M/S RAJASTHAN STATE INDUSTRIAL, Jaipur V. ACIT, Jaipur

ITA 1267/JPR/2010

• Counselvise Citation: 126723114 RSA 2010
• Duration Of Justice: 7 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-06-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 27-10-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business expenditure

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL JAIPUR BENCH A JAIPUR (BEFORE SHRI R.K.GUPTA AND SHRI N.L.KALRA) ITA NO.1267/ JP/2010 ASSESSMENT YEAR 2007-08 PAN: AABCR 4695 J M/S. RAJASTHAN STATE INDUSTRIAL DEVELOPMENT VS. TH E ADDL. CIT & INVESTMENT CORPORATION LTD. RANGE-6 UDYOG BHAWAN, TILAK MARG, JAIPUR JAIPUR (APPELLANT ) (RESPONDENT) ITA NO.1387/ JP/2010 ASSESSMENT YEAR 2007-08 PAN: AABCR 4695 J THE DCIT VS M/S. RAJASTHAN STATE INDUSTRIAL DEVE LOPMENT RANG-6 & INVESTMENT CORPORATION LTD. JAIPUR UDYOG BHAWAN, TILAK MARG, JAIPUR (APPELLANT (RESPONDENT) ASSESSEE BY : SHRI P.C. PARWAL DEPARTMENT BY : SHRI SUNIL MATHUR ORDER PER N.L. KALRA, AM:- THE ASSESSEE AS WELL AS REVENUE HAVE FILED APPEALS AGAINST THE ORDER OF THE LD. CIT(A)-II, JAIPUR DATED 20-09-2010 FOR THE ASSESSMENT YEAR 2007- 08. FIRST OF ALL, WE WILL TAKE UP THE APPEAL OF THE REVENUE. 2 2.1 THE FIRST GROUND OF THE REVENUE IS THAT THE LD . CIT(A) HAS ERRED IN DELETING THE ADDITION MADE BY THE AO ON ACCOUNT OF CHANGE IN ACCOUNTING POLICY FROM ACCRUAL BASIS TO CASH BASIS IN ASSESSME NT YEAR 2004-05 AND 2005-06 IN RESPECT OF ECONOMIC RENT AND SERVICE CHA RGES WAS NOT BONAFIDE. 2.2 THE ABOVE REFERRED ISSUE STANDS DECIDED BY THE TRIBUNAL IN THE CASE OF THE ASSESSEE FOR THE ASSESSMENT YEARS 2004-05 AND 2 005-06. THE TRIBUNAL VIDE ITS ORDER DATED 30 TH SEPT. 2008 AT PARA 7 HAS HELD AS UNDER:- WE ARE ALSO OF THE VIEW THAT FOR PREPARING THE AC COUNTS ON COMMERCIAL PRINCIPLES SECTION 21 OF THE COMPANIE S ACT REQUIRES THAT THE ASSESSEE HAS TO FOLLOW THE ACCOUN TING STANDARDS. AS-1 DEALS WITH CONCEPT OF PRUDENCE AND AS-9 DEALS WITH THE CONCEPT OF REVENUE RECOGNITION. THESE ACCO UNTING STANDARDS CATEGORICALLY PROVIDED THAT INCOME SHOULD NOT BE RECOGNIZED UNLESS THERE IS A REASONABLE CERTAINTY O F ITS RECOVERABILITY. IT IS SETTLED LAW THAT REAL INCOME IS TO BE TAXED. NO NOTIONAL OR HYPOTHETICAL INCOME CAN BE BROUGHT T O TAX EVEN IF ANY ASSESSEE FOLLOWING MERCANTILE SYSTEM MAKES A N ENTRY FOR HYPOTHETICAL INTEREST INCOME, THE SAME CANNOT BE IN CLUDED IN THE TOTAL INCOME WHERE SUCH INCOME HAS NEITHER BEEN ACC RUED NOR RECEIVED. CONSIDERING THESE MATERIAL FACTS OF THE I SSUE, WE ARE OF THE VIEW THAT THE LOWER AUTHORITIES WERE