LOCAL PUBLIC WORKS DEPARTMENT (LPWD) RATES FOR ESTIMATION OF CONSTRUCTION COST IS SETTLED POSITION

Commissioner of Income Tax, Ajmer Versus Sunita Mansingha 2017 (4) TMI 303 - SUPREME COURT

General discussion:

When an assessee does not maintain proper books of account and documents and in some other circumstances it becomes necessary to estimate cost of construction of buildings constructed for residential or commercial purposes.

The assessee can give its own estimates based on expenses incurred, quantity of material and labour used, rates of material and labour and other  cost etc. This can be with help of price quotations, computation made by  experts. 

However disputes and differences arise. Tax authorities tend to estimate higher cost and assessee try to minimise it. Therefore reference can be made to Valuation Officer.

CPWD vis s vis Local PWD:

There are Central Public Works Departments (CPWD) and Local Public Works Departments (LPWD). Both are engaged in works for public, however, the area of their role are different. The volumes are also different. Both have independent and different cost advantages and disatdvantages.

Some policies about procurement of material and engagement of labour are different. There is also difference between certain norms about construction and costs. In case of CPWD procurement or men, material and machines can be as per Centralized Policies and there can be bulk procurements. Therefore, there is advantage of bulk buying. Whereas in case of LPWD there can be some disadvantage on account of volume, whereas there can be advantage for local availability.

In case of CPWD sometimes costs can be lower than LPWD and in some case it can be higher. Though in overall there should not be much difference, if volume and quality are  comparable.

Estimation of costs:

 When it is a matter for estimation of cost of construction, it is logical that LPWD rates are likely to be more near than CPWD. This is for the reason that assessee has constructed building in local area and he was more dependent on local markets for material and labour both. The conditions which are applicable to assessee are more comparable to LPWD than CPWD.

Therefore, when it comes to choose between CPWD and LPWD, the better option is LPWD. This is a common sense approach considering ground reality.

Ruling of the Supreme Court:

On this aspect now we have ruling of the Supreme Court that for estimation of costs LPWD rates are proper, as held by Tribunal and confirmed by High Court. On aspect of the rates for valuation the Supreme Court held on the following lines (analysed)

             In view of the finding recorded by the Tribunal that the local Public Works Department rates are to be applied and adopted in place of Central Public Works Department rates, we do not find any good ground to interfere in the impugned judgment on this issue on merits. The appeal fails and is dismissed.

Therefore, now it is settled that the rates of LPWD are more appropriate for purpose of estimation of costs instead of CPWD rates.

Personal work vis a vis public work:

In case of an individual assessee cost effectiveness can be substantial for various reasons like personal interest, serious efforts to reduce costs by effective buying, effective engagement of labourers,  reduced idle time of labour, and reduced wastages of material etc.

Whereas in case of CPWD and LPWD there are many visible and  hidden factors, causing higher costs like lack of personal interest, spending of public money (which is spent much less carefully) - more wastage and idleness,  more outsourcing by CPWD / LPWD, procurement of material and labour at higher rates, corruption and bribery costs in public Works. This is evident from some cases of corruption which are reported and which are just like a tip of the iceberg.

Public feeling is that only 30-40 % of costs incurred in public works are fruitfully used and 60-70% is due to idleness of men and machines, higher costs due to higher rates and wastage and siphoning of public funds.

As per author, there must be a reduction of at least 30-40% when costs are incurred personally and 20-30% when costs are incurred by large private organization,in comparison to costs incurred in Public Works whether be CPWD or LPWD.

The judgment of the Supreme Court is reproduced below with highlights on aspects of valuation, and not on technical aspects about reference to Valuation Officers.