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Income Tax Appellate Tribunal, “B” BENCH, AHMEDABAD
Before: SHRI PRAMOD KUMAR&
PER Ms. MADHUMITA ROY - JM: These two cross appeals filed by the assessee and the revenue are directed against the single order dated 02.02.2015 passed by the Commissioner of Income Tax (Appeals)-8, Ahmedabad under section 143(3) of the Income Tax Act, 1961 (hereinafter referred as to “the Act”) arising out of the order & 1229/Ahd/2015 Vishwa Infra Project Pvt. Ltd. Asst.Year –2011-12 - 2 - dated 12.03.2014 passed by the DCIT(OSD), Circle-8, Ahmedabad for the Assessment Year 2011-12.
Since both the appeals relate to the same assessee, hence the same are heard analogously and are being disposed of by a common order. for A.Y. 2011-12 (Revenue’s appeal): 2. The assessee company engaged in the business of construction and development of properties, filed its return of income on 27.09.2011 declaring total income at Rs.34,55,666/- which was processed u/s 143(1) of the Act. Upon scrutiny notice u/s 143(2) of the Act dated 01.08.2012 was issued and served by RPAD. The matter was subsequently transferred from the ITO, Ward 8(4), Ahmedabad to this Circle – 8(OSD), Ahmedabad followed by a notice dated 02.07.2013 and 19.07.2013 u/s 142(1) of the Act. During the year under consideration the assessee has developed property named as “Sachet-IV”. Inventories thereof was valued by the assessee in the following manner: � Finished Goods : At cost on the basis of absorption costing comprising of direct costs, Labour charges and overheads. � Work-in-Progress (WIP) : At cost on the basis of absorption costing comprising of direct costs and Labour charges.
During the course of assessment proceeding, assessee submitted the valuation of closing stock by and under a letter dated 12.08.2013, which is as follows: Opening Stock Rs. 3,51,44,202/- Purchase Rs. 7,04,51,177/- Add Direct Expenses Rs. 4,15,060/- & 1229/Ahd/2015 Vishwa Infra Project Pvt. Ltd. Asst.Year –2011-12 - 3 - Total Rs.10,60,10,439/- Total Area = 6497.85 Sq. Mt. Rate / Sq. Mt = Rs. 16315 Sq. Mt. (106010439/6497.85) Out of the total area of 6497.85 Sq. Mt. 4340.76 Sq. Mt was sold during the year and remaining 2157.09 Sq. Mt was the closing stock. The valuation of closing stock therefore, was 2157.09 x Rs.16315/Sq. Mt = Rs.3,51,92,265/-
However, valuation of the closing stock was shown to be Rs.2,05,01,951/- and hence clarification was asked for whereupon the following details were provided by the assessee in respect of the stock, completion of work, rate per sq. mt., total amount of the finished stock in respect of unit numbers: Office Nos Work Rate Per Finished Finished Completed Sq. mt. stock sq. stock mt. amount 403 80% 309.0 4033068 403 80% 109.33 1309507 203 80% 184.13 2403265 204 50% 100.33 818442 101 50% 664.62 5421638 Sachet-IV 102 50% 396.32 3232980 16,315 204 50% 172.80 1409616 205 50% 172.24 1405048 404 50% 57.32 467588 2157.09 20501152
The assessee, therefore, submitted that the closing stock has been valued at percentage of work completed which according to the Assessing Officer was not appropriate and hence show-cause was issued to the assessee on 03.03.2014 as to why the entire closing stock of 2157.09 sq.mt & 1229/Ahd/2015 Vishwa Infra Project Pvt. Ltd. Asst.Year –2011-12 - 4 - should be valued at Rs.3,51,92,923/- @ Rs.16315/sq.mt. The assessee on 10.03.2014 filed the following reply: "With reference to above subject, and in response to your letter dated 3.03.2014 we would like to submit as under:- 1. As regards the valuation of closing stock of our scheme at Sachet IV we have to state that: a. The. total area under construction which is saleable which was envisaged by us was 6497.85 Scj. Mtrs.for the entire project. This is as per the permission received from Ahmedabad Municipal Corporation. Copy of the permission is enclosed herewith. b. At the end of the year the project was not complete and hence we had to estimate the work in progress in respect of incomplete offices. c. While doing so, we have calculated the total cost incurred by us during the year under review and apportioned it towards the total saleable area as initially envisaged by us to arrive at the cost per square meter incurred by us during the current year. In other words in order to estimate the cost of work in progress we have apportioned the current cost of construction over the total project area which are proposing to sale for the entire project. d. Thus the total cost per square meter calculated at current cost of construction over total area of saleable construction have been arrived at. e. Based on an estimate of work done and certificate received from the Architects respect of incomplete offices during the year we have thereafter arrived at certain percentage of work in progress. f. The cost per square meter has thereafter be applied to the complete office has the stages of completion.
