2014 (3) TMI 721 - AT - Income Tax

Validity of reassessment u/s 147 of the Act Income escapement Computation of cost of construction - inclusion of cost towards common area - excess claim of expenditure - Held that - The assessee has not disclosed truly and completely all the material facts necessary for the completion of the assessment in its case - By working out the cost of construction per sft. on an incorrect basis, assessee has furnished inaccurate particulars of income, the provisions of S.147 are clearly applicable - In a summary assessment under S.143(1), assessing officer cannot be said to have taken any view for or against the assessee, on the basis of material furnished with the return - since original assessment in this case has been done only under S.143(1) of the Act the decision in Assistant Commissioner of Income-Tax Versus Rajesh Jhaveri Stock Brokers P. Limited 2007 (5) TMI 197 - SUPREME Court followed - merely because summary assessment has been done earlier in terms of S.143(1), it cannot be said that the assessing officer, has already applied his mind to the material furnished by the assessee along with the return, and it is only on the basis of mere change of opinion, that he has invoked the provisions of S.147 of the Act - the reopening of assessment is very much legal and valid, and the contentions of the assessee is without any merit. Cost of construction per sft has to be determined by dividing the total area received by it in terms of the development agreement, and there is no justification for adopting only the area which the assessee is claiming to be the saleable area - As observed by the CIT(A) in the order, after development, assessee has sold various flats and also sold the parking areas to the flat owners and as such it is not correct to say that there is less expenditure in developing a parking area and a lot more expenditure in developing the kitchen - it is neither practical nor feasible to break up the cost of construction and the sale price into individual elements like fittings, bedrooms etc. and to calculate capital gains on such individual elements - Such an exercise would also be redundant, since a flat consist of all areas which belong to the purchaser including common areas which are used by various purchasers - A lot of developers incorporate common swimming pools, clubs and many other facilities in their integrated development and charge each flat owner a corresponding price, even though by way of advertisement or selling technique, a builder would state that certain portions are free, while other is being charged - The reasons discussed by the Revenue authorities in the orders for making the impugned addition are sound an valid the order of the CIT(A) upheld Decided against Assessee.

Summary

Issues Involved:
1. Legality of the reopening of assessment under Section 148 of the Income Tax Act.
2. Determination of the correct cost of construction per square foot for the purpose of income assessment.

Issue-wise Detailed Analysis:

1. Legality of the Reopening of Assessment under Section 148:

The assessee filed its return of income for the assessment year 2004-05 declaring a loss of Rs. 13,65,397/-, which was processed under Section 143(1) accepting the declared loss. Subsequently, a notice under Section 148 was issued on 25/02/2011, stating that income chargeable to tax had escaped assessment. The assessee contended that there was no reason to believe that income had escaped assessment and that the reassessment proceedings were prompted by a mere change of opinion without any new tangible material.

The Tribunal held that the reopening of the assessment was legal and valid. It was noted that the original assessment was completed under Section 143(1), which is a summary assessment and does not involve detailed scrutiny by the Assessing Officer. The Tribunal referred to the Supreme Court's decision in Asst. CIT V/s. Rajesh Jhaveri Stock Brokers (P) Ltd (291 ITR 500), which clarified that the reopening of assessment under Section 147 is permissible even if the original assessment was completed under Section 143(1). The Tribunal concluded that the assessee had not disclosed all material facts necessary for the assessment, and the provisions of Section 147 were applicable.

2. Determination of the Correct Cost of Construction per Square Foot:

The primary dispute was whether the cost of construction per square foot should be calculated based on the total constructed area (90,000 sq. ft.) or the saleable area (72,523 sq. ft.). The Assessing Officer determined the cost of construction per square foot at Rs. 911.69 by dividing the total construction cost (Rs. 8,20,52,329) by the total constructed area (90,000 sq. ft.). The assessee, however, calculated the cost at Rs. 1131.40 per sq. ft. by dividing the total construction cost by the saleable area (72,523 sq. ft.).

The Tribunal upheld the Assessing Officer's method, stating that the cost of construction should be determined by dividing the total construction cost by the total constructed area. It was noted that the entire constructed area, including common areas and parking spaces, contributes to the overall cost and value of the property. The Tribunal agreed with the CIT(A)'s observation that it is neither practical nor feasible to break up the cost of construction into individual elements like fittings, bedrooms, etc., and that the cost of common areas and facilities should be included in the total construction cost. Consequently, the addition of Rs. 66,86,572/- made by the Assessing Officer was upheld.

Conclusion:

The Tribunal dismissed the assessee's appeal, affirming the legality of the reopening of assessment under Section 148 and the method used by the Assessing Officer to determine the cost of construction per square foot. The decision emphasized that the entire constructed area, including common areas, should be considered for calculating the cost of construction, and the reopening of assessment was justified due to the assessee's failure to disclose all material facts necessary for the assessment.