Income Tax Appellate Tribunal - Indore
Indore Development Authority, Indore vs Assessee on 23 May, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL,
INDORE BENCH, INDORE
BEFORE SHRI JOGINDER SINGH, J.M. AND SHRI R.C.SHARMA, A.M.
PAN NO. : AAAJI0103J
I.T.A.No. 73/Ind/2012
A.Y. : 2006-07
Indore Development Addl. CIT,
Authority, Range 5,
Indore Indore
vs
Appellant Respondent
Appellant by : Shri Anil Kamal Garg, CA
Respondent by : Shri Darshan Singh, CIT DR
Date of Hearing : 23.05.2012
Date of : 19.06.2012
pronouncement
ORDER
PER R. C. SHARMA, A.M.
This is an appeal filed by the assessee against the order of CIT(A) dated 21.11.2011 for the assessment year 2006-07 in the matter of order passed u/s 143(3) of the Income-tax Act, 1961.
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2. Rival contentions have been heard and records perused. Facts in brief are that the assessee is Indore Development Authority engaged in implementing the development plan, preparing town development schemes and acquisition & development of land for the purpose of expansion and improvement of authorized area.
3. During the course of scrutiny assessment, the Assessing Officer observed that in compliance to the notice issued u/s 143(2), Shri Anil Kamal Garg, C.A. & Mr. H. K. Jhureley, Accounts Officer appeared before him. The Assessing Officer 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 2
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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.
4. By observing that the assessee has not furnished any basis of valuation of closing stock and estimation of work in progress an addition of Rs. 5,26,58,640/- was made by the Assessing Officer after rejecting the book results u/s 145(3) of the Act.
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5. In respect of method of accounting, the Assessing Officer observed that in the audit report point no.11(a) auditor has mentioned that method of accounting in the previous year was mercantile system of accounting . There was change in accounting system during the year. Earlier the cash basis of accounting were employed however sales and interest income on FDRs were accounted for on accrual basis. In the previous year 2005-06, the mercantile system of accounting were adopted and all the major income and expenses were accounted for on accrual basis. Assessing Officer observed that due to said change the net profit of the assessee have been reduced by Rs.
16,00,92,318/-. Vide questionnaire dated 7.08.08 assessee was asked to justify the change in method of accounting due to said change net profit have been reduced. It was further asked to explain the purpose of changing the method of accounting. Assessee vide its written submission dated 15.12.08 stated that :-
"Madam in the clause 11 (6) of the audit report in form 4
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no. 3CD obtained by the assessee Authority under section 44AB of the Income Tax Act, 1961 previous tax auditors of the assessee Authority have stated that there had been a change in the method of accounting employed by the assessee vis-a-vis the method employed in the immediately preceding previous year. Further at clause 11 (c) of the same report the Ld. Tax Auditors have stated that due to said change the net profit of the assessee have been reduced by Rs. 16,00,92,318/-. "
Now, before embarking upon the above stated comments of the Ld. Tax Auditors, it is submitted that the assessee is a statutory Authority constituted under an enactment of Government of Madhya Pradesh and it is functioning entirely under the supervision of the state government. The assessee Authority while preparing its financial statements under double entry system is dependent upon the services and advices of its Chartered Accountants. It by itself is not equipped with the service of in house expert and 5
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technically qualified accountants and therefore the impact of change in the method of accounting as reported 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- 6
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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 accounting or Mercantile System of accounting.
In order to comply with the statutory requirements of the Income Tax Act, 1961, only, the assessee Authority was compelled to change its method of accounting from that adopted by it in earlier years. Accordingly, for the previous year under review, the assessee Authority has adopted Mercantile System of accounting both in respect of its income and expenditure. Such change in the method has consistently been observed by the .assessee Authority in the subsequent years too. It shall thus be appreciated by your good self that the sole purpose for bringing change in the method of accounting was to strictly comply with provisions of section 145 of the Income Tax Act, 1961. Since, the change in the method was bona fide and therefore it has to be regarded as justified irrespective of its result.
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6. The Assessing Officer did not accept the assessee's contention and after observing that assessee was following cash system of accounting in previous year and only sales and interest income from FDRs were being booked on accrual basis as per audit report. Accordingly, he made an addition of Rs.
16,00,92,318/- to the taxable income of the assessee.
7. By observing that the assessee failed to produce any fixed assets register therefore existence of assets and utilization thereof in relevant previous year before assessment year 2003-04 is not verifiable. The claim of depreciation was therefore, held to be not allowable as claimed by the assessee. The Assessing Officer, thus, disallowed assessee's claim of depreciation of Rs. 22,29,485/-.
8. By the impugned order, the ld. CIT(A) confirmed the addition against which the assessee is in further appeal before us. Following grounds have been taken by the assessee :-
1a). That, on the facts and under the circumstances of the case, the learned CIT(A) grossly erred in confirming ad- 8
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hoc addition of Rs. 3,01,64,000/-, made by AO, in the appellant's income on account of Value of Closing Stock of Vacant Lands, Flats, Shops and Quarters by invoking provisions of section 145(3) of the Income Tax Act, 1961.
b) That, on the facts and under the circumstances of the case, the learned CIT(A) erred in confirming ad-hoc addition of Rs. 2,24,94,640/-, made by AO, in the appellant's income on account of Value of Closing Work-
In-Progress by invoking provisions of section 145(3) of the Income-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, 9
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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 erred in confirming disallowance of Rs.22,29,485/- made by the learned Assessing Officer, out of depreciation claimed by the appellant.
