1984 (4) TMI 76 - AT - Income Tax

Summary

Issues Involved:
1. Addition of Rs. 2,02,802 by the ITO for unaccounted investment in construction.
2. Discrepancy in the estimated cost of construction by different valuers.
3. Validity of addition based on estimates versus actual expenditure recorded in books.
4. Treatment of interest payments on loans for construction in cost calculation.

Issue-wise Detailed Analysis:

1. Addition of Rs. 2,02,802 by the ITO for unaccounted investment in construction:
The ITO made an addition of Rs. 2,02,802 to the assessee's income, attributing it to unaccounted investment in the construction of godowns. This was based on a valuation by the Valuation Officer, which estimated the construction cost at Rs. 16,91,757, significantly higher than the Rs. 11,58,000 estimated by the Approved Valuer.

2. Discrepancy in the estimated cost of construction by different valuers:
Three different estimates were made: Rs. 11,58,000 by the Approved Valuer, Rs. 16,91,757 by the Valuation Officer, and Rs. 12,50,000 by the IAC. The IAC found the Valuation Officer's estimate to be unsupported and adjusted the Approved Valuer's estimate by Rs. 43,000 for omitted structures, arriving at Rs. 12,50,000.

3. Validity of addition based on estimates versus actual expenditure recorded in books:
The CIT(A) found that the ITO's addition was based merely on estimates, disregarding the actual expenditure recorded in the assessee's books. The CIT(A) noted that the estimates contradicted each other and emphasized the need to consider the actual expenditure. The CIT(A) highlighted that the rate of construction costs used by the Department in similar cases was lower than that applied to the assessee, and a small margin of error should be ignored as estimates cannot represent the exact cost of construction.

4. Treatment of interest payments on loans for construction in cost calculation:
The ITO excluded Rs. 1,00,796 in interest payments on loans taken for construction from the cost calculation, while simultaneously including it for depreciation purposes. The Tribunal found this approach inconsistent and perverse, stating that interest payments on borrowings should be considered part of the construction cost, akin to interest paid on credit purchases.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 2,02,802, agreeing that the ITO and IAC's reliance on estimates over actual recorded expenditure was flawed. The Tribunal noted that adjustments for interest payments and the efficiency of the owner in managing construction costs were not properly accounted for, and thus, there was no justification for the addition. The appeal by the Revenue was dismissed.