JUDGMENT

A.K. Sikri, J. The respondent/assessee (hereinafter referred to as `the assessee) had filed the return for the assessment year 2005-06 at an income of Rs.7,08,334/-. It is in the business of building construction i.e. buying plots, constructing flats thereon and selling the same. During the assessment proceedings, the Assessing Officer noticed that the assessee had purchased the ground floor of an old building constructed on a plot of land measuring 500 sq. yds. At that time, first and second floor of the said property was also constructed and they were owned by some other persons. For the purchase of ground floor, the assessee had paid a consideration of Rs.97,20,000/- which included stamp duty of Rs.7,20,000/-. After purchase of the ground floor, the assessee entered into `Property Development Agreement' with the owners of first and second floor. This agreement, inter alia, stipulated that the old construction existing on the said plot shall be demolished entirely and new building would be constructed which would consist of basement, ground, first, second and third floor. After completion of the construction, the first and second floor were to be handed over to the original owners and the assessee was to retain basement, ground and third floor.

2. All the floors were constructed as per the agreement. As per the assessee, it incurred a cost of Rs.29,18,445/- on the construction work of all these floors which included first and second floor though they were meant for original owners. Subsequently, the assessee sold the newly constructed ground floor at Rs. 90 lacs on 30th March, 2005. The basement and third floor, which had become the property of the assessee was shown as `closing work in progress' and it was valued by the assessee at Rs. 50,62,500/-. The assessee had made the valuation of basement and third floor on weighted average method for ground floor, basement and third floor in the ratio of 4:1.25:1. Since ground floor was sold at Rs. 90 lacs, on that basis, value of the basement was worked out at Rs.90,000,00/- x 1.25/4 =Rs.28,12,500/-. Applying the same formula, the value of the third floor was worked out at Rs. 90,000,00/- x < = Rs. 22,50,000/-.

3. It was on this basis that value of basement and third floor as `closing work in progress' was shown at Rs.50,62,500/- [28.12:22.50 lacs]. The assessee gave its justification for adopting `weighted average method' to the ground floor, basement and third floors in the ratio of 4:1.25:1 respectively, on the ground that at the relevant time, the construction of basement as well as third floor was illegal; those floors had not been sold till date; as per municipal by-laws, the third floor is extension of second floor i.e. no dwelling unit or kitchen is allowed on the third floor; basement is allowed only for the purpose of godown for storage purpose or for parking. On this basis, it was submitted that the value of the basement as well as third floor had to be comparatively much less and could not be compared with other floors. It was also submitted that as per the Circle rates of Category-B colonies, cost of plot comes to Rs.14,30,000/- and even if the construction cost of entire super structure is taken into consideration, valuation of `closing work in progress' was quite fair, if not high. The Assessing Officer did not accept the valuation of `work in progress' as calculated by the assessee. The Assessing Officer did not accept the ratio adopted by the assessee. He pointed out that even as per the valuation reports submitted by the assessee, he himself valued the market price of ground floor at approximately twice that of other floors whereas the assessee had taken the value of ground floor as four times of the other floors. He further observed that concrete evidence of the market price of only ground floor was available as the same was sold for Rs. 90 lacs. He applied the ratio of 2.5:1:1.25 which was adopted by the valuer himself taking the value of ground f