M/s. Srinivasa Theatre, Siddipet V. Commissioner of Income Tax, A.P., Hyderabad

RC/87/1999

AI Insights

The case revolves around a dispute concerning the assessed cost of construction of a theatre by M/s. Srinivasa Theatre, Siddipet, for which the Income Tax Department treated a significant portion as unexplained expenditure under Section 69(C) of the Income Tax Act. Initially, the applicant reported the construction cost as Rs.8,10,000, supported by a Licensed Valuer's report. However, the Departmental Valuer assessed it at Rs.18,97,000. The Tribunal eventually settled on Rs.9,96,000, treating the difference as unexplained expenditure spread over subsequent years. The applicant contested the Tribunal's reliance on the Departmental Valuer's report and sought a reference to the High Court, which led to the current judgment favoring the applicant.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 676773 (HC-ANDHRA_PRADESH)
• Appeal Type: Others
• Pronouncement Date: 11-06-2014
• Assessment Year: misc
• Laws Referred To: Income Tax Act
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: S R ASHOK
• Assessee Lawyers: A V KOUNDINYA
• Keywords: Cost of construction; Departmental Valuer; Unexplained expenditure; Valuation dispute; Licensed Valuer
• Section: 69(c)

Judgement Text

"THE HON’BLE SRI JUSTICE L. NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE T. SUNIL CHOWDARY +REFERENCE CASE No.87 of 1999 % 11-06-2014 # M/s. Srinivasa Theatre, Siddipet. .. Applicant Vs. $ Commissioner of Income Tax, A.P., Hyderabad. .. Respondent HEAD NOTE: ! Counsel for applicant: Sri A.V. Krishna Koundinya ^ Counsel for respondent : Sri S.R. Ashok ? CASES REFERRED : ---- THE HON’BLE SRI JUSTICE L. NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE T. SUNIL CHOWDARY REFERENCE CASE No.87 of 1999 JUDGMENT: (Per LNR,,J) The applicant is an association of persons. It has undertaken the construction of a theatre at Siddipet. For the assessment year 1986-87, returns were submitted showing, inter alia, a sum of Rs.8,10,000/- as cost of construction. A report of a Licensed Valuer was enclosed. The Assessing Officer doubted the accuracy of that figure and called for a report from a Departmental Valuer. A report was received from the said Valuer, to the effect that the cost of construction undertaken by the applicant would be Rs.18,97,000/-. Taking the same into account, the Assessing Authority treated a difference of amount of Rs.10,87,000/- as unexplained expenditure, under Section 69(C) of the Income Tax Act (for short ‘the Act’). Aggrieved by the order of the Assessing Authority, the applicant preferred an appeal before the Commissioner of Income Tax, Appeals-II, Hyderabad. Through its order, dated 24.10.1989, the appellate authority modified the order of the Assessing Authority and took the view that the cost of construction is Rs.16,30,000/-. The applicant carried the matter in further appeal before the Income Tax Appellate Tribunal, Hyderabad Bench-B (for short ‘the Tribunal’). Through its order, dated 12.10.1990, the Tribunal took the view that the cost of construction is Rs.9,96,000/-. The balance of Rs.1,86,000/- was treated as unexplained expenditure and the same was spread over the subsequent assessment years. The applicant filed an application before the Tribunal, with a request to refer the questions framed by it, to this Court for answer. The Tribunal rejected the application. Thereupon, the applicant filed ITC No.64 of 1992. Through its order, dated 12.06.1998, this Court framed two questions, namely, 1) Whether on the facts and in the circumstances of the case the appellate Tribunal has not erred in law in relying upon the departmental valuation officer’s report having held that the said report is highly inaccurate for various reasons? 2) Whether on the facts and in the circumstances of the case, the Tribunal has not erred in not accepting as evidence the registered valuer’s report dated 12.09.1990 having called for it specifically on the ground that it was not produced before the lower authorities? and required the Tribunal to refer the same to it. In compliance with the same, an order was passed by the Tribunal on 26.04.1999 and the questions are referred to this Court. Hence, this Reference Case. Sri A.V. Krishna Koundinya, learned Senior Counsel for the applicant, submits that the Tribunal rejected the report of the Departmental Valuer on the ground that he did not appear before it, inspite of repeated requests, and in that view of the matter, it ought to have accepted the value furnished by the applicant, as submitted by a Licensed Valuer. He contends that not being the experts in the field of