COMMISSIONER OF INCOME TAX JALANDHAR II JALANDHAR vs. M/S SRISHTI CONSTRUCTIONS

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ITA/356/2014HC Punjab & HaryanaPHHC01109503201414 October 2015Author: MR. JUSTICE SURINDER GUPTA,MRS JUSTICE DAYA CHAUDHARY5 pages

AI SummaryDismissed

What did the High Court hold?

Regarding the first issue, the Tribunal held that the assessee had consistently followed the same method of accounting for many years, a fact not rebutted by the revenue. Therefore, departing from this past practice without justification was not permissible. The Tribunal reasoned that if the AO intended to change the method of accounting, they were required to provide a deduction for opening stock, which was an accepted accounting practice, and this was not done. The Tribunal also noted that the AO had not demonstrated that the assessee's method was incorrect or how profits were underestimated, and that the AO's reliance on a measurement book from one authority applied to other contractees was not accurate. The High Court found this to be a pure finding of fact, not illegal or perverse, and thus not warranting interference. Regarding the second issue, the High Court noted that this ground had not been pressed before the Tribunal, and therefore, the question did not arise.

What were the facts?

The revenue (Commissioner of Income Tax, Jalandhar II) filed an appeal under Section 260A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal (ITAT), Amritsar Bench, for assessment year 2007-08. The ITAT had deleted an addition of ₹36,41,702/- made by the Assessing Officer (AO) on account of closing work in progress (WIP) and an addition of ₹38,000/- on account of disallowance of interest on interest-free loans. The AO had made additions to closing WIP, including material, wages, earth filling, and fuel expenses, as the assessee, a civil contractor, had not shown any closing stock or WIP and had not maintained a stock register. The CIT(A) had partly allowed the assessee's appeal, confirming the additions on closing WIP and interest disallowance. The ITAT partly allowed the assessee's appeal, deleting the addition on closing WIP, citing consistent accounting methods.

What were the issues?

1. Whether on the facts and circumstances of the case and in law, the Hon'ble ITAT was justified in deleting the addition of ₹36,41,702/- on account of closing work in progress without appreciating the findings of the AO and ignoring the decisions of the Hon'ble Supreme Court in CIT vs. A. Krishnaswami Mudaliar and CIT vs. British Paints India Limited? The revenue argued that the ITAT failed to appreciate the AO's findings and ignored Supreme Court precedents. The assessee contended that the ITAT correctly deleted the addition because the assessee had consistently followed the same method of accounting for many years, which was not rebutted by the revenue, and the AO had not provided justification for adopting a different methodology or demonstrated how profits were underestimated. The ITAT also noted that if the AO changed the accounting method, a deduction for opening stock should have been given, which was not done. 2. Whether on the facts and circumstances of the case and in law, the Hon'ble ITAT was justified in deleting the addition of ₹38,000/- on account of disallowance of interest on interest-free loans, ignoring the decisions of the Hon'ble P&H High Court in CIT vs. Varinder Agro Chemicals Limited, CIT vs. Avery Cycle Industries Limited, and CIT vs. Industrial Cables (India) Limited, and also ignoring the fact that the Hon'ble ITAT had itself dismissed the ground challenging this addition? The revenue argued that the ITAT ignored High Court decisions and its own prior dismissal of the ground.

Which sections of the Income-tax Act were involved?

Section 260A

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Date of decision: 14.10.2015 The Commissioner of Income Tax,Jalandhar II, Jalandhar. ……Appellant M/s Srishti Construction …..Respondent CORAM: HON’BLE MR. JUSTICE AJAY KUMAR MITTAL HON’BLE MR. JUSTICE RAMENDRA JAIN

Whether Reporters of local papers may be allowed to see the judgment?

To be referred to the Reporters or not?

Whether the judgment should be reported in the Digest? Present: Mr. Vivek Sethi, Advocate, Advocate for the appellant- revenue. Mr. S.K.Mukhi, Advocate for the respondent-assessee. Ajay Kumar Mittal,J.

This appeal has been filed by the revenue under Section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 27.12.2012, Annexure-3 passed by the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar in ITA No.74(ASR)/2011 for the assessment year 2007-08, claiming following substantial questions of law:- “i) Whether on the facts and circumstances of the case and in law, the Hon'ble ITAT was justified in deleting addition of ` 36,41,702/- on account of closing work in progress without appreciating the findings of AO and ignoring the decisions of Hon'ble Supreme Court in the cases of CIT vs. A.Krishnaswami India Limited (1990) 91 CTR (SC) 108 :(1991) 188 ITR 44 GURBAX SINGH 2015.11.17 12:39 integrity of this document High Court Chandigarh (SC)? ii) Whether on the facts and circumstances of the case and in law, the Hon'ble ITAT was justified in deleting addition of ` 38,000/- on account of disallowance of interest on interest free loans ignoring the decisions of Hon'ble P&H High Court in the CTR (P&H) 334, CIT vs. Avery Cycle Industries Limited, (2006) 206 CTR (O&H) 347 and CIT vs. Industrial Cables (India) Limited, (2007) 209 CTR (P&H) 167 and also ignoring the fact that the Hon'ble ITAT has itself dismissed the ground No.5 vide which the addition has been challenged?”

