Income Tax Appellate Tribunal - Ahmedabad
Ruby Builders vs Income Tax Officer on 3 July, 1998
ORDER
R.K. Bali, A.M.
1. This is an appeal by the assessee against the order dt. 13th Jan., 1998, passed by the learned CIT (A) VII, Ahmedabad.
2. The only controversy in this appeal is with regard to the action of the departmental authorities in making/sustaining an addition of Rs. 4,99,300 on account of alleged unexplained investments in the cost of construction in relation to the construction of a building named 'Abhishek' at Gandinagar.
3. Briefly the facts are that the assessee has filed a return of income on 23rd Oct., 1992, declaring an income of Rs. 1,96,690. The AO while examining the case of the assessee which was selected for scrutiny found that the assessee has shown receipts of Rs. 53,37,013 and a gross profit of Rs. 2,39,980 was declared. The assessee derives income from developing land for construction and thereafter constructing multi-storeyed buildings and selling the flats/offices in those buildings. The AO found that in the financial year ending 31st March, 1989, the assessee had purchased a plot of land No. 19 situated in sector-11, Gandinagar from the State Government authorities for a sum of Rs. 13,25,000 in auction on 31st Jan., 1989. The AO noted that the assessee had entrusted the work of construction of 'shopping centre' known as 'Abhishek' to Esvee Builders. As per the agreement entered into between the assessee and said Esvee Builders, Esvee Builders was supposed to submit the bills from time to time for the building materials, construction work and labour, etc. along with the supervision charges at 15 per cent. In the assessment year under consideration the AO found that the assessee has debited a sum of Rs. 16,06,200 on account of cost of construction in the P&L a/c relating to 'Abhishek' shopping centre and this amount of Rs. 16,06,200 was as per the bills issued by Esvee Builders in favour of the assessee inclusive of the supervision charges. During the course of assessment proceedings the AO referred the question of cost of construction of the shopping centre 'Abhishek' to the Departmental Valuation Officer (DVO) who determined the cost of 'Abhishek' at Rs. 68,98,300 as against the value shown by the assessee as per its books of accounts at Rs. 52,62,108. The yearwise break-up and variation in the valuation as per the assessee and as estimated by the Departmental Valuation Officer are as under :
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Sr. Period Cost as per assessee Cost of construction
No. as per valuation
report
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1. 10-1990 to 3-1991 31,70,832 41,56,700
2. 4-1991 to 3-1992 16,60,200 21,05,500
3. 4-1992 to 3-1993 3,69,238 4,84,400
4. 4-1993 to 2-1994 1,15,838 1,51,700
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Total 52,62,108 68,98,300
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From the above, the AO concluded that the difference in the cost of construction as per the valuation report and the amount which has been actually shown by the assessee in its books of account comes to Rs. 16,36,192. Accordingly, the AO asked the assessee to show cause as to why proportionate addition amounting to Rs. 4,99,300 for asst. yr. 1992-93 may not be made to the income of the assessee on account of unexplained investment/expenditure incurred by the assessee in relation to the shopping centre 'Abhishek' which has not been fully accounted for in its books of accounts. In response to the show-cause notice the assessee explained to the AO that the total plot area of the land was 10,000 sq. mtrs. on which the construction was to the extent of 2,500 sq. mtrs. as per the rules and regulations of Gandhinagar Development Authority. It was explained that the entire construction work was entrusted by the assessee to Esvee Builders who carried out the construction work and the assessee had not purchased any material or engaged any labour and as such he was not having any account in relation to the consumption of raw materials, etc. It was submitted that as per the audit report filed under s. 44AB in Form No. 3CD the total construction bill upto the end of this accounting year came to Rs. 47,77,032. Accordingly the assessee pleaded before the AO that no addition can be made to the income of the assessee on account of alleged unexplained investment/expenditure which is not shown in the books relating to the construction of shopping centre 'Abhishek'. The assessee also filed a certificate from chartered engineer and government approved valuer objecting to the valuation of the DVO and submitted that the plinth area rates applied by the DVO on the basis of CPWD rates and Instruction No. 1671 of CBDT were unrealistic. The AO however rejected the submissions made by the assessee through his authorised representative and made an addition of Rs. 4,99,300 on account of alleged unexplained investment/expenditure not fully accounted for in the books in relation to the construction of shopping centre known as 'Abhishek' which was relevant to the asst. yr. 1992- 93.
