ME and Mummy Hospital vs Assistant Commissioner of Income Tax

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Akil Abdul Hamid Kureshi, J.—Petitioner has challenged reference order dt. 30th March, 2005 made by respondent No. 1 AO to Valuation Officer, Baroda calling for the valuation of investment made by the petitioner in the construction/renovation of the property mentioned in the order, namely, hospital building situated on the third floor of Jalnidhi Complex, Surat. Petition arises in the following factual background:

1.1 The petitioner is a partnership firm. For the asst. yr. 2002-03 the petitioner filed its return of income on 29th Oct., 2002. During the previous year relevant to the said assessment year, the petitioner had purchased a property for a hospital jointly with one Praful Doshi-HUF. The petitioner declared cost of property in the return at Rs. 83.87 lakhs (rounded off).

1.2 On 30th March, 2005, the AO passed the impugned order requesting the Valuation Officer, Baroda to calculate the correctness of the cost of investment and authorized the said officer under s. 142A of the IT Act, 1961 ("the Act" for short) to inspect the property and make such investigation as considered necessary. The order of reference reads as under:

"To:

The Valuation Officer

Date: 30th March, 2005

Valuation Cell, Income-tax Department,

Baroda,

Sir,

Sub: Valuing the cost of investment in the property belonging to M/s. Me & Mummy Hospital, 3rd Floor. Jalnidhi, Opp. Bhumali, Besides Navdi Ovara, Nanpura, Surat-395

M/s. Me & Mummy Hospital has invested in the construction/renovation of the property as per the details indicated below:

2(a) It is certified that the assessment for the period relevant to the above mentioned valuation period have been finalized. But, the Addl. CIT, Range-6 has directed to refer the building to valuation cell. (b) The assessment is getting time barred on 31st March, 2005 for asst. yr. 2002-03. You are requested to submit the report on or before 30th April, 2005 so that case can be reopened, if any variation is found preferably by 30th April, 2005.

In order to elucidate the correctness of the cost of investment, I require and authorise you under s. 142A of the IT Act, 1961 to inspect the property and to make such investigation and seek clarification and material from the assessee and other concerned persons as are considered necessary and take such measures as are deemed fit for determining the true and correct cost of investment of the said property. You are requested to send your valuation report to me in duplicate urgently and preferably by 30th April, 2005.

Yours faithfully, (Sanjay Punglia) Asstt. CIT, Circle-6, Surat."

On 31st March, 2005, the AO framed assessment of the return filed by the petitioner but left the question of investment in the acquisition of the hospital building unchanged. The petitioner carried the assessment order in appeal. We are not concerned with the details of the appellate proceedings.

When the petitioner received the notice from the District Valuation Officer ("DVO" for short) dt. 15th April, 2005 calling for details about the said investment, the petitioner filed this petition and challenged the very order of reference.

Learned counsel Mr. J.P. Shah for the petitioner inviting our attention to the reference order raised following contentions:

(1) That as per the AO the assessment was already finalized when the order of reference was passed. Therefore, since neither the assessment nor reassessment was pending on such date, the AO had no authority to call for DVO''s report under s. 142A of the Act.

(2) That such report cannot be in anticipation of reopening the assessment as was done in the present case.

(3) The AO had no reason to call for the valuation. The valuer''s report is called for only by way of fishing inquiry, which is not permissible.

(4) Before making a reference calling for the report of the valuer, the AO must be satisfied that valuation for the purpose of ss. 69, 69A and 69B is required to be made. In the present case, no such eventuality existed when the reference was made.

(5) He lastly contended that the AO called for the report under the directives of his superior. In absence of his own satisfaction, such reference could not have been made.

Counsel relied on the decision of this Court in the case of Commissioner of Income Tax Vs. Umiya Co-op. Housing Society Ltd., to contend that if no proceedings for assessment or reassessment are pending, the AO would have no jurisdiction to call for the report of DVO.

On the other hand, learned counsel Mr. Sudhir Mehta for the Department opposed the petition raising following contentions:

(1) The petition is not maintainable. The petitioner has challenged only the order of reference. The valuer''s report is yet to be made. At this stage, therefore, the petition is premature.

