TaxTMI 
TaxTMI 
2005 (7) TMI 341
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....artment" situated at Survey No. 353, Ward No. 16, near Sardar Baug, Rajkot. The total cost of construction declared by the assessee during the previous year, relevant for asst. yr. 1991-92 is Rs. 39,33,779. It is pertinent to mention here that in this case originally order under s. 143(3) was passed on 8th March, 1994 wherein addition under s. 69C, on account of unexplained investments in the work-in-progress for Rs. 25,51,227 was made. In appeal, the CIT(A)-I, Rajkot, set aside the assessment to be framed de novo after giving the assessee due opportunity of being heard. 5. During the course of reassessment as per direction of the CIT(A), the AO observed that the assessee has shown consumption of various materials in the process of construction, viz., iron, cement, bricks, sand, stone chips, lime and other electrical goods. The Authorised Representative was asked to produce the stock register wherein quantitative details regarding the purchase and consumption of these materials had been recorded. In this regard, the Authorised Representative vide his letter dt. 13th Sept., 1996 has submitted as under: "Your honour will appreciate that as far as quantitative details are concer....
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....ay-to-day construction activity was recorded so that the same could be compared with the consumption of materials declared. He was also asked whether the architect has carried a regular inspection of the site and whether he had taken periodic measurement of the construction carried out. He was told that the periodic measurements taken by the architect and regular inspection reports issued by him could serve as the basic document that would substantiate the extent of construction during the previous year. Further, he was also asked to produce the certificates issued by the architect after completion of the different stages of construction. He was also asked as to what was the basis for valuation of work-in-progress and in that regard he was required to produce certificates from the architect as an evidence thereof. The Authorised Representative has failed to file any such certificate of the architect. In the absence of the inspection reports of the architect, the extent of construction, the quality of construction, etc. cannot be verified. Technical details of the beams, columns, etc. cannot be verified. The extent of materials consumed in the foundation cannot be verified in the ab....
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....cond stage 4% of Rs. 10,30,391.25 for third stage 4% of Rs. 10,30,391.25 for fourth stage 4% of Rs. 10,30,391.25 for fifth stage 1% of Rs. 10,30,391.25 for first floor construction Similarly, for building B the total labour payment for 35,209 sq. ft comes to Rs. 7.48,191 and the bills have been raised accordingly. From this, it can be seen that payment to labour service provider is not based on proper measurements. Furthermore, the AO found that the assessee has computed well in advance the payment to be made to the labour contractor and the bills have been prepared accordingly. Based on the above facts, the AO stated that it can safely be inferred that labour payment bills are not based on proper measurements of the construction undertaken and on the work performed by the contractor. On the contrary it is seen that the assessee, after having decided the total labour payment to be made. has apportioned the labour expenses to different stages of construction, T....
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....e valuation was called. 11. The AO dealt with the objection of the assessee as follows: (1) The Authorised Representative of the assessee stated that the DVO has arrived at the basic rate of Rs. 2,450 per sq. mt. He stated that the Government valuer has adopted the value without giving any details as to how the basic rate of Rs. 2,450 has been arrived at. The detailed computation of the DVO was called for during assessment proceedings and a copy of the same was forwarded to the assessee on 21st Jan., 1997 and he was asked to show cause as to why the basic rate of Rs. 2,450 should not be adopted in computing the cost of construction during the previous year The computation of the rate by the DVO is as follows: Rate analysis Upper Floors (Rs.) Basic rate as on 1.10.76 400.00 (RCC framed structure) Less: for lesser fl. ht. 3.35 - 2.85 @ Rs. 17/0.30 mt. ht. &nb....
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....bsp; 476.62 Rate to be adopted= Rs. 476.62 x 5.14 2,449.82 Say: 2,450 (per) sq. mt. ------------ In response the Authorised Representative queried as to what was meant by basic rate of Rs. 400 and what is the multiplier of 5.14 applied by the DVO. The Authorised Representative was told that the basic rate of Rs. 400 was the approved plinth area rate of construction per sq. mt. as on 1st Oct., 1976, as per CBDT Instruction No. 1671, for R.C.C. framed structure for height upto 3.35 mt. This fact is also mentioned ....
