S.R. DEVELOPERS,MUMBAI vs. ACIT 15(2), MUMBAI

The ground raised by the assessee firm in the memo of appeal filed with the Tribunal reads as under:-

The brief facts of the case are that the assessee firm is engaged in the business of building construction activities. The assessee is specified firm which came into existence in terms of a joint venture agreement dated 31-05- 2005. The assessee firm had undertaken construction of building projects consisting of five buildings namely; Buildings A, B, C, D and namely wings A to K at Survey No. 139/141/143 at old CTS No. 463, 465 and 468 at village Navghar, Bhayandar (E), Mumbai as per the commencement certificate issued by Mira Bhayander Mahanagar Palika dated 6-12-2004. As per this certificate, approval was granted for commencement of the construction of five buildings A, B, C, D & E as one project. There was a survey action carried out by Revenue u/s 133A of the Income Tax Act, 1961(hereinafter called “the Act”) in the business premises of the assessee firm on 06-09-2007. During the ITA 3119/Mum/2012 3 course of survey action on 06-09-2007 u/s 133A of the Act, the statement was recorded on oath of Mr. Rajaram N. Bhati, the partner of the firm whereby he was confronted with the loose papers found at the drawer of the accountant which showed that the cost of the project II Wing (G.H.F.) at Rs. 8,05,13,500/-. Another statement on oath was recorded on 11-09-2007 of Mr Rajaram N Bhati. The relevant portion of the statement which was recorded on 11th September, 2007 is extracted below:-

Before the CIT(A), the assessee firm submitted that the sum of Rs. 1,75,00,372/- has been declared to cover the discrepancies observed during the course of survey u/s 133A of the Act and during the course assessment proceedings u/s 143(3) read with Section 143(2) of the Act, the basis of such declaration and treatment of the same in the books of accounts of the assessee firm has been fully explained. The declaration of such income has been applied to cover up the discrepancies in the Work-in-Progress noticed during the course of Survey proceedings u/s 133A of the Act. Thereafter, during the course of assessment proceedings u/s 143(3) read with Section ITA 3119/Mum/2012 6 143(2) of the Act, the assessee firm has fully explained the declaration of such amount and its application. Accordingly, the Profit & Loss A/c of the appellant AOP has been credited by Rs. 1,75,00,372/- and corresponding debit has been given to Work-in-Progress A/c. Thus, in the return of income filed by the assessee firm with the Revenue such disclosure of income has already been made. However, disregarding such disclosure the A.O. has once again added the same amount without assigning any reason and without application of mind which should be quashed.

Aggrieved by the orders dated 23-02-2012 passed by the CIT(A), the assessee firm is in appeal before the Tribunal.

