Commissioner of Income Tax vs Satish Estate P. Ltd.

Ajay Kumar Mittal, J.—This appeal has been preferred by the Revenue u/s 260A of the income tax Act 1961 (in short, "the Act"), against the order dated November 27, 2012, annexure AIII passed by the income tax Appellate Tribunal, Chandigarh Bench "A" Chandigarh (in short, "the Tribunal") in I.T.A. No. 1282/CHD/2010 ( 2013 (22) ITR (Trib) 349 ) for the assessment year 2006-07, claiming the following substantial questions of law:

(i) Whether, on the facts and in the circumstances of the case, the hon''ble income tax Appellate Tribunal was right in law in deleting the addition of Rs. 75,00,000 made by the Assessing Officer on account of undervaluation of closing stock of the land as the civil suit was filed in the civil court near the end of the financial year, i.e., March 18, 2006, which would have no impact on the value and that the events that took place in the subsequent year would have no hearing on the value of closing stock as on March 31, 2006?

(ii) Whether, on the facts and in the circumstances of the case, the hon''ble income tax Appellate Tribunal was right in law in deleting the addition of Rs. 75,00,000 made by the Assessing Officer on account of undervaluation of closing stock of the land as the assessee has not given any basis as to how he arrived at this figure?

Briefly, the relevant facts necessary for adjudication of the controversy involved, as narrated in the appeal, may be noticed. The assessee filed its return declaring income of Rs. 38,83,862 on November 30, 2006. Assessment u/s 143(3) of the Act was completed on November 23, 2007, at an income of Rs. 45,47,330. The Commissioner of income tax (CIT), vide order dated November 18, 2008, u/s 263 of the Act set aside the assessment. Again, assessment was framed, vide order dated October 13, 2009, annexure A.1 u/s 143(3) of the Act at an income of Rs. 1,20,47,330 and an addition of Rs. 75,00,000 was made on account of undervaluation of closing stock of the land. Aggrieved by the order, the assessee filed an appeal before the Commissioner of income tax (Appeals) (CIT (A)). Vide order dated August 30, 2010, annexure A. II, the Commissioner of income tax (Appeals) allowed the appeal and deleted the entire addition by relying upon the documentary evidence. It was further held that there was a legal dispute between the assessee and M/s. Amritsar Rayon and Silk Mills Pvt. Ltd. The said firm had filed a suit on March 11, 2006, against the assessee and as such the assessee had valued the closing stock at cost price or net realisation value, whichever was less. It was further held that the assessee had not changed the method of valuing the closing stock as was evident from the audit report "Details of deviation if any". Not satisfied with the order, the Revenue filed an appeal before the Tribunal. Vide order dated November 27, 2012, annexure A. III, the appeal was dismissed. Hence, the present appeal by the Revenue.

Learned counsel for the Revenue submitted that the civil suit was filed by M/s. Amritsar Rayon and Silk Mills Pvt. Ltd. on March 11, 2006, in which the assessee was made respondent No. 4 and the same was still pending at the end of the financial year, i.e., as on March 31, 2006, and, therefore, in such a situation, the valuation of the closing stock shown by the assessee by making reduction of Rs. 75 lakhs was improper. The Commissioner of income tax (Appeals) and the Tribunal had erred in granting the benefit of the same.

On the other hand, the learned counsel for the assessee besides supporting the findings recorded by the Commissioner of income tax (Appeals) and the Tribunal on the strength of the judgment of this court in Commissioner of Income Tax Vs. Fazilka Co-operative Sugar Mills Ltd., and of the Delhi High Court in Commissioner of Income Tax Vs. Continental Devices India Ltd., submitted that there was no loss to the Revenue on account of valuation of the closing stock for the assessment year 2006-07 as in the subsequent assessment year 2007-08, the valuation of the opening stock was taken after reducing the closing stock for the assessment year 2006-07.

After hearing the learned counsel for the parties, we do not find any merit in the appeal.

