Reference to valuation officer

The assessee is an educational society registered under s 12A. The main activity of the assessee-society is the running of schools in the city of Lucknow. The assessee-society was constructing a building at Sahara Estates, Jankipuram, Lucknow. During the course of the assessment proceedings, the AO made a reference to the Valuation Officer for estimating the cost of construction of the said building. The Valuation Officer submitted the valuation of the cost of construction. The AO took this valuation for the purposes of valuing the asset and made an addition to the total income. In an appeal, the CIT(A) deleted the addition on the ground that even if the excess cost of construction represented income from undisclosed sources, since the entire income of the society was fully applied for charitable purposes, such undisclosed income would still be exempt from tax. The Tribunal dismissed the appeal filed by the revenue, holding that without rejecting the books of accounts which are audited, the AO cannot resort to estimation. Being aggrieved, the revenue has filed the present appeal.

The issue is whether before making a reference to the Valuation Officer under s 142A, it is necessary for the AO to reject the books of account in terms of s 145(3).

The Supreme Court in the case of Sargam Cinema v CIT [2010] 328 ITR 513, has held that the Assessing Authority cannot refer the matter to the Departmental Valuation Officer without first rejecting the books of account.

The AO must reject books of account before making a reference to Valuation Officer under s 142A as held by AIIHC in CIT v Lucknow Public Educational Society In favour of: The Assessee; IT Appeal Nos. 136 of 2007, 93 of 2008 and 156 of 2009

Decided on: 17 March 2011