The ld. Counsel for the assessee firm submitted that there was a survey action u/s 133A of the Act which was conducted by the Revenue at the business premises of the assessee firm on 06-09-2007. During the course of survey proceedings u/s 133A conducted by the Revenue, loose papers were found from the accountant of the assessee firm whereby WIP was stated to be shown at Rs. 8,05,13,500/- towards the cost of project II Wing (G.H.F.) as against Rs. 6,30,13,128/- disclosed in the books of account and hence there was a discrepancy of Rs. 1,75,00,372/- between the loose sheet found during the course of survey and books of accounts maintained by the assessee firm. Explanation was sought by the Revenue and the partner of the assessee firm Mr. Raja Ram N. Bhati in the statement recorded on oath has offered an amount of Rs. 1,75,00,372/- as additional income for the current year for taxation on account of difference in the WIP. The statement of Shri Rajaram N. Bhati is placed on record vide paper book page No. 41 to 57. The ld. Counsel for the assessee firm has drawn our attention to the statement of Shri Rajaram N. Bhati whereby he offered the said amount for taxation. Our attention was also drawn to page 5 of the paper book whereby the assessee firm showed the income so disclosed u/s 133A of the Act amounting to Rs. 1,75,00,372/- credited to the P&L account and accordingly the P&L account was prepared. Our attention was also invited to the corresponding entry of Rs. 1,75,00,372/- which was simultaneously debited in the same Profit and Loss Account at page 5 of paper book to the expenditure account as “Expenses disclosed u/s 133A –Rs.1,75,00,372/-”, hence, there was a neutralizing impact of the income of Rs.1,75,00,372/- credited to Profit and Loss Account because the expenses of Rs. 1,75,00,372/- was correspondingly claimed against the income so declared towards the cost incurred towards WIP. Our attention was also drawn to the submission made by the assessee firm before the A.O. whereby all details relating to the projects was submitted before the AO such as commencement certificate, BMC approved layout plan , site plan , brochure of the project, land agreement and copy of TDR purchase ITA 3119/Mum/2012 8 agreements etc. which are placed vide paper book page 13 and were submitted during the assessment proceedings u/s 143(3) read with Section 143(2) of the Act before the AO. It was also submitted that the amount of Rs. 1,75,00,372/- which was disclosed u/s 133A of the Act during the course of survey vide statement recorded u/s 131 of the Act was offered for taxation vide credit in Profit and Loss Account while expenditure was incurred for the ongoing project II work i.e. WIP being application of such income of Rs.1,75,00,372/- so disclosed. The ld. Counsel for the assessee firm submitted that the additions have been made u/s 69C of the Act of Rs. 1,75,00,372/- on account of discrepancy in the WIP which is not warranted. It was also submitted that the CIT(A) has upheld the addition so made by recording his findings in the CIT(A) orders dated 23-02-2012 . It was also submitted that the statement was not retracted by the assessee firm but it was properly dealt in with the books of account and the income was offered for taxation. It was submitted that there is loss in the project which is getting set off against the profit in the project. The assessee firm relied upon the decision of Hon’ble Supreme Court in the case of CIT v. S.Khader Khan Son (2012) 25 taxmann.com 413(SC) to contend that no additions can be made by the Revenue based on the statement recorded during the course of survey proceedings u/s 133A of the Act as Section 133A of the Act does not empower Revenue to examine any person on oath; so statement recorded u/s 133A of the Act has no evidentiary value and any admission made during such statement cannot be made basis of addition. The assesee firm also relied upon decision of Hon’ble Delhi High Court in the case of CIT v. Dhingra Metal Works in (2011) 196 Taxman 488(Delhi)/ 328 ITR 384 and also in the decision of Mumbai-Tribunal in the case of Cannon Industries Private Limited v. DCIT (2015) 59 taxmann.com 65(Mum-Trib.)

The ld. D.R., on the other hand, submitted that there is a statement of the partner of the assessee firm which was recorded on 6th September, 2007 ITA 3119/Mum/2012 9 and also on 11th September, 2007 and the assessee firm vide statement on oath has offered the income for taxation amounting to Rs. 1,75,00,372/- over and above the normal income on account of discrepancy in the WIP. The ld. D.R. relied on the decision of Hon’ble Allahabad High Court in the case of Dr. S C Gupta v. CIT (2001) 248 ITR 782(All. HC) and Hon’ble Supreme Court in the case of Pullangode Rubber Produce Co. Ltd. v. State of Kerala (1973) 91 ITR 18(SC).

In the rejoinder, the ld. Counsel for the assessee firm submitted that the assessee firm has returned income of Rs. 1.47 crores and the discrepancy in the WIP towards expenditure incurred Rs. 1,75,00,372/- has been offered for taxation.

