2014 (3) TMI 434 - HC - Income Tax

Rectification of order - Validity of order passed u/s 245D(6B) of the Act - Revenue was of the view that the closing stock of unsold land was undervalued while estimating the income of the assessee in the order passed by the ITSC - Held that - The ITSC has followed a particular method of computing the income of the assessee which required to be settled - the method is that there should be a flat rate of net profit, expressed as a percentage of the gross receipts of the assessee - When a flat rate of profit is applied to the gross turn-over and the assessment of the income of the assessee is made in the manner akin to a best judgment assessment, there is no scope for making any separate addition for undervaluation of stock, disallowance of expenditure, other additions under Section 68 etc. - The flat rate assessment as a percentage of the gross turn-over takes care of all possible omissions and if this method of estimating the concealed income of the assessee is adopted by the ITSC, there is no justification for separately making any addition towards alleged undervaluation of the stock. The fact that there was a difference of opinion between the members of the ITSC while examining the application of the Revenue shows that the matter is in any case not free from debate which takes it out of the purview of the provisions of Section 245D (6B) of the Act Decided against Revenue.

Summary

Issues:
1. Challenge to the order passed by the Income Tax Settlement Commission (ITSC) under Section 245D(6B) of the Income Tax Act, 1961.
2. Rectification application filed by the Revenue regarding undervaluation of closing stock of unsold land.
3. Disagreement between majority and minority members of the ITSC on rectification of the order.

Issue 1: Challenge to ITSC Order under Section 245D(6B):
The Revenue challenged the ITSC order dated 19.12.2012, where the ITSC estimated the income of the assessee at 8% of the total turnover, resulting in additional income to be added. The Revenue filed an application under Section 245D(6B) for rectification, claiming undervaluation of unsold land, leading to underassessment. The Revenue argued that the closing stock was undervalued by Rs.6,27,73,623, as per detailed computations presented. The ITSC majority rejected the rectification application, stating that the Department never disputed the closing stock value during the initial proceedings. The minority opinion differed, suggesting a mistake apparent from the record requiring rectification.

Issue 2: Rectification Application for Undervaluation of Closing Stock:
The Revenue's rectification application highlighted the undervaluation of unsold land's closing stock, contending that the ITSC's initial order failed to consider the correct valuation. The Revenue's detailed computation showed a significant undervaluation of Rs.6,27,73,623 in the closing stock, emphasizing the necessity for rectification. However, the ITSC majority rejected the rectification, emphasizing that the valuation method used initially was appropriate and took into account all relevant factors. The minority opinion supported rectification, indicating a mistake in the valuation that needed correction.

Issue 3: Disagreement within ITSC on Rectification:
The ITSC members were divided in their opinions regarding the rectification application. While the majority held that no mistake was apparent from the record and rejected the rectification, the minority believed that a correction was necessary due to the undervaluation of the closing stock. The Revenue challenged the majority's decision, arguing that the ITSC's method of income estimation through a flat rate of profit based on gross receipts precluded the need for separate additions for alleged undervaluation of stock. The court upheld the majority decision, stating that the method used by the ITSC was valid and comprehensive, leaving no room for rectification based on alleged undervaluation.

In conclusion, the court dismissed the Revenue's writ petition, upholding the ITSC's original order and rejecting the rectification application. The judgment emphasized the validity of the ITSC's method of income estimation and the lack of a clear mistake apparent from the record warranting rectification.