1988-VIL-64-ITAT-DEL

Equivalent Citation: TTJ 032, 570,

Income Tax Appellate Tribunal DELHI

Date: 08.09.1988

SHEKHAR CHAND JAIN & SONS.

Vs

INSPECTING ASSISTANT COMMISSIONER.

BENCH

Member(s)  : P. J. GORADIA., M. C. AGARWAL.

JUDGMENT

This is an assessee's appeal arising out of its assessment for asst. yr. 1984-85.

2. We have heard the learned counsel for the assessee and the learned Departmental Representative and have perused the material on record.

3. The main contention raised in this appeal which has been detailed in Grounds Nos. 1 to 3 of the memorandum of appeal relates to an addition of Rs. 17,65,790 on account of unexplained investment in a building constructed by the assessee. The facts are that the assessee started the construction of a building which consisted of 12 shops and a hall on the ground floor and some other constructions on the first, second, third and the barsati floor. The construction was started on Diwali, 1979 and was completed in the accounting year ending Diwali, 1983. The assessee declared to have made a total investment of Rs. 17,44,960 in the construction of the said building during the aforesaid four years as under:

4. In the assessment proceedings for asst. yr. 1984-85, the assessee submitted a valuation report from a registered valuer Shri S.B. Gupta, who reported the cost of construction of the entire building at Rs. 17,21,754 calculated as below:

The IAC(A) referred the matter to the valuation officer and Shri P.K. Kohli, valuation officer, in his report dt.12th March, 1987valued the building at Rs. 39,00,156. The valuation officer arrived at this value as below:

Later the assessee submitted another report from another registered valuer Smt. Shama Mehra, who determined the cost of construction of this building at Rs. 16,30,000. Her calculations were based on the quantity of work in the various items of various floors of the building at the rates approved by the Public Works Department, Meerut and as specified in a booklet about building cost index for Western Zone for the year 1983-84 issued by Yojana Monitoring and Cost Management Division, State Planning Institute, UP, Lucknow. Before the IAC(A)the assessee had also contended that it had been maintaining regular accounts for its business as well as building activities and it is with reference to the books that the reliability of the cost reported by the assessee should be tested. The learned IAC(A)brushed aside the report of Smt.Shama Mehra observing that after such a large building has already been raised, it was not possible to measure accurately the quantities of various materials consumed and therefore, he would rely upon the plinth area method adopted by the valuation officer. The IAC(A) allowed the assessee some reduction in the cost of construction of the shops which admittedly were already there but were renovated by the construction of new pillars etc. so as to bear the load of the upper stories that were to be constructed thereon. He also allowed the assessee a reduction of 7.5% on account of savings that the assessee could have made by personal supervision. He thus determined the cost of construction of the building at Rs. 35,10,751 and after adjusting the investment as declared by the assessee made an addition of Rs. 17,65,719. The assessee appealed to the CIT(A)and relied upon his books of accounts as well as the reports of two registered valuers filed by it. The learned CIT(A) upheld the determination of the cost of construction by the IAC(A)but finding that the building has been constructed in a period of 4 years, he held that the unexplained investment cannot be subjected to tax in a single assessment year. He therefore, distributed the unexplained investment as follows:

Thus the learned CIT(A) reduced the addition for the year under consideration to Rs. 3,45,000 and directed the ITO to take appropriate action for the other relevant years. Like the ITO the learned CIT(A) also did not deal with the assessee’s plea that the correctness of the investment should be verified with reference to the books of accounts regularly kept by the assessee. The learned CIT(A) while dealing with the valuation report of Mrs. Shama Mehra observed that it was not sufficient to ascertain the actual facts on the basis of the cost of materials purchased in a particular year unless the assessee specifies that with the purchase of a particular material in that particular period a particular portion of the building had been constructed.

5.At the hearing before us the learned counsel for the assessee contended that the valuation reports filed by the assessee were good evidence in support of the investment declared by the assessee and that the valuation made by the valuation officer was highly excessive and unacceptable. It was also contended that the assessee’s investment in the building in question was daily recorded in its books of accounts and was verifiable with reference to the vouchers maintained by the assessee and in the absence of any defects found in the books, it could not be held that the cost of construction as represented by the assessee was not correct. On the other hand, the learned Departmental Representative relied upon the report of the valuation officer which indicated a large margin in the cost of construction as reported by him and the one declared by the assessee. Regarding the books of accounts, the learned Departmental Representative submitted that the very fact that the IAC(A) has chosen to make an addition indicates that he did not rely on the books and that in fact neither the IAC(A) nor the CIT(A) has examined the case with reference to the books of accounts and hence if the cost of construction requires to be verified with reference to the books then the matter should go back to the IAC(A) for necessary enquiries in that light. The learned Departmental Representative also supported the view of the IAC(A)that when the building was already ready it could not be ascertained how much quantity of different materials had been used in the construction and that, therefore, the report of Mrs. Shama Mehra was of little consequence.

