Income Tax | Reference To District Valuation Officer Cannot Be Used To Initiate Assessment Proceedings: Telangana HC

The Telangana High Court has dismissed the revenue's appeal against Legend Estates Pvt. Ltd. and held that a reference to the District Valuation Officer under Section 142A of the Income Tax Act is untenable where the taxpayer's books of accounts are neither rejected nor found defective.

It also held that a reference under Section 142A can be made only during the course of assessment or reassessment proceedings and not for the purpose of initiating such proceedings.

A Division Bench of Justice P. Sam Koshy and Justice Suddala Chalapathi Rao observed, “Also, the view that a reference under Section 142A of the Act can be made only during the course of assessment and reassessment and not for the purpose of initiating such proceedings, which is fortified by the judgment of the Hon'ble Division Bench of Ahmadabad High Court in Umiya Co-operative Housing Society Ld. v ITO, wherein it was held that the powers under Section 142A empowers the Assessing Officer to require the Valuation Officer for making the estimate of the value of any asset provided the Assessing Officer required the same for the purpose of making the assessment or reassessment.”

The court explained that such a reference is to be made during assessment proceedings, based on material indicating that the taxpayer's estimate is incorrect or unreliable, and not for the purpose of initiating proceedings or gathering material for reopening

Section 142A of the Income Tax Act, 1961, empowers an Assessing Officer to seek a valuation report from a Valuation Officer. This is for estimating the value of investments or assets referred to under Sections 69, 69A and 69B. The purpose is to aid in making an assessment or reassessment.

The case arose from a survey conducted under Section 133A on August 23, 2006. The department alleged that the taxpayer had not maintained a day-to-day stock register. It also alleged that cash payments towards construction materials were not verifiable. It further alleged that labour charges were not properly recorded.

Based on these observations, the Assessing Officer referred the matter to the DVO under Section 142A. This was done without recording any satisfaction regarding defects in the books. The reference was to determine the cost of construction of 22 properties. The DVO estimated the value at a substantially higher figure than that disclosed by the taxpayer.

Relying on this report, the Assessing Officer completed assessment under Section 143(3). Additions were made under Section 69 by treating the difference as unexplained investment. An addition of ₹6,51,01,056 was made for the assessment year 2007–08. The total difference was apportioned across assessment years 2004–05 to 2008–09.

The revenue contended that the taxpayer had undervalued construction costs. It argued that the taxpayer had failed to properly maintain records. On this basis, it justified the reference to the DVO. It also argued that such a reference could be made even without rejecting the books of accounts. It further submitted that the ITAT erred in setting aside the additions solely on this ground.

On the other hand, the taxpayer argued that the books of accounts were not rejected. It also argued that no specific defects were found in the books. On this basis, it contended that the Assessing Officer could not have invoked Section 142A. It further contended that the DVO's report could not be relied upon to make additions under Section 69.

The Division Bench, in its judgment dated March 26, 2026, upheld the findings of the ITAT. It held that the action of the Assessing Officer in referring the matter to the DVO and relying on the valuation report was “untenable and perverse.”

The court explained the statutory requirement in detail.

It observed, " Section 142A indicates that the power to refer a matter to the Valuation Officer can be exercised only for the purpose of making assessment or re-assessment and therefore, such reference must be made during the course of assessment proceedings when the Assessing Officer finds it necessary, based on available material, to determine the correct value of an investment, which would categorically mean that the process of assessment is initiated and the word 'making' should be presumed to be associated with the assessment or reassessment for reference under Section 142A of the Act."

It further held that where books of accounts are neither rejected nor found to be defective, the Assessing Officer cannot rely solely on a DVO report to make additions.

Clarifying the limits of the power, the Court held that Section 142 does not empower the Assessing Officer to refer a matter to the DVO for gathering material to reopen an assessment.

It observed, "The valuation report was not called for assessment or reassessment proceeding, but was done in the process of reopening of assessment. Thus, the action of the Assessing Officer in referring the matter to the DVO and relying upon the valuation report of current assets in one assessment year and disturbing the concluded assessments of other assessment years is untenable and perverse.”

Holding that the ITAT had correctly appreciated both facts and law, the court found no substantial question of law warranting interference. It dismissed the revenue's appeal and affirmed the deletion of additions.

For Appellant: Advocate Sudhakar Reddy, Senior Standing Counsel

For Respondent: Advocate K.Pabhabathi, counsel representing M.K.Vasanth Kumar