4. It appears that the AO has also reopened the cases for asst. yr. 1991-92 and have also made additions for asst. yrs. 1993-94 to 1994-95 also on the basis of the alleged suppression of construction cost yearwise on the basis of the report of the DVO vis-a-vis the amount actually shown by the assessee in its books of accounts.
For the asst. yr. 1991-92 the addition made under s. 69C on account of alleged suppression of cost of construction was Rs. 6,25,342. For the asst. yr. 1993-94 the addition made was Rs. 1,15,482 and for the asst. yr. 1994-95 the addition made was Rs. 35,862.
The assessments for the years 1991-92, 1993-94 and 1994-95 have been framed by the AO on 27th March, 1998 whereas the assessment for the asst. yr. 1992-93 which is subject-matter of dispute before us was framed by the AO on 31st March, 1995.
5. The assessee appealed against the order of the AO dt. 31st March, 1995 to the CIT (A) and the learned first appellate authority upheld the action of the AO in making the addition of Rs. 4,99,300 vide order dt. 13th Jan., 1998. The assessee is aggrieved with the order of the CIT (A) and has come up in second appeal before us.
6. Shri K. C. Patel, the learned counsel for the assessee submitted that the assessee-firm is a developer of commercial complex known as 'Abhishek' and it had purchased the land in an open auction from Gandhinagar Development Authority and the construction work has been handed over by it to Esvee Builders, a partnership firm, as per the agreement dt. 3rd Aug., 1989. It was submitted that as per the said agreement Esvee Builders, has to purchase the raw materials, employ labours, contractor, sub-contractor and carry out the construction work as per the approved plan. It was submitted that Esvee Builders had to incur all the expenses on behalf of the assessee i.e. Ruby Builders in respect of construction work as well as day-to-day expenditure and after including 15 per cent over the total cost of construction as supervision charges, Esvee Builders were required to submit the bills for payment to the assessee. It was explained that Ruby Builders the assessee has not incurred any expenditure in respect of cost of construction but Esvee Builders has to incur all the expenses on behalf of the assessee. It was explained that during the assessment year under consideration the assessee-firm got construction bill of Rs. 16,06,200 which has been treated by the assessee-firm as cost of construction and debited to the P&L a/c. It was submitted that the AO has referred the question of cost of construction to the DVO without bringing any material on record to indicate as to how the cost of construction shown by the assessee in its books of accounts was understated or inadequate. In any case it was submitted that the assessee has filed objections to the report of the DVO, by Shri Arun N. Shah approved valuer dt. 25th Jan., 1995, according to which the cost of construction incurred in relation to the disputed property was Rs. 54,90,409 as against report of the DVO wherein the cost was determined at Rs. 68,98,300. It was submitted that the assessee furnished also a second report from the valuer dt. 23rd March, 1995, wherein the cost of construction was estimated at Rs. 54,61,300. It was submitted that the AO as well as the CIT (A) have wrongly rejected the report of the approved valuer and relied on the report of the DVO on a mistaken belief that the factual details given in the report of the approved valuer were incorrect which have been found so by the DVO on actual measurement of the area. The learned counsel for the assessee invited our attention to the observations of the AO at p. 5 of the assessment order wherein it is mentioned as under :
"(i) The area of upper floors is taken at 2,258.48 sq. ft. against, 2,580.60 sq. ft. actually measured and executed by the valuation cell."
