Commissioner Of Income Tax vs Lord Buildcons Pvt. Ltd.
2011 Latest Caselaw 4413 Del

*                IN THE HIGH COURT OF DELHI AT NEW DELHI

+                            ITA 1884 OF 2010


                           JUDGMENT RESERVED ON: 02.9.2011
                            JUDGMENT DELIVERED ON: 09.9.2011


COMMISSIONER OF INCOME TAX                        . . . APPELLANT

                           Through    :Mr. N.P.     Sahni,   Sr.    Standing
                                       Counsel.

                                VERSUS

LORD BUILDCONS PVT. LTD.                      . . .RESPONDENT

                           Through: Mr. Vikram Kapoor, Advocate with
                                    Mr. Dilip Kapoor, Advocate.

CORAM :-

       HON'BLE MR. JUSTICE A.K. SIKRI
       HON'BLE MS. JUSTICE INDERMEET KAUR

       1.        Whether Reporters of Local newspapers may be
                 allowed to see the Judgment?
       2.        To be referred to the Reporter or not?
       3.        Whether the Judgment should be reported in the
                 Digest?


A.K. SIKRI, J.

1. The respondent/assessee (hereinafter referred to as 'the

assessee) had filed the return for the assessment year 2005-06 at

an income of `7,08,334/-. It is in the business of building

construction i.e. buying plots, constructing flats thereon and

selling the same. During the assessment proceedings, the

Assessing Officer noticed that the assessee had purchased the

ground floor of an old building constructed on a plot of land

measuring 500 sq. yds. At that time, first and second floor of the

said property was also constructed and they were owned by some

other persons. For the purchase of ground floor, the assessee had

paid a consideration of `97,20,000/- which included stamp duty of

`7,20,000/-. After purchase of the ground floor, the assessee

entered into 'Property Development Agreement' with the owners

of first and second floor. This agreement, inter alia, stipulated that

the old construction existing on the said plot shall be demolished

entirely and new building would be constructed which would

consist of basement, ground, first, second and third floor. After

completion of the construction, the first and second floor were to

be handed over to the original owners and the assessee was to

retain basement, ground and third floor.

2. All the floors were constructed as per the agreement. As per

the assessee, it incurred a cost of `29,18,445/- on the construction

work of all these floors which included first and second floor

though they were meant for original owners. Subsequently, the

assessee sold the newly constructed ground floor at ` 90 lacs on

30th March, 2005. The basement and third floor, which had

become the property of the assessee was shown as 'closing work

in progress' and it was valued by the assessee at ` 50,62,500/-.

The assessee had made the valuation of basement and third floor

on weighted average method for ground floor, basement and third

floor in the ratio of 4:1.25:1. Since ground floor was sold at ` 90

lacs, on that basis, value of the basement was worked out at

`90,000,00/- x 1.25/4 =`28,12,500/-. Applying the same formula,

the value of the third floor was worked out at ` 90,000,00/- x ¼ =

` 22,50,000/-.

3. It was on this basis that value of basement and third floor

as 'closing work in progress' was shown at `50,62,500/-

[28.12:22.50 lacs]. The assessee gave its justification for adopting

'weighted average method' to the ground floor, basement and

third floors in the ratio of 4:1.25:1 respectively, on the ground

that at the relevant time, the construction of basement as well as

third floor was illegal; those floors had not been sold till date; as

per municipal by-laws, the third floor is extension of second floor

i.e. no dwelling unit or kitchen is allowed on the third floor;

basement is allowed only for the purpose of godown for storage

purpose or for parking. On this basis, it was submitted that the

value of the basement as well as third floor had to be

comparatively much less and could not be compared with other

floors. It was also submitted that as per the Circle rates of

Category-B colonies, cost of plot comes to `14,30,000/- and even if

the construction cost of entire supe structure is taken into

consideration, valuation of 'closing work in progress' was quite

fair, if not high. The Assessing Officer did not accept the

valuation of 'work in progress' as calculated by the assessee. The

Assessing Officer did not accept the ratio adopted by the

assessee. He pointed out that even as per the valuation reports

submitted by the assessee, he himself valued the market price of

ground floor at approximately twice that of other floors whereas

the assessee had taken the value of ground floor as four times of

the other floors. He further observed that concrete evidence of

the market price of only ground floor was available as the same

was sold for ` 90 lacs. He applied the ratio of 2.5:1:1.25 which

was adopted by the valuer himself taking the value of ground floor

at `90 lacs. He valued the basement and third floor as ` 36 lacs

and 45 lacs respectively.

