Saraswati Devi Gehlot v Income Tax Officer

Income Tax Appellate Tribunal

JODHPUR BENCH

31 August 2007

The Order of the Court was as follows :

1. This appeal by the assessee arises out of the order passed by the learned CIT(A) on 18th Oct., 2006 in relation to asst. Yr. 2002-03

2. First ground is against the confirmation of addition of Rs. 2, 50, 823, which was made by the AO on account of assumed cost of acquisition.

3. Briefly stated the facts of the case are that the assessee had shown sale proceeds of shops at Rs. 25, 84, 000 with cost of construction at Rs. 26, 45, 100 thereby declaring loss of Rs. 61, 000 under the head “Capital gain”. Since the books of account were not properly maintained, inasmuch as there was difference in the total cost of construction shown by the assessee in the balance sheet, and the amount shown during the course of survey, the AO referred the matter to the DVO. The report of the DVO was received on 16th Feb., 2005 showing the value of the property at Rs. 47, 86, 849 whereas the value of this property was shown by the assessee at Rs. 54, 26, 804. On being called upon to explain the difference, the assessee stated that she had maintained complete books of account and the cost of construction shown by her was as per regular accounts. The AO did not concur with the submission advanced on behalf of the assessee on the ground that the shops shown to have been sold were having much higher value for the purpose of registration. It was further opined that since the provisions of Section 50C were brought into existence w.e.f. asst. yr. 2003-04, hence those could not be invoked in the assessment year in question. It was observed that the value given by the Departmental valuer was on standard rate and the same was correct. Accordingly, the AO adopted proportionate cost of construction at Rs. 23, 33, 177 in the light of the report of the Departmental valuer and worked out short-term capital gain at Rs. 2, 50, 823 as against loss of Rs. 61, 000 shown by the assessee. This addition was challenged in the first appeal but without any success.

4. Before us, the learned Counsel for the assessee contended that the AO was not justified in making reference to the DVO on the premise that there should be a lower cost of acquisition of the shops sold by the assessee as against the higher figure declared. He referred to the decision of the Hon’ble Supreme Court in the case of Smt. Amiya Bala Paul v. CIT 2003 Indlaw SC 491 to contend that such reference was invalid. He further referred to the provisions of Section 142A and Circular No. 5 of 2005, dt. 15th July, 2005 (2005) 197 CTR (St) 1 to show that the reference made by the AO was invalid. He further invited our attention towards the fact that the assessee had maintained complete records qua the cost of construction in which no defect was found by the AO. While referring to pp. 9 to 11 of the paper book, he submitted that the cost of acquisition in respect of shops sold during the year was determined on a rational basis by distribution of total cost of construction with the cost of land in proportion to the shops sold vis-a-vis the shops remaining unsold as at the year end. He contended that this detailed calculation was made available to both the Revenue authorities below who had not pointed out any discrepancy therein. In this background of facts, it was urged by the learned Authorised Representative that the addition has been sustained mechanically without application of mind and be deleted. Per contra, the learned Departmental Representative strongly relied on the impugned order. His further submissions were the reiteration of the reasoning recorded by the first appellate authority in support of his conclusion.

5. We have heard the rival submissions and perused the relevant material on record. The primary question, which falls for our consideration is to decide as to whether or not the reference to the Valuation Cell was valid. Copy of the report of the DVO is available at p. 18 onwards of the paper book from where it is clear that reference was made by the AO under Section 142A of the Act. Here we would like to clarify that there is no dispute regarding the nature of asset sold by the assessee, which is a capital asset and not stock-in-trade. It is a case in which the assessee had shown a higher cost of acquisition, which is held by the Revenue to be excessive and the capital loss has been converted into short-term capital gain. We would like to clarify that the provisions of Section 50C is not applicable in the year in question as per which if the consideration received or accruing as a result of transfer by an assessee of a capital asset being land or building or both, is less than the value adopted or assessed by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed shall, for the purposes of Section 48, is deemed to be the full value of the consideration received or accruing as a result of such transfer. Thus, the reference made by the AO as well as the learned CIT(A) to the higher value of the shops sold by the assessee for the purpose of stamp duty is out of the context and the AO had rightly pointed out that this provision cannot be taken assistance of in the year in question.

