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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 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.
Aggrieved by the order of the A.O., the assessee went on appeal
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.
Aggrieved by the order of the CIT(A), the assessee is in appeal
before this Tribunal and raised the following grounds of appeal:
The order of the learned Commissioner of Income Tax (Appeals)-2, Visakhapatnam is contrary to the facts and also the law applicable to the facts of the case.
The learned Commissioner of Income Tax (Appeals) ought to have held that the notice issued u/s 148 is not in accordance with law and is liable to be quashed as invalid and consequently the entire re-assessment proceedings are liable to be quashed as void ab initio. 3. a. The learned Commissioner of Income Tax (Appeals) is not justified in partly sustaining the addition to the extent of Rs.13,09,681/- out of total of Rs.50,06,106/- -made by the assessing officer towards alleged unexplained investment in cost of construction. b. The learned Commissioner of Income Tax (Appeals) is not justified in directing the assessing officer to determine the unexplained investment towards cost of construction for the A.Y.s 2010-11 and 2011-12 which was not the subject matter of - appeal before him. 3
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.
Ground Nos.1 & 4 are general in nature, which does not require
specific adjudication.
Ground Nos. 2, 3(a) & 3(b) are not pressed by the ld. A.R. during the
appeal hearing, hence, ground Nos.2, 3(a) & 3(b) are dismissed as not
pressed.
The only ground remained to be adjudicated is ground No.3(c),
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.
We have heard both the parties, perused the materials available
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/-.”
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 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/-.
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 eng ineer. T hat 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.”
ITA No.493 /Vizag/2016 Padmini Priya Property Developers and Builders, Kakinada
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.” 7. Since the facts are similar, respectfully following the view taken by
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.
In the result, the appeal filed by the assessee is partly allowed. The above order was pronounced in the open court on 4th Apr’18.
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:-
अपीलाथ� / The Appellant – M/s. Padmini Priya Property Developers and Builders, D.No.68-2-1, Ashok Nagar, Kakinada 2. ��याथ� / The Respondent – The ITO, Ward-2, Kakinada 3. आयकर आयु+त / The Principal CIT-2, Visakhapatnam 4. आयकर आयु+त (अपील) / The CIT (A)-2, Visakhapatnam 5. #वभागीय ��त�न.ध, आय कर अपील�य अ.धकरण, #वशाखापटणम / DR, ITAT, Visakhapatnam 6. गाड� फ़ाईल / Guard file आदेशानुसार / BY ORDER // True Copy // Sr. Private Secretary ITAT, VISAKHAPATNAM