Calcutta High Court
Commissioner Of Income-Tax vs Western Estates on 13 August, 1993
Equivalent citations: [1994]209ITR343(CAL)
JUDGMENT Shymal Kumar Sen, J.
1. In this reference made at the instance of the Revenue, the following questions have been referred by the Tribunal to this court under Section 256(2) of the Income-tax Act, 1961 :
"1. Whether on a correct interpretation of the provisions of income-tax law, the Tribunal was correct in not admitting the additional ground taken by the Department that the Commissioner of Income-tax (Appeals) erred in not giving opportunity of being heard to the Departmental Valuation Officer in the matter of working out the cost of construction of the flats and other units at 10, Gurusaday Road, Calcutta ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in upholding the order of the Commissioner of Income-tax (Appeals) deleting the addition made under Section 69B of the Income-tax Act, 1961 ?
3. Whether, on the facts and in the circumstances of the case and also on a correct interpretation of the provision of Section 22 of the Income-tax Act, 1961, the Tribunal was correct in law in upholding the order of the Commissioner of Income-tax (Appeals) that the Income-tax Officer erred in concluding that the annual letting value of the flats at 10, Gurusaday Road, Calcutta, was assessable in the hands of the assessee and thereby deleting the addition made on the point ?"
2. The facts as found by the Tribunal are as under :
This reference relates to the income-tax assessment of the assessee, a partnership firm for the financial year ending March 31, 1975, corresponding to the assessment year 1975-76. The assessee-firm is engaged in the business of constructing multi-storeyed buildings and selling offices and flats therein. The dispute, in this reference, relates to the construction of a multi-storeyed building at No. 10, Gurusaday Road, Calcutta. The assessee started making preparations for construction of a ten-storeyed building at No. 10, Gurusaday Road, Calcutta. The construction work was taken up in 2 phases, one comprising the main building consisting of forty-nine flats and the other comprising the annexe building consisting of thirty flats together with garage-cum-servants quarters block. The work of the foundation at the main building was started towards the end of 1965 and almost completed in the financial year ending March 31, 1967. Owing to sluggish market conditions, there was no further progress in construction during the next three years. The foundation work was carried out by the assessee-firm on its own.
3. On or about November 24, 1970, the assessee-firm entered into a construction agreement with Messrs. B. C. Mitra, contractors, for carrying out the further construction work. The contractor was to be paid at the rate of Rs. 25 per sq. ft. of the carpet area of the flats constructed. The main building was completed by February, 1973. Work on the second phase relating to the construction of annexe building was started in April, 1972, and the same was constructed by May, 1975. This construction was also carried out by Messrs. B. C. Mitra, contractors, who agreed to be paid Rs. 27.50 per sq. ft. in respect of the ground floor and Rs. 34.50 per sq. ft. in respect of the other floors. The garage-cum-servants' quarters were constructed by Messrs. B. S. Construction. But there is no dispute in regard to the construction of the garage-cum-servants' quarters.
4. As per the books of the assessee, the cost of construction of the main building together with the cost of land came to Rs. 25,65,840 and for the annexe building Rs. 24,83,828.
5. The Income-tax Officer referred the question of valuation of the cost of construction of the main building to the District Valuation Officer (DVO) under Section 16A(5) of the Wealth-tax Act, 1957. The District Valuation Officer estimated the value of the main building as on March 31, 1973, at Rs. 54,28,300. In this reference, this court is not concerned with the cost of construction of the main building as the same was already completed in February, 1973, and the present reference before this court relates only to the assessment year 1975-76 corresponding to the previous year April 1, 1974, to March 31, 1975.