6. Coming back to Section 142A in which reference was made to the DVO for determining the cost of construction, we find that this section has been inserted by the Finance (No.2) Act, 2004, w.r.e.f. 15th Nov., 1972. Circular dt. 15th July, 2005 copy placed in the paper book, provides that the scope of power vested in an AO under Section 131 to make a reference to the Valuation Officer of estimating the cost of construction or properties has been subject-matter of litigation. It is further incorporated in the circular that this new section has been inserted to specifically provide that the AO has power to make reference to DVO etc. In the later part of this circular the provisions of Sub-Sections (1) to (3) of Section 142A have been explained. At this juncture, it would be relevant to consider the judgment of the Hon’ble Supreme Court in the case of Amiya Bala Paul (supra), which divested the AO of making a reference to the Valuation Officer for estimating the cost of construction. In this case, it was held as under:

The AO in this case had made a reference under Section 55A of the Act. This action cannot be supported by reference to Section 131(1) of the. Act read with Order XXVI, Rule 9, of the Code since the consequences of reference to a Valuation Officer, under Section 55A of the Act and of a commission issued under Section 75 read with Order XXVI, Rule 9, of the Code are different, It is not, therefore, a case of correction of an error in mentioning the section by the AO, an error which could be ignored by referring the action to the appropriate source of power.

Besides, Section 55A having expressly set out the circumstances under and the purposes for which a reference could be made to a Valuation Officer, there is no question of the AO invoking the general powers of enquiry to make a reference in different circumstances and for other purposes. It is noteworthy that Section 55A was introduced in the Act by theTaxation Laws (Amendment) Act, 1972, when Sections 131(1), 133(6) and 142(2) were already in the statute book. Learned Counsel for the appellant has correctly submitted that if the power to refer any dispute to a Valuation Officer were already available in Sections 131(1), 133(6) and 142(2), there was no need to specifically empower the AO to do so in certain circumstances under Section 55A.

The Valuation Officer referred to has, according to the Explanation to the section, the same meaning as in Clause (r) of Section 2 of the Wealth-tax Act, 1957. Under Sub-section (2) of Section 269L, the Valuation Officer to whom a reference is made under Clause (a) or Clause (b) of Sub-section (1) is given all the powers he has under Section 38 of the Wealth-tax Act, 1957. And if, in an appeal under Section 269G against the order for acquisition of any immovable property, the fair market value of such property is in dispute, the Tribunal shall, on a request being made in this behalf by the competent authority, give an opportunity of being heard to any Valuation Officer nominated for the purpose by the competent authority.

From this it is clear that whenever reference to a Valuation Officer appointed under the Wealth-tax Act, 1957 is permissible under the Income-tax Act, 1961, it has been statutorily so provided.

Apart from the aforesaid, the Valuation Officer is appointed under the Wealth-tax Act, 1957 and can discharge functions within the statutory limits under which he is appointed. It is not open to a Valuation Officer to act in his capacity as Valuation Officer otherwise than in discharge of his statutory functions. He cannot be called upon nor would he have the jurisdiction to give a report to the AO under the Income-tax Act, 1961 except when a reference is made under and in terms of Section 55A or to a competent authority under Section 269L.

We are, therefore, of the view that the High Court incorrectly answered the question referred to it in the affirmative. The Tribunal had not erred in holding that the AO cannot refer the matter to the Valuation Officer for estimating the cost of construction of the house property. The appeal is accordingly allowed and the decision of the High Court set aside.”

With a view to empower the AO for making a reference to the DVO for estimating the cost of construction and coming out of the rigors of the aforenoted decision of the Hon’ble Supreme Court, a new Section 142A was inserted by theFinance (No.2) Act, 2004, w.r.e.f. 15th Nov., 1972. If the decision of the Hon’ble Supreme Court is analysed threadbare, the position which emerges is that the AO cannot make reference to the Valuation Officer under Sections 131(1) and 133(6) as these powers are distinct from the power of referring the matter to the Valuation Officer. Similarly, the power to make reference under Section 142(2) was also held to be not entitling the AO to make reference to the DVO to estimate the value of the property. Section 55A was held to be standing on a different footing. Thus it, becomes manifest that the AO has been debarred, by virtue of this decision, from making reference to the Valuation Officer for estimating the cost of construction, etc. under Sections 131(1), 133(6) and 142(2). The fallout of this judgment was that the AO became powerless to make such reference to the DVO for valuing any property. It was at that stage that Section 142A was brought on the statute book with retrospective effect. When the judgment of the Hon’ble Supreme Court in the case of Amiya Bala Paul (supra) is read in juxtaposition to Section 142A, it is clearly borne out that save as otherwise provided in Section 142A the decision of the Hon’ble apex Court in Amiya Bala Paul (supra) still holds the field. Now, AO has to make reference to the DVO only under Section 142A. However, the fact remains that Section 55A with which we will deal a little later, also empowers the AO to make reference to the Valuation Officer with a view to ascertain the fair market value of a capital asset.