6. We have considered the arguments raised from both sides and have also gone through the material placed before us. The building in question is a four-storeyed RCC Column structure. The registered valuer Shri S.B. Gupta applied a rate of Rs. 450 per sq. mt. In respect of the shops which admittedly were in existence from before and were in some way renovated. He applied a rate of Rs. 600 per sq. mt. for the ground floor, Rs. 625 per sq. mt. for the first floor, Rs. 650 per sq. mt. for the second floor, Rs. 675 per sq. mt. for the third floor and Rs. 600 per sq. mt. for the barsati in respect of the roomed accommodation. In respect of reception for the hotel and the nursing home being run in the building it was stated that they were situate in verandahs and therefore, for them a rate of Rs. 450 per sq. mt. was applied for the ground floor and the first floor, of Rs. 475 for the second floor and of Rs. 500 per sq. mt. for the third floor. He determined the value of the cost of construction at Rs. 7,21,754. He mentioned the following facts while considering the valuation:

(i)The building work has been carried out directly whereby saving at least 10% by way of contractor’s profits and supervision expenses.

(ii)The height of floors is only 10 feet while the ground floor consists only of a single hall.

(iii)Substantial quantities of bricks obtained from demolishing of the old existing structure at the site have been re-utilised in the brick masonry of the ground and the first floor laid in mud mortar.

7. The Valuation Officer Shri P.K. Kohli in his report has mentioned the year wise investments claimed by the assessee. According to him, the total covered area built was as under:

Regarding the rates adopted by the learned valuation Officer it has been mentioned in the valuation report as under:

"Rates adopted for valuation: The standard plinth area rate of CPWD as on 1st Oct., 1976 and approved by CBDT vide instruction 1671 for RCC framed structure/ buildings have been applied by multiplying with the cost index as 229.00. The cost index has been calculated forMeerutor the bases of year wise expenditure given by the assessee. The extra-cost of superior items has been calculated separately and added in the abstract".

Ultimately he determined the cost as under:

Although a registered valuer's report was already on record and was available to the learned Distt., Valuation Officer he did not make any comment on its accuracy and reliability although the cost as reported by him was more than double the cost of construction reported by the registered valuer. As reproduced above, the valuation officer claims to have applied the plinth area rates notified by the CPWD as on1st Oct., 1976by multiplying the same with the cost index of 229. Neither the CPWD rates as on 1st Oct., 1976 have been appended to the report nor has the cost index from year to year been indicated anywhere so that it is not possible to verify how far the plinth area rate applied by the Disst. Valuation Officer is correct.

8. Mrs. Sharma Mehra in her report dt.,26th March, 1987determined the cost of construction of this building at Rs. 16,36,000. In her report she has mentioned that in the ground floor and the first floor, second class brick work in mud mortar was done. She has based her calculations on the rate Schedule as on16th Oct., 1980of the PWD,Meerutand has upgraded the rates as under on account of cost increase:

and has added 18% separately for the cost of electrification, water supply and sanitation. She has also relied on the building cost index for Western Zone index which includesMeerut, for 1983-84 prepared by the Yojana Monitoring and Cost Management Division, State Planning Institute, UPLucknow. She has calculated the various quantities of work and determined the cost thereof by applying the rates as approved by the PWD,Meerut. A copy of the report alongwith all the calculations made by her and the booklet of the Yojana Monitoring and Cost Management Division and the Schedule of rates prescribed by the Superintending Engineer, PWD, Meerut are placed in the paper book from pages 23 to 90. The authorities below found no fault with the correctness of her calculations or of the rates applied by her which according to her were the rates specified by the PWD,Meerutand had been suitably upgraded according to cost index as stated above. The learned IAC(A) brushed aside this report by saying that in such a large building it is next to impossible to measure accurately the quantities of various materials consumed such as bricks, cement, steel etc. This contention is not at all tenable. However large or small a building may be, any person trained in or having some experience of building work can always calculate how much quantity of different materials should have been used in a given structure or what are the quantities of various materials that would be required for constructing a proposed building. If such a thing was not possible how could anyone estimate the cost of construction of a building proposed to be built and one which has already been built. Even the plinth area method is based only on the basis of the quantities of various materials required for the construction of a building and their market value at the relevant time. Therefore, the valuation report of Mrs. Sharma Mehra which was based on the calculations of the quantities of various types of works and their rates as prescribed by the PWD,Meerutwas a document which required proper regard and could not be discarded without adequate reasons. When we have the rates notified by a local authority and that too a Government one, it is the rates approved by that authority which should be given more credence than an authority like the CPWD which may not be executing any works at places like Meerut. Average cost as reported by the assessee for the construction comes to Rs. 511 per sq., mt. (Rs. 7,44,960 / 3410.45). this average plinth area rate appears to be quite reasonable when we look to the rates as specified by the aforesaid State Planning Institute. At page 46 we have the cost index of Type 'A' double storeyed quarters which is based on the Central Building Research Institute Building Digest No. 96. According to it the cost of construction of such quarters with a plinth area of 701.20 sq. mts., comes to Rs. 2,81,600 for the year 1980-81, giving an average rate of Rs. 420 per sq. mts. If we add 18% thereto for the electrical and sanitary fittings as done by Mrs. Shama Mehra, the rate will come to Rs. 496 per sq., mt., as against Rs. 511 per sq. mts., shown by the assessee. We all know that construction work done by private individuals, particularly one in trade in the same town, is much cheaper than the cost to the Government of similar works. Therefore, keeping in view the rates as specified in the aforesaid documents of the local authorities, the cost of construction shown by the assessee appears to be quite reasonable.