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9. Shri Anil Kumar Garg, C. A. appeared on behalf of the assessee and made following submissions on the issue of rejection of books of account :-
REGULAR BOOKS MAINTAINED I. That, the appellant Authority has maintained regular books of account in the ordinary course of carrying on its activities in which all the transactions relating to income and expenses such as income from sales, interest income, lease rent income, land acquisition expenses, land development expenses and other expenses have been fully and truly recorded.
BOOKS WERE AUDITED BY QUALIFIED CHARTERED ACCOUNTANTS [Relevant Paper Book Page No.4 to 17] II. That, the books of account of the appellant Authority were subjected to audit by an independent firm of qualified Chartered Accountants duly appointed under the provisions of section 44AB of the Income-Tax Act, 1961. The appellant Authority had obtained an 11
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Audit Report from such Auditors in the prescribed Form No. 3CB & 3CD, which were duly placed on the record of the learned Assessing Officer [kindly refer PB Page No.4 to 17 of the compilation NO DISCREPENCIES IN BOOKS FOUND BY THE TAX AUDITORS ONLY A REMARK ON THE IMPACT OF CHANGE IN THE METHOD GIVEN [PB Page No.4 & 6] II. That, the Auditors conducting the audit, as aforesaid, had not found any discrepancy in the books of account regularly maintained by the appellant Authority. The Auditors, in their main report given in Form No.3CB [kindly refer PB Page No.4], have clearly and without any qualification reported that (i) proper books of account, as required by law, have been kept by the assessee; and (ii) in the opinion of the Auditors and to the best of information and explanations given to the Auditors, the financial statements exhibit a true and fair view. It is submitted that the Auditors except giving a remark in clause lI(c) of the Audit Report in Form No. 3CD [kindly refer PB page No.6], as regard to impact of change in the accounting method (with which too the appellant Authority do not concur), has not found any short coming either in the recording of transactions 12
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or in valuation of closing stock by the appellant Authority. BOOKS WERE ALSO SUBJECTED TO GOVERNMENT AUDIT ON TRANSACTION TO TRANSACTION BASIS IV. That, besides getting 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 13
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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 No.3 of the body of the Assessment Order.
QUANTITATIVE DETAILS OF INVENTORIES ALONG I WITH VALUATION WERE FURNISHED BEFORE THE AO IPB Page Nos. 48 to 50 and Page Nos. 59 to 62] VI. That, during the course of assessment proceedings, the appellant Authority had also furnished details of closing inventory both in respect of developed properties and work-in-progress along with valuation thereof. Kindly refer submission letter dated 01-12-2008 [PB Page No. 48 to 50] and letter dated 19-12-2008 [PB Page No. 59 to 62]. A copy of such inventories, which have also been made a part of the order by the learned CIT(A), are placed at Page No. 66, 66A & 67 of our compilation.
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COPIES AND DETAILS OF ALMOST ALL THE GENERAL LEDGER ACCOUNTS WERE ALSO PRODUCED BEFORE THE AO [PB Page Nos. 47« 49 and 50] "
VII That, during the course of assessment proceedings, the appellant Authority had produced copy of account of almost all the general ledger accounts before the learned Assessing Officer. The appellant had, inter alia produced details of sales premium [Kindly refer to PB Page No.4 7], details of land acquisition expenses, details of land development expenses and details of construction expenses [Kindly refer to PB Page No. 49 & 50].
PROPERTY REGISTERS CONTAINING QUANTITATIVE DETAILS OF INVENTORIES WERE ALSO PRODUCED AND AO FOUND NO DISCREPENCY [Please refer Para 2 at page No.3 of the AO's order] VIII. That, during the course of assessment proceedings, the appellant had also produced property registers in support of quantitative details of vacant plots and constructed properties held by it in various schemes, before the learned Assessing Officer. The learned Assessing Officer duly verified such registers and got the closing inventory shown by such registers tallied with the same shown by the appellant in its list of closing inventory [Kindly refer para (2) and (3) of the 15
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Assessment Order]. It shall be worthwhile to note that the learned Assessing Officer did not find any discrepancy in the quantity of the closing inventory as furnished by the appellant during the course of assessment proceedings. COMPARATIVE DETAILS OF TRADING ACCOUNT AND EXPENSES WERE FURNISHED [PB Page Nos. 68 to 70] IX. That, during the course of assessment proceedings, the appellant had furnished a comparative statement of gross profit and it was established that the appellant had 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/-, 16
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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 accounting by employing applicable Accounting Standards. It shall be appreciated by Your Honours that no where in the body of the Assessment Order, the learned Assessing Officer has given any finding to the effect that books of account of the appellant were either not correct or complete or the appellant had not followed one of the recognized methods of accounting.
CHANGE IN THE METHOD WAS MADE FOR MEETING THE STATUTORY REQUIREMENT OF SECTION 145(1) OF THE ACT AND, FURTHER, SUCH CHANGE WAS BONAFIDE 17
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XII. As regard change in the method of accounting effected during the relevant previous year, it shall be appreciated by Your Honours that change in the method of accounting from Hybrid to Mercantile was bonafide and the same was purported only to bring the method in consonance with the statutory requirement of sub-section (1) of section 145 of the Act.