NOT JUS TIFIED IN MAKING AND UPHOLDING THE DISALLOWANCES OF RS. 220.8 LACS CLAIMED ON ACCOUNT OF ACCRUED INTEREST ON ECONOMIC RENT AND INTEREST ON SERVICE CHARGES BY NOT ACCEPTING THE CH ANGE IN THE 3 SYSTEM OF ACCOUNTING OF SUCH INCOME. WE THUS WHILE SETTING ASIDE THE ORDERS OF THE LOWER AUTHORITIES IN THIS R EGARD, DIRECT THE AO TO ACCEPT THE ABOVE CLAIM OF THE ASSESSEE. THE G ROUND NO. 1 IS THUS ALLOWED. 2.3 THE FINDINGS GIVEN BY THE TRIBUNAL FOR THE ASS ESSMENT YEAR 2004-05 WAS FOLLOWED IN THE ASSESSMENT YEAR 2005-06 BY THE TRIBUNAL VIDE ORDER DATED 8THJAN. 2010. THEREFORE, FOLLOWING THE ORDER OF THE TRIBUNAL IN THE CASE OF THE ASSESSEE, WE FEEL THAT THE LD. CIT(A) WAS JUSTIFIED IN DELETING THE ADDITION MADE BY THE AO ON ACCOUNT OF CHANGE IN ACC OUNTING POLICY FROM ACCRUAL BASIS TO CASH BASIS.. 3.1 THE SECOND GROUND OF THE REVENUE IS THAT THE LD . CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 10.00 LACS MADE BY WAY OF DISALLOWANCE OF CONTRIBUTION TO STATE RENEWAL FUND DESPITE THE FACT THAT IT WAS APPLICATION OF INCOME AND NOT BUSINESS EXPENDITURE. 3.2 THIS ISSUE HAS ALSO BEEN DECIDED IN FAVOUR OF T HE ASSESSEE BY THE TRIBUNAL WHILE DECIDING THE APPEAL FOR THE ASSESSME NT YEAR 2005-06. THE TRIBUNAL AT PARA 25 VIDE ITS ORDER DATED 8 TH JAN. 2010 HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE AND THE SAME IS REPRODUCED A S UNDER:- 25. AFTER CONSIDERING THE OBJECTS OF THE STATE RE NEWAL FUND (PAGE 9 OF THE PAPER BOOK) SUBMITTED BY THE AS SESSEE, WE NOTED THAT THIS FUND IS SET UP TO PROVIDE A SOCIAL SAFETY NET FOR 4 THE WORKERS LIKELY TO BE EFFECTED BY RESTRUCTURING IN THE STATE PUBLIC ENTERPRISES. THE OBJECTIVE OF TIS FUND ARE A S UNDER:- (I) TO PROVIDE ASSISTANCE TOWARDS COST OF RETIRING AND REDEPLOYMENT OF EMPLOYEES, FOLLOWING MODERNIZATION AND RESTRUCTURING OF PUBLIC SECTOR UNDERTAKING (II) TO PROVIDE FUNDS TOWARDS COMPENSATION/ VOLUNTA RY RETIREMENT SCHEME AFFECTING THE EMPLOYEES AS A RESU LT OF RESTRUCTURING / WINDING UP / DIS-ENGAGEMENT / CLOSU RE O ANY STATE PUBLIC ENTERPRISES. (III) TO PROVIDE ASSISTANCE TOWARDS GAINFUL SELF- EMPLOYMENT TO THE EMPLOYEES CONSEQUENT TO THE RESTR UCTURING/ WINDING-UP/ CLOSURE OF SUCH UNDERTAKINGS, UNDER SCH EME TO BE APPROVED BY THE STATE GOVT., AND (IV) ANY OTHER ASSISTANCE/ RELIEF PROGRAM FOR ANY CATEGORY OF WORKERS TO BE DECIDED BY THE STATE GOVT . THUS THE CONTRIBUTION MADE TO THE AFORESAID FUND IS SOLELY FOR THE PURPOSE OF THE WELFARE AND BENEFIT OF THE E MPLOYEES. THIS ISSUE HAS BEEN DECIDED BY US IN CASE OF RAJAST HAN STATE SEEDS CORPORATION