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.... 5.14 to arrive at the basic rate of valuation for the previous year. This valuation has been done in accordance with the guidelines and in accordance with Instruction No. 1671 issued by CBDT. Further, the DVO has also elucidated as to how the basic rate of Rs. 2,450 has been arrived at. A copy of the computation has also been provided to the assessee. Further, on going through the computation made by the DVO, the AO stated that he was satisfied that the basic rate has been computed properly as per Instruction No. 1671. 13. The second objection against the valuation report raised by the Authorised Representative is that the DVO visited only one flat and he has made his computations by taking measurements of that flat. The Authorised Representative further stated that the DVO did not consider extra items fitted by the flat owner. In this regard the Authorised Representative vide letter dt. 3rd Jan., 1997 was asked the following: "You have taken a plea that spartek tiles, found in the flat during the inspection, was fitted by some other agency and it was done at the behest of the person who bought that flat. In this regard you are required to produce evidences, that spartek til....
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....of construction for the first four floors would be 40 per cent of 1,84,21,060, i.e., 73,68,424. Here again it is observed that, even if all other items of valuation are being left out, the cost of construction comes to Rs. 78,99,778. This estimate has been prepared after taking into consideration only the cost of ground floor parking and the cost of the skeletal structure of the four upper floors. From this estimation, it can be seen that the cost of all other items like mosaic tiles, Kota stone, granite, lift, compound wall, machine room, borewell, etc. have not been considered in the relevant assessment year as objected to by the assessee. 14. The AO stated that the DVO has valued the building in toto and has apportioned these expenses over two financial years in the ratio of the cost of construction shown by the assessee in those two financial years, respectively. Therefore, the argument of the Authorised Representative that expenses pertaining to asst. yr. 1992-93 has been valued in this year is incorrect. Similarly, the Authorised Representative has raised objections regarding expenses on Kota stone, tiles, marble, granite, etc. being debited in this year. This contentio....
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.... necessarily implied prohibition in the construction or other law of evidence, evidences obtained as a result of illegal search or seizure is not liable to be shut down." 17. The next objection of the assessee is that the valuation report was sent directly to the AO without seeking any clarifications from the assessee. In this regard the AO stated that adequate opportunities were given to the Authorised Representative during assessment proceedings and he has filed all his objections against the valuation report and all of them have been taken on record. Therefore, it is immaterial that the DVO did not seek any clarification from the assessee. The AO was of the opinion that it should not make any difference to the assessee if his objections have been considered during assessment proceedings. This assessment is being framed after taking into consideration all the objections of the assessee against the valuation report, hence his contention that the DVO did not seek clarifications from him becomes infructuous. 18. With regard to the Authorised Representative's objection for making a reference to the Valuation Cell by quoting various decisions of the Tribunal, the AO observed tha....
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.... security cabin, machinery room, compound wall, fire stairs, mosaic tiles, Kota stone flooring, marble tiles, spartek tiles, granite platform, borewell, etc. is ignored for arriving at the cost of construction during the previous year. Only two items are being considered namely: Rate per Assessed Sq. mt. sq. mt. cost (a) Ground floor 668.37 9,795 5,31,354 used for parking (b) Upper floors 7,518.90 2,450 1,84,21,060 (residential flats) The Authorised Representative during scrutiny proceedings, had informed that skeletal construction upto 4th floor had been completed. Therefore, only 40 per cent of the total cost of upper floors is being taken into consideration. Cost of construction worked out is as follows : (Rs.) (a) Ground floor 5,31,354 (b) 40% of upper flo....
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....d his objection to the above show-cause notice by his letter dt. 13th Jan., 1995 were similar and they are discussed below: (i) The AO's reliance on the valuation report of the DVO is in itself bad in law because the AO's reliance for valuation under s. 131(1)(d) was for asst. yr. 199192. The DVO had suo motu carried out valuation both for asst. yr. 1991-92 and for asst. yr. 1992-93. He had exceeded his jurisdiction under the Act. The above contention of the assessee is not satisfactory because the reference to DVO was made after filing of return for asst. yr. 1991-92 to assess the correct cost of construction. The DVO has assessed the cost of construction of the building referred and has rightly assessed the cost separately falling in two years. (ii) The assessee's contention that CIT(A) in his order for asst. yr. 1991-92 has accepted all the arguments of the assessee both against the assessment and against the valuation report is not correct. The CIT(A) in the first round of appeal has merely set aside the order and has not allowed the appeal of the assessee. Therefore, it cannot be understood that the CIT(A) has accepted the arguments of the assessee. As far as CIT(A....
