ITO Vs G. Mahesh G Shetty (ITAT Bangalore)
CIT(A) Cannot Grant 50% Relief When Assessee Claimed Only 30%-Unreasoned Relief in Construction Cost Addition Set Aside: ITAT Bangalore
Summary: The Bangalore Bench of the Income Tax Appellate Tribunal has held that appellate relief cannot be granted on an ad hoc basis without recording proper reasons. Where the assessee had sought an aggregate reduction of 30% in the estimated cost of construction—15% for personal supervision and 15% for adopting State PWD rates instead of CPWD rates—the CIT(A) was not justified in granting relief of 50% without explaining the basis for the additional relief.
The Tribunal accordingly set aside the order and restored the matter to the CIT(A) for passing a fresh, speaking and reasoned order.
Facts of the case
The dispute related to the investment made by the assessee in the construction of a property. The total cost of construction was taken by the Assessing Officer at ₹2,57,82,000.
According to the Assessing Officer, the assessee was able to explain the source of investment only to the extent of ₹1,69,98,383. The balance amount of ₹87,83,617 was treated as an investment for which the assessee had failed to explain the source.
The Assessing Officer consequently made an addition in respect of the unexplained portion of the investment.
The assessee challenged the addition before the CIT(A). It was contended that appropriate deductions ought to be granted from the estimated cost of construction because the work had been carried out under the assessee’s personal supervision and because the valuation had been made by applying CPWD rates instead of the comparatively lower State PWD rates.
Relief granted by CIT(A)
The assessee sought two specific reductions:
- 15% towards personal supervision of construction; and
- 15% on account of the difference between State PWD and CPWD rates.
Thus, the assessee’s effective claim was for an aggregate reduction of 30% from the estimated construction cost.
The CIT(A) observed that there was merit in the assessee’s contention regarding both personal supervision and adoption of State PWD rates. However, instead of restricting the relief to the claimed 30%, the CIT(A) directed that the disallowance should be restricted to 50% of the alleged unexplained investment.
No proper calculation, supporting material or reasoning was given for allowing relief to the extent of 50%.
Aggrieved by the substantial relief granted by the CIT(A), the Revenue filed an appeal before the Tribunal.
Revenue’s contention
The Revenue contended that the order of the CIT(A) was cryptic and unsupported by reasons.
It was pointed out that the assessee himself had arrived at the total construction cost of ₹2.57 crore and had explained the source only to the extent of ₹1.69 crore. Even before the CIT(A), the assessee’s contention concerning personal supervision and the difference between State PWD and CPWD rates justified, at best, a reduction of 30%.
Therefore, the CIT(A) could not have granted relief of 50% without recording any reasons or identifying the evidence on the basis of which the higher relief was allowed.
The Revenue requested that the order of the CIT(A) be reversed and the assessment order restored. Alternatively, it sought restoration of the matter to the CIT(A) for fresh adjudication through a speaking order.
Findings of the Tribunal
The Tribunal noticed that the total construction cost had been determined at ₹2,57,82,000, while the source of investment was explained only to the extent of ₹1,69,98,383. The balance amount of ₹87,83,617 remained unexplained according to the Assessing Officer.
The Tribunal further noticed that the assessee’s claim before the CIT(A) was limited to a reduction of:
- 15% for personal supervision; and
- 15% for adopting State PWD rates instead of CPWD rates.
Therefore, the aggregate relief claimed by the assessee was only 30%. However, the CIT(A) had granted relief of 50% without giving any reason as to why the assessee deserved relief beyond the amount actually claimed.
The Tribunal held that the order of the CIT(A) was not sustainable because it did not disclose the reasoning or factual basis for granting 50% relief. An appellate authority is required to consider the material on record and pass a speaking and reasoned order. Relief cannot be determined merely by adopting an unexplained percentage.
The order of the CIT(A) was accordingly set aside, and the matter was restored to the CIT(A) for fresh adjudication after providing adequate opportunity of hearing to both the assessee and the Revenue.
