By TIOL News Service

AHEMDABAD, JUNE 27, 2017: THE ISSUE BEFORE THE COURT IS - Whether reopening can be instituted on the basis of DVO's report claiming unaccounted cost of construction incurred by the previous proprietor, when the assessee firm never even existed. NO is the verdict.

Facts of the Case:

The assessee is a partnership firm and is engaged in the business of running a hotel. Earlier, one of the partners of the firm Mr. Jagdish Bhatt had started construction for the purpose of running a hotel by the name Hotel Celebration as properitory concern. Substantial portion of the construction was carried on between 31st March and 1st April 2004. Construction continued in the next financial year also. For some point, the proprietor wanted to transfer the business of running the hotel. The assessee firm was then constituted, who took over the under-construction hotel business on Sep 20, 2005. According to the assessee, some finishing work was left out, which was done by the partnership firm after the said date. The return of the erstwhile proprietor for the A.Y 2005-06 was taken in scrutiny. During such scrutiny, the question of cost of construction came up for consideration, wherein the AO referred the issue for valuation. The DVO's report, however, did not arrive within time. The AO thus framed the assessment without making any addition on the score. Subsequently, notice for reopening was issued on the basis that according to DVO, total investment in construction during the period between was Rs. 1.82 crores. According to the AO the assessee had shown the cost of construction upto Sep 20, 2005 only at Rs. 64.11 lacs. On such basis, the assessment was reopened.

On appeal, the HC held that,

++ from the reasons recorded by AO, it can be seen that the total cost of construction of building was Rs. 66.87 lacs as per the records of assessee. Out of which, Rs. 61.11 lacs was spent up to Sep 20, 2005. However, as per the valuer's report, total investment in construction was Rs. 1.82 crores during financial years 2004-05 and 2005-06. Though these reasons do not indicate further details of the report of the DVO, reasons recorded by the AO in case of the properietor for reopening his assessment for the A.Y 2005-06 show that according to the valuer, the said investment of Rs. 1.86 crores was made during the period between April 01, 2004 and July 01, 2005. We have tried to verify whether the latter date was a typographical error. However, we find that even while disposing of the objections raised by the said assessee, the AO has stuck to this date. We may, therefore, proceed on such basis. Thus, according to the reasons recorded by the AO, in the connected case, the DVO's report suggests that total investment in construction of Rs. 1.82 crores was made between April 01, 2004 and July 01, 2005;

++ the assessee partnership firm came into picture only on Sep 20, 2005 when it took over the hotel business. The partnership can be made accountable for the cost of construction after the said date. Since the AO relies only on the DVO's report it is difficult to appreciate how he contends that the present assessee had made any unaccounted investment in construction. If we peruse the reasons recorded by him more minutely, we find that a rather unconventional approach was adopted by the AO to project the cost of construction over the entire span of financial year 2005- 06. He noted the declared cost of construction by the two assessees during F.Ys 2004-05 and 2005-06. He took note of the declaration of assessee of investment made in construction after Sep 20, 2005. He then broke up the total cost of construction of Rs. 1.82 crores estimated by the DVO over two financial years and then projected the figure commensurate to the F.Y 2005-06 in the proportion of the declared cost of construction pre and post Sep 20. This is a rather bizarre and wholly impermissible method of extrapolation. The AO had to have tangible material at his command to enable him to form a belief that income chargeable to tax had escaped assessment. His belief is based on presumption of extrapolation even otherwise wholly impermissible on the basis of materials on record. To reiterate, according to the report of the DVO, the entire investment of Rs. 1.82 crores in construction was made before July 01, 2005. There was thereafter, no question of apportioning any portion thereof during the period after Sep 20, 2005. In any case, the same could not have been done without basis or further opinion available with the AO.

(See 2017-TIOL-1189-HC-AHM-IT)