2012 (8) TMI 120 - AT - Income Tax

Addition for non furnishing any basis of valuation of closing stock and estimation of work in progress - Held that - As the assessee has not maintained day to day quantitative details of plots and other properties sold during the year under consideration and only on the basis of lay out plans of various schemes, inventory of unsold stock was prepared and the same was valued at cost price method - various registers produced contained only details of vacant plot and flat details, but basis of valuation of closing stock could not be worked out on the basis of these registers - as findings recorded by AO and CIT(A) in this regard has not been controverted by assessee by bringing any positive material on record the addition on account of valuation of closing stock and work in progress is hereby confirmed - against assessee. Addition for the change in method of accounting - change of method of accounting from hybrid system to the mercantile system - Held that - This change in method of accounting was bona fide which was consistently followed by the assessee in subsequent year that change in method of accounting was made for complying with the statutory requirement of Section 145(1)- that an Assessing Officer cannot base the computation of income solely on the basis of report of auditors - even after change in the method of accounting from hybrid to mercantile during the year under consideration, the assessee had shown positive gross profit in comparison to gross loss in the assessment year 2005-06 and 2004-05, thus nothing on record to suggest that assessee had changed method of accounting to show lower profit during the year as compared to earlier year - direction to delete the addition made on account of change in method of accounting and auditors report regarding reduction in net profit - in favour of assessee. Disallowance for depreciation on assets - Held that - the assessee has failed to produce any fixed assets registers, therefore, existence of various assets and utilization thereof in the relevant previous year was prior to assessment year 2003-04 was not verifiable - confirm the action of the Assessing Officer for decline of claim of depreciation - against assessee.

Summary

Issues Involved:
1. Rejection of books of account under Section 145(3) of the Income Tax Act, 1961.
2. Addition to the value of closing stock and work-in-progress.
3. Addition on account of change in the method of accounting from hybrid to mercantile.
4. Disallowance of depreciation claim.

Detailed Analysis:

1. Rejection of Books of Account under Section 145(3) of the Income Tax Act, 1961:
The Assessing Officer (AO) rejected the books of account maintained by the assessee due to the absence of day-to-day quantitative details of plots and other properties sold during the year. The AO noted that the assessee only prepared an inventory of unsold stock based on layout plans at the end of the financial year and valued it at cost price without providing a basis for valuation. Despite repeated requests, the assessee failed to furnish project-wise details, profit and loss accounts, and details of sales and improvements. Consequently, the AO invoked Section 145(3) to reject the book results.

2. Addition to the Value of Closing Stock and Work-in-Progress:
The AO made an addition of Rs. 5,26,58,640/- to the value of closing stock and work-in-progress. This was based on the observation that the assessee did not provide a basis for the valuation of closing stock and work-in-progress. The AO prepared a detailed chart of opening and closing stock, incorporating additions from the previous year's assessment. The CIT(A) confirmed this addition, and the Tribunal upheld the AO's action, directing that the enhanced value of closing stock and work-in-progress be credited in the subsequent year.

3. Addition on Account of Change in the Method of Accounting from Hybrid to Mercantile:
The AO observed that the change in the method of accounting from hybrid to mercantile resulted in a reduction of net profit by Rs. 16 crores, as noted by the tax auditor. The Tribunal found that the change in the method of accounting was bona fide and in compliance with statutory requirements under Section 145(1). The Tribunal noted that the AO did not object to the change in the method of accounting or dispute its bona fides. Citing judicial precedents, the Tribunal held that no addition could be made solely based on the auditor's report without any positive material on record. Consequently, the Tribunal deleted the addition made by the AO on this account.

4. Disallowance of Depreciation Claim:
The AO disallowed the assessee's claim for depreciation amounting to Rs. 22,29,485/- due to the assessee's failure to produce any fixed assets register. The AO noted that the existence and utilization of various assets before the assessment year 2003-04 were not verifiable. The Tribunal upheld the AO's decision, finding no persuasive evidence from the assessee to deviate from the lower authorities' findings.

Conclusion:
The Tribunal upheld the rejection of the books of account under Section 145(3) and the addition to the value of closing stock and work-in-progress. However, it deleted the addition made on account of the change in the method of accounting from hybrid to mercantile, finding the change bona fide and in compliance with statutory requirements. The Tribunal also confirmed the disallowance of the depreciation claim due to the lack of verifiable records. The appeal of the assessee was allowed in part.