Income Tax Appellate Tribunal - Patna
Nishant Housing Development (P.) Ltd. vs Assistant Commissioner Of Income-Tax on 26 September, 1994
Equivalent citations: [1995]52ITD103(PAT)
ORDER
V.K. Sinha, Accountant Member
1. These are three appeals filed by department for assessment years 1986-87 to 1988-89 and three cross-appeals filed by the department. They are being disposed of by this common order for the sake of convenience.
2. The dispute in these appeals relates to additions made by the Assessing Officer under Section 69 of the Income-tax Act, 1961 as unexplained investments in construction of two multi-storeyed buildings called Surya Apartment and Vaibhav Apartment. The construction was carried out between assessment years 1984-85 to 1988-89. A detailed and consolidated finding for the entire period has been given in the assessment order for assessment year 1986-87 and has been followed in two subsequent years.
3. The assessee is a private limited company and according to the assessment order it had business of construction and sale of multi-storeyed buildings. Profit and loss account and balance sheet have been prepared for all years from regular books of account which have been audited also. The total cost of construction according to the assessee's books was Rs. 84,58,353 for Surya Apartment and Rs. 79,04,406 for Vaibhav Apartment.
4. The Assessing Officer has first given a finding that the cost as per assessee's books should be something else. He has referred to the final bills drawn on M/s Nishant Sahkari Grih Nirman Samiti Ltd., Patna in respect of the two buildings. According to him, the assessee sold the two apartments to the said co-operative society. He analysed the figures in bills and came to conclusion that the net cost of construction for Surya Apartment came to only Rs. 60,48,895 and the net cost of construction for Vaibhav Apartment came to Rs. 75,64,426. These figures are relevant since the Assessing Officer worked the unexplained investment not with respect to the cost of construction as per assessee's books but as per these revised figures. Thereafter, he split the year-wise investment as under :
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Surya Apartment 9,26,086 10,16,819 20,26,380 19,59,842 1,19,7608 60,48,895@ 15.13% 16.81% 33.50% 32.40% 1.98% 113,28 sft.
100%
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Vaibhav 7,12.570 18,60,849 17,33,766 25,65,853 6,91,388 75,64,426@
Apartment 154.13 sft.
100%
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A. Yrs 1984-85 1985-86 1986-87 1987-88 1988-89
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5. Separately, the Assessing Officer made a reference to the District Valuation Officer, Kanpur, for the cost of construction. A report was prepared by the District Valuation Officer on which certain objections were raised by the assessee. After considering the same, the DVO gave a modified report according to which the cost of construction estimated for Surya Apartment was Rs. 93,34,036 and the cost estimated for Vaibhav Apartment was Rs. 82,53,380.
6. The Assessing Officer did not even find the above estimate of the DVO to be satisfactory. According to him 10% for self supervision was not proper since the entire project had been done through a sub-contractor. After deleting the deduction for self supervision, the Assessing Officer estimated cost on the basis of DVO's report for Surya Apartment at Rs. 1,03,89,426 and for Vaibhav Apartment at Rs. 92,07,146. These are only intermediary figures and were not finally adopted, as we will see presently. The Assessing Officer separately conducted independent enquiries about the cost of construction of multi-storeyed buildings constructed at Patna during the same period as that in the case of the assessee. In brief, he found that the cost of construction per sq. ft. was the following in respect of three buildings :-
Sl. No. Name Cost of construction per sq. ft.
1. Udyog Vikash Bhavan, Rs. 192
Bihar State Industrial
Development Corporation,
Patna.
2. Office complex of the Bihar Rs. 210
State Agricultural Marketing
Board, Patna.
3. Staff and Officers quarters Rs. 209
of Income-tax Department
7. On the basis of the above, he estimated the cost of construction for Surya Apartment @ Rs. 209 per sq. ft., i.e., the same as the cost for Income-tax quarters. However, the estimate was reduced to Rs. 201 per sq. ft. for Vaibhav Apartment considering that it had a lesser number of storeyes. The estimated cost in this manner for Surya Apartment came to Rs. 1,11,60,182 and the estimated cost for Vaibhav Apartment came to Rs. 98,64,678,
8. The Assessing Officer adopted the above estimates as the true cost of construction. Thereafter, he deducted the cost, not as disclosed in the books of account, but the cost determined by him on the basis of bills drawn on M/s Nishant Sahkari Grih Nirman Samiti Ltd., Patna. The undisclosed investment worked out for Surya Apartment was Rs. 51,11,287 and the undisclosed investment for Vaibhav Apartment amounted to Rs. 23,00,252.
