TaxTMI 
TaxTMI 
2012 (8) TMI 120
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....cer observed that books of account comprising of cash book, ledger, journal and vouchers for expenses produced and test checked by her. She (A.O.) observed that as per audit report point no. 28(a), auditor has commented that quantitative details traded not maintained by the assessee, hence, creditors were unable to report the same. Assessing Officer further stated that the assessee has filed the detail of closing stock of flats, vacant quarter shops & vacant plots on 1.12.08 but basis of valuation of stock was not given. Again vide order sheet entry dated 11.12.08 and 15.12.08 assessee was asked to file basis of valuation of closing stock and work in progress. Vide reply dated 15.12.08 assessee has submitted that the assessing authority has valued its closing stock at cost price. The assessee has not maintained day to day quantitative details of plots and other properties sold during the year. However, at the end of every financial year, based upon lay out of the various scheme, inventory of unsold stock was prepared by the estate officers of the authority and thereafter its valuation at cost price method is made. No basis of valuation of closing stock was given by the assessee. ....
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.... by Ld. Tax Auditors was not worked out at its end and the same was computed by its Tax Auditors only. Again vide reply dated 19.12.08 it has further submitted that:- "Assessee is a Statutory Authority established on 13.05.1977, under Notification No. 1688-XXXII-77 issued by the Government of Madhya Pradesh, under sub-section (1) of section 38 of the 'Madhya Pradesh Nagar Tatha Gram Nivesh Adhiniyam, 1973 '. Its entire income was exempted under clause (20) of section 10 of the Income Tax Act, 1961 up till A. Y 2002-03. Since, the assessee Authority was a Government Authority and therefore it could not maintain its books of account strictly in accordance with the accounting principles at which private commercial organizations are required to maintain. " After coming into the ambit of provisions of Income Tax Act, 1961 w.e.f. A. Y. 2003-04, the assessee Authority has been constantly making its best efforts to improve its system of accounting year after year. It would be pertinent to note that after amendment in sub-: section (1) of section 145 of the Income Tax Act, 1961 the assessee Authority was required to compute its income by employing either Cash System of accountin....
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....Tax Act, 1961. 2a). That, on the facts and under the circumstances of the case, the learned CIT(A) erred in confirming huge additions of Rs. 16,00,92,318/- in the appellant's income merely on the basis of a comment of the Auditors without giving any independent finding, working or basis for alleged under statement of net profit by the appellant. b) That, without prejudice to the above, the learned CIT(A) grossly erred, in confirming the impugned addition, despite the fact that the Assessing Officer was satisfied with the bonafideness of the appellant for changing its method of accounting from that of' Hybrid System' to 'Mercantile System' of accounting. c) That, without prejudice to the above, the learned CIT(A) grossly erred, in confirming the impugned addition of Rs.16,00,92,318/- in the appellant's income merely on the basis of the comments of the Auditors on its Financial Statements, for the relevant previous year despite the fact that the learned AO herself had rejected the books of account of the appellant by invoking provisions of section 145(3) of the Income-Tax Act, 1961. 3. That, on the facts and under the circumstances of the case, the learned CIT(A) grossly ....
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....ting books of account audited by a firm of qualified Chartered Accountants, the appellant Authority was also getting all its transactions pre-vouched and pre-audited by a team of Government Auditors on day to day and transaction to transaction basis. All the transactions of the appellant Authority were under the close vigil and supervision of the Government Auditors. Thus any possibility of under statement/over statement of any income/expenditure was completely ruled out. ALL THE BOOKS OF ACCOUNT WERE PRODUCED BEFORE THE AO [PB Page No. 58 and Page No.1 and para 2 of Page No.3 of AO's Order] V. That, all the books of account, registers, bills, vouchers, bank statements etc. maintained by the appellant Authority were duly produced by the appellant before the learned Assessing Officer during the course of assessment proceedings. The appellant had also produced property records maintained by it in support of closing stock shown in the financial statements. Kindly refer submission letter dated 18-12-2008 made before the learned AO [PB Page No. 58]. Such fact is also evidenced from the comments of the learned Assessing Officer herself in para (2) at page No.1 and para (2) of page ....
