ACIT, CHENNAI V. M/s Jai Bhawani Steel Enterprises Ltd., CHENNAI

ITA 2217/CHNY/2008

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 8326 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 8 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-08-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 14-06-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 04-12-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: TAPAS KUMAR DUTTA
• Assessee Lawyers: T BANUSEAKR
• Keywords: Revised return; Set aside
• Section: 139(5); 143(1); 145; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHENNAI BENCH C : CHENNAI [BEFORE SHRI N. BARATHVAJA SANKAR, VICE-PRESIDENT AND SHRI HARI OM MARATHA, JUDICIAL MEMBER] I.T.A NO. 2217/MDS/08 ASSESSMENT YEAR : 2005-06 THE ACIT COMPANY CIRCLE II(3) CHENNAI VS M/S JAI BHAWANI STEEL ENTERPRISES LTD II FLOOR, NO.91, ARMENIAN STREET CHENNAI [PAN - AAACI8346B] (APPELLANT ) (RESPONDENT) APPELLANT BY : SHRI TAPAS KUMAR DUTTA RESPONDENT BY : SHRI T. BANUSEAKR O R D E R PER HARI OM MARATHA, JM: THIS APPEAL OF THE REVENUE, FOR ASSESSMENT Y EAR 2005-06, FILED AGAINST THE ORDER OF THE LD. CIT(A)-III, CHEN NAI, RAISES THE SOLE QUESTION REGARDING VALUATION OF THE CLOSING STOCK A S CLAIMED BY THE ASSESSEE IN ITS REVISED RETURN OF INCOME. 2. THE FACTS APROPOS THE IMPUGNED ISSUE ARE THAT THE ASSESSEE HAD FILED RETURN OF INCOME ADMITTING A TOTAL INCOME OF ` 8,65,144/- ON 30.10.2005. SUBSEQUENTLY, A REVISED RETURN WAS FIL ED ON 29.3.2007 SHOWING A LOSS OF ` 7,03,37,642/-. THIS RETURN WAS PROCESSED U/S ITA 2217/08 :- 2 -: 143(1) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REF ERRED TO AS 'THE ACT' FOR SHORT) ON 28.7.2007. ALONGWITH THE REVISED RET URN FILED ON 29.3.2007, THE ASSESSEE HAD ENCLOSED A LETTER DATED 28.3.2007, THE RELEVANT PORTION OF WHICH READS AS UNDER: 'THE CLOSING STOCK HAS BEEN VALUED AT THE MARKET RA TES. WE HOWEVER FIND THAT THE COST IS LOWER THAN THE MARKE T PRICE AND HENCE WE SHOULD HAVE ADOPTED THE LOWER OF THE TWO B EING THE COST AS THE BASIS FOR VALUING THE CLOSING STOCK. SI NCE THIS IS AN INADVERTENT ERROR, WHICH AFFECTS THE TOTAL INCOME D ECLARED, WE ARE RECTIFYING THE SAME AND THIS IS REFLECTED IN THE IN COME DISCLOSED IN THE REVISED RETURN.' 3. THE ASSESSEE ALSO SUBSTANTIATED ITS CLAIM DURING AS SESSMENT PROCEEDINGS BY SUBMITTING AS UNDER: 'SINCE THE COMPANY WAS FACING FINANCIAL CRISIS FOR THE LAST FEW YEARS, THE STOCK POSITION HAD TO BE WINDOW DRESSED, WITH A VIEW TO SECURE FINANCIAL ASSISTANCE FROM BANKS, FINANCING PARTIES OR INSTITUTIONS. THIS WAS ACHIEVED BY OVERVALUING THE CLOSING STOCK, PARTICULARLY OF ROLLS. FOR THE FINANCIAL YEAR 2002-03, THE COMPANY HAD A CLOSING STOCK OF 7169.960 MT WAS ADOPTED CORRECTLY AT COST, THE VALUATION OF 7169.960 MT WAS INFLATED. AS AGAINST THE PRICE OF R S.7857/- PER M. T. ADOPTED FOR 2893.34 MT, THE VALUE ADOPTED FOR 71 69.960 MT WAS RS.23,809/ - PER M. T. THE OVER STATEMENT OF VALUAT ION OF CLOSING STOCK WAS CONTINUED FOR THE SUBSEQUENT YEARS AS WEL L WITH VARIATION IN THE STOCK POSITION, IT WAS IN THE YEAR ENDED 31 ST MARCH, 2005 THAT WE REALIZED THE NECESSITY OF CORRECTING DISCREPANCI ES IN ACCOUNTS . IN FACT, BY REASON OF OVER VALUATION OF THE CLOSING