Ita/126/2013 Of Commissioner Of Income Tax I Ludhiana v. M/S Satish Estate P Ltd

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH ITA No.126 of 2013 (O&M)Date of decision: 21.01.2014 Commissioner of Income Tax I, Ludhiana Vs, .....- Appe M/s Satish Estate P.Limited, Shop No.3, Kidwai Nagar, Ludhiana. ....mesponden CORAM: HON’BLE MR. JUSTICK AJAY KUMAR MITTALHON BLE MR. JUSTICK GURMEET SINGH SANDHAWALIAI Present: Mr. Rajesh Katoch, Advocate for the appellant. Mr. S.K.Mukhi, Advocate for the respondent. Ajay Kumar Mittal,J, 1]This appeal has been preferred by the revenue under Section260A of the Income Tax Act, 1961 (in short, “‘the Act’) against the ordedated 27.11.2012, Annexure A.III passed by the Income Tax AppellateTribunal, Chandigarh Bench 'A' Chandigarh (in short, “the Tribunal) in ITANo.1282/CHD/2010 for the assessment year 2006-07, claiming followingsubstantial questions of law:- (1)Whether on the facts and circumstances of the case, theHon'ble [TAT was right in law in deleting the addition of 475,00,000/- made by Assessing Officer on account of undervaluation of closing stock of the land as the civil suit wasfiled in the civil court near the end of the Financial Year 1.e.18.3.2006, which would have no impact on the value andthat the events that took place in the subsequent year wouldhave no bearing on the value of closing stock as on31.3 70006valuation of closing stock of the land as the civil suit wasfiled in the civil court near the end of the Financial Year 1.e.18.3.2006, which would have no impact on the value andthat the events that took place in the subsequent year wouldhave no bearing on the value of closing stock as on31.3 70006 (11)Whether on the facts and circumstances of the case, theHon'ble [TAT was right in law in deleting the addition of=75,00,000/- made by A.O. on account of under valuation ofclosing stock of the land as the assessee has not given anybasis as to how he arrived at this figure?”Hon'ble [TAT was right in law in deleting the addition of=75,00,000/- made by A.O. on account of under valuation ofclosing stock of the land as the assessee has not given anybasis as to how he arrived at this figure?” ? ? Briefly, the relevant facts necessary for adjudication of thecontroversy involved, as narrated in the appeal, may be noticed. Theassessee filed its return declaring income oftL38,83,862/- on 30.11.2006.Assessment under Section 143(3) of the Act was completed on 23.11.2007at an income of.445,47,330/-. The Commissioner of Income Tax videorder dated 18.11.2008 under Section 263 of the Act set aside theassessment. Again assessment was framed vide order dated 13.10.2009,Annexure A.|] under Section 143(3) of the Act at an income of =1,20,47,330/- and addition of=75,00,000/- was made on account of undervaluation of closing stock of the land. Aggrieved by the order, the assesseefiled appeal before the Commissioner of Income Tax (Appeals) [CIT(A)].Vide order dated 30.8.2010, Annexure A.II, the CIT(A) allowed the appealand deleted the entire addition by relying upon the documentary evidence.It was further held that there was legal dispute between the assessee and M/sAmritsar Royon and Silk Mill Pvt. Limited. The said firm had filed suit on11.3.2006 against the assessee and as such the assessee had valued the ITA No.126 of 2013 (O&M) ITA No.126 of 2013 (O&M) closing stock at cost price or net realization value whichever was less. Itwas further held that the assessee had not changed the method of valuing theclosing stock as was evident from the Audit report ‘Details of deviation 1fany. Not satisfied with the order, the revenue filed appeal before theTribunal. Vide order dated 27.11.2012, Annexure A.III, the appeal wasdismissed. Hence the present appeal by the revenue.3]Learned counsel for the revenue submitted that the civil suitwas filed by M/s Amritsar Rayon and Silk Mill Pvt. Limited on 11.3.2006 inwhich the assessee was made respondent No.4 and the same was stillpending at the end of the financial year 1.e. as on 31.3.2006 and therefore,in such a situation, the valuation of the closing stock shown by the assesseeby making reduction of|-75 lacs was improper. The CIT(A) and theTribunal had erred in granting the benefit of the same. 4On the other hand, learned counsel for the assessee besidessupporting the findings recorded by the CII(A) and the Tribunal on thestrength of judgment of this Court in-CIT vy. Fazilka Cooperative SugaMills Limited,(2002) 255 ITR 411 and of Delhi High Court in)CIT y,Continental Devices India Limited, (1992) 196 ITR 571 submitted thatthere was no loss to the revenue on account of valuation of the closingstock for the assessment year 2006-07 as in the subsequent assessment year2007-08, the valuation of the opening stock was taken after reducing theclosing stock for the assessment year 2006-07. 