9. At this stage it will be useful to summarise the various figures and other data as below :-
Vaibhav Surya
(a) Area constructed 49,078 sq. ft. 53,398 sq. ft.
(b) Investment as per books Rs. 79,04,406.00 Rs. 84,58,353.00
(c) Rate per sq. ft. Rs. 154.13 per sq. ft. Rs. 113.28 per sq. ft.
(d) Cost of construction Rs. 75,64,426.00 Rs. 60,48,895.00
reflected in bill to
Nishant Cooperative as
worked out by Assessing
Officer
(e) Cost of construction Rs. 82,53,380.00 Rs. 93,34,036.00
determined by DVO in
modified report
(f) Cost estimated by Rs. 92,07,146.00 Rs. 1,03,89,426.00
Assessing Officer on basis
of DVO's report.
(g) Cost estimated by Rs. 98,64,678.00 Rs. 1,11,60,182.00
Assessing Officer on
basis of I.T. staff
quarter
(h) Rate per sq.ft. Rs. 201.00 per sq.ft. Rs. 209.00 per sq.ft.
(i) Difference worked Rs. 23,00,252.00 Rs. 51,11,287.00
out by Assessing
Officer (g-d)
10. Thereafter, the unexplained investment was apportioned amongst various assessment years by the Assessing Officer as under :-
Surya Apartment A.Y. A.Y. A.Y. A.Y. A.Y. 1984-85 1985-86 1986-87 1987-88 1988-89 Total
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7.82.538 8.59.207 17.12.281 16.56.057 1.01,204 =51.11.287
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Vaibhav Apartment A.Y. A.Y. A.Y. A.Y. A.Y. 1984-85 1985-86 1986-87 1987-88 1988-89 Total
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2.16.683 5.65.861 5,27,218 7.80.246 2.10,244 23,00,252
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11. Various objections were raised before the CIT(A) which may be summarised as below :-
1. The assessee had maintained regular books of account which were audited. No defects had been pointed out. Proviso to Section 145(1) had not been invoked. The Assessing Officer therefore, could not estimate the cost of construction merely on the basis of DVO's report and some comparable cases.
2. The difference in the cost of construction of the two buildings as per DVO's modified report and as per assessee's books amounted to only Rs. 11,24,656 i.e., only about 7% of the total cost. This margin should have been accepted.
3. There were other objections raised by the assessee to the DVO's report which had not been accepted. After accepting the same the difference would be negligible.
4. The other buildings on the basis of which the cost was finally estimated by the Assessing Officer, i.e., I.T. Staff and Officers colony and others were not really comparable.
5. Alternatively, even if there was excess unexplained expenditure and addition was made on account of it, the expenditure should be debited to the profit and loss account. This would reduce the profits by exactly the same amount and, therefore, there would be no net addition.
6. The bill submitted to M/s Nishant Sahkari Grih Nirman Samiti was as per the agreement with the society. Obviously the amount billed and the cost of construction could not be identical. The Assessing Officer had confused the amount billed with the cost of construction and arrived at a cost of his own, which had really no basis; and
7. The DVO had made the valuation based on CBDT Circular No. 1671 which was binding on the Assessing Officer, particularly when he had been unable to find any mistake or omission therein.
12. The CIT(A) passed a lengthy order but in it he dealt with the objection Nos. 4 & 7 only and not the remaining 5 objections. He observed that the three buildings cited by the Assessing Officer were not comparable to the case of the assessee. In the case of I.T. staff quarters under construction, the estimate approved included substantial development cost and cost of other services, which are not comparable to the case of the assessee. The DVO was an expert and his technical valuation could not be lightly rejected without pointing, out any gross or glaring, omissions. The DVO had followed CBDT's Instruction No. 1671 which gave a fair estimate of the cost of construction of both the buildings. He accordingly directed the Assessing Officer "to accept the modified valuation made by the DVO, Kanpur in respect of cost of construction of both the buildings. The Assessing Officer is directed to recompute the addition in respect of unexplained investments in these buildings accordingly".