The Commissioner of income tax (Appeals), vide order dated August 30, 2010, annexure A. II while accepting the contentions of the assessee had recorded as under (page 352 of 22 ITR (Trib)):

2.3 I have considered the facts of the case and the submission of the authorised representative. The assessee is dealing in real estate. During the year after taking into account the opening stock, purchases, sales the Assessing Officer noticed that the assessee has undervalued its closing stock of land by Rs. 75 lakhs. The working of these details have been stated by the Assessing Officer on pages 7 and 8 of the assessment order: The Assessing Officer asked the assessee to explain why addition of Rs. 75 lakhs should not be made. The assessee submitted its reply which has been reproduced by the Assessing Officer in the assessment order. The assessee contended before the Assessing Officer that the land purchased from Balwinder Singh and Harjinder Singh fell into legal dispute as one M/s. Amritsar Rayon Silk Mills (P.) Ltd. filed a suit against the assessee stating that they had already paid a sum of Rs. 70 lakhs as byana for the same property and, therefore, claimed that the registration executed in the assessee''s favour was not correct. Oh the strength of the agreement M/s. Amritsar Rayon and Silk Mills (P.) Ltd. made further agreement to sell the same land to M/s. Futuristic Solutions Ltd. and received a sum of Rs. 70 lakhs from them. A stay was granted to M/s. Amritsar Rayon and Silk Mills (P.) Ltd. by virtue of which the assessee was debarred from making the sales of any land. The assessee paid Rs. 70 lakhs and a further sum of Rs. 70 lakhs was kept in bank FDR. Later on the court and then the hon''ble Punjab and Haryana High Court confirmed the stay. As a result of the above legal problems, the asses-see could not develop the colony as the disputed land was at the front. In view of the above, the assessee paid Rs. 2,30,000 (as per the assessee it is actually 2.30 crores) to M/s. Futuristic Solutions Ltd. in 2007 and they in turn agreed to withdraw all the suits and not to pursue the case before the hon''ble Punjab and Haryana High Court. It was under the above circumstances that the assessee valued the closing stock of land less by Rs. 75 lakhs.

2.4. The Assessing Officer, was not satisfied with the above explanation of the assessee. The Assessing Officer has observed that the civil suit was filed by M/s. Amritsar Rayon and Silk Mills (P.) Ltd., on March 18, 2006, and there was no verdict up to March 31, 2006. The assessee was adopting the cost price method for determining the valuation of the closing stock and it was not permitted under the law to change the method of valuation of closing stock. Further, the assessee is not permitted to shift the tax liability of a particular year to a subsequent year. In view of the above, the Assessing Officer rejected the various contentions of the assessee and made an addition of Rs. 75 lakhs.

2.5 The assessee in the course of the appellate proceedings has filed its detailed reply which has been reproduced above. The assessee after repeating the facts and history of the case has stated that as a result of legal dispute price of land had gone down which has been given effect while valuing the closing stock. From what is discussed above and detailed submission of the assessee, I am of the opinion that the Assessing Officer was not right in rejecting the assessee''s various contentions and making the addition of Rs. 75 lakhs. It is a fact that there was a legal dispute over the land which was in front of a big piece of land on which the assessee wanted to develop a colony. Unless the legal dispute is resolved the assessee could not have developed the colony which as claimed by the assessee would have caused huge losses to the assessee. It is not a case of pure legal dispute over land but the court had also, granted the stay which was confirmed by the hon''ble Punjab and Haryana High Court. The assessee had paid Rs. 70 lakhs to M/s. Amritsar Rayon and Silk Mills (P.) Ltd. and another Rs. 70, lakhs were kept on bank FDR to cover further losses. In fact as claimed an amount of Rs. 2.30 crores was paid to settle the dispute. From what is stated above, it cannot be said that the assessee did not have a clear title over the land and the same was not free from all encumbrance. Land was encumbered by legal dispute which had made a dent in the price of land. Regarding the Assessing Officer''s contention that suit was filed on March 18, 2006, and there was no verdict up to March 31, 2006, and, therefore, filing of suit had no impact on the value of the impugned land the same, in my opinion, is not tenable. The assessee has stated that immediately after the suit was filed on March 18, 2006, the land became a disputed property. The fact of dispute was reported in the newspapers. Legal dispute, in my opinion, has adversely impacted the price of land. Now, coming to the issue of undervaluation of Rs. 75 lakhs the assessee has already explained that it had paid Rs. 70 lakhs to M/s. Amritsar Rayon and Silk Mills (P.) Ltd. and finally the matter was settled at Rs. 2.30 crores. In fact, M/s. Amritsar Rayon and Silk Mills (P.) Ltd. had filed a suit for recovery of Rs. 1,08,00,000 being the double of advance amount paid as earnest money to the tune of Rs. 54 lakhs. In view of the above discussion, I am of the opinion that the assessee has rightly valued the closing stock of the aforesaid land less by Rs. 75 lakhs. Now, coming to the issue of the method of valuation of closing stock which the Assessing Officer says was cost price in earlier years, the assessee has stated that there is no change in the method of valuing of closing stock. It has consistently been following the method of valuing the closing stock at cost or market price, whichever is less. In fact tax audit report for the assessment year 2006-07 a copy of which has been filed in the course of appeal proceedings shows the method of valuation of closing stock as cost or net realisable value, whichever is less. Against the column ''Details of deviation, if any from the method of valuation prescribed u/s 145A and effect thereof on the profit and loss'' it is clearly mentioned nil. It is, therefore, clear that there is no change in the method of valuation of closing stock as alleged by the Assessing Officer. In any case the Assessing Officer has not substantiated his observation that the assessee has changed the method of closing stock.

