2018 (11) TMI 505 - AT - Income Tax

Addition towards the value of closing stock of land - value of closing stock of land determined by the Ld.AO at ₹ 53,03,690/-, which was not disclosed by the assessee in her return of income - Held that - When the assessee had incurred expenditure towards development of the land, definitely it is only with a view for bringing the land to marketable conditions. However we find that the Ld.Revenue Authorities had estimated the value of the land at ₹ 345 per sq.ft., being the sale price of the land sold in the earlier instance and also included the development cost of ₹ 153.41 per sq.ft.. No merit in the same. The sale value of the land will fluctuate from one plot to another due to various reasons. Therefore the earlier sale value of the land cannot be taken as a decisive factor to estimate the value of land that remains to be sold viz., the closing stock of land. Further when the development cost is also added to the earlier sale price of the land then the value of land becomes inflated. According to prudent accounting principles which is generally accepted is to value the closing stock at cost or market price whichever is less. In this situation, in the case of the assessee, it would be appropriate to value the closing stock of land based on the market value determined by the State Government Authorities in the Revenue records. Hence we hereby direct the AO to value the closing stock of land as per the market value stated in the Revenue records of the State Government Authorities or the actual cost of the land including development charges whichever is less.

Summary

Issues:
- Addition made towards the value of closing stock
- Determination of closing stock value of land

Analysis:
1. The appeal was against the order confirming the addition of ?53,03,690 towards the value of closing stock by the Commissioner of Income Tax (Appeals). The assessee, engaged in real estate business, had initially admitted a total income of ?7,89,250 for the assessment year 2012-13. The Assessing Officer (AO) added ?53,03,690 towards the value of closing stock and ?8,61,570 as undisclosed sale value in the return of income. The main issue was whether the value of closing stock of land, determined by the AO and confirmed by the Commissioner, was appropriate.

2. The Revenue Authorities believed that the value of closing stock of land cannot be treated as 'nil' and calculated the value at ?53,03,690 based on previous sale prices and development expenses. The assessee argued that the land had no realizable value and requested deletion of the addition. However, the Tribunal found no merit in the argument that the land value was 'nil'. It noted that land is not a depreciable asset and the development costs incurred by the assessee indicated an intention to make the land marketable. The Tribunal disagreed with the method used by the Revenue Authorities to estimate the land value and emphasized the need to value closing stock at cost or market price, whichever is lower.

3. The Tribunal directed the AO to determine the closing stock value of land based on the market value in the State Government Revenue records or the actual cost of the land including development charges, whichever is lower. The decision highlighted the importance of valuing closing stock appropriately and in accordance with accepted accounting principles. As a result, the appeal by the assessee was partly allowed, emphasizing the need for accurate valuation of closing stock in the real estate business.