Rajasthan State Industrial Development And Investmentcorporation Limited v. Assistant Commissioner Of Income Tax, Circle

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No.252/2018 Rajasthan State Industrial Development And InvestmentCorporation Limited, Having Its Address At Udhyog Bhawan,Tilak Marg, C-Scheme, Jaipur in the State of Rajasthan ----Assessee-Appellant Versus Assistant Commissioner Of Income Tax, Circle-6, Jaipur HavingIts Address At New Central Revenue Building, Statue Circle,Bhagwan Das Road, C-Scheme, Jaipur In The State Of Rajasthan ----Respondent For Appellant(s) : Shri Siddharth Ranka For Respondent(s): HON'BLE MR. JUSTICE MOHAMMAD RAFIQ HON'BLE MR. JUSTICE GOVERDHAN BARDHAR 23/01/2019 Judgment This appeal filed by the M/s. Rajasthan State IndustrialDevelopment & Investment Corporation Limited (hereinafter calledas the “RIICO”) is directed against the order dated 28.05.2018passed by the Income Tax Appellate Tribunal, whereby the learnedTribunal has remitted back the matter to the Assessing Officer. The facts of the case are that the assessee appellant- RIICOis a Rajasthan State Government Enterprise. The Board ofDirectors of the assessee-appellant consists of senior officers ofthe cadre of Indian Administrative Services and overallmanagement and control is under the supervision of Governmentof Rajasthan. The assessee-appellant is regularly filing its incometax returns under the provisions of Income Tax Act from time to time after getting the books of accounts audited as per theprovisions of Companies Act and Income Tax Act. The books arealso separately audited by the office of Comptroller & AuditorGeneral. For the assessment year 2006-2007, the assesseeappellant filed its return of income on 27.10.2006 declaringtherein total income at Rs. 43,73,82,600/-. The return of incomewas subsequently revised on 24.08.2007 declaring therein totalincome at Rs. 43,73,82,600/-. The assessee appellant’s primaryobjective was to set up of industrial areas in the State ofRajasthan such as SEZ parks, Information Technology parks, Bio-Technology parks, Stone parks, Textile parks, Agro parks, etc., forwhich it acquired lands and spent substantial amount towardscreating infrastructural facilities so as to enable setting up ofindustries in such industrial parks by way of allotment/auction.The land acquired by the assessee appellant for the purpose ofcreating industrial parks is stock-in-trade and the assesseeappellant carries out development activities in such industrialareas. Assessee appellant valued its closing stock of land at actualdirect development expenditure (less grant utilized) incurred onthe area in stock. The management realizing thatdisposal/realization of land under litigation/encroachment is notpossible in near future, it was considered appropriate to valuesuch stock of land at ZERO price. Accordingly datas were collectedfrom various regional managers of such land. After getting thefeedback, such land under litigation/encroachment was valued atRs.NIL. The following disclosure was made in the notes toaccounts: “2.6. At few industrial areas some portion of land is underlitigation and/or under encroachment aggregating to 384.23acres valuing Rs. 1042.85 lacs. The value of stock of suchland has been taken as NIL as on 31.03.2006.” Relevant and sufficient disclosures & notes for adopting the said valuation policy were duly disclosed in the Audit Report whichwas duly approved by the Board of Directors and thereafter byshare holders in their Annual General Meeting. Learned counsel for the appellant submits that the “2.6. At few industrial areas some portion of land is underlitigation and/or under encroachment aggregating to 384.23acres valuing Rs. 1042.85 lacs. The value of stock of suchland has been taken as NIL as on 31.03.2006.” Relevant and sufficient disclosures & notes for adopting the said valuation policy were duly disclosed in the Audit Report whichwas duly approved by the Board of Directors and thereafter byshare holders in their Annual General Meeting. Learned counsel for the appellant submits that the Comptroller & Auditor General (C&AG) also raised the query withregard to valuation of such encroached/litigated land and afterconsidering the reply of the assessee appellant it was satisfied anddropped the Audit Para for assessment year 2010-2011. Thereturn filed by the assessee appellant for the assessment year2006-2007 was selected for scrutiny assessment and relevantnotices were issued by the Assistant Commissioner of Income