ITA No.721 of 2010 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. ITA No.721 of 2010 Date of decision: 31.1.2011 The Commissioner of Income Tax, Karnal -----Appellant Vs. M/s Om Overseas, Shiv Nagar, Panipat ----Respondent CORAM:- HON'BLE MR JUSTICE ADARSH KUMAR GOEL HON’BLE MR. JUSTICE AJAY KUMAR MITTAL Present:- Mr. Yogesh Putney, Sr.Standing Counsel for the revenue. Adarsh Kumar Goel,J. 1. This order will dispose of ITA Nos.697, 689, 708 and 721 of 2010 as it has been stated by learned counsel for the revenue that all the four appeals involve common questions. 2. ITA No.721 of 2010 has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (for short, ‘the Act’) against the order of the Income Tax Appellate Tribunal, Delhi bench ‘B’ New Delhi passed in ITA No.2726/Del/2009 dated 29.1.2010 for the assessment year 2004-05, claiming following substantial questions of law:- “i) Whether on the facts and circumstances of the case and in law, the learned ITAT was right in holding that the CIT(A) had duly put all the objections and documents to all the parties for their comments, it cannot be said that there was violation of provisions contained in Rule 46A of the Income 1 ITA No.721 of 2010 Tax Rules, 1962, despite the fact that opportunity was given by the AO under section 142A(3) of the Income Tax Act, 1961 to the assessee during the course of assessment proceedings and any evidence if any or objections to the DVO’s report was to be submitted before the AO which was not done and that the assessee was not eligible to produce new evidence for the first time before the CIT(A) and also not appreciating the fact that there is no provision for a revised report under section 142A of the Income Tax Act, 1961? ii) Whether on the facts and circumstances of the case and in law, the learned ITAT was right in law in observing that there was no violation of Rule 46A of the Income Tax Rules, 1962, despite the fact that none of the conditions prescribed under rule 46A were satisfied by the assessee for admission of additional evidence in as much as there was no occasion where (a) the AO refused to admit the evidence, (b) or the assessee was prevented by sufficient cause from producing the evidence which was called upon to be produced by the AO, (c) or the assessee was prevented by sufficient cause for producing before the AO any evidence which is relevant to the ground of appeal, (d) or the AO passed the assessment order without giving the assessee sufficient opportunity to adduce evidence relevant to any ground of appeal? iii) Without prejudice to the above, whether on the facts and in the circumstances of the case, the 2 ITA No.721 of 2010 learned ITAT is right in arriving at the conclusion that a sum of Rs.91,30,355/- on ‘Humidification Plant’ and Rs.1,20,01,718/- under the head ‘Trenches’ considered by the DVO’s subsequent invalid report, be treated as investment and holding that the investment made in the building account under the head ‘Humidification Plant’ and ‘Trenches’ considered for allowing relief to the assessee is completely ignoring the provision of section 142A of the Income Tax Act? Iv) Whether on the facts and in the circumstances of the case, the learned ITAT was justified in allowing deduction under section 80-HHC on the face value of DEPB in the case where turnover exceeds Rs.10 crores in view of the proviso (ii), (iii) and (iv) inserted by the Taxation Law (Amendment) Act, 2005 with retrospective effect from 1.4.1998? v) Whether on the facts and in the circumstances of the case, the learned ITAT was justified in allowing deduction under section 80HHC in respect of entire DEPB amount by incorporating the same in the computation of business profit under section 28 (iiib)? vi) Whether on the facts and in the circumstances of the case, the learned ITAT was justified in placing reliance upon the decision of Income tax Appellate Tribunal, Special Bench, Mumbai in the case of M/s Topman Exports v. ITO (2009) – TOIL 3 ITA No.721 of 2010 531 ITAT dated 1.8.2009 despite the fact that the decision of the Mumbai ITAT Special Bench in the case of Topman Export, supra has been reversed by the decision of the Hon’ble Bombay High Court in the case of CIT v. Kalpataru Colours and Chemical, 2010 –TOIL- 482 HC-Mum?” 3. The assessee is an exporter deriving income from manufacture and export of handloom goods. Dispute arose during the assessment proceedings as to the correct value of the construction of the factory and calculation of benefit under Section 80HHC of the Act. The Assessing Officer referred the matter to the District Valuation Officer (DVO) in whose opinion, cost of construction was much higher than the