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....shown better trading results in comparison to that of earlier years. A copy of such comparative statement is placed at Page No. 68 to 70 of the Paper Book. APPELLANT SHOWN BETTER TRADING RESULTS AND NET PROFIT IN COMPARISON TO EARLIER YEAR ~ Page Nos. 68 to 70] X. On a perusal of the comparative statement, it shall be observed by Your Honours that for the year under consideration, the appellant had shown positive gross profit of Rs. 57,32,910/- in comparison to negative gross profit i.e. gross loss of Rs. 1,41,30,803/- and Rs. 9,06,09,817/-, respectively for A.Y. 2005-06 and A.Y. 2004-05. Likewise, the appellant had shown an increased amount of net profit both in absolute and percentile terms. NO DEFECT IN MAINTENANCE OF BOOKS OR THE METHOD OF ACCOUNTING WAS NOTICED BY THE AO XI. That, the learned Assessing Officer had not found any defect in the books of account maintained by the appellant. The learned Assessing Officer had also not found any discrepancy in the tally of closing stock submitted by the appellant. The learned Assessing Officer had not disputed the fact that during the relevant previous year, the appellant Authority had observed Mercantile System of accoun....
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....property registers produced before her during the course of the assessment proceedings. Further, the details regarding the basis of valuation of the closing inventory being' At Cost' was also furnished before the learned AO. The grounds taken by the authorities below for invoking the provisions of section 145(3) are only hovering around the facts that the appellant could not furnish the working of closing inventory and also could not furnish project-wise income and expenditure account. It is submitted that besides furnishing the complete details of closing stock in terms of quantity as well as value, the appellant had also furnished similar details in respect of the opening stock. Besides, the appellant had also furnished all the details and documents in connection with the expenditure incurred by it on land acquisition, land development and construction. It shall be pertinent to note that most of the properties lying in the closing inventory were brought forward by the appellant from earlier years and on the basis of the valuation of the opening inventory, the basis and correctness of the valuation of closing inventory could have been adjudged by the learned AO. Further, from the ....
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....S OF ACCOUNT [kindly refer PB Page No. 63 to 65] XVI. It is submitted that during the course of assessment proceedings, the appellant vide its counsel's letter dated 20-12- 2008, had offered its detailed explanation before the learned Assessing Officer by strongly objecting rejection of books of account. A copy of such explanation is being placed at Page No. 63 to 65 of our Paper Book. Despite such elaborative explanation with documentary evidences, the learned Assessing Officer merely on extraneous considerations, rejected the books of account of the appellant by invoking provisions of section 145(3) of the Act. The learned AO has not brought on record any single instance in respect of undervaluation of any of the properties shown by the appellant in its inventory tally. RULING OF CIT vs. BRITISH PAINTS (I) LTD. 188 ITR 44 (SC) IS NOT APPLICABLE ~IN THE APPELLANT'S CASE XVII. It is submitted that both the authorities below have heavily placed reliance on the judicial pronouncement of Hon'ble Supreme Court in the case of CIT vs. British Paints India Ltd. 188 ITR 44 (SC) without appreciating that the facts of the above cited case and that of the appellant are clearly distin....
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....rized Representative was as under :- QUANTITATIVE DETAILS OF CLOSING STOCK WAS DULY FURNISHED [PB Page No. 66, 66A and 67] I. During the course of assessment proceedings, the appellant authority through its counsel's letter dated 01-12-2008 had furnished quantitative details of closing stock of its finished properties along with valuation thereof. The appellant had furnished two separate statements for its closing stock of developed properties. One statement was in respect of valuation of vacant land and plots and other statement was in respect of flats and quarters. Likewise, the appellant, vide letter dated 19-12-2008 had furnished a statement showing details of scheme-wise work-inprogress of Rs. 18,85,61,360/-as shown in the Balance-Sheet. A copy of all such statements are placed at Page No. 66, 66-A & 67 of our compilation. Such statements have also been made a part of the Order, by the learned CIT(A). ALL THE BOOKS OF ACCOUNTS ALONG WITH THE VOUCHERS AND REGISTERS WERE DULY PRODUCED PROPERTY REGISTERS WERE ALSO PRODUCED [ Page No.58] - NO DISCREPENCY IN THE PROPERTY REGISTERS OR BOOKS FOUND II. That, during the course of assessment proceedings, the appellant had pr....