4. In appeal, the CIT (A) reversed the aforesaid order of the

Assessing Officer. Before the CIT (A), the argument of the

assessee was that the 'work in progress' shown by the assessee

was nothing but the closing stock only as the assessee had not

added anything further in the said floors. Valuation was done on

the basis of cost or market price whichever is less and it was not

proper on the part of the Assessing Officer to adopt the value of

the closing stock as cost only. It was also argued that the first

floor and second floor of the same very building were sold in April,

2005 and September, 2005 for a consideration of `48 lacs and `36

lacs respectively, which could not be the basis to compare the

realizable sale value of basement and third floor with many

deficiencies in the properties, inasmuch as, the basement could

not be used for other purposes than a storage and third floor was

illegal. It was also argued that the assessing Officer had adopted

the value of each floor by dividing the total cost by 3 instead of 5

since the building consisted of 5 floors and not 3 floors. The CIT

(A) accepted both these pleas and held that basement and third

floor could not be sold out as an independent dwelling unit and,

therefore, realizable sale value of these floors was much lesser

than the sale value of the second floor. He further held that the

cost incurred by the assessee in the construction of the said

building should have been divided by 5 and not by 3 since five

floors were constructed. The view of the CIT (A) has been

affirmed by the ITAT resulting into dismissal of the appeal of the

Revenue against which present appeal is preferred on the

substantial question of law formulated as under:-

"Whether the Income Tax Appellate Tribunal was correct in law and on fact in deleting the addition made by the AO on account of undervaluation of closing stock of work in progress amounting to ` 33,63,130/-?

5. We shall first advert to the question as to whether the cost of

construction incurred by the assessee should have been divided

by 3 or by 5. Here, we do not agree with the approach of the

CIT(A) and ITAT. No doubt, five floors were constructed. However,

two floors were handed over to the original owners. Insofar as the

assessee is concerned, it acquired three floors namely basement,

ground and third floor and as is the business proposition for these

three floors, it incurred the entire cost. Therefore, insofar as the

assessee is concerned, cost which was borne by the assessee for

these three floors had to be taken into consideration and not five

floors.

6. Coming to the issue of apportionment of the cost, we find

that neither the Assessing Officer not the CIT(A)/ITAT have arrived

at the valuation of basement and third floor by adopting the valid

method. The Assessing Officer simply took the sale price of

ground floor and applied the ratio of 2.5:1:1.25. He did not

consider or deal with the argument of the assessee regarding

realizable value of the basement and third floor particularly the

assessee's argument that basement was meant only for storage

and third floor was illegally constructed.

7. Likewise, the CIT (A) as well as ITAT also did not advert to

the issue with relevant consideration in focus and it simply went

by the consideration that cost should have been divided by 5 and

on that basis deleted the addition.

8. Thus, we are of the opinion that the Tribunal was not right in

deleting the addition made by the Assessing Officer. At the same

time, it is noted that this issue is not looked into and considered

even by the AO in its proper perspective. While setting aside the

order of the authorities below, we remit the case back to the AO

with the direction to consider the cost to be divided by 3 and

thereafter the AO shall proceed to determine as to what ratio is to

be applied between basement, ground and third floor having

regarding to the nature of basement and third floor and then

arrive at the value of 'closing work in progress'.

9. The appeal is disposed of in the aforesaid terms.

(A.K. SIKRI) JUDGE

(INDERMEET KAUR) JUDGE SEPTEMBER 09,2011 skb