GENUINE INABILITY OF THE APPELLANT TO FURNISH PROJECT - WISE INCOME & EXPENDITURE OR CONSOLIDATED STOCK REGISTER COULD NOT BE A BASIS FOR REJECTION OF BOOKS OF ACCOUNT XIII. It is submitted that, merely for genuine inability of the appellant to furnish details of project-wise income & expenditure and a consolidated stock register, the books of account of the appellant should not have been rejected by the learned AO by invoking provisions of sub-section (3) of section 145 of the Act. It has been judicially pronounced by various authorities that non-maintenance of closing stock could not be a sole and valid reason for rejection of books of account. Reliance is placed on following 18
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judicial pronouncements:
i) Ashoke Refractories (P) Ltd, vs. CIT (2005) 279 ITR 457 (Cal)
ii) Pandit Bros. vs. CIT (1954) 26ITR 159 (Punj)
iii) ITO vs. Prakashchand (2006) 100 TTJ (Jd) 639
iv) Vishal Infrastructure Ltd. vs. A CIT (2007) 107 TTJ (Hyd) 484 FROM THE DETAILS OF OPENING INVENTORY, EXPENSES INCURRED DURING THE YEAR, THE CORRECTNESS OF VALUATION OF CLOSING STOCK COULD HAVE BEEN CHECKED BY THE AO XIV. Your Honours, in the instant case, it is not the case of the revenue that the appellant did not incorporate closing inventories in its books of account. It is also not the case of the revenue that the quantitative details of the inventories, as furnished by the appellant, are not correct.
Even the learned AO had verified the 'correctness of the quantitative details furnished by the appellant from the 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 19
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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 details of trading account and details of various expenses incurred by the appellant, towards the scheme-in- progress, the learned AO could have verified the correctness of the valuation of closing WIP. It is submitted 20
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that for making the valuation of the closing stock of those properties which were also lying in the opening stock, there was no necessity for verifying the cost of acquisition of land, land development expenses, etc. incurred by the appellant in earlier years and merely on the basis of its valuation made at the end of the earlier year, the learned AO could have verified the correctness of the valuation of closing stock shown by the appellant.
NON-MAINTENANCE OF PROJECT-WISE INCOME & EXPENDITURE CANNOT LEAD TO REJECTION OF BOOKS OF ACCOUNT - BOOKS OF ACCOUNT SHOULD NOT BE REJECTED LIGHT - HEARTEDLY XV. Further, it is not necessary that every entity engaged in the business of development of properties should separately keep the project-wise income and expenditure. It is submitted that there are many expenditure which are common in the nature and which cannot be allocated to any particular project and, therefore, it is neither practicable nor possible for a quasi government authority alike the appellant to maintain such project-wise income and expenditure account. It is submitted 21
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that in the case of all the private colonizers, the revenue never insisted for maintenance of such type of project-wise details. In these circumstances, it will be appreciated by Your Honours that merely for taking a ground to make/sustain unwarranted and uncalled for additions in the income of the appellant, by- overvaluing the closing stock, the authorities below have taken the irrelevant and extraneous pretences, not grounds, for rejecting the books of account of the appellant under the provisions of section 145(3) of the Act. It is a settled law that the books of account of an assessee cannot be reiected light- heartedly unless and until there exists sufficient reasons to do so. Reliance is placed on following judicial pronouncements:
(i) St. Teresa's Oil Mills vs. State of Kerala (1970) 76ITR 365 (Ker.)
(ii) Shri Amarlal Kirana Stores, Dewas vs. ITO (2005) 4 IT J 480 (Trib.)
(iii) Md. Umar vs. CIT (1975) 101 ITR 525 (Patna)
(iv) JK. Trivedi Bros. vs. CIT (1986) 158ITR (MP) 705 AO DID NOT CONSIDER THE APPELLANT'S EXPLANATION FOR NON-REJECTION OF BOOKS 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- 22
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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 under-
valuation 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 distinguishable. In the case of British Paints (supra), there was 23
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a clear finding on record that the assessee did not include certain components of expenses while making the valuation of its closing stock whereas in the present case, no. such finding has been brought on record.
CASE OF THE APPELLANT FOR THE ASSESSMENT YEAR UNDER CONSIDERATION IS DISTINGUISHABLE FROM THAT OF THE EARLIER YEARS - DISCREPENCIES NOTICED BY HON'BLE ITAT IN AY 2003-04 AND 200405 GOT REMOVED IN THE YEAR [kindly refer PB Page No.92 - Para 15] XVIII. It is submitted that the facts of the appellant for the assessment year under consideration are clearly distinguishable from its own facts for the assessment year 2003-04 to 2005-06 In the assessment year 2003-04, the appellant did not incorporate the valuation of the work-in-progress in its books of account and, further, for such assessment year, the appellant had observed hybrid system of accounting. In such circumstances, this Hon'ble Bench, in the appellant's Appeal No. ITA-233/1nd/2008, at para 15 of the order dated 31-08-2010, had upheld the rejection of books of account [Kindly refer PB Page No. 92]. This Hon'ble Bench, vide the same common order, at para 27 [Kindly refer PB Page No. 102], upheld the 24
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rejection of books of account for A.Y. 2004-05 too. However, for A.Y. 2005-06, this Hon'ble Bench has not given any specific finding on the rejection of books of account. In such circumstances, it shall be appreciated by Your Honours that the learned CIT (A) was not justified in upholding the action of the learned AO in rejecting the books of account merely on the basis of findings given by this Hon'ble Bench for A.Y. 2003-04 (supra) without taking into consideration the fact that the discrepancies/factors prevailing for A.Y. 2003-04 were not in prevalence for the assessment year under consideration and all such discrepancies got removed in the year under consideration. It is a settled law that the books of account of an assessee, for a year, cannot be rejected merely on the basis that such rejection was made in the earlier years. In view of the above facts and circumstances of the case, it is submitted that the action of both the authorities below on the issue of rejection of books of account deserves to be knocked-down" 25
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10. With regard to ad hoc addition made in the valuation of the closing stock, contention of ld. Authorized 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 26
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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 produced all its Books of account with registers, bills, vouchers, bank statements, etc. for the relevant previous year before the learned Assessing Officer. Besides, the appellant had also produced relevant property registers maintained by it respect of its closing stock along with its submission letter dated 18-12-2008 [Kindly refer to Page No. 58 of Paper Book]. Such fact is also apparent from the Page No.3 of the assessment order passed by the learned Assessing Officer. The appellant by producing the registers of the properties before the learned Assessing Officer had demonstrated the method and basis for arriving at the quantity of the closing stock. It was shown to tile learned Assessing Officer that the appellant had been maintaining separate registers of developed properties in respect of each of the schemes implemented by it. In such registers, at the time of commencement of implementation of any particular scheme, the total number of properties available for disposal are entered into and 27
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subsequently on each and every disposal of the property appropriate entries are made and on the basis of such entries, quantity of the developed properties available at the end of every financial year is taken by the appellant. The learned Assessing Officer had, on test basis, checked the registers in respect of Scheme No. 94 and Scheme No. 99 implemented by the appellant. The learned Assessing Officer could not find any discrepancy in the quantity stated in such registers. The learned Assessing Officer made only one observation that in such register the basis of valuation of properties was not stated.
