2020 (6) TMI 371 - AT - Income Tax

Value of closing stock - assessee had included only land cost, but not included the development cost of plots in arriving at the work in progress/closing stock - AO reworked the value of closing stock including the development cost and made the addition representing the difference amount on account of undervaluation of the stock - AO observed that as per Accounting Standard 2, the inventory required to be valued at cost or net realisable value whichever is lower - HELD THAT - Though the assessee stated that the entire development cost pertained to the plots sold and ready for sale, the assessee had incurred the expenditure for development of roads, levelling of the land, drainage, water tank, street lights, parks etc., for laying the plots, hence the assessee cannot argue that no expenditure was incurred for unsold plots. In the absence of the details with regard to the actual expenditure incurred on sold plots and unsold plots, there is no option except to resort for estimation of income and arrive at the value of closing stock. We, find from the order of the AO and the Ld.CIT(A), against the sale price of ₹ 2,500/-, the AO worked out the profit of ₹ 1,676/- per plot which is unreasonable. Since, the assessee did not produce the details of the tracks of the land developed and undeveloped out of the total area we are also unable to accept the contention of the assessee that the expenditure was exclusively laid out for the sold plots. Therefore we hold that the CIT(A) has rightly resorted for estimation of the profit.- The department did not bring any other case establishing that the profit of 15% estimated by the Ld.CIT(A) is less in this line of business. Therefore, we are of the view, that no interference is called for in the order of the Ld.CIT(A) and the same is upheld. The appeal of the revenue is dismissed.

Summary

Issues Involved:
1. Addition made by the Assessing Officer (AO) regarding the value of closing stock.
2. Method of valuation of closing stock and work-in-progress.
3. Allocation of development cost to sold and unsold plots.
4. Estimation of profit percentage for valuation purposes.

Issue-wise Detailed Analysis:

1. Addition Made by the Assessing Officer (AO) Regarding the Value of Closing Stock:
The AO observed that the assessee, engaged in civil contract works, had undervalued the closing stock by not including the development cost of plots in the work-in-progress/closing stock. The AO reworked the value of closing stock, including development costs, resulting in an addition of ?3,13,94,622 to the returned income. The revaluation was based on the total cost of developed land and the saleable area, leading to a difference in the closing stock value.

2. Method of Valuation of Closing Stock and Work-in-Progress:
The AO's method involved apportioning the total development cost incurred up to the year-end across the entire saleable area, including unsold plots. This method was challenged by the assessee, who argued that development costs should only be allocated to developed and sold plots, as the remaining land was undeveloped. The CIT(A) agreed with the assessee, noting that the AO's method resulted in an unreasonably high profit margin of 60%, which was inconsistent with industry norms.

3. Allocation of Development Cost to Sold and Unsold Plots:
The assessee contended that development costs were incurred only on plots that were developed and ready for sale, and not on the entire land. The CIT(A) found merit in this argument, stating that the development cost should not be apportioned to undeveloped and unsold plots. The CIT(A) reworked the development cost allocation, agreeing that the AO's method was erroneous and led to absurd results. The CIT(A) estimated a reasonable profit margin of 15%, leading to a partial relief of ?2,91,79,590 to the assessee.

4. Estimation of Profit Percentage for Valuation Purposes:
The CIT(A) considered the assessee's estimated profit margin of 11% to be low and revised it to 15%, which was deemed reasonable for this line of business. This adjustment resulted in a revised closing stock value, sustaining an addition of ?22,15,032 instead of the AO's addition. The Tribunal upheld the CIT(A)'s decision, noting that the department did not provide evidence to counter the revised profit estimation or to show that the entire land was developed.

Conclusion:
The Tribunal dismissed the revenue's appeal, agreeing with the CIT(A) that the AO's method of valuing closing stock was flawed and resulted in an unreasonably high profit margin. The Tribunal also dismissed the assessee's cross objections, finding the 15% profit estimation reasonable. The final judgment upheld the CIT(A)'s revaluation, sustaining an addition of ?22,15,032 and providing significant relief to the assessee.