cost declared by the assessee in its books of accounts. Accordingly, the Assessing Officer made additions based on the report of the DVO. On appeal, the CIT(A) sought a revised report in view of objections of the assessee to the first report. This was done in exercise of power under Rule 46A of the Income Tax Rules, 1962 (for short, ‘the rules’). In the revised report, the DVO reduced the estimated cost of construction given earlier taking into account the factor of self supervision and self procurement of material by the assessee. The DVO, however, did not accept the objections of the assessee under the heads ‘Humidification Plant’ and ‘Trenches’. The CIT(A) accepted the revised report of the DVO against which cross appeals were filed by the revenue as well as the assessee. 4 ITA No.721 of 2010 According to the revenue, the CIT(A) was not justified in seeking revised report and should have upheld the additions made by the Assessing Officer while according to the assessee, its objections to higher cost under the heads ‘Humidification Plant’ and ‘Trenches’ should have been accepted and cost reduced further and to that extent, the modified report should not have been accepted. The Tribunal dismissed the appeals filed by the revenue and upheld the exercise of power by CIT(A) under Rule 46A of the Rules and deleting of additions to the extent suggested in the revised report. The appeals of the assessee were allowed and valuation report to the extent it rejected the objections of the assessee against taking of higher cost under the heads ‘Humidification Plant’ and ‘Trenches’ was disapproved. 4. We have heard learned counsel for the revenue. Re: questions (i) to (iii) 5. Contentions raised on behalf of the revenue are that in view of section 142A (3) of the Act, the Assessing officer was entitled to call for a report and the CIT(A) was not justified in invoking Rule 46A of the rules. The objections of the assessee under the heads ‘Humidification Plant’ and ‘Trenches’ should not have been accepted as the DVO had duly considered the said objections and rejected the same. 6. A brief reference may be made to the finding recorded by the Tribunal to the extent relevant for the questions proposed:- 5 ITA No.721 of 2010 Issue of admitting additional evidence “23. In the present case, the AO has completed the assessment and determined the difference in the cost of construction on the basis of DVO’s report, which was obtained by the AO by making a reference to DVO under section 131(1)(d) of the Act. This action of the AO to make a reference to DVO under section 131(1)(d) to determine the cost of construction of factory building has been upheld by the learned CIT(A). The learned CIT (A) in his order has observed that initially the AO made a reference within the meaning of section 131(1)(d) but subsequently a reference under section 142A was made by the AO and the DVO has furnished the valuation report in response to the reference made to him by the AO under section 142A only. The learned CIT(A) further observed that no objection was raised ever by the assessee before the AO with regard to the AO’s action in making a reference to DVO for determination of the cost of factory building constructed by the assessee. Therefore, the learned CIT(A) upheld the action of AO in making a reference to DVO under section 142A by holding that the reference is proper and justified. In the light of the facts discussed just above, we are inclined to uphold the order of learned CIT(A) in holding that there is no irregularity in the reference made by the AO to determine the cost of factory building under section 142A of the Act. 6 ITA No.721 of 2010 24. Having upheld the order of learned CIT(A) in sustaining the AO’s action in making reference to DVO under section 142A as proper and justified, we now proceed to decide the issue as to whether the DVO’s report is relevant to determine the cost of construction of factory building. In the present case, the DVO determined the cost of construction at Rs.10,46,80,683/- spreading over the period beginning from assessment years 2000-01 to 2006-07. This report was originally submitted by the DVO to the AO vide letter dated 9.12.2006 just before the completion of the assessment made on 27.12.2006 for the assessment year 2004-05. The AO has completed the assessment on the basis of DVO’s report and by stating that the assessee has failed to file any objection against the value determined by the DVO. However, during the course of the appellate proceedings, the assessee submitted a detailed objection to the valuation report submitted by the DVO. The assessee also submitted the report from registered valuer