A.C.I.T., BANGALORE vs. M/S NAGSON & CO, BANGALORE

The present appeal is filed by the Revenue against the order of the CIT (A)-2, Bengaluru, dated.14.07.2015, for the assessment year 2004-05, on the following effective ground :

Brief facts are, the assessee was engaged in the manufacture of mosaic tiles and hollow blocks. During the course of assessment proceedings for AY 2006-07 it was noticed that the assessee had constructed commercial complex during the period 1998-2004. As per the valuation report issued by the approved Valuer of the assessee, the assessee has completed the ground floor and first floor after commencement of the construction in the FY 1998-99 and the assessee for the construction of the ground floor as per the cost of basement floor, ground floor and first floor, the total cost of construction was Rs.4,08,59,247/-. As per the valuation report submitted at page 157 of the paper book the cost of basement floor an first floor was taken at Rs.4,08,59,247/- and the said construction was completed in the year 1998 to 2004. Further as per the assessee’s own approved valuer’s report the cost of construction for second floor and third floor worked out to Rs.4,08,65,848/- as against the cost arrived by the assessee at Rs.2,83,07,244/-. 03. As per the valuation report, the construction for the second and third floors, lift-room and staircase area was reportedly constructed in the year ITA.1247/Bang/2015 Page - 3 2002 to 2004. From the bare perusal of the valuation report, there was a break in the construction activity, as the construction up to first floor was ended in the FY 1998-99, whereas construction of second and third floors was started and completed during 2002-2004.

As there was difference in the cost of construction of second and third floors between the cost of construction as mentioned by the approved valuer and the cost debited by the assessee to the extent of Rs.1,25,58,614/-. The AO initiated proceedings u/s.148 of the Act. Thereafter the assessee filed a reply before the AO and has submitted that the total cost of construction if taken into account from AY 1999-2000 to 2005-06 would be the same. However the AO was not convinced with the reasoning by the assessee and therefore the AO made an addition of Rs.1,25,58,614/- u/s.69B of the Act. Feeling aggrieved by the addition the assessee filed an appeal before the CIT (A).

It was submitted before the CIT (A) that as the assessee himself was supervising the construction activity, therefore there is a deficit in the cost of construction between the cost debited by the assessee in its books of account and the cost estimated by the approved valuer. The CIT (A) sought a remand report and consequently deleted the addition. Aggrieved, Revenue is in appeal before us.

Before us, the Ld. DR submitted that the reasoning recorded by the CIT (A) is incorrect as the CIT (A) had examined the cost of construction from 03.07.1998 up to 31.03.2005 and has come to the conclusion that the total cost of construction comes to Rs.7,32,58,831.36 and the CIT (A) has ITA.1247/Bang/2015 Page - 4 further taken into account the investment of Rs.35,34,636/- in the compound wall made in the year 2006 as the same is not relevant being constructed on 31.03.2006. After dealing with this issue in this manner the CIT (A) has wrongly deleted the addition on the pretext that the valuation made by the registered valuer is merely an estimation only and therefore the deletion made by the CIT (A) was without any basis.

On the other hand, the Ld. AR for the assessee submitted that if the order of the CIT (A) is taken into consideration there is not much difference between the cost estimated by the registered Valuer and the cost debited by the assessee in the books of account and therefore, the order passed by the CIT (A) was in accordance with law. The Ld. AR relied upon the following judgments : • CIT v. OM Overseas (P & H)-ITA.721/2010, dt.31.01.2011 • CITv. Tulsiani Constructions & Developers Ltd (All) ITA.67/2011, dt.27.09.2012 • CIT v. Abeeson Hotels P. Ltd (MP) -191 ITR 263 • K K Seshaiyer v. CIT (Mad) 166 ITR 527