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....S WERE VALUED AT STOCK AND MOST OF THE PROPERTIES IN THE CLOSING STOCK WERE ALSO LYING IN THE OPENING STOCK [kindly refer PB Page No.71 and 66 & 72 and 66A] - THE RATE OF VALUATION WAS ALSO AT PAR WITH THE RATE OF OPENING VALUATION. IV. After arriving at the quantity of the properties held in stock at the end of the relevant previous year, the appellant had made valuation thereof on the basis of 'At Cost' method which had consistently been observed for the last many years. It shall be pertinent to note that most of the properties held by the appellant as closing stock were also forming part of its opening stock. On a perusal of the details opening stock of plots as placed at Page No. 71 of the compilation and its comparison with the closing stock of plots as placed at Page No. 66 of the compilation, it shall be observed by Your Honours that as on 0104- 2005, the appellant was having total 2015 Nos. of plots, divided into 28 categories whereas as on 31-03-2006 it was having 1485 Nos. of plots of almost the same categories. Due to sales during the financial year 2005-06, the number of plots in closing stock got reduced from 2015 to 1485. It shall further be observed by Your Honour....
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....0/- in the total income of the appellant. ADDITION MADE MERELY FOR THE REASON THAT THE PROJECT - WISE INCOME & EXPENDITURE ACCOUNT WAS NOT MAINTAINED VI. Your Honours, despite furnishing the details of opening and closing stock along with valuation thereof, which in its turn were duly supported by the property registers maintained by the appellant, the ld. Assessing Officer has chosen to make estimation of valuation of closing stock merely on guess work, surmises and conjectures. The learned AO has made the estimation merely for the reason that the appellant had not maintained Project-wise Income and Expenditure Account and a Consolidated Stock Register. During the course of assessment proceedings, it was explained to the learned AO that the appellant is a statutory authority and it is not carrying on its activities on commercial concepts. It was also explained that the appellant Authority is a successor of erstwhile Improvement Trust and there are many schemes which have been launched by it in last 30 years. The appellant Authority does not depute its man force on project to project basis and, further, there are many common expenditure which are required to be incurred for a....
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....rning authority in a reasonable and judicious manner. NON-MAINTENANCE . OF CONSOLIDATED STOCK REGISTER CANNOT BE A BASIS FOR HIGHER VALUATION WHEN THE ASSESSEE MAINTAINED SCHEME-WISE SEPARATE PROPERTY REGISTERS X. That, although, the appellant Authority has maintained separate property registered in respect of each of the schemes implemented by it but it could not maintain any consolidated stock register, as required by the learned AO. However, this deficiency alone can not be a sale for disturbing the trading results and making wild guess work. We wish to place reliance on the following judicial pronouncements: i) M Durai Raj vs. CIT (1972) 83 ITR 484 (Ker) ii) S. Veeriah Reddiar vs. CIT (1960) 38 ITR 152 (Ker) iii) DCIT vs. Gajanan Traders (2006) 104 TTJ (Bang) 1030 iv) Vishal Infrastructure Ltd. vs. ACIT (2007) 107 TTJ (Hyd) 484 v) ITO v. Refugee Harijan Labour Co-op. Society (1980) 10 TTJ (Born) 454 vi) Delhi Securities Printers vs. DCIT (2007) 15 SOT 353 (Mum) vii) 1 TTJ (Del) 435 viii) 21 TTJ 216 ix) (2005) 3 SOT 803 (Bang) x) 54 TTJ 335 xi) 67 TTJ 434 xii) 72 TTJ 169 xiv) 7 TTJ 419 WITHOUT ASSIGNING ANY REASON OR DISCLOSING THE BA....
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....3/-respectively for A.Y. 2005-06 and A.Y. 2004-05. SINCE BETTER MARGIN OF PROFIT WAS SHOWN, THERE WAS NO SCOPE FOR FURTHER ENHANCEMENT XIII. It is, therefore, submitted that since the appellant Authority itself has shown better margin of profit on sale of its properties coupled with disclosure of higher amount of net profit and therefore there was no reason for learned Assessing Officer to make further additions and that too without assigning any cogent reason for the same. REJECTION OF BOOKS OF ACCOUNT DOES NOT AUTOMATICALLY GIVE A LICENSE TO AO TO MAKE ADDITIONS IN EVERY CASE - RULING OF RAJASTHAN HIGH COURT IN CASE OF GOT AN LIME KHANIJ UDYOG [256 ITR 243} XIV. Without prejudice to the our submissions that the rejection of books of account by the AO, under s. 145(3) itself was unjustified and unwarranted, it is further submitted that even if the rejection of books of .account of the appellant are held to be justified, than the learned AO was no justified in disturbing the trading results. The learned CIT(A)'s finding to the effect that whenever books of account are rejected a new estimation of trading results declared by the assessee is required to be made is not leg....