Tax,Circle 6, Jaipur, i.e., the Assessing Officer from time to time. Theassessee appellant appeared through its authorized representativeand furnished reply from time to time on various queries raised bythe Assessing Officer. The Assessing Officer passed an order dated25.11.2008 under Section 143(3) of the Act wherein variousdisallowances/additions were made and total income wasdetermined therein at Rs.61,12,82,240/- as againstRs.43,73,82,600/- declared by the assessee appellant. Withregard to valuation of encroached/litigated land, the AssessingOfficer held that the value of land cannot be taken at NIL andfurther held that the assessee appellant has changed its methodof valuation during the year under consideration and accordinglyan addition of Rs.10,42,85,000/- was made by the Assessing Officer. Against the impugned assessment order dated25.11.2008, the assessee-appellant preferred first appeal beforethe Commissioner of Income Tax (Appeals), Jaipur (for short-’theCIT(A)’) wherein the assessee appellant challenged the variousdisallowances/additions made by the Assessing Officer. The matterwas transferred to CIT(A), Bikaner who by its order dated29.09.2017 partly allowed the appeal of the assessee appellant. It is contended that with reference to valuation ofencroached/litigated land, the CIT(A) concurred with the view ofthe Assessing Officer and has held that the value of land cannotbe taken at NIL and has further upheld that the assesseeappellant has changed its method of valuation during the yearunder consideration. Against the order dated 29.09.2017 passedby the CIT(A), the assessee appellant preferred appeal before theITAT. The ITAT by impugned order dated 28.05.2018 has remittedback the matter to the Assessing Officer. Hence this appeal. Shri Siddharth Ranka, learned counsel for the appellant-assessee has argued that the learned ITAT failed to appreciatethat valuing the closing stock of encroached/litigated land atactual direct development expenditure upto assessment year2005-2006 is against the principle of prudence. The settledprinciple of valuation of closing stock is Cost or Market valuewhich is lower. Even when in the notes to accounts for theassessment year 2005-06 it is stated that at few industrial areasome of the portion of land is under litigation as well as underencroachment aggregating to 263.03 acres as on 31.03.2005 andthe statutory auditors in their auditors’ report have themselves qualified that stock of land under litigation is treating as saleablewhereas it was not and therefore the assessee changed themethod of valuation of stock of encroached/litigated land in theyear under consideration. qualified that stock of land under litigation is treating as saleablewhereas it was not and therefore the assessee changed themethod of valuation of stock of encroached/litigated land in theyear under consideration. It is contended that in the assessment year underconsideration, the statutory auditors in their audit report havestated some of the portion of the land is under litigation as well asunder encroachment aggregating to 384.23 acres as on31.03.2005 and have further observed that stock of land underlitigation/encroachment is treated as not-saleable. It is contended that the ITAT failed to appreciate and even refer to the details of the land which was under encroachment andlitigation, highlighted before the ITAT. There were instances of thelands which were being used as cremation ground/templeland/tribal hostel under control of forest department/courtlitigations etc., and which were not readily available to theassessee for industrial development activity and hence, the valueof such land at NIL is proper and justified. However, the learnedITAT failed to even consider the same. Learned counsel submitted that the Board of Directors afterconsidering all the facts and circumstances had approved themethod of valuation, which was subsequently also approved in theAnnual General Meeting of the assessee appellant. Learned counsel submitted that similar issue was also raisedby the Comptroller & Auditor General (C&AG) who afterconsidering the reply of the assessee appellant was satisfied anddropped the Audit Para for assessment year 2010-2011. Learned counsel contended that as per the AccountingStandard 2 issued by the Institute of Chartered Accountants ofIndia, the closing stock is to be valued at cost or market valuewhichever is less and since in the instant matter the assesseeappellant was not having even physical possession over the landas the same