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....he facts. The bifurcation of expenditure was shown in the same proportion as given by the assessee during the respective years as per his statement. (2) The statement of the assessee that all the details as required by the Valuation Officer were submitted is not correct. (3) The reference made under s. 131(1)(d) was proper to get the guidance from a technically qualified Government valuer. It is correct that the rates adopted are standard plinth area rate for residential building according to the prevailing rates of materials and labour at Rajkot, during the period of construction. (4) Even though all the technical details such as structural drawings, foundation details, etc. of many concealed items were required to be given. These were not furnished by the assessee, without which the correctness, of the materials used such as cement, steel, etc. could not be verified. As such, the general requirement of such standard structure were taken into consideration to work out the plinth area rate and accordingly the cost of construction was determined. (5) The valuation is based on actual measurement of the building and determining the specification and type of different items....
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.... land of Rs. 47,94,760. The AO has requested the DVO in para 2 that he should determine the correct and true cost of construction and send the valuation report on or before 31st March, 1993. Nowhere the AO has stated even indirectly, that valuation be made as on 31st March, 1991. Therefore, the contention of the assessee that valuation from DVO was sought only as on 31st March, 1991 is incorrect. The fact that the DVO in his report has indicated that valuation was required for asst. yr. 1991-92 is of no consequence. The DVO has written it incorrectly and hence no cognizance. Besides that, the DVO inspected the property on 4th Dec., 1992. On the date of inspection the construction of property was complete and, therefore, the DVO had no option but to value the property as it existed on the date of inspection. On the date of inspection, the construction was over. Therefore, the DVO valued the property as a whole and then bifurcated it in the same proportion as given by the assessee for 31st March, 1991 and 31st March, 1992. It is again emphasized that the AO never sought valuation as on 31st March, 1991. The AO required the DVO to give the cost of construction of the property as such ....
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....ction is incorrect. Many details like structural designs, etc. were not furnished to the Valuation Officer. Further, the reference made to Valuation Cell under s. 131(1)(d) is proper and appropriate to get guidance from a technically qualified Government valuer. Further, the plinth area method is most sound method to calculate the cost of construction. The plinth area rates depend upon material and labour rates prevailing at Rajkot at the time of construction. Further, the standard plinth area method was used for the reason that assessee failed to give or for reasons best known to it did not submit structural designs to the DVO. Had they been filed, the DVO would have determined the actual quantity of major raw materials, etc. used for construction and compared the same with the cost shown by the assessee. I fail to understand as to why the assessee should agitate on the plinth area method when it itself did not submit the structural designs to the DVO. May be the assessee knew that by providing structural designs, the exact cost of construction would be worked out and consequently, the suppression of expenditure on construction. Further, the assessee has not maintained quant....
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....ion suffered from various infirmities such as appellant's objections relating to the investment made by the purchasers and the fact that the borewell was already in existence, had been completely ignored. In the said appellate order, the appellate authority while setting aside the assessment order gave specific directions as under: 'The assessment is accordingly set aside to be refrained after allowing a meaningful and proper opportunity of hearing to the appellant before concluding the matter. The AO is directed to check the state of the regular books of account, vouchers and bills maintained by the appellant and make a reappraisal of the issue taking note of each individual objection of the appellant relating to the DVO's report.' The said appellate order was passed on 28th Nov., 1994. The assessment order under appeal was passed on 28th March, 1005 (sic). The directions given in the above appellate order were not followed and it was simply stated that the facts are similar for asst. yr. 1992-93 also and, therefore, the book results declared by the appellant were not acceptable. However, the facts for asst. yr. 1991-92 were different inasmuch as the IT return for asst. yr. ....
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....on the report of the DVO. Thus, not only the rejection of books of account for placing reliance on valuation report is a precondition but it is also a precondition for making the reference to the Valuation Officer. Similar, view has been taken by the Tribunal. Bangalore Bench, in the case of Patil Enterprises vs. Asstt. CIT (1995) 53 TTJ (Bang) 279, by Tribunal. Madras Bench in the case of K. Hari Rao vs. ITO (1979) 8 TTJ (Mad) 15, by Tribunal, Ahmedabad Bench in the case of ITO vs. Sethna Ice & Cold Storage (1980) 9 TTJ (Ahd) 537 and by Tribunal, Jaipur Bench, in the case of Singhvi Woollen Industries vs. ITO (1980) 10 TTJ (Jp) 276. In the present case, leave alone the verification of books of account but even without the IT return itself (which was not, even due when the reference to the Valuation Officer was made), the AO has made the reference to the Valuation Officer. Further, even after getting the IT return/audited accounts and various details asked for, the AO does not seem to have bothered to verify the same. Thus, while observing that no day-to-day quantitative details are filed, the AO seems to have totally overlooked the fact that the appellant has supplied the material....