INVENTORY DETAILS WERE COMPLETE QUA THE QUANTITY. RATE AND VALUATION III. On a perusal of the details of closing stock of vacant land and flats, quarters, etc., as furnished by the appellant before the learned Assessing Officer, [PB Page No. 66 & 67], it shall be appreciated by Your Honours that the appellant had furnished the necessary details of properties held by it as closing stock, in each of its schemes by giving the details, in terms of numbers as well as in terms of area. The appellant Authority had also given the rates of valuation for properties situated in different schemes. Finally, the appellant had also 28
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given the valuation of the closing stock which was getting fully tallied with the same shown by it in the Audited Financial Statements.
PROPERTIES 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 Honours that the appellant had shown opening stock of vacant plots at 29
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Rs.48,26,71,000/-in respect of total plots admeasuring 3,55,690 sq. meters which works out to be at average rate of Rs. 1357/- per sq.meter. As against the same the appellant had shown closing stock of vacant plots at Rs. 33,22,85,OOO/- in respect of total plots admeasuring 2,45,754 sq. meters which works out to be Rs. 1352/- per sq. meter which is more and less at the same average rate at which it was holding the plots in earlier years. Likewise, it has shown the closing stock of flats and quarters at the same rate at which it was carrying them as opening stock. Such fact may kindly verified by Your Honours by having a comparison between the opening stock statement of flats, quarters etc. placed at Page No. 72 and closing stock statement thereof placed at Page No. 66-A of the Paper Book. It shall thus be appreciated by Your Honours that the appellant, following the consistent method of valuation of stock at cost basis had rightly made valuation of its closing stock which was broadly based upon the valuation made in the earlier years. It would be pertinent to note that the learned AO has not found any discrepancy in the valuation details furnished by the appellant.
AD-HOC ADDITION MADE BY THE LEARNED AO WITHOUT ANY BASIS V. That, the learned assessing officer without properly considering the appellant's submissions, chosen to substitute valuation of finished properties [vacant land, flats, shops and quarters] and Schemes in pipeline (WIP), at an ad-hoc amount of Rs. 42,20,OO,OOO/- and Rs. 30
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22,OO,OO,OOO/- respectively as against the same shown by the appellant at Rs. 36,38,36,OOO/- and Rs. 18,85,61,360/- respectively without assigning any single basis or reason for such estimation. The learned assessing officer accordingly made enhancement in valuation of finished properties and WIP by a sum of Rs. 6,O1,64,OOO/- and Rs. 3,14,38,640/- respectively. However, after making such an enhancement, the learned Assessing Officer has fairly given the relief to the appellant on account of similar kind of additions made in the immediately preceding assessment year at Rs. 3,OO,OO,OOO/- and Rs. 89,44,OOO/- respectively. Thus, she made net addition of Rs.3,O1,64,OOO/- and Rs. 2,24,94,640/- respectively in the valuation of closing of finished properties and WIP aggregating to an addition of Rs. 5,26,58,640/- 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 31
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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 all the schemes as a whole. It is therefore neither practicable nor possible to prepare Project-wise Income and Expenditure Account.
NON-MAINTENANCE OF PROJECT-WISE INCOME & EXPENDITURE ACCOUNT ALONE CANNOT BE A BASIS FOR HIGHER VALUATION - ADDITION SHOULD NOT BE MADE ON SURMISES AND GUESS WORK VII. It is further submitted that merely non-maintenance of project-wise income and expenditure cannot become a basis for making a higher valuation of closing stock shown by an assessee. It would be pertinent to note that during the course of assessment proceedings, the appellant had produced its all books of accounts along with vouchers in evidence of expenditure incurred by it. Besides producing such books and evidences, the appellant had also 32
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furnished the details of closing stock and the learned Assessing Officer could not find any specific discrepancy in the list so furnished. The learned assessing officer has made the entire addition merely on guess work, surmises and conjectures and therefore, the same deserves to be deleted in toto. It has been judicially pronounced in a number of cases that an addition made merely on the guess work and surmises cannot be sustained. Reliance is placed on the following judicial pronouncements.