13. Although the CIT(A) gave a decision that the two costs of construction should be taken according to the DVO's modified report, he has not given any decision on how the unexplained investment should be worked out. Normally, it should be worked out by deducting the cost disclosed by the assessee in its books, but the Assessing Officer has arrived at a modified cost based on the bills submitted to M/s Nishant Sahkari Grih Nirman Samiti Ltd. and in this manner arrived at a higher figure of unexplained investment. The order of the CIT(A) is silent on this aspect of the matter.
14. The assessee is in appeal before us for the addition sustained by the CIT(A) whereas the department is in appeal before us against the relief allowed by the CIT(A).
15. The ld. counsel for the assessee took us through the orders of the Assessing Officer and the CIT(A) and the connected papers and reiterated the arguments given before the CIT(A). In support of his contention that no estimate of cost of construction could be made before giving a finding that proviso to Section 145(1) was applicable pointing out defects in the books, he relied on the following decisions :-
1. R.B. Bansilal Abirchand Spg. & Wvg. Mills v. CIT [1970] 75 ITR 260 (Bom.).
2. Md. Umer v. CIT [1975] 101 ITR 525 (Pat).
3. Dr. (Mrs.) K.D. Arora v. CIT [1986] 162 ITR 481 1 (Pat.).
4. Seikhar Chand Jain & Sons v. IAC [1989] 45 Taxman 45 (Delhi-Trib.) (Mag.).
5. CIT v. Pratapsingh Amrosingh Rqjendra Singh and Deepak Kumar [1993] 200 ITR 788 (Raj.).
16. He, therefore, submitted that the assessee's book results should be accepted and the remaining addition should be deleted.
17. The ld. DR, on the other hand, relied on the order of the CIT(A) and further submitted in the departmental appeal that the comparable cases taken by the Assessing Officer were quite suitable and, therefore, the addition made should be restored. He further invited our attention to para 2 of the assessment order where, according to him, defects had been pointed out in the cost of construction as per assessee's books. He admitted fairly that it had not been recorded as such that proviso to Section 145(1) was being invoked, but from the tenor of the order it followed that the Assessing Officer was proceeding only on the basis of proviso to Section 145(1). He, therefore submitted that the addition made by the Assessing Officer should be restored.
18. We have heard the rival submissions carefully. Some important preliminary legal issues have been raised and it is necessary to deal with them first. The assessee is a builder and had maintained regular books of account which were closed and adjusted and were also audited. It was claimed that all expenditure incurred on the construction of the two buildings - Surya Apartment and Vaibhav Apartment, had been entered in the account books. The first question for consideration is the circumstances under which the Assessing Officer can estimate higher cost of construction.
19. In this context it will be necessary to refer to Section 145(1) of the Income-tax Act which lays down that income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall be computed in accordance with the method of accounting regularly employed by the assessee. It is not in dispute before us that the assessee had a method of accounting and it was regularly employed by it. It becomes mandatory in terms of Section 145(1) to compute the income in accordance with the assessee's accounts. Two exceptions have been provided to this mandatory provision. The first is contained in the first proviso below Section 145(1) according to which where the accounts are correct and complete to the satisfaction of the Assessing Officer but the method employed is such that the income cannot properly be deduced therefrom, computation shall be made upon such basis and in such manner as the Assessing Officer may determine. The second exception is provided in Section 145(2) which lays down that where the Assessing Officer is not satisfied about the correctness or the completeness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee, the Assessing Officer may make addition in the manner provided in Section 144. The Assessing Officer has not mentioned either proviso to Section 145(1) or Section 145(2) in his order. However, we may still see if any of these are applicable on the basis of material brought on record by him. The ld. DR has invited our attention to paragraph two of the assessment order. We have already noticed the contents of this paragraph earlier. The Assessing Officer analysed the final bills to M/s Nishant Sahkari Grih Nirman Samiti Ltd. He has overlooked the distinction between "cost", which is a fact and "price" which is matter of policy or agreement. He described the bills as "final bills of cost". Whereas in fact they were "final bills of price". His entire exercises thereafter was fruitless. His conclusion that the net cost of construction came to Rs. 60,48,985 for Surya Apartment against Rs. 84,58,353 as per assessee's books and that the net cost of construction of Vaibhav Apartment came to Rs. 75,64,426 as against Rs. 79,04,466asperassessee's books is based on wrong premises and is, therefore, rejected by us.