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....O's comments of 16th Nov., 1994, it is seen that the Valuation Officer has stated as under: 'Even though only one flat was measured and verified in detail, the other flats were also seen to satisfy the comparability.' It is also seen that the DVO has mentioned that only some details were produced. From scrutiny of the correspondence between the DVO and the appellant, it is seen that the DVO vide his letter No. 2(5)/DVO/1992-93/402, dt. 14th July, 1992, raised 14 queries and the same had been duly replied, including plan and structural designs, vide appellant's letter of 19th Aug., 1992. No other details besides the above 14 details were called for by the DVO, though the appellant had volunteered vide his above letter to furnish any further information if required. Apart from what has been stated above, the AO has not found any defects in the accounts maintained by the appellant. It is, therefore, felt that it is not the defect in the accounts but it is the valuation report that has prompted the AO to reject the books. However, as seen above, the AO has not made out a case for not accepting the cost of construction as declared by the appellant. As has been held by many judicia....
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....clusion that the books of account showing the cost of construction are not reliable and hence, liable to be rejected. In the present case, the reference was made to the DVO even before the return for asst. yr. 1992-93 was filed. This was the year when major portion of construction was carried out and the construction of the building was also completed. Only after having the figures for total cost of construction, the AO could have formed an opinion as to the suppression of the cost of construction. The AO could not come to the conclusion at the time of making reference on 3rd July, 1992, that the books of account were liable to be rejected. In the assessment order, the AO has stated that the books of account suffered from following deficiencies, as pointed out in detail in para 8 above of this order: (a) No stock register was maintained wherein quantitative details regarding the purchases and consumption of materials could be recorded. The AO has described in detail as to theoretical consequences can follow for non-maintenance of the register and what he cannot find out in the absence of the said register. Since, the appellant took the stand that it was completing on....
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....e a substitute for assuming jurisdiction by rejecting the books at the time of reference, as held by Courts and as quoted above from a decision in para 17, above. In any case, the defects pointed out by the AO are not sufficient and adequate to arrive at the conclusion that the cost of construction has been suppressed. As to the manner of determination of cost of construction for the asst. yr. 1991-92 under consideration, the basis of bifurcating the total cost of construction determined by the DVO, does not appear to be scientific. The method adopted by the DVO is based on the assumption that provision in the cost of construction is proportionate to the total cost of construction determined. This is not adequate to make addition under s. 69C. Further, the starting point of determination by the DVO is the value mentioned in Instruction No. 1671 which is based on the rate of 1st Oct., 1976 and to which the cost of index has been applied. In the next assessment year, i.e., asst. yr. 1992-93, the addition was made of Rs. 50,71,505 on the basis of the same valuation report. The same was deleted by the CIT(A) under appellate order No. CIT.R-I/82/199596, dt. 17th Jan., 1996. Whe....
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....re fitted in the building, which was stated by the assessee as having fitted by the prospective buyers, but no confirmation were filed from the prospective buyers to the effect that spartek tiles were fitted by them through incurring additional expenditure. If the assessee wants to shift the burden of any part of cost of construction having been incurred by others, the onus lies on the assessee to prove that such costs have been incurred by others and not by the assessee. In the instant case neither the assessee provided name and address of the prospective buyer nor confirmation from the prospective buyer regarding purchase of these spartek tiles, or payment of additional price to the assessee for such work. He further pointed out that the assessee failed to provide even the report of any chartered engineer or valuer to the effect that the construction cost recorded in the books of account were same or nearby to the total cost recorded in the books. He further submitted that without controverting various findings recorded by the AO, the CIT(A) has brushed aside all the observations of the AO and just by pointing out some defects in the AO's order, he has deleted the entire addition....
