2010 (10) TMI 1106 - AT - Income Tax

Tax Tribunal Confirms CIT(A) Decision: No Evidence to Support AO's Adjustment of Stock Valuation and Sales Rates.

Assistant Commissioner of Income-Tax, 25 (1) Versus Dharti Estate

The ITAT upheld the CIT(A)'s decision to delete additions made by the AO concerning undervaluation of closing stock for assessment years 1998-99 and ... Method of valuation of Stock - enhancement of rates of sales - difference of opinion between the learned Members - Third Member Order - Whether, the order of the CIT(A) is liable to be confirmed or to be set aside and to restore the issue to his file to decide the same afresh ? - HELD THAT:- It is not in dispute that the assessee has followed percentage completion method consistently since inception and has been declaring income/loss from year to year and the same was accepted in earlier years. Despite the Assessing Officer’s stand for the assessment years 1998-99 and 1999-2000, with regard to correctness of the method of accounting followed by the assessee, in the year 2000-01 when the assessee declared profit of more than ₹ 5 crores the Assessing Officer appears to have accepted the same method to accept the income declared therein which in itself is an indication that the method of accounting followed by the assessee is an approved method of accounting. The decision of the Apex Court in the case of British Paints India Ltd.[1990 (12) TMI 2 - SUPREME COURT] comes into play only in a case where a plea of the assessee is accepted in contravention of law or an incorrect method of accounting followed by the assessee was accepted from year to year. As rightly submitted by the learned Counsel, appearing on behalf of the assessee, in the case of British Paints overheads which ought to have been taken into account to arrive at the correct cost of raw materials was not taken into consideration by the assessee but at the same time pleaded that the method has been consistently followed and hence the same deserves to be accepted. However, in the instant case, there is no such finding either by the Assessing Officer or by the learned CIT(A) ; Assessing Officer has not rejected the book results by pointing out any defect in the books maintained by the assessee. Categorical findings of the learned CIT(A) to highlight that assessee has not deviated from guidelines issued by the Institute of Chartered Accountants (under AS-7) , was not challenged before the Tribunal by learned D.R. by producing any evidence thereof. Learned CIT(A) has discussed the issue elaborately and met each point of dispute raised by the Assessing Officer to highlight that there is no merit in the conclusion reached by the Assessing Officer. In fact, learned J.M. has extracted the operative portion of the Order of the learned CIT(A) from paras 7 to 20 wherein learned CIT(A) not only analysed each issue raised by the Assessing Officer but also supported the conclusions drawn by him while holding that assessee has adopted correct method of accounting and the same was followed consistently. In addition to that, learned Judicial Member had highlighted that the project was ultimately completed in the previous year relevant to the assessment year 2000-01 wherein the assessee declared income of ₹ 5 crores plus and the same has been accepted by the department which has attained finality, in the absence of any proceedings initiated u/s 263 or otherwise. Neither the learned A.M. controverted the findings of the CIT(A) or the learned J.M. nor the learned DR sought to controvert the findings of the learned CIT(A) and learned Judicial Member. It is also not out of place to mention that with regard to deletion of addition of ₹ 2,70,230 (vide Ground No. 2 in assessment year 1998-99) though the learned J.M. has given cogent reasons while coming to the conclusion that the Order passed by the learned CIT(A) is in accordance with the law, the learned A.M. has not touched upon the said issue. Thus, I agree with the view taken by the learned J.M. on both the issues. In my considered opinion, order passed by the learned CIT(A) deserves to be upheld and thus I agree with the view taken by the learned Judicial Member. In the light of the majority view, the order passed by the learned CIT(A) is upheld. In the result the appeals filed by the revenue are dismissed and cross objections filed by the assessee are also dismissed being infructuous. Issues involved:1. Deletion of addition on account of undervaluation of closing stock for assessment years 1998-99 and 1999-2000.2. Deletion of addition on account of enhancement of rates of sales effected for assessment year 1998-99.Issue 1: Deletion of addition on account of undervaluation of closing stockThe department objected to the deletion of additions made by the Assessing Officer (AO) on account of undervaluation of closing stock for the assessment years 1998-99 and 1999-2000. The AO had adopted a higher rate per square foot for valuing the closing stock, whereas the assessee had used a lower average rate based on historical sales data. The AO's valuation was based on the current year's rate of realization, while the assessee followed the percentage of completion method, which had been consistently applied and accepted in previous years.The CIT(A) found that the assessee's method of accounting was in accordance with Accounting Standard 7 (AS-7) issued by the Institute of Chartered Accountants of India. The CIT(A) noted that the method had been consistently followed and accepted by the department in earlier years. The CIT(A) also observed that the AO had not pointed out any defects in the books of account or the method of accounting followed by the assessee. The CIT(A) concluded that the AO was not justified in adopting a different rate for valuing the closing stock and deleted the additions made.The ITAT upheld the CIT(A)'s decision, agreeing that the method of accounting followed by the assessee was appropriate and had been consistently accepted by the department. The ITAT noted that the AO had not provided any material evidence to justify the change in the valuation method. The ITAT also highlighted that the project was completed in the assessment year 2000-01, and the assessee had declared a profit, which was accepted by the department.Issue 2: Deletion of addition on account of enhancement of rates of sales effected for assessment year 1998-99The department objected to the deletion of an addition made by the AO on account of enhancement of rates of sales effected during the assessment year 1998-99. The AO had enhanced the rates by 15% over the declared rate of booking based on an earlier agreement, resulting in an addition of Rs. 2,70,230.The CIT(A) deleted the addition, noting that the AO had not brought any material evidence to prove that the assessee sold the flats at a price higher than recorded in the books of account. The CIT(A) observed that the assessee had accepted the enhancement in rates for the assessment year 1996-97 under protest and that the current year's transactions were independent of the earlier year's transactions. The CIT(A) concluded that the AO's ad hoc addition was not justified without any material evidence.The ITAT upheld the CIT(A)'s decision, agreeing that the AO had not provided any material evidence to justify the enhancement in rates. The ITAT noted that the CIT(A) had provided detailed reasoning for deleting the addition, and the department had not controverted the findings of the CIT(A).Separate Judgment by the Accountant Member:The Accountant Member disagreed with the Judicial Member's decision to uphold the CIT(A)'s order. The Accountant Member argued that the issue of undervaluation of closing stock should be examined in light of the principles laid down by the Supreme Court in CIT v. British Paints India Ltd. The Accountant Member noted that the AO had found that the value of work-in-progress shown by the assessee was lower than the cost and expenses incurred. The Accountant Member suggested that the matter be remanded to the CIT(A) for a fresh decision after considering all relevant materials and the principles laid down by the Supreme Court.Third Member Decision:The Third Member was appointed to resolve the difference of opinion between the Judicial Member and the Accountant Member. The Third Member agreed with the Judicial Member's view that the CIT(A)'s order should be upheld. The Third Member noted that the assessee had consistently followed the percentage of completion method, which was an approved method of accounting. The Third Member also observed that the AO had not pointed out any defects in the books of account or the method of accounting followed by the assessee. The Third Member concluded that the CIT(A)'s order was in accordance with law and should be upheld.Final Decision:In light of the majority view, the ITAT upheld the order of the CIT(A). The appeals filed by the department were dismissed, and the cross objections filed by the assessee were also dismissed as infructuous.