The learned counsel also referred to the observations of the CIT (A) in this regard at p. 9 of the appellate order wherein the CIT (A) referred to this very discrepancy that the area of upper floors has been taken by the approved valuer at 2,258.48 sq. ft. whereas on verification by the DVO it was found to be 2,580.60 sq. ft. In this connection the learned counsel has referred to the assessment order passed by the AO for asst. yr. 1991-92 at pp. 5 and 6, copy of which has been furnished to us at pp. 157 to 158 of the paper-book III. The relevant portion of the assessment order reads as under :
(i) that the DVO and the AO (for asst. yr. 1992-93) have wrongly stated that "the area of upper floor was taken by the Regd. Valuer at 2,258.48 sq. ft. against 2,850.50 sq. ft. actually measured.
(ii) that the standard plinth area rates approved by the CBDT and adopted by the DVO consider the floor height at approximately 12 feet whereas the height of the building constructed by the assessee was only 9 feet and this would itself involve substantial reduction in the construction cost.
On the issue at (i) above, I find after verification of the valuation report of the Regd. Valuer and the observations of the DVO as well as AO for asst. yr. 1992-93 that the assessee's argument on this point is correct. But, this would not involve any reduction in the cost of construction as arrived at by the DVO or enhancement in the construction cost debited by the assessee in his books".
Accordingly it was submitted that although the alleged difference was duly explained on account of inclusion of balcony on the first floor and it was so accepted by the AO yet the departmental authorities preferred to follow the report of the DVO without considering the submissions made by the approved valuer of the assessee. It was submitted that since the assessee itself was not actually engaged in the construction work and it has entrusted the carrying out of the construction work to a third party, and the cost of the construction was debited in the books as per the bills of the third party, no tax advantage can be obtained by the assessee showing lesser cost of construction in its books of accounts. Accordingly, it was submitted that the departmental authorities were not justified in making/confirming the addition of Rs. 4,99,300 to the income of the assessee. Reliance was placed on the decision of the Calcutta High Court in the case of CIT vs. Western Estates (1994) 209 ITR 343 (Cal) as well as the decision of the Tribunal in the case S. F. Wadia vs. ITO (1987) 27 TTJ (Ahd) 437 : (1986) 19 ITD 306 (Ahd) and the decision of the High Court (sic) in the case of Nishant Housing Development (P) Ltd. vs. Asstt. CIT (1995) 52 ITD 103 (Pat).
6.1 The learned counsel also relied on the following decisions :
(i) Shanti Complex vs. ITO (1997) 63 ITD 181 (Pat) (TM);
(ii) Babyland Hostel vs. ITO (1988) 31 TTJ (Ahd) 136; and
(iii) ITO vs. Dreamland Enterprises (1995) 81 Taxman 143 (Ahd).
7. The learned counsel for the assessee further objected to the action of the AO in charging interest under s. 234A, 234B and 234C and also the action of the AO in initiating the penalty proceedings under s. 271(1) (c).
8. At the time of hearing, the learned counsel for the assessee raised an alternative argument that even assuming though not admitting that there has been some understatement in the cost of construction as debited in the books of accounts, it will not result into any tax advantage to the assessee because any addition on account of alleged unexplained investment/expenditure required to be made by invoking the provisions of s. 69B/69C will be offset by the claim of an equivalent amount as a deduction under s. 37 because admittedly the amount spent is on acquiring flats/shops in the commercial shopping centre 'Abhishek' which is stock-in-trade of the assessee.
