Interesting Case: Validity of addition on account of difference in cost of construction as shown by assessee and as valued by the valuation officer

 

 

One of the area of addition by the assessing officer in assessment proceeding is often with respect to the cost of construction incurred by the assessee. The addition is further going to rise in the faceless assessment scheme as there will be a separate verification unit and the officer would often refer it to the DVO for valuation. Here is one case where similar issue has arisen.

The court held that the assessee had used first class, second class and third class bricks in constructing the plinths, which is duly certified by the Inspector, Food & Supplies Department, vide his certificate, addressed to the AO. If one carefully goes through the order of the CIT(A), it would also be clear that the AO has taken labour charges of laying the bricks at a higher rate, i.e., @ Rs. 347 per 1000 of bricks whereas the prevailing rate was Rs. 120 per 1000 of bricks. Even the Inspector, of IT Department has estimated the same at Rs. 111 per 1000 of bricks. It is also an admitted position that the AO has not given any rebate on account of self-supervision. The CIT(A) was justified in stating that rebate on account of self-supervision is generally allowed at 10 per cent. In view of the above, the cost of construction as worked out by the CIT(A), is reasonable keeping in view the relevant facts of the present case. There is no material on record to controvert the above findings of the CIT(A). It is also relevant to point out that the certificate issued by the Inspector, Food & Supplies Department has not been controverted the Department. It is also a factual position that 10 per cent rebate is generally allowed on account of self-supervision. Thus, considering the entire facts of the present case, there is no justification for interfering with the order of the CIT(A).

The court concluded that CIT(A) was justified in deleting the addition made by AO on account of difference in cost of construction of plinth as shown by assessee and as valued by the valuation officer on taking into account rebate towards self-supervision, the fact that assessee had used all classes of bricks and that labour charges adopted by the AO were higher than prevailing rates.

Here is a copy of the complete case:

INCOME TAX OFFICER vs. SMT. VIMLA CHOUDHARY

ITAT, AMRITSAR BENCH

H.L. Karwa, J.M. & N.K. Saini, A.M.

ITA No. 446/Asr/1999

19th July, 2002

(2002) 21 CCH 0258 AsrTrib

(2004) 1 SOT 0418

Legislation Referred to

Section 69

Case pertains to

Asst. Year 1996-97

Decision in favour of:

Assessee

In favour of:

Assessee

Counsel appeared:

S.C. Pahwa, for the Appellant : P.N. Arora, for the Respondent

ORDER

H.L. KARWA, J.M. :

ORDER

This is an appeal by the Department and is directed against the order of the CIT(A), Bhatinda dt. 2nd June, 1999, relating to the asst. yr. 1996-97.

2. The only ground taken by the Department in this appeal reads as under :

“On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the addition of Rs. 82,210 made on account of difference in cost of construction.”

3. Briefly stated, the facts of the case are that the assessee along with four other family members constructed plinths during the period 30th March, 1995 to 14th April, 1995, in pursuance of an agreement executed on 20th March, 1995, with DP&SC. During the course of assessment proceedings, the assessee vide its reply dt. 24th Dec., 1997, declared the total cost of construction by all the co-owners at Rs. 4,60,714 inclusive of Rs. 96,668 by the assessee. In support of cost of construction, the assessee furnished the Valuation report dt. 31st Oct., 1997, of a registered Valuer, who had estimated the cost of construction at Rs. 4,59,614. In order to ascertain the correctness of the total cost of the construction, the AO referred the matter to the Valuation Cell and the Valuation Officer vide his report dt. 18th Sept., 1998, determined the cost of construction at Rs. 8,52,500. Thus, there was a difference of Rs. 3,91,800 in the cost of construction determined by the Valuation Officer and the one disclosed by the assessee. During the course of assessment proceedings, the assessee raised certain objections on the report of the AVO. The assessee also moved an application under s. 144A of the Addl. CIT for intervening in the matter and for referring the objections of the assessee to the Valuation Cell. The Valuation Officer stated that the valuation done by him was perfectly in order and correct and that the valuation report prepared by the registered valuer was full of shortcomings inasmuch as there was marked difference in the measurement marked on plan and actual dimension of plinths at site and further the registered valuer had simply made an attempt to arrive at the declared amount of the assessee. The assessee brought to the notice of the AO that she had used bricks of first class, second class and third class and further stated that an additional expenditure of Rs. 48,440 was incurred after inspection of the plinths by the registered valuer. On the other hand, the AO has held that bills, vouchers regarding purchase of third class bricks were bogus and fake inasmuch as a few bricks kilns did not have in their stock third class bricks from whom the assessee alleged to have purchased bricks. The AO also negatived the claim of the assessee that she had incurred Rs. 48,440 as an additional expenditure.

