Madras High Court Dismisses Taxpayer Appeal, Says Books Were Rejected Before DVO Reference

The Madras High Court has held that the Assessing Officer was justified in referring the matter to the District Valuation Officer after examining the books of accounts and finding inconsistencies in them, and that the taxpayer could not rely on the Supreme Court's ruling in Sargam Cinema to argue that the reference to the Valuation Officer was invalid.

The Division Bench of Justice G. Jayachandran and Justice Shamim Ahmed dismissed the tax appeal filed by taxpayer M. Ravindran and affirmed the findings recorded by the tax authorities as well as the tribunal.

Before the court, the individual taxpayer argued that the assessment order did not expressly record rejection of the books of accounts and, therefore, the valuation reference could not have been made. Recording this submission, the bench noted,

"Taking advantage of the fact that the Assessing Officer has not expressly stated in the assessment order that the books of accounts were rejected, argument is placed by the Learned Counsel for the appellant as if the Tribunal has failed to follow the dictum laid down in Sargam Cinema case cited supra."

The court, however, found that the record of the assessment proceedings itself showed that the books produced by the taxpayer had been scrutinised, contradictions were noticed, and the accounts were rejected before the valuation exercise was undertaken.

Referring to the assessment order, the bench observed that the discrepancies between the returns, the balance-sheet entries, and the construction agreement had been specifically recorded, after which the Assessing Officer sought the opinion of the District Valuation Officer.

"We find in the facts of the case in hand the Assessing Officer has in fact considered whatever books of accounts produced by the assessee and rejected it, recording the apparent contradictions in the returns filed by the assessee and the building contract agreement. Only thereafter, the Assessing Officer has resorted to get the opinion of the District Valuation Officer."

The Court further held:

"We hold that, based on the facts and circumstances, it is incorrect to plead that the Assessing Officer has failed to reject the books of accounts produced by the assessee before resorting to get the District Valuation Officer's report. The records and evidence clearly establishes that the books of accounts produced by the assessee were considered and rejected."

The assessee, an individual earning income from property and rent, filed his income tax return for the Assessment Year 2007–08, declaring a total income of Rs 1,10,880.

During scrutiny, the tax authorities noticed investment in building construction at “Ravindra Residency (Ravindra Arcade)” in Villupuram. The assessee had disclosed an investment of Rs 17,80,200 in the balance sheet.

However, after seeking a valuation report from the District Valuation Officer, the cost of construction attributable to the assessee was estimated at Rs 41,71,518. The difference of Rs 23,91,318 was treated as an unexplained investment and added as escaped income under the provisions of the Income Tax Act, 1961.

Aggrieved by the assessment order and the demand raised, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), who partly allowed the appeal and directed the Assessing Officer to adopt State PWD rates instead of CPWD rates for valuation.

The assessee further appealed before the Income Tax Appellate Tribunal, which dismissed the appeal and upheld the Commissioner's findings.

Challenging the Tribunal's decision, the assessee approached the High Court, relying on the decision of the Supreme Court of India in Sargam Cinema v. Commissioner of Income Tax, contending that before referring to the District Valuation Officer, the Assessing Officer and the Appellate Authorities ought to have first rejected the books of accounts submitted by the assessee. Without rejecting the books of accounts, the opinion of the Departmental Valuation Officer cannot be resorted to.

The High Court observed that the assessment order clearly showed that the Assessing Officer had examined the books of accounts produced by the assessee and rejected them due to inconsistencies between the declared investment, the balance sheet entries, and the construction agreement. Only after recording these discrepancies did the Assessing Officer seek the opinion of the District Valuation Officer to determine the actual cost of construction.

The Court further observed that the Commissioner of Income Tax (Appeals) had only corrected the methodology of valuation by directing the adoption of State PWD rates instead of CPWD rates, and had not found any procedural irregularity in referring the matter to the DVO. The Tribunal also found no reason to interfere with the findings of the Commissioner.

Holding that the Assessing Officer had followed the correct procedure and that the reference to the District Valuation Officer was justified after rejecting the books of accounts, the High Court dismissed the appeal.

For Appellant: Advocates, Madhumitha Kesavan and Sudha Kesavan

For Respondent: Senior Standing Counsel, S.Sathiyanarayanan