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2017 DIGILAW 1085 (GUJ)

Hotel Celebration v. Income Tax Officer

2017-06-15

AKIL ABDUL HAMID KURESHI, BIREN VAISHNAV

body2017
JUDGMENT : Akil Abdul Hamid Kureshi, J. 1. This petition is filed by the assessee to challenge a notice dated 14.03.2013 issued by the respondent-Assessing Officer to reopen assessment for the assessment year 2006-07. 2. Brief facts are as under: "The petitioner is a partnership firm and is engaged in the business of running a hotel. Earlier, one of the partners of the firm Mr. Jagdish Bhatt had started construction for the purpose of running a hotel by the name Hotel Celebration as proprietary concern. Substantial portion of the construction was carried on between 01.04.2004 and 31.03.2004. Construction continued in the next financial year also. For some point, the proprietor wanted to transfer the business of running the hotel. The present petitioner-partnership firm was constituted, who took over the under-construction hotel business on 20.09.2005. According to the petitioner, some finishing work was left out, which was done by the partnership firm after the said date. The return of the erstwhile proprietor for the assessment year 2005-06 was taken in scrutiny. During such scrutiny, the question of cost of construction came up for consideration. Assessing Officer referred the issue for valuation. The DVO's report, however, did not arrive within time. The Assessing Officer framed the assessment without making any addition on the score. Subsequently, notice for reopening of the assessment was issued on the basis that according to DVO total investment in construction during the period between 01.04.2004 to 01.07.2005 was Rs. 1.82 crores. According to the Assessing Officer, the assessee had shown the cost of construction upto 20.09.2005 only at Rs. 64.11 lacs. On such basis, the assessment was reopened." 3. In case of the present petitioner, the assessment of the return for the year 2006-07 was similarly carried out and completed. To reopen such assessment also the Assessing Officer issued the impugned notice. In order to do so, he relied on the same report of the valuation and recorded following reasons: "In this case, assessment was finalized u/s. 143(3) on 31.12.2008 and income assessed at Rs. 15640/-. During the course of assessment proceedings investment in construction of hotel building was examined. 2. A reference was made to the valuation officer on 17/08/2007 to determined value of property, known as Hotel Celebration during the course of assessment proceedings u/s. 143(3) in case of M/s. Hotel Celebration, Jamnagar. 15640/-. During the course of assessment proceedings investment in construction of hotel building was examined. 2. A reference was made to the valuation officer on 17/08/2007 to determined value of property, known as Hotel Celebration during the course of assessment proceedings u/s. 143(3) in case of M/s. Hotel Celebration, Jamnagar. However, valuation report was not received till the completion of time barring Assessment year 2006-07 i.e. 31.12.2008. During the course of assessment proceedings total value of land and building was declared by assessee was Rs. 64,11,464/- for land and building up to 20.09.2005 and Rs. 66,87,372/- at the end of year i.e. 31.03.2005. 3. The valuation officer prepared report on 02.12.2011 and submitted it on 08.12.2011 determining total cost of investment Rs. 1,82,16,349/- for financial year 2004-05 and 2005-06 against declared cost of Rs. 66,87,372/- by the assessee firm. 4. During the course of assessment proceedings, the firm made submission vide letter dated 30.10.2008 as under: "Shri Jagdishchandra P. Bhatt originally commenced the business in the name of Hotel Celebration as proprietary concern. With a view to broad base the activity, partnership firm in the name of Hotel Celebration took over the running business of Hotel Celebration as a going concern within effect from 20.09.2005. Copies of ledger accounts of all assets together with copies of bills are submitted herewith. You may kindly note that the opening balance mentioned in the ledger account is balance incurred upto the date of the formation of partnership." 