2019 (11) TMI 1037 - AT - Income Tax

Valuation of closing stock - GP estimation - AO has applied Percentage Completion Method (PCM) and estimated @15% profit on the entire value of closing stock(WIP) as declared by the assessee in his profit and loss account and balance sheet - HELD THAT - It is undisputed that the assessee has taken advance from customers i.e. the final sale value has not been recognized. We also notice from the order of AO that the assessee did not cooperate during the course of assessment proceedings for substantiating the valuation of closing stock(WIP) as shown in the profit and loss account. As per the profit and loss account filed before us by the assessee we find that the gross profit of the assessee comes to 6.45% on the assessee s business for the year under consideration. Therefore, authorities below should apply the GP rate on the impugned amount @6.45%. Accordingly, we restrict the addition estimating @6.45% on the value of closing stock(WIP) as shown by the assessee in his profit and loss account. Hence, the profit on the closing stock of ₹ 1,88,08,700/- estimated @15% by the CIT(A) without any basis, is restricted to 6.45% and the profit is directed to be taxed in the impugned assessment year on the closing stock at ₹ 12,13,161/-. In regard to the contention of ld. AR that the assessee will get benefit of opening work-in-progress in the next year, it is made clear that the assessee has not cooperated during the course of assessment stage for substantiating the value shown in the profit and loss account of work-in-progress. The AO has added as unexplained closing stock (WIP) and the CIT(A) has observed that percentage completion method (PCM) has not been followed. Therefore, the contention of the assessee is not accepted. Accordingly, the grounds of appeal of the assessee are partly allowed.

Summary

Issues:
1. Validity of the order passed by the Commissioner of Income Tax (Appeals) and the Assessing Officer.
2. Estimation of net profit on closing stock.
3. Compliance and substantiation of closing stock valuation.
4. Application of Percentage Completion Method (PCM) for profit calculation.
5. Cooperation during assessment proceedings.

Issue 1 - Validity of Orders:
The appeal was filed against the order of the Commissioner of Income Tax (Appeals) and the Assessing Officer for the assessment year 2015-2016. The assessee contended that the orders were passed without valid reason and without considering the facts of the case, deeming them illegal, unjustified, and liable to be quashed.

Issue 2 - Estimation of Net Profit on Closing Stock:
The Assessing Officer added the entire amount of closing stock to the total income of the assessee. The Commissioner of Income Tax (Appeals) applied the Percentage Completion Method (PCM) and estimated a profit of ?28,21,305 on the valuation of closing stock. The Income Tax Appellate Tribunal restricted the profit on the closing stock to ?12,13,161, calculated at 6.45% of the value, as opposed to the 15% estimated by the CIT(A).

Issue 3 - Compliance and Substantiation of Closing Stock Valuation:
The assessee failed to furnish sufficient documents/evidences for verification of the closing stock valuation during the assessment proceedings. The Tribunal noted that the assessee did not cooperate and did not obtain a valuation report from technical persons/architects for the closing stock valuation.

Issue 4 - Application of Percentage Completion Method (PCM):
The Tribunal observed that the assessee followed the mercantile system of accounting and the Percentage Completion Method (PCM) for calculating profits. However, it was noted that the valuation of closing stock should have been substantiated with a report from technical persons/architects, which was not done by the assessee.

Issue 5 - Cooperation During Assessment Proceedings:
The assessee's lack of cooperation during the assessment proceedings was highlighted, leading to the addition of unexplained closing stock to the total income. The Tribunal emphasized the importance of substantiating the valuation of closing stock and following the prescribed methods for profit calculation.

In conclusion, the Tribunal partly allowed the appeal of the assessee, restricting the profit on the closing stock and emphasizing the need for proper substantiation and cooperation during assessment proceedings.