation certificate of the bank’s surveyor-cum-valuer. The valuation was regarding the cost of construction of hotel building which was funded on loan acquired from the bank. Such loan was granted by the bank after considering the project report of the assesee with respect to an estimated costs of construction. Hence, during the scrutiny assessment, it was believed that the AO did not take proper cognizance of valuation of fixed assets on materials available and failed to give specific reason as to why the valuation done by the surveyor-cum-valuer was not acceptable. The CIT referred the matter of valuation to DVO u/s 142A. An order was issued u/s 263. However, this order was set aside by the Tribunal.

On hearing the appeal, the High Court held that,

Whether whenever there is a doubt regarding valuation of fixed assets, it is mandatory for the AO to complete its investigation by referring the issue to the Department Valuation Officer even if the Officer is satisfied with the cost of assets as recorded in the books of account – NO: HC

++ the project report produced by the assessee before the bank at the time of taking the loan was only a projected estimated of the cost and not the actual cost of construction incurred by the assessee. The Tribunal took the view that if the order passed by the AO is without any investigation or enquiry on an issue, then it would be erroneous so far as it is prejudicial to the interest of the Revenue on the ground of lack of enquiry. However, it was not a case of complete lack of enquiry rather the AO has conducted a detailed enquiry on this issue and called for all the relevant records from the bank for the purpose of examining the cost of construction of the hotel building. It could be a case of inadequate enquiry so far as not referring the matter to the DVO, however, it was not mandatory for the AO to refer the valuation to the DVO once the AO was satisfied with the cost of construction and cost of fixed assets as recorded in the books of account. The Principal Commissioner has set aside the assessment order only for the purpose of referring it to the DVO. It is thus evident that the Principal Commissioner was not sure about the correctness of the cost of construction or cost of fixed assets either shown in the project report or recorded in the books of account;

Whether the Pr. Commissioner is justified to mechanically invoke its revisionary powers whenever it does not agree with one of the possible views taken by the AO during the assessment proceeding – NO: HC

++ in the facts of the case, when the AO has taken a broad view by accepting the cost of fixed assets as recorded in the books of account which were also supported by the valuation report, then the order of the AO cannot be held to be erroneous on the ground of lack of enquiry. It is settled position of law that when the AO has taken one of the possible views then the Principal Commissioner cannot be permitted to invoke the provisions of Section 263 simply because he does not agree with the view taken by the AO. Every loss of the revenue as a consequence of the order of the AO cannot be treated prejudicial to the interest of the revenue. Where two views are possible and the AO has taken one view with which the Principal Commissioner did not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the AO was not at all possible in law.

Revenue’s appeal dismissed

Case followed:

Malabar Industrial Co. Ltd. Vs. Commissioner of Income Tax, Kerala State – 2002-TIOL-491-SC-IT

JUDGEMENT

1. This appeal under Section 260A of the Income Tax Act, 1961 has been preferred by appellant Principal Commissioner of Income Tax, Kota, assailing the order dated 20.12.2018 of the Income Tax Appellate Tribunal, Jaipur Bench, Jaipur, in ITA No.416/JP/2018 for the assessment year 2013-14, whereby the Tribunal allowed the appeal of assessee M/s Om Rudra Priya Holiday Resort Pvt. Ltd. and set aside the order dated 31.01.2018 of the Principal Commissioner of Income Tax, Kota, passed under Section 263 of the Income Tax Act, 1961.

2. Facts of the case are that respondent M/s Om Rudra Priya Holiday Resort Pvt. Ltd. (hereinafter shall be referred to as ‘the assessee’) is a company engaged in the business of hotel and it follows the mercantile system of accounting. The assessment order under Section 143(3) of the Income Tax Act, 1961 (for short, ‘the IT Act’) was passed on 14.03.2016, whereby total income was assessed at Nil. The assessing officer examined the books of accounts randomly. Subsequent to passing of order dated 14.03.2016, it was found by the CIT that the order was erroneous and prejudicial to the interest of the revenue, therefore, a notice dated 22.09.2017 was issued to the assessee under Section 263 of the IT Act, which was duly served on the assessee. The issue was in respect of investment in fixed assets under the head “Income from Business or Profession”, which was declared and accepted at Rs.2,20,03,275/-, whereas the same was valued at Rs.3.52 crore by the bank’s surveyor-cum-valuer vide his valuation certificate dated 02.10.2012. Further, it was noticed that the assessee had shown total investment in fixed assets at Rs.2,69,26,206/- including land worth Rs.49,22,931/- as per Note 9 to the Balance Sheet as on 31.03.2013 against the amount of investment excluding land certified by the valuer vide work completion certificate dated 02.10.2012 of Rs.3.52 crores. The same value including land cost was to be taken as full value of investment in fixed assets at Rs.4,01,22,931/- which was neither taken by the assessee nor by the assessing officer. The said certificate was available on record while completing the assessment proceedings. However, the assessing officer had not taken proper cognizance on it and the assessing officer failed to deal with entire material on record including the valuation certificate of the surveyor-cum-valuer appointed by the bank. He did not give specific reasons why the valuation done by the surveyor-cum-valuer was not acceptable. There was a huge difference in the valuation done by the two valuers. Thus, the CIT was of the view that in such a situation the correct course of action would have been to refer the matter to the Departmental Valuation Officer (for short, ‘the DVO’) under Section 142A of the IT Act.

