2014 (7) TMI 300 - AT - Income Tax

Validity of reassessment u/s 147 of the Act Valuation of closing stock - Held that - on perusal of the order of CIT(A) itself it becomes clear that the assessee has raised a specific ground with regard to validity of proceeding u/s 148 of the Act. However, as it appears from finding of the CIT(A) in para 5 of his order, he has not decided the issue on merit. - matter remanded back. Undervaluation of closing stock - CIT(A) has concluded that 1% of closing stock determined by the Assessing Officer is to be treated as under valuation made by the assessee. - Held that - Though on one hand the CIT(A) has upheld Assessing Officer s finding that closing stock for the year ending was understated but at the same time, he has not agreed with the quantum worked out by the Assessing Officer. It is also pertinent to mention here that in para 4.2.4, the CIT(A) while observing that both the assessee as well as the Assessing Officer were correct in working out the value of the closing stock for the year ending 31/03/2006, in the same breath has observed that both of them were wrong in quantifying closing stock. matter remanded back for fresh decision.

Summary

Issues Involved:
1. Valuation of closing stock.
2. Jurisdiction of the AO in initiating proceedings under Section 147 of the Income Tax Act.

Detailed Analysis:

1. Valuation of Closing Stock:

The Department and the assessee both contested the addition sustained by the CIT(A) regarding the valuation of closing stock. The assessee, a partnership firm in the real estate and land development business, filed its return of income declaring a total income of Rs. 11,52,530/-. The AO observed that the assessee had incurred an expenditure of Rs. 2,48,44,380/- and had a closing stock of unsold plots valued at Rs. 1,20,73,178.02. The AO calculated the unit cost of land at Rs. 137/- per sq. ft. and revalued the closing stock at Rs. 1,75,40,767/-, leading to an under-valuation of Rs. 54,67,589/-.

The assessee argued that the Bangalore Metropolitan Region Development Authority (BMRDA) had imposed a condition to sell the layout in two phases, with only 60% of the land being sold initially. The remaining 40% was undeveloped and constituted the closing stock. The AO did not dispute this condition but insisted that the valuation should include development costs. The CIT(A) partially agreed with the AO, retaining 1% of the closing stock value as under-valuation, amounting to Rs. 54,680/-.

The CIT(A) noted that the project spanned four years, with development and sale in two phases. The AO's method of spreading the development cost uniformly was deemed unscientific and unrealistic. However, the CIT(A) acknowledged that some expenses had a bearing on the entire project, warranting a reasonable estimate. The CIT(A) concluded that 1% of the closing stock value determined by the AO should be retained, resulting in an addition of Rs. 54,680/-.

2. Jurisdiction of the AO under Section 147:

The assessee challenged the AO's jurisdiction in initiating proceedings under Section 147. The CIT(A) dismissed this ground, noting that the assessee neither withdrew the challenge nor presented a defense, indicating a lack of seriousness in pursuing this ground.

The learned AR argued that the reopening of the assessment was invalid as it was based on the same material considered during the original assessment, constituting a mere change of opinion. The CIT(A) did not address this issue on its merits.

Decision:

The Tribunal noted that the AO's calculation of under-valuation relied on the 3CD report, which stated that the closing stock was valued at cost. The AO treated the entire expenditure as the cost of the total land, applying a unit cost of Rs. 137/- per sq. ft. to the unsold land. However, the assessee contended that only 60% of the land was developed, and the remaining 40% was undeveloped, justifying the valuation based on land cost alone.

The Tribunal found the CIT(A)'s order confusing and contradictory, as it upheld the AO's finding of under-valuation but disagreed with the quantum. The Tribunal also noted an error in the CIT(A)'s retention of 1% of the closing stock value, which should have been Rs. 1,75,407/- instead of Rs. 54,680/-.

Regarding the reopening of the assessment, the Tribunal observed that the CIT(A) failed to consider the issue on its merits. The Tribunal directed the CIT(A) to re-examine both the validity of the proceedings under Section 147 and the valuation of closing stock, considering all relevant materials and providing the assessee a reasonable opportunity to be heard.

Conclusion:

The Tribunal remitted the matter back to the CIT(A) for a fresh decision on the validity of the proceedings under Section 147 and the valuation of closing stock, ensuring a thorough consideration of all materials and arguments presented by the assessee. The appeal of the department and the C.O. of the assessee were allowed for statistical purposes.