1987-VIL-47-ITAT-AHM

Income Tax Appellate Tribunal AHMEDABAD

ITA No. 2019/Ahd/198

Date: 08.12.1987

BABYLAND HOSTEL

Vs

INCOME TAX OFFICER

For the Assessee : K. C. Patel
For the Revenue : A. K. Hajela

BENCH

P. J. Goradia (Accountant Member) And U. T. Shah (Judicial Member)

JUDGMENT

These two cross appeals against the order of the CIT (A) involving a common point of dispute are disposed off together for the sake of convenience.

2. The assessee is a firm and runs a residential hostel known as "Babyland Hostel" and a School known as "St. Karve School." The assessment year is 1981-82 and the relevant previous year is the Financial year ended on 31st March, 1981.

3. As we narrate the facts, it would appear that the Income-tax authorities have made fantastic addition ignoring all the principles of law and accounts. While framing the assessment under s. 143(3) of the Act, the ITO made an addition of Rs. 3,40,472 on account of alleged unexplained investment in the construction of Babyland Hostel in the following manner:

"As search under s. 132 was carried out at the premises of the assessee firm and at that time it was found that a new hostel building is constructed by the assessee firm. Construction of this hostel building is completed during the period relevant to asst. yr. 1981-82. The cost of construction as shown by the assessee firm in books of accounts is Rs. 3,27,728 (excluding value of the land). It is double storeyed hostel building. Looking to the total area constructed and the year of construction it was noticed that the actual cost of construction would be much more than what is shown by the assessee firm in books of accounts. The matter was therefore, referred to the valuation officer Income Department, Rajkot on 12th Sept., 1984 to ascertain the correct cost of construction of this hostel building. The Valuation officer vide his report sent under his No. 2A(B)VOR/84-85/2958, dt. 31st Jan., 1985 has worked out the probable cost of construction of the building at Rs. 6,68,200 (excluding cost of land) as against the declared cost of Rs. 3,27,728, The report of the Valuation Officer is based on prevailing market rate of labour and materials during the period of construction of the building. This shows that the assessee firm has shown cost of construction much less than what it should have been.

As the Valuation Officer has correctly worked out the probable cost as per his detailed report, this amount of Rs. 6,68,200 is required to be adopted as correct cost as against the cost of construction shown by the assessee firm which is Rs. 3,27,728. A letter is, therefore, written to the assessee firm on 7th Feb., 1985 inviting their objections, if any, for adopting the correct cost of construction at Rs. 6,68,200. This letter is delayedly served on 7th Feb., 1985. The assessee firm has filed their reply in response to this letter. This is duly considered. Shri Doshi representative, represented that the cost of construction worked out by the Valuation Officer is very high. He further represented that the building was constructed under personal supervision of the partners of the firm and the building material was also purchased by them from the market at a very competitive rates. Shri Doshi has accordingly requested that the cost of construction as per books should be accepted. The Valuation Officer, IT Department, Rajkot has duly considered this point. He has already deducted 7.5 per cent of the estimated cost for self supervision. All considered, it is held that the probable cost of construction is Rs. 6,68,200 of this building as worked out by the Valuation Officer, Rajkot. The difference between the probable cost of construction as worked out by the Valuation Officer Rajkot and the cost of construction as shown by the assessee firm, which comes to Rs. 3,40,472 is added to the income of the assessee firm as income from undisclosed sources utilised for construction of this hostel building. Notice under s. 274 r/w s. 271(10(c) is issued for concealment of income by furnishing inaccurate particulars."

4. The assessee's letter referred to in the aforesaid order of the ITO reads as under:

"We are in receipt of your letter. You have proposed to adopt the cost of construction of the Hostel Building at Rs. 6,68,200 as worked out by the Valuation Officer. You have also stated in your letter under reply that you have considered the cost of construction worked out by the Valuation Officer as "quite reasonable."

We have already filed with you a valuation report of our Architect, Mr. Jalvant Vora who has given detailed working of the cost of construction. Our Architect has given you the cost item-wise and arrived at the cost of construction. Moreover, during the course of hearing, we have also filed with the Valuation Officer a letter dt. 30th Jan., 1985 giving details of the cost of construction according to P.W.D. rates. We had also produced before him various type rate of cost of construction of P.W.D.