i) Brij Bhushanlal Praduman Kumar vs. CIT (1978) 115 ITR 524 (SC) ii) Dhakeshwari Cotton Mills Ltd. vs. CIT (1954) 26 ITR 775 (SC)
iii) Umacharan Shaw & Bros vs. CIT (1959) 37 ITR 271 (SC) SPECIFIC FINDING REGARDING THE LOWER RATE OF VALUATION WAS REQUIRED TO BE GIVEN BY THE AO VIII. The Hon. High Court of Karnataka in the case of Mrs. 1). G. Graig Jones vs. State of Karnataka as reported in (1984) 148 ITR_ 297 (Kar) has pronounced that absence of finding by an Assessing Officer that the valuation of stock was at too low a rate or the method of accounting adopted was not acceptable no addition on account of valuation could be made. It was further held that assessee's method of accounting having been accepted by the Department, AO was bound to accept the reasonable estimates made by the assessee. 33
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VALUATION OF STOCK SHOULD BE MADE IN A REASONABLE AND JUDICIOUS MANNER IX. The Hon'ble High Court of Rajasthan in case of CIT vs. Bindal Jewellers (1998) 100 Taxman 650 (Raj) has held that the value of stock cannot be mathematically calculated. The money value attributed to the stock should be decided and estimated by the concerning 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 34
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335
xi) 67 TTJ 434
xii) 72 TTJ 169
xiv) 7 TTJ 419 WITHOUT ASSIGNING ANY REASON OR DISCLOSING THE BASIS FOR ESTIMATION, THE AO WAS NOT JUSTIFIED IN MAKING THE ADDITIONS XI. It is a settled law that an Assessing Officer is not empowered to make any estimation of valuation of stock without assigning any reason or disclosing the basis for such estimation. Reliance is placed on the following judicial pronouncements:
i} Anand Rice & Oil Mills vs. CIT (1997) 108 ITR 372 (Cal) ii) Gurmukh Singh vs. CIT (1944) 12 ITR 393 (Lah) (para 64) iii} State of Kerala vs. C. Velukutty (1966) 60 ITR 239 (SC) APPELLANT SHOWN BETTER TRADING RESULTS AND AS ALSO NET PROFIT· [Refer PB· Page No. 68 to 70] XII. That, without prejudice to the above, it is submitted that the appellant is a Statutory Authority constituted u/s. 38 of the 'Madhya Pradesh Nagar Tatha Gram Nivesh Adhiniyam, 1973'. The main objects of the appellant Authority is to prepare and implement schemes for development, improvement and maintenance of land and other infrastructure facilities in the notified town for public utility. Under the provisions of section 49 of such Act, a Town 35
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Development Scheme may inter-alia make provisions for remodeling of road and street patterns, development of playgrounds, parks, reconstruction of drains, sewage lines and other similar amenities. All such activities are required to be carried on without any profit motive. As such, it would be appreciated that the appellant Authority is not supposed to profiteering. However, it may generate reasonable surplus from its activities which again has to be deployed wholly for the development of notified town. It would thus be appreciated that being a statutory Authority, functioning under the control and supervision of the State Government, the appellant's main object is to develop the town and to meet the residential accommodation requirement of a common person and not to make profit. On a perusal of the comparative details of Trading & Profit & Loss Account of the appellant for the relevant period as well as for earlier two assessment years, as placed at Page No. 68 to 70 of the Paper Book, it would be observed by Your Honours that the appellant has shown better Gross Profit both in absolute as well as in percentile terms as compared to immediately preceding two previous years. During the year under review, the appellant has shown net Profit of Rs.95,56,517/- as compared to the same shown at Rs.28,87,094/- and Rs.34,60,963/-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 36
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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 legally sustainable. It is not necessary that once the books of account are rejected some addition is compulsorily to be made in the trading results. Such view was also expressed by the Hon'ble High Court of Rajasthan in the case of CIT 37
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vs. Gotan Lime Khanij Udhyog (2002) 256 ITR 243 (Raj) and again in case of CIT vs. Dr. A.P. Bahal (2010) 322 ITR 71 (Raj). It is submitted that this Hon'ble Bench has also in the case of Agrawal Jewellers, Bhopal vs. ACIT (2008) 10 ITJ 10, has held the same view. It shall be appreciated by Your Honours that for the assessment year under consideration, the appellant had shown the better trading results than that of the earlier years, assessments whereof were completed under s. 143(3) and therefore, despite rejecting the books of account, the AO was not justified in disturbing the trading results without any cogent basis or material on record.
ADDITION MADE IS QUITE ARBITRARY AND EXCESSIVE CONSIDERING THE FINDINGS OF THIS HON'BLE BENCH IN THE APPELLANT'S OWN CASE FOR EARLIER YEARS [Kindly refer PB Page No.75 to 113} XV. Without prejudice to the above, it is submitted that the additions so made by the learned AO, on account of valuation of closing stock, is quite arbitrary and excessive, in comparison to the additions made and finally sustained by this Hon'ble Bench, in the appellant's own case for the earlier assessment years i.e. A.Y. 2003-04 to A.Y. 2004-05. Such fact can be 38
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verified by this Hon'ble Bench from the copy of the common order of this Hon'ble Bench in the appellant's own case for A.Y. 2003- 04 to A.Y. 2005-06 in ITA Nos. 203, 433 & 516/Ind/2008 as placed at Page No. 75 to 113 of our compilation.
It is humbly submitted that it is a settled law that even where a best judgment assessment is in required by AO then such assessment should be a fair and not an arbitrary assessment and it should be based upon the past records of the assessee [Vrajlal Manilal & Co. vs. CIT (1973) 92 ITR 287 (MP)]. In the instant case, this Hon'ble Bench for A.Y. 2004-05 and A.Y. 2005-06 has upheld the addition of the closing stock respectively at 0.50% and 2% only and therefore, the estimation made by the learned AO for the year under consideration at 16.63% of the valuation shown by the appellant in its books of account cannot be said to be justified. It is submitted that for A.Y. 2005-06, the Hon'ble Bench reduced the addition to 2% and the addition was directed to be made on the value declared by the appellant in its books of 39
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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 40
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made in respect of Grounds 2a & 2b discussed infra, it is submitted as under: TAX AUDITORS' REPORT WAS BASED ON BOOKS OF ACCOUNT ONLY I. It is submitted that the tax auditors have made the subject remark at Point No.llC in Form No. 3CD annexed to and forming part of the main audit report in Form No. 3CB, [kindly refer PB Page No.6]. The tax auditors have submitted their report under the provisions of s. 44AB of the Income-Tax Act, 1961. The tax auditors have given such report only on the basis of the books of account of the appellant Authority maintained for the year under consideration.