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....o 2% and the addition was directed to be made on the value declared by the appellant in its books of account and not on the adjusted value of closing stock by giving effect to the increase in the opening stock of earlier year. Likewise, this Hon'ble Bench has upheld the addition in WIP for A.Y. 2005-06 at 6.63% only of the value shown by the appellant in its audited books of account. Since, for the assessment year under consideration, the appellant had shown better trading results, the learned CIT(A) ought to have either deleted the entire addition or at the most, it should have been restricted in accordance with the findings of this Hon'ble Bench in the appellant's case for earlier years, as demonstrated above in the table. In view of the above facts and circumstances of the case, the addition so made by the learned Assessing Officer by enhancing the value of closing stock, by rejecting the books of account of the appellant, may kindly be deleted in toto. In this context, without going into the merits of the AO's action and CIT(A)'s action in making and maintaining addition of Rs.16,OO,92,318/ - merely on the basis of auditors comment, for which detailed submission have been....
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....ven by the same tax auditors at some other part of the same report for the purpose of making the impugned additions. It is submitted that even the learned CIT(A) has upheld the addition merely on the basis of the comments of the auditors and it is not case of the revenue that except having the remark of the auditors, any other material was in possession of the revenue to justify the impugned addition. HAVING MADE THE ADDITION IN TRADING RESULTS, AGAIN MAKING THE ADDITION ON THE BASIS OF AUDITORS' REPORT WAS NOT JUSTIFIED - THE CIT(A) ALSO MADE THE AUDITORS' REMARK AS ONLY BASIS FOR JUSTIFYING THE AO's ACTION VII. It is further submitted that the learned AO after rejecting the books of account has made the huge addition of Rs. 5,26,58,640/-, by exercising her estimation, in the appellant's income on account of valuation of closing stock and therefore, again making the huge addition of over Rs.16 Crore, under the garb of impact of change in the method of accounting, was not at all justified or warranted. It is submitted that after rejecting the books of account, the method of accounting adopted by the appellant during the relevant previous year also became quite irrelevant and ....
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....est that the appellant Authority was also required to employ either mercantile or cash system of accounting and it was precluded from observing hybrid system of accounting. It is submitted that even this Hon'ble Bench in the appellant's own case, while deciding the appeal for A.Y. 2003-04 has, at Para 15 [Kindly refer PB Page No. 92], held that there was no justification to adopt the hybrid system of accounting in contravention of provision of s. 145 of the Income-Tax Act, 1961. Keeping in view the requirement of the law, the appellant Authority has maintained its books of accounts for the year under consideration purely on mercantile basis and, therefore, no fault can be found in the appellant's action in its changing the method of accounting. It is submitted that from A.Y. 2006-07 onwards, the appellant authority is consistently observing the changed method of accounting i.e. 'Mercantile' which proves the bonafideness of the change so made. AN ASSESSEE IS ENTITLED TO CHANGE THE METHOD OF ACCOUNTING III. It is submitted that it is a settled law that an assessee is entitled to change the method of accounting regularly employed by him. [CIT vs. Eastern Bengal Jute Trading C....
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....ellant Authority could not be able to get any basis for the comment so made by the Tax Auditors in his report. Even, during the course of the appellate proceedings, an effort was made by the appellant as well as by the learned CIT(A) for getting the working of the impact of change in the method of accounting from the tax auditors but no positive result could be derived. In such a situation, the appellant could not be blamed with. It is submitted that it was only revenue and not the appellant which was placing reliance on the comment of the tax auditors and therefore no onus was lying upon the appellant to extract the working or basis of comment from the tax auditors, as erroneously held by the learned CIT(A). THE AO DID NOT APPLY HER OWN MIND AND DID NOT PROBE INTO THE BOOKS OF ACCOUNT FOR ARRIVING AT THE IMPACT OF THE CHANGE VII. It shall be appreciated by Your Honours that the learned AD has not applied her own mind on the comment of the Tax Auditors. She has not made any independent enquiry. She has also not probed into the books of accounts and other records of the appellant which were produced before her, during the course of assessment proceedings, for verifying the ver....