4]After hearing learned counsel for the parties, we do not find any merit in the appeal. 6]The CIT(A) vide order dated 30.8.2010, Annexure A.II while accepting the contentions of the assessee had recorded as under:- “)3 | have considered the facts of the case and submissionof the A.R. Assessee 1s dealing in real estate. During theyear after taking into account the opening stock,purchases, sales Assessing Officer noticed that assesseehas undervalued its closing stock of land by475 lacs. Theworking of these details have been stated by the AssessingOfficer on page 7 and 8 of the assessment order. AssessingOfficer asked the assessee to explain why addition of4-:lacs should not be made. Assessee submitted its replywhich has been reproduced by the Assessing Officer in theassessment order. Assessee contended before the AssessingOfficer that land purchased from Balwinder Singh andHarjinder Singh fell into legal dispute as one M/s AmritsarRayon Silk Mills (P) Limited filed a suit against theassessee stating that they had already paid sum of470 lacsas|byanafor the same property and therefore, claimed thatthe registration executed in assessee's favour was notcorrect. On the strength of the agreement M/s AmritsarRayon & Silk Mills (P) Limited made further agreement tosell the same land to M/s Futuristic Solutions Limited andreceived a sum of 470 lacs from them. A stay was grantedto M/s Amritsar Rayon & Silk Mills (P) Limited by virtueof which assessee was debarred from making the sales ofany land. Assessee paid470 lacs and a further sum of=-#lacs was kept in bank FDR. Later on Court and then theHon'ble Punjab and Haryana High Court confirmed thestay. As a result of above legal problems assessee couldnot develop the colony as the disputed land was at thefront. In view of above assessee paid L2,30,000/- (As perassessee it 1s actually 2.30 crore) to M/s FutrusticSolutions Limited in 2007 and they in turn agreed towithdraw all the suits and not to pursue the case before the Hon'ble Punjab and Haryana High Court. It was underabove circumstances that the assessee valued the closingstock of land less by=74 lacs. Hon'ble Punjab and Haryana High Court. It was underabove circumstances that the assessee valued the closingstock of land less by=74 lacs. 2.4. Assessing Officer however was not satisfied with theabove explanation of the assessee. Assessing Officer hasobserved that civil suit was filed by M/s Amritsar Rayon &Suk Mills (P) Limited, on 18.3.2006 and there was noverdict upto 31.3.2006. Assessee was adopting cost pricemethod for determining the valuation of closing stock andit was not permitted under the law to change the method ofvaluation of closing stock. Further the assessee 1s notpermitted to shift the tax lability of a particular year to asubsequent year. In view of above Assessing Officerrejected various contentions of the assessee and madeaddition of 4T5 lacs, 2.) Assessee in the course of appellate proceedings hasfiled its detailed reply which has been reproduced above.Assessee after repeating the facts and history of the casehas stated that as a result of legal dispute price of land hadgone down which has been given effect while valuingclosing stock. From what is discussed above and detailedsubmission of the assessee, I am of the opinion thatAssessing Officer was not right in rejecting assessee'svarious contentions and making the addition of=75 lacs. Itis a fact that there was a legal dispute over the land whichwas in front of a big piece of land on which assesseewanted to develop a colony. Unless the legal dispute 1sresolved assessee could not have developed the colonywhich as claimed by the assessee would have caused hugelosses to the assessee. It 1s not a case of pure legal disputeover land but court had also granted the stay which wasconfirmed by the Hon'ble Punjab and Haryana High Court.Assessee had paid470 lacs to M/s Amritsar Rayon & SilkMills (P) Limited and another =70 lacs were kept on bank EDR to cover further losses. Infact as claimed an amountot L2.30 crores was paid to settle the dispute. From whatis stated above, it cannot be said that the assessee did nothave a clear title over the land and the same was not freefrom all encumbrance. Land was encumbered by legaldispute which had made a dent in the price of land.Regarding Assessing Officer's contention that suit was gfiled on 18.3.2006 and there was no verdict upto 31.3.2006and therefore filing of suit had no impact on the value ofthe impugned land same in my opinion is not tenable.Assessee has stated that immediately after the suit wasfiled on 18.3.2006 land became a disputed property. Thefact of dispute was reported in the newspapers. Legaldispute in my opinion has adversely impacted the price ofland. Now coming to the issue