was under encroachment/litigation and since the landwas not saleable, the same was valued at Rs.NIL. Shri Siddharth Ranka, learned counsel for the appellant-assessee reiterating the arguments before the ITAT has arguedthat earlier assessee was valuing the closing stock of land atactual direct development expenditure, however, in the notes toaccounts for the assessment year 2005-06 it is stated that at fewindustrial area some of the portion of the land is under litigationas well as under encroachment aggregating to 263.03 crores as on31.03.2005. The statutory auditors in their audit report haveobserved that stock of land under litigation is treated as saleable,therefore, the observation of the statutory auditor was consideredby the assessee and consequently a Board Resolution was passedwhereas the valuation of such land has been taken at Nil as on31.03.2006. The land was not available to the assessee as on31.03.2006, therefore, the realization value of the land at the endof the financial year was Zero and accordingly, the assessee hasconsidered the same at Nil which is justified as per the principle ofprudence accounting policy. It is contended that whenever the assessee retrieves thelands from encroachment, the same is offered to tax, therefore,the said method of valuing the closing stock adopted by theassessee is Revenue in nature. The assessee is consistently It is contended that whenever the assessee retrieves thelands from encroachment, the same is offered to tax, therefore,the said method of valuing the closing stock adopted by theassessee is Revenue in nature. The assessee is consistently following the said method of closing stock and therefore, theaddition made by the AO is not justified. Learned counselproduced the details of the land which was under encroachmentand litigation; and submitted that there were instances that someof the land is used as cremation ground cannot be readilyavailable to the assessee for industrial development activity andhence, the value of such land at Nil was proper and justified.Learned counsel in support of his arguments has relied on thejudgement of the Supreme Court in CIT vs. Shoorji Vallabhdas &Co.-(1962) 46 ITR 144 (SC), CIT vs. Excel Industries Ltd.-(2013)358 ITR 295 (SC), CIT vs. Hindustan Housing & LandDevelopment Trust Ltd.-(1986) 161 ITR 524 (SC) and CIT vs.Wolkem India Ltd.-(2009) 315 ITR 211 (Raj.). Perusal of the impugned order of the ITAT shows that thelearned Tribunal has observed that though the land which wasunder encroachment and litigation cannot be valued at the cost orprevailing market price but the value of such land would definitelybe very less due to defects and deficiency of not available to theassessee for immediate use. However, the land in litigation orencroachment which is still shown as part of the closing stock ofthe assessee cannot be value at nil. Further the valuation of theland has to be determined on the basis of the actual status of theland in each case and it cannot be valued applying a standardparameter for each and every case of encroachment or litigation.Even the Tribunal in assessee's own case for the assessment year2007-08 in ITA No. 1267/JP/2010 & 1387/JP/2010 vide orderdated 24.06.2011 has considered this issue and remitted thematter back to the file of the AO for proper verification andadjudication. Similarly for the assessment years 2009-10 to 2012- 13 the Coordinate Bench of this Tribunal vide order dated23.02.2018 in ITA No. 311/JP2014, 420/JP2014 and others hasconsidered this issue in para 5. For ready reference, para 5 readsas under:- "5. We have considered the rival submissions as well asrelevant material on record. At the outset we note that thisTribunal in assessee's own case for the assessment year2007-08 vide order dated 24.06.2011 in ITA No. 1267 &1387 of 2010 has considered this issue in para 5.7 asunder:-relevant material on record. At the outset we note that thisTribunal in assessee's own case for the assessment year2007-08 vide order dated 24.06.2011 in ITA No. 1267 &1387 of 2010 has considered this issue in para 5.7 asunder:- "5.7 During the course of hearing, the ld. AR wasasked as to whether land which has been valuedat nil as on 31-03-07 to the extent of Rs. 145.3311 crores was purchased during the year. Wewere informed that the land was not purchased inthis year. We are not having the details of thelitigation in respect of land for which valuation hasbeen taken at nil from 31-03-06 to 31-03-07. It istrue that encroachment and litigation will have