M/s SreeLaxmi Hotels (P) Ltd.,, Hyderabad v. ACIT, Tirupathi

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B HYDERABAD BEFORE SHRI N.R.S. GANESAN JUDICIAL MEMBER AND SHRI CHANDRA POOJARI ACCOUNTANT MEMBER ITA NO.723/HYD/2008 : ASSTT. YEAR 2 003-04 ITA NO.724/HYD/2008 : 2004-05 M/S SULAKSHMI HOTELS (P) LTD. TIRUPATI (PAN AAHCS 5909A) VS ACIT CIRCLE 2 (1) HYDERABAD (APPLICANT) (RESPONDENT) APPLICANT BY : SHRI RAMA RAO RESPONDENT BY : SMT. NIVEDITA BISWAS DR O R D E R PER: CHANDRA POOJARI ACCOUNTANT MEMBER THESE TWO APPEALS PREFERRED BY THE ASSESSEE ARE DIRECTED AGAINST THE COMMON ORDER PASSED BY THE CIT(A) TIRUPATHI DATED 14.1.2008 AND PERTAINS TO THE ASSESSMENT YEARS 2003-04 AND 2004-05. S INCE ISSUES INVOLVED IN THIS TWO APPEALS ARE COMMON IN NATURE THE Y ARE CLUBBED TOGETHER HEARD TOGETHER AND DISPOSED OFF VIDE THIS CO MMON ORDER FOR THE SAKE OF CONVENIENCE. 2. THE ASSESSEE RAISED THE FOLLOWING COMMON GROUNDS: 1. THE CIT(A) IS ERRONEOUS TO THE EXTENT IT IS PRE JUDICIAL TO THE ASSESSEE HEREIN. 2. THE CIT(A) ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN REJECTING THE COST OF CONSTRUCTION AS PER BOOKS AND IN MAKING ADDITION AS UNEXPLAINED INVESTMENT IN CONSTRUCTION. 3. THE CIT(A) OUGHT TO HAVE CONSIDERED THE FACT THA T THE VALUATION CELL IS NOT CORRECT IN DETERMINING THE COST OF CONSTRUCT ION FOR THE FOLLOWING GROUNDS: A) THE CIT(A) OUGHT TO HAVE HELD THAT THE DETAILED ESTIMATE METHOD HAS TO BE ADOPTED AND NOT THE PLINTH AREA RA TE FOR DETERMINING THE COST OF CONSTRUCTION OF THE BUILDIN G PARTICULARLY WHEN THERE WAS ABNORMAL DELAY OF TWO DECADES FOR CO MPLETION OF CONSTRUCTION OF THE BUILDING FROM 1985 TO 2004. 2 B) THE CIT(A) OUGHT TO HAVE OBSERVED THAT NO WATER PROOFING TREATMENT WAS DONE TO THE BUILDING AND THEREFORE ER RED IN CONFIRMING THE COST OF THE BUILDING WHICH INCLUDES THE COST OF WATER PROOFING. HE OUGHT TO HAVE HELD THAT THE COST OF WATER PROOFI NG TREATMENT IS TO BE REDUCED FOR THE ENTIRE PLINTH AREA AS THE PLINTH AREA RATES INCLUDE THE COST OF SUCH WATER PROOFING TREATMENT. C) THE CIT(A) OUGHT TO HAVE HELD THAT FOR THE PURPO SE OF SELF SUPERVISION A REDUCTION OF 10% AND A REDUCTION OF 1 5% FOR THE PURPOSE OF RATE DIFFERENCE IS TO BE ALLOWED FROM TH E COST OF ESTIMATED BASED ON PLINTH AREA METHOD. D) THE CIT(A) ERRED IN NOT ALLOWING RELIEF AS CLAIM ED BEFORE HIM ON VARIOUS GROUNDS AND FURTHER ERRED IN NOT ACCEPTI NG THE COST OF CONSTRUCTION AS PER THE BOOKS OF ACCOUNT. 4. THE CIT(A) ERRED IN INCLUDING THE COST OF BUILD ING CONSTRUCTION DURING THE PERIOD 1985 TO 2001-02. THE CIT(A) OUGH T TO HAVE DIRECTED THE ASSESSING OFFICER TO EXCLUDE THE AREA BUILT EAR LIER TO THE ASSESSMENT YEARS 2003-04 AND 2004-05. 5. THE CIT(A) OUGHT TO HAVE SEEN THAT THE EXPENDIT URE INCURRED DURING THE PREVIOUS YEAR RELEVANT FOR THE ASSESSMENT YEAR 2003-04 IS ONLY RS.16.66 LAKHS AND FOR THE ASSESSMENT YEAR 2004-05 IT IS ONLY 30.08 LAKHS AND THE CIT(A) ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN TREATING THE ENTIRE DIFFERENCE IN THE CO ST OF CONSTRUCTION AS THE INCOME FOR THE TWO ASSESSMENT YEARS I.E. 2003-04 AN D 2004-05. