2023 (7) TMI 464 - AT - Income Tax

Scope of limited scrutiny - Addition beyond the issues as selected for limited scrutiny - Valuation of closing stock - whether the Percentage Completion Method had been adopted or not? - assessee was selected for limited scrutiny to interalia examine real estate business with high closing stock (verify whether the assessee has adopted percentage completion method) - HELD THAT - The percentage completion method as per assessee s own submission and as per the guidance issued by the ICAI is not just limited to valuing the closing stock rather it is a method of accounting and revenue recognition for real estate transactions undertaken by enterprises dealing in real estate as sellers or developers. It encompasses the whole gamut of determination of project costs, project revenues and determination of closing work-in-progress (closing stock) at the end of the reporting period. Therefore, we find that there is no basis to hold that the scope of limited scrutiny is restricted to determination of whether the assessee has followed the percentage completion method or not rather the scope of the limited scrutiny is to determine whether the assessee has followed the percentage completion method and secondly, how the said method has been actually followed while accounting for the real estate transactions undertaken by the assessee during the financial year relevant to the impugned assessment year. Therefore, the contentions advanced by the ld AR cannot be acceded to and are hereby dismissed. Hence, ground no. 2 is dismissed. Working of revenue recognition and closing stock - Percentage Completion Method as per the Guidance Note issued by ICAI - There would be change in the value of the closing stock, in addition there would be change in the value of the sales which needs to be recognized in the assessee's trading account and that the revised working may be considered and the matter may be set aside to the file of the AO to examine and verify the same. The matter is accordingly set-aside to the file of the AO to examine and verify the revised working of revenue recognition and closing stock and decide as per law after providing reasonable opportunity to the assessee.

Summary

Issues involved:
The judgment involves issues related to the scope of limited scrutiny by the Assessing Officer (AO) and the application of Percentage Completion Method for valuation of closing stock in a real estate business.

Ground No. 1:
The first ground of appeal was considered general in nature and did not require specific adjudication.

Ground No. 2:
The assessee challenged the action of the ld. CIT(A) in confirming additions made by the AO beyond the issues for which the case was selected for limited scrutiny. The AO re-evaluated the closing stock despite the limited scope of scrutiny, which was only to verify the adoption of the Percentage Completion Method. The AO exceeded his jurisdiction by making impugned additions without converting limited scrutiny into complete scrutiny. The Board's Instruction No.20/2015 prohibits additions beyond the selected issues in limited scrutiny cases. The ground was dismissed after considering the arguments from both sides.

Ground No. 3:
Regarding the third ground, the assessee argued that the value of closing stock and sales should be revised based on the Percentage Completion Method as per the Guidance Note issued by ICAI. The matter was set aside to the AO for further examination and verification of the revised working of revenue recognition and closing stock, providing a reasonable opportunity to the assessee for representation.

Conclusion:
The Tribunal dismissed ground no. 2, emphasizing that the limited scrutiny was not restricted to verifying the adoption of the Percentage Completion Method but also included how the method was applied in accounting for real estate transactions. Ground no. 3 was partially allowed, directing the AO to examine and verify the revised working of revenue recognition and closing stock. The appeal was partly allowed for statistical purposes.