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Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI V. DURGA RAO& SHRI D.S. SUNDER SINGH
आदेश /O R D E R PER D.S. SUNDER SINGH, Accountant Member: This appeal is filed by the assessee against the order of the Commissioner of Income Tax(Appeals) [CIT(A)]-2, Guntur vide ITA No.93/14-15 dated 24.08.2016 for the assessment year 2011-12.
Brief facts of the case are that the assessee is engaged in the business of construction of individual houses. A survey u/s 133A of the act was
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conducted in the business premises of the assessee on 06.12.2012 and found that the assessee has constructed a function hall by name M/s Venkanna Babu Function Hall and started running it in his proprietary capacity. He has also started a firm in the name and style of M/s Padmini Priya Properties and Developers. The assessee has stopped filing the return of income, hence the Assessing Officer (AO) has conducted a survey and subsequently issued notice u/s 147 and in response to the notice, the assessee filed return of income electronically admitting total loss of Rs.5,02,789/-, and agricultural income of Rs.1,80,000/-. The AO completed the assessment on total income of Rs.39,57,209/- and raised the demand of Rs.16,97,513/-.
Aggrieved by the order of the AO, the assessee went on appeal before the CIT(A) and the Ld.CIT(A) partly allowed the appeal of the assessee and also made an enhancement in respect of sources for construction.
Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before this Tribunal.
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Ground No.1 and 6 are general in nature which does not require specific adjudication.
Ground No.2 is related to the cost of construction of the building. During the assessment proceedings, the AO found that the assessee had constructed a function hall by name M/s Venkanna Babu Function Hall. During the survey proceedings, the assessee was asked to produce the books of accounts for construction of the function hall, but the assessee failed to produce the books of accounts. However during the course of survey, the AO found certain loose sheets and bills which were impounded, and found that they do not reflect the complete details of construction account. Therefore, the AO referred the valuation of the property to the Departmental valuation cell (DVO) and the Executive Engineer, Valuation Cell, (DVO),Visakhapatnam, has estimated the cost of construction at Rs.1,42,25,000/- vide his report dated 28.01.2013 against the cost of construction admitted by the assessee atRs.1,11,30,963/-. The AO called for the objections of the assessee for cost of construction estimated by the DVO and the assessee filed objections stating that the cost of construction estimated by the DVO was very high and furnished the valuation report
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from the independent approved valuer who has valued the cost of construction at Rs.60,00,000/- and requested the AO to consider the independent valuation report and accept the cost of construction admitted by the assessee. The AO not being convinced with the explanation of the assessee, adopted the cost of construction estimated by the DVO at Rs.1,42,25,000/-.
The ld.AR during the appeal hearing submitted that against the cost of construction declared by the assessee for an amount of Rs.1,11,30,963/-, the sources were explained by the assessee. The assessee referred the valuation of property to the approved valuer who in turn has estimated the building at Rs.60,00,000/-, and on reference to the departmental valuation cell, the DVO has valued the cost of construction at Rs.1,42,25,000/-. This difference clearly shows that the DVO has valued the property at very exorbitant rates and not comparable with local rates. The Ld.AR further argued that the assesse is an experienced builder who is having long experience in construction activities. The rates quoted for cost of construction by the DVO are CPWD rates and the same are not comparable to the local rates. They are very exorbitant and it includes profit element of
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the contractors, therefore requested to allow the rate difference @ 15% in cost of construction. Further, the Ld.AR argued that the assessee is experienced builder who is having vast experience in the construction activities, therefore requested to allow the rebate of 10% towards self supervision and relied on the decision of this Tribunal in the case of Padmini Priya Property Developers and Builders, Kakinada in ITA.No.493/vizag/2016 dated 04/04/2018.