LTD., SUPRA WHERE WE HAVE HELD AS UNDER:- WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND T HAT AS PER THE MEMORANDUM OF STATE RENEWAL FUND SET UP BY THE STATE GOVT. , IT IS CREATED WITH THE OBJECT OF PROVIDING A SAFETY NET FOR THE WORKERS LIKELY TO BE AFFECTED BY RESTRUCTURING IN THE STATE PUBLIC ENTERPRISES. WE A RE THUS OF THE VIEW THAT CONTRIBUTION MADE TO THE SAID FUND IS SOLELY FOR THE PURPOSE OF WELFARE AND BENEFIT OF TH E 5 EMPLOYEES. THE RAJASTHAN HIGH COURT IN CASE OF CIT VS. RAJASTHAN SPINNING AND WEAVING MILLS LTD., 274 ITR 465 HAS BEEN OBSERVED THAT IF IS FOR THE ASSESSEE T O DECIDE WHETHER ANY EXPENDITURE SHOULD BE INCURRED IN COURS E OF BUSINESS. THE EXPENDITURE CAN BE INCURRED VOLUNTARI LY AND WITHOUT NECESSITY. ANY CONTRIBUTION MADE BY THE ASSESSEE TO A PUBLIC WELFARE FUND WHICH IS CONNECTE D OR RELATED WITH HIS BUSINESS IS AN ALLOWABLE DEDUCTION U/S 37. AGAIN THE COURT IN THE CASE OF CIT VS. SHRI RAJ ASHAN SYNTEX LTD. , 221 CTR 410 (RAJ.) HELD THAT WHERE ASSESSEE GAVE CONTRIBUTION TO THE EMPLOYEES WELFAR E FUND, THE SAME IS ALLOWABLE AS BUSINESS EXPENDITURE . THE CASE RELIED BY AO OF CIT VS. JODHPUR COOPERATIVE MARKETING SOCIETY 275 ITR 372 (RAJ.) IS DISTINGUISH ABLE AS IN THIS CASE THE AMOUNT WAS SET APART FOR THE SHAREHOLDERS OF THE SOCIETY WHEREAS IN THE PRESENT CASE AMOUNT WAS PROVIDED FOR THE BENEFIT OF THE EMPLOYEE S. IN VIEW OF THIS THE CONTRIBUTION MADE TO STATE RENEWAL FUND IS ALLOWABLE U/S 37(1). IN VIEW OF ABOVE, WE WHILE SETTING ASIDE THE ORDERS OF THE LOWER AUTHORITIES IN THIS REGARD, DIRECT THE AO TO DELETE THE ADDITION OF RS. 10,00,000/- IN QUESTION. 3.3 FOLLOWING THE ORDER OF THE TRIBUNAL, WE HOLD TH AT THE LD. CIT(A) WAS JUSTIFIED IN DELETING THE ADDITION OF RS. 10.00 LAC S 4.1 THE THIRD GROUND OF THE REVENUE IS THAT THE LD . CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 5,60,841/- MADE BY THE AO ON ACCOUNT OF PRIOR PERIOD EXPENSES NOT PERTAINING TO THE RELEVANT FINA NCIAL YEAR. 4.2 THE TRIBUNAL WHILE DECIDING THE APPEAL IN THE C ASE OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2004-05 HAS DECIDED THE ISSUE I N FAVOUR OF THE ASSESSEE. 6 WHILE HOLDING SO, THE TRIBUNAL HAS REFERRED TO THE DECISION IN THE CASE OF THE ASSESSEE FOR THE ASSESSMENT YEAR 1994-95 AND 1995-9 6 IN WHICH THE TRIBUNAL HAS HELD THAT SUCH EXPENDITURE IS ALLOWABLE. IN THE ASSESSMENT YEAR 2003-04, SUCH PRIOR PERIOD EXPENSES WAS ALLOWED BY THE TRIBU NAL VIDE ITS ORDER DATED 21-08-2007 IN ITA NO. 324/JP/2006. FOLLOWING THE DE CISION OF THE TRIBUNAL FOR THE ASSESSMENT YEAR 2003-04, THE TRIBUNAL ALLOW ED THE PRIOR PERIOD EXPENSES FOR THE ASSESSMENT YEAR 2004-05 VIDE ITS O RDER DATED 30 TH SEPT. 2008. THUS THE ISSUE OF ALLOWABILITY OF PRIOR PERIO D EXPENSES STANDS DECIDED IN FAVOUR OF THE ASSESSEE. THEREFORE, THE LD. CIT(A ) WAS JUSTIFIED IN ALLOWING THE PRIOR PERIOD EXPENSES. 