TAX AUDITORS HAVE GIVEN"- CLEAN AND UNQUALIFIED REPORT [kindly refer PB Page No.4] EVEN THE SUBJECT REMARK WAS A QUANTIFICATION OF IMPACT OF CHANGE IN THE METHOD WORKED OUT BY THE AUDITOR HIMSELF :
II. The tax auditors after examining the books have given a clear and unqualified report on the proper maintenance of books of account [Kindly refer PB Page No.4]. It is submitted that even the remark given by the Tax Auditors in Point 11 C was not an adverse remark but it was only a disclosure of the impact of bona fide change in the method of accounting noted and probably, worked out by the auditors. 41
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THE AO REJECTED THE BOOKS OF ACCOUNT III. That despite having on records the tax auditors' unqualified report, the learned AO has rejected the books of account by invoking provisions of s. 145(3) of the Act, as discussed in detail in preceding paras. REJECTION OF BOOKS RESULTED INTO REJECTION OF METHOD OF ACCOUNTING AS WELL IV. That, rejection of books of account by the AO has consequently resulted into rejection of the method of accounting deployed by the appellant authority as well as main report of the auditors as given in Form No. 3CB [Kindly refer PB Page No.4].
AFTER REJECTION, THE AO WAS NOT JUSTIFIED IN RELYING UPON ONLY ONE PART OF THE AUDITORS' REPORT V. That, after rejection of the books and auditors' main report, the learned AO was not legally justified to take cognizance of any of the remarks made by the tax auditors in the Form No. 3CD which was only a part and parcel of the main report in Form No. 3CB.
EXCEPT THE AUDITORS' COMMENT, THE AO WAS NOT HAVING ANY OTHER BASIS 42
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VI. It is submitted that having rejected and disbelieved the main report of the tax auditors, the learned AO was not legally justified in relying upon the remarks given 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 therefore, on the basis of new method of accounting 43
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adopted by the appellant no addition could have been made by the learned AO. It is submitted that even the learned CIT(A) has given the finding that no break-up of Rs.16 Crore is available and even it is not clear that such amount of Rs.16 Crore has any correlation with the valuation of closing stock and work-in-progress for which a separate addition has already been made by the learned AO. In nutshell, in the given circumstances where the books of account, and impliedly method of accounting, of the appellant have already been rejected, merely on the basis of a remark of the auditors, about the impact of bonafide change in the method of accounting from defective one (Hybrid) to correct one (Mercantile), no addition can be made.
11. With regard to addition made on account of change in method of accounting, contention of ld. Authorized Representative was as under :-
CHANGE IN THE METHOD OF ACCOUNTING WAS MADE FOR COMPLYING WITH STATUTORY REQUIREMENT OF SECTION 145(1)
- EVEN THIS HON' BLE BENCH HAS DISAPPROVED THE METHOD 44
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OF ACCOUNTING ADOPTED IN EARLIER YEARS [PB Page No.92 - Para 15} II. On a perusal of the comment of the Tax Auditors of the appellant Authority, as given at clause lI(c) of his report in Form No. 3CD [Kindly refer to Page No.6 of Paper Book], it shall be appreciated by Your Honours that according to the Tax Auditors there was a change in the method of accounting employed by the appellant Authority. The appellant Authority was observing 'Hybrid' system of accounting up till the previous year relevant to the preceding assessment year i.e. A.Y. 2005-06 whereas during the previous year under consideration, i.e. for A.Y. 2006-07, the appellant Authority has observed 'Mercantile' system of accounting. It shall be appreciated by Your Honours that the change in the method of accounting so effected by the appellant Authority during the relevant previous year, was not only a bona fide change but it was also statutorily warranted. It shall be appreciated that after substitution of section 145 by the Finance Act, 1995 w.e.f. 01-04-1997, income chargeable under the head "Profits and gains of business or profession" or "income from other sources" has to be computed only in accordance 45
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with either cash or mercantile system - _of accounting regularly employed by the assessee. It would thus manifest 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 46
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entitled to change the method of accounting regularly employed by him. [CIT vs. Eastern Bengal Jute Trading Co. Ltd. (1978) 112 ITR 575 (Cal.), CIT vs. Rajasthan Investment Co. (P) Ltd.
(1978) 113 ITR 294 (Cal.)].
BONAFIDENESS OF THE CHANGE IN THE ACCOUNTING METHODS NOT OBJECTED BY THE AO IV. On a perusal of the body of assessment order, it shall be appreciated by Your Honours that the learned AO has not objected to the change in the method of accounting effected by the appellant during the previous year under consideration. The learned AO has also not disputed bona fideness of the appellant in bringing such change. The learned AO has made the impugned addition of Rs.16,OO,92,318/- merely on the basis of impact of the change quantified by the Tax Auditors of the Authority.