9. The learned Departmental Representative strongly supported the order of the CIT (A) and submitted that the AO was perfectly justified in making a reference to the DVO as an expert to assist him in the discharge of his official duty concerning with the framing of correct assessment of the income of the assessee in the assessment year under consideration. It was submitted that the report of the DVO who is an expert in the field has to be preferred from the report of the approved valuer of the assessee because the report of DVO is based upon plinth area rates as approved by the CPWD. It was submitted that the alleged agreement between the assessee and Esvee Builders with regard to the carrying out of the construction work was only a make- believe arrangement as Esvee Builders was a sister concern having partners who were family members of the partners of the assessee-firm. It was further submitted that though the construction work was carried out by Esvee Builders the same was as per the approved plan by the assessee and it was the assessee alone who was responsible for the actual construction of the building as per the plan approved by Gandhinagar Development Authorities. Accordingly it was submitted that the assessee cannot be excused of showing lesser cost of construction in its books on the plea that it was based on the bills issued by /s Esvee Builders when it is found as a fact on the basis of the report of the DVO that the cost of construction in fact was much more than what was disclosed in the books of accounts. He accordingly submitted that the departmental authorities were perfectly justified in adding the difference, spread over the period of several years on the basis of the cost of construction debited in the books of accounts of the assessee as the unexplained investment/expenditure of the assessee in relation to cost of construction of shopping centre known as 'Abhishek' at Gandhinagar. He accordingly submitted that the addition of Rs. 4,99,300 was perfectly justified in the facts and circumstances of the case.
10. Coming to the alternative plea raised by the assessee's counsel, it was submitted that once the income has been assessed as income from undisclosed sources on account of unexplained investment/expenditure under s. 69B/69C, then the deduction is not available to the assessee under s. 37. It was submitted that the addition has been made by the AO and confirmed by the CIT (A) not under the head "Income from business or profession" but under the head "Income from other sources" and as such no deduction can be allowed to the assessee under s. 37 because under s. 37 expenditure can be allowed as a deduction only against the income from business and profession. It was submitted that once the income is assessed under the head "Income from other sources" under s. 69B/69C then only deduction which can be allowed/claimed by the assessee is under s. 57(3). Accordingly it was submitted that the decisions relied upon by the learned counsel for the assessee are distinguishable on facts. The learned Departmental Representative further argued that even assuming though not admitting that the assessee is entitled to deduction under s. 37 in respect of income which is being treated as deemed income under s. 69C on the ground that the assessee has not been able to record the expenditure in the books of accounts, then it will lead to rendering s. 69C as redundant and it will further encourage the practice of assessee indulging into unaccounted business transactions because then there will be no distinction in an unaccounted business and accounted business. It was submitted that ss. 40A (3) and 69C was brought in the statute to curb the use of unaccounted money in business and if any expenditure is not found recorded in the books of accounts the same has to be deemed as income of the assessee under s. 69C but its claim for deduction will be hit by the provisions of s. 40A (3). Reliance was placed on the decision of the Supreme Court in Attar Singh Gurmukh Singh vs. ITO (1991) 191 ITR 667 (SC). The learned Departmental Representative further submitted that the decisions relied upon by the assessee's counsel are distinguishable on facts.
11. We have considered the rival submissions and have also gone through the orders passed by the AO as well as CIT (A). As regards the objection of the learned representative of the assessee that the AO has not brought any material on record to indicate as to how the cost of construction by the assessee in its books was understated or inadequate and why he has made a reference to the DVO to ascertain the cost of construction of commercial complex known as 'Abhishek', we are of the opinion that the AO while completing the assessment exercised quasi-judicial function and is expected to frame the assessment in accordance with the rules of judicial procedure. In addition to the specific powers with which the AO is vested under s. 131 in the matter of discovery, production of evidence, etc., the AO would exercise the same jurisdiction and power as conferred by the CPC in a civil Court inter alia, in the matter of issuing commissions. In this connection reference could be made to the specific provisions of sub-s. (6) of s. 133. In the instant case one had to consider the plight of the AO before whom a claim was lodged by the assessee stating a figure having been invested in the construction of shopping centre 'Abhishek'. The investment is stated to be based on the bills issued by Esvee Builders to the assessee who were entrusted with the responsibility of constructing