2011 (9) TMI 256 - HC - Income Tax

Closing work in progress - undervaluation - Construction of additional floors in the premises - whether the cost of construction incurred by the assessee should have been divided by 3 or by 5. - Held that - Insofar as the assessee is concerned, it acquired three floors namely basement, ground and third floor and as is the business proposition for these three floors, it incurred the entire cost. Therefore, insofar as the assessee is concerned, cost which was borne by the assessee for these three floors had to be taken into consideration and not five floors. - Tribunal was not right in deleting the addition made by the Assessing Officer. At the same time, it is noted that this issue is not looked into and considered even by the AO in its proper perspective. - Remanded back to the AO with direction to arrive at the value of closing work in progress .

Issues: Valuation of closing work in progress; Apportionment of construction cost; Valid method of valuation.

In this case, the respondent/assessee filed a return for the assessment year 2005-06, reporting an income from building construction activities. The assessee purchased the ground floor of an old building and entered into a Property Development Agreement with the owners of the first and second floors for complete reconstruction of the property. The assessee sold the newly constructed ground floor but retained the basement and third floor as closing work in progress. The dispute arose regarding the valuation of the basement and third floor. The assessee justified the weighted average method used for valuation based on the illegal construction status and limited usage of these floors. The Assessing Officer disagreed with the valuation and adopted a different ratio for valuation, resulting in a higher value for the basement and third floor.

The CIT (A) reversed the Assessing Officer's decision, considering the basement and third floor's limited market value due to their specific nature and legal restrictions. The CIT (A) held that the cost of construction should have been divided by 5, representing all five floors, instead of 3 as argued by the assessee. The ITAT affirmed the CIT (A)'s decision, leading to the Revenue's appeal on the issue of undervaluation of closing stock of work in progress.

The High Court analyzed the apportionment of construction costs and the method of valuation. It disagreed with the CIT (A) and ITAT's approach of dividing the cost by 5, stating that the assessee only bore the cost for the three floors it retained. The court found that the Assessing Officer and lower authorities did not consider the valid method for valuation, overlooking the specific nature and restrictions of the basement and third floor. The court concluded that the Tribunal was wrong in deleting the addition made by the Assessing Officer and remitted the case back to the AO to reconsider the cost division by 3 and determine the appropriate ratio for valuation of the closing work in progress based on the nature of the basement and third floor.

In summary, the judgment focused on the correct apportionment of construction costs and the valid method of valuation for closing work in progress, emphasizing the specific nature and restrictions of the basement and third floor in the context of the overall building construction project.

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