2025 (6) TMI 884 - AT - Income Tax

Unexplained investment in hospital building - validity of even making reference to the ld DVO for determining the cost of construction by stating that the books of account were not rejected - HELD THAT - It is pertinent to note that the assessee had not disclosed the investment made in the hospital building either in the books of account or in the return of income. Only pursuant to the survey conducted on the assessee the assessee surrendered a sum of Rs. 70, 60, 117/- and offered a sum towards investment in hospital building in the revised return filed on 24.02.2014. Further the assessee even justified with supporting bills vouchers and documentary evidence as to how the surrendered made by him in the sum of Rs. 70, 60, 117/- towards investment in the hospital building to be justified. In this circumstance no fault could be attributed on the action of the ld AO to make a reference to the ld DVO for determining the fair market value of cost of construction u/s 142A of the Act. The very basis of reference to valuation officer cannot be objected to in the instant case. However we are in agreement with the arguments advanced by the ld AR that ld DVO ought to have adopt State PWD rates as against central PWD rate while determining the value of cost of construction. The deduction towards self supervision charges @7.5% has already been given by the AO himself. Hence we deem it fit and appropriate and in the interest of justice and fairplay we restore this issue again to the file of the ld AO with a direction to make a reference to ld DVO for re-determining the value of property by adopting State PWD rates instead of Central PWD rates. Appeal of the assessee is allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered by the Tribunal is whether the Commissioner of Income Tax (Appeals) was justified in confirming the addition made by the Assessing Officer on account of unexplained investment in the hospital building under Section 69 of the Income-tax Act, 1961. This issue arises from the valuation of the hospital building constructed by the assessee and the discrepancy between the surrendered investment amount and the valuation determined by the Departmental Valuation Officer (DVO). Ancillary issues include the validity of the reference to the DVO under Section 142A, the applicability of Section 69 in the facts of the case, and the correctness of the valuation rates applied by the DVO.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Justification of Addition on Account of Unexplained Investment in Hospital Building under Section 69

Relevant Legal Framework and Precedents: Section 69 of the Income-tax Act empowers the Assessing Officer to treat any investment made by the assessee as income if such investment is not recorded in the books of account or if the source of investment is unexplained. Section 142A allows the AO to refer valuation matters to the DVO for determination of fair market value or cost of assets. The principle underlying these provisions is to ensure that undisclosed or unexplained investments are brought to tax.

Court's Interpretation and Reasoning: The Tribunal examined the facts that the assessee initially filed a return declaring a modest income but subsequently, after a survey under Section 133A, filed a revised return disclosing a significantly higher income and surrendering investments including Rs. 69 lakhs in the hospital building. The AO referred the valuation of the hospital building to the DVO, who estimated the value at over Rs. 4 crores, substantially higher than the surrendered amount. The AO treated the difference as unexplained investment and added it to income under Section 69.

Key Evidence and Findings: The assessee's hospital was run under a partnership deed that was short-lived, and the assessee declared losses from the hospital business. The assessee surrendered Rs. 70,60,117 towards investment in the hospital building with supporting bills and vouchers. However, the DVO's valuation, based on CPWD (Central Public Works Department) rates, was much higher. The assessee objected to the valuation rates and methodology, contending that local State PWD rates should have been applied and that the DVO did not inspect the interiors of the building, leading to an inflated valuation. The AO allowed a deduction of 7.5% towards self-supervision charges but still made a large addition.

Application of Law to Facts: The Tribunal noted that the reference to the DVO was valid under Section 142A because the assessee had not disclosed the investment in the books or the original return, and only after the survey was the investment surrendered. The AO was justified in seeking an independent valuation to verify the correctness of the surrendered amount. The Tribunal agreed with the assessee's contention that the DVO should have used State PWD rates rather than Central PWD rates, which are higher and resulted in an excessive valuation.

Treatment of Competing Arguments: The revenue argued that the books of account were rejected and that the entire difference between the DVO valuation and the surrendered amount was unexplained investment. The assessee argued against the validity of the DVO reference and the applicability of Section 69, asserting that the investment was disclosed post-survey and supported by evidence. The Tribunal rejected the objection to the DVO reference, affirming the AO's power to seek valuation, but accepted the assessee's argument on the choice of valuation rates.

Conclusions: The Tribunal concluded that while the AO's action in making a reference to the DVO and adding unexplained investment was legally permissible, the valuation methodology was flawed. The matter was remanded to the AO for fresh valuation by the DVO applying State PWD rates and maintaining the deduction for self-supervision charges. The AO was directed not to disturb the deduction already granted.

3. SIGNIFICANT HOLDINGS

"The very basis of reference to valuation officer cannot be objected to in the instant case."

"We are in agreement with the arguments advanced by the ld AR that ld DVO ought to have adopt State PWD rates as against central PWD rate while determining the value of cost of construction."

"The reduction already granted to the assessee should not be disturbed in the fresh round of proceedings."

The Tribunal established the principle that a reference to the DVO under Section 142A is valid even if the books of account are not rejected outright, provided there is a need to verify the correctness of the investment disclosed post-survey. It also clarified that valuation must be done using appropriate local standards (State PWD rates) rather than central rates if the property is situated locally, ensuring fairness and accuracy in assessment.

On the issue of unexplained investment under Section 69, the Tribunal confirmed that investments not disclosed in the original return or books but surrendered post-survey can be subjected to scrutiny and addition if unexplained or undervalued. However, the valuation must be fair and based on correct parameters.

Final determination: The appeal was allowed for statistical purposes with the direction to the AO for fresh valuation adopting State PWD rates, preserving the deduction for self-supervision charges, and re-examining the addition accordingly.