A few facts relevant for the decision of the controversy involved as narrated in the appeal may be noticed. The assessee is a civil contractor and has executed various projects like railway over-bridges, airport and other government constructions. During assessment proceedings, the Assessing Officer noted that the assessee had not shown any closing stock or closing Working in Progress (WIP) in the profit and loss account/balance sheet for the year ending 31.3.2007. The assessee had not maintained stock register. The method of valuation of closing stock was stated to be at cost or market value whichever was lower. The Assessing Officer made the following additions on account of closing stock/WIP:- a) Material : ` 22,27,607/- as per the details furnished by the assessee. b) Wages: ` 9,21,979/- being 1/6th of the expenditure incurred under this head in the month of March 2007. c) Earth filling: ` 4,35,916/-.The AO noted that expenditure of ` 3,06,500/- was incurred by the assessee in executing the contracts in Punjab from 26th March 2007 to 31st March 2007 which she held obviously have to form part of the closing WIP. d) Fuel expenses: ` 56,220/- added on account of fuel GURBAX SINGH 2015.11.17 12:39 integrity of this document High Court Chandigarh consumption on pro rata basis to the closing WIP. The Assessing Officer also made addition of ` 78,000/- on account of disallowance of interest on interest free loans. Aggrieved by the order, the assessee filed appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated 21.12.2010, Annexure 2, the CIT(A) partly allowed the appeal confirming the following additions:- i) Closing work in progress ` 36,41,702/- ii)Disallowance of interest on interest free loans ` 38,000/-. The assessee filed second appeal before the Tribunal. Vide order dated 27.12.2012, Annexure 3, the Tribunal partly allowed the appeal giving relief to the assessee on the fact that the method of accounting had been followed by the assessee consistently for many years and this fact had not been rebutted by the revenue. It was further held that the Assessing Officer was, thus, not justified in making addition on account of closing work in progress. Hence the instant appeal by the revenue.

We have heard learned counsel for the parties.

With regard to question No.(i), the Assessing Officer made certain additions on account of closing Stock/WIP. The CIT(A) on appeal gave partial relief to the assessee but confirmed the additions on account of closing work in progress and disallowance of ` 38,000/- on account of interest on interest free loans. The Tribunal on considering the matter recorded that since the assessee had been following the same method of accounting consistently for many years, in the absence of any justification by the authorities below in their orders, different methodology could not be adopted. Therefore, the Assessing Officer and the CIT(A) were not held to GURBAX SINGH 2015.11.17 12:39 integrity of this document High Court Chandigarh be justified in adopting different methodology. It was further recorded that if the method of accounting is changed by the Assessing officer, then for including the closing stock/WIP in the income, the Assessing Officer is required to give deduction for the opening stock which is accepted method of accounting. The relevant findings recorded by the Tribunal read thus:- “8. We have heard the rival contentions and perused facts of the case. There is no dispute to the fact that the assessee has been following the same method of accounting consistently for many years as pointed out at PB-12. This fact has not been rebutted by the revenue. Therefore, it is undisputed fact that when method of accounting has been followed consistently and in the absence of any justification by the lower authorities in their orders, a different methodology cannot be adopted departing from the past practice as a matter of principle of consistency. Therefore, the AO as well as the learned CIT(A) are not justified in adopting different methodology as in the present case. The reliance was placed on the decisions of various courts of law upon by the learned AR for the assessee Shri Sandeep Vijh mentioned hereinabove.

1 Moreover, if at all, the method of accounting is changed by the AO then for including the closing stock in the name, the AO is required to give deduction for the opening stock which is accepted method of accounting. This had not been done by the AO. Therefore, he is not justified in making any addition on account of closing stock.

2 Nothing has been brought by the AO or nothing has been demonstrated by the AO that the method adopted by the assessee is different as required by the revenue and how the profit has been under estimated has not been worked out properly. The AO has relied upon the measurement book of Jalandhar Improvement Trust and the same has been applied on the other contractees which infact is not true. It has been GURBAX SINGH 2015.11.17 12:39 integrity of this document High Court Chandigarh argued and also is on record that the assessee had received payment upto 30th March. Therefore, on no account, the purchase of material between 25th March 2007 to 31st March 2007 can be ` 22,27,607/-. Therefore, no addition in the present case can be made on surmises and conjectures.”

The finding recorded by the Tribunal is a pure finding of fact which has not been shown to be illegal or perverse in any manner by the learned counsel for the appellant-revenue warranting interference by this Court.

With regard to question No.(ii), the same has not been pressed even before the Tribunal as is evident from para 2 of the order dated 27.12.2012 passed by the Tribunal. Consequently, question No.(ii) does not arise.

In view of the above, no substantial question of law arises and the appeal stands dismissed. (Ajay Kumar Mittal) Judge October 14, 2015 (Ramendra Jain) 'gs' Judge GURBAX SINGH 2015.11.17 12:39 integrity of this document High Court Chandigarh

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