Section 142A: Reference of matter to DVO by AO for valuation of property is not mandatory

Even after insertion of section 142A of the I.T. Act, there are number of judicial pronouncements holding that the reference to DVO under section 142A of the I.T. Act is possible only upon finding that the books of accounts maintained by the assessee is not correct and the value estimated by the Assessing Officer varies substantially from what is recorded in the books of accounts. The various judicial pronouncements confirms that the process of estimation cannot be done if the investment is properly recorded in the books of accounts and the Assessing Officer is satisfied with the correctness and completeness of such books of accounts. If the AO is not satisfied with the correctness and completeness of the books of accounts, he should record his findings and reasoning and reject the books of accounts to proceed for estimation of the value of investments by referring to DVO.

Section 142A of the I.T. Act was substituted vide Finance (No.2) Act, 2014 w.e.f 1.10.2014. As per the said substitution the reference to section 69, 69B etc …. had been removed and it has made as a general provision stating that Assessing Officer can refer to DVO to estimate the value of any asset, property or investment for the purpose of assessment. The sub section (2) of 142A of the I.T. Act states that the Assessing Officer may make a reference to DVO whether or not he is satisfied about correctness or completeness of the accounts of the assessee. The ITAT Delhi Bench in the case of Westland Buildtech (P) Ltd. v. ITO Ward-18 (3), New Delhi (2016) 76 Taxman.com 142 (Delhi – Trib.) had occasion to consider the amendment to section 142A of the I.T. Act by the Finance Act, 2014.

This finding of the Tribunal make the law very clear and unambiguous to the effect that the rejection of books of account, as decided by the Apex Court in the case of Sargam Cinema reported in 328 ITR 513 is valid for all assessment years prior to 01.10.2014, till the section is amended to neutralize the decision of the Apex Court.

The judgment of the Apex Court in the case of CIT v. Sunita Mansingha [(2017) 393 ITR 121 (SC)] will not apply to the facts of the present case. The Apex Court in the case of Sunita Mansingha (supra) was interpreting proviso to section 142A(3) of the I.T. Act (which was in existence from the date of insertion of section 142A of the I.T. Act till section 142A of the I.T. Act was substituted w.e.f. 01.10.2014). The newly substituted section 142A(3) of the I.T. Act w.e.f. 01.10.2014 does not have a proviso. Therefore, the principle laid down by the judgment of the Supreme Court does not have application to the newly inserted section 142A of the I.T. Act. It is admitted that section 142A of the I.T. Act is a procedural section and applies to the pending proceedings. In other words, the law on the date of referring the case to the Valuation Officer u/s 142A of the I.T. Act has to be applied. In this case, the Assessing Officer referred for valuation u/s 142A of the I.T. Act on 06.12.2004. The law that is applicable as on 06.12.2004 is a provision prior to its insertion of section 142A with effect from 01.10.2014. Therefore, going by the judgment of the Apex Court in the case of Sargam Cinema (supra), which was in force at the relevant time states that it is mandatory that the books of account need to be rejected prior to referring the case for valuation u/s 142A of the I.T. Act. Further, we rely on the decision of the ITAT, Delhi Bench in the case of Jithendra Singh Chaddha in ITA No.2732/Del/2018 dated 31/12/2018 wherein it was held that reference of matter to the DVO by the Assessing Officer for valuation of property is not mandatory. In our opinion, the provisions of section 142A of the Act provides that the Assessing Officer may refer the matter to the DVO for the purpose of estimation of the value of the asset, property or investment and get a copy of the report from the DVO. The word ‘may’ makes it discretionary to refer the matter to the DVO. It cannot be said by any stretch of imagination that it is mandatory. Therefore, we are of the view that CIT is not justified in exercising jurisdiction u/s. 263 of the Act. Accordingly, we quash the order passed by CIT u/s. 263 of the Act. Since we have quashed the order of CIT passed u/s. 263 of the Act, we refrain from going into other grounds of appeal of the assessee. The appeal of the assessee in ITA No. 241/Coch/2018 is allowed

ACIT Vs M/s. Ardra Associates (ITAT Cochin)

I.T.A. Nos. 374 to 379/Coch/2017