Cost of construction based on actual expenditure is to be considered in computation of capital gain

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH ‘E’ DELHI

BEFORE SHRI I.P. BANSAL AND SHRI K.G. BANSAL

ITA No. 5494(Del)/2010

Assessment year: 2002-03

Assistant Commissioner of Income-tax,

Circle 23(1),

New Delhi.

(Appellant)

Vs.

National Cooperative Consumers

Federation of India Ltd., 5th floor,

Deepali Building, 92, Nehru Place,

New Delhi.

PAN: AAAAN0109N

(Respondent)

ITA No.5572 (Del)/2010

Assessment year: 2002-03

National Cooperative Consumers Federation of India Ltd.,

New Delhi.

(Appellant)

Vs.

Assistant Commissioner of Income tax,

Circle 23(1),

New Delhi.

 (Respondent)

Department by: Shri R.S. Negi, Senior DR

Assessee by: Shri Sanjay Aggarwal, FCA

Date of Hearing: 20.03.2012

Date of Pronouncement: 13 .04.2012.

ORDER

PER K.G. BANSAL: AM

These cross appeals of the assessee and the revenue have been argued in a consolidated manner by the ld. counsel for the assessee and the ld. senior DR. Therefore, a consolidated order is passed.

2. The facts mentioned in the assessment order are that the return declaring total income of Rs. 51,27,967/- was filed on 31.10.2002. In the course of assessment, it was inter-alia found that the assessee sold its property situated at B-19, Okhla Industrial Area, Phase-I, New Delhi, for a consideration of Rs. 1,06,37,050/-. After reducing the cost of acquisition, capital gain was worked out at Rs. 51,27,967/-. Original assessment u/s 143(3) was completed on 29.3.2005 at a total income of Rs. 1,08,01,894/-, which included long-term capital gain (‘LTCG’ for short) of Rs. 89,48,917/-. The income of the assessee was revised to Rs. 82,82,648/- on giving effect to the order of the CIT(Appeals). In the course of assessment proceedings, the valuation of the property was referred to the District Valuation Officer. His report was not received till the completion of original assessment order and it was received subsequently. He valued the property at Rs. 6,54,09,300/- as on 31.3.2002, being 50% of sale consideration. The capital gains on the basis of this valuation works out to Rs. 5,99,00,217/- as under:-

Sale consideration as per DVO Rs. 6,54,09,300/-

Less: Cost of acquisition

                                                                (Rs.)

(i) cost of land transferred as claimed: 14,62,474/-

(ii)cost of building in progress as claimed: 40,46,609/-   55,09,083

Long-Term Capital Gains 5,99,00,217/-

2.1 Therefore, proceedings u/s 147 of the Income-tax Act, 1961 were initiated by issuing a notice u/s 148 on 23.12.2005. The assessment was finalised on 27.12.2006 on the basis of aforesaid report. This assessment was cancelled by the CIT(A) on the ground of lack of jurisdiction u/s 147. On appeal of the revenue, the Tribunal reversed the order of the CIT(A), but restored the matter of computation of capital gain to the file of the AO. The present proceedings are in pursuance of the order of the Tribunal.

2.2 Coming to the facts in detail, the assessee had been constructing a building at the plot mentioned above. This plot was allotted to it by the DDA in terms of a lease deed dated 10.04.1985. Unable to carry on the construction on its own, it entered into a collaboration agreement with Devika Builders (P) Ltd. (‘Devika’ for short) on 14.10.1996. The Devika was required to construct the building as per approved plans on his own cost. On completion of the construction, 50% thereof was to be retained by the builder in lieu of half of the land underneath the building and the balance 50% of the building was to be handed over to the assessee. The Devika was also to pay a sum of Rs. 30.00 lakh to the assessee. On completion of the building, the west side was taken by the assessee and the East side by the Devika. The value of the construction made by the Devika was made at Rs. 2,29,16,400/- by an approved valuer and, thus, the share of the assessee worked out to Rs. 1,14,58,200/-. As against the aforesaid, 50% of the plot area passed on to the builder. However, the DVO estimated the fair market value of the property at Rs. 6,54,09,800/-, which included value of half of the land at Rs. 4,40,53,000/- and 50% of the building, boundary wall and ancillary structure at Rs. 2,13,56,800/-. It appears that the assessee also obtained another valuation report from Shri Chiranjit S. Shah, approved valuer, who valued the total cost of construction including extra items at Rs. 2.29 crore, which is more or less the same as estimated by the approved valuer. The share of the assessee according to this comes to Rs. 1,14,50,000. It also appears that the assessee wrote various letters to the builder to provide certified account about cost of construction. The same was not furnished. The AO ,however, was able to illicit some information in the form of balance sheets, in response to notice u/s 131, which is reproduced below:-