As early as stated the cost of construction of the Hostel building is also substantiated with the purchase bills and vouchers. As against this you have stated in your reply that the cost of construction as proposed by the Valuation Officer is reasonable. You are requested to let us know the items in respect of which variation is in the cost of construction. You are also requested to give us the valuation worked out by the Valuation Officer and in the absence of the working of Valuation, we would not be able to point out the difference in the cost or working.

It would be in the interest of justice, you should point out to us the reason for which you do not agree with the valuation report filed by us. If you furnish us the reasons we would try to explain the discrepancy in the valuation, if there be any. In spite of the above if you adopt the valuation on the basis of the valuation report of the department, the assessment would be null and void and without any basis."

(Underlined italicised in print by us)

5. In appeal before the CIT (A), the assessee resisted the action of the ITO on various grounds, which has been summarised by the CIT(A) in para 2 of his order as under:'

"The following objections have been raised by the learned counsel against the valuation of the Department Valuer. The first and foremost objection is that the appellant has maintained proper books of accounts and these books have been examined by the ITO and that they have not been rejected by the ITO. All the vouchers and bills for the purchase of building materials like cement, steel, bricks, wood etc. have been produced and the same have been examined by the ITO. The ITO has not given any specific reason for rejecting the books result. In fact there are no finding of the ITO. Thus, it is urged that the ITO should not have referred the matter to the Department, Valuer. The other objection is that the appellant's Valuer, who was on the site soon after the construction was over, has inspected the property and a valuation report has been submitted to the ITO which is reasonable. There is no provision in the Act to refer the matter to the Valuation Cell when the assessee submits a report of the approved and registered valuer. It is also objected that there is a comparable case of rate of construction and the cost of construction of Public Work Department. It is stated that M/s N. Kunverji & Co., carried out the construction of Gujarat Government and the rate of cost of construction is Rs. 427 per sq. meter and this is very much comparable case because the construction took place in the year 1979-80 in both these cases. The other objection is that the Department Valuer has given a comparable case which is not at all comparable. Therefore, it is urged that the Department Valuer has wrongly compared the case of the appellant with Shri Ram Bungalow which is situated at the Kalavad road. Thus, it is urged that since the ITO has not given any findings and the Department Valuer has erred in taking the valuation at Rs. 790 as against Rs. 450 per sq. meter disclosed by the appellant when the rate of the Gujarat Government was done at Rs. 427 per sq. meter. The appellant has based his arguments on the basis of the objections raised by his approved valuer Mr. Jalvant Vora. It is stated that the Department Valuer has seriously erred in comparing the case of the appellant with that of Shri Ram Building. The Department Valuer was also present at the time of hearing of this appeal and he has also submitted his report objecting therein the valuation report of the appellant's valuer is not at all supported by materials facts. It is objected by the Department Valuer that the height of 380 meters as against normal height of 280 meters for residential construction. It is also objected that the comparable case quoted by the appellant in the case of M/s N.Kunver ji & Co. cannot be taken into account because the Gujarat Government might have supplied the building materials like cement and steel etc. to the contractors at concessional rate and therefore, no comparison could be made. It is also objected that there is a wide variation in the quantity of the materials used in the construction as worked out in the estimate and that supplied at the time of hearing. It is also objected that the details of the measurement now furnished have no relevance to the estimation. The Department Valuer has stated that he has followed the instruction No. 365 of the CBDT. He stated that the variation in the valuation of the cost of the construction may be the tune of 10 per cent either way."

(Underlined italicised in print by us)

6. Apart from the aforesaid oral submissions, the assessee had also field detailed written submissions before the CIT (A) which reads as under:'

"In respect of the hearing of the above referred appeal we are making the following submissions which may please be considered before finalising the appeal.

In respect of the above referred assessment year we have been assessed on a total income of Rs. 3,90,000 as against returned income of Rs. 57,400. The principal addition to the returned income is no account of cost of construction added to the income of year petitioner on the basis of the valuation report of the Departmental Valuer. The addition made on this account amount to Rs. 3,40,472.