before the learned CIT(A). The assessee’s objection with the copy of valuation report submitted by the assessee were duly forwarded by the learned CIT(A) to the AO as well as to the DVO for their comments. There were series of report submitted by the AO as well s by the DVO who originally valued the property. Each and every report o the AO as well as the DVO were given to the assessee for his comments, and similarly the objections submitted by the assessee were also furnished to the AO as well as to the 7 ITA No.721 of 2010 DVO. Therefore all the particulars or the reports or objections collected during the course of appellate proceedings were duly put to all the parties for their comments and objections and therefore it cannot be said that there was a valuation of the provisions contained in rule 46A (3) of the Act. Upholding of objections of the assessee against the report. 28. Now we shall come to decide about amount towards cost of factory building declared by the assessee in its books of account so as to find out as to whether there exist in difference between the value determined by the DVO and the value disclosed by the assessee in its books. At this stage, it is pertinent to note that the AO has himself referred the matter to DVO to make the value of the property. During the appellate proceedings, the learned CIT(A) also obtained various clarifications and explanations with regard to the cost of construction determined by the DVO as well as the cost declared by the assessee in its books of account. After series of round of remand report or clarification submitted by the AO, DVO as well as the present DVO and the assessee, the DVO modified his valuation report vide letter dated 22.12.2008 which was confirmed by the earlier DVO, Chandigarh vide his letter dated 9.1.2009. The DVO also clarified the position about the expenditure incurred under the two heads i.e. ‘Humidification Plant’ and ‘Trenches’ 8 ITA No.721 of 2010 vide letter dated 11.2.2009. The DVO has finally submitted the report vide letter dated 22.2.2008 confirmed by another DVO vide letter dated 9.1.2009 and further clarified the position vide letter dated 11.2.2009. After considering all the materials and the evidences produced by the assessee as well as after making physical inspection of the building. The learned CIT(A) has ignored the DVO’s report to certain extent in so far as its concerned about the expenditure incurred by the assessee on ‘Humidification Plant and ‘Trenches’ and recorded the same in the books of account under the different head. The DVO is of the opinion that the valuation determined by him at Rs.9,70,23,300/- includes all such expenses incurred by the assessee on ‘Humidification Plant’ and ‘Trenches’, which was separately books under the different head. Therefore, the DVO was of the opinion that the expenses incurred towards’ Humidification Plant’ and ‘Trenches’ by the assessee is to be included into the total cost of construction declared by the assessee. In the manner, the DVO found that the assessee had declared the cost of construction of the factory building in respect of which a valuation report has been submitted by the valuation officer at Rs.9,69,51,534/-. While determining the cost of construction shown by the assessee in the books of account, the DVO has also taken into account the expenditure already declared by the assessee in the books of account upto 2.11.2006 i.e., the date of physical inspection 9 ITA No.721 of 2010 made by the DVO. The DVO, Mr. AK Sharma has considered the expenditure amounting to Rs.80,45,110/- incurred by the assessee from 1.4.2006 to November 2006 while determining the total investment declared by the assessee vis a vis assessed value as per Annexure IV of his comment dated 22.12.2008; which was confirmed by Shri SN Vemra, DVO, Chandigarh vide his letter dated 9.1.20-09. The learned CIT(A) has also accepted this position that sum of Rs.80,45,110/- has been incurred by the assessee from 1.4.2006 to November 2006 and has accordingly given the benefit thereof to the assessee. The DVO while determining the cost of construction declared by the assessee in the books of account has also taken into account the expenditure incurred on trenches and humidification plant to the extent of Rs.2,06,78,902/- in financial years 2004-05 and Rs.4,53,171/- in financial year 2005-06 out of which sum of Rs.91,30,355/- were booked under the head ‘Humidification Plant’ and Rs.1,20,01,718/- under the head ‘Trenches’. However, the expenditure incurred on humidification and trenches has been accepted by the learned CIT(A) only to the extent of Rs.52,66,691/- by saying that only the amount of