animpact on the on the valuation. The managementhas taken the decision to consider the value at Nilbut we are not informed as to whether thedecision is based on certain expert opinion or onthe basis of prudence or after considering eachand every case on merits. Section 4 is a chargingSection and according to which income tax is tobe charged in respect of total income of theprevious year. The reduction in the value of thestock is to be substantiated by the assessee thatit has resulted into previous year relevant toassessment year under consideration. In case thelitigation and encroachment were existing at thetime when the assessee acquired the land andfiled the dispute before 31-03-06 then why such reduction was not considered when the assesseewas changing the method of accounting in theassessment year 2006-07. As per chargingSection, tax is levied on the actual income of theprevious year. It means that facts which existedduring previous year are to be considered. Whenthe assessee makes his purchases, he enters hisstock at cost price on one side of the accounts. Atthe close of the year, he enters the value of anyunsold stock at cost on the other side of theaccounts thus canceling out the 12 entriesrelating to the same unsold stock in the accounts;and then that it is carried forward as the openingbalance in the next year's account. This cancelingout of the unsold stock from both the sides of theaccounts leaves only the transactions on whichthere have been actual sales and gives a true andactual profit or loss on his year's dealings. Theonly exception is that unsold stock can be valuedat the cost price or market value whichever isless. The notional loss, if any, can be claimed inthe year when unsold stock has a lesser value ascompared to the stock price. However, notionalprofit cannot be added in case market value ismore than the cost. Hence, valuation of the stockis to be based on the same method for bothopening and closing stock. The AO has simply notallowed deduction of Rs. 145.33 lacs on theground of not accepting the change in method ofvaluation. However, the AO has not consideredthe aspects as to whether events in respect ofreduction in valuation of stock have occurredduring previous year relevant to assessment yearunder consideration. We are not having full factsin respect of the stock which have been valued atnil to ascertain the nature of litigation orencroachment and the period when such lands were acquired and when the assessee becameaware of encroachment or litigation. Hence, theissue of addition of Rs. 145.33 lacs is restoredback on the file of the AO. We do feel thatlitigation and encroachment will affect thevaluation of the 13 stock and such stock cannotbe valued at cost price. With this observation, thematter is restored back on the file of the AO." In view of the earlier decision of this Tribunal and tomaintain the rule of consistency, we are of the view that theaddition made by the AO for the under year underconsideration is dependent on the outcome to the additionmade by the AO on this account in the earlier year.Therefore, in the facts and circumstances of the case we setaside this issue to the record of the Assessing Officer fordeciding the same afresh in terms of the directions as givenby the Tribunal for the A.Y. 2007-08." The Tribunal considering the decisions of Coordinate benchesof the Tribunal itself in assessee's own case, set aside the issue tothe record of the Assessing officer for fresh adjudication afterconducting a proper verification and enquiry. The assessee wasalso directed to produce all the relevant facts in respect of eachand every piece of land under litigation and encroachment so as toreveal the actual status of the land for the purpose ofdetermination of value. Moreover, in the subsequent assessment year viz assessmentyear 2007-08 in the case of assessee, the Tribunal vide orderdated 24.06.2011, restored back the matter to the AssessingOfficer for deciding the issue and even in subsequent years i.e.2009-10, 2010-11, 2011-12, 2012-13, vide order dated 23.02.2018, the Tribunal set aside this issue to the record of theAssessing Officer for deciding the same afresh in terms of thedirections as given by the Tribunal in the assessment year 2007-2008 and no appeal has been filed against the aforesaid orders bythe assessee before this Court or before the Supreme Court. In view of above discussion, no question of law does arise inthis present appeal, which is accordingly dismissed. (GOVERDHAN BARDHAR),J (MOHAMMAD RAFIQ),J RS/27