DVO's Construction Cost Estimate Is Not Proof of Unexplained Investment: ITAT Chandigarh Deletes ₹2,12,09,000 Addition Under Section 69
Background and Context
A significant ruling has emerged from the Income Tax Appellate Tribunal (ITAT), Chandigarh Bench, in the case of Hari & Co. Owners Vs ITO (ITAT Chandigarh), concerning Assessment Year 2012-13. The central question before the Tribunal was whether a difference between the assessee's declared construction cost and the Departmental Valuation Officer's (DVO) estimate could, standing alone, constitute sufficient grounds for making an addition under Section 69 of the Income Tax Act, 1961 as unexplained investment.
The Tribunal delivered a clear answer: it cannot. The entire addition of ₹2,12,09,000 was deleted.
The Factual Matrix: Construction of Godowns at Kaithal
The assessee, Hari & Co. Owners, undertook construction of godowns and associated structures at France Wala Road, Kaithal. The cost of construction as disclosed in the assessee's books stood at ₹10.66 crore.
During the course of regular assessment proceedings under Section 143(3), the Assessing Officer (AO) made a reference to the Departmental Valuation Officer on 21.03.2016 for determination of the actual cost of investment in the said construction. The DVO, upon conducting its valuation exercise, estimated the cost of construction at ₹12.78 crore — a figure that was ₹2,12,09,000 higher than the amount declared by the assessee.
Note: The assessee had not filed its Income Tax Return, a fact noted by the Tribunal in its order.
The Reassessment Journey and Revision Under Section 263
To bring the differential amount to tax, the case was reopened and an assessment was framed under Section 143(3) read with Section 147 on 31.12.2019. However, a procedural anomaly occurred at this stage — while framing the reassessment order, the AO accepted the assessee's valuation report and made no addition, apparently having failed to take the DVO report into consideration at all.
This omission attracted the attention of the revisionary authority. The Principal Commissioner of Income Tax (PCIT) invoked powers under Section 263 and set aside the reassessment order on 08.03.2022, directing fresh examination of the DVO report and the consequential addition.
The assessee challenged the validity of the Section 263 proceedings before the Tribunal. However, those proceedings were dismissed by the ITAT Chandigarh vide a common order in ITA Nos. 402 & 403/Chd/2022 dated 31.07.2024. With the validity of the revision proceedings thus concluded, the present appeal before the Tribunal was confined exclusively to the merits of the valuation addition made in the consequential fresh assessment.
Fresh Assessment: Addition of ₹2.12 Crore Under Section 69
In the fresh assessment framed under Section 143(3) read with Section 263 on 24.03.2023, the AO added the entire difference of ₹2,12,09,000 as "investment from unexplained sources" under Section 69 of the Income Tax Act, 1961, relying primarily on the DVO's estimate.
The assessee's challenge before the Commissioner of Income Tax (Appeals), NFAC [CIT(A)] was unsuccessful. The CIT(A), by order dated 22.11.2024, endorsed the findings of the AO. Aggrieved, the assessee carried the matter to the ITAT Chandigarh.