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COM PANY IN WHICH THE PUBLIC ARE NOT SUBSTANTIALLY INTERESTED AND IS ENGAGED IN RUNNING OF A HOTEL. THE CONSTRUCTION OF THE HOTEL BUI LDING COMMENCED IN THE YEAR 1985 AND ENDED DURING THE FINANCIAL YEAR 20 03-04 RELEVANT FOR THE ASSESSMENT YEAR 2004-05. THE TOTAL EXPENDITURE INCU RRED BY THE ASSESSEE ON CONSTRUCTION WAS 1 55 84 032 AND AN AMOUNT OF RS.19 85 874 WAS TRANSFERRED TO VARIOUS OTHER HEADS LIKE FURNITURE FURNITURE MATERIAL MACHINERY CENTERING MATERIAL ETC. IN THE BOOKS OF ACCOUNT AN AMOUNT OF RS.1 35 98 158 IS RECORDED AS SPENT BY 31.3.2004. FOR THE ASSESSMENT YEAR 2004-05 THE ASSESSEE FILED ITS RETURN OF INCOME ON 31.10.2004 ADMITTING A LOSS OF RS.1 5 76 600 . THE ASSESSEE ALSO CLAIMED LOSS OF RS.3 82 095 RELATING TO THE ASSE SSMENT YEAR 2003-04 TO BE CARRIED FORWARD. THE ASSESSING OFFICE R CONDUCTED SURVEY U/S 133A ON 28.3.2003. LATER THE ASSESSING OFFI CER REFERRED THE 3 MATTER OF VALUATION OF COST OF CONSTRUCTION TO THE VALUA TION CELL FOR A REPORT. THE DISTRTICT VALUATION OFFICER DETERMINED T HE COST OF CONSTRUCTION OF THE BUILDING AT RS.1 87 21 000 ON AN ES TIMATE BASIS. THE ASSESSEE FILED DETAILED OBJECTIONS BEFORE THE ASSESSING OFFICER WHICH WERE FORWARDED BY THE ASSESSING OFFICER TO THE SUPERINTE NDENT ENGINEER VALUATION CELL HYDERABAD AND ON RECEIPT OF THE REPO RT OF THE VALUATION CELL HE ARRIVED AT THE DIFFERENCE IN THE COST OF CONSTRU CTION OF THE ENTIRE BUILDING TO BE AT RS.51.56 LAKHS. OUT OF THIS HE ESTI MATED THE EXCESS COST OF CONSTRUCTION AT 80% FOR THE ASSESSMENT YEAR 2003-0 4 WORK OUT AT RS.40 98 400 AND 20% FOR THE ASSESSMENT YEAR 2004-05 WORKS OUT AT RS.10 24 600. AGAINST THIS THE ASSESSEE WENT IN A PPEAL BEFORE THE CIT(A). THE CIT(A) HAS GIVEN PARTIAL RELIEF AND HEN CE THE ASSESSEE IS IN APPEAL BEFORE US. 4. THE MAIN CONTENTION OF THE ASSESSEES COUNSEL IS THAT THE VALUATIONS OF COST OF CONSTRUCTIONS ARE TO BE DETERMINED O N THE STATE PWD RATE. SINCE THE VALUATION HAS BEEN DETERMINED ON THE BASIS OF CPWD RATE TO BRING THE SAME WITH THE PARITY OF ST ATE PWD RATE SUITABLE DEDUCTION TO BE GIVEN. FURTHER CONTENTION O F THE ASSESSEES COUNSEL IS THAT THE ASSESSEE SHALL BE GIVEN DEDUCTION TOWARD S SELF SUPERVISORY CHARGES AT 10% INSTEAD OF 7.5% ALLOWED BY TH E DVO. FURTHER CONTENTION IS THAT THE CONSTRUCTION WAS CARRIED O UT IN THE YEAR 1985 TO 2004 THE COST TO BE SPREAD OVER TO DIFFERENT ASSESSMENT YEARS. 4. THE DR RELIED ON THE ORDER OF THE CIT(A). 