Up to 31.03.2002   Rs. 2,78,60,136/-

Up to 31.03.2003   Rs. 2,81,17,182/-

Up to 31.03.2004   Rs. 2,83,05,380/-

Up to 31.03.2005   Rs. 3,40,86,855/-

Up to 31.03.2006   Rs. 3,65,10,481/-

2.3 The important question before the AO in respect of computation of capital gain was regarding the consideration received by way of building in lieu of 50% of the land beneath the building transferred to the Devika. The AO accepted the value of land furnished by the assessee. He also accepted the fact that the assessee had incurred expenditure of Rs. 13,00,488/- on construction prior to the development agreement. Thus, he worked out the indexed cost at Rs. 68,09,571/-. Coming to the cost of construction of half of the building, the AO had three figures before him in three valuation reports. The first valuation report showed the value at Rs. 1,14,58,200/-, the DVO’s report at Rs. 2,13,56,800/-. The final report showed the value at Rs. 1,14,50,000/-. In the original assessment, the figure of Rs. 1,14,58,200/- was adopted to which a sum of Rs. 30.00 lakh was added as further cash received. The AO adopted the DVO’s report estimating the value of Rs. 2,13,56,800/-, to which he added a sum of Rs. 30.00 lakh, thus, arrived at the consideration of Rs. 2,43,06,812/-. The LTCG was accordingly worked out at Rs. 1,74,97,241/-. He did not take the information received the Devika into account by mentioning that it was not verifiable.

2.4 The ld. CIT(Appeals) considered the facts of the case and various submissions made before him. It is mentioned that the cost of construction shown by the builder up to 31.03.2002 at Rs. 2,78,60,136/- cannot be accepted as expenditure incurred thereafter has not been taken into account.

2.5 It is further mentioned that the assessee’s objection to the DVO’s report revolves around various factors affecting the fair market value, being location, unauthorized encroachment, approach road and sanitation problem. These factors are not relevant for the determination of cost of construction. The DVO has arrived at cost of construction by applying CPWD rates, which have been approved by the CBDT. He inspected the property on 25.04.2005 but applied the rates from BSR 2002. He arrived at the cost of construction at Rs. 4,27,13,623/-, out of which assessee’s share is Rs. 2,13,56,800/-. On the other hand, the assessee’s valuer arrived at cost of construction of Rs. 2.29 crore, which includes Rs. 11.00 lakh for site development and additional items. Thus, the share of the assessee works out to Rs. 1,14,50,000/-. The cost of construction shown by the Devika up to 31.03.2006 is Rs. 3,65,10,481/-. Thus, the assessee’s share is Rs. 1,82,55,240/-. Prior to entering into development agreement, the assessee had already carried out the work of foundation, RCC walls, boundary walls etc., for which the AO has allowed deduction by way of cost of acquisition at Rs. 40,46,609/-. This has been enhanced by another amount of Rs. 13,00,488/- on receipt of the order of the CIT(Appeals) against original order. In these circumstances, it is logical to hold that the cost of construction estimated by the DVO includes the cost incurred by the assessee. Therefore, the cost actually incurred by the Devika is Rs. 3,73,66,526/- (Rs. 4,27,13,622- Rs. 53,47,097/-). The share of the assessee in this cost works out to Rs. 1,86,83,263/-. This value comes quite close to the total cost of construction of Rs. 3,65,10,481/- shown by the Devika. Therefore, it has been held that it will be appropriate to estimate the cost incurred for half portion of the assessee at Rs. 1,86,83,263/-. The LTCG thus works out to Rs. 1,18,73,692/-. The AO has been directed to adopt the value accordingly.

3. Aggrieve by this order, both the parties are in appeals. The assessee has taken up three substantive grounds in its appeal as under:-

2) “That on the facts and in the circumstances of the case, the ld. CIT(A) has erred in stating that the appellant did not furnish credible proof regarding the year of completion of the building.

3) That on the facts and in the circumstances of the case, the ld. CIT(A) has erred in not appreciating the fact that once there was an agreement of apportionment for the respective share of the appellant and the builder and possession has been taken from the builder, the builder would not make any construction or incur any expense on the property of the appellant already apportioned.

4) That on the facts and in the circumstances of the case, the ld. CIT(A) has erred in equating the cost of construction estimated by the DVO with the cost of construction to the builder as at 31.03.2006 for computing capital gains for the assessment year 2002-03.”

3.1 As against the aforesaid, the revenue has taken only one substantive ground that the ld. CIT(Appeals) erred in reducing LTCG computed by the AO at Rs. 1,74,97,241/- to Rs. 1,18,73,692/-.

