Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI CHANDRA POOJARI & SMT. BEENA PILLAI
Per Chandra Poojari, Accountant Member This appeal by the assessee is directed against the order dated 3.10.2017 of the CIT(Appeals), Hubli for the AY 2003-04 on the following grounds :-
“1. The learned Commissioner of Income-tax (Appeals) erred in passing the order in the manner in which he did without appreciating the jurisdictional High Court judgment in right prospects. 2. The learned CIT(A) grossly erred in confirming the order of the Assessing officer by not considering the fact that the Hon'ble High Court has only considered the short question of law on the issue of cost of construction of the buildings, and interest included in the cost of construction on the
ITA No.2780 /Bang/2017 Page 2 of 12
books and in the opinion of the Hon'ble High Court, the issue being based on the fact and details furnished by the appellant company before the CIT(A) and the ITAT for its consideration and that ITAT has considered the details-facts and passed the order, the Hon'ble High Court remanded back the issue of cost of construction to the assessing officer for fresh consideration of facts and details. 3. The learned CIT(A) grossly erred in confirming the order of the Assessing officer by not considering the fact that the Assessing officer exceeded his jurisdiction in considering the two other issues which are prior period expenses and interest disallowance on investment made in Anand Printers and Publishers. 4. Without prejudice, the Ld. CIT(A) failed to peruse the facts and details submitted by the appellant in respect of the prior period expenses and that the appellant had claimed the expenses based on the payments made by it in the relevant year, has not been appreciated by him. 5. The Ld. CIT(A) failed to appreciate the fact that the valuation report was for an ongoing project and that the cost of construction was based on the structure completed on 25.03.2003 and that of the cost accounted in the books 'were based on the accounting entries passed by it. 6. The Ld. CIT(A) erred in confirming the order of the assessing officer and failed to appreciate the fact that bills for Rs. 1.03 crores were received by the appellant subsequent to 31.03.2003, pertaining to the construction work carried out prior to 31.03.2003, and that the company has accounted for it as the cost of construction in the subsequent year, the details of which have been submitted by the appellant. 7. Without prejudice, the additions/disallowances as confirmed by the Ld. CIT(A) and interest levied are excessive, arbitrary and unreasonable and ought to be deleted in toto.
ITA No.2780 /Bang/2017 Page 3 of 12
For these and other grounds that may be urged at the time of hearing of the appeal, the appellant prays that the appeal may be allowed.” 2. Ground Nos. 1 to 4 are with regard to disallowance of Rs.28,18,226 on the reason that these are relating to previous year expenses. The ld. AR submitted that on earlier occasion the assessee came in appeal before this Tribunal and vide order dated 11.7.2008 in ITA No.302/Bang/2008 decided the issue in para 27 and 28 as follows:-
“24. We have heard the rival contention and perused the material Available on record. We have carefully perused the orders of the authorities below and find the framing of assessment and the computation of disallowances and thereafter the confirmation thereof by the learned CIT(A) leave much to be desired. The Assessing Officer was subjected to verification of voluminous details as are recorded by the assessee duly computerized for its control of the activity of individual driver performing a journey, travelling all over India to bring out the best possible income from the main business of the assessee being a transporter and courier rendering Rs.167 crones income. The very fact that the assessee has large fleet of buses and lorries at its disposal and more than 700 depots and godowns for taking care of its business required the Assessing Officer to consider the case of the assessee in accordance with the concept of materiality. The books of accounts are maintained in mercantile system of accounting and has been duly certified by the statutory auditors in their report to the share holders along with accounting policies and report to the Directors as an Annexure to the main report does not indicate any expenses either having been incurred not for the business of the assessee or in the nature of personal expenses. It is not the case of the Assessing Officer to carryout determining expenses which should be disallowed under the pretext as for non-business purposes or on account of personal nature. The prior expenses were not claimed by the assessee as expenses incurred for an earlier year. These expenses were for the earlier year but had crystalised to be paid for in the impugned assessment year. The Assessing Officer deemed it fit disallow the same on the basis that the assessee had changed from mercantile
ITA No.2780 /Bang/2017 Page 4 of 12
