COMMISSIONER INCOME TAX/WEALTH TAX, COS-IV, KARACHI VS SASI REAL ESTATE DEVELOPMENT (PVT.) LIMITED, KARACHI
2011 P T D 1275
[Karachi High Court]
Before Muhammad Athar Saeed and Irfan Saadat Khan, JJ
COMMISSIONER INCOME TAX/WEALTH TAX, COS-IV, KARACHI
Versus
Messrs SASI REAL ESTATE DEVELOPMENT (PVT.) LIMITED, KARACHI
I.T.R.A. No.327 of 1999, decided on 12/04/2011.
Wealth Tax Act (XV of 1963)---
----Ss. 2(5), 3 & 16(3)---Wealth Tax Rules, 1963, R. 8(3)---Incomplete construction projects of a construction company--- Market value of assets held by such company on valuation date determined by Assessing Officer by adding 18% of gross profit to declared cost of such project---Validity---Such projects did not have market value on successive valuation date on basis of progress in construction work---Valuation of such projects as on different valuation dates could be arrived at by finding out actual amount spent on such projects as on different valuation dates---Correct method of valuation of such project in year of its completion would be profit earned plus price of land and cost of construction---Assessing Officer had powers to estimate valuation of assets and property of an assessee keeping in view market rate thereof-Assessing Officer, in the present case, had proceeded in an illegal manner by applying imaginarygross profit rate to declared valueof such projects---AssessingOfficer could make addition only in year of completion of such projects---Impugned addition was deleted in circumstances.
Jawaid Farooqi for Applicant.
Muhammad Javed Khurrum for Respondent.
Date of hearing: 7th April, 2011.
JUDGMENT
IRFAN SAADAT KHAN, J.---This Income Tax Reference Application (ITRA) has been filed against the order passed by the Income Tax Appellate Tribunal (ITAT) dated 13-1-1994 in W.T.A. No.309 of 1991 against which a Reference Application (R.A.) was filed bearing R.A. No. 207 KB/1993-1994 before the ITAT and the learned ITAT vide its order dated 5-5-1994 referred the following question of law for advisory jurisdiction of this Court.
"Whether the Income Tax Appellate Tribunal had any legal basis to direct that the valuation of incomplete project should be adopted at cost and project should be added to work out the market value in the year of completion".
2. Briefly stated the facts of the case are that the return of wealth was filed by the company at a net wealth of Rs.(5, 641,200) on 21-3-1989, without any document. Statutory notices were issued by the Wealth Tax Officer (WTO) in response to which the Authorized Representative appeared and filed relevant details. The Respondent-Company is engaged in the construction and during the year under consideration was working on two projects namely "SASSI BOAT VIEW APARTMENTS and SASSI BOAT VIEW VILLAS". The W.T.O. then finalized the assessment under section 16(3) of the Wealth Tax Act, 1963 (the Act) by applying a gross profit of 18% on cost of construction of the incomplete above mentioned projects to determine the market value of the assets held by the company on the valuation date. Being aggrieved with the order an appeal was filed before the Commissioner of Income Tax (Appeals) who vide his order dated 26-12-1990 confirmed the treatment meted out by the WTO. An appeal thereafter was filed before the ITAT which vide its order dated 13-1-1994 allowed the appeal by observing as under:
"Heard Mr. Iftikhar Ahmed, learned counsel for the appellant and Mr. Ali Nasir Bukhari, learned representative for the department. The only objection pressed by the learned counsel for the appellant is to the addition of gross profit at 18% to the cost of construction in respect of incomplete project. The learned counsel for the appellant has submitted that the point in issue already stands decided by a Division Bench of this Tribunal vide order dated 16-4-1989, in WTA Nos. 795. and 796/KB of 1986-87 wherein it has been held that in the case of incomplete construction/project the correct method of valuation is to take the price of land and the cost of construction only. In the year of completion of construction/project the market value of such project is to be taken and the method of arriving at the market value of such project should be the profit earned plus the price of land and the cost of construction. It was further held that the method of adding the profit to the price of land and the cost of construction in respect of incomplete projects was not justified. The contention of learned counsel for the appellant is correct. Following the earlier decision of this Tribunal the addition made at Rs 29,46,413 on account of gross profit at 18% is hereby deleted. The assessing officer can make the addition in the year of completion of project only".
3. The department thereafter filed a R.A. before the ITAT by raising a number of questions of law, however the ITAT vide its order dated 5-5-1994 in R.A No. 207 KB/93-94 has referred the above mentioned question only, for opinion of this Court.
4. Mr. Javeed Farooqui appeared on behalf of the department and supported the order passed by the WTO and the CIT (Appeals) and submitted that the WTO was competent to work out the valuation of the said incomplete projects and to apply a gross profit on them to work out the valuation of the assets held by the company for wealth tax purposes. Accordingly the learned counsel the company was holding certain assets on the valuation date and as per the provisions of the Act they were legally obliged to pay wealth tax on them. He however conceded that there was no basis available with the WTO as to from where he had applied the gross profit rate at 18% on the cost of incomplete projects and what was the rate of gross profit rate applied by the Income Tax Officer on these incomplete projects, while making the assessment for the year under question.