construction, the member of the Tribunal ought not to have imported their personal knowledge in determination of the cost of construction. Sri S.R. Ashok, learned Senior Counsel for the Income Tax Department, on the other hand, submits that the questions framed by this Court are purely factual in nature, and hardly there exists any element of law. He submits that having rejected the report submitted by both the Valuers, the Tribunal has taken into account, certain objective criteria and determined the cost of construction. He contends that such questions do not constitute the basis for any reference. Even from a perusal of the questions, or for that matter, the arguments advanced by the learned Senior Counsel for the applicant, it is evident that what are referred to this Court are just questions of fact. However, there is no prohibition against the reference of questions of fact, if they have any serious impact, upon the exercise undertaken by the authorities under the Act. In a given case, if the findings of fact are not supported by defence or are contrary to law, there is no reason, why the reference be not entertained, in relation thereto. The applicant stated that the cost of construction is Rs.8,10,000/-. In support of their contention, they have submitted a report of a Licensed Valuer. The Assessing Authority, however, did not accept the report and, on the other hand, it called for a report from a Departmental Valuer. Physical inspection is said to have been made by the Departmental Valuer and he submitted a report stating that the cost of construction is Rs.18,97,000/-. After giving an opportunity to the applicant, the Assessing Authority adopted those figures and passed an order, directing that the differential amount shall be treated as unexplained expenditure, under Section 69(C) of the Act, and made it liable to Income Tax. The appellate Authority examined the matter in a bit detail and took the view that the cost of construction is Rs.16,30,000/-. This was the result of allowing the cost of supervision and management at 12.5%. What happened before the Tribunal is somewhat curious. To convince itself about the accuracy of the report submitted by the Departmental Valuer, which in turn constituted the basis for the Assessing Authority, the Tribunal directed the Departmental Valuer to appear before it. That, however, did not fructify. In clear terms, the Tribunal rejected the report of the Departmental Valuer indicating the relevant reasons. It also did not accept the report of the Licensed Valuer furnished by the applicant. Even after expressing the view that the Departmental Valuer did not undertake the exercise in a proper manner, the Tribunal took the figures mentioned by him and allowed 40% deduction therefrom. The basis for this is not indicated. A further deduction was made for the supervising charges, and as a result, it was found that the cost of construction is Rs.9,96,000/-. Howsoever tempting it may be, for an adjudicating authority or an agency to get into the realm of technical assessment, it would not at all be safe to undertake it, unless the facts are undisputed. Once the report of the Departmental Valuer was rejected, mainly on the ground that he did not appear before it, the Tribunal ought to have taken into account the report submitted by the Licensed Valuer, particularly when nothing objectionable was pointed out in it. We do not find any valid reasons for rejection of the same. Further, such a report could have been rejected, if only there existed any other objective assessment. The difference is hardly of Rs.1,00,000/-. The cost of construction cannot be assessed in mathematical precision. There is bound to be variation of 10 to 20%, depending upon the interest, which the agency may evince. A construction, which costs Rs.10,00,000/- if undertaken by the departments of Government, can be completed with Rs.5,00,000/- or Rs.6,00,000/-, if it is done by private agencies. We are of the view that the Tribunal was not justified in importing its knowledge into the field, even after expressing the view that the report of the Departmental Valuer was defective. We, therefore, answer the questions referred to this Court in favour of the assessee. In the result, the Reference Case is allowed. There shall be no order as to costs. The miscellaneous petitions filed in the reference case shall stand disposed of. _____________________ L. NARASIMHA REDDY, J ____________________ T. SUNIL CHOWDARY, J 11th June, 2014 Note: LR copy be marked. (b/o) cbs THE HON’BLE SRI JUSTICE L. NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE T. SUNIL CHOWDARY R.C.No.87 of 1999 11th June, 2014 cbs "