7. Before we embark upon to ascertain the extent of power with the AO for making reference to the Valuation Officer, it would be relevant to consider the provisions of Section 142A, which are as under:

142A. Estimate by Valuation Officer in certain cases.–(1) For the purposes of making an assessment or reassessment under this Act, where an estimate of the value of any investment referred to in Section 69 or Section 69B or the value of any bullion, jewellery or other valuable article referred to in Section 69A or Section 69B is required to be made, the AO may require the Valuation Officer to make an estimate of such value and report the same to him.

(2) The Valuation Officer to whom a reference is made under Sub-section (1) shall, for the purposes of dealing with such reference, have all the powers that he has under Section 38A of the Wealth-tax Act, 1957 (27 of 1957).

(3) On receipt of the report from the Valuation Officer, the AO may, after giving the assessee an opportunity of being heard, take into account such report in making such assessment or reassessment:

A bare perusal of the section reveals the circumstances and sections under which such reference can be made by the AO. It is discernible that the first section referred to in Sub-section (1) is Section 69. The latter section, in turn, provides that where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the AO, satisfactory, the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee for such financial year. Thus, it is clear that Section 69 is attracted where the assessee had made investment but has not recorded it in the books of account. In other words, it applies where the investment is made outside the books of account and not in the converse position when a higher investment is shown as is the case in hand and the AO is of the opinion that the actual investment should be on a lower side. Coming to Sections 69A and 69B which are the only other sections referred to in Sub-section (1) of Section 142A it can be seen that these sections are attracted wherein any financial year the assessee is found to be owner of any money, bullion or jewellery or any other article and such money, bullion or jewellery is not recorded in the books of account, if any maintained by him for any source of income and the assessee offers no explanation about the nature and source and acquisition of money, bullion or jewellery or any other valuable article or explanation offered is unsatisfactory in the opinion of the AO, or where the assessee had made investment or is found to be owner of money, bullion or jewellery or any other valuable article and the amount so recorded in the books of account is less than the money, bullion or jewellery or any other valuable article, such excess amount may be deemed to be income of the assessee for such financial year. These two sections also clearly stipulate the situations in which the assessee has made an investment, or is the owner of money, bullion or jewellery but has not recorded fully or partly in the books of account or the source is not explainable, such amount or excess amount may be deemed to be the income of the assessee. Here again, the reference is made where the actual investment in the specified assets is more and a lower or no amount has been recorded in the books of account if any, maintained by the assessee. In other words, all these three sections viz., Sections 69, 69A and 69B refer to the cases in which the assessee has made more investment or is the owner of bullion, jewellery or any other valuable article, etc. at a higher figure than that recorded in his books of account. These sections nowhere contemplate a situation in which the assessee has shown a higher value of assets and in the opinion of the AO such value should be at a lower figure. Adverting to the facts of our case, we find that the AO had made reference to the DVO specifically under Section 142A in a case where the assessee had shown investment in shops sold at Rs. 26, 45, 100 whereas the AO opined that this figure ought to have been and on a reference made to the DVO, he estimated the cost of investment at Rs. 23, 33, 177. Under these circumstances, it is manifest that the reference made by AO to the DVO under Section 142A is void ab initio and the resultant report supplied by the Valuation Officer is of no consequence insofar as the assessment is concerned.

8. Now we will deal with Section 55A under which the AO is empowered to make a reference to the Valuation Officer. This section stipulates that with a view to ascertain the fair market value of a capital asset for the purpose of this chapter, the AO may refer the valuation of capital of asset to a Valuation Officer (a) in a case where the value of the asset as claimed by the assessee is in accordance with the estimate made by a registered valuer, if the AO is of opinion that the value so claimed is less than its fair market value. This clause is not applicable to our case for the reason that the AO had not proceeded on the basis of report of the registered valuer. Clause (B) of this section is further sub-divided into two parts. Sub-clause (i) is applicable in any other case, if the AO is of opinion that the fair market value of the asset exceeds the value of the asset as claimed by the assessee by more than such percentage of the value of the asset as so claimed or by more than such amount as may be prescribed in this behalf. Sub-clause (ii) of Clause (b) refers to a situation where the AO is of the opinion that having regard to the nature of the asset and other relevant circumstances, it is necessary so to do Where a reference is made under any. of the clauses of Section 55A, the Valuation Officer determines the fair market value of a capital asset. Section 48 is machinery section which provides mode of computation of capital gain by deducting from the full value of consideration received or accruing as a result of transfer of the capital asset, the cost of acquisition of the asset and the cost of any improvement thereon and also expenditure incurred wholly and exclusively in connection with such transfer. In our case, the dispute is centered around determining the cost of acquisition of the shops sold. Cost of acquisition of the asset refers to the amount spent by the assessee on acquiring a capital asset. Section 49 states certain situations in which the capital asset becomes the property of the assessee. In these cases, the cost of acquisition is deemed to be cost for which previous owner of the property acquired it as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be. Certain other situations are enshrined in Section 49 in which mechanism of the determination of cost of acquisition is also provided. It is not the case of the learned Departmental Representative that the provisions of Section 49 are attracted to the present case. We further find that “cost of acquisition” has been defined under Section 55(2). Clauses (a), (aa) and (ab) deal with the specified assets and the machinery for determination of cost of acquisition in these cases is provided therein. None of these clauses is attracted in our case. Then Clause (b) of Section 55(2) refers to “other capital assets”. As per Sub-clause (1), where the capital asset became property of the assessee before 1st April, 1981 in that case the last of acquisition of asset to the assessee or the FMV of the asset as on 1st April, 1981 at the option of the assessee is taken as cost of acquisition. It is not the case of the assessee or the Revenue before us that the assessee had constructed shops prior to 1st April, 1981. It thus becomes apparent that the specific provisions provided for in the sections in Chapter IV-E for determining the cost of acquisition are not applicable insofar as the facts of our case are concerned. In this scenario, the cost of acquisition as per its meaning in common parlance is the amount spent by the assessee on acquisition of asset, is applicable.