20. Two conclusions follow from the above discussion. The first is that no defects in the books have been pointed of the nature described in proviso to Section 145(1) or Section 145(2). The second conclusion is that the base figure for unexplained investment, if any, should be the amounts recorded in the assessee's books and not the estimated figures arrived at in para 2 of the assessment order. This second conclusion takes care of objection No. 6 raised before the CIT(A), and also before us, in addition to the first objection.
21. A weak attempt was also made by the ld. DR by inviting our attention to para 17 of the assessment order where it was mentioned that the investment shown by the assessee was incorrect and unreliable. However, this observation is not based on the examination of the assessee's books of account and supporting documents but on the basis of estimates of cost of construction obtained by the Assessing Officer in the case of some other buildings. The remark, therefore, does not fulfil the conditions laid down either in proviso to Section 145(1) or Section 145(2).
22. We will now look at the cases relied upon by the ld. counsel for the assessee in support of the contention that an estimate cannot be made without first rejecting the books under proviso to Section 145(1) or Section 145(2). In the case of R.B. Bansilal Abirchand Spg. & Wvg. Mills (supra) there was a dissolution of a firm and the cost of assets had to be ascertained in its connection. There was no material on record to show that the valuation by experts was either exaggerated or incorrect. It was held that the officer's right under the proviso to Section 13 of the Indian Income-tax Act, 1922 (corresponding to proviso to Section 145(1) of the Income-tax Act, 1961) arises only after a finding is recorded as to the unacceptability of the method an 1 irregularities of the accounts kept. In the absence of such a finding recorded by the authorities the book results could not be ignored or brushed aside. The mere fact that the percentage of dead loss of cotton is high. in a particular year cannot lead to an inference that thereby there has been a suppression of the production of spinning mill.
23. In the case of Md. Umer (supra), no finding was recorded by the departmental authorities as to the unacceptability of the method and irregularity of the account kept by the assessee. It was held that it was well settled that in the absence of such a finding recorded by the authorities, the book results could not be ignored or brushed aside.
24. In the case of Dr. (Mrs.) K.D. Arora (supra), it was held that levy of penalty under Section 271(1)(c) of the Act was not justified where the difference between the cost of construction as disclosed by the assessee and the cost estimated by the revenue was only marginal.
25. In the case of Seikhar Chand Jain & Sons (supra) it was held that it would not be justifiable to totally ignore books of account supported by registered valuer's report regarding cost of construction of building and rely solely on DVO's report.
26. First two cases discussed above relate to estimates of production or g.p., whereas the third relates to levy of penalty under Section 271(1)(c). The fourth case deals with cost of construction. Finally we came to the decision of the Rajasthan High Court in Pratapsingh Amrosingh Rajendra Singh and Deepak Kumar's case (supra) which was a case of estimate of income from undisclosed sources being unexplained investment in property. It was held that there was no dispute that the assessee maintained proper books of account and the same had been accepted in the past and no defects were pointed out in the books. The expenses were fully supported by vouchers. Full details were also mentioned in respect of each items in the books. Simply because the valuation report of the valuation cell was of a higher amount, the books could not be said to be unreliable. The Tribunal was, therefore, justified in deleting the addition. Relevant extract at page 971 :-
We have considered the matter. In respect of the investment which is made in the property, there can be only two methods to find out the correct position (0 when proper books of account are maintained, and (ii) valuation report. If the assessee has maintained proper books of account and all details are mentioned in such books of account, which are duly supported by vouchers and no defects are pointed out and the books are not rejected, the figures shown therein have to be followed. The valuation report can be taken into consideration only when the books of account are not reliable or are not supported by proper vouchers or the Income-tax Officer is of the opinion that no reliance can be placed on such books of account. It is true that the Income-tax Officer has no option but to rely on the valuation report which is a document prepared by an expert and is admissible, but there must be a finding by the Income-tax Officer that the books of account maintained by the assessee are defective or are not reliable. There may be a marginal difference in the actual investment and the report of the Valuation Officer for a number of reasons as the valuation report is prepared on the basis of norms prescribed by the C.P.W.D. for the construction of buildings and the difference may be with regard to quality of the materials, etc. The Income-tax Officer could have examined the matter in details with regard to the books of account in order to say that the books are not reliable. Simply because the valuation report is of a higher amount, the books cannot be said to be unreliable unless, by a deeper probe, any defect is found in the maintenance of the books of account. The Tribunal was, therefore, justified in deleting the addition of Rs. 55,780.