5. Mr. Muhammad Javed Khurrum learned counsel appeared on behalf of the respondent and submitted that the method of valuation adopted by the WTO is alien to the provisions of the Act. He submittedthat the question of application of gross profit on incomplete projects is only applicable while making the assessment of Income Tax in the case of builders and contractors and not in Wealth Tax cases. He submitted that there is no provision in the Act which authorizes the WTO to applygross profit on the incomplete projects of a construction company. Henceaccording to the learned counsel the method of valuation adopted by the WTO is totally illegal and uncalled for.
6. We have heard both the learned counsel at some length-and have perused the record.
7. Before proceeding any further for the sake of brevity the relevant law is discussed hereunder:--
Section 2(5) "assets" include--
(i) in the case of an individual and a Hindu undivided family, property of every description movable or immovable, except--
(a)growing crops, grass or standing trees on agricultural land; and
(b)any building owned or occupied by a cultivator or receiver of rent or revenue out of agricultural land:
Provided that the building is on or in the immediate vicinity of the land and is a building which the cultivator or the receiver of rent or revenue by reason of his connection with the land requires as a store house or an out-house; and
(ii) in the case of a firm, an association of persons or a body of individuals, whether incorporated or, not, and a company, immovable property held for the purpose of business of construction and sale, or letting out of property;
Explanation.-- For removal of doubt, it is hereby declared that immovable property and the purpose, referred to in this sub-clause includes--
(i)immovable property held for the purpose of letting out, or business of letting out of property;
(ii)immovable property held for the purpose of construction and letting out of property; and
(iii) immovable property held for the purpose of construction and sale of property.
Section 3. Charge of wealth-tax.---Subject to the other provisions contained in this Act, there shall be charged for every financial year commencing on and from the first day of July, 1963, a tax (hereinafter referred to as wealth-tax) in respect of the net wealth or assets on the corresponding valuation date of every individual, Hindu undivided family, firm association of persons or body of individuals, whether incorporated or not, and company at the rate or rates specified in the Schedule.
Rule 8(3) -- Lands and buildings.---The value of lands and building, excluding agricultural land, shall be estimated with due regard to the nature and size of the property, the amenities available and the price prevailing for similar property in the same locality or in the neighbourhood of the said locality.
8. Perusal of the above law reveals that the Act authorizes the WTO to estimate the valuation of the assets and property of an assessee, which in his view have not been so correctly stated. There is complete, mechanism given under the law through which the WTO is authorized to make such valuation, keeping in view the market rate of the assets and properties held by an assessee.
9. It is seen from the record that the above projects were under construction and the work thereon was in progress. It is seen that the declared value of the assets was not accepted by the WTO who determined value of the incomplete projects by adding 18% of the gross profit to the declared cost of the incomplete projects. The term asset has been defined under section 2(5) of the Act according to which a company holding assets for the purposes of business of construction and sale or letting out falls under the definition of asset on which a company is liable to pay Wealth Tax, as specifically defined under Section 3 of the Act. However incomplete constructions normally do not have any market value on the successive valuation date on the basis of progress in the construction. In respect of any incomplete construction, normally there cannot be any market value as on successive valuation dates on the basis of the progress in the construction work and the only manner in which the value of such incomplete construction as on different valuation dates, could be arrived at was by finding out the actual amount spent on the construction as on the different valuation dates.
10. However, in the present case it is seen that the order has been passed by the WTO in a slipshod manner as the WTO instead of working out that the value of incomplete project which according to him was not in accordance with the market value, adopted a strange method of applying an imaginary gross profit of 18% on the cost of construction which method in our opinion is totally alien to the Act. The WTO had not even cared to quote the gross profit rate applied by the Income Tax Officer on these incomplete projects for the year under construction to justify his valuation rather the WTO proceeded in an illegal manner. Though the WTO is authorized under the law to adopt the valuation of certain assets which in his opinion were not in accordance with the market rates but the manner in which the WTO has proceeded in the present case is totally uncalled for.
11. In our considered view the law clearly stipulates that valuation in respect of incomplete projects has to be made by taking the price of the land and the cost of construction so far made on these incomplete projects however the method adopted by the WTO by applying imaginary gross profit on the value of the incomplete project doesn't have, a legal sanctity behind it. We specifically asked the learned counsel representing the department to justify the method of valuation adopted by the department and to quote the relevant law under the Wealth Tax Act under which the law authorizes the WTO to make such type of valuation by applying gross profit rate to the declared value of the incomplete projects. However, the learned counsel could neither justify the said method of valuation adopted by the WTO nor could he substantiate the same by placing reliance on the relevant law of the Act to justify the method of valuation adopted by the WTO.
12. We, therefore, in the light of the above observations are of the considered view that the order passed by the learned ITAT do not suffer from any legal infirmity and hence answer the question raised in this ITRA in affirmative i.e. in favour of the Respondent-Company and against the department.
13. Above are the reasons for our short order dated 7-4-2011 through which we have dismissed the present ITRA.
S.A.K./C-1/KApplication dismissed.