We therefore have to submit based on the above process followed by us that the percentage of work completed has not been arbitrarily arrived at.
Further we have to submit that since we are estate developers and not contractors the percentage completion method as envisaged in AS-7 in respect of accounting for construction contracts does not apply to us. We are recognizing sales when risk and rewards are transferred & 1229/Ahd/2015 Vishwa Infra Project Pvt. Ltd. Asst.Year –2011-12 - 5 - to the customers and no significant uncertainly exists as to its realization, based on the general accounting convention of revenue recognition.
We therefore are submitting that the valuation of closing stock made us is following the general principles of accounting and no arbitrary method has been followed by in doing so.
5. Moreover in the ultimate analysis we also have to submit that the issue relating to valuation of stock is continuous process and has pass through effects which spill over next financial years as opening stock. On an overall perspective in an environment of constant tax rates and continuity of business this does not in any major way affect the total tax paid by an assessee over two financial years. As in our case in the next financial year the entire project was completed and we have valued the entire closing stock at the total current cost of construction."
Such contention of the assessee that it has calculated the total cost incurred by it during the year under review and apportioned it towards saleable area as initially envisaged by it to arrive at the cost per square meter incurred by it during the year was not found acceptable. As per the assessee, working cost of Rs.16,315/- sq. mt is applied only in respect of 1263.783 sq. mt. of closing stock instead of the closing stock shown as 2157.09 sq. mt. according to the AO. Had that rate been applied to the entire closing stock of Rs.2157.09 sq. mt. the actual valuation would have been Rs.3,51,92,923/-. The assessee’s further contention that for certain flats only 80% work was completed and for other flats only 50% work was completed was also found irrelevant for valuation of closing stock by the Assessing Officer. Once the rate of Rs.16,315/sq.mt. has been arrived on the basis of actual cost incurred by the assessee during the year the valuation of closing stock as per section 145A of the Act has to be done on the basis of actual cost incurred by the assessee as the case made out by the Assessing Officer. In that view of the matter, the addition of Rs.1,46,91,771/- (3,51,92,923 – & 1229/Ahd/2015 Vishwa Infra Project Pvt. Ltd. Asst.Year –2011-12 - 6 - 2,05,01,152) in terms of the provision of section 145A of the Act was made which was partly allowed in appeal by the Learned CIT(A). The Learned CIT(A) while granting part relief to the assessee worked out the valuation of the stock in the manner as follows: “5. The submissions are considered. The assessing officer has not disputed the part completion of areas as submitted by the appellant before him during the proceedings and reproduced above. However while working out the average cost of construction the assessing officer as don't be considered the whole area is completed. The assessing officer has considered the total area of 6497.85 Square meter in working out the rate per square metre which is not proper since area of 6497.85 Square meter is yet to be completed. It is seen that out of the area of 2157.09 square meter, the area of 593.46 Square meter is completed 80 percent while area of 1563.63 Square meter is completed at 50 percent, hence the average cost of construction is required to be worked out as below:
Cost of Construction per square metre = 10,60,10,439 / (4340.76 + 593.46 x 0.8 + 1563.63 x 0.5) = 18939.422
The above working is based on the principle that whole of the work which has been completed is required to be considered in denominator, then only numerator will have partly completed areas to work out the construction cost of partly completed areas. The above per-unit cost is required to be multiplied by the area unsold and partly completed till 31st March. The said area is 593.46 x 0.8 + 1563.63 x 0.5=1256.583sq m Hence, the cost attributable to above area is= 1256.583 x 18939.422 = Rs. 23798956.