5. WE HAVE HEARD FROM BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. WE HAVE CAREFULLY GONE THROUGH T HE VALUATION REPORT FURNISHED BY THE ASSESSEE AS WELL AS SUBMITTED BY DISTRICT VALUATION OFFICER DATED 21.11.2005 VIDE REPORT NO. 1:02:1242: 187.21:510751 4 FIXING AT RS.187.12 LAKHS. THE VALUATION REPORT FURN ISHED BY THE ASSESSEE REFLECTS THE COST OF CONSTRUCTION AT RS.135.98 LAKHS. THE ASSESSEE STATED THAT THE CONSTRUCTION WORKS WERE CARRIED OUT BETWEEN THE PERIODS FROM 10.12.1985 TO 31.3.2004. ACCORDING T O THE DVO MAJOR CONSTRUCTION WORKS COMMENCED IN APRIL 1999 AND COMPL ETED IN THE YEARS 2003-04 AS MUNICIPAL SANCTION WAS GIVEN ON 25 .6.1999. THOUGH THE ASSESSEE STARTED THE CONSTRUCTION OF HOTELS IN TH E YEAR 1985 EXPENDITURE INCURRED UP TO MARCH 1999 WAS MINOR. THE ASSESSEE STATED THAT FROM APRIL 1999 ONWARDS THE CONSTRUCTION WORKS WEN T IN FULL SWING. HOWEVER THE ASSESSING OFFICER CONSIDERED THE ENTIRE COST OF DIFFERENCE BETWEEN THE DVO REPORT AND THE COST DECLARED BY THE A SSESSEE I.E. (RS.18 72 0635 - RS.13598158 ) AT RS.51 22 477 IN TWO YEARS I.E. ASSESSMENT YEARS 2003-04 AND 2004-05 AND HE HAS CONSIDERED RS.40 98 400 FOR THE ASSESSMENT YEAR 2003-04 AND RS.10 24 600 IN THE ASSESSMENT YEAR 2004-05 AND TREATED THE SAME AS UNEXPLAIN ED INCOME OF THE ASSESSEE. THIS IS NOT PROPER. WE DIRECT THE ASSESSING OFFICER TO CONSIDER ONLY THE COST OF CONSTRUCTIONS WHICH ARE BUILT IN THE ASSESSMENT YEAR 2003-04 AND 2004-05. THE EXPENDITURE INCURRED IN EARLIER ASSESSMENT YEARS PRIOR TO THIS ASSESSMENT YEARS CANNOT BE CONSID ERED IN THESE ASSESSMENT YEARS BECAUSE EACH ASSESSMENT YEAR IS A INDEPENDENT AND DISTINCT ASSESSABLE UNIT. THE INVESTMENT MADE IN ONE ASSESSMENT YEAR CANNOT BE ASSESSED IN ANOTHER ASSESSMENT YEAR. FURTHER STATE PWD RATE INSTEAD OF CPWD RATE IS MORE A PPROPRIATE IN THIS CASE DEPENDING UPON THE NATURE OF BUILDING AND LOCATIO N OF BUILDING. IN THE EVENT THE CPWD RATE IS APPLIED DIRECTLY AND THE SAME TO BE BROUGHT WITH THE PARITY OF THE SPWD RATE. ACCORDINGLY THE A SSESSING OFFICER REQUIRED TO COMPARE EACH RATE FOLLOWED BY DVO WITH ST ATE PWD RATE AND IF THE DVO APPLIED THE CPWD RATE DIRECTLY WITHOUT GI VING ANY DEDUCTION TO BRING IT PARITY WITH STATE PWD RATE THEN WE DIRE CT THE ASSESSING OFFICER TO CONSIDER THE STATE PWD RATE IN THE PLACE OF C PWD RATE OR TO GIVE 15% DEDUCTION OUT OF CPWD RATE WHICHEVER IS LESS. FURTHER THE 5 ASSESSING OFFICER IS DIRECTED TO GIVE DEDUCTION TO SELF SUPE RVISORY CHARGES AT 10% INSTEAD OF 7.5 % AND DIRECTED TO RE-COMPUTE TH E COST OF CONSTRUCTION THEREAFTER FRAME FRESH ASSESSMENTS FOR BOTH T HE ASSESSMENT YEARS. 6. ACCORDINGLY WE SET ASIDE THE ISSUE TO THE FILE OF ASSESSING OFFICER FOR FRESH CONSIDERATION FOR THE PURPOSE FOR GIV ING SUITABLE MODIFICATION IN THE COST OF CONSTRUCTION.. 7. IN THE RESULT THE APPEALS IN ITA NOS.723 & 724/ HYD/2008 OF THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 29 .1.2010 SD/- SD/- (N.R.S. GANESAN) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 29 TH JANUARY 2010. NP COPY FORWARDED TO: 1. SHRI RAMA RAO DISTRICT VALUATION OFFICERCATE FLAT NO.103 H.NO.3-6-542/4 INDIRADEVI NILAYAM ST.NO.7 HIMAYATN AGAR HYDERABAD-500 029. 2. ACIT CIRCLE 2(1) TIRUPATHI 3. CIT TIRUPATHI CHARGE TIRUPATHI. 4. CIT HYDERABAD 5. THE D.R. ITAT HYDERABAD.