6. The construction of the annexe building, as already mentioned earlier, commenced in April, 1972, and was completed in May, 1975. The matter of cost of construction of the annexe building was also referred by the Income-tax Officer to the District Valuation Officer under Section 16A(5) of the Wealth-tax Act, 1957. The District Valuation Officer estimated the cost of construction of the annexe building at Rs. 35,82,804 as against the cost of construction shown in the books of account of the assessee-firm being Rs. 19,99,278. According to the Income-tax Officer, the cost of construction of the annexe building had been understated by the assessee to the tune of Rs. 15,83,126 (Rs. 35,82,404 minus Rs. 19,99,278). Since the construction of the annexe building took place in three financial years, i.e., 1972-73, 1973-74 and 1974-75, corresponding to the assessment years 1973-74, 1974-75 and 1975-76, the Income-tax Officer proposed to treat one-third of the sum of Rs. 15,83,216, i.e., Rs. 5,27,709 as unexplained investment of the assessee-firm in each of these three financial years. On this basis, the Income-tax Officer added Rs. 5,27,709 as the unexplained income of the assessee-firm for the assessment year 1975-76 which is now in reference before this court.
7. The assessee-firm challenged the aforesaid addition made by the Income-tax Officer in appeal filed before the Commissioner of Income-tax (Appeals). It was contended on behalf of the assessee-firm before the Commissioner of Income-tax (Appeals) that,--
(a) The assessee-firm had maintained regular books of account which were duly audited by the firm of chartered accountants.
(b) The Income-tax Officer did not find any deficiency and/or defects in the books of account of the assessee-firm.
(c) The Income-tax Officer did not reject the books of account and/or book results which truly and fully reflected the construction cost.
(d) The Income-tax Officer did not bring on record any material which would justify or warrant the rejection of the cost of construction of the buildings as appearing in the regular books of account of the assessee-firm.
(e) The entire construction work save and except the foundation (which, of course, was completed in the financial year 1966-67) was carried out by the assessee-firm through Messrs. B. C. Mitra, construction contractors, under two separate contracts-one dated February 11, 1970, and the other dated April 12, 1972, and the contractors were paid for the construction work in accordance with the rate per square feet as agreed and determined in the said two agreements.
(f) Even the contractors had maintained regular books of account, which were audited by chartered accountants and they were also assessed to tax on the profits made on such construction work by their respective Assessing Officers.
(g) The report of B. K. Chandra and Associates, Government approved valuer, engaged by the assessee-firm was filed before the Income-tax Officer to show that the construction cost as appearing in the books of account regularly maintained by the assessee-firm was reasonable.
(h) Certain comparable cases of construction of other properties were cited before the Commissioner of Income-tax (Appeals) on behalf of the assessee-firm to show that the cost of construction as shown by the assessee-firm was reasonable.
(i) The Income-tax Officer had accepted the sale proceeds and there is no allegation that the assessee-firm had understated sales. The assessee constructed the building as part of its business activity. The cost of construction in the case of the assessee is a revenue expenditure. The higher the cost, the lower the profits ; and, therefore, logically no builder would ever understate the cost of construction.
(j) The report of the District Valuation Officer obtained under Section 16A(5) of the Wealth-tax Act, 1957, is wholly irrelevant as this was not a case of assessment under the Wealth-tax Act. Under the Income-tax Act, there is no power to make reference to a Valuation Officer save and except under Section 55A of the Income-tax Act, 1961, which Section can be invoked only for the purpose of determining the income chargeable under the head "Capital gains". There is no provision in the Income-tax Act for making reference to the District Valuation Officer for determining the cost of construction. Section 55A has no application for computing business income.
(k) Even the District Valuation Officer did not estimate the cost of construction of the building, but only its fair market value. Cost of construction can never be equal to fair market value. These two are different concepts.
8. The Commissioner of Income-tax (Appeals) considered the aforesaid submissions made on behalf of the assessee-firm and found great force therein. He held that there is no basis for making any addition in the hands of the assessee-firm in the assessment year 1975-76 which is the only year involved in this reference.
