2021 (8) TMI 601 - AT - Income Tax

Revision u/s 263 - valuation of closing stock, non increasing of closing stock by proportionate other direct expenses contravention of provisions of Section 40A(3) of the Act by purchasing land and cash - HELD THAT - As specific queries were raised towards the difference in the closing stock valuation and the AO did not disturb the closing stock after making several rounds of enquiry. Pertinently, the law does not require to stretch enquiries and verification to an extent which may tantamount to oppression and harassment of a taxpayer. The assessee has offered explanation for difference in the valuation on account of apportionment towards internal road and garden etc. which represented cost of project and thus represented as an outgo which could not have been included in the closing stock. The explanation appears plausible. Assessee that similar method of valuation have been adopted in the earlier years as well as in the subsequent assessment years and there is no departure in the valuation of closing stock as certified by the statutory auditors of the company year after year as mandated in law. The tabulated statement showing comparison of closing stock year after year vouches the claim of the assessee on consistency of method of valuation and tax neutrality. In these circumstances, the action of the AO in accepting the closing stock cannot be blamed as erroneous by a two line show cause notice on the issue. The alleged under valuation of closing stock is a tax neutral exercise when seen over a longer horizon and thus, in effect, not prejudicial to the interest of the Revenue per se. Section 263 of the Act calls for existence of both the pre-requisites, namely; (i) order under revision should be erroneous as well as (ii) prejudicial to the interest of the Revenue. Both the conditions must coexist simultaneously. Also every loss of the Revenue as a consequence of an order of the AO cannot necessarily be treated as pre-judicial to the interest of the Revenue. In the instant case, the AO after examining the issue has taken a view which is plausible. This apart, the Revenue cannot be said to be prejudiced in a Revenue neutral exercise. Thus, none of the conditions required for invocation of Section 263 of the Act are fulfilled. Thus, the exercise of jurisdiction in respect of first point of the issue is not justified when tested on the touchstone of Section 263 of the Act. The findings of the CIT on this score is thus set aside and cancelled. The second limb of the show cause notice is rendered infructuous as fairly submitted on behalf of the assessee and therefore not determined. As regards the purchase of land in cash and alleged contravention of provisions of Section 40A(3) of the Act, we find merit in the case made out on behalf of the assessee. The land parcels purchased are stated to have been registered and documented. Therefore, the parties are identifiable and genuineness of transaction is established. The provisions of Section 40A(3) of the Act have been read down by the Hon'ble Jurisdictional High Court in R.P. Real Estate Pvt. Ltd. 2016 (3) TMI 1303 - CHHATTISGARH HIGH COURT in such a situation. Hence, the action of the AO in not applying Section 40A(3) of the Act being consistent with the observations of the Hon'ble Jurisdictional High Court cannot be termed as 'erroneous' per se. Consequently, the directions of the CIT on the third limb of the show cause notice is also set aside and quashed.

Summary

Issues Involved:
1. Valuation of closing stock.
2. Non-increasing of closing stock by proportionate direct expenses.
3. Contravention of provisions of Section 40A(3) of the Income Tax Act, 1961 by purchasing land in cash.

Issue-wise Detailed Analysis:

1. Valuation of Closing Stock:
The Commissioner of Income Tax (CIT) issued a show cause notice alleging that the Assessing Officer (AO) did not verify the undervaluation of closing stock by ?3.0035 Crores. The assessee argued that the AO had indeed verified the closing stock valuation through specific queries and that the same method of valuation had been consistently applied in previous and subsequent years. The Tribunal noted that the AO had made several rounds of enquiry and accepted the assessee's explanation regarding the valuation difference due to apportionment for internal roads and gardens, which were project costs and not included in the closing stock. The Tribunal found the explanation plausible and consistent with the statutory auditors' certification. The Tribunal held that the alleged undervaluation of closing stock was a tax-neutral exercise over a longer horizon and not prejudicial to the interest of the Revenue. Consequently, the Tribunal set aside and cancelled the CIT's findings on this issue, stating that the AO's acceptance of the closing stock valuation was not erroneous.

2. Non-increasing of Closing Stock by Proportionate Direct Expenses:
The CIT's show cause notice also alleged that the AO did not verify the non-increasing of closing stock value by proportionate direct expenses. However, the assessee submitted that no addition was made on this score in the assessment carried out under Section 143(3) read with Section 263 of the Act. The Tribunal noted that this issue had become infructuous as no prejudice had occurred to the assessee. Therefore, the Tribunal did not determine this issue further.

3. Contravention of Provisions of Section 40A(3) of the Income Tax Act, 1961 by Purchasing Land in Cash:
The CIT alleged that the assessee purchased land worth ?30 lakhs in cash, which contravened Section 40A(3) of the Act. The assessee argued that the cash payment was recorded in the sale deed, which was registered before the Registrar, and the parties from whom the land was purchased were identifiable. The Tribunal referred to the Jurisdictional High Court's judgment in ACIT vs. R.P. Real Estate Pvt. Ltd., which held that Section 40A(3) would not apply if the genuineness of the payment was confirmed by a registered sale deed. The Tribunal found that the AO's non-application of Section 40A(3) was consistent with the High Court's interpretation and could not be termed erroneous. Consequently, the Tribunal set aside and quashed the CIT's directions on this issue.

Conclusion:
The Tribunal allowed the appeal in favor of the assessee on the first and third issues, while the second issue was dismissed as infructuous. The Tribunal held that the CIT's exercise of jurisdiction under Section 263 was not justified as the AO's order was neither erroneous nor prejudicial to the interest of the Revenue. The appeal was partly allowed, and the Tribunal pronounced the order in open court on 02/08/2021.