1994 (9) TMI 139 - AT - Income Tax

Tribunal rules in favor of assessee, rejects AO's higher estimations for unexplained investments

The Tribunal ruled in favor of the assessee, deleting the additions made by the AO for unexplained investments in construction. It held that the cost of ... Unexplained Investments Issues Involved:1. Additions made u/s 69 of the Income-tax Act, 1961 for unexplained investments.2. Validity of cost estimation by the Assessing Officer (AO) and District Valuation Officer (DVO).3. Acceptance of the assessee's books of account.4. Applicability of proviso to section 145(1) and section 145(2).5. Comparison with other buildings for cost estimation.6. Treatment of unexplained expenditure u/s 69C.Summary:Issue 1: Additions made u/s 69 of the Income-tax Act, 1961 for unexplained investments.The dispute relates to additions made by the AO u/s 69 as unexplained investments in the construction of Surya Apartment and Vaibhav Apartment. The AO estimated the cost of construction higher than what was recorded in the assessee's books, leading to additions for unexplained investments.Issue 2: Validity of cost estimation by the Assessing Officer (AO) and District Valuation Officer (DVO).The AO referred to the final bills and conducted independent inquiries, estimating the cost of construction based on comparable buildings. The DVO provided a modified report estimating higher costs, which the AO further adjusted by removing deductions for self-supervision. The CIT(A) directed the AO to accept the DVO's modified valuation but did not address how unexplained investments should be worked out.Issue 3: Acceptance of the assessee's books of account.The assessee maintained regular, audited books of account with no defects pointed out. The CIT(A) observed that the buildings cited by the AO were not comparable and directed the AO to accept the DVO's valuation. The Tribunal held that the cost of construction as per the assessee's books could not be rejected without invoking proviso to section 145(1) or section 145(2).Issue 4: Applicability of proviso to section 145(1) and section 145(2).The Tribunal noted that the AO did not invoke proviso to section 145(1) or section 145(2). The AO's analysis of final bills was based on a misunderstanding of 'cost' and 'price.' The Tribunal concluded that no defects were pointed out in the books, and the base figure for unexplained investment should be the amounts recorded in the assessee's books.Issue 5: Comparison with other buildings for cost estimation.The Tribunal found that the buildings used for comparison by the AO were not suitable. The CIT(A) also observed that the DVO's valuation, based on CBDT Instruction No. 1671, was a fair estimate and should be accepted.Issue 6: Treatment of unexplained expenditure u/s 69C.The Tribunal highlighted that in the case of a builder, unexplained expenditure would be assessable u/s 69C and would be neutralized when debited to the profit and loss account. Thus, no net addition would result. The Tribunal also noted that the DVO's estimated cost was within the expected variation limit of 5% to 10%.Conclusion:The Tribunal deleted the additions sustained by the CIT(A), holding that the cost of construction as per the assessee's books should be accepted. The assessee's appeal was allowed, and the department's appeal was dismissed.