Income Tax Appellate Tribunal - Pune
Ajit Chintaman Karve vs I.T.O. on 17 January, 2007
ORDER
Mukul Shrawat, Judicial Member
1. This is an appeal filed by the assessee directed against the order of CIT(A)-II, Pune dated 28.112002. Grounds have been concised and Learned iA.R. has stated that the only issue is in respect of an addition of Rs. 18,00,000/- which was alleged to be a declaration made by the assessee during the course of a survey action and in this regard, he has mainly pressed ground No. 1 and ground No. 4 of the concised grounds reproduced below:
1. In the facts and circumstances of the case and in law, the learned C.I.T.(A) has erred in mechanically confirming the addition of Rs. 18.00 lacs made by the learned Assessing Officer to the returned income of the appellant solely on the basis of declaration made by the appellant at the time of survey action carried on 18/03/1998 when the alleged declaration was retracted by the appellant for valid cogent and legal reasons by filing a revised return of income.
4. The learned C.I.T.(A) has failed to appreciate the fact that neither the survey party nor the learned Assessing Officer has brought on record an iota of evidence to show that the appellant had made any undisclosed investment in the W.I.P. Even there is no admission on the part of the appellant that he had made any such unrecorded investment. In the circumstances the impugned addition made solely on the basis of declaration of the appellant is devoid of any merit and hence deserves to be deleted.
2. Briefly stated, facts of the case were that the assessee is an 'Individual' and engaged in the business of construction and sale of flats. A survey was conducted Under Section 133A on 18.3.98. In the impugned order passed Under Section 143(3) dated 3.11.2000, it was noted by the A.O that a statement of the assessee was recorded and vide an answer to question No. 23, the assessee has declared Rs. 18 lacs in respect of a project namely Ajit Apartment II, which was stated to be near completion. Thereafter, a return of income was filed on 2.11.98 declaring total income of Rs. 19,99,390/-. The said declared income has consisted business profit of Rs. 343/-, charges for extra work of Rs. 2 lacs and additional value of work in progress of Rs. 18 lacs. Later on, the assessee has filed a revised return on 7.3.2000 wherein the said offer of Rs. 18 lacs was withdrawn and value of work-in-progress was reduced by the said sum. A note was annexed to the revised return wherein it was stated that the part of the stock was sold on 1st June 99 at an average rate of Rs. 1800/- and the tentative valuation of work-in-progress as agreed earlier was erroneous. The A.O has not accepted the said retraction and the reasons recorded were that during the course of survey operation, the assessee has declared on oath the additional net profit of Rs. 18 lacs. The said declaration was again confirmed by the assessee vide a confirmation on a stamp paper of Rs. 20/- dated 20th March 98. The A.O has also noted that this confirmation was duly witnessed by a Chartered Accountant. The assessee has also filed the original return declaring the said amount, so the A.O has concluded that the assessee was very well aware about the fact that he had invested Rs. 18 lacs in work-in-progress and should not have gone back by his own admission. After recording these reasons, the A.O has computed the income as declared in the original return. Being aggrieved, this issue was carried before the first appellate authority.
3. Before the first appellate authority, it was vehemently contended that during the Course of survey action, no incriminating material was found and the survey party had not observed any defect in the books of accounts. It was explained that the retraction was on account of the fact that the valuation as agreed upon by the assessee was only an imaginary figure and the part of the stock was sold subsequently at an average rate of Rs. 1800/-. Ld CIT(A) has called for a remand report from the A.O wherein the A.O has reiterated all those facts which were already stated in the assessment order and further remarked that the retraction was made after a said long period, hence the said retraction was an after-thought to evade the tax liability. Ld CIT(A) has thus concluded that the disclosure in the statement during the course of survey was made voluntarily by the assessee which was later confirmed on a stamped paper and further a final seal of acceptance was given by the assessee by filing a return wherein included the said offer and an additional income was declared. After the lapse of two years, a revised return was filed and in the opinion of Ld CIT(A), it was an after-thought. In his words, the assessee was the first judge to know about his affairs, therefore, admitted the additional income, hence the A.O was justified to assess the said income in the hands of the assessee. Being aggrieved, now the assessee is further in appeal.