system of accounting to cash system of accounting mid-stream. With the magnitude of expenses incurred, the assessee was within the prescribed limit of 5% thereof to provide for it and pay for it as and when the expenditure crystalised. It is not a case of recurring expenses which actually could be accounted for accurately in view of the various factors involved when the trips therein having been performed later or a claim having been lodged later. The expenses have been controlled on the basis of which it is provided for and therefore becomes a regular feature which information has been received at the head office at the close of financial year. Similar is the case of a short provision when a claim is made subsequently due to many factors especially on account of salary, etc which mayor may not be provided for to pay to temporary staff. We find force in the submission of the learned counsel that these expenses are incurred to be allowed under section 37(1) and not because of the assessee having failed to incorporate the same under the mercantile system of accounting. It is an extension of the provision short made or not made for want of information. The Assessing Officer has not disputed the expenses to be disallowed for non-business purpose or duplicate payment and therefore it cannot be said that the assessee was not maintaining mercantile system of accounting for consideration under the provision of section 145 for rejecting the book results. The learned CIT(A) relied on the decision of Gujarat High court in the case of Saurashtra Cement & Chemical Industries Vs. CIT reported in 213 ITR 523 was on the fact of non-disclosure of expenses which in the case of assessee before us is clearly otherwise. The payment crystalised the expense which are regularly incurred and are acceptable to the authorities, therefore, was duly considered for allowance as relied upon by the learned counsel in the case of Sterilite Industries (India) Ltd. Vs. Addl.CIT 6 SOT 497 which facts are equally applicable in the case of the assessee. The learned CIT(A) tried to justify the accounting failure and failure on the part of Accountant to uphold the action of the Assessing Officer in disallowing the same and confirmation thereafter. On the facts and circumstances as has been brought on record, it is clear that these expenses could not be accounted for by the assessee in the earlier year as the payments had not crystalised and therefore could not be provided for under the mercantile system of accounting. The amount of expenses disallowed being
ITA No.2780 /Bang/2017 Page 5 of 12
Rs.19,41,506 and Rs.8,76,720 therefore are directed to be deleted from disallowance as the expenses have been incurred for the business of the assessee and are miniscule part of the voluminous expenses incurred and provided for in accordance with the system of accounting followed.” 3. Thus, the ld. AR submitted that this issue was already decided in favour of the assessee and this was not subject matter of appeal before the High Court of Karnataka in ITA No.1048/Bang/2008 dated 28.8.2013. Being so, the AO is disentitled to adjudicate this ground in the fresh assessment passed consequent to the High Court judgment cited supra. He also drew our attention to the High Court judgment para 5 to 8 which is as follows:-
“5. The appeal was admitted on 22/10/2009 to consider the following substantial question of law: Whether the finding of the Tribunal in deleting the addition made by the Assessing Officer as unexplained investment in respect of previous year expenses, differences in cost of building and interest is perverse and arbitrary being contrary to law and material on record? 6. We have heard Mr. Raviraj, for the revenue and Mr. Parthasarathi for the assessee. 7 The short question that arises for our consideration is: Whether the assessee has explained the investment made and the expenses incurred in case of construction of building and whether the interest has to be disallowed or not? 8. So far as this point is concerned, admittedly it is a question of fact. The question whether assessee has incurred any expenses for the previous year, is required to be taken into consideration while passing the order of assessment. This aspect of the matter has not been considered by the authorities below. The Assessing Officer has to consider the same in accordance with law and pass an order on merits after providing an opportunity to the assessee to
ITA No.2780 /Bang/2017 Page 6 of 12
explain the expenditure incurred by him for the previous assessing year. Therefore, we are of the opinion that for answering the question of law framed herein, the matter requires to be reconsidered by the Assessing Officer afresh as stated supra. In the circumstances, the appeal is allowed. The order passed by the Assessing Officer which has been affirmed by the Commissioner of Income Tax(Appeals), Bangalore and further modified by the Income Tax Appellate Tribunal are set aside. The matter is remanded to the Assessing Officer for fresh consideration in accordance with law.” 4. On the other hand, the ld. DR relied on the authorities below.
We have heard both the parties and perused the material on record. Admittedly on earlier occasion the Tribunal decided the issue in favour of the assessee as mentioned above. The Revenue went in appeal before the High Court of Karnataka in ITA No.1048/2008 and by judgment dated 28.8.2013, the High Court set aside the issue relating to unexplained investment made and expenses incurred in the case of construction of building and interest thereon. In our humble opinion, the High Court has not considered the issue of previous year expenses which is to be disallowed, as seen from the question formulated by them in para 7 of the judgment.