3.2 Before proceeding further, it may be mentioned that the assessee filed a paper book of eight pages containing additional evidence. However, this evidence was not pressed before us in the course of hearing. Therefore, the same is not taken into account while passing this order.

4. Before us, the ld. counsel for the assessee submitted that it acquired a plot of land on lease from the DDA on 10.04.1985. Some construction was undertaken by the assessee. Thereafter, the assessee entered into a collaboration agreement with Devika on 14.10.1996 under which Devika was to complete the construction work as per approved plan by incurring expenditure from its sources. On completion of the building, half of it was to be retained by Devika and half of its had to be given to the assessee. The assessee was also to receive Rs. 30.00 lakh from Devika. The question is regarding computation of capital on this transaction.

4.1 It is further submitted that the matter has come up before the Tribunal for the second time. In the first round, “F” Bench of the Tribunal had passed the order on 23.12.2008 in ITA No. 4519(Del)/2007, a copy of which has been placed in the paper book on page nos. 26 to 32. In this order, it has been held that the reopening of the assessment was valid. It has further been held that the ld. CIT(Appeals) failed to adjudicate the issue as to what would be actual sale consideration in the hands of the assessee for the purpose of determining capital gain. Since all the facts relating to actual cost of construction incurred by the builder, and the terms of agreement entered into between the assessee and the builder have not been brought on record and appreciated properly, the matter was restored to the file of the AO for fresh adjudication. The operative part of the order is contained in paragraph no. 10, which is reproduced below:-

“10. The assessee had declared the total sale consideration at Rs. 1,44,58,000/-, being the assessee’s share in the constructed property. The assessee’s share was worked out at Rs. 1,44,58,200/- on the basis of valuation report given by the approved valuer as so mentioned by the ld. CIT(A) at page  4, para 4, of his order. It is thus clear that the assessee has shown the sale consideration as valued by the approved valuer. The AO, therefore, referred the matter to the DVO in the course of original assessment proceedings. The report of the DVO was not received by the AO by the time original assessment was completed. The AO received the valuation after the assessment was completed. Valuation report of the DVO is, thus, a material subsequently received by the AO, which may lead to a belief that income had escaped assessment within the meaning of section 147 of the Income-tax Act, particularly in view of the fact that the value of construction falling in the assessee’s share was determined as per valuation report by the assessee’s approved valuer. The actual cost of construction incurred by the builder, namely, M/s Devika Builders Pvt. Ltd. was not brought on record nor was adopted for the purpose of determining the sale consideration in the hands of the assessee. The value of the plot was also made by the approved valuer. Thus, it is the case where notice u/s 148 has been issued by the AO before the expiry of four years from the end of the relevant assessment year. Thus, the various decisions relied upon by the ld. CIT(A) are not applicable to the present case. The assessee has itself shown the consideration on the basis of valuation made by its approved valuer and, therefore, the matter referred to the DVO by the AO was relevant evidence or basis for the purpose of assessment. We, therefore, find that the reopening of the assessment u/s 147, in the light of the facts and circumstances of the present case, was valid. The order of Ld. CIT(A) in annulling the reopening of assessment u/s 147 is, thus, set aside. We have carefully gone through the ld. CIT(A)’s orders and find that though the ld. CIT(A) has discussed the difference between the cost of construction shown by the assessee and the cost of construction determined by the DVO, the ld. CIT(A) has failed to adjudicate the issue as to what would be actual sale consideration to be taken in the hands of the assessee for the purpose of determining capital gain. This aspect of the matter pointed out to the ld. counsel for the assessee who, in turn, submitted that the matter with regard to the determination of actual sale consideration to be taken in the hands of the assessee and the matter with regard to the computation of capital gain in the hands of the assessee may be restored back to the file of the AO or ld. CIT(A) as the bench may think fit and proper. Since all the facts relating to the actual cost of construction incurred by the builder, and the terms of the agreement entered into between assessee and builder has not been properly appreciated nor brought on record by the lower authorities, we find it fit to restore the matter as to the computation of capital gain in the hands of the assessee after determining the actual sale consideration as well as the actual cost of acquisition in the hands of the assessee, to the file of the AO, for his fresh adjudication as per law. The AO shall provide reasonable\ opportunity of being heard to the assessee. The assessee shall be at liberty to produce and furnish any other evidence or evidences in support of its case as it may so advised. The assessee shall be at liberty to take any other contention or contentions that may be available to it under the law with regard to the issue relating to the computation of capital gain arising from the transfer of the land in question vide the agreement entered into with M/s Devika Builders Pvt. Ltd. The AO shall make such further enquiry as he may thinks fit and proper to decide the issue in its correct and right perspective as per law. The AO shall provide reasonable opportunity of being heard to the assessee. We order accordingly.”