4. From the side of the assessee, Ld. A.R. Mr. Sunil Ganoo appeared and opened his argument that in the absence of any incriminating material found even when the survey was conducted, the addition was unjustifiable merely on the basis of a statement made by the assessee when the revenue officers had carried on the survey operation. At the outset, the Ld. A.R. has drawn our attention on question No. 23 annexed in the compilation file and tried to clarify that the said offer was as per the suggestions of the revenue authorities , hence it was not a voluntary offer. Ld. A.R. has mentioned that in an answer to the question, the assessee has categorically pointed out before the revenue authorities that there was a difference between the sale price and the value of work-in-progress. So, it was stated by the assessee in his statement that in view of above, a declaration would be made of an additional net profit of Rs. 18 lacs. Ld. A.R. has stressed that this offer thus suggests that the same was made on an instigation and not a voluntary offer. Next, the Ld. A.R. has drawn our attention on a qualification of the Chartered Accountant made through a note below the Trading Account for the accounting period ended on 31st March 98, placed in the compilation on page 15 wherein it was certified that the recourse adopted by the assessee was devoid of any merit. The Chartered Accountant has further quantified that the offer of the assessee did not find any support either from principle of accountancy or legal position. It was mentioned to that extent that on the insistence of the assessee to keep his commitments to the Department, the said additional value of Rs. 18,00,000/- was declared. The note has mentioned about the recession and steep fall in the prices of real estate. The purpose of this reference of the note, as per Ld. A.R, was to establish that the declaration was subjective attached with certain qualifications or restrictions. Then, the A.R. has drawn our attention on the accounting policy adopted by the assessee in the past years. He has mentioned that all the indirect cost such as interest etc., were debited to the scheme which were under development. If there were more than one scheme under development, then interest other than indirect cost were apportioned to the various scheme. The value of each work-in-progress of a scheme is used to be worked out at the end of each year. The work-in-progress consisted of land price, direct expenses, and capitalized cost debited to this scheme. He has made a remark that it was not the case of the revenue that the value of the work-in-progress was alleged to be inflated by the assessee. On completion of a scheme, the profit or loss for such scheme is used to be arrived at by deducting the work-in-progress from the sale price on completion of the project. Ld. A.R. has tried to establish from the accounts of the assessee of the past years that it was always the cost price which was made basis for the valuation of the work-in-progress and not the market price. On page 40 of the compilation, there is an year-wise bifurcation of work-in-progress, according to which, as on 31-3-95, it was reflected in the books of accounts at Rs. 29.50 lacs, as on 31.3.96 at Rs. 35.40 lacs, as on 31.3.97 at Rs. 44.90 lacs and as on 31.3.98 at Rs. 70.68 lacs (the year under consideration). The A.R. has explained that year-wise, the proportionate expenditure was capitalized and added to the opening balance of the work-in-progress. For the year under consideration, the work-in-progress was Rs. 70.68 lacs and the same was enhanced by Rs. 18 lacs, and accordingly, the gross profit was computed to Rs. 26,99,234/- of Ajit Apartments - II site. Finally, he has also drawn our attention on an order of the assessee passed for A.Y. 2003-04 Under Section 143(3) dated 28.2.2006 wherein the returned loss was accepted as it was declared.
5. From the side of the revenue, Learned D.R. Mr. Anoop Kumar appeared and argued that the declaration made by the assessee and thereafter steps taken by him deserves to be taken into account. The revenue department has simply asked vide question No. 23 that whether the assessee wants to say anything else before conclusion of the survey. In reply the assessee has offered the said sum of Rs. 18 lacs. It was the offer of the assessee which was accepted by the Survey party and thereafter the survey proceedings were concluded. Thereupon a letter on a stamp paper of Rs. 20/- has also been submitted by the assessee before the concerned I.T.O, which was also witnessed by his Chartered Accountant, wherein it was declared that the said offer was suo moto and the letter was to be treated as an evidence of having accepted the said offer. Not only this, the assessee has confirmed in the said letter not to go back from his admission. Ld. D.R. has mentioned that the assessee has taken the next step of filing the income-tax return through which the aforesaid amount of Rs. 18,00,000/- was disclosed and accepted as value of the closing stock. A filing of return is a verification on oath about the contents and the income declared therein. The said conduct of the assessee thus proved that initially he was willing to offer Rs. 18,00,000/-, however, changed his mind and retracted his own admission. Ld. D.R. has further argued that the retraction was also not immediate but after a considerable delay. The impugned revised return was also filed belatedly. Hence, he has vehemently argued that such type of behaviour of a tax payer should not be encouraged and retraction should be dismissed. He has also made a passing remark that on the question of statement recorded during the survey operation that the revenue authorities were duly authorized to conduct the survey operation, hence empowered to take a Statement on oath, he has concluded.