ONCE BONAFIDENESS OF CHANGE IN THE METHOD IS NOT DISPUTED. NO ADDITION CAN BE MADE EVEN IF THE CHANGED METHOD RESULTS INTO SOME LOSS TO REVENUE 47
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V. It shall be appreciated by Your Honours that it is a settled law that once the change in the method of accounting is not disputed by the AO then irrespective of the consequences of such change no addition can be made in the income of an . assessee. Reliance is -placed on the following iudicial / pronouncements:
i) Indo-Commercial Bank Ltd. vs. CIT (1962) 44ITR 22 (Mad.) ii) CIT vs. Delta Plantations Ltd. (1993) 71 Taxman 329 (Cal)
iii) CIT vs. Pandapura Sahakara SakkareKarkhana Ltd. (1993) 201 ITR 56 (Kar)
iv) CITvs. Atul Products Ltd. (2002) 125 Taxman 727 (Guj)
v) Forest Industries Travancore Ltd. vs. CIT (1964) 51 ITR 329 (Ker) APPELLANT W AS NOT IN AGREEMENT WITH THE COMMENTS OF THE TAX AUDITORS AND HONEST EFFORTS WERE MADE FOR GETTING THE WORKING FROM THE TAX AUDITORS [PB Page No.73 & 74] VI. As regard the comments of the Tax Auditors, the appellant wish 48
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to reiterate its earlier submission made before the authorities below that it is not in agreement with the comments of the Tax Auditors, who is an independent Authority, appointed under section 44AB of the Income Tax Act, 1961. It shall be pertinent to note that during the course of assessment proceedings, the appellant authority had made specific efforts for having the basis of comments of the Tax Auditors by addressing a letter dated 12-12-2008 to the auditors. A xerox copy of such letter is duly placed on the record of the learned AO. A copy of the same is also being placed at Page No. 73 & 74 of our compilation. Despite making such honest efforts, the appellant 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 49
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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 veracity of the comments made by the Tax Auditors in their Audit Report. The learned Assessing Officer has not brought on record any material that how the taxable income of the appellant Authority has got understated by effecting a change in method of accounting. The learned AO has not even made any independent attempt to get the explanation of the Tax Auditors 50
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on the issue by invoking powers vested in her under the law. The learned AO has made the impugned additions merely on the basis of two lines comments given by the Tax Auditors which cannot be held to be justified under any cannon of law. MERELY ON THE BASIS OF AUDITORS' REPORT, NO ADDITION CAN BE MADE RULING OF THE HON'BLE KARNATAKA HIGH COURT VIII. In the case of Karnataka State Forest Industries Corporation Ltd. Vs. CIT as reported in (1993) 201 ITR 674 (Kar.), their Lordships of the Hon'ble Karnataka High Court has held that an assessing officer cannot base the computation solely on the basis of the statutory auditor's report to the directors of the assessee company. In such case too, the assessing officer after discarding the assessee's changed method of accounting, had mechanically added a sum of Rs.lO,56,746/- as per the auditor's report to the income returned, without adopting any method or disclosing any valid basis for such additions. The Hon'ble High Court at para (7) has observed, as under: 51
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"What emerges from the above principles laid down by the Supreme Court is that when the assessing authority does not accept the assessee's method of accounting for the assessment year, then he could exercise power under section 145 to make such computation in such method as he 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 52
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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 53
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prejudicial to the assessee cannot preclude him from pleading that the auditor's opinion was not well founded or legally correct.
ONCE THE CHANGE IN THE METHOD IS BONA FIDE, THE EXPENSES OF EARLIER YEARS HAS TO BE ALLOWED - JUDICIAL RULINGS W. It is submitted that one of the findings of the learned CIT(A) given on the issue is that if due to change in the method of accounting from Hybrid to Mercantile, the appellant would not be eligible for claim of expenditure pertaining to earlier years. It is submitted that such finding is not tenable in the eyes of the law for the reason that once a bonafide change in the method of accounting is made, an assessee becomes eligible for claim of deduction in respect of the expenditure which were not claimed in earlier years. It is submitted that the appellant Authority is subjected to highest rates of tax since A.Y. 2003-04 and therefore, non-making of claim for expenditure, on accrual basis, would not result into any loss to the revenue. It has been judicially held that in the year of change of method of accounting from cash to mercantile, an assessee can claim 54
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expenditure related to earlier years. For such preposition, reliance is placed on following judicial pronouncements:
i) CITvs. West Coast Paper Mills Ltd. (1992) 193 ITR 349 (Bom)
ii) CIT vs. Standard Radiators (P) Ltd. (2006) 286ITR 207 (Guj.) RULING OF JURISDICTIONAL HIGH COURT - ONCE THE CHANGE IN METHOD IS FOUND BONA FIDE, REVERSAL OF INCOME FOR EARLIER YEARS IS ALLOWABLE XI. The Hon'ble High Court of Madhya Pradesh in the case of CIT vs Madhya Pradesh Financial Corporation (2008) 299 ITR 297 (MP) held that the assessee changing the method of accounting from mercantile to cash was eligible to reverse the income of earlier years in the year of change.
APPREHENSION OF THE LEARNED CIT(A) THAT EARLIER YEARS' EXPENDITURE WERE CLAIMED IS ILLFOUNDED XII. Without prejudice to the above, it is submitted that the apprehension of the learned CIT(A) regarding the claim of 55
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expenditure for earlier years is ill founded as is evident from the comparative statement of expenses for .the last two years as placed at Page No. 68 to 70 of our compilation. On a perusal of such comparative statement, it shall be observed by Your Honours, at the bottom of Page No. 68, that the appellant had shown positive gross profit of Rs. 57,32,910/- in comparison to gross loss of Rs. l,41,30,803/- and Rs. 9,06,09,817/- respectively 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, 56
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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 facts and circumstances of the case, it is submitted that the huge addition of Rs.16,00,92,318/- so made by the learned AO merely on the comment of the Tax Auditors, deserves to be deleted in toto.)
12. On the other hand, Shri Darshan Singh, CIT DR, appeared on behalf of the Revenue and contended that in view of the defects pointed out in the assessment order, the Assessing Officer was justified in rejecting books of account and thereby making addition on account of closing stock and work in progress. He further submitted that on the basis of 57
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auditor's report/comments, the Assessing Officer was also justified in making addition on account of change in method of accounting and also on account of depreciation on assets. The ld. CIT DR reiterated and invited our attention to the various observations made by the Assessing Officer and CIT(A) in its appellate order and contended that addition so made by the Assessing Officer deserves to be upheld.
