Facts of the Case

Following a survey under section 133A at medical establishments connected with the assessee, assessment was completed under section 143(3). Subsequently, the Assessing Officer referred the construction of a hospital building to the Departmental Valuation Officer (DVO) for estimation of investment.

Based on the DVO’s report, the Assessing Officer concluded that the cost of construction disclosed by the assessee was understated and initiated reassessment proceedings under section 147. The difference of ₹9,26,796 between the declared cost and the DVO’s estimate was treated as unexplained investment under section 69 and taxed under section 115BBE. The CIT(A) upheld the addition.

Issues Involved

  1. Whether reassessment based solely on a DVO’s valuation report is legally valid.
  2. Whether a marginal difference between declared cost and estimated value can justify addition as unexplained investment.
  3. Whether tolerance principles applicable in valuation disputes should apply in cases under section 142A.

 Petitioner’s Arguments

The assessee contended that a valuation report is merely an estimate and cannot by itself establish concealment or unexplained investment. All construction expenses were duly recorded in audited books, and no incriminating material was found during survey.

It was further argued that the variation between declared cost and estimated value was only about 7%, which falls within acceptable tolerance limits recognized in judicial precedents. Therefore, the addition based solely on such marginal difference was unsustainable.

Respondent’s Arguments

The Revenue argued that after the insertion of section 142A, a reference to the Valuation Officer is legally permissible, and the resulting report constitutes valid material for reopening assessment.

It was submitted that the assessee had not provided adequate supporting documents such as labour bills, vouchers, or structural details before the Valuation Officer, making reliance on the estimated valuation justified.

Court Order / Findings (ITAT Allahabad)

The Tribunal held that a DVO’s report constitutes relevant information capable of forming the basis for a belief that income has escaped assessment. Therefore, reassessment initiated on this basis was valid.

On Merits of Addition

On the substantive issue, the Tribunal found that the variation between the declared cost of construction and the DVO’s estimate was approximately 7%, which is relatively minor. It observed that valuation is inherently an estimate based on assumptions, whereas actual expenditure depends on numerous variable factors.

Drawing support from tolerance principles reflected in other provisions such as sections 50C and 55A and relevant judicial precedents, the Tribunal held that such marginal differences cannot justify a conclusion of undisclosed investment.

Accordingly, the addition of ₹9,26,796 under section 69 was deleted.

Important Clarification

The Tribunal emphasized that while valuation reports can justify reopening of assessment, they do not automatically establish unexplained investment. Additions require substantial and significant discrepancies, not minor variations within reasonable tolerance limits.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1771061874_OMPRAKASHSINGHALLAHABADVS.ACITCENTRALCIRCLEALLAHABAD.pdf

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