5.1 NOW WE WILL TAKE UP THE APPEAL FOR BY THE ASSES SEE. 5.2 THE SOLITARY GROUND OF THE ASSESSEE IS THAT THE LD. CIT(A) HAS ERRED IN CONFIRMING THE ADDITION OF RS. 1,45,33,000/- MADE B Y THE AO ON ACCOUNT OF UNDERVALUATION OF THE CLOSING STOCK OF LAND BY HOL DING THAT THE VALUE OF THE LAND UNDER LITIGATION/ ENCROACHMENT SHOULD BE INCLU DED IN THE CLOSING STOCK. 5.3 THE AO NOTICED FROM THE AUDIT REPORT IN WHICH I T HAS BEEN COMMENTED IN PARA 4.1 THAT LAND MEASURING 383.26 ACRES VAL UING RS. 1188.18 LAC AS ON 31-03-2007 BEING UNDER LITIGATION/ OR ENCROACHME NT HAS NOT BEEN VALUED AS THOUGH THE SAID LAND IS TREATED AS SALEABLE. IN THE AUDIT REPORT, THE MANAGEMENT STATED THAT AS DISPOSAL / REALIZATION OF LAND UNDER LITIGATION OR 7 ENCROACHMENT IS NOT POSSIBLE IN NEAR FUTURE, IT WAS CONSIDERED APPROPRIATE TO VALUE SUCH STOCK OF LAND AT NIL PRICE. THE ASSESSEE WAS THEREFORE, ASKED TO EXPLAIN AS TO WHY RS. 1188.18 LACS ON ACCOUNT OF NO N-VALUATION OF LAND MEASURING 383.26 ACRE BE NOT ADDED TO INCOME. THE A SSESSEE VIDE REPLY DATED 12LTH NOV. 2009 STATED THAT SUCH LANDS ARE NO T IN THE POSSESSION OF THE ASSESSEE COMPANY SINCE LONG TIME. ACCORDINGLY AS PE R PRUDENCE, SUCH LAND HAS BEEN VALUED AT ZERO VALUE WHICH IS IN CONFORMI TY OF GENERALLY ACCOUNTING PRINCIPLES. WITHOUT PREJUDICE TO ABOVE, IT WAS FURTHER SUBMITTED THAT ON SIMILAR ISSUE ADDITION OF RS. 1042.85 LACS HAS ALREADY BEEN CONSIDERED WHILE COMPLETING ASSESSMENT OF ASSESSMEN T YEAR 2006-07. THEREFORE, ADVERSE VIEW, IF ANY, IS TAKEN IN RESPEC T OF DIFFERENTIAL AMOUNT OF RS. 145.33 LACS. THE AO AFTER CONSIDERING THE REPLY OF THE ASSESSEE VIDE LETTER DATED 12 TH NOV. 2009, MADE THE ADDITION OF RS. 145.33 LACS AF TER OBSERVING AS UNDER:- I HAVE GONE THROUGH THE QUALIFICATION MADE BY THE AUDITORS AND REPLY OF THE ASSESSEE, THE REPLY O F THE ASSESSEE IS NOT FOUND SATISFACTORY AS ASSESSEE COUL D NO EXPLAIN ANY REASON AS TO WHY IN THIS YEAR THE ASSES SEE HAS DECIDED NOT TO VALUE THE LAND UNDER LITIGATION/ ENCROACHMENT. IT IS OBSERVED THAT UP-TILL THE ASSES SMENT YEAR 2005-06, THE ASSESSEE CORPORATION IS VALUEING THE AFORESAID LAND AS ITS COST PRICE AND THE SAME IS BE ING 8 VALUED LIKE OTHER LAND IN STOCK. THIS IS NOT THE CA SE OF ASSESSEE THAT ALL THESE DISPUTES HAS BEEN ARISEN