9. The Revenue filed an appeal against the aforesaid order of the Commissioner of Income-tax (Appeals) before the Income-tax Appellate Tribunal. It may be noted that the first two questions raised in this reference relating to the assessment year 1975-76 have not been raised in any of the other years even though the Income-tax Officer made additions in different years based on the Departmental Valuation Officer's report and these additions were either deleted and/or substantially reduced by the Commissioner of Income-tax (Appeals) and later by the Tribunal. It may be noted from page 203 of the paper book, paragraph 5 of the Tribunal's order, that as against substantial additions made by the Income-tax Officer under Section 69B of the Income-tax Act, 1961, on account of alleged understatement of cost of construction in the assessment years 1967-68, 1973-74, 1974-75 and 1975-76, the Commissioner of Income-tax (Appeals) confirmed additions of Rs. 75,000 only in the assessment year 1967-68 and Rs. 1,75,000 in the assessment year 1973-74. On further appeal by the assessee-firm before the Tribunal, the addition of Rs. 75,000 confirmed by the Commissioner of Income-tax (Appeals) in 1967-68 was directed to be deleted and as against Rs. 1,75,000 made in 1973-74, the Tribunal confirmed the addition of Rs. 25,000 only. The Revenue accepted the decision of the Tribunal in all the years and did not seek any reference on the question of alleged understatement of the construction cost based on the Departmental valuation report. The present reference relates to the assessment year 1975-76 and in this case, the Commissioner of Income-tax (Appeals) deleted the entire addition as made by the Income-tax Officer and on further appeal, the Tribunal confirmed the order passed by the Commissioner of Income-tax (Appeals) with the observation that there was no justification to interfere with the well-reasoned order of the Commissioner of Income-tax (Appeals) as stated in paragraph 8 of the Tribunal's order at page 207 of the paper book. In other words, the Revenue did not place any further material before the Tribunal to enable it to take a view different from the one taken by the Commissioner of Income-tax (Appeals). The Tribunal noted the various submissions made on behalf of the assessee-firm before the Commissioner of Income-tax (Appeals) and found no justification to take a view different from the one taken by the Commissioner of Income-tax (Appeals). In other words, the addition made by the Income-tax Officer under Section 69B in relation to the assessment year 1975-76, now in reference before this court, was deleted wholly by the Commissioner of Income-tax (Appeals) and the order of the Commissioner of Income-tax (Appeals) was confirmed by the Tribunal.
10. The contention of the Revenue in question No. 1 is to the effect that the Commissioner of Income-tax (Appeals) should have given an opportunity of being heard to the Departmental Valuation Officer. No such ground was raised by the Revenue before the Commissioner of Income-tax (Appeals). The Revenue never approached the Commissioner of Income-tax (Appeals) for giving the District Valuation Officer any notice and/or any opportunity of being heard. The Commissioner of Income-tax (Appeals) is not required to give any notice to the District Valuation Officer under Section 246 and/or 250 and 251 of the Income-tax Act, 1961. It may also be noted that when an appeal is heard by the Commissioner of Income-tax (Appeals) under Section 23 of the Wealth-tax Act, 1957, and one of the questions involved in the appeal relates to the valuation of any asset, the Commissioner of Income-tax (Appeals) is required to give a notice of hearing to the Departmental Valuation Officer under Sub-section (3A) of Section 23 of the Wealth-tax Act, 1957. Similarly, the Tribunal is also required to give a notice to the Departmental Valuation Officer before disposing of an appeal under Section 24(5) of the Wealth-tax Act, 1957.
11. However, in the corresponding sections of the Income-tax Act, namely, Sections 246, 249, 250, 253, 254 and/or 255 of the Income-tax Act, there is no such stipulation for giving an opportunity to the Departmental Valuation Officer of being heard. The reason is obvious because there is no provision in the Income-tax Act either for making a reference to the Departmental Valuation Officer for determining the cost of construction or for obtaining the report of the Departmental Valuation Officer for computing business income. If the Revenue wanted the Departmental Valuation Officer to be heard by the Tribunal, it could on its own request the Departmental Valuation Officer to appear before the Tribunal and represent the case of the Department when the appeal is fixed before the Tribunal for hearing. Similar procedure would have been adopted even at the time of hearing of the appeal before the Commissioner of Income-tax (Appeals). But the Revenue never requested the District Valuation Officer on its own to appear before the Commissioner of Income-tax (Appeals) or before the Tribunal. The only ground raised by the Revenue before the Tribunal and that too not originally but through an additional ground of appeal was to the effect that the Commissioner of Income-tax (Appeals) erred in not giving opportunity of being heard to the District Valuation Officer. The Tribunal in paragraph 3 of the said order clearly held and observed that the appeals before them having arisen under the Income-tax Act, 1961, there was no statutory provision for giving any opportunity of being heard to the District Valuation Officer and in that view of the matter, the Tribunal found no justification in admitting the additional. ground sought to be raised by the Revenue.