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....f power under s. 145 for computation of income by adopting such other basis as determined by him. The ITO's power under this proviso to choose the basis and manner of computation of income is not an arbitrary power to assess the income, but he must exercise his direction .and judgment judicially. He cannot base the computation solely on the basis of the statutory auditor's report to the directors of the assessee-company. The ITO, after discarding the assessee's changed method of accounting, has mechanically added a sum of Rs.10,56,746/- as per the auditor's report to the income returned, without adopting any method or disclosing any valid basis for such additions." (emphasis supplied) AN ASSESSEE CAN CLAIM THAT THE AUDITORS' OPINION WAS NOT WELL FOUNDED OR LEGALLY CORRECT - RULING OF THE HON'BLE RAJASTHAN HIGH COURT IX. The Hon'ble High Court of Rajasthan in the case of Rajkot Engineering Association vs. Union of India (1986) 162 ITR 28 (Raj) has held that since it is ultimately the ITO who has to decide about the taxability of the income and admissibility of the expenses, the auditor's report or certificate even if prejudicial to the assessee cannot preclude him from plea....
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....ly for A.Y. 2005-06 and A.Y. 2004-05. Even on comparison of the expenses, it shall be observed by Your Honours that except an increase in the Repairs & Maintenance Expenses and Government Audit Fees, there was no substantial increase in the expenses claimed by the appellant. It is submitted that liabilities for repairing expenses and government audit fees got accrued during the relevant previous year only and therefore, it has no bearing on the impact of change of the method, as reported by the auditors. IF ADDITION MADE BY THE AO IS UPHELD, IT WOULD RESULT IN ABSURD WORKING OF NET PROFIT XII. At last, it is submitted that the appellant Authority has shown the total revenue of Rs.66.79 Crores from sales premium, rental income, interest income and other income and against such gross revenue of Rs.66.79 Crores, the learned AO has made the assessment at an income of Rs.22.57 Crores which works out to be 33.79% of the total revenue which cannot, by any stretch of imagination, be held to be justified considering the fact that in the appellant's case no instance of suppression of any income or over statement of any expenses was brought on record. XIII. In view of the above fa....
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....sing Officer, the assessee was unable to file the project-wise details, profit and loss account, closing stock details. Even details of sales effected during the year, cost of acquisition, details of improvement could not be furnished. As the assessee has failed to furnish basis of valuation of closing stock and work in progress, the Assessing Officer was justified in rejecting the book result u/s 145(3). The Assessing Officer prepared a detailed chart of opening and closing stock in respect of vacant plots, flats, shops etc., duly incorporating the additions in last year's assessment. The Assessing Officer has thus worked out total addition of Rs. 5,26,58,640/- on account of closing stock and work in progress as per the chart given at page 8 of Assessing Officer's order. The detailed findings recorded by the Assessing Officer and CIT(A) in this regard has not been controverted by ld. Authorized Representative by bringing any positive material on record. Accordingly, we confirm the action of the Assessing Officer for making addition on account of valuation of closing stock and work in progress. We direct the Assessing Officer to give credit for the enhanced value of closing stoc....
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.... determines for deducing the correct profits and gains. In this case, the ITO did not accept the changed method of accounting of the assessee merely on the basis of the objections taken by the statutory auditor. Not accepting the assessee's changed method of valuation, the ITO had merely taken the figure of the statutory auditor on the assumption that the assessee corporation, while changing the method of valuation of the closing stock, has not, in the same manner, changed the valuation of the opening stock. The said action of the Income-tax Officer cannot be held to be in exercise of his power under s. 145. The ITO not having accepted the assessee's changed method of accounting, has not resorted to the exercise of power under s. 145 for computation of income by adopting such other basis as determined by him. The ITO's power under this proviso to choose the basis and manner of computation of income is not an arbitrary power to assess the income, but he must exercise his direction .and judgment judicially. He cannot base the computation solely on the basis of the statutory auditor's report to the directors of the assessee-company. The ITO, after discarding the assessee's changed met....