9. The learned counsel for the assessee had also pointed out that the building has been subjected to house-tax for which the municipal authorities themselves estimated the cost of construction and according to them, it was Rs. 13,32,800. This was stated in the written submissions before the CIT(A) and has not been disputed.

10. For the above reasons we are of the opinion that the valuation as reported by Mrs. Shama Mehra and Shri S.B. Gupta, the registered valuers was nearer to the true cost of construction and the cost of construction as determined by the Dist. Valuation Officer was highly excessive and unacceptable.

11. As already stated the assessee had been contending before the authorities below that it has been maintaining regular books of accounts in which the investment has been duly recorded and, therefore, the correctness of the investment should be tested with reference to the books of accounts. In a letter dt, 23rd March, 1987 addressed to the IAC(A), the assessee specifically stated so in paragraph 3 and cited some authorities laying down the proposition that books of accounts regularly maintained have to be taken as correct unless proved that they were unreliable. Similar submissions were made before the CIT(A) in the assessee's submissions dt,2nd July, 1987at page 2 thereof. It was stated that the books of accounts have always been accepted from year to year and they stood supported by purchase invoices, sales memos, vouchers etc., for expenses including vouchers for the wages of raw materials and payments of wages for the construction of the new building and hence there was no justification to resort any estimates. The assessment order shows that with regard to the trading activities of the assessee, its book results have been accepted. The learned counsel for the assessee also submitted before us that never in the past the books maintained by the assessee were looked upon with suspicion. This contention was not controverted. That appears to be the reason why the learned IAC(A) did not think it safer to proceed on this line of enquiry and the learned CIT(A) has also not chosen to work on the basis of the books and find out how far they reflected the cost of construction correctly. The learned Departmental Representative's argument that the IAC(A) impliedly rejected the books of accounts cannot be accepted as there is nothing in the assessment order to indicate that the books were not reliable and were intended to be rejected. As a matter of fact that learned Departmental Representative herself contended that none of the authorities below has examined the case on those lines. If that be so where is the question of rejecting the books even impliedly? Regarding the argument that the matter may be sent back to the IAC for re-examination on those lines, we are of the view that it is not too late to order such an investigation when no material is placed before us to show that such an investigation is really necessary. As already stated the assessee's books of accounts have been accepted and its income from business as declared has been accepted as correct with only routine modifications. The assessee has been declaring this investment for the last four years and the investment reported by it seems acceptable being supported by the reports of two registered valuers. The report of the Departmental Valuation Officer was a mere mathematical exercise lacking necessary supporting material as well as reasons for rejecting the report of a registered valuer. It is important to bear in mind that registered valuers are appointed by the Department and are equally qualified. Therefore, when there is a registered valuer's report the valuation officer’s job is not merely to report the value as assessed by him but also to clarify where the registered valuer has erred. We have already stated that in this case the registered valuer's report had been made available to the valuation Officer and yet he chose not to comment on its accuracy. We, therefore, find no justification for the plea that the case should be sent back to the IAC(A) for examination of the accounts. If he chose not to do so he must have his own reasons for the same and a second innings would be thoroughly unjustified. We may mention that the learned counsel for the assessee had placed relianced on a Third Member order dt, 7th May, 1988 of this Tribunal in M/s. Harswarup Cold Storage & General Mills vs. ITO (ITA Nos. 2447 and 2448/Del/85) in which in a similar situation regarding investment in the construction of a cold storage building it was observed that if the account books have not been shown to be wrong, faulty or defective, the question of placing reliance upon the opinion of experts like valuation reports should not arise. In view of the above discussion, we are of the opinion that it was not clearly established that the cost of construction of the building in question as declared by the assessee was incorrect or that any larger amount had been spend on its construction. We also hold that the cost of construction as reported by the valuation Officer or as determined by the learned IAC(A) were unacceptable in the face of sufficient and better evidence to the contrary. Therefore, the addition of Rs. 17,65,790 was unjustified and is hereby deleted.

12. The next ground raised in this appeal is about a disallowance of Rs. 5,000 out of electricity expenses. This was not pressed before us and is accordingly rejected.

13. The last contention raised in this appeal is about the levy of interest under s. 139(8) and 215 of the Act. This is merely consequential and the ITO will have to see whether after the modification of the income, as ordered above, any interest is still charged.

14. In the result, the appeal stand partly allowed.

 

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