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..... yr. 1992-93 during the course of which bulk of the construction was carried out was even filed by the respondent. (b) The reference was made purely on a notional contention that the valuation as shown by the assessee was not satisfactory. No concrete evidence, not even a whisper has been made in the entire order as far as the rejection of the books of account is concerned. As has been clearly laid down in the decisions described in the attached Annex. A the AO must point out glaring defects in the books of account before he can take recourse to the report of the Valuation Cell. (c) Reference may also be made to the observations of the first appellate authority in the order for asst. yr. 1992-93 wherein at p. 4, she has clearly stated that "In the present case the AO has referred the matter to the DVO under s. 131(1)(d) without application of mind and hence reference itself is bad in law. This is clearly borne out by the fact that the AO had asked for several details (for asst. yr. 1991-92) on 22nd Oct., 1992, i.e., 3 months and 16 days after referring the matter to the Valuation Officer." (d) The DVO had sent his report directly to the AO. No objections were invited n....
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....d AO has pointed out the following defects: That the respondent has not maintained a day-to-day register recording the consumption of the several raw materials utilized in the construction. The AO vide para 2.1 of his order has contended that the respondent has not maintained any details vide which the day-to-day consumption of the raw materials would be verifiable. The AO has further on contended that details about the day-to-day work done have also not been maintained. The AO has further on contended that bills per se do no certify consumption. The AO has failed to appreciate that this requirement for maintaining day-to-day consumption details apart from being unnecessary is impossible to maintain. The respondent begs to submit that this was the only project it had undertaken; that obviously all that it had purchased was consumed; that books of account cannot be rejected because something that is impossible to maintain has not been maintained. The AO has failed to appreciate that a method of accounting has to be practically sustainable and commercially practicable. How does the AO expect the respondent to maintain a day-to-day record of steel consumption or cement consumption ....
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....n law. This is clearly borne out by the fact that the AO had asked for several details (for asst. yr. 1991-92) on 22nd Oct., 1992, i.e., 3 months and 16 days after referring the matter to the Valuation Officer. The report given by the DVO under s. 131(1)(d) is in the advisory capacity and hence cannot be final or conclusive. This may be used as guide and the report of the DVO must be examined in light of objections by the respondent. In the present case, the AO relied on the DVO's report as conclusive which is absolutely unjustified. The AO has also mentioned that for asst. yr. 1991-92, the respondent's books of account were rejected because no quantitative details of materials consumed had been filed. This objection of the AO is patently wrong because all the relevant quantitative details were specifically sought for by the AO vide his letter of 28th Dec., 2004 and all these details were duly submitted by the respondent on 4th March, 1994, i.e., during the assessment proceedings. This contention of the respondent has also been accepted by the CIT(A) for asst. yr. 1991-92. The AO has not even bothered to correct this factual defect while drafting the order for asst. yr. 1992-93.....
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....O vs. Tandel Automobiles (c) Sayar Engg. (P) Ltd. vs. ITO (1992) 43 ITJ (Jp) 23 (d) ITO vs. Sagar Cold Storage & Ice Factory 113 Taxation 7 (Del) (e) Sri Har Sarup Cold Storage & General Mills vs. ITO (1988) 27 ITD 1 (Del)(TM) (f) Naresh Behal vs. ITO (1992) 41 ITD 298 (Del) (g) ITO vs. Pitambar Industries (P) Ltd. (h) CIT vs. Pratap Singh Amro Singh Rajendra Singh & Deepak Kumar (1993) 200 ITR 788 (Raj). 33. With regard to invocation of power to make a reference under s. 142A. the argument of the learned Authorised Representative was as follows: Even if one presumes that s. 142A applies and the reference to the Valuation Officer can be made, s. 142A states the circumstances under which the reference can be made. The section states that where an estimate of the value of any investment referred to in s. 69 or 69B is required to be made, the AO may require the Valuation Officer to make an estimate of such value and report the same to him. Sec. 69 is attracted when the investment is not at all reflected in the books of account. Sec. 69B applies where the AO finds that the amount expended on making investment exceeds the amount recorded in the books of account. ....
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....ed differently by both the AO and the DVO. The learned AO has failed to appreciate the respondent's arguments in this regard that during the course of the asst. yr. 1991-92 only the skeletal structure was constructed and that too in part. Consequently, the entire exercise of proportioning total costs over these two periods would be incorrect. What can be apportioned is only the cost of the skeletal figure. This is of course without prejudice to all the other objections as raised by the respondent. The respondent further on begs to submit that all the details as sought for by the DVO were provided to him. The AO on p. 15 has drawn up a factually incorrect conclusion that technical details of the construction were not provided. The DVO had sought 14 details vide his letter dt. 14th July, 1992 all of which were provided by the assessee vide his letter dt. 19th Aug., 1992. Copies of these letters are attached at pp. 50 to 67 of the synopsis. The DVO has not sought any additional details after these submissions. The DVO vide his letter dt. 16th Nov., 1994 has contended that technical details regarding the concealed items were not submitted. The assessee begs to submit that this conte....
