ACIT, MADURAI vs. S.JAYARAMAN, MADURAI

Revenue against the Order of the Commissioner of Income Tax (Appeals)-2, Madurai, in dated 17.01.2017 for the AY 2011-12 and CO No.110/Chny/2017 is a Cross-Objection filed by the assessee in ITA No.1073/Chny/2017 for the AY 2011-12.

It was submitted by the Ld.DR that the assessee had constructed a hotel building at Madurai. In the course of the assessment for the AY 2011-12, the AO had obtained the Valuation Report from the Departmental Valuation Officer (in short “DVO”) in respect of the cost of construction of the said property. The DVO’s Report mentioned the cost of construction at Rs.4,79,14,694/-. On pro-rata basis, the AO determined the cost of construction till 31st March, 2011 at Rs.3,87,00,329/-. The cost of construction of the building admitted in the balance sheet of the assessee as on 31.03.2011 was Rs.2,38,21,371/- only and the difference of Rs.1,48,78,959/- was treated as unexplained investment by the assessee in the construction of the hotel building. It was a submission that on appeal, the Ld.CIT(A) had reduced the difference to Rs.49,96,697/- by holding that PWD rates are to be applied and not CPWD rates. It was a submission that Madurai was treated as comparable to Metro City and CPWD rates were liable to be applied. It was a submission that the order of the Ld.CIT(A) was liable to be reversed.

In reply, the Ld.AR submitted that the DVO, at the outset, wrongly valued the property by applying the CPWD rates. It was a further submission that the cost of construction was clearly recorded in the books of the assessee and books of accounts of the assessee had not been rejected and consequently, in view of the decision of the Hon’ble Supreme Court in the case of Sargam Cinemas reported in 328 ITR 513 (SC), no addition can be made. It was a further submission that Madurai was not covered by the CPWD rates in so far as it was not a Metro City. It was a submission that in the Cross Objection, the assessee has challenged the additions sustained by the Ld.CIT(A). It was a prayer that the additions on account of the unexplained investment was liable to be deleted in its entirety.

We have considered the rival submissions.

A perusal of the Valuation Report has found at Page No.1 of the Paper Book shows that in Para No.3.5 of the Valuation Report, the period of construction has been recorded by the DVO is October, 2007 to January, 2012. The DVO has done the valuation as on 19.03.2014. Thus, the valuation has done by the DVO is in respect of the hotel building after completion. The DVO has not given any year wise breakup of the possible cost of construction. From the above fact, it becomes clear that the construction started during the AY 2008-09 and was completed in the AY 2013-14 i.e. over a period of five years. A perusal of the details filed by the assessee before the DVO shows that the assessee has admitted a total cost of construction of Rs.4,33,41,667/-. The same is found in proforma which has being submitted to the DVO. The assessee has also enclosed the delivery bills for the materials and labour and the supporting vouchers. The break-up of year wise expenditure incurred is also submitted. A perusal of the Assessment Order shows that the AO for the purpose of determining the cost of construction has done a pro-rata reduction i.e. he has taken the valuation of the DVO as applicable for 52 months and for the year ending 31.03.2011, he determined the cost for 42 months. Thus, for the AY 2011-12, the AO determined the alleged unexplained investment right from the AY 2008-09 to 2011-12 and assessed the entire amount during the AY 2011-12 which itself is not permissible. Further, a perusal of the balance sheet of the assessee as on 31.03.2011 shows that the fixed assets has shown by the assessee is Rs.3,61,59,736/- whereas the AO has taken only the portion in respect of the building at Rs.2,38,21,371/-. A perusal of the DVO’s report shows that in Para No.3.6 in the specifications, he has considered the fact that the building is air-conditioned and the lift is also available. If the figure of Rs.3,61,59,736/- is considered, admittedly, there would be a difference of only Rs.25.00 lakhs which fell within the margin of error in respect of the estimates @10%. Further, a perusal of the order of the Assessing Authority also clearly shows that the AO has not rejected the assessee’s books of accounts or his accounts in respect of the cost of construction. A perusal of the DVO’s Report shows in Para No.4.1.1 method of accounting, the DVO mentions that there is an absence of detailed working drawing, bill of quantities, vouchers for the building material required for work including the labour payments. But, a perusal of the proforma required for the valuation shows that the same had also been submitted before the DVO. A perusal of the order of the Ld.CIT(A) shows that the Ld.CIT(A) has accepted the contention that PWD rates were to be applied in place of the CPWD rates in view of the decision of the jurisdictional High Court in the case of Shri Raya R. Govindarajan. Consequently, the Ld.CIT(A) had granted the assessee the benefit of reduction @25%. This finding has been challenged by the Revenue. Admittedly, as per the Revenue, Madurai is comparable to a Metro City. It is not the case of the Revenue, Madurai is a Metro City. What is to be looked into is, as to whether the CPWD rates are applicable to a place like Madurai and whether the cost of construction as determined under the CPWD rates can be applied to non- Metro Cities? The Hon’ble Jurisdictional High Court in the case of Shri Raya R. Govindarajan has held that when details regarding the cost of construction at PWD rates for specific Districts are applicable, there is no reason for the Valuation Officer to adopt the rate which is prevalent to distant places and metropolitan cities. For this purpose, the Hon’ble High Court had relied upon the decision in the case of T.M.P.N. Murugasen reported in 217 Taxmann 40. Admittedly, for Madurai, PWD rates are specifically available and therefore, Madurai cannot be compared to a Metropolitan City for the purpose of applying PWD rates. Admittedly, the Ld.CIT(A) is also not a Valuation Officer competent for doing valuation by applying PWD rates. Consequently, modifying the CPWD rates valuation has done by the DVO by reducing the same by 25% on the presumption that it would meet the PWD rates is erroneous. The only option available to the Ld.CIT(A) was to delete the addition made as the PWD rates have not been applied. This being so, we are of the view that the order of the Ld.CIT(A) is erroneous in so far as he has estimated the PWD rates by reducing the valuation done by the DVO by applying CPWD rates by 25% as Madurai is not liable to be considered as Metropolitan City for the purpose of applying the CPWD rates for determining the cost of construction. The difference in the cost of construction as determined by the AO based on the DVO’s rates applying CPWD rates would also be bad and consequently, the addition stands deleted. The addition is deleted for other reasons also being –

In the result, the appeal filed by the Revenue in is dismissed and the Cross-Objection filed by the assessee in CO No.110/Chny/2017 is allowed.