1. Heard learned counsel for the appellant.
2. The proceedings for block asst. yrs. 1988-89 to 1997-98 were initiated against the respondents as a result of search conducted at the residence of assessee on 24th March, 1997 under Section 132 of the IT Act, 1961. In response to the notice to file return, the assessee filed a return of the block period by showing the income for asst. yrs. 1988-89 to 1997-98 as per the income-tax return for the respective assessment years and undisclosed income in the sum of Rs. 41,220 for 20 days for the asst. yr. 1998-99 corresponding to the period from 1st April, 1996 to 24th March, 1997. Undisclosed income was referable to the value of 7 kg. of silver utensils.
3. The AO found that the assessee is a partner of M/s Balaji Investors and besides having agricultural income of the agricultural land at Atun Road, Bhilwara the assessee has half share in a farm house cum swimming pool which was constructed by the firm during the block assessment period. During the financial year 1996-97 the assessee has also shown long-term capital gain from sale of shares amounting to Rs. 10,41,673. The assessee owns a residential house at B-37, Shastri Nagar, Bhilwara which had also been constructed during the block assessment period.
4. This appeal is about additions made on account of about three items only.
5. The properties namely residential house as well as farm house were referred to the Departmental Valuation Officer (DVO) for evaluating cost of construction and in turn vide report dt. 2nd June, 1997, the cost of the farm house was determined at Rs. 23,54,200 as against Rs. 5,82,600 declared by the firm as cost of construction. The difference between the cost of construction shown by the assessee and report submitted by the DVO was sought to be added as income from undisclosed sources as investment in cost of construction of the farm house to the extent of the assessee's share. The 50 per cent difference in the cost of construction so worked out at Rs. 8,81,300, half of Rs. 17,62,600, was added to the income of assessee as income from undisclosed sources as one and half of the additional cost of construction of the farm house belonging to M/s Balaji Investors in which the petitioner was partner. The claim of the assessee that she had earned a long-term capital gains from the sale of shares amounting to Rs. 10,41,673 and the same was invested in the construction of residential house was rejected and the capital gains shown by the assessee were added as income from undisclosed sources. Similarly an addition of Rs. 12,19,145 in addition to Rs. 10,41,673, was made by the AO on account of undisclosed investment in cost of construction of house No. D-37, Shastri Nagar which again was founded on the report submitted by the DVO on the reference having been made so to it because the cost of construction shown by the assessee was much less than the valuation report submitted by the officer who has evaluated the cost of construction at Rs. 38,42,500.
6. Certain other additions were also made by the AO on different counts which are subject-matter of this appeal.
7. In this appeal, by the Revenue, the principal contention is about the deletion of the aforesaid additions made by the AO firstly by the CIT(A) who has sustained the addition to the tune of Rs. 2,56,691 on account of alleged unexplained investment in the construction of residential house at Bhilwara. No issue survives about the deletion of the additions made in the income on account of unexplained cash credit to the tune of Rs. 1,00,000. While on the merit of the additions made in the return submitted by the assessee having been decided in favour of the assessee by the Tribunal including its claim for deleting the additions of Rs. 2,56,691 sustained by the CIT(A) in respect of residential property on account of alleged unexplained investment in construction, the assessee's cross-objection was otherwise on legal issues firstly that the block assessment year ought to have been quashed being not founded on the material found as a result of search but by relying on other material; and that the AO for the purpose of considering cost of construction of immovable property for the purpose of making addition in cost of construction cannot refer the matter to the DVO and rely on its report for making additions.
8. The Tribunal has deleted all the additions made which were bone of contention between the parties except that it has not agreed with the contention of the assessee that the deduction on account of sale supervision ought to have been allowed in respect of the farm house property at the rate of 15 per cent and not at the rate of 10 per cent. The said plea of the assessee was dismissed however, the assessee is not the appellant before us.
9. In this appeal against the order of the Tribunal dt. 20th May, 2004, Revenue has sought to raise following questions as substantial questions of law arising for decision in this appeal :
'I. Whether, on the facts and in the circumstances of the case and in law, the learned Tribunal was legally correct in setting aside the issue of validity of completion of block assessment when all evidences/materials found during the search under Section 132 were available with the AO which have been duly considered by the AO before passing the assessment order ?