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...., asked to produce stock register wherein quantitative details regarding purchase, consumption and closing stock of these materials have been recorded. The Authorised Representative failed to produce any such register. The AO, therefore, found it difficult to work out the actual consumption of respective materials and the value of work-in-progress shown in the books of account vis-a-vis cost of construction debited in the books of account with reference to different purchases. The AO further observed that in the absence of the inspection report of the architect, the extent of construction carried out at site cannot be verified and that technical details of the beams, columns, etc. could not be verified. In the absence of technical details, the extent of material consumed in the foundation cannot be verified. The AO further observed that the Authorised Representative has failed to produce certificate from the architect regarding work-in-progress shown at the end of the year in the construction account and balance sheet. With regard to payment of labour charges, the AO observed that labour work was done through M/s Mayur Construction Co. for which six bills issued by it in the month ....
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....ccount were rejected under s. 145. Only after rejecting the books of account, the AO made a reference to the DVO. The DVO has valued the cost of construction at Rs. 64,85,006 for the asst. yr. 1991-92 and Rs. 1.35.48,994 for the asst. yr. 1992-93. The DVO called for various information from the assessee with regard to the building so constructed vide its letter dt. 14th July, 1992, which was duly acknowledged by the assessee and replied on 19th Sept., 1992. Even though in this letter it was stated that structural drawings were enclosed, but the same is not correct because while commenting on the assessee's submission, as required by the AO, the DVO in its letter dt. 16th Nov., 1994 had categorically stated that: "Even though all the technical details such as structural drawings, foundation details, etc. of main concealed items were required to be given. These were not furnished by the assessee, without which the correctness of the material used such as cement, steel, etc. could not be verified." After receipt of DVO's report, the assessee was confronted by the AO with various rates taken by the DVO in his report. The objections of the assessee were called for and the AO has d....
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....s have been furnished regarding alterations made at the request of the flat owners at the time of construction and its effect on costing, etc. In view of the above discussion, I hold that the AO is right in relying on the DVO's report for the asst. yr. 1992-93. In the nutshell, the objection under s. 144A on both issues stands rejected." 37. In view of the above order of the Dy. CIT under s. 144A" the AO observed that reference to the Valuation Cell was in order and the valuation report is valid and not bad in law. He further noted that even if it was bad in law, the information contained therein has been used after giving proper opportunity of being heard to the assessee. 38. From the order of the CIT(A), we found that he has deleted the entire additions without any cogent reasons to the effect that reference to the DVO was not warranted under s. 131(1)(d). The CIT(A) further observed that reference was made to the DVO much prior to the filing of return by the assessee for the asst. yr. 1992-93, in which major expenditure were incurred, therefore, the AO was having no material to come to the conclusion that the assessee has not recorded the correct expenditure on the c....
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....n introduced in the statute book by Finance (No.2) Act, 2004 with retrospective effect from 15th Nov., 1972, according to which for the purpose of making an assessment or reassessment under this Act, where an estimate of the value of any investment is required to be made, the AO may require the Valuation Officer to make an estimate of such value and report the same to him. It has been further provided in sub-s. (2) of S. 142A that the Valuation Officer to whom a reference is made under sub-s. (1) shall, for the purpose of dealing with such reference, have all the powers that he has under S. 38A of the WT Act, 1957. As per provisions of sub-s. (3) of S. 142A. on receipt of report from the Valuation Officer. the AO may, after giving the assessee an opportunity of being heard, take into account such report in making such assessment or reassessment. It is very much pertinent here to bring on record that while making a reference to the DVO after rejecting the books of account or pointing out mistakes in the construction account, the only moot question before the AO pertains to know the quantum of unaccounted investment made out of unaccounted money which has not been recorded in the boo....
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.... after pointing out specific defects in the books of account, and/or after rejecting the books of account under s. 145. There is no dispute to the well-settled legal proposition that no addition can be made merely on the basis of valuation report, which is just an estimate prepared by a technical person on the basis of physical inspection and measurement of building, without pointing out specific defects in the construction account kept in the books of account and/or rejecting the books of account under s. 145. Whenever the AO wants to adopt the valuation as made by the DVO, he is first of all required to point out the defects in the construction account maintained by the assessee or to indicate that construction cost shown in the books of account are not correct or that cost of construction could not be correctly deduced due to the information asked from the assessee but not supplied by him to the AO. 43. In the instant case, we found that in respect of various construction cost incurred by the assessee, no quantitative details regarding purchase, consumption in the construction and the work-in-progress was neither maintained nor furnished by the assessee. We also found that st....