5.1 Without prejudice to the above findings, we are of the opinion that these prior period expenses crystallised in the assessment year under consideration and payment has been made at Rs.28,18,226. This practice of accounting has been followed consistently from year to year by the assessee and there is no change in this practice in this assessment year also. The assessee has been making the provisions for payment of expenses at the end of each year which provision has been paid in the next assessment year. Sometimes there was short provision made by assessee
ITA No.2780 /Bang/2017 Page 7 of 12
and in view of short provision, when actual bills are received after crystallisation of expenditure, assessee makes the payment. This method is consistently followed by the assessee. Being so, we do not find infirmity in the method of accounting followed by the assessee and it cannot be disallowed on the reason of prior period expenses incurred by the assessee. Accordingly, we allow this ground taken by the assessee.
Ground No.5 is with regard to addition of Rs.18,19,322/- and Rs.91,51,796/- towards unexplained investment in building including interest on borrowings. It was noted by that the depreciation schedule of the assessee indicated the investment in buildings at Rs.8,64,28,421/- as against which the approved valuer of assessee valued the same properties at Rs.8,82,47,753/- as follows:-
As per Depreciation Chart As per Valuers report Building at Varur Rs.7,31,79,709 Rs.7,35,94,450 Add: Mistake in taking Shed Cost Rs. 10,78,327 Building at Varur(APP) Rs. 10,00,000 Rs. 10,00,000 Building at Chitradurga Rs. 8,48,712 Rs. 9,66,566 Building at Chitradurga(APP)Rs. 24,00,000 Rs. 26,08,410 ------------------- ------------------- Total Rs.8,64,28,421 Rs.8,82,47,753 ------------------- ------------------- 7. The cost shown in depreciation schedule also includes Rs.91,51,796/- of interest on loan capitalized. The AO in the original assessment u/s. 143(3) brought to tax the differential amount of Rs.18,13,332/- apart from the said amt of Rs.91,51,796/- which was included in the cost admitted in depreciation schedule. In other words, but for the inclusion of the said interest, the cost shown in the depreciation schedule would have come down further i.e. differential amount would have increased further to this extent. The CIT(A) has confirmed the addition. On appeal, the ITAT decided against revenue. The ITAT held that, the
ITA No.2780 /Bang/2017 Page 8 of 12
difference in valuation of Rs.18,19,332/- and interest of Rs.91,51,796/- were embedded in the cost of construction, about which no finding has been given by the AO as well as the CIT(A). The ITAT also held that, the AO, without rejecting the books has come to the conclusion to quantify the difference.
On further appeal by revenue, the Hon'ble High Court of Karnataka, set-aside the issue to the file of the AO. The AO, after affording opportunity, concluded the assessment proceedings, making the same additions of Rs.18,19,332/- and Rs.91,51,796/- to returned income. The following is the relevant part of the assessment order:-
“The assessee capitalized interest adding the same to the cost of construction and brought the figure nearer to the valuation done by the registered valuer. The registered valuer has not taken interest amount while making valuation of the buildings. Therefore the actual cost shown by the assessee in its books of accounts was Rs. 7,40,27,913/-. The assessee had claimed that the difference in the valuation of Rs.18,19,332/- and the interest of Rs.91,51,796/- become clearly embededed in the cost of construction. The interest of Rs.91,51,796/- is the borrowing cost and it cannot become the actual cost. The borrowing cost is only a notional cost. Thus it is apparent that the assessee had camouflaged his cost of construction by adding the interest so that the cost of the buildings come somewhat nearer to the valuation done by the valuer. The revised cost of construction submitted is nothing but an afterthought explanation put forwarded by the assessee in its desperate attempt to come clean. In view of above discussion, I am of the opinion that the above mentioned difference amount of Rs.18,19,332/- being the difference of in the cost as per the registered valuer's report submitted by the assessee and the assessee's books of accounts is met out of undisclosed sources and added back to the total income of the assessee. Penalty proceedings under section 271(1)(c) of the Act, are initiated accordingly for furnishing inaccurate particulars of income.”
ITA No.2780 /Bang/2017 Page 9 of 12
In this regard, the assessee submitted that bills and vouchers were submitted by the contractor in the subsequent year and after verification they were accounted for in the subsequent year only. It is also stated that Rs.37,70,893/- of amount payable to suppliers were shown in the balance sheet under the head loan and advances. The AO has not pointed out any defect in the accounts maintained by the assessee. In fact, the submitted that he has furnished details of bills in annexure-1&2 but actually they are not enclosed to the submission. A few case laws were relied on by the assessee.