The above addition on account of cost of construction is absolutely without any basis. The assessment relates to asst. yr. 1981-82 and proceedings for assessment were stated very late. The learned ITO referred the matter to the Departmental Valuation Officer and we have fully co-operated with the valuation Officer in furnishing him with such date and materials as is required and which would be helpful. in determining the real cost of the building. However, the Valuation Officer totally ignored all principles in arriving at the cost of construction and has valued the property on ad hoc basis. Not only this but an objection letter was also filed stating to the Valuation Officer that your petitioner has carried out the construction Departmentally and therefore, it has got all the expenditure vouchers. The same may please be considered in arriving at the cost of construction. Moreover, we also field with the Valuation Officer a report of the registered Architect wherein the detailed working of the building has been given. We also explained to the Valuation Officer that if there is any discrepancy in the cost of construction shown by us you may point out the same to us so that we can explain the matter to him. However, ignoring all the principles of natural justice, the Valuation Officer worked out the cost of construction of the building according to his own method. We also insisted before the Valuation Officer that keeping in view that all the details are available with us a detailed cost of construction may be worked out giving details of raw materials consumed, cost of labour and other expenses and if there is any discrepancy, the same may be pointed out to us so that we can explain the same. Further, Valuation by our registered Valuer has been made on the basis of the rates approved by the Public Works Department of Gujarat State. The Valuation Officer would have been very much justified in not accepting the Valuation shown by us of the registered Valuer if there was any discrepancy in working out the cost of construction. In absence of the same, the Valuation Officer is not at all justified in working out the cost of the construction on ad-doc basis.

After we received a notice from the learned ITO proposing to file objections, we submitted our objections by our letter dt. 8th Feb., 1985 submitted to the ITO vide receipt No. 930094 dt. 3rd Feb., 1985. Reference to our file with the ITO, you would please observe that the learned Valuation Officer has made the valuation on ad-hoc basis ignoring our valuation report submitted to the ITO. The total cost of construction as per our accounts comes to Rs. 2,70,281. The cost of construction worked out by the Registered Valuer as per the Scheduled rates of Public Works Department, Government of Gujarat comes to Rs. 2,840,22. The above cost of construction has been worked out by actual measurement and not on ad-hoc basis. The cost of construction is shown in our books of accounts is almost tallying with the cost of construction as per the rates of Public Works Department, Govt. of Gujarat. Apart from the above, we are also separately giving the details of cost of construction worked out on ad-hoc basis, i.e. cost of construction per sq. meter. The autonomous body such as Gujarat Housing Board has given contract to a private contractor for construction of Housing Board Buildings, tenements etc. and according to the said contractor, the cost of construction per sq. meter. comes to Rs. 427. We are filing herewith supporting evidence in respect of the above.

According to the above working the cost of construction comes to Rs. 450 per sq. meter whereas the Departmental Valuation Officer has worked out the cost of Rs. 790 per sq. meter. In view of the above details it is abundantly clear that no reliance can be placed on the cost of construction as worked out by the Departmental Valuer and in absence of any defect of omission in the cost of construction as shown by your petitioner should be accepted as true cost of construction.

It may also be noted that while accepting the cost of construction as worked out by the Departmental Valuation Officer, the learned ITO has not considered our principal objections that the cost of construction should be worked out on the basis of actuarial consumption of material, cost of labour etc. This is a matter of vital importance which has been ignored by the learned ITO while finalising the assessment. Gross injustice would be caused to your petitioner if the valuation is worked out ignoring the data of cost of construction furnished by your petitioner. In the absence of any defect in the cost of construction as worked out by your petitioner should be declared to be genuine and correct cost of construction of the property."

(Underlined italicised in print by us)

7. In his order under appeal, the CIT (A) after giving all the findings in the favour of the assessee estimated the cost of construction at Rs. 500 per sq. meter as against the estimate of Rs. 790 per sq. meter adopted by the ITO and Rs. 45. per sq. meter disclosed by the assessee in the following manner:'