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....t sufficient for discharging the burden of the assessee for not recording its cost in the books of account, without bringing some corroborative material or evidence on record in support of it. 44. Thus, the CIT(A) was not justified in taking the cost of construction shown by the assessee debited in its books of account by brushing aside the findings recorded by the AO, and the DVO while determining the cost of construction with regard to the items of cost not found to be recorded in the books of account but was found to be actually incurred during the physical inspection and valuation of building. Non-supply of structural drawings of building disabled the Department to find out correctness of the quantity of iron, steel, cement and other major building materials actually debited in the books of account. Even though the CIT(A) had stated in his order by referring to the letter of assessee dt. 19th Aug.,1992 in reply to DVO's letter dt. 14th July, 1992 that the assessee had furnished structural drawings to the DVO but it is factually not correct because as per letter of DVO, dt. 16th Nov., 1994 written to the Asstt. CIT, technical details, such as structural drawings, foundation d....
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..... 251 are quasi-judicial powers, it is incumbent on him to exercise the same if the facts and circumstances so warrant. If the CIT(A) fails to exercise the powers and responsibility casted on him, and arbitrarily refuses to make the enquiry if the facts and circumstances so demand, his action would be open for correction by the higher authority/forum. As per our considered view, such coterminous powers of the CIT(A) are also having equal responsibility to undertake the necessary enquiry which the AO has failed to undertake. We are, therefore, inclined to agree with learned Departmental Representative, Mr. A.K. Singh, that CIT(A) being a quasi judicial authority, it is incumbent on him to exercise the same in the interest of justice, rather than accepting the version of the assessee on its face value, by pointing out defects and laches in AO's action, without any cogent reasons/materials. The observation of the CIT(A) that standard plinth area method is applicable only to the Government work, and not to the work undertaken by private agency is devoid of any merit. As the assessee did not furnish structural designs of building, the DVO had correctly taken the plinth area rate after a....
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....termined the actual quantity of major raw materials, etc. used in construction and could have compared the same with the cost shown by the assessee. In its order under s. 144A, the Dy. CIT also observed that the assessee has not furnished any evidence to substantiate that any extra items were included in the determination of the cost of construction by the DVO and that the DVO has stated that spartek/glazed tiles were used whereas the assessee contended that it did not use them. At no stage the assessee has furnished as to which other agency fixed any such spartek/glazed tiles. Besides that, no details have been furnished regarding alteration made at the request of the flat owners at the time of construction and its effect on costing, etc. We also found that even the assessee did not furnish the report of registered valuer or chartered engineer so as to substantiate the correctness of the cost of construction debited in the books of account or to indicate any wrongful determination of valuation of building by the DVO. Had the assessee supplied the valuation report of chartered engineer/registered valuer, the same could have been the basis for justifying the correctness of cost o....
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....uilding materials, which is duly supported by the letter of the assessee and nonfurnishing of any quantitative details of purchase/consumption/work-in progress/closing stock at the year end, duly certified by the auditor, we are not inclined to give any credence to the notes given in the audit report for both the asst. yrs. 1990-91 and 1991-92. 49. Furthermore, we do not appreciate the observation of the CIT(A) for exonerating the assessee from explaining the spartek/glazed tiles in the building, merely by stating that the assessee had filed copy of advertisement giving details of fittings provided by the builder and the same did not show any provision for spartek/colour/glazed tiles, when undisputedly the DVO during the course of physical verification of building found all these things fitted in the building and the CIT(A) had not brought on record any materials to show that no such tiles were actually fitted or that expenditure on these items were actually incurred by some other agency and the same have been duly verified and confirmed or that the report of DVO in this regard is wrong. 50. Now let us discuss the case laws relied on by the learned Authorised Representative i....