We have heard both the parties and perused the material placed on record and gone through the orders of the authorities below. The assessee has constructed function hall for which the cost of construction was admitted by the assessee at Rs.1,11,30,963/- against the valuation made by the registered approved valuer at Rs.60,00,000/-. The same building was valued by the departmental valuation officer at Rs.1,42,25,000/-. As observed from the approved valuer, the cost of construction admitted by the assessee and the valuation report estimated by the DVO shows substantial difference in cost of construction. The DVO has valued the property on the basis of CPWD rates and CPWD rates include the profit element of the contractor. Therefore, the CPWD rates cannot be applied
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mutatis mutandis to the constructions made in the local areas. There is a difference between the CPWD rates and state PWD rates. This Tribunal in the case of Padmini Priya Property Developers and Builders (supra) has considered similar facts and circumstances and allowed deduction of 15% towards the rate variation for CPWD rates and local rates and further reduction of 10% towards self-supervision from the value estimated by the DVO, following the decision of this tribunal in Salma A Mehdi’s case and the decision of ITAT, Hyderabad in G.Pulla Reddy’s case. For ready reference, we extract relevant paragraphs of the orders of this Tribunal in the cases cited supra which reads as under: “9. The assessee relied upon the judgement of coordinate bench of this Tribunal in the case of Salma A. Mehdi in ITA No.697 & 698/Hyd/1995. We have examined the case laws relied upon by the assesse, in the light of the facts of the present case. The coordinate bench of this Tribunal, in the above mentioned case, while dealing with similar issue held as under: “ T h e D V O e s t im a t e d t h e c o s t o f c o n s t r u c t i o n following the plinth area method of valuation. He applied the basic plinth area rates approved by the CBDT. . He applied the plinth area of New Delhi as fixed in 1976 and approved by the Government of India by duly enhancing the basic rate of similar structures with appropriate cost index as applicable to the locality during the period of construction. The Valuation did not appear to have taken into consideration the local rates that actually existed during the period for construction. It is common knowledge CPWD rates of New Delhi are far higher than local rates. Keeping that factor in view the first appellate authority would appear to have allowed some ad hoc deduction in the cost of basic construction. Taking into consideration the fact that the CPWD rates of New Delhi are always higher than the local rates, we
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feel that it would be just and reasonable to give an overall reduction of 15% on the cost of construction estimated by the DVO in order to compensate the higher estimate on account of the adoption of higher rate of CPWD of New Delhi. Further, the valuation officer did not allow any deduction towards personal supervision. The first appellate authority allowed 10%reduction on account of savings by personal supervision appears to be quite reasonable. If we deduct 10% towards personal supervision and 15% on account of the higher rate adopted by the valuation officer, the estimate of cost of construction determined by the valuation officer comes down to Rs.5,16,7501/-. Even if we take average of cost of construction of Rs.68900 determined by the DVO on the basis of plinth area method works out to Rs.5,22,000/-. In that view of the matter, the cost of construction of Rs.5,16,750/- arrived at by us after giving 15% reduction for higher CPWD rates and 10% deduction for personal supervision, appears to be quite reasonable. It can be rounded to Rs.5,16,000/-.” 10. In yet another case, the ITAT Hyderabad bench in the case of G. Pulla Reddy Vs. JCIT, while considering the similar issue of applicability of State PWD rates and deduction for self supervision charges, has observed as under: “Plinth area rate as prescribed by CBDT of courrse contain provisions for cost indexing and adjustment of location variation to arrive at cost of construction of a particular location. But the facts remains that such valuation rests CPWD rates fixed on uniform basis. As observed in the case of ITO vs. Tek Chan, 52 lTD 1995 by the Jaipur Bench that CPWD rates are general in their nature and purpose in view of the wide area of their applicability, the State PWD rates take into account the special conditions in a particular area in the territories of the State. The availability of cost for constructionmaterial, the availability of labour and wages to be paid to them and other like factors do affect the cost of construction and, therefore, it was quite logical for the person concerned to follow the State PWD rates while estimating the cost of construction of building in different area. However, the facts remains that the PWD rates are for the purpose of determining fair market rent of a property, whenever the State PWD awards a contract for construction of a particular property, very specific parameters are sent in the contract for the purpose of each individual project and, hence,
