2001 (5) TMI 141 - AT - Income Tax

Summary

Issues Involved:
1. Determination of the cost of construction of the assessee's property.
2. Validity of the valuation report by the Departmental Valuation Officer (DVO).
3. Reassessment proceedings under Section 147.
4. Allowance for personal supervision in construction costs.
5. Acceptance of the registered valuer's report and reconciliation statement.

Detailed Analysis:

1. Determination of the Cost of Construction:
The primary issue in these appeals is the determination of the cost of construction of a three-storey building constructed by the assessee. The Assessing Officer (AO) referred the matter to the Departmental Valuation Officer (DVO), who estimated the cost of construction up to 31st March 1991 to be Rs. 10,69,027. The AO, relying on the DVO's report, treated the difference between the DVO's valuation and the assessee's declared construction costs as income from undisclosed sources.

2. Validity of the Valuation Report by the DVO:
The DVO's valuation was contested by the assessee, who argued that the DVO's rates were exorbitant. The AO, however, found no evidence to contradict the DVO's report and accepted it as it was based on adequate materials. The DVO's report indicated the use of costly materials such as teak wood and marble. The AO added the difference between the DVO's valuation and the assessee's declared costs as undisclosed income for the relevant assessment years.

3. Reassessment Proceedings under Section 147:
The AO reopened the assessment proceedings for the years 1988-89, 1989-90, and 1991-92 under Section 147. The reassessments were completed under Section 144/147 for 1988-89 and under Section 143(3)/147 for 1989-90 and 1991-92. The assessee challenged the DVO's valuation during these reassessment proceedings and submitted a valuation report by a registered valuer, which was not accepted by the AO.

4. Allowance for Personal Supervision in Construction Costs:
The assessee claimed a 12.5% allowance for personal supervision, which the AO reduced to 10%, considering the assessee's social status and the strenuous nature of construction work. The AO ultimately rejected the assessee's valuation report and accepted the DVO's valuation, adding the differences as undisclosed income.

5. Acceptance of the Registered Valuer's Report and Reconciliation Statement:
The assessee argued that the DVO's valuation did not consider ongoing construction after 31st March 1991 and that further expenses were incurred in subsequent years. The DVO's report, dated 14th November 1992, acknowledged that construction was still in progress. The assessee submitted evidence of continued construction, including agreements and cash memos for building materials. The registered valuer's report, which provided a reconciliation of costs, was not initially accepted by the CIT(A) because it was not filed before the AO.

Final Judgment:
The Tribunal found merit in the assessee's arguments and the registered valuer's reconciliation statement. The Tribunal noted that the DVO's valuation was based on an incorrect assumption that construction was completed by 31st March 1991. The Tribunal also recognized that the DVO used higher cost indices and CPWD rates, which were not applicable to the location of the construction. The Tribunal accepted the assessee's declared cost of construction, which included additional expenses incurred in subsequent years, and deleted the additions made by the AO. The orders of the CIT(A) were reversed, and the appeals filed by the assessee were allowed.