IN THESE TWO YEARS I.E. ASSESSMENT YEAR 2006-07 AND 2007-08. LAST BUT NOT THE LEAST THE OWNERSHIP OF THE LAND IS / CO NTINUES WITH THE ASSESSEE CORPORATION AND ASSESSMENT YEAR 2 004- 05 AS WELL AS 2005-06 ALSO THE ASSESSEE HAS CHANGED ITS METHOD OF VALUATION OF STOCK OF LAND BY EXCLUDING T HE GRAND IN AID THEREOF. THE AO HAS NOT ACCEPTED THE C HANGE IN VALUATION OF CLOSING STOCK. FOLLOWING THE DECISION IN THE CASE OF BRITISH PAINT INDIA LTD. (1991) 188 ITR 44 (SC) WHEREIN IT WAS HE LD THAT IT IS INCORRECT TO SAY THAT THE OFFICER IS BOU ND TO ACCEPT THE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. THE CORRECTNESS OF WHICH HAS NOT BEEN QUESTIONED IN THE PAST. THERE IS NO ESTOPPEL IN THE SE MATTERS AND THE OFFICER IS NOT BOUND BY THE METHOD FOLLOWED IN EARLIER YEARS. IN VIEW OF THIS, IT IS A BUNDANTLY CLEAR THAT BY CHANGING ITS METHOD OF VALUATION OF C LOSING STOCK, THE CORRECT PROFITS AND GAINS CANNOT BE DEDU CED HENCE, IT IS HELD THAT BY THE NON-VALUATION OF THE CLOSING STOCK IN RESPECT OF THE DISPUTED LAND THE OWNERSHIP OF WHICH CONTINUES WITH THE ASSESSEE'S CORPORATION. TH E ASSESSEE HAS UNDERSTATED ITS PROFITS AND INCOME BY RS. 1188.18 LACS. HOWEVER, ON THE SIMILAR ISSUE I.E. IN COME ON ACCOUNT OF UNDER VALUATION OF CLOSING STOCK ADDI TION OF RS. 1042.85 LACS WAS MADE IN ASSESSMENT YEAR 2006-0 7, ACCORDINGLY IN THIS YEAR ADDITION WAS MADE IN RESPE CT OF 9 BALANCE AMOUNT OF UNDER VALUATION OF CLOSING STOCK. THUS RS. 14533 LACS IS ADDED TO THE RETURNED INCOME OF T HE ASSESSEE. 5.4 THE LD. CIT(A) HAS CONFIRMED THE ADDITION AFTER OBSERVING AS UNDER:- I HAVE CONSIDERED THE FACTS OF THE CASE AND ARGUMENTS TAKEN BY SHRI PARWAL AND SHRI NUHAL QUITE CAREFULLY. IT IS SEEN THAT THE LEGAL OWNERSHI P OVER THE LAND UNDER CONSIDERATION WAS OF THE APPELLANT AND UNDISPUTEDLY EVEN AT THE LAST DAY OF THE ACCOUNTING YEAR, IT WAS WITH THE APPELLANT CORPORATION. WHETHER THERE IS SOME ENCROACHMENT OR SOME COURT CASE IS GOING ON DOES NOT MAKE REALIZABLE VALUE OF THE SAID LAND AT NIL VALUE. FURTHER THE APPELLANT CORPORATION WAS VALUING THE SAID LAND AT ITS COST PRICE UP TILL ASSESSMENT YEAR 2005-06 EVEN THOUGH THESE WERE UNDER ENCROACHMENT AND LEGAL CASES WERE GOING ON. THERE IS NO CHANGE OF CIRCUMSTANCES AS FAR AS STATUS OF LAND IS CONCERNED BECAUSE OF WHICH ALL OF A SUDDEN THE REALIZABLE VALUE HAS BEEN CONSIDERED AT NIL. FURTHER THE ASSESSEE CORPORATION IS SET UP BY THE ENACTMENT OF STATE GOVT. AND THE LEGAL RIGHT AS WELL AS ENFORCEABILITY OF THE LEGAL RIGHTS OVER THE OWNERSHIP OF THE LAND IS BACKED UP BY THE AUTHORITY NOT POWER OF THE STATE GOVT. UNDER THESE 10 CIRCUMSTANCES, IN MY CONSIDERED VIEW LIKE EARLIER YEARS, THE VALUATION OF THE SAID LAND HAS TO BE AT COST AND THEREFORE, THE NET ADDITION MADE BY THE AO ON ACCOUNT OF UNDER VALUATION OF CLOSING STOCK BY RS. 145.33 LACS IS HEREBY CONFIRMED BY REJECTING RELEVANT GROUND OF APPEAL. 