2011 (6) TMI 954 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition due to change in accounting policy from accrual basis to cash basis.
2. Deletion of addition due to disallowance of contribution to the state renewal fund.
3. Deletion of addition due to prior period expenses.
4. Addition due to undervaluation of closing stock of land under litigation/encroachment.

Summary:

1. Deletion of Addition Due to Change in Accounting Policy:
The Revenue contended that the CIT(A) erred in deleting the addition made by the AO due to a change in accounting policy from accrual basis to cash basis for economic rent and service charges. The Tribunal had previously decided this issue in favor of the assessee for the assessment years 2004-05 and 2005-06, stating that income should not be recognized unless there is a reasonable certainty of its recoverability. Following these precedents, the CIT(A) was justified in deleting the addition.

2. Deletion of Addition Due to Disallowance of Contribution to State Renewal Fund:
The Revenue argued that the CIT(A) erred in deleting the addition of Rs. 10.00 lacs made by disallowing the contribution to the state renewal fund, claiming it was an application of income and not business expenditure. The Tribunal had previously ruled in favor of the assessee for the assessment year 2005-06, recognizing the contribution as solely for the welfare and benefit of employees and allowable u/s 37(1). Following this precedent, the CIT(A) was justified in deleting the addition.

3. Deletion of Addition Due to Prior Period Expenses:
The Revenue contended that the CIT(A) erred in deleting the addition of Rs. 5,60,841/- made by the AO for prior period expenses not pertaining to the relevant financial year. The Tribunal had previously ruled in favor of the assessee for the assessment years 1994-95, 1995-96, 2003-04, and 2004-05, allowing such expenses. Following these precedents, the CIT(A) was justified in allowing the prior period expenses.

4. Addition Due to Undervaluation of Closing Stock of Land:
The assessee appealed against the addition of Rs. 1,45,33,000/- made by the AO for undervaluation of closing stock of land under litigation/encroachment. The AO argued that the land should be valued at cost price, as it was in previous years, and that the change in valuation method was not justified. The CIT(A) confirmed the addition, stating that the legal ownership of the land remained with the assessee and that the valuation should be at cost. The Tribunal restored the issue back to the AO for further examination, emphasizing that litigation and encroachment affect stock valuation and that the reduction in value must be substantiated by the assessee.

Conclusion:
The appeal of the assessee was allowed for statistical purposes, and the appeal of the Revenue was dismissed. The order was pronounced in the open Court on 24-06-2011.