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it is not correct to say that the State PWD rates are the proper basis to arrive at the cost of construction. The applicability of CPWD rate with local indexing came up before the Tribunal in the case of Smt. Salma A. Mehdi, in ITA Nos. 697 & 698/Hyd/93 for asst. years 1985-86 and 1986-87 wherein the Tribunal vide paras 10 of this order held that in arriving at proper cost of construction, it would be justified if a discount of 15% is given for higher CPWD rate and further rate of for personal supervision is allowed. The said 100/0 paragraph-10 reads as under:- T h e D V O e s t i m a t e d t h e c o s t o f c o n s t r u c t i o n following the plinth area method of valuation. He applied the basic plinth area rates approved by the CBDT. . He applied the plinth area of New Delhi as fixed in 1976 and approved by the Government of India by duly enhancing the basic rate of similar structures with appropriate cost index as applicable to the locality during the period of construction. The Valuation did not appear to have taken into consideration the local rates that actually existed during the period for construction. It is common knowledge CPWD rates of New Delhi are far higher than local rates. Keeping that factor in view the first appellate authority would appear to have allowed some ad hoc deduction in the cost of basic construction. Taking into consideration the fact that the CPWD rates of New Delhi are always higher than the local rates, we feel that it would be just and reasonable to give an overall reduction of 15% on the cost of construction estimated by the DVO in order to compensate the higher estimate on account of the adoption of higher rate of CPWD of New Delhi. Further, the valuation officer did not allow any deduction towards personal supervision. The first appellate authority allowed 10%reduction on account of savings by personal supervision appears to be quite reasonable. If we deduct 10% towards personal supervision and 15% on account of the higher rate adopted by the valuation officer, the estimate of cost of construction determined by the valuation officer comes down to Rs.5,16,7501/-. Even if we take average of cost of construction of Rs.68900 determined by the DVO on the basis of plinth area method works out to Rs.5,22,000/-. In that view of the matter, the cost of construction of Rs.5,16,750/- arrived at by us after giving 15% reduction for higher CPWD rates and 10% deduction for personal supervision, appears to be quite reasonable. It can be rounded to Rs.5,16,000/-.
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We are in respectful agreement with the aforesaid order of the Tribunal and hold that CIT(A) was justified in upholding plinth area basis for determining cost of construction over the CPWD rates and further reduction of 10%0 on account of persona! supervision. We do not find force in department's submission that the object of determining that rate of 10% for personal supervision was given only because, the assessee in that case himself was an engineer. That may be a fact when a but property being constructed, every person takes care and supervises the property personally, and the rate allowed by the Tribunal by 10°/o would be applicable in all such cases. We may, however, say here that the property in case of Smt. Salma A. Mehdi, was of about 3000 sq.ft., which is a very small area, as compared to 1,22.985 sq. ft., area in the present' case. It is an admitted fact that when a larger area is being constructed, there will be cost economy in many ways for bulk purchases and a better bargaining power and the discount which is given in case of smaller area may not be sufficient. Looking to the facts and circumstances of the case and a very huge area constructed in this appeal, we are of the opinion that a further discount at 5% would be reasonable in estimating the cost of construction. We direct accordingly.” 11. Considering facts and circumstances of the case and also respectfully following the coordinate bench decision, we are of the opinion, that the assessee is entitled for 15% deduction towards rate variation between CPWD and State PWD and a further 10% deduction towards self-supervision charges from the value arrived by the DVO applying the CPWD rates. The CIT(A), after considering the facts that the assesse has maintained books of accounts and bills for construction, scaled down the addition to Rs.7,25,000/-. We do not find any error or infirmity in the order of the CIT(A). Therefore, we inclined to upheld the order of the CIT(A) and reject the ground raised by the revenue.” Similar view was taken by this tribunal in the case of Padmini Priya Property Developers. Since the facts of the assessee’s case are identical, respectfully following the view taken by the Coordinate Bench, we direct the AO to allow the rate difference of 15% and supervision charges to the
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extent of 10% in cost of construction determined by the DVO and recompute the investments subject to minimum of the cost of construction admitted by the assessee. Accordingly, the order of the assessee on this ground is allowed.
