2013 (1) TMI 84 - AT - Income Tax

Additional income toward additional value of WIP - Revised return - AO stated that there was no provision in the Act for allowing deduction for additional income offered for earlier years(s) to cover up the deficiencies in the books of account - Held that - There is no question in the said Statement of Shri C.Sivarama Prasad, Director, either in relation to any discrepancy in accounts, including WIP or its valuation, or inadequacy of profits disclosed, or share application money, or the question also alluding to land purchased by the assessee company, in the said Statement. In fact, even the assessee referred only to this part of the Statement. There is no whisper of the WIP or its valuation, much less of any discrepancy therein, in the said Statement. As such, the CIT(A) is correct in stating so, holding that the disclosure during survey - implying thus to be for both the years - was not made on account of difference in WIP or stock. The assessee s claim of the said aspect having attained finality in view of its revised return for AY 2005-06, offering additional income (of Rs.75 lakhs) toward additional value of WIP is without merit. This is as the same (revised return) is only based on, or in terms of (or ought to be so), the declaration made during the Survey, and which is de hors and without reference to any material or evidence as to WIP. The revised return, thus, to the extent it is inconsistent with the same cannot be considered as in pursuance thereto or arising therefrom. The same would therefore require a finding by the AO, accepting the increased value of the closing WIP for that year, to claim for its inclusion as a part of the WIP for the current year. No evidence to substantiate its said claim stood adduced by the assessee either in the assessment proceedings or before the first appellate authority - The increase in the closing stock, is only on account of admission of the corresponding expenditure thereon, which, where not adjusted against the income for the year, gets carried forward in the form of unbilled expenditure. However, as the expenditure is not admissible, there is no question of it being adjusted either against the income for the current or any subsequent year, i.e., by being carried over as unbilled expenditure, so that it would result in a net increase in the income for the year of expenditure, with no implication for any other year. The appellate order by the CIT(A), holding that the disclosure of Rs.50 lakhs for the current year as toward reconciling all differences, while rejecting an attempt by the AO to disturb the assessee s valuation method, thus, has to be viewed as correcting this anomaly. No infirmity therein. Method of valuation - Held that - Nothing on record to hold it as inadequate. Further, there is also nothing on record to show that the changed/enhanced allocation has been insisted upon and applied by the Revenue for the succeeding years as well, as any change has necessarily to be regularly followed, or else would lead to a distortion in profits across different years. As such, confirm the assessee s valuation method for the current year, so that no interference therewith, as made by the AO, is called for. Disallowance for Rs. 2 lakhs qua Entry Tax - CIT(A) deleted the addition - Held that - While the AO presumes that entry tax is only for fresh purchase, the CIT(A) admits and accepts assessee s explanation at face value, i.e., de hors any material. The question is not if the machinery is old or new, as the assessee could well have purchased some old machinery, but whether it is a purchase or acquisition of a capital asset or not, from where to where, and for what purpose, is the machinery being moved - the matter is restored back to the AO for proper examination and a decision in accordance with law, consistent with the facts of the case Disallowance of fees paid to the Registrar of Companies - same is paid toward increase in share capital - Held that - As clarified by the assessee, with reference to the various forms for which the filing fees stands paid, and to which reference was also made by the during hearing, it is only in respect of registration of charges, appointments of Directors, etc. No case for disallowance, under the circumstances, is made out, and the same stands rightly deleted by the ld. CIT(A).

Summary

Issues Involved:
1. Disallowance of Rs.75 lakhs claimed as additional Work-in-Progress (WIP) for AY 2005-06.
2. Addition of Rs.84.93 lakhs due to revaluation of WIP for AY 2006-07.
3. Deletion of disallowance of Rs.2 lakhs for Entry Tax.
4. Deletion of disallowance of fees paid to the Registrar of Companies.

Detailed Analysis:

1. Disallowance of Rs.75 lakhs claimed as additional Work-in-Progress (WIP) for AY 2005-06:

The assessee, a company in civil construction and real estate, was subject to a survey under section 133A of the Income-tax Act on 16.2.2006. During the survey, the Director disclosed additional income of Rs.75 lakhs for AY 2005-06 and Rs.50 lakhs for AY 2006-07 to cover various deficiencies. The assessee revised its return for AY 2005-06, declaring an additional income of Rs.75 lakhs, which was accepted by the Revenue. However, the Assessing Officer (AO) did not allow the corresponding increase in the opening WIP for AY 2006-07, stating there was no provision in the Act for such a deduction. The CIT(A) upheld this disallowance, noting the additional income was to cover deficiencies in accounts and low gross profit rate, not specifically for WIP discrepancies.

The Tribunal found no evidence in the survey statement indicating discrepancies in WIP. The assessee's claim that the additional income for AY 2005-06 was for WIP was unsubstantiated. The Tribunal upheld the CIT(A)'s decision, stating the assessee failed to provide evidence that the additional income was related to WIP investment.

2. Addition of Rs.84.93 lakhs due to revaluation of WIP for AY 2006-07:

The AO revalued the closing WIP by allocating the entire indirect expenditure over the unbilled direct expenditure, resulting in an addition of Rs.84.93 lakhs. The CIT(A) restricted this addition to Rs.50 lakhs, aligning it with the survey disclosure. The Tribunal noted that the AO's revaluation method, which was more scientific than the assessee's ad-hoc 10% allocation, was flawed due to an arithmetical error and conceptual mistake. The Tribunal upheld the CIT(A)'s decision to restrict the addition to Rs.50 lakhs, confirming the assessee's valuation method for the current year.

3. Deletion of disallowance of Rs.2 lakhs for Entry Tax:

The AO disallowed Rs.2 lakhs paid as Entry Tax, treating it as capital expenditure. The CIT(A) allowed the deduction, stating the tax was paid for shifting machinery. The Tribunal restored the matter to the AO for verification, noting the need for proper examination to determine if the tax was for acquiring a capital asset or for shifting machinery.

4. Deletion of disallowance of fees paid to the Registrar of Companies:

The AO disallowed fees paid to the Registrar of Companies, considering it capital expenditure related to increasing share capital. The CIT(A) deleted the disallowance, clarifying the fees were for registration of charges, appointments of Directors, etc. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's ground.

Conclusion:

The assessee's appeal was dismissed. The Revenue's appeal was partly allowed and partly allowed for statistical purposes. The Tribunal upheld the CIT(A)'s decisions on the disallowance of Rs.75 lakhs and the addition of Rs.84.93 lakhs, while restoring the Entry Tax issue to the AO for verification and confirming the deletion of disallowance of fees paid to the Registrar of Companies.