II. Whether, on the facts and in the circumstances of the case and in law, the learned Tribunal was justified in deleting the addition of Rs. 9,62,276 out of total addition of Rs. 12,19,145 made by the AO on account of unexplained investment in construction of house property, on the basis of reference to DVO under Section 131(1)(d) of the IT Act/under order XXVI Rule 9 of CPC and not under Section 55A of the Act. As in the case of Amiya Bala Paul pronounced by the apex Court ?
III. Whether, on the facts and in the circumstances of the case and in law, the learned Tribunal was legally correct in deleting the addition of Rs. 10,41,873 treating the long-term capital gains as income from undisclosed sources of the assessee ignoring the fact of absence of full consideration from a party at distant place of Bhilwara, transfer of shares earlier to the payment made and ignorance about the shareholding by the purchaser and seller company ?'
10. The suggested questions appear to have been framed by the appellant in a very casual and careless manner. For example, the full subject-matter of additions made by the AO and deleted by the Tribunal on the same grounds have not been included in questions framed regarding additions made as undisclosed income invested in construction of house. While the question No. 2 refers to deleting the additions of Rs. 9,62,276 only out of total addition of Rs. 12,19,145, the Tribunal had deleted the entire amount added by the AO, on the very same reason. The addition made on account of unexplained investment in construction of the farm house of Balaji Investors, in which the respondent-assessee has half share amounting to Rs. 8,81,300 has not at all been included in question though the same has been deleted for some reason, though, grounds have been raised to that effect.
11. Moreover, in question No. 2, non-existing fact has been introduced about the issuance of commission under Section 131(1)(d) to the DVO in terms of Order 26 Rule 9 of the CPC. The AO in his order has clearly referred to the fact that the property was being referred to the DVO for evaluating the cost of construction in pursuance of which DVO submitted vide letter dt. 2nd June, 1997, first report and subsequently a revised report was submitted. The learned counsel for the Revenue was candid enough to state that there is no material to show that the matter was referred to DVO. By appointing him as a CIT under Section 131(1)(d) r/w Order 26 Rule 9, CPC but was referred to the valuation cell in routine course.
12. The Tribunal while deleting all the additions made by the AO has remanded the case back for the purpose of reframing the assessment by considering that no material outside the material which has come on record as a result of search proceedings or requirement as a result of directions to produce books of account and documents under Section 132A can be taken into consideration.
13. We have given our anxious consideration to the question whether substantial question of law arises in this case and if so what substantial question of law arises in this case to warrant a decision of this Court.
14. So far as deleting the additions made by the AO on account of unexplained cost of construction in residential house of the assessee situated at Bhilwara and her one half share in the farm house of Balaji Investors is concerned, it is founded on the ground that for the purpose of finding cost of construction, for the purpose of making assessment under IT Act, no reference can be made to the DVO under Section 55A and no addition can be made on the basis of report submitted by the DVO on such reference. The Tribunal has relied on a decision of Supreme Court in Smt. Amiya Bala Paul v. CIT : [2003]262ITR407(SC) .
It was a case where the assessee has built a house between the years 1981 to 1983. The assessee had filed a return for asst. yr. 1982-83 and disclosed that she had invested Rs. 1,73,000 in construction of her house. Her claim to such investment was accepted. In her return for asst. yr. 1983-84, the assessee disclosed further investment of Rs. 1,73,000 in the construction of house which was not accepted by the AO and he referred the question of construction of cost of the house to the Valuation Officer under Section 55A of the IT Act, 1961. The Valuation Officer submitted a report to the AO. On the basis of report, the AO reopened the assessment in respect of the asst. yr. 1982-83 and made additions in respect of asst. yr. 1982-83 and also in respect of 1983-84 that such additional cost of construction was the income from undisclosed sources, invested in construction of the house. On appeal, the assessee's contention was accepted that no additions could be made by referring the question of cost of construction to DVO.
On reference being made to the High Court, the Division Bench of the High Court held that although the AO could not have referred the question of the cost of construction of the assessee's house to the Valuation Officer under Section 55A of the Act, he had ample power under Sections 131(1)(d), 133(6) and 142(2) of the Act to ask for a valuation report from the Valuation Officer. It was held that each of these sections were 'enabling machinery provisions which invested ample powers in the assessing authority', and that any wrong mention of the provisions on the requisition memo would not be material.