Ground No.3 is related to the addition towards sources of investment amounting to Rs.9,98,491/- and Rs.3,67,470/-. The assessee has admitted the cost of construction at Rs.1,11,30,963/- and explained the sources as under : The sources for investment in the ‘Venkanna Babu Function Hall; as shown in the Fixed Assets as under : Sl.No. Source of Investment Amount 1. Loan from Dhanalakshmi Mac. Society 20,00,000 2. OD Account from SBH 65,71,321 3. Union Bank Account 32840650029309 2,50,000 4. Cash Paid 9,98,491 5. Creditors 3,67,470 6. Loan interest capitalized 9,43,681 Grand Total 1,11,30,963
The AO did not accept the sources of cash of Rs.9,98,491/- and source of creditors of Rs.3,67,470/- against the sources explained by the assessee amounting to Rs.1,11,30,963/-. The AO disbelieved the source for investment of Rs.13,65,961/- and accepted the source of Rs.97,65,002/-. the remaining amount of Rs.13,65,961/-was added to the income.
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Aggrieved by the order of the AO, the assessee went on appeal before the CIT(A) and the Ld.CIT(A) tabulated the availability of the cash and the source as under : 1. Cash Paid : Sources for the cash paid are as under : Source Agricultural Income 1,80,000 Property Income 67,986 Refer Pg.7 of the paper book-1 Net Proft as per profit and loss 3,25,800 account on civil works Add : Depreciation 31,683 Add : Sundry Creditors 1,01,591 4,59,074 Refer Pgs. 8 & 10 of paper book- 1 Income from other sources 5,00,000 Refer Pg.7 of paper book-1 Labour wages payable 3,55,200 Refer Pg.10 of the paper book-1 15,62,260 Out of the above, the cash expenditure of Rs.9,98,491 was met.
As per the tabulation, the income from other sources was Rs.5,00,000/- representing the amenities of rent from function hall of Rs.2.00 lakhs and gifts from relatives and friends on the occasion of opening of function hall of Rs.3 lakhs. The Ld.CIT(A) accepted the receipt
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of gifts and the amenities but did not accept the same as source, since the amenities and gifts of Rs. 5.00 lakhs were received in the subsequent year. The Ld.CIT(A) was of the view that the sources cannot be applied for cost of construction as they were earned only after completion of construction.
During the appeal hearing, the Ld.AR argued that the assessee has offered the amenities from rent of Rs. 2.00 lakhs and gifts received from relatives of Rs.3.00 lakhs in the subsequent year as income. This fact was not disputed by the Ld.CIT(A). Though technically the function hall was completed during the impugned assessment year, there were certain pending works which were undertaken by the assessee immediately after the end of the assessment year and the amounts were spent for construction of the function hall. The report of the DVO dated 28.01.2013 which includes the works undertaken by the assessee after finishing the construction of function hall in all respects, therefore requested to consider the source of Rs.5.00lakhs towards the construction of function hall.
On the other hand, the Ld.DR relied on the order of the Ld.CIT(A).
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We have heard both the parties and perused the material placed on record. The fact that the assessee has received amenities of rent from function hall and gifts from relatives and friends is not disputed. The assessee also has offered the same to the income. The Ld.CIT(A) has rejected the claim of the assessee merely because the earnings were in the subsequent assessment year and received after completion of construction. There was no evidence brought on record by the AO to show that the assessee has not undertaken any miscellaneous works subsequent to the period ending the assessment year 2011-12. The DVO has inspected and prepared and submitted the report subsequent to the receipt of gifts and the amenities and completion of misc. works. There was no finding given either by the AO or the Ld.CIT(A) to establish that the said amount of Rs. 5,00 lakhs admitted by the assessee as income from other sources was applied for any other purpose. Therefore, there is no reason to suspect the submission of the assessee and application of the income for the purpose of construction of function hall. Accordingy, we direct the AO to accept Rs.5 lakhs as a source for construction of the function hall and allow the credit to the assessee.
