TMI Blog2010 (4) TMI 1090X X X X Extracts X X X X X X X X Extracts X X X X ..... shown as purchases as on 31st March, 2005 were actually purchased in earlier months and such packing material was consumed during the process. The bills were posted on 31st March, 2005. It was further claimed that entire packing material left after the end of year became obsolete and therefore, it was not shown in the closing stock. The AO observed that posting of bills of earlier months can be made on 31st March, 2005. The AO was not satisfied with the manner in which closing stock has been valued. The AO further noticed that there could be a possibility that some purchases made in the previous year, could have been booked during this year. The AO further noticed that the assessee has made payments to the small parties in respect of purchases of rags which is the main raw material normally in cash while the payments to bigger parties have been made through cheques. The AO therefore, held that book results are not acceptable. During the year, the net profit rate has decreased marginally and therefore, the AO made a trading addition of ₹ 5 lacs. 4. Before the learned CIT(A), it was submitted that the packing material is used by the assessee in the case of manufacturing of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... net profit rate is only marginal and the AO has separately made disallowance out of the expenses claimed in the P and L a/c. In these facts of the case and considering the various cases of Hon'ble Rajasthan High Court above. I do not find any justification in making a lump sum trading addition of ₹ 5 lacs. The same is deleted. 5. We have heard both the parties. The assessee debited the expenditures for packing material and colour and chemical as on 31st March, 2005. Such bills related to period from 14th April, 2004 to 29th March, 2005. It is true that the explanation was given before the AO that such bills could not be posted due to problem in computer. However, looking to the date of the bills which are from 21st April, 2004, it is clear that the posting might not have been delayed on account of some problems in the computerization. However, the AO has not made any step to verify as to whether such purchases were genuine or not. It is not the case of the Revenue that the purchases as debited as on 31st March, 2005 were not genuine. Moreover, it is also an admitted position of law that in case the AO wanted to change the method of valuation of stock then the AO is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o identify the actual work done in a particular period, therefore, the Valuation Officer can evaluate the entire building and for that DVO can work out the expenditure incurred vis-a-vis the expenditure shown by the assessee. The AO therefore, referred to the valuation of the building under s. 142A of the Act for the asst. yr. 2005-06 also. The report was received from the DVO on 17th Dec., 2007. Copy of the valuation report was given to the assessee. The registered valuer has estimated the cost of new building at ₹ 2,38,28,993 as against ₹ 2,32,51,710 shown by the assessee. The DVO estimated the cost of construction for the entire building at ₹ 4,29,16,000. The assessee was required to explain as to why the difference should not be added to his income as undisclosed investment made in the factory building. Before the AO, the assessee filed the report of another registered valuer and also filed his comments. The AO has summarized the comments of the registered valuer as under:- 1. The measurements have been stated to be slightly less than adopted in the report under s. 142A. A detailed working of such difference has been furnished by the assessee. 2. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led calculation for different percentages. (b) The registered valuer has not considered the following costs-Wire gauge provided in windows/ventilator. Aluminum windows and partitions. Glazed tile perception ad floor tiles. Terracing treatment on the roof, brackets of angles. G.I. wire. (c) Further, following items had not been considered by the registered valuer:- (i) Extra heights of Mumty and lift room/machine room. (ii) RCC columns raised upto 7 ft. roof level. (iii) RCC retaining wall provided at basement level. (iv) Excavation items for construction of foundations system. (d) It is seen that nearly 1,684 cubic metre of concrete has been shown and reinforcement shown is hardly 143 MT that signifies that for beams/columns/slabs taken together is nearly 84 kg./cubic metre which is far less that the standard weight of 80 kg./cubic metre in slabs, 175 kg./cubic metre in columns and 120 kg./cubic metre in beams. Hence, less quantity of steel has been shown to match the stated expenditure. (e) The valuer has assumed certain quantity of various items executed during 2003-04. For this, he must have had to rely on only the statement of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e DVO, the assessee pointed out the major defects in the report of the DVO. Such major defects have been mentioned by the learned CIT(A) in para 4.5 of his order and the same are reproduced as under:- (i) The construction of basement, ground floor and first floor is hall type construction with large hall area. There arc only two rooms in entire building. Considering this, the deduction for hall type construction should be at 25 per cent as against 15 per cent considered by the DVO. (ii) In the front portion of ground and first floors, electric fitting is not installed. However, no deduction was given for the same. (iii) Deduction for water proofing treatment over basement, ground floor, first floor and second floor is not considered. (iv) Cost of the flouring for the front portion of ground floor and first floor is not considered. (v) Foundation