Addition on account of unexplained investment in construction of hotel building and undisclosed income from Lawn Garden bookings – ITAT dismissed appeal of the Income Tax Department
In a recent judgment, ITAT Jaipur has upheld the deletion of additions of account of unexplained investment in construction of hotel building and undisclosed income from Lawn Garden bookings.
ABCAUS Case Law Citation:
4334 (2024) (12) abcaus.in ITAT Jaipur
Case laws relied upon by the Parties:
PCIT Vs. Abhisar Buildwell P. Ltd
PCIT Vs. J. Upendra Constructions Pvt. Ltd
CIT vs. Kabul Chawla
In the instant case, the Income Tax Department had challenged the order passed by the CIT(A) in deleting the addition made by the Assessing Officer (AO) on account of unexplained investment u/s 69 of the Income Tax Act, 1961 (the Act) in construction of hotel building and addition made on account of undisclosed income from Lawn Garden bookings.
The respondent assessee was a family member in a business group engaged in the business of wholesale as well as retail trade of timber, ply-boards, laminated sheets, teak wood etc.
A search and seizure operation u/s 132(1) of the Act was carried out at the various premises of the said Business Group and the assessee was also covered. In response to notice u/s 153A of the Act, the assessee filed his return of income.
the AO completed the assessment by making addition on account of unexplained investment in construction of Hotel and a further addition on account of undisclosed income of lawn Garden booking.
The Tribunal observed that addition was made with regard to unexplained investment in construction of Hotel Building by a separate partnership firm in which the assessee was one of the partners. It was further noticed that addition was made by the AO who completely relied upon the DVO’s valuation report without considering the objection filed during the pendency of the assessment proceedings. Further, addition was also made as unexplained income from lawn garden completely ignoring the facts that the lawn was not even started during the year under consideration and second that the property was solely used by the assessee for get-togethers of family, relatives, business associates etc. on obligatory basis for which no rent was charged.
Further, the Tribunal opined that any notice if required to be issued u/s 153A for allegation of escapement of income should have been issued to that partnership firm and not to the assessee who was merely a partner in that firm. Hence, the notice issued u/s 153A in the case of the assessee partner was illegal and time barred.
As regards the quantum addition under section 69 as unexplained investment in construction in respect of construction of hotel property in the partnership , the Tribunal observed that the AO relied on DVO valuation report estimating the construction cost which was unjustified because no incriminating material was found during search operations in respect of the construction of house property as was also evident from the assessment order passed u/s 153A wherein there was no mention about any incriminating material found for the relevant assessment year even no mention in the AO remand report. In view of the judgment of the Hon’ble Supreme Court, it is now a settled law that no addition can be made in search u/s 153A in respect of completed/unabated assessments, if no incriminating document found during search.
Secondly, the Tribunal observed that it is a settled law that no addition can be made solely on the basis of DVO Valuation report as it is mere an estimation and mere an opinion of a person as held by the Gujarat High Court.
Thirdly, no discrepancies were pointed out in the valuation report of the registered valuer furnished by the assessee to the AO alongwith rule 46A application. Moreover, the discrepancies pointed out by the assessee in the DVO report during the assessment proceedings were not considered by the A.O. while making the impugned addition.
The Tribunal noted that the assessee had objected to the DVO report by contending that the DVO had considered CPWD rates instead of State PWD rates and also not allowed higher deduction for self supervision. It was well settled by a number of decisions that for the purpose of valuation it is the State PWD rates which are to be applied. Further, Self supervision deduction of 10% is well justified in view of numerous decisions. It was further stated that the assessee being engaged in the business of sale of construction material hence, the assessee was well conversant with various construction persons/business viz. Architects, Builders, Contractors, Carpenters, Other Construction material suppliers etc. As a result, the assessee had taken good advantage of his contacts in construction line, material goods as well as construction services, resulting in further reduction in construction costs to a significant extent to save around 10% of the construction costs.
Further, the Tribunal observed that on one hand the A.O. made addition for unexplained stock of partnership firm in the hands of the partnership firm itself whereas on the other hand addition for construction in building of partnership firm was made by the ld. A.O. in the hands of one of the partner instead of the partnership firm, which was not justified and it tantamounts to blowing hot and cold at the same time which is not permissible.
Accordingly, the appeal of the department was dismissed.
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