Income from undisclosed sources: Reference to DVO: S/s. 69 and 142A: A. Y. 1989-90: Rejection of books of account is prerequisite for valid reference to DVO for valuation u/s. 142A: Report of DVO pursuant to invalid reference could not be a basis for addition u/s. 69:

In the previous year relevant to the A. Y. 1989-90, the assessee had constructed a building and had declared the cost of construction to be Rs. 13,23,321/-. The Assessing Officer made a reference to the DVO for valuation who computed the cost of construction at Rs. 19,13,100/-. The Assessing Officer made the addition of the difference of Rs. 5,89,779/- as undisclosed income u/s. 69 of the Income-tax Act, 1969. The reference to the DVO and the addition was upheld by the Tribunal.

On appeal by the assessee, the Gujarat High Court reversed the decision of the Tribunal and held as under:

“i) Expression used by the Legislature in the heading of section 142A as well as in the opening part of the said section is “estimate”. Question of estimate arises only when the books of account of the assessee are not reliable. For the purpose of resorting to the provisions of section 142A, the Assessing Officer is first required to record a satisfaction that the assessee has made investments which are not recorded in the books of account. As a necessary corollary, he would then reject the books of account as not reflecting the correct position and then proceed to make the assessment on the basis of the estimation. Thus, it is apparent that the question of estimating the value of any investment would arise only when the books of account are not reliable. Accordingly, the Assessing Officer is first required to reject the books of account before making a reference to the Valuation Officer.

ii) Report of the Valuation Officer cannot form the foundation for rejection of the books of account. In the instant case, the Assessing Officer has categorically recorded a finding to the effect that the assessee’s accounts are duly audited and complete details are available. He made reference to the valuation Officer merely to seek expert advice regarding the cost of construction. There is nothing in the assessment order to suggest that the Assessing Officer had any doubt regarding the cost of construction or that he was not satisfied regarding the correctness or completeness of the books of account.

iii) Prior to making the reference to the valuation Officer, the Assessing Officer has not ascertained what was the defect in the cost of construction disclosed by the assessee in its return. Except for the difference between the estimated cost determined by the Valuation Officer and the actual cost shown by the assessee, the Assessing Officer has not brought any material on record to establish that the assessee has made any unaccounted investment in the construction of the building in question and that the books of account do not reflect the correct cost of construction.

iv) Hence, the reference made to the Valuation Officer not being in consonance with the provisions of law was invalid. Accordingly, the report made by the valuation Officer pursuant to such invalid reference could not have been made the basis of the addition u/s. 69.

v) In view of the above discussion, the Tribunal was not justified in holding that the reference made by the Assessing Officer to the Valuation Officer for estimating the cost of construction was not invalid. The Tribunal was also not justified in holding that the addition made by the Assessing officer u/s. 69 of the Act was correct.”