13. We have considered the rival submissions and have gone through the orders of the authorities below and found from record that the assessee is a Development Authority, which is engaged in implementing the development plan preparing Town Development Schemes and acquisition and development of land. During the course of scrutiny assessment, the Assessing Officer observed that the assessee has produced relevant books of account comprising of cash book, ledger, journal and vouchers for expenses, which were test checked. The Assessing Officer found that as per audit report point No. 28(a), the auditors have commented that 58
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quantitative details of goods traded, were not maintained by the assessee. The assessee was asked to furnish quantitative and qualitative details of closing stock with its basis of valuation and also details of work in progress. The Assessing Officer found that the assessee has not maintained day to day quantitative details of plots and other properties sold during the year under consideration and only on the basis of lay out plans of various schemes, inventory of unsold stock was prepared and the same was valued at cost price method. The Assessing Officer found that various registers produced contained only details of vacant plot and flat details, but basis of valuation of closing stock could not be worked out on the basis of these registers. We also found that inspite of repeated query from the Assessing 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 59
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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 stock and work- in-progress in the subsequent year by replacing the respective figures of opening stock 60
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14. We also found that the Assessing Officer has made addition for the change in method of accounting by observing that auditor has given note regarding change in method of accounting from hybrid to mercantile system of accounting during the year under consideration, which resulted in reduction in net profit by Rs. 16 crores. In this regard, we found that the tax auditor has given his audit report and form 3-CD remarked at point no.11-C to the effect that during the year the assessee has changed its method of accounting from hybrid system to the mercantile system and because of this change in method of accounting, there is reduction in net profit by Rs. 16 crores. We found that this change in method of accounting was bona fide which was consistently followed by the assessee in subsequent year. Even as per the statutory requirement, the assessee was supposed to follow mercantile system of accounting. We found that change in method of accounting was made for complying with the statutory requirement of Section 145(1). Even this Bench of I.T.A.T. in 61
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earlier assessment years of the assessee has disapproved hybrid system of accounting followed by the assessee. On over all perusal of the body of assessment order, we found that the Assessing Officer has not objected to the change in method of accounting adopted by the assessee during the previous year under consideration. Even the bonafideness in change of method is not disputed, no addition can be made even if the changed method results into some loss to revenue. Hon'ble Karnataka High Court in the case of Karnataka State Forest Industries Corporation, 201 ITR 674, observed that an Assessing Officer cannot base the computation of income solely on the basis of report of auditors. In this case, after discarding the assessee's changed method of accounting, which was mercantile added a sum of Rs. 10.65 lakhs as per the auditors' report. The addition so made was deleted by the Hon'ble High Court after having the following observations :-
"What emerges from the above principles laid down by the Supreme Court is that when the assessing authority 62
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does not accept the assessee's method of accounting for the assessment year, then he could exercise power under section 145 to make such computation in such method as he 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 63
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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."
15. Furthermore, once a change in the method of accounting is found bona fide, the expenses of the earlier years has to be allowed as per judicial pronouncement reported at 193 ITR 349 and 286 ITR 207. Even the Jurisdictional High Court in the case of MPFC, 299 ITR 297, held that the assessee changing the method of accounting from mercantile to cash was eligible to reverse the income of earlier years in the year of change. We also found that even after change in the method of accounting from hybrid to 64
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mercantile during the year under consideration, the assessee 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 in the assessment year 2005-06 and 2004-05. We also found that the assessee had shown an increased amount of net profit in absolute and percentage terms during the year under consideration. There is nothing on record to suggest that assessee had changed method of accounting to show lower profit during the year as compared to earlier year. It is also not the case of Department that assessee had shown expenses of earlier year in this year nor there is any allegation of Department that income of current year has not been accounted for in the year under consideration due to change in the method of accounting. On the contrary, we found that by adopting mercantile system of account the assessee has accounted for its income and expenditure on accrual system notwithstanding the fact of actual receipt of income and/or 65
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actual payment of expenditure. It is also not the case of revenue that after change in method of accounting during the year under consideration, the assessee had not consistently followed the changed system of accounting. We also do not see any mala fide intention of assessee in changing the method of accounting. Accordingly, the change in method of accounting from hybrid to mercantile, which we found to be bona fide and the same was followed by the assessee consistently in subsequent years, there was no justification for making any addition merely on observation of the auditor without bringing any positive material on record. Accordingly, we delete the addition made by the Assessing Officer on account of change in method of accounting and auditors' report regarding reduction in net profit. We direct accordingly.
16. The Assessing Officer has also disallowed the assessee's claim for depreciation on assets amounting to Rs. 22,29,485/-. We found that the assessee has failed to produce any fixed assets registers, therefore, existence of various 66
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assets and utilization thereof in the relevant previous year was prior to assessment year 2003-04 was not verifiable. After giving detailed observation at pages 11 & 12, the Assessing Officer has disallowed assessee's claim of depreciation of Rs. 22,29,485/- out of total depreciation claim of Rs. 29,44,942/-. Nothing was brought on record by the ld. Authorized Representative to persuade us to deviate from the finding recorded by the lower authorities in this regard. Accordingly, we confirm the action of the Assessing Officer for decline of claim of depreciation of Rs. 22,29,485/-.
17. In the result, the appeal of the assessee is allowed in part.
This order has been pronounced in the open court on 19th June, 2012.
sd/- sd/-
(JOGINDER SINGH) (R. C. SHARMA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 19th June, 2012.
CPU*
13196
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