The appeal was treated as allowed for statistical purposes.
Author’s comments
This decision reiterates the elementary but important principle that every appellate order must disclose the reasons supporting its conclusion. The power of the CIT(A) is co-terminus with that of the Assessing Officer, and the CIT(A) may confirm, reduce, enhance or annul an assessment. However, such power must be exercised judicially and not on an arbitrary or ad hoc basis.
The mere statement that the assessee’s submission has “merit” is not sufficient. The appellate authority must determine the acceptable construction cost, the appropriate valuation rate, the allowance for personal supervision and the precise amount of unexplained investment. The working and reasoning should be apparent from the appellate order itself.
The decision also highlights that deductions for personal supervision and the difference between CPWD and State PWD rates are factual matters. Such deductions cannot be granted at a standard percentage in every case. The nature of construction, location of the property, period of construction, procurement of materials, involvement of the assessee and the valuation method used must be examined.
Importantly, the Tribunal did not uphold the entire addition of ₹87,83,617, nor did it decide that the assessee was entitled only to 30% relief. It merely found that the CIT(A)’s grant of 50% relief was unsupported by reasons and therefore required reconsideration.
There also appears to be a drafting inconsistency in the Tribunal’s order. Though the appeal was filed by the Revenue, the concluding paragraph refers to the “appeal filed by the assessee” as allowed for statistical purposes. From the cause title, grounds of appeal and discussion, it is clear that the matter before the Tribunal was the Revenue’s appeal. The concluding reference to the assessee appears to be a typographical error and does not alter the substance of the remand order.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, BANGALORE BENCH
This is assessee’s appeal directed against the order of the ld. CIT(A)-II, Bangalore dated 21-08-2014 for the assessment year 2008-09.
2. In this appeal, the Revenue has raised the following grounds;
“1. The order of the ld.CIT(A) is opposed to law and facts of the case.
2. On the facts and circumstances of the case, the ld. CIT(A) erred in law in directing the AO to restrict the disallowance to 50% of the amount of undisclosed investment after giving credit for a personal supervision and adoption of State PWD rates without appreciating the fact that the assessee himself had arrived at the cost of construction as Rs.257.82 lakhs and the submission before the ld.CIT(A) is only an afterthought and the same is not supported by any evidence too, as admitted by the CIT(A).
3. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and hat of the AO may be restored.
4. The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above”.
3. It was submitted by the ld. DR of the revenue that the order of the ld. CIT(A) is very cryptic and therefore, his order should be reversed and that of the AO be restored and alternatively, the matter may be sent back to the file of the ld. CIT(A) for a fresh decision by way of a speaking order.
4. The ld. AR of the assessee supported the orders of the ld.CIT(A).
5. We have considered the rival submissions. We find that it is noted by the AO on page no.2 of the assessment order that total cost of the construction at Rs.2,57,82,000/- out of which the assessee could explain the source of investment of Rs.1,69,98,383/- only and for the remaining amount of Rs.87,83,617/-, the assessee could not explain the source of investment. This issue has been decided by the ld. CIT(A) as per para-4.4 at page 11 of her order wherein it was held that she is restricting the disallowance to 50% after giving credit for the personal supervision and adoption of State PWD rates in estimating the cost of construction. At para 4.3 she stated that there is merit in the assessee’s submission, regarding credit for personal supervision of the construction at 15% and 15% benefit by considering State PWD rates as against CPWD rates. Hence, it is seen that even the claim of the assessee was restricted to the extent of 30%, whereas ld. CIT(A) has granted relief of 50% and that too without giving any reasoning and therefore, we feel it proper that this matter should go back to the file of the ld. CIT(A) for a fresh decision by way of a speaking order. Hence, we set aside the order of the ld. CIT(A) and restore the matter back to his file for a fair decision by way of a speaking and reasoned order after providing adequate opportunity of being heard to both sides.
6. In the result, the appeal filed by the assessee stands allowed for statistical purposes.
Order pronounced in the open court on the date mentioned on the caption page.