cost is not deducted in the ground floor over basement. (vi) Cost of mosaic, chips/tiles/Kota stone flooring as per the norms is not deducted. (vii) Cost of the doors/windows for the front portion of ground floor and first floor is not deducted. (viii) The DVO has determined the cost of construction by adopting the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining 153 pages. The learned Authorised Representative has also filed the written submissions. The learned Authorised Representative submitted that the applicability of s. 69B of the Act can be exercised in case the Revenue has certain material on record to suggest that there is an unexplained investment. The AO has not pointed out any defect in the vouchers. In view of the decisions of Hon'ble Rajasthan High Court as mentioned by the learned CIT(A), it was submitted that reference to Valuation Cell was not legally correct. In para 4 of the written submissions, the learned Authorised Representative has mentioned about the major defects in DVO's report. Such defects have been mentioned in the order of the learned CIT(A) and we have earlier reproduced them. The learned Authorised Representative has also referred to the chart appearing in the order of the learned CIT(A) in which the revised cost as per CPWD as made by the registered valuer was filed. It was therefore, submitted that the learned CIT(A) was justified in deleting the addition. 10. The learned Departmental Representative drew our attention to the fact that the DVO has clearly pointed out defects in the report o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and other relevant circumstances it was necessary to do so. If an account of the expenses of the construction of the asset is maintained regularly and supported by vouchers there should be no reason not to accept the same for determining the cost of construction of the asset. The AO was required to assess the value of the asset on appreciation of material before him. The cost of construction arrived at by the Tribunal was wholly based on relevant considerations and hence no referable question of law arose. 11. In the case of CIT us. Hotel Joshi (supra), the assessee submitted the valuation report and the Tribunal directed that the report of the registered valuer should be adopted. The Hon'ble High Court at p. 483 observed as under:- In view of the aforesaid, the question, whether the valuation made by the DVO as per the CPWD rates prescribed in the Board's Instruction No. 1671 or the valuation made by the registered valuer as per the rates provided by the Public Works Department of the State Government should be accepted, does not arise. The Tribunal has arrived at the conclusion that the cost based on item-wise basis is the proper method to work out the cost. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e before the Hon'ble apex Court, the reference was made to the Valuation Cell under s. 55A of the IT Act. The Hon'ble apex Court thereafter held that ss. 133(6) and 142(2) of the Act do not authorise the AO to refer the valuation of the cost of the construction. Thereafter, the Hon'ble apex Court considered the provisions of s. 131(1) of the Act. The AO can issue commission. The commission can be issued as per s. 75 of the CPC and Order 26 of the Schedule to the Code. The Hon'ble apex Court observed that the AO should have issued the commission to Valuation Officer only under r. 9 of Order 26. As per this rule, the Valuation Officer to whom the commission issued is required to produce in writing the evidence taken by him and to report such evidence together with his report in writing. The CPC provides that any of the parties to the suit may examine the CIT personally. Since in the case before the Hon'ble apex Court, the reference was made in s. 55A of the IT Act, therefore, correction of an error in mentioning the section by the AO cannot be ignored by referring appropriate sources of the powers. 11.3 The Hon'ble apex Court left the issue open as to wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ni Shankar Vyas (2009) 311 ITR 8 (Uttarakhand) held that the AO need not rejected the accounts before making a reference under s. 131(1)(d) of the Act or for calling for report under s. 142A of the Act. In the case before Hon'ble Uttarakhand High Court, the assessee placed reliance on the decision of Hon'ble Rajasthan High Court in the case of CIT vs. Pratapsingh Amrosingh Rajendra Singh and Deepak Kumar (supra). The Hon'ble Uttarakhand High Court observed that judgment of Hon'ble Rajasthan High Court is predate the amendment brought in the IT Act in the year 2004 whereby s. 142A was inserted. 11.4 Keeping in view the discussions as above in various paras, we hold that the AO was justified in referring the valuation to Valuation Cell for estimating the cost of construction. Sec. 69B of the Act provides that the amount expended on making investment in valuable articles exceed the amount recorded in the books of account and the assessee offers no explanation or explanation is not satisfactory then the AO can treat the excess amount as deemed income of the assessee in the financial year. The assessee (sic-AO) is having power under s. 143(2) to serve on the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the order of the AO clearly suggests that the AO has considered that vouchers as maintained by the assessee are not correct or complete. 