In view of that finding, the High Court held the Tribunal to be in error and the question was answered in affirmative in favour of the Revenue and against the assessee. However, on appeal, the judgment of the High Court was reversed and that of the Tribunal was upheld.
The Supreme Court made a clear distinction between the enquiry made by the Valuation Officer as to the value of the property referred to it and the power of the AO, who is otherwise invested with the power to inquire into the necessary facts for the purpose of assessing the income of the assessee. One is in the realm of assessing the market value of the property on a given date, the other on the realm of collecting the necessary evidence for the purpose of discharging its statutory duty of the AO whether under the WT Act or under the IT Act. The Court found that there is no overlapping between the provisions. It was stated :
'The inquiry by the Valuation Officer is distinct from the power of the AO who is otherwise invested with the power to enquire into the actual wealth of an assessee under the WT Act.'
The Court referred to the scheme of IT Act and explained:
'Section 55A of the IT Act occurs in Chapter IV, Part E, which deals with capital gains. For the purpose of assessing the fair market value of a capital asset in connection with the computation of capital gains, it incorporates several provisions relating to a Valuation Officer in the WT Act..........
Clearly this section in terms can have no application to the assessee's case. But can the AO otherwise make a reference to a Valuation Officer for generally computing the assessee's taxable income The respondents say he can, and have referred us to Sections 131(1)(d) and 133(6) of the Act. Section 131(1) of the Act is in pari materia with Section 37 of the WT Act and Section 133(6) of the Act is substantially similar to Section 38 of the wealth-tax. On parity of our earlier reasoning, the power of the AO under the Sections 131(1) and 133(6) of the IT Act is distinct from and does not include the power to refer a matter to the Valuation Officer under Section 55A. Nor does the third section, viz., Section 142(2), on which reliance has been placed by the respondents allow him to do so....
The common feature of Sections 133(6) and 142(2) is that the AO is the fact-finding authority. It is his opinion on the basis of the facts as found on an enquiry conducted by himself which results in the assessment order. A report by the Valuation Officer under Section 55A is on the other hand the outcome of an inquiry held by the Valuation Officer himself and reflects his opinion on the evidence before him. Such a report would not be the result of an inquiry by the AO under the provisions of Section 133(6) or Section 142(2) ..... the power of inquiry granted to an AO under Sections 133(6) and 142(2) does not include the power to refer the matter to the Valuation Officer for an enquiry by him.'
Thus, finding clear distinction between the nature and purpose of report submitted by the Valuation Officer to be founded on an enquiry conducted by him and the power of the AO to collect the material for assessment on the basis of opinion formed by him, referring to the provisions of Section 131 and the provisions of Code of Civil Procedure relating to the issuing of commissions it was further said :
'If at all the AO could have issued a commission to a Valuation Officer, it could only be under Rule 9 which lays down that:
'Commissions to make local investigations.--In any suit in which the Court deems a local investigation to be requisite or proper for the purpose of elucidating any matter in dispute, or of ascertaining the market value of any property, or the amount of any mense profits or damages or annual net profits, the Court may issue a commission to such person as it thinks fit directing him to make such investigation and to report thereon to the Court :Provided that, where the State Government has made rules as to the persons to whom such commission shall be issued, the Court shall be bound by such rules.''
On this premises, the apex Court said that a reference under Section 55A of the Act having been made, the action cannot be supported by reference to Section 131 of the Act r/w Order 26, 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 r/w Order 26, 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 but an error which could not be ignored by referring the action to the appropriate source of power.
The Court concluded :
'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.'
Thus, the Supreme Court clearly held against making a reference to the Valuation Officer for the purpose of enquiry into cost of construction of any immovable property and held that where a reference has been made to Valuation Officer for holding an inquiry into the cost of construction, the action cannot be saved with reference to Section 131(1)(d) or Section 133(6) or Section 142(2). If that were so, there was no need to specifically empower the AO to do so in certain circumstances under Section 55A.