"I have considered the submissions made both by the learned counsel as also the Department Valuer and have gone through the valuation reports prepared by the appellant's Valuer as also by the Department Valuer, who was also present at the time of hearing and the matter was discussed in great detail. On perusal of the objections raised by the appellant as also by the Department Valuer, one thing is clear that the construction work, which was carried out in 1979-80, was gone under the personal supervision of the partners. It is submitted that the partners are very much experienced in the construction work because such work was carried out in earlier year and hence the construction work has been done by them departmentally. The material used in the construction of "Babyland Hostel" appeared to be of ordinary quality and no of superior quality as stated by the Department Valuer. I agree with Appellant's Valuer with regard to the remarks that the margin of profit in the case of construction is about 25 per cent and that much deductions is to be given in the case where the construction work has been supervised personally by the assessee. In the case of the appellant, the work has been done in piecemeal under the supervision of experienced partners. This fact is to be taken into account and the Department Valuer also stated that the variation may be 10 per cent on account of various reasons. The appellant, during the course of appeal, has produced a copy of work carried out by the Gujarat Government contractor M/s N.Kunverji & Co. and the construction took place during the year in which the construction of the appellant's property look place. A certificate in this respect has been produced, according to which, the cost of construction per sq. meter is about Rs. 427. It may be stated that the construction carried out by M/s. N.Kunverji &co., on behalf of the P.W.D. of Gujarat Govt., may be of inferior quality in the sense that the materials used are of normal quality and not of superior quality. But the fact is that the variation in the cost of construction should not be as high as 363 per sq. meter as adopted by the Department Valuer. It is seen that the Department Valuer has based his report on the comparable case of Shri Ram Building. It may be mentioned that Shri Ram Building is not at all comparable because in that building most costly materials have been used. Marble, glassed tiles have been used. Decorative items used are also very costly. It may be considered as a luxurious bungalow which has attached both the large drawing room, Brase and other materials have been used in the doors and even the stair-case is very decorative. This building is situated on the main Kalawad road, which is considered as posh locality of Rajkot City and, therefore, no comparison can be made with that in order to arrive at the cost of construction of the hostel building constructed by the appellant firm. It may be mentioned that the building is meant for hostel and not residential purpose. If the building is constructed for the purpose of residence, costly materials are mostly used and lot of money is spent for decoration purpose. Here again distinction is to be made from the building which is meant for ordinary use by the students who are residing in a hotel. On perusal of the objections raised against the valuation of the Department Valuer, it may be seen that the valuation based by the Department Valuer is not based on material facts. The objections given by the Department Valuer on the objections raised by the appellant against the valuation are very much in general and no proper inference can be drawn from such report of the Department Valuer. It appears that he has applied the current rate of construction of the building in the year 1979-80. It may also be mentioned that the rate adopted by the Department Valuer is very much excessive and very high. It may be mentioned that the appellant has maintained books of accounts and that the ITO has not found out that materials which have been purchased and used in the construction, have not been disclosed to the department. It is not the case of the ITO that the appellant has suppressed the cost of particular item of building material purchased and used in the construction and moreover the appellant has maintained proper books of accounts and all the vouchers and bills have been kept. There is a decision of the Delhi Bench of TRIBUNAL In that case, similar set of facts came up for consideration and there was a difference as per valuation report of the Department Valuer and as per assessee's Valuer and such difference was of Rs. 53, 000. The Tribunal Delhi, after considering the merits of the case, have held that since the ITO did not find out any defects in the books of accounts, there was no reason to treat the difference in the cost as income of the assessee during the year. In the present case, the learned counsel has pointed out that since the construction work was personally supervised by the partners and, therefore, the cost of construction to the extent of 24 per cent has been reduced and had the construction work been entrusted to the contractors, the margin of profit for the contractor would have been 25 per cent. Therefore, the important factor has to be taken into account. In view of these facts and in view of the comparable case of the Gujarat Government contractor and on the basis of the Tribunal decision., as also the fact that the books of accounts have been maintained and the ITO has not found out any specific defects in them and also in view of the fact that the construction was carried out under the personal supervision of the experienced partners of the appellant firm, the valuation adopted by the Department Valuer is certainly very much excessive and high. Having regard to all these fact and taking into account that proper books of accounts have been maintained, the comparable case cited by the Department Valuer is not at all comparable. Valuation report of a registered and approved valuer has been furnished by the appellant and also taking into consideration the objections raised by the appellant and submissions made by the learned counsel and comparable case of the Gujarat Government Contractor quoted by the appellant's Valuer, I direct the ITO to estimate the cost of construction of Rs. 500 per sq. meter. as against the rate of Rs. 790 per sq. meter. adopted by the Department Valuer against the cost disclosed by the appellant at Rs. 450 per sq. meter. The ITO is directed to work out the value of the cost of construction of the building known as "Babyland Hostel" at the rate of Rs. 500 per sq. meter. and treat the difference in the value as shown by the appellant and now taken as income from undisclosed sources."

