2019 (8) TMI 847 - AT - Income Tax

Tribunal grants deduction under Section 54F, directs AO to accept revised construction cost.

The Tribunal allowed the appeals for both assessment years, directing the AO to accept the revised cost of construction and grant the deduction under ... Unexplained cost of construction in the building - AO proposing to adopt the cost of construction of building at ₹ 1.70 crores as valued by the DVO- valuation based on rates of construction of CPWD - HELD THAT:- The AO instead of verifying the facts from the books of accounts and vouchers, summarily rejected the contention of the assessee which is incorrect and unjustified. AO ought to have decided the year wise cost of construction after verifying the books of accounts and the details instead of finding easy way of estimating the cost of construction on the basis of original cost of construction declared by the assessee. DVO calls for information from the assessee to determine the cost of construction and estimates the cost of construction of the building. The value determined by the DVO with regard to cost of construction of the building has evidentiary value and the AO should not disturb the valuation without having valid reason. The AO is obliged to consider the explanation and the evidences placed before him to arrive at the finding with regard to the accounted expenditure on construction of the building. When the evidences are available, the AO is not permitted to reject the submission of the assessee merely on the premise that the assessee had already intimated the cost of construction to the DVO. In the instant case though initially the assessee has intimated the DVO that she had incurred the cost of construction till the date of inspection at ₹ 111.10 lakhs, subsequently reexamined the facts and found that the actual expenditure incurred was ₹ 136.06 lakhs but not ₹ 110.10 lakhs and submitted the same before the AO with relevant evidences and the books of accounts. The AO without causing any inquiry rejected the contention of the assessee which is incorrect and unreasonable. Therefore, we hold that there is no reason for rejecting year-wise cost of construction declared by the assessee aggregating to ₹ 136.06 lakhs and accordingly we direct the AO to accept the cost of construction declared by the assessee at ₹ 136.06 lacs for arriving the unexplained investment in place of ₹ 111.10 lakhs adopted by the AO. AO increased the cost of construction without taking account of a total cost of construction declared by the assessee in the F.Y.2015-16 and 2016-17 - We find no reason to increase the cost of construction for the F.Y.2011-12 relevant to the A.Y.2012-13. It is also unjustified to estimate the cost of construction when the assessee has maintained the books of accounts without verifying the same and giving valid reasoning. Further after giving rebate for rate difference and discount for self supervision, the cost of construction of the building worked out to less than the revised cost of construction declared by the assessee. Since we have already directed the AO to adopt the revised cost of construction in the earlier paragraphs, we find no reason to uphold the order of the Ld.CIT(A), accordingly we set aside the order of the Ld.CIT(A) and delete the addition made by the AO. Thus, the appeal of the assessee is allowed for the A.Y.2012-13. Deduction u/s 54F - residential unit has already come into existence before the transfer of capital asset - two floor constructed prior to sale and other two after the sale - no bar in commencement of construction prior to sale - HELD THAT:- The assessment order passed by the AO for the A.Y.2012-13 and the allocation of cost of construction for various assessment years establishes that the assessee had completed the building after transfer of the capital assets and incurred the cost to the extent of ₹ 101.14 lakhs during the F.Y.2013-14 to 2016-17 as per the page No.8 of the assessment order of A.Y.2012-13. Having determined the cost of construction and assessed the unexplained investment if any, for the F.Y.2013-14 to 2016-17, the AO is not permitted to take different stands for the purpose of assessment and for the purpose of deduction u/s 54F which shows the inconsistent approach of the department and it is against the justice. In view of the fact that the AO himself determined the cost of construction incurred for the A.Y.2013-14 to 2016-17 in the assessment order of A.Y.2012-13, we are under the considered opinion that the residential unit was constructed after transfer of capital asset and we do not find any merit to uphold the order of the Ld.CIT(A) and the same is set aside and direct the AO to allow deduction u/s 54F. As decided in SRI BOLLINA SRIHARI RAO AND VICE-VERSA [2017 (4) TMI 117 - ITAT VISAKHAPATNAM] assessee would be entitled for deduction u/s 54F even though the amount is invested in construction prior to the transfer of original asset. Issues Involved:1. Validity of reference to DVO without rejecting the books of account.2. Sustaining the addition of Rs. 13,55,750/- towards unexplained cost of construction.3. Deduction under Section 54F of the Income Tax Act.Issue-Wise Detailed Analysis:1. Validity of Reference to DVO Without Rejecting the Books of Account:The appellant argued that the reference made to the Departmental Valuation Officer (DVO) was invalid as the Assessing Officer (AO) did not point out any specific defects in the books of account nor reject them. However, this ground was not pressed during the hearing and thus dismissed as not pressed.2. Sustaining the Addition of Rs. 13,55,750/- Towards Unexplained Cost of Construction:The AO found discrepancies in the cost of construction declared by the assessee and referred the matter to the DVO. The DVO estimated the cost at Rs. 1,70,60,047/-, significantly higher than the Rs. 1,11,10,744/- initially declared by the assessee. The AO proposed to adopt the DVO’s valuation and made an addition for the unexplained investment. The assessee contended that the actual cost incurred was Rs. 1,36,06,190/-, which was accounted for in the books, and requested rebates for self-supervision and local rates.The CIT(A) partially sustained the addition, allowing a 15% rebate for rate differences and increasing the self-supervision allowance from 7.5% to 10%. The Tribunal noted that the AO did not verify the books of accounts and vouchers before rejecting the revised cost of construction and summarily rejected the assessee's contention without proper inquiry. The Tribunal held that the AO should have verified the actual expenditure from the books and directed the AO to accept the cost of construction declared by the assessee at Rs. 1,36,06,190/-.3. Deduction Under Section 54F of the Income Tax Act:The assessee claimed a deduction under Section 54F for constructing a residential house after selling vacant land. The AO, following the JCIT's direction, disallowed the deduction, arguing that the construction was completed before the transfer of the capital asset, which contradicts the conditions under Section 54F that require construction to be completed within three years after the transfer.The Tribunal examined the timeline of construction and found that the second and third floors were completed after the transfer of the capital asset, as evidenced by the valuation report and the allocation of construction costs in the assessment order. The Tribunal held that the AO's inconsistent approach in determining the cost of construction for different purposes was unjustified. The Tribunal allowed the deduction under Section 54F, noting that the residential unit was constructed after the transfer of the capital asset.Additionally, the Tribunal referenced a precedent where the commencement date of construction is irrelevant as long as the construction is completed within three years from the transfer date. However, this was deemed academic in this case since the construction was completed post-transfer.Conclusion:The Tribunal allowed the appeals for both assessment years, directing the AO to accept the revised cost of construction and grant the deduction under Section 54F. The orders of the lower authorities were set aside.