12. In our view, in the absence of any provision in the income-tax law requiring the Commissioner of Income-tax (Appeals) and/or the Tribunal to give the Departmental Valuation Officer an opportunity of being heard, the Tribunal was fully justified in refusing to admit the additional ground raised by the Revenue for the first time before the Tribunal in this respect. If the Revenue was really serious, it could have easily produced the District Valuation Officer to represent the Department before the Commissioner of Income-tax (Appeals) and/or the Tribunal. The Revenue did not do so. In the absence of any provision in the income-tax law corresponding to Section 23(3A) of the Wealth-tax Act, 1957, the first question raised by the Revenue in this reference is answered in the affirmative and in favour of the assessee.
13. In the second question raised by the Revenue, in this reference, the only issue in dispute is whether the Tribunal was correct in law in upholding the order of the Commissioner of Income-tax (Appeals) deleting the additions made under Section 69B of the Income-tax Act, 1961.
14. It has been submitted by the learned advocate for the Revenue relying on the decision of the Calcutta High Court in the case of Rahmat Development and Engineering Corporation v. CIT [1981] 130 ITR 602 that Section 69 of the Act deems unexplained investments to be the income of the assessee and that position has to be accepted in penalty proceedings. The moment Section 69 is attracted, the unexplained investments become, by fiction of law, the income of the assessee.
15. It is apparent from the facts already stated hereinabove that the Commissioner of Income-tax (Appeals) passed a detailed order after considering the various submissions and evidence including in particular the fact that the assessee-firm maintained regular books of account, the construction was carried out through a firm of contractors, who were paid the rate per sq. ft. of the area constructed and that no defects were found by the tax authorities either in the books of account maintained by the assessee-firm and/or the vouchers, documents and/or contractors' bills produced by it in support of the construction cost incurred. Furthermore, the Commissioner of Income-tax (Appeals) also noted that the construction cost being a revenue expenditure in the case of the assessee-firm, who carried out the construction as a part of the business activity, it had no tax advantage in reducing the construction cost. The findings recorded by the Commissioner of Income-tax (Appeals) were fully recorded by the Tribunal. The Revenue did not produce before the Tribunal and/or bring on record any material or evidence to enable the Tribunal to take a view other than the one taken by the Commissioner of Income-tax (Appeals). There is no challenge on the ground of perversity in this reference. It is nobody's case that either the Commissioner of Income-tax (Appeals) and/or the Tribunal ignored any relevant material and/or took into account any irrelevant materials and/or evidence. The reports given by the District Valuation Officer were duly considered by the Commissioner of Income-tax (Appeals) in detail and he recorded his findings after considering the case made out by the Income-tax Officer, the District Valuation Officer as well as on behalf of the assessee.
16. In the absence of any challenge on the grounds of perversity the answer to question No. 2 raised by the Revenue in this reference is wholly academic and self-evident. The second question is, therefore, answered in the affirmative and in favour of the assessee.
17. It has been submitted by the learned advocate for the assessee that the third question raised by the Revenue in this reference is clearly covered by the decision in the case of Madgul Udyog v. CIT .