5. It is seen that assessee firm has debited expenditure on its account Rs. 2,75,908 (66,87,372-64,11,464) which is required to be determined true value of investment proportionate to total cost of value determined as per valuation report received on 08.12.2011 from the Departmental Valuer as mentioned above para. As the valuation report is prepared for entire hotel building this portion of expenditure is also considered to assess true value of expenditure by the firm for the period from 21.09.2005 to 31.03.2006. The Departmental Valuer has determined total value of hotel building at Rs. 1,82,16,349/- against total investment declared by the assessee for Rs. 65,87,372/-. Thus proportionate investment not declared by the firm for the period from 21.09.2005 to 31.03.2006 to the tune of Rs. The Departmental Valuer has determined total value of hotel building at Rs. 1,82,16,349/- against total investment declared by the assessee for Rs. 65,87,372/-. Thus proportionate investment not declared by the firm for the period from 21.09.2005 to 31.03.2006 to the tune of Rs. 4,75,663/- (7,51,571-2,75,908) as per the e detail working in Table A & B below which has escaped the assessment and assessee firm has failed to declare fully and truly all material facts necessary for assessment year 2006-07 regarding expenditure incurred for construction of Hotel Building. In view of the above, I have reason to believe that the income chargeable to income tax escaped assessment at least to the above extent for the above Assessment year within the meaning of section 147 of the Income Tax Act, 1961. Therefore, I am satisfied that it is a fit case of reopening for the assessment by issuing notice u/s. 147 of the IT Act, 1961." 4. From the reasons recorded by the Assessing Officer it can be seen that the total cost of construction of building was Rs. 66.87 lacs as per the records of the assessee. Out of which, Rs. 61.11 lacs was spent up to 20.09.2005. However, as per the valuer's report dated 08.12.2011, total investment in construction was Rs. 1.82 crores during financial years 2004-05 and 2005-06. 5. Though these reasons do not indicate further details of the report of the DVO, reasons recorded by the Assessing Officer in case of the proprietor for reopening his assessment for the assessment 2005-06 show that according to the valuer, the said investment of Rs. 1.86 crores was made during the period between 01.04.2004 and 01.07.2005. We have tried to verify whether the latter date 01.07.2005 was a typographical error. However, we find that even while disposing of the objections raised by the said assessee, the Assessing Officer has stuck to this date. We may, therefore, proceed on such basis. Thus, according to the reasons recorded by the Assessing Officer, in the connected case, the DVO's report dated 08.12.2011 suggests that total investment in construction of Rs. 1.82 crores was made between 01.04.2004 and 01.07.2005. 6. The petitioner partnership firm came into picture only on 20.09.2005 when it took over the hotel business. The partnership can be made accountable for the cost of construction after the said date. 1.82 crores was made between 01.04.2004 and 01.07.2005. 6. The petitioner partnership firm came into picture only on 20.09.2005 when it took over the hotel business. The partnership can be made accountable for the cost of construction after the said date. Since the Assessing Officer relies only on the DVO's report it is difficult to appreciate how he contends that the present petitioner had made any unaccounted investment in construction. If we peruse the reasons recorded by him more minutely, we find that a rather unconventional approach was adopted by the Assessing Officer to project the cost of construction over the entire span of financial year 2005-06. He noted the declared cost of construction by the two assessees during the financial years 2004-05 and 2005-06. He took note of the declaration of the petitioner of investment made in construction after 20.09.2005. He then broke up the total cost of construction of Rs. 1.82 crores estimated by the DVO over two financial years and then projected the figure commensurate to the financial year 2005-06 in the proportion of the declared cost of construction pre and post 20.09.2005. This is a rather bizarre and wholly impermissible method of extrapolation. The Assessing Officer had to have tangible material at his command to enable him to form a belief that income chargeable to tax had escaped assessment. His belief is based on presumption of extrapolation even otherwise wholly impermissible on the basis of materials on record. To reiterate, according to the report of the DVO, the entire investment of Rs. 1.82 crores in construction was made before 01.07.2005. There was thereafter, no question of apportioning any portion thereof during the period after 20.09.2005. In any case, the same could not have been done without basis or further opinion available with the Assessing Officer. Only in the present case, we are concerned with the reopening of an assessment which was previously framed after scrutiny and whet her such notice is issued beyond a period of four years from the end of the relevant assessment year. 7. For such reasons, this petition is allowed. Impugned notice dated 14.03.2013 is set aside. Rule is made absolute.