(Underlined italicised in print by us)

8. Being aggrieved by the order of the CIT (A), both the assessee as well as the Revenue have come up in appeal before the Tribunal. The assessee's grievance is that in spite of giving all the findings in favour of the assessee, the CIT (A) was not justified in not accepting the cost of construction disclosed by it. The revenue in its appeal urges that the order of the CIT (A) on this point should be reversed.

9. The learned counsel for the assessee invited our attention to the relevant portions of the orders of the income tax authorities as well as the assessee's submissions made before them and strongly urged that since the assessee had maintained proper books of accounts regarding the construction of the property in question which was supported by vouchers, bills etc., the income tax authorities were not justified in making the addition in the manner they did. He also highlighted the fact that neither the ITO, nor the CIT (A) has found out any glaring or obvious defects in the books of accounts maintained by the assessee, on the contrary the finding of the CIT (A) on this point, as would appear from the above, is in favour of the assessee. In spite of this position available, both the income tax authorities have ignored the books of accounts of the assessee and have ttempted to make certain additions that too on probability. He also placed before eus copies of the orders of the Tribunal in the case of M/s. Rupam Talkies and Hasmukhbhai Panchanbhai and pointed out that in the said orders, the Tribunal was pleased to delete certain addition made by the income tax authorities, on the facts and circumstances identical to the one obtaining in the instant case. He, therefore, urged that the addition as sustained by the CIT (A) deserves to be deleted. The learned representative for the department, on the other hand, strongly supported the order of the ITO and vehemently argued that the CIT (A) was not justified in adopting the cost of construction at Rs. 500 per sq. meter as against Rs. 790 adopted by the ITO on the basis of the report of the Department Valuer. He. therefore, urged that the order of the CIT (A) on this issue should be reversed.

10. We have carefully considered the rival submission of the parties and perused the material already brought on record and we are constrained to observe that this litigation could have been avoided, if the income tax authorities had taken proper care and appreciated the assessee's case in proper perspective. It is pertinent to note that the assessee has maintained proper books of accounts in respect of the construction of the property in question, not only that the books of accounts are fully supported by vouchers and bills. In fact this aspect of the matter has not been challenged either by the ITO or by the CIT (A), on the contrary, the CIT (A) has given clear finding that such position is available in this case. In this view of the matter, we fail to appreciate how an addition could not be made on the basis of "probable cost of construction." We are constrained to observe that even though the CIT (A) has given his findings which are clearly in favour of the assessee, he thought it fit to sustain certain additions by estimating the cost of constructions at Rs. 500 per sq. meter, without any basis for this action. It appears to us that all these litigation has started only because such operation under s. 132 of the Act carried out at the premises of the assessee and the Department could not find anything in such operation. We make this observation as according to us, the income-tax authorities were not justified in ignoring the books of accounts of the assessee specifically maintained in respect of the cost of construction of the property in question which were fully supported by vouchers, bills etc. In fact, as would appear from the orders of the income tax authorities (reproduced above) that they have simply ignored the books of accounts of the assessee without pin-pointing any glaring or major defects therein. Surely, the addition made by giving blink eye to the material available on record cannot get approval from a judicial body like the Tribunal. In fact, in the aforesaid two orders of the Tribunal, the Tribunal has deleted certain addition made by the income tax authorities on the fact and circumstances which are identical to the one obtaining in the instant case with which we fully concur. In this view of the matter, we are of the opinion that there is no justification of making any addition in the manner made by the ITO or sustained by the CIT (A). We would therefore direct the ITO to accept the assessee's cost of construction at Rs. 3,27,728 and modify the assessment accordingly. In this view of the matter, we delete the addition as sustained by the CIT (A). The ITO is, therefore, directed to modify the assessment accordingly.

11. Before we part with this order, it may be mentioned that the learned counsel for the assessee had not pressed ground No. 7 taken up in the memo of appeal regarding certain small disallowances made under various head. We would, therefore, uphold the order of the CIT (A) on this point.

12. In the result, the appeal filed by the assessee is partly allowed and that filed by the Revenue is dismissed.

 

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