2007 (1) TMI 243 - AT - Income Tax

Addition u/s 69 - Income From Undisclosed Sources - Valuation of the work-in-progress on cost basis - maintaining books of account - declaration made at the time of survey action - HELD THAT - It is not clear from the assessment order that what was the sale price alleged to be different from the work-in-progress. It is also not clear that what was the basis of allegation of the additional value of work-in-progress on account of concealed investment or unrecorded expenses. Even when this issue was taken before the first appellate authority, the main reason of confirmation of the action of the AO was an order of the respected co-ordinate Bench in the case of Champion Constructions Co. vs. ITO 1983 (4) TMI 68 - ITAT BOMBAY-A , but on reading, we have found the difference in the facts and the issues. It is true that an assessee is liable for taxation of the profit in respect of a project which is near to completion or major part of the project is completed but the computation of profit should be on a correct basis. The admitted position is that during the year under consideration, the assessee has not sold a single flat and this fact has not been denied by the Revenue, hence, it is not clear that on what basis the Revenue Department has arrived at a conclusion that there was a difference in the value of work-in-progress on account of sale price. This is also not the case of the Revenue that comparable sale instances were examined and on that basis it was suggested to the assessee to make a declaration on account of the value difference in work-in-progress. Merely on the basis of the possibility, as mentioned by the AO, in our opinion, an addition is not warranted. The settled law is that an assessee appreciates in its books of account the value of his stock-in-trade artificially, it is held as a unilateral transaction and since there could not be any sale of the stock at that point of time, hence, the said artificial appreciation does not result into a profit. Further, the one thing that is essential is that there should be a definite method of valuation adopted which could be carried through from year to year. In case of any deviation, i.e., switchover from cost price to market price, an explanation and reasoning is essential to be recorded. There should be a cogent basis and neither the assessee nor the Revenue be allowed to arbitrarily change the method of accounting as regards the basis for stock valuation. The amount at which long-term contract work-in-progress is stated in periodic financial statements should be cost plus any attributable profit, less any foreseeable losses and progress payments received and receivable. If, however, anticipated losses on individual contracts exceed cost incurred to-date less progress payments received and receivable, such excesses should be shown separately as provisions. Thus, we can safely arrive at a conclusion that in the instant case, since the assessee was regularly maintaining the books of account and valuing the work-in-progress on cost basis, then the Revenue had no reason to arbitrarily adopt the market price basis for the valuation of their said work-in-progress in a particular accounting period. Ld AR has placed one more evidence on record i.e., an assessment for AY 2003-04 passed u/s 143(3), wherein the returned loss was accepted by the Revenue Department. For two reasons, he has cited this assessment order, first, there was recession in the real estate business in the subsequent years, hence, there was no likelihood expected hypothetical income in future, hence, erroneously suggested to assessee to make the alleged offer and, second, the accounting effect of enhanced work-in-progress further increases the loss, hence, no evasion of tax. We find force in this argument and express our view that the alleged declaration if at all made in the expectation of future profits, then the same was a premature step, so cannot be approved. Thus, the main ground of the assessee pertaining confirmation of an addition is hereby allowed and rest of the grounds are decided pro tanto. In the result, the appeal is allowed.

Issues Involved:
1. Legitimacy of the addition of Rs. 18,00,000 based on the assessee's declaration during a survey.
2. Validity of the assessee's retraction of the declaration.
3. Basis and method of valuation of work-in-progress.
4. Application of estoppel against the assessee's retraction.
5. Timing and validity of the retraction.

Issue-wise Detailed Analysis:

1. Legitimacy of the Addition of Rs. 18,00,000:
The primary issue in this appeal was the addition of Rs. 18,00,000 to the assessee's income based on a declaration made during a survey conducted under section 133A. The assessee retracted this declaration in a revised return. The Assessing Officer (AO) did not accept the retraction, citing that the declaration was made on oath and confirmed on a stamp paper, witnessed by a chartered accountant. The AO concluded that the assessee was aware of the investment in work-in-progress and should not have retracted the declaration. The Commissioner of Income-tax (Appeals) upheld the AO's decision, asserting that the declaration was voluntary and confirmed by the assessee in the original return.

2. Validity of the Assessee's Retraction:
The assessee argued that the declaration was made under the suggestion of the Revenue authorities and was not voluntary. The retraction was based on the realization that the valuation agreed upon was erroneous. The Commissioner of Income-tax (Appeals) rejected this argument, considering the retraction an afterthought to evade tax liability. The Tribunal noted that no incriminating material was found during the survey, and no defects were observed in the books of account. The Tribunal emphasized that the AO did not provide specific reasons for the addition, and the basis of the alleged investment in work-in-progress was unclear.

3. Basis and Method of Valuation of Work-in-Progress:
The Tribunal highlighted that the assessee consistently valued work-in-progress on a cost basis, and the Revenue had no reason to arbitrarily adopt the market price basis for valuation. The Tribunal referenced established principles, stating that profit should not be included until it is reasonably clear that a profit will ultimately be earned. The Tribunal concluded that the method of accounting cannot be substituted by the AO merely because it is unsatisfactory, and any deviation from the accepted method should be based on cogent evidence.

4. Application of Estoppel Against the Assessee's Retraction:
The Tribunal discussed the law of estoppel, noting that an admission contrary to law does not create estoppel against law. The Tribunal cited a previous decision, emphasizing that no amount of admission contrary to law can create estoppel against law. The Tribunal asserted that the assessment of income should be made as per the provisions of law, and the assessee's retraction should be considered if it corrects a mistake.

5. Timing and Validity of the Retraction:
The Tribunal acknowledged that the retraction was not immediate and occurred after a considerable delay. However, the Tribunal found the reasons for the delay unconvincing but still considered the retraction valid. The Tribunal noted that the alleged declaration was made in the expectation of future profits, which was premature and could not be approved.

Conclusion:
The Tribunal allowed the appeal, concluding that the addition of Rs. 18,00,000 was unjustified. The Tribunal emphasized that the method of accounting should be consistent and based on cogent evidence. The Tribunal also highlighted that an admission contrary to law does not create estoppel against law, and the assessment should be made as per the provisions of the Income-tax Act. The appeal was allowed, and the addition of Rs. 18,00,000 was deleted.

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