(2) That the assessment was not yet finalized when the reference order was passed. In any case the petitioner had filed appeal against such order of assessment. The appeal would be continuation of the assessment proceedings and that therefore, the AO was within his right to call for the report of DVO. In this context, counsel relied on the decision of Uttarakhand High Court in the case of Commissioner of Income Tax Vs. Rajendra Aggarwal, in which the petitioner''s challenge to the order of reference under s. 142A of the Act made by the AO was rejected. The Court observed that the AO was well within his power under s. 142A to take up the issue of valuation of investment in the petitioner''s plant for reassessment, if necessary.

From the record, it emerges that the order of reference was passed on 30th March, 2005. Though loosely mentioned in the said order but explained in the affidavit-in-reply filed before the Court, the assessment was not yet over on the day on which the said reference order was passed. Admittedly, the order of assessment was passed only on 31st March, 2005. As held by this Court in the case of CIT vs. Umiya Co-op. Housing Society Ltd. (supra) the matter can be referred to Valuation Officer only when the proceedings of assessment or reassessment are pending before the AO. In the present case, however, such proceedings were not yet terminated and were thus pending. Even without, therefore, resorting to the logic adopted by Uttarakhand High Court in the case of CIT vs. Rajendra Aggarwal (supra), it can be safely taken that AO, if other parameters of s. 142A were satisfied, did have jurisdiction to call for the report from the valuer. Uttarakhand High Court in the said decision, considered pendency of appeal against order of assessment as continuation of the assessment, and therefore, held that during the pendency of such appellate proceedings also power under s. 142A can be exercised by the AO. The decisions of Delhi, Allahabad and Karnataka High Courts taking contrary view were not followed. In the present petition, we are not concerned with this controversy and would, therefore, refrain from giving any expression of our opinion on the same. Suffice to conclude that assessment proceedings were pending before the AO when the reference order was passed.

Despite such conclusion the crucial question is whether the requirements of exercising such powers under s. 142A calling for DVO''s report are satisfied. In this context, we may peruse the provisions of s. 142A more minutely. Sec. 142A pertains to estimate by Valuation Officer in certain cases and reads as under:

"142A Estimate by Valuation Officer in certain cases.--(1) For the purposes of making an assessment or reassessment under this Act, where an estimate of the value of any investment referred to in s. 69 or s. 69B or the value of any bullion, jewellery or other valuable article referred to in s. 69A or s. 69B or fair market value of any property referred to in sub-s. (2) of s. 56 is required to be made, the AO may require the Valuation Officer to make an estimate of such value and report the same to him.

(2) The Valuation Officer to whom a reference is made under sub-s. (1) shall, for the purposes of dealing with such reference, have all the powers that he has under s. 38A of the WT Act, 1957 (27 of 1957).

(3) On receipt of the report from the Valuation Officer, the AO may, after giving the assessee an opportunity of being heard, take into account such report in making such assessment or reassessment:

Provided that nothing contained in this section shall apply in respect of an assessment made on or before the 30th day of September, 2004, and where such assessment has become final and conclusive on or before that date, except in cases where a reassessment is required to be made in accordance with the provisions of s. 153A.

Explanation: In this section, ''Valuation Officer'' has the same meaning as in cl. (r) of s. 2 of the WT Act, 1957 (27 of 1957)"

Power of the AO for making a reference to the Valuation Officer seeking the estimate flows from sub-s. (1) of s. 142A. It provides that for the purposes of making assessment or reassessment under the Act, where an estimate of the value of any investment referred to in s. 69 or s. 69B or the value of any bullion, jewellery or other valuable article referred to in s. 69A or s. 69B or fair market value of any property referred to in sub-s. (2) of s. 56 is required to be made, such reference to make an estimate of such value can be made to the Valuation Officer.

We are not concerned with the fair market value of the property referred to in sub-s. (2) of s. 56. We would, therefore, confine our inquiry with respect to the provisions contained in ss. 69, 69A and 69B of the Act. Since sub-s. (1) permits the AO to call for the valuer''s report where an estimate of the value of such investment or value of bullion or jewellery or valuable article is required to be made, for the purposes of invoking powers under sub-s. (1) of s. 142A, therefore, there must be a case where an estimate of the value of such investment or value of bullion or jewellery or valuable article is required to be made.