15. We are, therefore, of the opinion that the ITO could not have made additions of certain amount by way of unexplained investment in construction of immovable property namely residential house situated at Bhilwara and farm house situated at Atun, on the basis of valuation report obtained by referring the issue to DVO as no power of making such reference exists in the IT Act. Hence, on merits of the additions deleted by the Tribunal on account of unexplained investment in construction of the house properties do not give rise to any substantial question of law as it is founded on law declared by the Supreme Court.
16. In this connection, the learned counsel for the appellant made a reference to Smt. Pushpa Kumari v. CIT and Ors. : [2004]269ITR366(Patna) , a decision of the Patna High Court. However, the facts of the case has no application to the present case. The AO in Smt Pushpa Kumari's case (supra) has consciously issued directions under Section 133(1)(d) of the Act to make local inspection with regard to the cost of construction of the premises. The Court finding that it was held by the apex Court that though under Section 55A of the Act the AO cannot call for an enquiry report from the DVO, it can issue commission to a Valuation Officer in exercise of power under Section 131(1)(d) of the Act, held that from perusal of Annex.-2 (before it) it appears that only a commission has been issued to the Valuation Officer in exercise of power under Section 131(1)(d) of the Act r/w Order 26, Rule 9 of the CPC and as such the submission advanced on behalf of the respondents is acceptable and the impugned order cannot be assailed on the grounds urged on behalf of the petitioner.
Apparently, the issue before Patna High Court was about the authority of AO to issue commission under Section 131(d) and the issue was not connected with placing reliance on report submitted by the Valuation Officer on a reference being made to it about the cost of construction.
The Patna High Court concluded :
'Moreover, we may notice that the apex Court in Smt Amiya Bala Paul v. CIT : [2003]262ITR407(SC) has clearly said that whether the enquiry report submitted by the Valuation Officer on being appointed as a commission in terms of Rule 9 of the Order 26 will ultimately depend on the tenor of report submitted and the material annexed therewith. Obviously, it is premature at the assurance of the commission whether the ITO will act on such report or not.'
17. In the present case, from the order of the ITO, it is apparent that he had made a reference to DVO to make a report on the cost of construction as was the case in Smt. Amiya Bala (supra). No different result can follow.
18. So far as the question relating to the deletion of Rs. 10,41,873 by which the AO has treated the long-term capital gains disclosed by the assessee but claimed to be not taxable as having been undisclosed investment in construction of the residential house, was not accepted by the AO on the ground that the investment in the house has been made prior to that because the AO doubted the very transfer of purchase and sale of the shares by opining that how a party can go distant place of Bhilwara and could transfer shares earlier than the date.
19. However, it has been accepted by the CIT(A) as well as by the Tribunal by referring to the evidence on record, which included the acknowledgement regarding the sale at the rate of 65.30 per share and bill issued by U.P. Stock Exchange, allegedly purchased through one Shri Kailash Madai, resident of Jaipur and that the return was submitted by the assessee for the asst. yrs. 1996-97 and 1997-98 prior to search disclosed the said transactions that sale of shares did take place at the relevant time and has not sustained the finding of the AO and did not sustain the additions.
20. Apparently, this is a question of fact depending upon appreciation of the evidence whether the transaction of sale and purchase of shares were genuine or not and does not give rise to the question raised. No perversity has been shown in the finding reached by the two appellate authorities in this regard.
21. The other question which survives for consideration is whether the question of going outside the material which has come in possession of the AO during the search or as a result of production of documents or acts under Section 132(1) or whether the AO could make regular enquiry for collecting necessary material for block assessment, undoubtedly gives rise to the substantial question of law. However, in these circumstances, prima facie, the question becomes of academic importance as the Tribunal has deleted the additions made by the AO on merit also.
22. But, it does give rise to a question whether in such circumstances, keeping in view its own finding on merit, was the Tribunal right in remitting the case to the CIT(A) for deciding once again on the assessment by keeping the other material out of consideration. In this respect, we are of the opinion that the Mowing substantial question of law does arise for consideration in this appeal:
'Whether the Tribunal on deciding the contention on merit between the parties one way or the other on the material which was before it, could remand the case back to the CIT(A) only for the purpose of writing a reasoned order on a issue which need not be decided as it cannot have bearing on the merits of the additions or deletions sustained by the Tribunal.'
Admit. Issue notice.