As against this the assessing officer worked out the closing stock at Rs.351,92,923, while the correct working is 237,98,956, hence the appellant will get relief of Rs. 143,93,967, while the balance addition is confirmed. The said working was discussed during the hearing on 23.01.2015 with the AO and Appellant and none gave any objection to it. The ground of appeal 1 to 4 are partly allowed.”
Hence, the instant appeal before us. & 1229/Ahd/2015 Vishwa Infra Project Pvt. Ltd. Asst.Year –2011-12 - 7 - 3. At the time of hearing of the instant appeal, the Learned Counsel appearing for the assessee submitted before us that it appears from the records that the assessee sold units admeasuring 4340.76 sq.mt. The remaining area admeasuring 2157.09 sq. mt. has been shown as closing stock which fact has been acknowledged by the Assessing Officer. Further that out of this under constructed area admeasuring 2157.09, areas admeasuring 593.46 sq. mt. and 1563.63 sq.mt. were developed to the extent of 80% and 50% respectively which is appearing from certificate issued by Almoula Associates dated 31st March, 2011 available at Page 85 of the Paper Book. The assessee has ascertained the cost per unit of output i.e. units developed, after following the method of Unit Costing. It was further submitted before us that both the authorities failed to appreciate that section 145A does not empower an Assessing Officer to change the method of valuation of closing stock which is regularly being followed by the assessee and the same is also scientific. Apart from that the closing stock in question has been sold in the subsequent assessment year. In this respect, the Learned Counsel relied upon the judgment passed in the matter of CIT-vs-Excel Industries Ltd. reported in 358 ITR 295. On the other hand, Learned Representative of the Revenue relied upon the order passed by the Learned AO.
4. Heard the respective parties, perused the relevant materials available on record. The dispute before us whether valuation is to be done of all units or the total sales. The object of this method is to ascertain the cost per unit of output which is determined by dividing the total expenditure incurred during a given period by the number of units produced during that period. The cost of WIP under this method is restricted to the percentage of its completion and thus the stock was valued at Rs.2,05,01,152/- as shown by the assessee. The case of the Revenue is this that the assessee should have adopted the method of process & 1229/Ahd/2015 Vishwa Infra Project Pvt. Ltd. Asst.Year –2011-12 - 8 - costing wherein the cost per unit is obtained by averaging the expenditure incurred on the process during a certain period which is also known as average costing. Hence the Assessing Officer valued on the basis of such process costing at Rs.3,51,92,923/-. Thus addition of the balance amount being Rs.1,46,91,771/- u/s 145A of the Act was made. In appeal, the Learned CIT(A) restricted the addition to an extent of Rs.32,97,804/- after dividing the total expenditure incurred during the period under consideration, by the number of units produced converting the WIP into the finished goods. Further that the details as provided by the assessee at Page No.69 of the Paper Book reveals that the assessee had returned valuation of stock, has provided a higher GP. The GP in respect of the next assessment year i.e. A.Y. 2012-13, has available from Page 70 of the Paper Book comes close to 38% in case of said project at “Sachet-IV”. In that view of the matter, the result of entire excise is revenue neutral since the closing stock if changed in the present year, will have impact on the profitability in the next assessment year on account of consequent change in the opening.
We find substance in the submission advanced by the Learned Counsel appearing for the assessee. We find that the method of valuation of closing stock cannot be changed without rejecting the books of accounts. Further that, it is not the case of the Revenue that the assessee has not followed the method of valuation of closing stock regularly or this is not in terms of the accounting standards envisaged by the Government notification as per provision of Section 145 of the Act. We have also carefully considered the details of the closing stock which was sold in the subsequent years available at Page 69 of the Paper Book wherein the GP has been shown at 35% on the same project in the A.Y. 2012-13 as reflected at page 70 of the paper book and addition made to the closing stock cannot be recorded as a source of profit which is nothing & 1229/Ahd/2015 Vishwa Infra Project Pvt. Ltd. Asst.Year –2011-12 - 9 - but a principle of balancing. It is the fact that present GP rate in the next assessment year will certainly fall if the value of closing stock is valued upwards. However, since the rate of tax remained the same in the present assessment year as well as in the subsequent year and therefore we find no justification in disturbing the valuation made by the assessee when the said as a result of “Revenue neutral”. Further that when the books of accounts has not been rejected the method of valuation of closing stock cannot be changed and hence the addition made by the Learned AO subsequently restricted by the Learned CIT(A) is liable to be quashed. In that view of the matter, we are of the considered opinion that the valuation made by the assessee by application of that particular method which has been consistently followed by the assessee is without any infirmity; does not warrant any rectification or needs to be disturbed and thus addition made by the authorities below on applying percentage completion method which ultimately results revenue neutral taking into consideration the closing stock which was sold in the subsequent assessment year needs to be deleted. Hence addition is deleted.