Sec. 69 of the Act pertains to unexplained investment and starts with the expression "Where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income and the assessee offers no explanation about the nature and source of investments...."

Sec. 69A pertains to unexplained money etc., and starts with the expression "Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income and the assessee offers no explanation about the nature of source of acquisition of the money, bullion, jewellery or other valuable article...."

Likewise s. 69B of the Act pertains to amount of investments etc., not fully disclosed in books of account. The said section starts with expression "Where in any financial year the assessee has made investments or is found to be the owner of any bullion, jewellery or other valuable article, and the AO finds that the amount expended on making such investments or in acquiring such bullion, jewellery or other valuable article exceeds the amount recorded in this behalf in the books of account maintained by the assessee for any source of income, and the assessee offers no explanation about such excess amount..."

All these three provisions give rise to deeming fiction and consider such unexplained investment, unexplained money or investment not fully disclosed to be deemed income of the assessee. These provisions start with an essential requirement that the assessee has made such investments or that the assessee is found to be the owner of such money, bullion, jewellery etc., or where assessee has made investment or is found to be the owner of bullion, jewellery etc., which are not recorded in the books of account and the assessee offers no explanation about the nature and source of such investment or expenditure or the explanation offered by the assessee, in the opinion of the AO, is not satisfactory. Common thread which runs through all these three provisions is that the assessee has made certain investments or expenditure or is found to be the owner of any bullion, jewellery etc., and the same are not recorded in the books of account.

The valuer''s report under s. 142A of the Act is for the purpose of estimating value of such investment referred to in s. 69 or s. 69B or the value of any bullion, jewellery or other valuable article referred to in s. 69A or s. 69B of the Act. Unless, therefore, there is prima facie application of ss. 69, 69A and 69B of the Act, reference to the valuer is simply not permissible. It is only when there is some material before the AO to hold that the case of an assessee falls under ss. 69, 69A and 69B as the case may be, that he can, to estimate the value of such unexplained investment or expenditure in bullion, jewellery etc., call for the report of the valuer. Initial starting point for triggering a reference to the valuer, therefore, has to be invocation of ss. 69, 69A or 69B of the Act. It is only when any of these provisions come into play that the AO can resort to s. 142A for estimating the value of such investment or expenditure. Sequence cannot be put in the reverse. In other words, the AO would have no authority to call for the report of the valuer under s. 142A to judge whether there has been any unexplained investment or expenditure as referred to in ss. 69, 69A and 69B of the Act. It would only amount to fishing inquiry and not investigation under s. 142A of the Act. In our opinion, the scheme of the provisions when read harmoniously would lead to a situation where in case the AO, during the pendency of assessment or reassessment, is of the opinion that ss. 69, 69A and 69B of the Act can be invoked; in order to estimate such unexplained investment or expenditure in acquisition of bullion, jewellery or valuable article, he can resort to valuation by the Valuation Officer in terms of sub-s. (1) of s. 142A of the Act. In the present case, no such material emerges from the record. To the contrary, neither from the order of reference nor from any other material, the respondent could point out that the AO had invoked the provisions of ss. 69, 69A or 69B of the Act and in the process desired to obtain the estimate of unexplained investment or expenditure and for which purpose DVO''s report was called. He simply gave no reasons in the order. No independent reasons, either flowing from the file or even in the form of an affidavit assuming the same would be permissible, are brought to our notice. Thus quite apart from the petitioner''s grievance that the AO merely acted under the directives of the superior and did not, on his own application of mind, desire to call for the report, in absence of any valid reasons for making a reference, in our opinion, the order must fail.

The objection of the Revenue that the petition is premature must be rejected out of hand. If the reference to DVO is simply not competent, we fail to see why the petitioner should be made to go through the gamut of supplying details permitting the valuer to make his estimate. If eventually such report itself can be of no legal value, the inquiry must be terminated at the threshold. We do not see any other stage where the assessee can oppose the reference to the valuer itself. Under the circumstances, impugned order dt. 30th March, 2005 is quashed. The petition is allowed. Rule is made absolute. No order as to costs.