5.5 WE HAVE HEARD BOTH THE PARTIES. THE LD. AR HAS FILED THE WRITTEN SUBMISSIONS ALONGWITH PAPER BOOK CONTAINING 60 PAGE S. THE PAPER BOOK DOES NOT CONTAIN LETTER DATED 12 TH NOV. 2009 FILED BEFORE THE AO. BEFORE DECIDING THE ISSUE, ONE HAS TO CONSIDER THE FOLLOWI NG ASPECTS. 1. WHETHER CHANGE IN METHOD OF VALUATION OF STOCK I N RESPECT OF ENCROACHMENT OF LAND OR UNDER LITIGATIO N IS BONAFIDE OR NOT. 2. IF ANSWER TO THE FIRST ASPECT IS YES THEN ONE HA S TO CONSIDER AS TO WHETHER THE DECREASE IN VALUATION CA N BE CONSIDERED FOR ASSESSMENT YEAR UNDER REFERENCE 5.6 THE CHANGE IN METHOD OF VALUATION OF THE STOCK HAS BEEN MADE FOR THE ASSESSMENT YEAR 2006-07 AND THE APPEAL IS PENDING B EFORE THE LD. CIT(A). IT WILL NOT BE PROPER FOR US TO PRE-JUDGE THAT ISSUE B ECAUSE THE BONAFIDE OF CHANGE IN METHOD OF VALUATION IS TO BE DECIDED IN A SSESSMENT YEAR 2006-07. 5.7 DURING THE COURSE OF HEARING, THE LD. AR WAS AS KED AS TO WHETHER LAND WHICH HAS BEEN VALUED AT NIL AS ON 31-03-07 TO THE EXTENT OF RS. 145.33 11 CRORES WAS PURCHASED DURING THE YEAR. WE WERE INFOR MED THAT THE LAND WAS NOT PURCHASED IN THIS YEAR. WE ARE NOT HAVING THE DETAILS OF THE LITIGATION IN RESPECT OF LAND FOR WHICH VALUATION HAS BEEN TAKEN AT NIL FROM 31-03-06 TO 31-03-07. IT IS TRUE THAT ENCROACHMENT AND LITIGATI ON WILL HAVE AN IMPACT ON THE ON THE VALUATION. THE MANAGEMENT HAS TAKEN THE DECISION TO CONSIDER THE VALUE AT NIL BUT WE ARE NOT INFORMED AS TO WHETHER THE DECISION IS BASED ON CERTAIN EXPERT OPINION OR ON THE BASIS OF PRUDENCE OR AFTER CONSIDERING EACH AND EVERY CASE ON MERITS. SECTION 4 IS A CHARGING S ECTION AND ACCORDING TO WHICH INCOME TAX IS TO BE CHARGED IN RESPECT OF TOT AL INCOME OF THE PREVIOUS YEAR. THE REDUCTION IN THE VALUE OF THE STOCK IS TO BE SUBSTANTIATED BY THE ASSESSEE THAT IT HAS RESULTED INTO PREVIOUS YEAR R ELEVANT TO ASSESSMENT YEAR UNDER CONSIDERATION . IN CASE THE LITIGATION AND EN CROACHMENT WERE EXISTING AT THE TIME WHEN THE ASSESSEE ACQUIRED THE LAND AND FILED THE DISPUTE BEFORE 31-03-06 THEN WHY SUCH REDUCTION WAS NOT CONSIDERED WHEN THE ASSESSEE WAS CHANGING THE METHOD OF ACCOUNTING IN THE ASSESS MENT YEAR 2006-07. AS PER CHARGING SECTION, TAX IS LEVIED ON THE ACTUAL I NCOME OF THE PREVIOUS