We have considered the rival contentions and also perused the material available on record including the case laws cited by both the sides. We have observed that the assessee firm is in the business of undertaking construction of buildings. There was a survey operation carried out by the Revenue in the business premises of the assessee firm u/s 133A of the Act on 06-09-2007. During the course of survey operations on 06-09-2007, loose documents were found from the accountant of the assessee firm which reflected WIP of Rs.8,05,13,500/- as on 06-09-2007 , while the WIP as per books of the accounts as on the date of survey u/s 133A of the Act on 06-09- 2007 was Rs.6,30,13,128/- , thus there was discrepancy of Rs.1,75,00,372/- as on 06-09-2007 between the loose documents found during the course of survey operations and books of accounts maintained by the assessee firm, whereby statement of the partner of the assessee firm on oath was recorded and accordingly assessee firm offered additional income of Rs. 1,75,00,372/- for the difference appearing in the closing WIP which was disclosed in the books of account at Rs. 6,30,13,128/- as on date of survey on 06-09-2007as against the WIP shown in the loose papers at Rs. 8,05,13,500/- as on date of ITA 3119/Mum/2012 10 survey on 06-09-2007. This differantial amount was surrendered by the partner of the assessee firm Shri Rajaram N. Bhati as income of the assessee firm vide statement recorded on oath during the course of survey operations u/s 133A of the Act on 6th September, 2007 and also vide statement recorded on 11-09-2007 , whereby he offered for taxation the same as additional income of the assessee firm not disclosed in the books of accounts maintained by the assessee firm. This statement was not retracted by the assessee firm rather the statement of partner of the assessee firm is corroborated and supported by the loose documents found during the course of survey operations . This is pertinent to note that the assessee firm has not disputed the contents of the afore-stated loose documents found during the course of survey operations rather the contents of the said loose documents found during the course of survey proceedings is accepted by the assessee firm to be true and correct. The contention of the assessee firm was that although the statement has not been retracted but the assessee firm has offered the same for taxation in the returned income filed with the Revenue by making proper entries in the books of account and hence the authorities below are not correct in making the addition, which is a double addition which is not permissible under the Act. Our attention was drawn to the P&L account, balance sheet of the assessee firm and a perusal of the same revealed that the assessee firm has credited the amount of Rs. 1,75,00,372/- being income disclosed u/s 133A of the Act in the credit side of the Profit and Loss Account under nomenclature ‘By Income disclosed u/s 133A- Rs.1,75,00,372/-‘ but at the same time the assessee firm has passed a corresponding debit entry to the P&L account under the head expenditure under a nomenclature ‘To expenses disclosed u/s 133A – Rs.1,75,00,372/-‘ to neutralise the effect of equivalent income which was credited to Profit and Loss Account with the equivalent amount of expenditure debited to Profit and Loss Account by contending that these are the cost which are incurred by the assessee firm and hence income got offered for taxation when the same is ITA 3119/Mum/2012 11 credited to the Credit side of the Profit and Loss Account. The contention of the assessee firm is fallacious. Reference is drawn to Section 69C of the Income Tax Act, 1961 which is reproduced below:-

The next issue raised by the assessee firm relates to the difference in stock of flats by taking their value at cost by the AO as against the value disclosed by the assessee firm based on cost or net realisable value which ever is lower . From the perusal of the P&L account of the assessee firm, it was found by the A.O. that assessee firm has taken the value of Rs. 23,18,008/- as a opening stock(seven flats). The status as at the end of year of these flats is as under:-