6. We have heard the submissions of both the sides at length and carefully perused the orders of the authorities below in the light of the compilation filed and case laws cited. As per the observation made hereinabove, we have noted that admittedly no incriminating material was found during the course of survey operation. In the impugned assessment order, there is no observations that defects were noted in the books of accounts either at the time of survey or during the course of assessment proceedings. Once the survey party has visited the site, then in our opinion, it was proper and justifiable to ascertain the correct value of the cost of construction which was held as work-in- progress. The survey action was devoid of this exercise. A question was asked and the same was answered, reproduced verbatim as follows:
Q.23. Do you have anything else to say before we conclude the survey:
Ans.: The Ajit Apartment, 11 project is nearing completion and as pointed out by you during inspection/visit to site the building is almost completed and the sale price will be different than the WIP. Keeping this in view will declare an additional net profit of Rs. 18 lacs over and above the net profit of Rs. 343 as shown in tentative P &L a/c, i.e. in a nutshell Rs 20 lacs is being shown as profit/income during survey which includes Rs. 2 lacs on a/c. of additional facilities provided Rs. 18 lacs on files.
I have made the declaration voluntarily and without any coercion.
This offer as made by the assessee during the course of survey was the basis for the impugned addition now in question before us. The purpose of reproduction of the statement is to analyze the basis of the reasoning behind this declaration as well as the intention of the assessee. On reading of this answer, it appears that the survey party has inspected and visited the site and thereafter suggested that there would be a difference between the sale price and the work-in-progress. So, the assessee has answered that keeping in view the said situation, offering an additional net profit of Rs. 18,00,000/-. On one hand, this was the declaration but on the other hand, on carefully perusal of the impugned assessment order, we have noted that the A.O has not given any specific reason either in respect of alleged investment in work-in-progress or alleged possibility of not recording of the expenses incurred. Rather, from the tone and tenor of the entire assessment order, it appears that the A.O was not clear that under what ground he wanted to make the said addition. It is not clear from the assessment order that what was the sale price alleged to be different from the work-in-progress. It is also not clear that what was the basis of allegation of the additional value of work-in-progress on account of concealed investment or unrecorded expenses. Even when this issue was taken before the first appellate authority, the main reason of confirmation of the action of the A.O was an order of the respected co-ordinate bench in the case of Champion Constructions 5 ITD 495, but on reading, we have found the difference in the facts and the issues. It is true that an assessee is liable for taxation of the profit in respect of a project which is near to completion or major part of the project is completed but the computation of profit should be on a correct basis. The admitted position is that during the year under consideration, the assessee has not sold a single flat and this fact has not been denied by the revenue, hence it is not clear that on what basis the revenue Department has arrived at a conclusion that there was a difference in the value of work-in-progress on account of sale price. This is also not the case of the revenue that comparable sale instances were examined and on that basis it was suggested to the assessee to make a declaration on account of the value difference in work-in-progress. Merely on the basis of the possibility, as mentioned by the A.O, in our opinion, an addition is not warranted.
6.1 The settled law is that an assessee appreciates in its books of accounts the value of his stock-in-trade artificially, it is held as a unilateral transaction and since there could not be any sale of the stock at that point of time, hence the said artificial appreciation do not result into a profit. Further, the one thing that is essential is that there should be a definite method of valuation adopted which could be carried through from year to year. In case of any deviation, i.e. switch over from cost price to market price, an explanation and reasoning is essential to be recorded. There should be a cogent basis and neither the assessee nor the revenue be allowed to arbitrarily change the method of accounting as regards the basis for stock valuation. The amount at which long-term contract work-in-progress is stated in periodic financial statements should be cost plus any attributable profit, less any foreseeable losses and progress payments received and receivable. If, however, anticipated losses on individual contracts exceed cost incurred to date less progress payments received and receivable, such excesses should be shown separately as provisions. Then in the following passages reproduced from Chaturvedi & Pithisaria-s Income Tax Law, Fifth Edition, page 4993, one can find the method of valuation of long-term contracts as recognized in standard Works on Accountancy:
In business which involve the acceptance and completion of long-term contracts it is often appropriate to spread over the period of the contracts on a properly determined basis, the profits which are expected to be earned when the contracts are completed. This procedure takes up in each period during the performance of the contract a reasonable amount as representing the contribution of that period towards the eventual profit; it thus recognises to a prudent extent the value of the work done in each period and restricts the distortion which would result from bringing in the whole of the profit in the period of completion. The principles which determine whether an element of profit is to be included are:
(a) profit should not be included until it is reasonably clear from the state of the work that a profit will ultimately be earned; it is, therefore, inappropriate to include any profit element where at the balance-sheet date the contract has been in progress for a comparatively short time or to include an amount in excess of the profit element properly attributable to the work actually done;
(b) provision should be made for foreseeable losses and allowance should be made as far as practicable for penalties, guarantees and other contingencies;
(c) a clear basis for including a profit element should be established and adhered to consistently.