9. Reference as contemplated under Section 55A is for ascertaining the ‘FMV of a capital asset’ and not for determining the cost of acquisition. The concept of FMV comes into picture in various sections under this chapter. For example, Section 45(1A) provides that the fair market value of other assets on the date of such receipt shall be deemed to be the full value of consideration received or accruing as a result of transfer of such capital asset. Similarly, Section 45(2) also provides that the fair market value of the asset on the date of such conversion on treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. Section 45(4) also contemplates a situation in which capital assets are distributed on the dissolution of a firm or otherwise, and for the purposes of charging tax under this head in the hands of the firm, the fair market value of the asset on the date of such transfer is deemed to be the full value of the consideration received or accruing as a result of the transfer. From this discussion it follows that Section 55A, which empowers the AO for making, reference to the Valuation Officer for determination of fair market value of a capital asset cannot be applied and the AO had rightly not taken shelter of this section for making a reference to the DVO.

10. This brings us to a place in which the AO made reference to the DVO under Section 142A for estimating the value of investment, which action is void ab initio. The basis of cost of construction shown by the assessee for the shops sold at Rs. 26, 45, 100 has not been disputed by the AO though it was specifically made available to him. No adverse comment has been made by the AO in this regard. In such a situation, the cost of acquisition declared by the assessee does not warrant any interference. We order accordingly. The order of the learned CIT(A) on this issue is set aside and the resultant addition sustained in the first appeal is hereby ordered to be deleted.

11. The only other ground which survives for our consideration is the sustenance of addition of Rs. 36, 870 made under Section 68 of the Act.

12. Facts apropos of this ground are that the assessee had shown cash credits from three parties, namely, Shri Ananada Ram (Rs. 15, 000), Shri Bhanwar Lal Kacchawaha (Rs. 17, 500) and Smt. Kamla Kacchawaha (Rs. 18, 000). On such alleged deposits, the assessee had also shown interest payment. The AO required the assessee to file confirmations and also produce them for verification. It was stated on behalf of the assessee that Shri Bhanwar Lal Kacchawaha had expired and the copy of death certificate was also furnished. The AO did not dispute the genuineness of this credit. He, however, made addition under Section 68 for the remaining two creditors with interest at Rs. 36, 870. No relief was allowed in the first appeal.

13. The learned Counsel for the assessee contended that Shri Ananada Ram was a watchman of the assessee who had left the job when the enquiry was conducted. He further submitted that Smt. Kamla Kacchawaha was a nurse in the hospital and was known to the assessee. He argued that since the amounts of these credits were small, the same should be treated as genuine. In the opposition, the learned Departmental Representative relied on the impugned order.

14. Having heard both the sides and perused the relevant material on record in the light of precedents taken note of by the authorities below, it is obvious that the assessee had neither produced these two persons for verification before the AO nor even confirmations were filed. It is trite law that in order to establish the genuineness of a credit not only the identity and the capacity of the creditor is required to be proved but also the genuineness of the transaction has to be established. Unless the three requisite conditions are cumulatively satisfied, the AO can validly make addition. Coming to the facts of our case, we find that what to talk of the capacity of the creditors or genuineness of the transaction, even the identity was not established as the confirmation from these two persons were not filed either before the Revenue authorities or before us. In our considered opinion, the assessee miserably failed to establish the genuineness of the credits and is caught within the mischief of Section 68. We , therefore, hold that the learned CIT(A) was right in sustaining this addition.

15. In the result, the appeal is partly allowed.