The Commissioner of Income Tax and The Assistant Commissioner of Income Tax vs Y. Abdulla Kunhi, Partner, Modern Kunhi and Co.

B.V. Nagarathna, J.—This appeal is filed by the Revenue on the following substantial questions of law:

Whether the appellate authorities were correct in holding that the profit of the assessee should be estimated at 88 of the cost of construction in respect of the Land Mark Apartment instead of the actual difference of Rs. 20,52,265/- arrived at from the declaration made by the assessee towards the cost of construction at Rs. 50,11,275/- and that fixed by the valuation officer at Rs. 70,63,540/- which had been admitted by both the appellate authorities and the same was not disputed?

Whether the Tribunal was correct in merely holding that no error was pointed out in respect of the appellate Commissioner''s orders without independently considering the controversy before it and recording a finding on it?

The relevant facts of the case are that the respondent assessee as an individual had filed re turn a for the assessment year 1993-94 on 30.11.1993. The assessing officer found that the assessee had disclosed profits from business of Horizon Constructions, i.e. construction and sale of flats but in respect of premises called Land Mark Apartment ''A'' block, the assessing officer found that the total construction investment was to an extent of Rs. 70,63,540/- which was also confirmed by a valuation report. However, what had been disclosed by the assesses was Rs. 50,11,275/- as the expenditure on construction and that there was a difference of Rs. 20,52,265/-The said difference was treated as unexplained investment of the assesses and was added back u/s 69 of the Act under an assessment order dated 27.03.1996.

The assessee being aggrieved by the said addition preferred an appeal before the Commissioner of Income Tax (Appeals)-III, Bangalore. The Commissioner of Appeals by its order dated 31.7.1996 took into consideration the estimation made by the Valuation Officer regarding the construction of Land Mark Apartments "A" Block and opined that since the books of accounts maintained by the assessee were not reliable it would not be possible to deduce correct profit/income earned by the assessee from the construction activity and therefore Section 145(3) was attracted to the case. However, while accepting the argument of the revenue and taking into account the facts of the case concluded that it would be proper to estimate the profits of the assessee from the construction activity at 8% of the cost of construction estimated by the Valuation Officer and accordingly the Assessing Officer was directed to estimate the profit from the construction activity and subject it to tax and accordingly partly allowed the said appeal.

Being aggrieved by the said order, the assessee had filed the appeal before the appellate Tribunal and it would be of relevance to mention that revenue also filed an appeal before the appellate Tribunal. The appeal filed by the Revenue on the above issue was however dismissed by confirming the order of the Commissioner of Appeals with regard to the Land Mark Apartments, ''A'' Block. Being aggrieved by the said order of dismissal, the revenue has preferred this appeal.

We have heard the learned Counsel for the appellants and the learned Counsel for the respondent.

It is submitted on behalf of the appellants that in the instant case the valuation made by the Valuation Officer was accepted by the respondent-assessee. However, there is no basis for the first appellate authority as well as the Tribunal to have concluded that 8% of the cost of construction estimated by the Valuation Officer ought to be taken as the profit from construction activity. He submits that in the absence of any reference to the material on record, the said authorities could not have arrived at such conclusion.

Per contra, Counsel for the respondent submits that despite the material on record and on consideration of the same, the authorities below had come to a conclusion that 8% of the coat of construction ought to be taken as the profit from the construction activity and the said conclusion does not call for any interference in this appeal.

Having heard the Counsel on both sides and on perusal of the material on record, we find that it is not in dispute that there is a difference of Rs. 20,52,265/- with regard to valuation of the construction in question. However, the authorities below have not adverted to any details with regard to the unexplained difference or the difference in the valuation of the said amount nor has any reference been made to the source of such investment and also the expenditure involved. In the absence of any discussion on such aspect of the matter, the authorities could not have concluded that 8% of the cost of construction as the profit from the construction activity. We find that in the absence of any reasons given to hold the same, the orders of the authorities below deserve to be set aside with a direction to the first appellate authority to re-consider the matter having regard to the material on record furnished by both sides and then to assess the profit from the business (construction activity).

The appeal is accordingly allowed by setting aside the order dated 31-07-1990 by the first appellate authority and the order dated 29-4-2004 passed by the Appellate Tribunal with a direction to the Commissioner of Income Tax (Appeals) III to pass a fresh order hewing regard to the observations made above.