THE COMMISSIONER OF INCOME TAX V. M/S SURAJ TOWERS

ITA/1098/2008

AI Insights

The case revolves around an appeal by the Revenue against the decision of the Income Tax Appellate Tribunal (ITAT), which upheld the findings of the Commissioner of Income Tax (Appeals). The dispute originated from the valuation of a building constructed by the assessee, M/s Suraj Towers, Vaishnavi Infrastructure (P) Ltd., for which the cost declared by the assessee was significantly lower than the valuation by the Departmental Valuation Officer (DVO). The ITAT and the Commissioner of Income Tax (Appeals) found that the difference in valuation should not be treated as income but rather allowed as a deduction under Section 37(1) of the Income Tax Act. The Revenue challenged this interpretation, particularly the application of the proviso to Section 69C, which they argued should prevent such deductions for unexplained expenditures.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 744920 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 13-10-2014
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: A SHANKAR; M LAVA
• Assessee Lawyers: JEEVAN NEERALGI
• Keywords: Appellate Authority; Construction cost; Deductions; Income Tax; Valuation
• Section: 69; 69C; 69B; 37(1); 142(A); 260-A

Judgement Text

" - 1 - IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 13th DAY OF OCTOBER 2014 PRESENT THE HON’BLE MR.JUSTICE N.KUMAR AND THE HON’BLE MR.JUSTICE B.MANOHAR I.T.A.NO.1098/2008 BETWEEN: 1. The Commissioner of Income Tax, C.R.Building, Queens Road, Bangalore. 2. The Income-tax officer Ward-4(1) C.R. Building, Queens Road, Bangalore. (By Sri.Jeevan J.Neeralgi, Advocate) …APPELLANTS AND: M/s Suraj Towers, Vaishnavi Infrasctructure (P) Ltd., No.2/2, Walter Road, Opp. Vittal Malya Road, Bangalore. ...RESPONDENT (By Sri.A.Shankar and M.Lava, Advocates) - 2 - This appeal is filed under Section 260-A of I.T.Act, 1961, arising out of order dated 25-07-2008 passed in ITA No.1195/Bng/2007, for the Assessment year 2002- 03, praying to formulate the substantial questions of law stated therein and allow the appeal and set aside the order passed by the ITAT, Bangalore, in ITA No.1195/Bng/2007, dated 25-07-2008 confirm the orders of the Appellate Commissioner and confirm the order passed by the Income tax officer, Ward-4(1), Bangalore in the interest of justice and equity. This appeal coming on for hearing this day, KUMAR J, delivered the following:- JUDGMENT The Revenue has preferred this appeal against the concurrent findings recorded by the two Appellate Authorities holding that even if the valuation by DVO is accepted and the difference in the cost of construction is Rs.41,33,983/-, which has to be set off against the expenditure incurred for the said construction and therefore, there won’t be any liability to pay tax on the said amount. - 3 - 2. The assessee is a property developer. He filed the return of income for the Assessment year 2002-03 on 23.10.2002 declaring his total income of Rs.5,72,840/-. The case was selected for scrutiny. The assessee filed the valuation report of an approved valuer. According to which, the cost of construction was determined at Rs.1,13,28,000/- after deducting 15% on account of lower specification and reduced work and Rs.19,99,200/- on account of economy of construction. 3. The Assessing Officer, invoked the provisions of Section 142-A of the Income Tax Act, and referred the matter to the DVO for valuation of the building. According to him, the cost of construction was Rs.1,70,65,000/-. The assessee objected to the said valuation on several grounds. The Assessing Officer came to the conclusion that the assessee had suppressed the investment in the building construction and went ahead to make addition of Rs.41,33,983/- being the difference in the cost of construction of the - 4 - building as determined by the DVO and the cause shown by the assessee in its books. 4. The assessee preferred an appeal to the Commissioner of Income Tax (Appeals). The 1st appellate authority accepted the said valuation and held, the said difference in the amount is to be allowed as deduction under Section 37(1) of the Act and as such, it has no impact on the income of the assessee. Hence, the Assessing officer was directed to allow the deduction under Section 37(1) of the Act equal to the amount of addition made by him. It did not consider the objections filed by the asessee to the said valuation. 5. Aggrieved by the same, the Revenue preferred an appeal to the Tribunal. The Tribunal on reconsideration of entire material on record, found no infirmity in the order of the Appellate Authority. He affirmed the findings of the Appellate Authority that any investment in a flat being stock-in-trade to the assessee was being held as capital account by the owner. In fact, additional investment made therein shall not be - 5 - considered in the hands of the assessee and therefore, dismissed the appeal. Aggrieved by the said order, the present appeal is filed. 6. The appeal was admitted to consider the following substantial questions of law on 07.07.2009:- “1. Whether the Appellate Authorities were correct in holding that the difference in the investment in construction of the building as declared by the assessee and worked out by the Valuation Officer cannot be treated as the income of the assessee u/s 69, 69B/69C of the Act as the building should be treated as stock in trade? 2. Whether the Appellate Authorities were correct in holding that the entire addition made u/s 69, 69B/69C of the Act in respect of difference in valuation of building should be allowed deduction u/s 37(1) of the Act without taking into consideration the proviso to Section 69C w.e.f. 1.4.1999 which did not permit such a deduction?” 7. Learned counsel for the Revenue, assailing the impugned order, contended that in view of proviso to Section 69C, the unexplained expenditure which is - 6 - deemed to be the income of the assessee shall not be allowed as deduction under any head of income. That proviso equally applies to Section 69-B and therefore, the finding of the appellate authorities allowing the unexplained expenditure as a deduction is erroneous and requires to be interfered with. 8. Per contra, learned counsel for the assessee submitted, the proviso to Section 69C has to be confined to Section 69C only and it has no application to Section 69B and therefore, he submits that there is no substance in the said finding. 9. As the Assessing Officer invoked Section 142-A of the Act and got DVO appointed for the purpose of valuation, no such power is conferred under Section 69C to such Assessing Officer. Therefore, Section 69C is not attracted to this case. The proviso to Section 69C is confined to Section 69C only. No such proviso is found in Section 69C and therefore, the proviso to Section 69C cannot be read as proviso to Section 69B. In terms of Section 69B, the excess amount may be - 7 - deemed to be the income of the assessee for such financial year. However, when the said excess amount is in the nature of the investment on building and the said building is sold to prospective purchaser, that investment is in the nature of expenditure. Therefore, that unexplained income has to be set off against the expenditure and the net tax could be ‘nil’ and that the Appellate Authorities dismissed both the appeals and held that it is strictly in accordance with law. Therefore, we do not see any merits in this case. No case for interference is made out. Substantial questions of law is answered in favour of the assessee and against the revenue. No merits. Dismissed. Sd/- JUDGE Sd/- JUDGE Srl. "