PADMINI PRIYA PROPERTY DEVELOPERS AND BUILDRS,KAKINADA vs. THE ITO, KAKINADA

आदेश / O R D E R

PER D.S. SUNDER SINGH, Accountant Member:

This appeal filed by the assessee is directed against order of the

Commissioner of Income Tax (Appeals)-2 {CIT(A)}, Visakhapatnam vide

ITA No.92/2015-16/CIT(A)-2/VSP/W-2/KKD/2016-17 dated 1.9.2016 for

the assessment year 2012-13.

ITA No.493 /Vizag/2016 Padmini Priya Property Developers and Builders, Kakinada 2. The assessee filed return of income declaring total income of

Rs.2,520/- on 31.12.2012. A survey u/s 133A of the Act was conducted

in the case of Sri M.Venkanna Babu on 6.12.2012, who is the managing

Partner of the assessee firm. During the course of survey A.O. found

that the assessee firm had constructed the residential complex

consisting of apartments in the name of Venkatadri Residency and the

assessee did not produce the books of accounts on a request made by

the Assessing Officer at the time of survey. Hence, the assessment is

reopened u/s 147 of the Act by issue of notice u/s 148 of the Act. The

A.O. has asked the assessee to produce the books of accounts, bills,

vouchers relating to construction of residential apartment building and

the firm failed to produce the same. Therefore, the A.O. referred the

cost of construction to the Departmental valuation cell (DVO) and the

Executive Engineer, valuation cell, Visakhapatnam vide his report dated

28.12.2013 valued the cost of construction of the said property at

Rs.172.10 lakhs and submitted his report. The DVO has adopted the

plinth area rate method for valuing the property. The A.O. during the

assessment proceedings observed that 93.25% of the construction was

completed by the end of financial year 2011-12, relevant to the

assessment year 2012-13, hence, proportionate cost of construction

amounting to Rs.1,00,48,325/- was taken as cost of construction for the

ITA No.493 /Vizag/2016 Padmini Priya Property Developers and Builders, Kakinada assessment year 2012-13 and accordingly, treated the difference

amount of Rs.50,06,106/- as unexplained investment and added back to

the returned income.

before the CIT(A) and disputed the cost of construction and also

requested for rebate towards self supervision and the rate difference.

The Ld. CIT(A) directed the A.O. to assess the undisclosed investment

year wise proportionate to the investment made by the assessee from

the assessment year 2009-10 to 2012-13 to arrive at the undisclosed

income relating to the relevant assessment year. The ld.CIT(A) did not

allow the rebate towards self supervision and the rate difference.

before this Tribunal and raised the following grounds of appeal:

ITA No.493 /Vizag/2016 Padmini Priya Property Developers and Builders, Kakinada c. The learned Commissioner of Income Tax (Appeals) ought to have granted rebate 15% towards difference in CPWD rates and local rates and @ 10% rebate towards self-supervision. 4. Any other ground that may be urged at the time of appeal hearing.

specific adjudication.

appeal hearing, hence, ground Nos.2, 3(a) & 3(b) are dismissed as not

pressed.

which relates to the rebate of 15% towards difference in cost of

construction with CPWD rate and 10% for self supervision. During the

appeal hearing, the Ld. A.R. argued that the assessee is in the business

of constructing the residential apartments and he is having thorough

knowledge and vast experience in this line of activity. The ld. A.R argued

that with his experience and knowledge they bought the materials at

lowest cost and reduced the wastages to the maximum level ,thus

reduced the cost of construction, hence requested for rebate for self-

supervision. The Ld. AR submitted that both the Ld. DVO and the Ld.

CIT(A) have not allowed any rebate for self supervision. The rates of

CPWD are abnormal and the cost of construction cannot be compared

with the assessee’s cost of construction or for that matter very high

ITA No.493 /Vizag/2016 Padmini Priya Property Developers and Builders, Kakinada compared to market rate of construction. The Ld A.R further submitted

that the there are hidden costs in CPWD construction since the

contractor executes the work. The CPWD type construction is entirely

different with that of assessee’s construction, hence requested for

allowing credit for self supervision @ 10% and rate difference 15%.

The Ld. A.R. further argued that the DVO has adopted the cost of

construction adopting the plinth area rate of CPWD. Adoption of plinth

area rate is not correct and it is purely a guess work since the contracts

of CPWD involve the profit of contractor’s margin, hence, argued that

there is a vast difference in cost of construction of CPWD buildings and

the residential complex built by the developers. The Ld. A.R. relied on

the decision of this Tribunal in the case of ITO Ward-1 Gudivada Vs. K.

Satish in ITA No.49/Vizag/2013 dated 4.12.2015. On the other hand, Ld.

D.R. supported the orders of the lower authorities.

on record and gone through the orders of the authorities below. The

assessee is engaged in the construction of residential apartments and is

having enough knowledge of construction and is capable of reducing the

cost of construction by procuring the materials at reasonable cost and

avoid the wastage. While arriving the cost of construction both the DVO

and the A.O. did not consider these issues. Similarly, there is a rate

ITA No.493 /Vizag/2016 Padmini Priya Property Developers and Builders, Kakinada difference in CPWD & State PWD rates. The CPWD gives the

construction of its works to the private contractors and the private

contractors include their profit margin in CPWD works. This Tribunal in

the case cited supra on the similar facts and circumstances held that the

assessee is entitled for 15% reduction deduction towards rate variation

for CPWD rates and further reduction towards self supervision @10%

from the value estimated by the DVO after applying the CPWD rates.

For ready reference, we extract para Nos.9 to 11 of the cited order

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 ti m a t e d th 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 6

ITA No.493 /Vizag/2016 Padmini Priya Property Developers and Builders, Kakinada 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/-.”

“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 construction material, 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, 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 100 /0 for personal supervision is allowed. The said paragraph-10 reads as under:-

T h e D V O e s t i m a te d the c o s t o f c o n s tr 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 7

ITA No.493 /Vizag/2016 Padmini Priya Property Developers and Builders, Kakinada 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/-.

ITA No.493 /Vizag/2016 Padmini Priya Property Developers and Builders, Kakinada

the coordinate bench, we direct the A.O. to allow the rate difference of

15% and self supervision charges to the extent of 10% from the cost of

construction determined by the DVO and recompute the undisclosed

investment year wise. Accordingly the appeal of the assessee on this

ground is partly allowed.

Sd/- Sd/- (वी. दुगा�राव) ( ड.एस. . . . सु�दर "संह) (V. DURGA RAO) (D.S. SUNDER SINGH) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER #वशाखापटणम /Visakhapatnam: 'दनांक /Dated : 04.04.2018 VG/SPS

ITA No.493 /Vizag/2016 Padmini Priya Property Developers and Builders, Kakinada आदेश क� ��त)ल#प अ*े#षत/Copy of the order forwarded to:-