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From the cash flow statement tabulated by the Ld.CIT(A) for the sources of Rs.9,98,491/- the assessee has admitted agricultural income of Rs.1,80,000/- and the business income of Rs.4,59,074/- which was not disputed by the Ld.CIT(A) or the AO. The assessee has contended that he has used the agricultural income of Rs.1,80,000/- and the business income Rs.4,59,074/- for construction of function hall and argued that the same be treated as the source.
We have heard both the parties and observed that the assessee has admitted agricultural income of Rs.1,80,000/- and derived business profit of Rs.4,59,074/-. There was no evidence or finding given by the AO to establish that the funds available from agricultural income and business income were not used in the construction of function hall but applied for any other purpose or applied in the business of the assessee. The AO simply rejected the assessee’s claim of cash of Rs.9,98,491/- without bringing any evidence on record. During the appeal hearing the Ld.DR did not controvert the submissions of the assessee. Since the AO failed to bring on record any evidence for application of the cash for any other purposes other than the function hall, representing the agricultural income and business income,
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there is no reason to suspect the source of Rs.6,39,074/- for construction of function hall. Accordingly, we hold that the assessee explained the sources to the extent of Rs.6,39,074/- and direct the AO to accept the source.
As per the cash flow statement, there was wages payable outstanding to the extent of Rs.3,55,200/- which the assessee has requested to accept the same as source, however, the assessee failed to produce any evidence with names and addresses of the labourers to whom the wages are payable and the date of payment. Therefore, the assessee’s contention to accept the labour wages payable as source is without any basis and the same rejected. Accordingly Ground No.3 is partly allowed accepting the source of Rs.11,39,074/- against the additions sustained by the Ld.CIT(A) amounting to Rs.13,65,961/- on account of cash availability and sundry creditors.
Ground No.4 is related to the enhancement of sources for construction from Rs.60 lakhs to Rs.65,71,000/- by the Ld.CIT(A) relating to the OD account with the SBI. During the appeal hearing, the Ld.AR did not press this ground, therefore Ground No.4 is dismissed as not pressed.
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Gound No.5 is related to the addition of agricultural income of Rs.84,000/- belonging to the wife of the assessee. The Ld.CIT(A) disbelieved the source of agricultural income of Rs.84,000/- used by the assessee for the purpose of construction. Since the assessee did not make any argument on this issue, we uphold the order of the Ld.CIT(A) and dismiss the appeal of the aasesse on this ground.
In the result, appeal of the assessee is partly allowed.
The above order was pronounced in the open court on 31st July, 2018.
Sd/- Sd/- (िी.दुगाा राि) (धड.एस. सुन्द रससह) (V. DURGA RAO) (D.S. SUNDER SINGH) न्याधयक सदस्य/JUDICIAL MEMBER लेखा सदस्य/ACCOUNTANT MEMBER धिशाखापटणम /Visakhapatnam ददिांक /Dated : 31.07.2018 L.Rama, SPS
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आदेश की प्रधिधलधप अग्रेधर्ि/Copy of the order forwarded to:- 1. ननर्ााररती/ The Assessee- Madireddy Venkanna Babu, D.No.68-2-1, Ashok Nagar, Kakinada 2. राजस्व/ The Revenue – The Income Tax Officer, Ward-2, Kakinada 3. The Pr.CIT-2, Visakhapatnam 4. The Commissioner of Income Tax (Appeals)-2, Visakhapatnam 5. धिभागीयप्रधिधिधि, आयकरअपीलीयअधिकरण, धिशाखापटणम /DR, ITAT, Visakhapatnam 6.गाडाफ़ाईल / Guard file आदेशािुसार / BY ORDER // True Copy //
Sr. Private Secretary ITAT, VISAKHAPATNAM