3.1 Considering the above facts, the AO made the addition of Rs. 82,210 on proportionate basis.

4. When the matter was taken to the CIT(A) in appeal, the assessee contended before him that estimate of cost of construction has been made by the Valuation Officer by adopting very high rates of different materials used for constructing the plinths. The assessee has constructed plinths with area admeasuring 13340.75 sq.mts. and one sq.mt. requires 50 bricks for construction as per actual counting by the Inspector of the Department against 54 bricks taken by the AO on estimate basis on the basis of specifications laid down in CPWD Rules. It was brought to the notice of the CIT(A) that the total bricks required for constructing the plinth area was at 667000 as against 720401 taken by the Valuation Officer. It was also stated that the Valuation Officer had taken the bricks used of second class generally known as doam and taken the value @ Rs. 620 per 1000 whereas the assessee used 2nd and 3rd class bricks which is apparently clear from the certificate issued by the Inspector, Food Supplies, Jalalabad vide his certificate dt. 16th Nov., 1998, wherein he has stated that the bricks used were of first, 2nd and third class quality known as Abal, doam, soam in colloquial language. It was also stated that the average value if taken @ Rs. 450 per 1000 and the total cost of bricks used would come to Rs. 3,00,150. Similarly, the Valuation Officer has adopted the labour charges for laying dry bricks @ Rs. 502 per Rs. 1000 after the value of bricks is taken @ Rs. 650 per 1000 against the maximum rate paid and prevalent at a particular time cannot be more than Rs. 100 per 1000 of bricks. Even the Inspector of income-tax has estimated the cost of laying dry bricks at Rs. 111 per 1000. It was also claimed by the assessee that the AO has not given the deduction which is generally allowed @ 10 per cent for self-supervision. It was claimed by the assessee that, in fact, she had incurred a sum of Rs. 5,09,154 during the asst. yrs. 1994-95, 1995-96 and 1996-97. It was also brought to the notice of the CIT(A) that the AO did not agree to the expenditure incurred of Rs. 48,440 in the financial year 1996-97. It is stated that the Inspector, Food & Supplies, Jalalabad (West) has certified vide his letter dt. 16th Nov., 1998, that the road of the said plinth was completed by the end of the calendar year 1997. In other words, the expenditure in constructing the road was incurred till 31st March, 1997, i.e., in the financial year 1996-97. All the above information was furnished before the AO. It was claimed that the AO arbitrarily ignored the claim of the assessee and had determined the cost of construction incurred at Rs. 4,60,174 against the actual expenditure incurred at Rs. 5,09,154. The assessee also claimed that she was having no other sources except agricultural income. Accordingly, it was claimed that in case the investment in the cost of construction is not explained, the same is attributable to the income earned from the agriculture which is exempt from income-tax.
5. After considering the above contentions of the assessee, the learned CIT(A) reached at the following conclusions :

“2.3 I have given careful consideration to the views expressed by both the sides. It is a factual position that the appellant has used first class, second class and third class bricks colloquially known as Abal, Doam and Soam quality of bricks in constructing the plinths which is duly certified by the Inspector, Food & Supplies Department, Jalalabad vide his certificate dt. 16th Nov., 1998, addressed to the AO in response to the queries made by him. It is also a factual position that the AO has taken the labour charges of laying dry bricks ridiculously at a higher rate of Rs. 347 per 1000 of bricks whereas the prevailing mason’s per day rate of Rs. 120 to Rs. 100 at a relevant time and labour @ Rs. 48 per day as certified by the A.V.O. himself vide his report dt. 23rd April, 1999. One mason and two labourers can lay more than around 2000 bricks per day and therefore, the cost per 1000 bricks will not be more than Rs. 120 whereas the Inspector of the IT Department has estimated the same at Rs. 111 per 1000. Similarly the AVO has not given any rebate on account of self-supervision when the same is generally allowed at 10 per cent Further in the case of M/s JMP Enterprises the learned Tribunal, Amritsar Bench, Third Member Bench vide their order dt. 12th July, 1993, reported on page No. 421 of the Selected Orders of the Tribunal have held that for the difference of opinion in the estimation of value of cost of construction a margin of 10 per cent would meet the ends of justice in view of the fact that there is estimation in the value of cost of construction. Similarly the appellant has incurred expenditure in the cost of construction of plinths during the financial year 1996-97 as is evident from the certificate of the Inspector, Food & Supplies Department referred supra, I, therefore, hold that the cost of construction shown by the appellant and other co-owners of the plinths is Rs. 5,09,154 against the cost of Rs. 4,60,174 taken by the AO. Similarly I hold that the bricks were used having average rate of Rs. 500 per 1000 against Rs. 620 taken by the AVO keeping in view of the fact that the appellant has used 1st, second and third quality of bricks and has not paid any carrying charges as the same were carried by the appellant in his own tractors. According to the above observations the following would be the cost of construction of plinths of the appellant :

