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2010 (10) TMI 707 - AT - Income TaxUndervaluation of closing stock - business of construction and development of properties flats shops etc - enhancement of rates of sales - Since the method followed by the assessee is an approved method and had been followed consistently the learned CIT(A) accepted the plea of the assessee that the value of work-in-progress has to be worked out as per the method consistently followed - It is not in dispute that the assessee has followed percentage completion method consistently since inception and has been declaring income/loss from year to year and the same was accepted in earlier years - Despite the AO s stand for the asst. yrs. 1998-99 and 1999-2000 with regard to correctness of the method of accounting followed by the assessee in the year 2000-01 when the assessee declared profit of more than Rs. 5 crores the AO appears to have accepted the same method to accept the income declared therein which in itself is an indication that the method of accounting followed by the assessee is an approved method of accounting - in the instant case there is no such finding either by the AO or by the learned CIT(A); AO has not rejected the book results by pointing out any defect in the books maintained by the assessee - Decided in favor of assessee.
Issues Involved:
1. Deletion of addition made by the AO on account of undervaluation of closing stock. 2. Deletion of addition made by the AO on account of enhancement of rates of sales effected. Detailed Analysis: 1. Deletion of Addition on Account of Undervaluation of Closing Stock: The Department appealed against the deletion of additions made by the AO for undervaluation of closing stock in the assessment years 1998-99 and 1999-2000. The AO had valued the closing work-in-progress/sales at Rs. 1,000 per sq. ft. for 1998-99 and Rs. 1,200 per sq. ft. for 1999-2000, instead of the assessee's valuation at Rs. 901.58 per sq. ft. and Rs. 1,289 per sq. ft. respectively. The AO's valuation was based on the current year's rate of realization, whereas the assessee used an average rate realized over the years. The assessee argued that it followed the percentage of completion method for recognizing revenue, which was consistently accepted by the Department in previous years. The CIT(A) accepted the assessee's method, noting that it was in line with AS-7 guidelines issued by the ICAI, which the AO had not fully considered. The CIT(A) found that the AO's method of valuing the work-in-progress did not reflect the true cost and was not justified. The CIT(A) emphasized that the assessee's method was consistent and had been accepted in earlier assessments. The Tribunal, after considering the rival submissions, upheld the CIT(A)'s decision. It noted that the assessee's method was consistent with AS-7 guidelines and that the AO had not pointed out any defects in the assessee's books of account. The Tribunal found no reason to interfere with the CIT(A)'s findings, which were based on detailed reasoning and consideration of the facts. 2. Deletion of Addition on Account of Enhancement of Rates of Sales Effected: For the assessment year 1998-99, the AO had enhanced the rates of sales by 15% over the declared rate, resulting in an addition of Rs. 2,70,230. This was based on a similar enhancement agreed to by the assessee under protest in the assessment year 1996-97. The assessee argued that the enhancement was not justified for the current year and that the AO had made an ad hoc addition without any material evidence. The CIT(A) agreed with the assessee, noting that the AO had not brought any material on record to prove that the flats were sold at a higher price than recorded in the books. The CIT(A) found that the addition was not justified and deleted it. The Tribunal upheld the CIT(A)'s decision, finding no infirmity in the CIT(A)'s reasoning. The Tribunal noted that the AO had not provided any evidence to support the enhancement of rates and that the CIT(A)'s findings were not controverted by the Department. Separate Judgment by the Accountant Member: The Accountant Member (AM) dissented from the Judicial Member (JM) and CIT(A), arguing that the issue of undervaluation of closing stock should be examined in light of the Supreme Court's decision in CIT vs. British Paints India Ltd. The AM noted that the valuation method used by the assessee might not reflect the true cost and that the matter should be remanded to the CIT(A) for a fresh decision after considering all relevant materials, including the tax audit report. Third Member's Decision: The Third Member, appointed to resolve the difference, agreed with the JM and CIT(A). The Third Member noted that the assessee's method was consistent, in line with AS-7 guidelines, and had been accepted by the Department in previous years, including the assessment year 2000-01. The Third Member found that the AO had not pointed out any defects in the assessee's books and that the CIT(A) had provided detailed reasoning for accepting the assessee's method. The Third Member concluded that the CIT(A)'s order should be upheld. Final Decision: In light of the majority view, the Tribunal upheld the CIT(A)'s order, confirming the deletion of additions made by the AO on account of undervaluation of closing stock and enhancement of rates of sales effected. The appeals filed by the Department were dismissed, and the cross-objections filed by the assessee were also dismissed as infructuous.
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