4.2 It is also submitted that the DVO has valued 50% cost of the building, boundary wall and development work at Rs. 2,13,56,800/- as evidenced from page no. 151 of the paper book. After adding the further amount of Rs. 30.00 lakh, the consideration would be Rs. 2,43,56,800/-. The approved valuer has valued 50% of the cost of construction at Rs. 1,14,58,200/-. Thus, the sale consideration would be Rs. 1,34,58,200/-. At the same time, information received from Devika shows the value of 50% of cost of construction as on 31.03.2002 at Rs. 1,39,30,068/- and 50% of the cost of construction as on 31.03.2006 at Rs. 1,82,55,240/-. It is argued that the value as on 31.03.2002 is relevant for the purpose of computing cost of construction as Devika would not carry out any further work as the building was handed over to the assessee before this date. Thus, this information shows that the sale consideration would be Rs. 1,69,30,068/-.

4.3 It is also submitted that the valuation officer has adopted the rates applicable to the area of Okhla Industrial Estate, while the plot of land of the assessee is actually situated in Okhla Industrial Area, Phase-I, New Delhi. The difference in location will make some difference in the valuation made by the Valuation Officer. However, we do not find this submission of any great relevance as we are on the issue of determining cost of construction. Finally, it is argued that the value determined by the approved valuer may be taken as the correct value for the purpose of computation of capital gains.

4.4 In regard to the year of completion of the building, the ld. counsel drew our attention to page nos. 90 and 91 of the paper book. Page no. 90 is a letter dated 22.06.2000 written by the architect, H.R. Suri, to Zonal Engineer to the effect that the building plans were passed on 11.12.1996. The building is now complete and an application for grant of extension of time has been moved to the DDA. Therefore, the Zonal Engineer was requested to process the application for grant of forms ‘C’ & ‘D’. Page no. 91 is the deposit receipt for obtaining these forms paid on 28.06.2000. Therefore, it is argued that the building was completed in financial year 2000-01.

4.5 In reply, the ld. senior DR relied on the orders of the authorities below, which in turn relied on the valuation report of the valuation officer.

5. We have considered the facts of the case and submissions made before us. According to us, the best evidence regarding cost of construction is from Devika, who constructed the building. In response to summons u/s 131, Devika filed a copy of the agreement, an unsigned valuation report prepared by Shri Charanjit S. Shah and a copy of balance-sheet as on 31.03.2002. The balance-sheet shows capital work-in-progress as on 31.03.2002 at Rs.2,50,30,642/-, half of which amounts to Rs. 1,25,15,372/-. By way of another letter dated  29.10.2009, it also furnished the cost of construction as on 31.03.2002, 31.03.2003, 31.03.2004, 31.03.2005 and 31.03.2006. Since the half portion of the assessee was handed over to the assessee in the financial year 2001-02, i.e., this year, we are of the view that subsequent figures are not of relevance because Devika would not spend any further amount in normal circumstances on half portion of the building handed over to the assessee on or before31.03.2002. Therefore, the relevant figure according to us would be Rs. 1,39,30,068/-. Devika had also furnished unsigned valuation report prepared by Shri Charanjit S. Shah, architect. We find that a signed report of Shri Charanjit S. Shah addressed to the assessee vide letter dated 05.02.2001 is also available on record, which shows the cost of construction of the half portion at Rs. 1,14,58,200/-. As against the aforesaid, the valuation officer has valued the cost of construction at Rs. 2,13,56,800/- based upon BSR 2002. Having considered all these matters, we are of the view that the cost of construction shown in the books of Devika is most appropriate for computation of capital gain as it is based upon the actual

expenditure incurred by it. It is also a third party evidence. It is not the case of the AO that there is manipulation in the balance-sheet made by Devika in collusion with the assessee to show lower cost of construction as on 31.03.2002. The report of the valuation officer is based upon estimates. In such circumstances, we are of the view that the value shown by Devika for 50% of the cost of construction at Rs. 1,39,30,068/-, say Rs. 1,39,31,000/- represents the best figure of the cost of construction. Accordingly, the transfer consideration works out to Rs. 1,69,31,000/-. The AO is directed to work out capital gains accordingly.

6. In the result, both the appeals are partly allowed.

                                                        Sd/-                      Sd/-

                                               (I.P. Bansal)         (K.G. Bansal)

                                           Judicial Member  Accountant Member

Copy to:

1. Assessee

2. Respondent

3. CIT (A)

4. DR, ITAT, New Delhi