3. Ms. Parinitoo Jain, learned counsel for the revenue, has submitted that the Tribunal was not justified in setting aside the order passed under Section 263 of the IT Act because the project report, which was filed at the time of getting the loan, was prepared on 28.05.2011, wherein the cost was estimated at Rs.2.26 crores. Thereafter, the work completion certificate was prepared on 02.10.2012 after utilization of loan and the costs of construction was certified at Rs.3.53 crores. The Tribunal has wrongly considered the work completion certificate as project report filed with bank at the time of getting loan. The assessing officer made reference under Section 142(1) of the IT Act to the DVO estimated the cost of investment in construction of building at Rs.5.81 crores which is much higher than amount estimated in the work completion certificate dated 02.10.2012 issued by the bank valuer. The report was prepared by the revenue on the basis of specified and scientific rates of the CPWD, according to which the cost of construction was much higher than cost of Rs.1.81 crores recorded by the assessee in the books of accounts. The Tribunal was therefore not justified in holding that the assessing officer has made all equiries in respect to investment of Rs.1,81,49,072/- for construction of hotel building which was recorded by the assessee in its books of accounts, whereas the assessing officer has never made any inquiry regarding actual investment in construction of hotel building. The fact is that the assessing officer never referred the matter to the DVO for valuation of construction work and never made any inquiry in respect of amount mentioned in the work completion certificate.

4. It is argued that the Tribunal failed to appreciate that the loan was sanctioned by the bank on 26.07.2011 and at the time of getting loan, a project report dated 28.05.2011 was prepared by the bank valuer and cost of construction was estimated at Rs.2.26 crores. The Tribunal has failed to appreciate that the assessee has produced on record showing different valuation of cost of construction of the hotel building, then the claim of the assessee could not be accepted without proper inquiry. The Tribunal has not considered the judgment of the Calcutta High Court in Binod Kumar Agarwala Vs. CIT -257 Taxman 58 (Cal.) = 2018-TIOL-1174-HC-KOL-IT, judgment of Madras High Court in M/s. Coimbatore Spinning & Weaving Co. Ltd. Vs. CIT – 95 ITR 375 (Mad.)and that of Gauhati High Court in Dhansiram Agarwalla Vs. CIT – 201 ITR 192 (Gau.), in true perspective. It is therefore prayed that the appeal be allowed.

5. Having heard learned counsel for the revenue and perused the impugned judgment as also the material on record, we find that the Tribunal has analytically examined all the arguments which were advanced on behalf of the revenue. The Tribunal has noted that the assessing officer during the course of assessment proceedings had issued a query letter dated 03.03.2015 wherein various queries were raised including the details of additions of Rs.2,20,03,275/- as per the schedule of fixed assets of the audit report and copies of supporting books and vouchers for acquisition of the fixed assets were also called from the assessee. The assessing officer also asked the assessee to furnish the valuation report of the cost of construction as shown in the books of accounts. In response thereto, the assessee produced the valuation report dated 14.05.2013. The assessing officer also called for relevant documents submitted with the Baroda Rajasthan Gramin Bank including application form and other record in the shape of project report for availing the term loan for construction of the hotel building. All these records were supplied by the bank to the assessing officer along with the sanction letter dated 26.07.2011, whereby a loan of Rs.2.00 crores was sanctioned by the bank for construction of the hotel building. The Tribunal therefore concluded that at the time of applying for term loan, the assessee furnished the estimated and projected cost of construction of the hotel building for a total cost of Rs.3.52 crores, whereas the assessee had shown the fixed assets in the balance sheet as on 31.03.2013 at Rs.2,69,26,206/-. The project report submitted with the bank was an estimated cost of the hotel building to be incurred in future and was not based on the valuation of any existing assets of the assessee. It was therefore that the Tribunal held that the project report cannot constitute actual cost of construction once the assessee has recorded the actual cost of construction in the books of accounts, which was duly verified by the assessing officer along with the report of the registered valuer. After considering the explanation of the assessee as well as the relevant valuation report, the assessing officer was satisfied with the cost of fixed assets as shown in the balance sheet. There was no dispute that the project report produced by the assessee before the bank at the time of taking the loan for the purpose of construction of hotel building was only a projected estimated of the cost and not the actual cost of construction incurred by the assessee. It was stated that the assets must be as per the actual cost of construction and not on the projected cost of acquisition. In these facts, the Tribunal took the view that if the order passed by the assessing officer is without any investigation or enquiry on an issue, then it would be erroneous so far as it is prejudicial to the interest of the revenue on the ground of lack of enquiry. However, it was not a case of complete lack of enquiry on the part of the assessing officer rather the assessing officer has conducted a detailed enquiry on this issue and called for all the relevant records from the bank for the purpose of examining the cost of construction of the hotel building. It could be a case of inadequate enquiry so far as not referring the matter to the DVO, however, it was not mandatory for the assessing officer to refer the valuation to the DVO once the assessing officer was satisfied with the cost of construction and cost of fixed assets as recorded in the books of account. The Tribunal further held that even if the Principal Commissioner found that the decision of the assessing officer accepting the cost of construction/cost of fixed assets is contrary to the facts or otherwise not permissible as per the provisions of the IT Act, then the order of the assessing officer could have been reversed by giving a concluding finding on the issue. The Principal Commissioner has set aside the impugned order only for the purpose of referring the same to the DVO. It is thus evident that the Principal Commissioner was not sure about the correctness of the cost of construction or cost of fixed assets either shown in the project report or recorded in the books of account. In the facts of the case, when the assessing officer has taken a broad view by accepting the cost of fixed assets as recorded in the books of account which were also supported by the valuation report, then the order of the assessing officer cannot be held to be erroneous on the ground of lack of enquiry. It is settled position of law that when the assessing officer has taken one of the possible views then the Principal Commissioner cannot be permitted to invoke the provisions of Section 263 simply because he does not agree with the view taken by the assessing officer.