Rs.52,66,691/- comprising of two items i.e. Rs.34,45,090/- and Rs.18,21,601/- can only be included in the cost of construction. However, the learned CIT(A) has not brought any material on record to say and establish that the revised cost 10 ITA No.721 of 2010 determined by the DVO was defective and thus, it should not be accepted. It is the case where the factory building was physical inspected by the DVO, who has estimated the cost of construction of all the items to the factory building. Mere because, certain expenditure incurred by the assessee towards, construction of the factory building, in respect of which the value has been determined by the DVO, has been shown under different heads in the books of account that by itself cannot be a ground to ignore the expenditures incurred by the assessee towards construction of factory building when the DVO was of the opinion that the expenditure incurred towards humidification plant and trenches are also included in the cost of construction estimated by him. The learned CIT(A)’s action in not accepting the DVO’s revised estimate furnished vide letter dated 22.12.2008 and confirmed by another DVO vide letter dated 9.1.2008 is not based on any adequate material and evidences, when the matter was examined and considered by the expert whom the reference was made by the department itself, it is not for the department to ignore the comments and finding given by the DVO with regard to the cost of construction estimated by him vis a vis the cost of construction shown by the assessee in the books. In this view of the matter, we therefore hold that as against Rs.52,66,.691/- adopted by the learned CIT(A) on account of investment on trenches and humidification the amount of Rs.2,06,78,902/- and Rs.l4,53,171/- should be 11 ITA No.721 of 2010 taken into account as so accepted by both the DVO’s in their respective report dated 22.12.2008 and 9.1.2009 respectively. In this view of the matter, the total investment declared by the assessee is to be taken at Rs.9,69,51,534/- as accepted and determined by the DVO in their final report. 29. In the light of the discussion made above, we, therefore, hold as under:- i) Cost of construction declared by the assessee in the books is to be taken at Rs.9,69,51,534/-; ii) Cost of construction as estimated by the DVO is to be taken at Rs.9,70,23,300/-. The difference between the cost declared by the assessee and the cost estimated by the DVO is very nominal being Rs.71,766/- (Rs.9,70,23,300/- - Rs.9,69,51,534/-) only. 30. This difference can be due to the difference of the opinion and even this difference can be ignored in the light of the fact that the deduction on account of self supervision allowed by the DVO and by the learned CIT(A) at 7.5% is found to be on lower side as in most of the cases cited by the assessee the deduction in that respect has been allowed at 10%. In this view of the matter the difference of Rs.71,766/- as worked out above is not liable to be treated as undisclosed investment of the assessee. For the reasons given above, we, therefore, hold that no addition of account for investment in construction of factory building is called for and whatever addition sustained by the learned CIT(A) in various assessment years are 12 ITA No.721 of 2010 deleted. Therefore, the grounds raised by the assessed with regard to the addition on account of undisclosed investment in factory building are allowed and that of the revenue are dismissed.” 7. In our view, Questions (i) to (iii) cannot be held to be substantial questions of law. The Tribunal rightly upheld the finding of the CIT(A) for admitting additional evidence under Rule 46A and giving the assessee the benefit as per the revised report. The Tribunal correctly appreciated the material on record for upholding the objections of the assessee under the heads ‘Humidification Plant’ and ‘Trenches’ and deleting the additions to that extent. The finding so recorded is a finding of fact and is not shown, in any manner, to be perverse. Re: Questions (iv) to (vi) 8. As regards proposed Questions (iv), (v) and (vi), it was submitted that the matter is covered by earlier order of this Court dated 16.8.2010 in ITA No.299 of 2010, CIT v. M/s F.C.Sondhi and Company (P) Limited, remanding these issues for fresh decision to the Tribunal. In view of earlier order of this Court, the matter is remanded to the Tribunal for fresh decision on the issue involved in the said questions. If the assessee is aggrieved by this order, it will be at liberty to move this Court. 9. The appeals are disposed of accordingly. 13 ITA No.721 of 2010 (Adarsh Kumar Goel) Judge January 31, 2011 (Ajay Kumar Mittal) ‘gs’ Judge 14