From the above discussion, we can safely arrive at a conclusion that in the instant case, since the assessee was regularly maintaining the books of accounts and valuing the work-in-progress on cost basis, then the revenue had no reason to arbitrarily adopt the market price basis for the valuation of their said work-in-progress in a particular accounting period.
6.2. The method of accounting cannot be substituted by the A.O merely because it is unsatisfactory. What is material for the purpose of Section 145 is the method should be such that the real income, profits and gains can be properly deduced there-from. If the method adopted does not afford a true picture of the profits, it could be rejected, but such rejection should be based on cogent evidence and would be done with caution. The power can be exercised by the A.O to choose the basis and manner of computation of income but he must exercise his discretion and judgment judicially and reasonably. This is the view expressed by the Hon'ble Apex Court in the case of Sanjeev Woolen Mills 279 ITR 434. Ld. A.R. has also touched the issue of legality of the statement recorded during the survey operation and argued that such a statement had no evidentiary value and in support, referred the decision in Paul Mathews & Sons 263 ITR 101 (Ker.) but we are not on this issue because, in view of the above discussion, whatever was the statement but an income has to be assessed as per law as well as per the accepted method of accounting as it was held in the case of CIT v. Mogul Line Ltd. 46 ITR 591 that what would determine the taxability is not whether the assessee has shown a particular item as a profit or loss in the accounting year, but whether the said item can be regarded either as a profit or loss under the provisions of I.T. Act and also has to be decided in accordance with the provisions of law.
6.3. Ld. A.R. has also discussed the law of estoppel and argued that an admission which is contrary on law do not create any estoppel against law. He has cited ITAT 'B' Bench, Pune decision in the case of M/s. Madan Developer, ITA No. 329/PN/03, A.Y. 1999-2000, order dated 24th March 2006 and the relevant portion from para 12 is reproduced below:
It is well settled that there could be no estoppel against statute. Estoppel is not a base of liability to assessment under the Income-tax Act, and, therefore, the assessment of a person for an amount of income to which he is stranger cannot be based on the ground that he himself wanted to be assessed on it. This is so because no amount of admission contrary on law can create any estoppel against law. In this sense of the term, we may say that if a particular income is not taxable under the Income-tax Act, it cannot be taxed on the basis of estoppel or any other equitable doctrine. A mistaken view of a statutory provision does not estop the AO or the assessee from taking a correct view. There can be no estoppel on a pure question of law. In short, we may say that it is an established position of law that there is no estoppel by conduct against law, not is there any waiver of the legal right. It is always open to take the plea that the figure, though shown in his return of total income, is not taxable in law. In the light of the said proposition of law, we hold that the assessment of total income of the assessee is required to be made as per the provisions of law contained in the Income-tax Act.
The view expressed by the respected co-ordinate bench is a correct position of law and to be applied in the instant appeal as well. Merely because an offer was made having no cogent basis or an approval of law should not estop a tax payer to correct his mistake. Rather, it is a duty of the revenue department to tax the legitimate amount from a tax payer. This is what exactly directed by CBDT in a very old administrative instructions: for guidance but the Income-tax Officer on matters pertaining to assessment vide circular No. 14(XL-35), dated 11-4-1955
7. Next is the question of issue of retraction whether permissible after a long gap. Ld. A.R. has advanced few arguments and also given certain reasons, which according to us, are not convincing and dismissed. Naturally, if the assessee wanted to retract his earlier statement, then he should have reacted within a reasonable time. Such a long gap or the time taken by the assessee cannot be approved especially when the reasons given for this inordinate delay were not convincing.
7.1. Ld. A.R. has placed one more evidence on record i.e. an assessment for A.Y. 2003-04 passed Under Section 143(3) dated 28.2.2006 wherein the returned loss of Rs. -63,85,038/- was accepted by the revenue department. For two reasons, he has cited this assessment order, first, there was recession in the real estate business in the subsequent years, hence there was no likelihood expected hypothetical income in future, hence erroneously suggested to assessee to make the alleged offer and, second, the accounting effect of enhanced work-in-progress further increases the loss, hence no evasion of tax. We find force in this argument and express our view that the alleged declaration if at all made in the expectation of future profits, then the same was a premature step, so cannot be approved.
8. In the light of above discussion, the main ground of the assessee pertaining to confirmation of an addition of Rs. 18,00,000/- is hereby allowed and rest of the grounds are decided pro-tanto.
9. In the result, the appeal is allowed.