We have heard the rival contentions and perused the record. It is an admitted case before us that the cost of construction of the building was fixed after taking into consideration the plan-sanction of the building, dt.21.09.1998. It is also an admitted case of the assessee that the total cost of construction of basement, ground floor and first floor as per the valuation report was Rs.2,88,59,247/-. The assessee as on 31.03.2001, has invested an amount of Rs.4,49,51,137.36. Thus the cost of construction of basement, ground and first floors as per the registered valuer was Rs.4,08,59,247/- and that as per the books of account, was ITA.1247/Bang/2015 Page - 5 Rs.4,49,51,137/-. Thus there was no major difference between the cost of construction of basement, ground and first floors. Therefore the valuation report submitted by the assessee cannot be doubted or faulted with. Having said so, the case of the AO with respect to the cost of construction with respect of second and third floors, lift-room and staircase area of the building constructed in the year 2002-2004 was that the assessee has debited in the books of account cost of Rs.2,01,31,697/- in the year 01.04.2002 to 31.03.2003 and for 01.04.2003 to 31.03.2004 an amount of Rs.81,75,547/-, whereas the total cost of construction of the second floor, third floor, lift-room and staircase as estimated by the registered valuer was Rs.4,08,65,858/-. Thus it is clear that the cost of construction shown by the registered valuer of the assessee was Rs.4,08,65,858/-, whereas the cost debited by the assessee in its books was Rs.2,01,31,697/- + Rs 8175547/- = Rs 2,83,07,244/-. Thus the assessee has made an investment of Rs.1,25,58,614/- {Rs.4,08,65,858/- ( - ) Rs 2,83,07,244/-} out of the books of account. The assessment year under consideration is 2004-05 (FY 2003-04). In the financial year 2003-04, the assessee had debited an amount of Rs.81,75,547/- whereas if the investment made in the FY 2002- 03 is debited from the estimated cost, then it would be Rs.2,07,34,161/-. It may be pertinent to record that the cost of construction of the second floor as per the valuation report was mentioned as Rs.2,00,64,088/- whereas the cost debited by the assessee for the AY 2003-04 (FY 2002-03) was Rs.2,01,31,697/-. Cost of construction shown by the approved valuer for the second floor was Rs.2,00,64,288/- and the cost debited by the assessee for AY 2003-04 was Rs.2,01,31,697/-. Thus both the cost as per the approved valuer and the cost debited for the second floor for AY 2003-04 ITA.1247/Bang/2015 Page - 6 are in the same range and therefore no addition can be made on this account qua the second floor.

However, when we see the balance cost referred above i.e., Rs.2,07,34,161/-, which was incurred by the assessee as per the valuation report for the third floor, lift-room, then we notice that against this head, the assessee has debited only Rs.81,75,547/-. From the above said conclusion, in our view the valuation report submitted by the assessee cannot be brushed aside merely based on the estimation as the cost reflected in the valuation report matches with the cost debited by the assessee for all the previous assessment years except the assessment year under consideration. In view thereof, it is clear that the assessee has invested an amount of Rs.1,25,58,614/- out of the books of account and therefore the addition made by the AO was in accordance with law.

Reliance placed by the assessee in the matter of M/s. OM Overseas (supra) is misplaced as in the said matter the AO has completed the assessment and determined the final cost of construction based on the DVO’s report, whereas in the present case, the AO has come to the conclusion based on the approved valuer’s report submitted by the assessee itself and not by a third party.

The second judgment relied upon by the assessee was in respect of Tulsiani Constructions & Developers Ltd (supra), where the principle of law laid down by the Allahabad High Court for under-statement of the investment in the building. In the present case as noticed hereinabove, the report on which the AO relies is not the report of the DVO but of the ITA.1247/Bang/2015 Page - 7 assessee’s approved valuer. Therefore the judgment is not applicable to the facts and circumstances of the case.

The next judgment relied upon by the assessee in the matter of Abeeson Hotels P. Ltd (supra). This judgment of the Madhya Pradesh High Court is also on the principal of, if there is a variation in the valuation made by the assessee and that of the DVO, then the Tribunal may accept the valuation made by the assessee, if there is 10% difference in the valuation made by both of them.

Thus, in view of the above, we do not find any substance in the submission made by the assessee. Accordingly the order passed by the CIT (A) is required to be reversed and the order passed by the AO is upheld.

In the result, appeal filed by the Revenue is allowed. Order pronounced in the open court on 30th day of November, 2017.