the shopping centre. There were no details available in the accounts of the assessee with regard to the cost of construction incurred in relation to the construction of complex 'Abhishek'. The AO himself was not an expert and have no background whatsoever of a civil engineer. Prima facie he was not satisfied with the assessee's claim which he wanted to have verified. Accordingly the AO referred the matter for such verification to the DVO. We do not find anything wrong in the action of the AO in taking the assistance of the Departmental Valuer in estimating the cost of construction incurred by the assessee on the construction of shopping centre 'Abhishek'. After obtaining the report of the DVO, the AO called upon the assessee to show cause as to why suitable addition on pro rata basis may not be made to the income of the assessee on account of unexplained expenditure/investment made by the assessee in the cost of construction of shopping centre 'Abhishek' which according to the AO came to Rs. 4,99,300 in the year under consideration. The assessee objected to the proposed action of the AO and filed a report of the Govt. approved valuer supporting the cost of construction debited by the assessee in its books of accounts. The AO however rejected the report of the approved valuer and preferred the report of the DVO on account of certain alleged discrepancies which were found to be non-existence even by the AO as mentioned in the assessment order for the asst. yr. 1993-94, relevant portion of which we have referred in para 6 above. On appeal, the CIT (A) upheld the action of the AO mostly relying on the alleged discrepancies in the measurement of certain areas which have been found to be non-existence as admitted by the AO in its order for asst. yr. 1993-94 referred to supra. It is also pertinent to note that the AO has not been able to find any specific defect in the books of account. of the assessee with regard to the cost of construction may be because of the fact that the cost of construction was debited in the books of the account on the basis of bills issued by Esvee Builders and the real construction work was carried out only by Esvee Builders who were being separately assessed to tax. In this view of the matter we are of the opinion that the additions made merely on the basis of the report of the DVO in which main emphasis was on some discrepancies in the measurement of areas by the approved valuer, which subsequently were found to be non-existence, cannot be justified.
12. The matter can be looked from another angle also. Admittedly the assessee was carrying out the construction of the shopping centre 'Abhishek' in the course of business. The situation was quite different from another case where building may be constructed as a capital investment. In the former case the expenses are debited to the P&L a/c whereas in the latter case i.e. the case of capital investment, the expenses are not debited in the P&L a/c. It follows that in the former case if the assessee has incurred expenditure in excess of the amounts recorded in the books, then the unexplained expenditure would be assessable as income under s. 69C. On the other hand, in the case of capital investment, unexplained investment if any will be assessable under s. 69B. There are different consequences in the two situations. In the first situation, although the difference of the actual cost estimated by the DVO and the cost shown by the assessee may be assessable as unexplained expenditure under s. 69C, as soon as the amount is debited in the P&L a/c the addition is neutralised and the net result is Nil addition. However, in the latter case i.e. the case of unexplained investment added under s. 69B, since unexplained investment does not go to the P&L a/c, there is no figure setting it off over and the entire amount remains income. Thus, in the present case assuming that even if any addition is required to be made under s. 69C, the entire expenditure towards it has to be allowed as a deduction under s. 37(1). In this connection we may point out that to negative the above reasoning the legislature is proposing to amend s. 69C by introducing a specific amendment in the Finance Bill, 1998, in the following manner :
"29 Amendment of s. 69C. - In s. 69C of the IT Act, the following proviso shall be inserted at the end w.e.f. 1st day of April, 1999, namely :
"Provided that, notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income".
Thus, from the above it is clear that if the reasoning relied upon by the Departmental Representative that if an addition on account of unexplained expenditure is made under s. 69C then the deduction could not be allowed under s. 37(1) was obvious and automatic then there was no need of amending s. 69C by adding the proposed proviso which will come into force w.e.f. 1st April, 1999, and is relevant to asst. yr. 1999-2000 only and has not been made retrospective in operation. The assessment year under consideration is admittedly 1992-93 to which the effect of this amendment, if it is approved and made into law subsequently, will not be applicable. Thus, taking into consideration the totality of the facts and circumstances of the case, we are of the opinion that the Departmental authorities were not justified in making the disputed addition because even if the assessee did incur some additional expenditure in the cost of construction, the equivalent debit in the P&L a/c will neutralise each other and no addition could be made. Accordingly the appeal filed by the assessee is allowed.
13. The appeal is allowed.