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....us it cannot be said that the assessee had furnished both quantitative and value-wise details of main building materials used in the construction of building. Thus this case as relied on by learned Authorised Representative is also of no help to the assessee as it is distinguishable on facts, as discussed hereinabove. In the case of Nishant Housing Development (P) Ltd., it was held by the Patna Tribunal that CIT(A) was justified in deleting the addition made with reference to DVO's report when the books of account were not rejected by the AO under s. 145 However in the instant case even before making a reference to the DVO, the books of account were rejected under s. 145 after giving due reasons for rejecting the same. Thus the facts of the instant case are distinguishable to the case cited by learned Authorised Representative. 51. Now coming to the last issue regarding allowing deduction of unexplained expenditure which has been added under s. 69C. According to s. 69C, where in any financial year the assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in th....
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....ded in the books of account, are in the nature of revenue expenditure, the same should be allowed as a deduction while computing the profit on sale of such building. 53. On the other hand, it was argued by learned Departmental Representative that as per proviso provided below s. 69C, such unexplained expenditure is not to be allowed as a deduction under any head of income. 54. We have considered the contentions of learned Authorised Representatives of assessee and Revenue, and are inclined to agree with learned Authorised Representative of the assessee, Mr. Sanghavi that assessee in the instant case undisputedly engaged in the building construction, the addition on account of unexplained investment is going to indirectly increase the cost of construction of the impugned building which is stock-in-trade of the assessee, therefore, same is liable to be deducted while computing business income. In this regard various Benches of the Tribunal are taking consistent. view for allowing deduction of extra expenditure found to be incurred on building and added under s. 69C. For this purpose, reliance may be placed on the decision of Ruby Builders vs. ITO (1999) 63 TTJ (Ahd) 202, Nishan....
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....is the substance of the order that the AO was not satisfied with the explanation which is relevant. This is apparent from ss. 69 and 69B of the IT Act, 1961. Where accounts are not reflected in the account books, they can be explained by the assessee, who under s. 69 is entitled to an opportunity to explain. If in the opinion of the AO the explanation is not satisfactory, the income can be added. The phraseology of s. 69 creates a legal fiction. Held, that, in the instant case, the AO had not rejected the books of account. He had not specifically observed that the books of account were not reliable. But he had pointed out that a sum of Rs. 2,68,986 was spent during the year for building construction. Furthermore, Hon'ble Rajasthan High Court in Smt. Amar Kumari Surana vs. CIT (1996) 134 CTR (Raj) 313 : (1997) 226 ITR 344 (Raj) observed as under: "It is true that merely on the basis of fair market value no addition can be made under s. 69B, but on the basis of sufficient material on record some reasonable inference can be drawn that assessee has invested more amount that the one shown in account books, then only the addition under s. 69B can be made. The burden is on the Reven....
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....n be drawn that the expenditure or the unaccounted part thereof must have been, met out of undisclosed income of the previous year. The case of an item of proved expenditure is in principle not different from that of cash credit. In both the cases, the assessee is in possession of certain funds during the previous year the, source of which he is unable or unwilling to explain satisfactorily. It is a matter entirely in the assessee's knowledge as to how the cash credits came to be introduced or the items of wealth came to be acquired or the expenditure was incurred and once it is postulated that such cash credit or investment or expenditure belongs to the assessee then his failure to explain the same or to explain satisfactorily can constitute a reasonable ground for Ian inference that the source thereof must be an item taxable under the Act. Otherwise, if a nontaxable source or a capital item was utilized for the purpose in question, the assessee could and would easily have come forward with an explanation to the said effect and proved it to the satisfaction of the ITO. The whole history of the introduction of ss. 68 to 68D and the judicial decisions bearing thereupon clearly estab....
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....r so as to enable the Department to find out correctness of building cost actually debited in the books of account with reference to the valuation arrived at by the assessee's valuer, the use of spartek/glazed tiles in the building but not found recorded in the books of account, and non-recording of expenditure relating to borewell. Other than these defects, no other major defects were found by the AO. As per our considered view, even though these defects are not sufficient for rejection of books of account out rightly and adoption of DVO's valuation in toto, but as per our considered view some addition/adjustment is required to be made in the cost of construction recorded in the books of account. Keeping in view totality of the facts and circumstances of the case as discussed hereinabove, we are inclined to modify the orders of both the lower authorities and direct the AO to sustain the addition to the extent of Rs. 5.90 lakhs in the asst. yr. 1991-92 and Rs. 12.71 lakhs in the asst. yr. 1992-93, which works out to 15 per cent of cost of construction shown by the assessee in its books of account amounting to Rs. 39.33 lakhs in asst. yr. 1991-92 and Rs. 84.77 lakhs in asst. yr. 199....