2.6 In view of the above, I am of the opinion that the assessee has rightly and correctly valued its closing stock and the Assessing Officer, therefore, was not justified in making the addition of Rs. 75 lakhs and the same is deleted.

The Tribunal, vide order dated November 27, 2012 ( 2013 (22) ITR (Trib) 349 , annexure A-III, while dismissing the appeal of the Revenue, affirmed the aforesaid findings with the following observations (page 355):

It is evident that the company, M/s. Amritsar Rayon and Silk Mills Pvt. Ltd., filed a suit against the assessee on March 11, 2006, which had an adverse impact on the market value of the impugned asset. The Revenue itself did not challenge the opening stock of the impugned asset in the subsequent assessment year, while passing the assessment order u/s 143(3) and accepted the same as contended by the learned authorised representative. Having regard to the above discussed legal and factual position of the case and also perusing the findings of the Assessing Officer and the Commissioner of income tax (Appeals), in the matter, we are of the considered opinion that the order passed by the Commissioner of income tax (Appeals) does not suffer from any infirmity and, hence, the same is upheld and the appeal of the Revenue is dismissed.

In the present case, it was not disputed that a civil suit was filed by Ms. Amritsar Rayon and Silk Mills Pvt. Ltd. in which the assessee was impleaded as respondent No. 4. There was an interim order passed by the trial court which was affirmed by this court as well. In such a situation, the assessee was justified in reducing the valuation of the closing stock. The assessee had reduced the closing stock and the same was taken as opening stock for the assessment year 2007-08 which was accepted by the Assessing Officer while framing assessment u/s 143(3) of the Act. Thus, no loss to the Revenue had been caused. Further, this court in Fazilka Co-operative Sugar Mills Ltd.''s case (supra) had noticed as under (page 412):

We think that the plea is untenable. If the assessee had claimed the benefit, the Revenue would have contended before the Tribunal that the assessee has accepted the addition. Otherwise, the Revenue does not give the benefit. So, it wants the best of both the sides. Still further, it appears to us that the Revenue is only trying to fiddle with the figures. In fact, the addition to the value of the stock-in-hand has not resulted in any loss to the Revenue. The value which has been shown by the assessee has been carried forward to the next year. Thus, there is no loss of tax so far as the Revenue is concerned. In any case, the ultimate position is that the assessee has suffered loss.

The Delhi High Court in Continental Devices India Ltd.''s case (supra) had recorded as under (page 573):

As regards questions Nos. 1, 3 and 5, in our opinion, the said questions are questions of fact. With regard to question No. 1, we are further informed that, in respect of the subsequent year, the dosing stock has been accepted by the Department to be the opening stock. As far as question No. 5 is concerned, for the subsequent assessment year, a similar contention had been raised and the assessing authority had accepted that investment allowance is allowable on the air-conditioning plant.

In view of the above, no substantial question of law arises. Consequently, the appeal stands dismissed.