2015 (12) TMI 895 - AT - Income Tax

Computation of cost of construction - Held that - CIT(A) has determined the cost of construction of the flats at ₹ 700/- per sq.ft. as against ₹ 511/- estimated by the Assessing Officer, without giving any valid reason for the relief allowed to the assessee. The CIT(A) has allowed the relief on the ground that selling price of the flats for succeeding year has been taken at ₹ 735/- per sq.ft. We are unable to appreciate that how the selling price in the succeeding year could determine the cost of construction of the property for the preceding year. In these facts of the case, we hold that the assessee could not adduce any evidence in support of its estimate of cost of construction and no valid reason could be assigned by the CIT(A) while giving substantial relief to the assessee and there was some basis for arriving at the cost of construction at ₹ 511/- per sq.ft. by the Assessing Officer on the basis of the assessee s own valuer report - Decided in favour of revenue Estimating the net profit rate of 15% of gross contract receipts - Held that - he addition was made by estimating the net profit rate of 15% of gross contract receipts minus 8% of contract receipts by the Assessing Officer. We find that there was no basis for estimating the profit by applying the net profit rate of 15% and, accordingly, we hold that there is no mistake in the order of learned CIT(A) in holding that the Assessing Officer has adopted 15% rate without any concrete reason. Accordingly, the order of learned CIT(A) on this issue is confirmed - Decided against revenue

Summary

Issues:
1. Discrepancy in cost of construction calculation for flats sold.
2. Deletion of addition made by Assessing Officer under Section 44AD.

Analysis:

Issue 1: Discrepancy in cost of construction calculation for flats sold

The Revenue challenged the CIT(A)'s decision to adopt a cost of construction of Rs. 700 per sq.ft. instead of Rs. 511 per sq.ft. as determined by the Assessing Officer for the assessment year 2010-11. The Revenue argued that the assessee's method of cost allocation was arbitrary and not in compliance with the Income-tax Act. The Revenue contended that the Assessing Officer's adoption of Rs. 511 per sq.ft. based on the valuer's report was more appropriate. The assessee, on the other hand, defended its calculation method, stating that the flats in question were incomplete and that it was challenging to determine the exact cost of construction for a specific period. The ITAT found that the assessee failed to provide a reasonable basis for estimating the cost of construction and upheld the Assessing Officer's determination of Rs. 511 per sq.ft. The ITAT criticized the CIT(A) for increasing the cost to Rs. 700 per sq.ft. without valid reasons, emphasizing that the selling price in the succeeding year should not determine the cost of construction for the preceding year. Therefore, the ITAT allowed ground No.1 of the Revenue's appeal.

Issue 2: Deletion of addition made by Assessing Officer under Section 44AD

The Revenue disputed the deletion of an addition of Rs. 1,16,340 made by the Assessing Officer under Section 44AD. The Revenue argued that the provisions of Section 44AD did not apply to the case. However, the ITAT upheld the CIT(A)'s decision to delete the addition, noting that the Assessing Officer had estimated the net profit rate without a concrete basis. The ITAT found that the Assessing Officer's application of a 15% net profit rate lacked justification, leading to the dismissal of ground No.2 of the Revenue's appeal.

In conclusion, the ITAT partially allowed the Revenue's appeal, confirming the decision on the second issue while overturning the CIT(A)'s decision on the first issue. The judgment was pronounced on 6th May 2015 by the Appellate Tribunal ITAT Delhi.