11.6 The assessee has also filed valuation report from Shri Vivek Kulshrestha. In this regard, the registered valuer has taken different percentages for the different items as compared to the percentages considered by the DVO. The DVO has taken 15 per cent rebate for hall type of construction while registered valuer has mentioned that 25 per cent deduction is to be given for hall type of construction as per PWD rates. As per PWD rates, the cost of construction for the year under reference comes to ₹ 1,23,53,227 as against ₹ 1,92,71,676 made by the DVO. The first valuer determined the cost of construction at ₹ 1,08,68,730 as against the expenditure shown at ₹ 1,05,41,341. The DVO has clearly mentioned that the registered valuer who gave first report has not included certain items. Thus the cost of construction as given by two valuers is different as compared to the cost of construction shown by the assessee. It is true that one has to understand that valuation reports made by the valuers are estimates. However, the DVO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the basis of an expert opinion that quantum of cement and steel has been shown less. The AO has accepted the DVO's report. We are also aware that Hon'ble Uttarakhand High Court and Hon'ble Allahabad High Court have held that reference to the Valuation Cell can be made under s. 142A of the Act without rejecting the books of account. The Hon'ble Delhi High Court in the case of CIT vs. Satish Kumar Chandna (2008) 218 CTR (Del) 528 : (2008) 9 DTR (Del) 240 : (2008) 166 Taxman 40 (Del) referred the matter back to the Tribunal because the Tribunal has not considered the provisions of s. 142A of the Act. Considering the above factual and legal position, we hold that the AO was justified in referring the matter to the Valuation Cell. 12. The next issue before us is to decide as to what estimate is to be made in respect of cost of construction as against the cost of construction shown by the assessee in the books of account. We have gone through the valuation report of the registered valuer and the valuation report made by the DVO. Before proceeding further, it will be useful to reproduce the specifications mentioned by the DVO in his report:- 1. Foundations:- Isol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the DVO for basement. RCC framed structure upto six storeyes Basement (with floor height 4.25 m) Front portion P.A. rates for 3.35 M floor height 2,290.00 Add extra for floor height 4.25 - 3.35 = 0.90 @ ₹ 125 - 0.30 M 3.75.00 3,295.00 Add for internal services @ 4% (+) 131.80 Less than normal:- (1) electric installation (wo fans) (2) W/o and S/I Deduction on account of @ 30% (1) Hall type construction 15% (2) Less journey 10% (-) 988.50 (3) Less painting and Misc. 3% (4) Less dado 2% 2,438.30 PA rates with C.I. 195 ₹ 4,755 M 2 12.2 For all the different portions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.2 Rest of the area ordinary cement concrete Rest of the area ordinary cement concrete Rest of the area ordinary cement concrete Roofing 5.1 Insulation for air conditioning foam concrete Insulation for air conditioning foam concrete 5.2 Filling for drainage lime concrete Filling for drainage lime concrete Filling for drainage lime concrete finished with brick tiles 5.3 Waterproofing treatment 4 course treatment finished with brick tiles Waterproofing treatment 4 course treatment finished with brick tiles Waterproofing treatment 4 course treatment finished with brick tiles Finishing 6.1 External water proofing cement paint External water proofing cement paint External water proofing cement paint 6.2 Internal-Officers rooms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst 15 per cent considered by the DVO. (ii) Cost of the flooring for the front portion of ground floor and first floor is not considered. (iii) Foundation cost is not deducted in the ground floor over basement. (iv) Cost of mosaic chips/tiles/Kota stone flooring as per the norms is not deducted. (v) Cost of the doors/windows for the front portion of ground floor and first floor is not deducted. (vi) The DVO has determined the cost of construction by applying the CPWD rates. The DVO has observed the PWD rates are mainly used for assessing the rent of residential and other ordinary buildings and therefore, CPWD rates should be applied for valuation of building. However, while making such observation, he has not considered that various Courts have consistently held that the cost of construction should be determined on the basis of local PWD rates and not CPWD rates. The normal difference between the cost as per PWD rates and CPWD rates ranges between 20 per cent to 30 per cent. Difference of 20 per cent was accepted in the cases of CIT vs. Smt. Prem Kumari Murdia (2006) 204 CTR (Raj) 343 : (2008) 296 ITR 508 (Raj) and Smt. Prem Kumari Mudria vs. Asstt CIT (2007) 211 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng, finishing and services. The learned Authorised Representative has submitted that the deduction of 25 per cent is to be given for hall type of construction instead of 15 per cent. However, for this proposition, the learned Authorised Representative has not given any basis except the comments of the registered valuer. We have gone through the report of the registered valuer Shri Vivek Kulshrestha dt. 25th Dec., 2007. The registered valuer has estimated the cost of construction in financial year at ₹ 40,35,646 as against ₹ 39,27,060 shown by the assessee. The cost of construction has been estimated at ₹ 1,05,67.592 for the financial year 2004-05 as against ₹ 1,04,41,314. The registered valuer has determined the cost of construction at ₹ 1,15,49,281 for the financial year 2005-06 as against ₹ 88,83,337 shown by the assessee. In its report, the valuer has adopted the percentage for water charges, for electrical charges and for sanitary fire hydrant charges. While determining the cost of construction for the asst. yr. 2005-06, the valuer has not considered the rebate for self-supervision. The valuer has given the report in respect of cost of constr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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