Before the CIT(A) the assessee firm submitted that the addition of Rs. 13,08,556/- was made by the A.O. as variation of opening stock of ULC flats. The assessee firm submitted that as per the condition of the approval of the project, the assessee firm is required to allot certain flats at concessional rate as per the direction of the Government authorities to the weaker sections for their upliftment . This is mandatorily required to be allotted to eligible allottee’s as per the concessional rate prescribed by the government authority and the assessee firm does not have any control over the same. During the year ending 31.03.2007, relevant to the assessment year 2007-08, the value of the stock was taken at cost while during the year under appeal i.e. assessment year 2008-09 when the sale of these ULC flats was actually ITA 3119/Mum/2012 16 undertaken, the realizable value as per prescribed rates was received in respect of four flats sold by the assessee firm and the balance three flats were lying as stock. The assessee firm applied AS- 2 - Valuation of Inventories, as prescribed by Institute of Chartered Accountants of India(ICAI), the stock is required to be valued either at Cost or at Net Realizable Value whichever is less. Since such realizable value being lesser than the cost, it is taken at Net Realizable Value of Rs. 4,32,480/- for the remaining three flats. The assessee firm submitted that for the year under consideration relevant to the assessment year 2008-09, the assessee firm has shown 7 ULC flats at the value of Rs. 23,18,008/- as opening stock and at the end of the year, value for the unsold 3 ULC flats is shown at Rs. 4,32,480/- as Closing Stock. During the year, 4 flats have been sold at the value of Rs. 5,76,972/-. The assessee firm submitted that the builder and developer of the project provides an undertaking to the Additional Collector & Competent Urban Agglomeration for handing over and maintaining tenements equivalent to 5% of the total area of the housing scheme, to be allotted to the Government nominees being weaker sections of the society for their upliftment. The assessee firm submitted that from the copy of undertaking dated 15.12.2005, clearly earmarking the number of flats (being 7) and their location in the project, along with requisite additional conditions pertaining to amenity charges and requesting the concerned authorities to allot the flats at their discretion to the selected Government nominees. In this agreement there is no mention of the rate at which the said flats are to be allotted to the appointed Government nominees. The assessee firm submitted that until the completion of the project and handing over the said 7 ULC flats, the assessee firm does not have any idea as to what values will these flats fetch, thereby it has no option but to value them as Stock-in-trade, as per the cost of construction incurred for the entire project comprising of both ULC and non-ULC flats. Thereafter, the Competent Authority, Thane for Urban Land Regulation Act, 1976, apportioned the selected flats vide separate Allocation Letters addressed to ITA 3119/Mum/2012 17 the individual Government nominees, specifying the exact cost to be paid by the said nominees to the concerned builders. At this juncture, that the assessee firm is made aware of the actual value to be expected of these ULC flats. The CIT(A) after considering the findings of the AO as well as the submissions of the assessee firm held that the AO tried to change the value of opening stock without any adjustment in the earlier year. The CIT(A) held that it is a settled principle of law that the value of closing stock of last year will be the opening stock of subsequent year and moreover the assessee firm cannot be allowed to change the method of accounting of stock in different years. When opening stock was valued at cost by the assessee firm, closing stock should also have been valued at cost only. Hence, the CIT(A) directed the A.O. to re-work the difference in stock of the unsold flats by taking their value at cost as against the value disclosed by the assessee firm on net realisable value and accordingly the CIT(A) partly allowed the ground vide orders dated 23-02-2012 .

Aggrieved by the order of the CIT(A) dated 23-02-2012, the assessee firm is in appeal before the Tribunal.

The ld. Counsel for the assessee firm submitted that the dispute here is with regard to the closing stock of the three flats, which are unsold flats. The ld. Counsel submitted that four flats were sold to the weaker sections for their upliftment at a price fixed by the Government Authorities on which the assessee firm has no control in fixing the said price. Out of seven flats, the remaining three unsold flats were valued at the cost or net realisable value which ever was lower but the A.O. has valued the same at cost. The ld. Counsel submitted that as per AS-2 issued by the ICAI, it is mandatory that stock is required to be valued either at cost or at net realisable value whichever is lower. The assessee firm, being builder and developer of the project, provides an agreement to the Additional Collector & Competent ITA 3119/Mum/2012 18 Authority, Urban Agglomeration for handing and maintaining, whereby the assessee is compelled to offer 5% of the total area of the housing scheme to be allotted to the government nominees which are weaker section of the society at government determined rate and the assessee has no control over the same in fixing the price.The assessee firm reiterated its submissions as made before the authorities below which is not repeated for the sake of brevity.

The ld. D.R., on the other hand, relied on the orders of the lower authorities.