of under valuation of4-:lacs assessee has already explained that it had paidLC-#lacs to M/s Amritsar Rayon & Silk Mills (P) Limited andfinally the matter was settled at42.30 crores. In fact, M/sAmritsar Rayon & Silk Mills (P) Limited had filed a_ suitfor recovery of=1,08,00,000/- being the double of advanceamount paid as earnest money to the tune of=54 lacs. Inview of above discussion, | am of the opinion that assesseehas rightly valued the closing stock of aforesaid land lessby 475 lacs. Now coming to the issue of method ofvaluation of closing stock which Assessing Officer sayswas cost price in earlier years, assessee has stated thatthere 1s no change in the method of valuing of closingstock. It has consistently been following method ofvaluing closing stock as Cost or Market price whichever 1sless. Infact tax audit report for the assessment year 2006-07 copy of which has been filed in the course of appealproceedings shows method of valuation of closing stock asCost or net realizable value whichever is less. Against thecolumn ‘Details of deviation, 1f any from the method of valuation prescribed under Section 145A and effect thereofon the profit and loss’ it is clearly mentioned Nil. It 1stherefore clear that there 1s no change in the method ofvaluation of closing stock as alleged by the AssessingOfficer. In any case Assessing Officer has _ notsubstantiated his observation that the assessee has changedthe method of closing stock. 2.6 In view of above, | am of the opinion that assessee hasrightly and correctly valued its closing stock and AssessingOfficer therefore was not justified in making the additionot|475 lacs and the same 1s deleted.’ TdThe Tribunal vide order dated 27.11.2012, Annexure A.IIIwhile dismissing the appeal of the revenue affirmed the aforesaid findingswith the following observations:- "8. It is evident that the company M/s Amritsar Rayon &Suk Mulls Pvt. Limited filed a suit against the assessee on11.3.2006 which had an adverse impact on the marketvalue of the impugned asset. The revenue itself did notchallenge the opening stock of the impugned asset in thesubsequent assessment year, while passing the assessmentorder under Section 143(3) and accepted the same ascontended by the learned ‘AR’. Having regard to the abovediscussed legal and factual position of the case and alsoperusing the findings of the AO, and the CIT(Appeals), inthe matter, we are of the considered opinion that the orderpassed by the CIT(Appeals) does not suffer from anyinfirmity and hence the same is upheld and the appeal ofthe revenue 1s dismissed.’ § In the present case, 1t was not disputed that civil suit was filed by M/s Amritsar Royon and Silk Mull Pvt. Limited in which the assessee was impleaded as respondent No.4. There was an interim order passed by ITA No.126 of 2013 (O&M) the trial court which was affirmed by this Court as well. In sucha situation,the assessee was justified in reducing the valuation of the closing stock. Theassessee had reduced the closing stock and the same was taken as openingstock for the assessment year 2007-08 which was accepted by theAssessing Officer while framing assessment under Section 143(3) of theAct. Thus, no loss to the revenue had been caused. Further this Court inFazilka Cooperative Sugar Mills Limited'S case (supra) had noticed asunder:- “We think that the plea is untenable. If the assessee hadclaimed the benefit, the revenue would have contended beforethe Tribunal that the assessee has accepted the addition.Otherwise, the Revenue does not give the benefit. So, 1t wantsthe best of both the sides. Still further, 1t appears to us that theRevenue is only trying to fiddle with the figures. In fact, theaddition to the value of the stock in hand has not resulted inany loss to the Revenue. The value which has been shown bythe assessee has been carried forward to the next year. Thus,there is no loss of tax so far as the Revenue is concerned. [Iany case, the ultimate position 1s that the assessee has sufferedloss.’ Q The Delhi High Court inContinental Devices [India Limited'case (supra) had recorded as under:- “As regards questions Nos.|I,3 and 5, 1n our opinion, thsaid questions are questions of fact. With regard to questionNo.l, we are further informed that, in respect of thesubsequent year, the closing stock has been accepted by thedepartment to be the opening stock. As far as question No.5is concerned, for the subsequent assessment year, a similarcontention had been raised and the assessing authority hadaccepted that investment allowance is allowable on the air- ITA No.126 of 2013 (O&M) conditioning plant...” 10.In view of the above, no substantial question of law arises,Consequently, the appeal stands dismissed. (Ajay Kumar Mittal)Judge January 21, 2014=8%= (Gurmeet Singh Sandhawalia)Judge