In the result, the revenue’s appeal is dismissed.
A.Y. 2011-12 (Assessee’s appeal): 6. Ground No.1 : We find that this particular issue as already been dealt with by us in for A.Y. 2011-12 in Revenue’s appeal Hence, in the absence of any changed circumstances the same shall apply mutatis mutandis. Hence, the ground of appeal preferred by the assessee is allowed.
7. Ground No.2: The assessee has challenged the order passed by the Learned CIT(A) in not deleting the addition made u/s 50C of the Act. & 1229/Ahd/2015 Vishwa Infra Project Pvt. Ltd. Asst.Year –2011-12 - 10 -
During the filing of return the assessee erroneously made an addition of Rs.20,76,150/- which was requested to be excluded later on by the assessee to the Assessing Officer by and under a letter dated 07.09.2013. The assessee stated that the capital gain u/s 50C was added in respect of sale of unit-1 of “Sachet - II”. Since no details of the same was provided by the assessee either before the Assessing Officer or before the appellate authority clarifying as to why such income was offered by the assessee or as why no revised return was filed, the said prayer of the assessee was rejected. It is the case of the assessee that the assessee sold unit-1 of “Sachet-II” which has been held as stock-in- trade. Since the provision of section 50C does not apply to the sale of “Stock- in-Trade” but only to the sale of capital assets being land or building or both, the assessee made such application for withdrawal of such suo moto disallowance. The assessee was not holding any other land or building as capital asset and therefore the question of transferring the same does not and cannot arise at all.
At the time of hearing of the instant appeal, the Learned Counsel appearing for the assessee relied upon the judgment passed in the matter of Goetze (India) Ltd-vs-DCIT reported in (2007) 112 TTJ Delhi 1 and submitted that even though the claim of withdrawal of adjustment under section 50C is treated as fresh claim, the same ought to have been entertained by the first appellate authorities. Since it is a settled principle of law that the Assessing Officer does not have the power to entertain such claim after filing of original return of income otherwise than filing of revised return. However, the Learned DR relied upon the order passed by the first appellate authority. & 1229/Ahd/2015 Vishwa Infra Project Pvt. Ltd. Asst.Year –2011-12 - 11 - 10. Heard the respective parties, perused the relevant materials available on record. In view of the settled principle laid down in the judgment passed by the Jurisdictional High Court in the matter of CIT-vs-Arvind Mill Ltd. in Tax Appeal No.1407 of 2011 (Gujarat High Court), we find that claim of withdrawal of adjustment u/s 50C ought to have been entertained by the Learned CIT(A) and hence in the absence of such exercise of power by the Learned CIT(A), we remit the issue to the file of the Learned CIT(A) to allow the application to withdraw such adjustment u/s 50C as made by the assessee and to pass orders in accordance with law upon giving a reasonable opportunity of being heard to the assessee.
Ground No.4 At the time of hearing of the instant appeal, Learned Counsel of the assessee submitted before us that he does not want to proceed with this ground of appeal. Thus, this ground is dismissed as not pressed.
Ground No.5 to 7 These grounds of appeal are general in nature hence 12. no order need to be passed.
In the combined result, the revenue’s appeal is dismissed and the assessee’s appeal is partly allowed. This Order pronounced in Open Court on 01/07/2019 Sd/- Sd/- ( PRAMOD KUMAR) ( Ms. MADHUMITA ROY ) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad; Dated 01/07/2019 PritiYadav, Sr.PS & 1229/Ahd/2015 Vishwa Infra Project Pvt. Ltd. Asst.Year –2011-12 - 12 -