18. The learned advocate for the Revenue disputes the same.
19. The facts as appear from the record with regard to the sale of the flats, inter alia, are that as soon as work on the foundations of the main building commenced, the appellant advertised the fact that flats were available for sale. An intending purchaser was to make an initial deposit as and by way of earnest money. Simultaneously with the making of the initial deposit or soon thereafter, a printed agreement was signed by the assessee and each of the intending purchasers. The provisions of the agreement need not be examined in detail. Suffice it to note that according to Clause 4 of the agreement the balance of the purchase price of the flat was to be paid in specified instalments at different stages of completion of the building as stipulated in that clause. The initial response was good. However, in the years 1967-68 to 1969-70 when, as pointed out earlier, owing to adverse market sentiment, the assessee was forced to suspend work on the building, the frequency of the enquiries about the flats slowed down and the flow of deposits stopped. Things looked up in 1971-72 and all the flats of the main building were taken. The deposits were made, generally, simultaneously with the signing of the agreement for sale. In a number of cases the deposits were made even before the agreement was signed. Quite a few purchasers paid up the entire cost of the flat in one instalment.
20. The demand for the flats completed in the second phase was equally brisk and the flow of funds equally smooth.
21. The main building was completed in February, 1973, and the asses-see handed over the physical possession of the flats to the respective purchasers. The annexe building and the garage-cum-servants' quarters block were completed by May, 1975, and the allottees of the flats were put in physical possession of the flats. In both the cases, no conveyance deed was drawn up and registered. The fact that physical possession was handed over to each of the allottees was brought on record and evidenced first by a letter addressed by the allottees of the flat to the appellant. This was followed by a certificate of confirmation issued by the appellant-firm to each allottee and countersigned by him. This certificate contained (i) the details of the flat sold, (ii) the price at which it was sold, (iii) the manner in which the price was paid by the purchaser, and (iv) the date on which possession of the flat was given to the purchaser. The assesses made it clear therein that, from the date possession was given, the assessee had no right, title and interest whatsoever in the property specified.
22. The Income-tax Officer held that the rental income from the flats must be assessed in the hands of the appellant on the ground that in the case of some of the flats, sale was evidenced by a duly registered conveyance deed. Since most of the flats of the main building were in the possession of the alleged buyers by February, 1973, the Income-tax Officer estimated the gross rental income from the flats for the two months February, 1973, and March, 1973, at Rs. 1,46,040.
23. The Income-tax Officer did not allow any statutory deduction on account of municipal taxes and repairs because under the agreement, the buyers had to bear the municipal taxes and maintenance expenses. With the result, he proposed to assess a sum of Rs. 1,46,060 under the head "Income from house property".
24. The assessee had returned an income of Rs. 1,83,980 under the head "Business" for the assessment year 1973-74. The Income-tax Officer had held that, by reason of there being no effective transfer of the flats, the appellant continued to be the owner of the building. No income, under such circumstances, could be said to have arisen from such transactions. However, as the assessee itself had offered the income for being taxed, the Income-tax Officer computed the net income from business at Rs. 2,13,862 and included it in the appellant's total income "by way of protective measure only".
25. The Commissioner of Income-tax (Appeals), however, accepted the contention of the assessee and held that the Income-tax Officer erred in concluding that the annual letting value of the flats in question was assessable in the hands of the appellant. Accordingly, he deleted the addition made on this count in each of the assessments under appeal.
26. In our view, the contention of the Revenue does not appear to be correct. The question is now concluded by the judgment and decision in the case of Madgul Udyog , and the Tribunal was correct in law in upholding the order of the Commissioner of Income-tax (Appeals) that the Income-tax Officer erred in holding that the annual letting value of the flats at 10, Gurusaday Road, Calcutta, was assessable in the hands of the assessee.
27. Question No. 3 is, therefore, answered in the affirmative and against the Revenue.
28. Mr. Moitra, the learned advocate appearing for the Revenue, made an oral prayer for leave to appeal to the Supreme Court under Section 261 of the Income-tax Act, 1961, in respect of the third question.
29. In answering the third question in favour of the assessee, we have followed the decision of this court in Madgul Udyog v. CIT [1990] 184 ITR 484. Against the said judgment in Madgul Udyog's case leave has already been granted by this court under Section 261 of the said Act. In that view of the matter, we certify that it is a fit case for appeal to the Supreme Court in so far as the third question is concerned. We order accordingly.
30. Let the certificate be drawn up separately. There will be no order as to costs.
Ajit K. Sengupta, J.
31. I agree.