27. The case law is, therefore, overwhelmingly in favour of the assessee that the cost of construction as per books cannot be rejected and an estimate made without first bringing the case either under proviso to Section 145(1) or under Section 145(2). The case has been brought under neither of these. We, therefore, hold that the cost of construction as per assessee's books cannot be rejected and a higher estimate cannot be made either on the basis of the report of the DVO or any other case considered comparable. The additions sustained by the CIT(A) are, therefore, deleted on this preliminary issue.
28. Having come so far we will also deal with other objections for the sake of completeness. This is a case of a builder. According to the Assessing Officer, the business consisted of construction and sale of multi-storeyed buildings and according to him Surya Apartment and Vaibhav Apartment were sold to M/s Nishant Sahkari Grih Nirman Samiti. However, the Id. counsel for the assessee explained to us that the assessee was never the owner of the apartments and the contract as per agreement was only for construction, where the material and labour were both supplied by the assessee. In return, the assessee was to be paid at an agreed price as per the agreement. A copy of the relevant agreement could not be produced before us. Be that as it may, the facts remain that the assessee was carrying out the construction in the course of business. The situation was quite different from another case where a building may be constructed as a capital investment. In the former case, the expenses are debited to the profit and loss account whereas in the latter case, i.e., the case of capital investment, the expenses are not debited in the profit and loss account. 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 Section 69C of the Income-tax Act. On the other hand, in the case of a capital investment, unexplained investment if any will be assessable under Section 69 of the Income-tax Act, 1961. There are different consequences in the two situations. In the first situation although some amount may be assessable as unexplained expenditure under Section 69C, as soon as the amount is debited in the profit and loss account, the addition is neutralised and the net result is a nil addition. However, in the latter case, since unexplained investment does not go to the profit and loss account, there is no figure setting it off and the entire amount remains income. This distinction has not been kept in view by the Assessing Officer. In the present case, as has been discussed in the assessment order, even if there was some unexplained expenditure, the addition under Section 69C of the Act and the additional debit in the profit and loss account will neutralise each other. Thus, there is merit in the objection No. 5 raised before the CIT(A), and also before us and we, therefore, hold that no addition can be made for this reason also.
29. Further, the ld. counsel for the assessee has brought to our notice a copy of a letter dated 15-10-1990 from the Superintending Engineer (Valuation), Kanpur addressed to the assessee's Architects, according to which, "being an estimate it is bound to have certain variation from the actual cost of construction. The expected variation limit for finding out cost of construction by this method is 5% to 10%".
30. We have noticed above that the excess of the total cost of the two buildings estimated by the DVO was only 7%. This falls within the expected variation limit even according to the DVO. For this reason also the cost of construction as per books should be accepted.
31. We may mention in this connection that the ld. DR placed reliance on the decision of the Punjab & Haryana High Court in the case of Dina Nath v. CED [1970] 77 ITR 193 for his contention that the valuation report of the DVO was not binding. However, on referring to the decision we find that the facts are distinguishable. There the valuation had been made by a registered valuer on behalf of the assessee and it was held that the report was both inaccurate and unreliable. In these circumstances, it was held that it could be rejected. In the present case, the report was prepared at the instance of the Assessing Officer himself by the DVO of the Government of India, who followed CBDT Instruction No. 1671 and his report has not been found to be incorrect or unreliable. The case law, therefore, does not help the department.
32. For the above reasons, the addition sustained by the CIT(A) is deleted. The assessee's appeal is allowed and the department's appeal is dismissed.