Facts of the Case

A search under section 132 was conducted on the assessee’s premises on 27.08.2009, followed by assessments under section 153A. Additions were made on two principal issues:

  1. Alleged bogus sundry creditors
  2. Unexplained investment in construction based on a District Valuation Officer (DVO) report

Earlier appellate proceedings had resulted in remand directions by the Tribunal to verify old balances of creditors and reconsider valuation issues. The CIT(A), after re-examination, partly sustained additions, leading to further appeals before the Tribunal covering multiple assessment years from 2004-05 to 2009-10.

 Issues Involved

  1. Whether old balances of trade creditors can be treated as bogus liabilities.
  2. Whether additions can be sustained for new creditors without documentary evidence.
  3. Whether valuation-based additions for construction are justified when books exist but primary evidence is lacking.
  4. Whether a DVO report under section 142A is binding on the Assessing Officer.

Petitioner’s Arguments

The assessee contended that regular books of account were maintained, audited, and accepted in earlier years without invoking section 145(3). Many creditor balances represented opening balances carried forward from prior years and therefore could not be treated as unexplained.

Regarding construction, it was argued that expenditures were recorded in books and supported by accounting entries; reliance on the DVO report without rejecting books was improper. Judicial precedents including Sargam Cinema vs. CIT and CIT vs. Lucknow Public Education Society were cited to contend that valuation cannot override recorded figures without valid rejection of books.

Respondent’s Arguments

The Revenue argued that the assessee failed to produce primary evidence such as bills and vouchers to substantiate creditor balances and construction expenses. Ledger entries alone were insufficient to establish genuineness.

It was further contended that the DVO report constituted the only reliable basis for determining investment in the absence of supporting documents and therefore had been rightly adopted.

Court Order / Findings (ITAT Allahabad)

The Tribunal held that balances carried forward from earlier years (opening balances) could not be treated as bogus liabilities in the absence of evidence showing cessation or falsity. Additions relating to such old balances were deleted.

However, for creditors appearing for the first time during the relevant year, the assessee was required to furnish supporting evidence. Since only ledger accounts were produced without corroborative proof, additions relating to such new creditors were sustained.

On Construction Investment Based on DVO Report

The Tribunal observed that failure to produce primary evidence justified the reference to the Valuation Officer. Therefore, the reference itself was valid.

However, it rejected the appellate authority’s view that the valuation report was binding. Under section 142A, the Assessing Officer must consider objections raised by the assessee and apply independent judgment before adopting the valuation. Since objections had not been properly examined, reliance on the report was flawed.

Accordingly, construction-related additions were restored to the Assessing Officer for fresh adjudication after considering the assessee’s objections to the valuation.

Across Multiple Assessment Years

  • Deleted additions relating to old creditors
  • Sustained additions for unsupported new creditors
  • Remanded valuation-based additions for fresh consideration
  • Held that interest liability would vary according to revised assessments

Several appeals were partly allowed, while some were dismissed where no evidence was furnished.

Important Clarification

  • Opening balances cannot be taxed as unexplained liabilities without proof that they are fictitious.
  • Valuation reports under section 142A are advisory and not automatically binding; authorities must examine objections before making additions.

Thus, proper evidentiary verification remains essential in search assessments involving creditors and construction investments.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1771062921_MSKESARWANIJARDABHANDARALLAHABADVS.JOINTCOMMISSIONEROFINCOMETAXCENTRALCIRCLEALLAHABAD.pdf

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