2015 (12) TMI 831 - HC - Income Tax

Addition on account of alleged excess cost of construction - as per AO cost should be taken at ₹ 511 per sq. ft. as against ₹ 750 per sq. ft. shown by the Assessee - ITAT confirmed AO order - Held that - An authentic determination of the cost of construction for the flats which were sold during the AY 2010-11 is not available in the record. Dr. Rakesh Gupta, learned counsel for the Assessee, states that the Assessee has in its possession all the relevant records which it is prepared to produce for determining the cost of construction in any manner that may be considered appropriate so that an arbitrary figure is not adopted. In the considered view of the Court, the approach adopted by the ITAT in the matter was possibly not the best way of going about determining whether the CIT (A) was in error in adopting the figure of ₹ 700 per sq.ft. as the cost of construction of the flats in question. One method was to insist on a proper report of valuation taking into account the books of accounts maintained by the Assessee himself. The alternative method of taking the figure for 2008 and applying to it a mark up by the cost inflation index should normally be resorted to when the Assessee is unable to produce its books of accounts or documents. Where it is prepared to do so, as in the present case, the former method should be adopted. In view of the statement made by the counsel for the Assessee before this Court, the Court is of the view that the ITAT should re-examine the above issue on merits by calling for a report of valuation by any approved registered valuer as may be considered appropriate by the ITAT. The ITAT will issue appropriate directions regarding the production by the Assessee of its records relevant to the issue of determination of the cost of construction of the flats sold during the AY in question.

Summary

Issues:
1. Determination of cost of construction for flats sold during the Assessment Year 2010-11.
2. Justification of the ITAT in restoring the Assessing Officer's order regarding the cost of construction.

Analysis:
1. The case involves a real estate developer and builder (Assessee) filing income tax returns for the Assessment Year 2010-11, selected for scrutiny. The Assessing Officer (AO) added Rs. 36,26,586 as excess cost of construction, contending it should be Rs. 511 per sq. ft. instead of the Rs. 750 per sq. ft. claimed by the Assessee. The AO appointed a District Valuation Officer (DVO) who valued construction at Rs. 1,174 per sq. ft. The Assessee argued for a cost not exceeding Rs. 750 per sq. ft., calculated based on profit margin from sale proceeds. The AO relied on a Chartered Engineer's report from 2008, setting cost at Rs. 5,550 per sq.m, equivalent to Rs. 511 per sq. ft., leading to the addition of excess construction cost to income.

2. The Commissioner of Income Tax (Appeals) partially allowed the Assessee's appeal, reducing the addition to Rs. 7,58,700 based on a cost estimate of Rs. 700 per sq. ft. The Revenue appealed to the ITAT, which noted the lack of evidence supporting the cost estimate and restored the AO's order. The High Court observed discrepancies in the cost determination methods used and emphasized the need for an accurate valuation based on the Assessee's records. The Court criticized the ITAT's approach and directed a fresh determination by an approved valuer, instructing the Assessee to provide relevant records for a proper assessment of construction costs.

3. The Court set aside the ITAT's order and remanded the case for a thorough re-examination of the cost of construction issue. The judgment highlighted the importance of accurate valuation methods and the Assessee's obligation to provide necessary documentation for a fair assessment. The case underscores the significance of proper record-keeping and transparent valuation processes in determining income tax liabilities for real estate transactions.