YEAR. IT MEANS THAT FACTS WHICH EXISTED DURING PREVIOUS Y EAR ARE TO BE CONSIDERED. WHEN THE ASSESSEE MAKES HIS PURCHASES, HE ENTERS HI S STOCK AT COST PRICE ON ONE SIDE OF THE ACCOUNTS. AT THE CLOSE OF THE YEAR, HE ENTERS THE VALUE OF ANY UNSOLD STOCK AT COST ON THE OTHER SIDE OF THE ACCOU NTS THUS CANCELING OUT THE 12 ENTRIES RELATING TO THE SAME UNSOLD STOCK IN THE AC COUNTS; AND THEN THAT IT IS CARRIED FORWARD AS THE OPENING BALANCE IN THE NEXT YEARS ACCOUNT. THIS CANCELING OUT OF THE UNSOLD STOCK FROM BOTH THE SID ES OF THE ACCOUNTS LEAVES ONLY THE TRANSACTIONS ON WHICH THERE HAVE BEEN ACTU AL SALES AND GIVES A TRUE AND ACTUAL PROFIT OR LOSS ON HIS YEARS DEALINGS. T HE ONLY EXCEPTION IS THAT UNSOLD STOCK CAN BE VALUED AT THE COST PRICE OR MAR KET VALUE WHICHEVER IS LESS. THE NOTIONAL LOSS, IF ANY, CAN BE CLAIMED IN THE YEAR WHEN UNSOLD STOCK HAS A LESSER VALUE AS COMPARED TO THE STOCK PRICE. HOWEVER, NOTIONAL PROFIT CANNOT BE ADDED IN CASE MARKET VALUE IS MORE THAN T HE COST. HENCE, VALUATION OF THE STOCK IS TO BE BASED ON THE SAME METHOD FOR BOTH OPENING AND CLOSING STOCK. THE AO HAS SIMPLY NOT ALLOWED DEDUCTION OF R S. 145.33 LACS ON THE GROUND OF NOT ACCEPTING THE CHANGE IN METHOD OF VAL UATION. HOWEVER, THE AO HAS NOT CONSIDERED THE ASPECTS AS TO WHETHER EVE NTS IN RESPECT OF REDUCTION IN VALUATION OF STOCK HAVE OCCURRED DURIN G PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR UNDER CONSIDERATION. WE ARE NOT HAVING FULL FACTS IN RESPECT OF THE STOCK WHICH HAVE BEEN VALUED AT NIL TO ASCERTAIN THE NATURE OF LITIGATION OR ENCROACHMENT AND THE PERIOD WHEN SUCH LANDS WERE ACQUIRED AND WHEN THE ASSESSEE BECAME AWARE OF ENCROACHMENT OR LITIGATION. HENCE, THE ISSUE OF ADDITION OF RS. 145.33 LACS IS RESTORE D BACK ON THE FILE OF THE AO. WE DO FEEL THAT LITIGATION AND ENCROACHMENT WILL AF FECT THE VALUATION OF THE 13 STOCK AND SUCH STOCK CANNOT BE VALUED AT COST PRICE . WITH THIS OBSERVATION, THE MATTER IS RESTORED BACK ON THE FILE OF THE AO. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED FOR STATISTICAL PURPOSES AND THE APPEAL OF THE REVENUE IS DISMISSED . THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 24-0 6-2011. SD/- SD/- (R.K. GUPTA) (N.L. KALRA) JUDICIAL MEMBER ACCOUNTANT MEMBER JAIPUR DATED; 24 /06/2011 *MISHRA COPY FORWARDED TO :- 1. M/S. RAJASTHAN STATE INDL DEVELOPMENT & INVESTMENT CORPORATION LTD., JAIPUR 2. THE ADDL. CIT, RANGE-6, JAIPUR / DCIT CIRCLE- 6, JAIPUR 3. THE LD CIT (A) 4. THE LD. CIT BY ORDER 5. THE LD.DR 6. THE GUARD FILE (ITA NO.1267/JP /10) A.R, ITAT, JAIPUR 14 15