The CIT(Appeals) found that the assessee has not contested the cost estimated by the approved valuer who has valued the cost at Rs.8,82,47,753/-. The cost shown in the depreciation schedule is only Rs.8,64,28,421/-. The difference comes to Rs.18,19,322/-. In fact, there is a shed constructed at Varur, cost of which is not shown in the depreciation schedule at all. Cost of the shed is estimated by the approved valuer at Rs.10,78,327/-. The cost of Rs.8,64,28,421/- also includes Rs.91,51,796/- of interest capitalized. In other words the actual cost of construction of the properties is only Rs.7,40,27,913/-. This leaves a difference of Rs.91,51,796/- and Rs.18,19,322/- which is nothing but the unexplained investment in construction of the properties. Because, the difference in construction cost has arisen from the books of the assessee only, there was no scope for the AO to have rejected the books. The ITAT has decided that there is nothing wrong in the assessee having capitalized the interest paid on loan borrowed for construction. In the light of the above discussion the CIT(Appeals) held that the AO has rightly taxed the unexplained investment in construction of the building and sustained the addition. Against this, the assessee is in appeal before us.
The contention of the ld. AR is that the assessee has duly accounted all the expenses incurred towards construction of the building and books of
ITA No.2780 /Bang/2017 Page 10 of 12
accounts are not rejected. The AO cannot consider the valuation report submitted by the assessee consultant, Sri Madan K. Desai, Structural Consultant, who is not a registered valuer with the department or DVO. Further, the assessee is following mercantile system of accounting all the accounting of the accrued expenditure while accounting cost of construction. The valuation report prepared by Sri Madan K. Desai is a rough estimate and it is his opinion. There should be difference between the actual cost and expenditure incurred by the assessee and the valuation given by Sri Madan K. Desai is only a opinion. There may be every chance of difference between the actuals and valuation made by Sri Madan K. Desai which is also in this case very minimal. On that basis, the addition cannot be made.
Regarding accounting of interest, it was submitted that the interest part is already embedded in the cost of construction. There is no question of accounting it separately and accordingly entries are made in books of accounts to be accepted towards cost of construction incurred by the assessee.
On the other hand, the ld. DR submitted that the valuation report given by Sri Madan K. Desai is based on the actuals as he is engineer of assessee itself and it was based on physical verification by him which cannot be rejected. Further, the interest cost of Rs.91,51796 is not duly accounted by the assessee in the valuation of the building and the same to be considered separately as cost of construction.
We have heard both the parties and perused the material on record. In this case, the assessee shown total cost of building in its books of account at Rs.8,64,28,421 as against the assessee’s valuer’s report of Rs.8,82,47,753. However, AO observed that the valuation shown in the valuation report includes interest amount of Rs.91,51,796. Thus, the actual
ITA No.2780 /Bang/2017 Page 11 of 12
cost shown by valuer after reduction of interest portion of Rs.91,51,796 is Rs.7,40,27,913. Thus, there was a total difference of Rs.1,09,71,118.
Now the contention of the ld. AR is that the valuation report submitted by the assessee is by the assessee’s own valuer which cannot be the basis for addition without the AO referring the matter to the DVO for valuation. For this purpose, he relied on various case laws which are kept on record. In the present case, if we consider the difference between the books of account of the assessee and the valuation report including interest cost, difference is very huge at Rs. 1,09,71,118. The AO ought to have referred the matter to the DVO for valuation which he failed to do so. Being so, without referring the matter to the DVO, the AO cannot consider the difference between the entries made by the assessee and its registered valuer to make the addition. The valuation report relied on by the AO for making the addition is not the valuation report which is contemplated u/s. 142A of the Act. To make addition on account of difference in cost of construction, AO is duty bound to reject the books of accounts and refer the matter to the DVO as prescribed u/s. 142A of the Act, which the AO failed to do so. The registered valuer’s report of the assessee cannot be the basis for making addition which has to be deleted. Being so, we are inclined to delete the addition made by the AO on this count. This ground is accordingly allowed.
In the result, the assessee’s appeal is allowed.
Pronounced in the open court on this 11th day of March, 2022. Sd/- Sd/- ( BEENA PILLAI ) ( CHANDRA POOJARI ) JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore, Dated, the 11th March, 2022. /Desai S Murthy /
ITA No.2780 /Bang/2017 Page 12 of 12
Copy to:
Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore.
By order
Assistant Registrar ITAT, Bangalore.