We have heard the rival contentions and also perused the material available on record. We have observed that the assessee firm has constructed buildings and as per the mandatory requirement, the assessee firm is required to allot to eligible allottee’s as per the concessional rate prescribed by the government authority equivalent to 5% of the total area of the housing scheme to the weaker sections of the society. The assessee firm has no control over the price and the same will be determined by the government authority. The assessee firm has seven flats and out of which four flats were sold at fixed price and three flats were unsold as at the end of the financial year. Hence , the assessee firm has computed the valuation of these three un- sold flats at the price fixed by the Government authorities which was far lower than the actual cost. In our considered view, the assessee firm has valued the stock at cost or net realisable value whichever is lower as per AS -2 prescribed by ICAI which is an accepted method of valuation of inventories as prescribed by the ICAI and required to be mandatorily followed by the enterprises and the change in the method of valuation of the stock by the assessee firm from ‘cost’ method to ‘cost or net realisable value’ method whichever is lower is bonafide and the assessee firm has rightly changed the method of valuation of inventories from ‘cost’ to ‘cost or net realisable value’ whichever is lower method of valuation of inventories , which is a recognised ITA 3119/Mum/2012 19 method of valuation of inventories. The assessee firm has no control over the fixing of price on these three un-sold flats as per conditions imposed by Government authorities while approving the project and as per undertaking given by the assessee firm to the Government authorities rather the prices of these flats to be offered and sold to weaker sections of the society are determined and fixed by the government authorities of which the assessee firm has no control in the fixation of price which is fixed by Government authorities which is binding on the assessee firm. AS-2 stipulates that the stock is required to be valued either at cost or at net realisable value whichever is less. The assessee firm , in our considered view , has rightly adopted the method of valuation of closing stock of inventories at cost or net realisable value whichever is lower which is supported by AS-2 issued by the ICAI and change in the method of valuation of inventory is bona-fide and hence we do not find any error in the change of method of valuation of stock adopted by the assessee firm as detailed above, hence, the addition made by the A.O. and as confirmed by the CIT(A) is deleted and the valuation of the closing stock of three unsold flat as adopted by the assessee firm based on government authorities notified rates for offering these three flats to weaker sections of the society in terms of the conditions of approval of the project is accepted as the assessee firm has to compulsorily sell these three flats at a price fixed by Government authorities and the assessee firm is bound by the price fixed by the government authorities as the same was part of the condition imposed by the Government while approving the project and undertaking given by the assessee firm to the government authorities. We order accordingly.

The last issue is regarding arithmetical error which have crept in the assessment order dated 30-12-2010 passed by the A.O u/s 143(3) of the Act. In this regard it was submitted by the ld. Counsel for the assessee firm that the CIT(A) has not adjudicated the issue pertaining to arithmetical mistake ITA 3119/Mum/2012 20 committed by the A.O. in his assessment order dated 30-12-2010 passed u/s 143(3) of the Act despite the ground of appeal raised by the assessee firm in the first appeal filed before the CIT(A). It was submitted that there are arithmetical errors in the assessment order dated 30-12-2010 passed by the AO u/s 143(3) of the Act which has not been rectified by the CIT(A) vide orders dated 23-02-2012 despite the ground of appeal taken by the assessee firm before the CIT(A). The ld. Counsel accordingly submitted that directions may be given to the A.O. to correct the arithmetical error on merits. The ld. D.R. submitted that he has no objection if the matter is sent back to the A.O. for correction of arithmetical errors which have crept in the afore-stated assessment order dated 30-12-2010 passed u/s. 143(3) of the Act on merits. In the interest of justice, we direct the A.O. to consider the grievance of the assessee firm on merits with respect to the correction of the arithmetical error which have crept in the assessment order dated 30-12-2010 passed u/s 143(3) of the Act. We order accordingly.

In the result, the appeal filed by the assessee firm in ITA N0. 3119/Mum/2012 for the assessment year 2008-09 is partly allowed.