2015 (10) TMI 382 - AT - Income Tax

Unexplained investment - Computation of cost of construction - Variations in the measurements - difference between the constructed area as per the Valuation Cell and the actual area - CIT(A) deleted the addition - Held that - There is no need to differ from the findings of the Ld. CIT(A). As far as Revenue appeals are concerned, with reference to deletion of additions made by the A.O. on the so-called unexplained investment, we are unable to understand how the building constructed as a part of development cum GPA agreement become unexplained investment, just because assessee has not maintained books of accounts. A.O. is very well aware that assessee has received advances and in fact he has accepted the estimation of 8% income on the advances received. Having accepted that assessee has received advance towards apartments, apart from partner s capital, the amounts received towards that should have been given credit. Even though reference to valuation was made, as pointed out by the Ld. CIT(A), the valuation report itself has certain basic errors in taking the areas and the valuation adopted is also on higher side. Thus CIT(A) has correctly arrived at the valuation of the building more or less to the extent of valuation as declared by the assessee over a period of three years. Therefore, the addition made by the A.O. as unexplained investment cannot be sustained. To that extent, the orders of Ld. CIT(A) in A.Y. 2009-2010 and 2010-2011 are to be sustained. - Decided against revenue. Allowing salary on the estimated income to the partners of the firm - Held that - This is as per the provisions of partnership deed provisions under section 40(b) are correctly invoked and accepted by the Ld. CIT(A). In fact, A.O. himself was accepted deduction of salary in A.Y. 2009-2010 and that there is no issue in that year, but why he did not allow the same in A.Y. 2010-2011 is not understandable. Assessee has claimed one salary in A.Y. 2009- 2010 for one partner. Whereas, by virtue of the revised agreement, it claimed salaries for two persons in the later year. Since the partnership deed permits the remuneration to the partners, this has to be allowed as per the provisions of the Act. Therefore, Revenue contention on this issue cannot be accepted. In view of this, grounds raised by the Revenue in A.Y. 2009-2010 and 2010- 2011 are rejected.- Decided against revenue. Interest paid to partners disallowed - Held that - The assessee has not furnished any evidence with reference to advancement of capital. Even though the statements enclosed to the computation of income do indicate capital of various partners, on similar capital in A.Y. 2009-2010 there was no claim of interest. As seen from the computation in A.Y. 2009- 2010 assessee has only claimed remuneration and interest was not claimed. Therefore, on what basis the interest was claimed in later year and how the interest was calculated was also not forthcoming from the record. In view of this, we agree with the findings of the Ld. CIT(A) that interest cannot be allowed on the facts of the case. - Decided in favour of revenue.

Summary

Issues Involved:
- Disallowance of interest and estimation of income for A.Y. 2010-2011
- Deletion of addition made by the A.O. towards cost of construction

Analysis:

Issue 1: Disallowance of interest and estimation of income for A.Y. 2010-2011:
The assessee, a partnership firm engaged in construction, was aggrieved by the disallowance of interest and estimation of income for the assessment year 2010-2011. The Assessing Officer (A.O.) estimated income at 20% on the advances received, leading to additional demands. However, the Ld. CIT(A)-VI, Hyderabad, independently reviewed the case and directed the A.O. to adopt 8% on the advances as per the assessee's computation. The Ld. CIT(A) also allowed the claimed salary deduction but disallowed interest on partner's capital due to insufficient explanation regarding the capital brought in by the partners. The Revenue was dissatisfied with the deletion of the addition made as unexplained investment, while the assessee was unhappy with the non-allowance of interest. The Ld. CIT(A)'s decision to adopt State PWD rates and his rejection of the 20% income estimation were upheld, concluding that the Revenue's contentions were unfounded.

Issue 2: Deletion of addition made by the A.O. towards cost of construction:
The A.O. had referred the cost of construction to a valuation cell, resulting in an estimation of unaccounted investment in the construction of apartments. The A.O. considered 1/3rd of the total construction cost for each year as unexplained investment. However, the Ld. CIT(A)-V, Hyderabad, disagreed with this approach. He re-determined the valuation based on identified mistakes in the valuation report, arriving at a cost of construction that aligned with the aggregate amount declared by the assessee over three years. The Ld. CIT(A) found discrepancies in the valuation report and concluded that the A.O.'s addition towards unexplained investment was unwarranted. The Revenue challenged the deletion of this addition for the assessment year 2009-2010, but the Tribunal upheld the Ld. CIT(A)'s decision, emphasizing that the valuation was reasonable and in line with the declared income.

In summary, the Tribunal dismissed both Revenue and assessee appeals for the assessment year 2010-2011, affirming the Ld. CIT(A)'s decisions on the issues of interest disallowance, income estimation, and deletion of the A.O.'s addition towards cost of construction. The Tribunal found the Ld. CIT(A)'s reasoning sound and supported by the facts and legal provisions, thereby upholding the orders in question.