6. On examination of the reasoning given by the Tribunal, we do not find that there was any justification for the Principal Commissioner to invoke the provisions of Section 263 of the IT Act on the specific plea that the order of the assessing officer was prejudicial to the interest of the revenue.

7. The Supreme Court in Malabar Industrial Co. Ltd. Vs. Commissioner of Income Tax, Kerala State – (2000) 2 SCC 718 = 2002-TIOL-491-SC-IT, in para 9 of the report, did not approve the interpretation placed by the Madras High Court in Venkatakrishna Rice Co. Vs. CIT – (1987) 163 ITR 129 (Mad) on the phrase “prejudicial to the interests of the Revenue” and held that the scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Income Tax Officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. The phrase “prejudicial to the interests of the Revenue” is not an expression of art and is not defined in the Act. When this phrase is understood in its ordinary meaning, it is of wide import and is not confined to loss of tax. Relevant discussion is found in Paras 8, 9 and 10 of the Report, which are reproduced as follows:

“8. The phrase “prejudicial to the interests of the Revenue” is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The High Court of Calcutta in Dawjee Dadabhoy & Co. v. S.P. Jain (1957) 31 ITR 872 (Cal), the High Court of Karnataka in CIT v. T. Narayana Pai (1975) 98 ITR 422 (Kant) = 2003-TIOL-1376-HC-KAR-IT, the High Court of Bombay in CIT v. Gabriel India Ltd. (1993) 203 ITR 108 (Bom) = 2003-TIOL-446-HC-MUM-IT, and the High Court of Gujarat in CIT v. Minalben S. Parikh (1995) 215 ITR 81 (Guj) treated loss of tax as prejudicial to the interests of the Revenue.

9. Mr Abraham relied on the judgment of the Division Bench of the High Court of Madras in Venkatakrishna Rice Co. v. CIT (1987) 163 ITR 129 (Mad) interpreting “prejudicial to the interests of the Revenue”. The High Court held:

“In this context, (it must) be regarded as involving a conception of acts or orders which are subversive of the administration of revenue. There must be some grievous error in the order passed by the Income Tax Officer, which might set a bad trend or pattern for similar assessments, which on a broad reckoning, the Commissioner might think to be prejudicial to the interests of Revenue Administration”.

In our view this interpretation is too narrow to merit acceptance. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Income Tax Officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue.

10. The phrase “prejudicial to the interests of the Revenue” has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue, for example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income Tax Officer is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the Revenue. (See Rampyari Devi Saraogi v. CIT (1968) 67 ITR 84 (SC) = 2002-TIOL-544-SC-IT-LB and in Tara Devi Aggarwal v. CIT (1973) 3 SCC 482) = 2002-TIOL-543-SC-IT-LB“.

8. In view of the above discussion, it must be held that every loss of the revenue as a consequence of the order of the assessing officer cannot be treated prejudicial to the interest of the revenue. Where two views are possible and the assessing officer has taken one view with which the Principal Commissioner did not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the assessing officer was not at all possible in law.

9. In the result, we do not find any merit in this appeal. It is accordingly dismissed.

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