			Rs.
1. For dry bricks in edge flooring No. of bricks required for dry bricks on edgier flooring 720401 @ Rs. 500 per 1000			3,60,200
2. Labour for 720401 bricks @ Rs. 120 per 1000			86,448
3. Brick works in mud morter with bricks 258.33 @ 494 bricks 127615 @ Rs. 500 per 1000 bricks			63,808
4. Labour on above 127615 bricks @ 120 per 1000 bricks			15,314
						52,770
Other items as added by the AVO
Angle iron	1,971
Barbed wire fencing	2,327
CC Block 1:3:6 for embedding fencing	4,420
Earth filling only cost of diesel with MS Old gate	19,665
For water charges, mud, sand T&P etc.	8,000
1.50 per builders efforts	12,615
		51,230			51,230
			5,77,000
Cost of construction b/f			5,77,000
Less : 10 per cent rebate on account of self supervision			57,700
Net value				5,19,300

As against the net value as mentioned above Rs. 5,19,300, the appellant has shown the value of the same at Rs. 5,09,154 and there remains a very little and insignificant difference of only Rs. 10,146 which is reasonable and can be ignored for a construction of Rs. 5,77,000. Accordingly, the addition made at Rs. 82,210 is held to be made not on sound footing which is unable to stand the test of appeal. Accordingly the addition so made stands deleted.”

6. Before us, Shri S.C. Pahwa, the learned Departmental Representative heavily relied upon the order of the AO and further submitted that the objections raised by the assessee against the report of the DVO were general in nature and, therefore, are not tenable in the eyes of law. Shri S.C. Pahwa, the learned Departmental Representative also brought to our notice that the bills/vouchers regarding purchase of third class bricks were bogus and fake inasmuch as a few brick kilns did not have in their stock third class bricks from whom the assessee alleged to have purchased bricks. Shri S.C. Pahwa, the learned Departmental Representative gave an argument that the contention of the assessee regarding spending of Rs. 48,440 was found to be an afterthought and an attempt to reduce the difference in the cost of construction because the assessee did not make any mention of it in its reply dt. 24th Dec., 1997, nor the registered valuer mentioned in its report dt. 31st Oct., 1997, after inspection of impugned property on 20th Oct., 1997, as the assessee had contended to have incurred this expenditure during the period October/November, 1997. He, therefore, submitted that the learned CIT(A) has not correctly appreciated the facts of the present case and, therefore, his order may be set aside and that of the AO be restored.
7. Shri P.N. Arora, advocate, while appearing for the assessee, reiterated the submissions made before the authorities below. He further submitted that the order of the CIT(A) is based on correct appreciation of the facts and, therefore, no interference is called for.
8. We have carefully considered the rival submissions and have also perused the orders of the authorities below. At the very outset, we made it clear that the order of the CIT(A) is based on correct appreciation of the facts and, therefore, requires no interference at our level. It is well established fact that the assessee had used first class, second class and third class bricks in constructing the plinths, which is duly certified by the Inspector, Food & Supplies Department, Jalalabad (West) vide his certificate dt. 16th Nov., 1998, addressed to the AO. If we carefully go through the order of the CIT(A), it would also be clear that the AO has taken labour charges of laying the bricks at a higher rate, i.e., @ Rs. 347 per 1000 of bricks whereas the prevailing rate was Rs. 120 per 1000 of bricks. Even the Inspector, of IT Department has estimated the same at Rs. 111 per 1000 of bricks. It is also an admitted position that the AO has not given any rebate on account of self-supervision. The CIT(A) was justified in stating that rebate on account of self-supervision is generally allowed at 10 per cent

8.1 In view of the above, we are of the considered view that the cost of construction as worked out by the CIT(A), hereinabove, is reasonable keeping in view the relevant facts of the present case. We do not find any material on record to controvert the above findings of the CIT(A). It is also relevant to point out that the certificate issued by the Inspector, Food & Supplies Department dt. 16th Nov., 1998, has not been controverted the Department. It is also a factual position that 10 per cent rebate is generally allowed on account of self-supervision. Thus, considering the entire facts of the present case, we do not see any justification for infering with the order of the CIT(A) and accordingly we uphold the same.

8.2 Before parting with this case, we may also state here that the Department has also filed appeals in the case of co-owners and those appeals have already been disposed of considering the tax effect. In other words, in those appeals no decision has been given on merits.

9. In the result, the appeal is dismissed.