STOCK, THE COMPANY WHICH WAS ALREADY INCURRING LOSS HAD DISCLO SED A REDUCED LOSS. THIS POSITION REQUIRED TO BE CORRECTED AND AC CORDINGLY, THE POSITION WAS REVIEWED AND THE CORRECT VALUE WAS ADO PTED FOR THE CLOSING STOCK IN THE (FINANCIAL) YEAR 2004-05. IT I S IN THIS CONTEXT THAT THE CLOSING STOCK VALUATION WAS REVISED. ON TH E BASIS OF THE REVISED VALUE ADOPTED AT COST WHICH WAS LOWER THAN THE MARKET PRICE, THE LOSS ARISING ON ACCOUNT OF THE REVALUATI ON OF THE CLOSING STOCK WAS ARRIVED AT RS.9,20,02,786/-.' ITA 2217/08 :- 3 -: 4. BUT THE ASSESSING OFFICER WAS NOT AGREEABLE BECAUSE OF THE FOLLOWING REASONS: (I) AS PER SEC. 145A(A), THE VALUATION OF PURCHASE AND SALE OF GOODS AND INVENTORY FOR THE PURPOSE OF DETERMINING THE INCOME CHARGEABLE UNDER SEC. 28 SHALL BE IN ACCORDA NCE WITH THE METHOD OF ACCOUNTING REGULARITY EMPLOYED B Y THE ASSESSEE. HENCE, IN THIS CASE, ASSESSEE VALUED ITS INVENTORY OF CLOSING STOCK AT COST OR MARKET PRICE WHICHEVER IS HIGHER IN THE ASSESSMENT YEARS 2002-03, 2003-04 AND 2004-0 5 AND EVEN FOR THE AY 2005-06 AS PER ACCOUNTS SUBMITTED ALONGWITH THE ORIGINAL RETURN FILED ON 30.10.05. TH EREFORE, THIS METHOD CAN BE REGARDED AS THE METHOD REGULARLY EMPLOYED BY THE ASSESSEE FOR VALUATION OF CLOSING STOCK. VAL UATION BY ADOPTING COST OR MARKET PRICE WHICHEVER IS LOWER AS SHOWN BY ASSESSEE IN ITS REVISED RETURN ACCORDINGLY STAND S UNLAWFUL AND NOT ACCEPTABLE AS THE METHOD IS NOT REGULARLY EMPLOYED BY THE ASSESSEE FOR VALUATION OF CLOSING STOCK. VAL UATION BY ADOPTING COST OR MARKET PRICE WHICHEVER IS LOWER AS SHOWN BY ASSESSEE IN ITS REVISED RETURN ACCORDINGLY STAND S UNLAWFUL AND NOT ACCEPTABLE AS THE METHOD IS NOT REGULARLY E MPLOYED BY THE ASSESSEE WITH THE MEANING OF SEC. 145A OF TH E INCOME-TAX ACT, 1961. II) ANOTHER MOOT QUESTION IS TO BE CO NSIDERED HERE AS TO WHETHER UNDERVALUATION OF CLOSING STOCK IN THE REVI SED RETURN BY ADOPTING A DIFFERENT METHOD OF VALUATION IN COMPARISON TO THE VALUE OF CLOSING STOCK SHOWN IN THE ORIGINAL RE TURN IS COMING WITHIN THE AMBIT OF SEC. 139(5) OR NOT . SEC . 139(5) PROVIDES THAT AN ASSESSEE IS ENTITLED TO FURNISH A REVISED RETURN ONLY WHEN ANY OMISSION OR WRONG STATEMENT IS DISCOVERED IN THE ORIGINAL RETURN. IN THIS CASE ORI GINAL RETURN SHOWS VALUATION OF INVENTORY OF STOCK @ COST AND MA RKET PRICE WHICHEVER IS HIGHER AND THIS METHOD IS REGULA RLY EMPLOYED BY ASSESSEE. THERE IS NO OMISSION OR NOTH ING WRONG IN THIS STATEMENT FILED WITH ORIGINAL RETURN AND THEREFORE, IT CANNOT BE A SUBJECT MATTER TO FACILIT ATE THE ASSESSEE TO FILE A REVISED RETURN.' 5. BUT IN FIRST APPEAL, THE ASSESSEE WAS SUCCESSFUL IN GETTING THE DESIRED RELIEF WHEN THE LD. CIT(A) HEAVILY RELIED O N THE HON'BLE ITA 2217/08 :- 4 -: SUPREME COURTS DECISION RENDERED IN THE CASE OF SA NJEEV WOOLEN MILLS VS CIT, 279 ITR 434, WHEREIN IT HAS BEEN HELD THUS: 'THE RECOGNIZED AND SETTLED ACCOUNTING PRACTICE OF ACCOUNTING WITH THE CLOSING STOCK IN THE ACCOUNTS HAS TO BE VALUED ON COST BASIS OR AT MARKET VALUE BASIS IF THE MARKET V ALUE OF THE STOCK IS LESS THAN THE COST VALUE. IN THE PRESENT C ASE THE ASSESSEE HAS NOT ADOPTED THE ESTABLISHED AND SETTLE D PRACTICE. THE MARKET VALUE OF THE STOCK HAS BEEN TA KEN INTO CONSIDERATION WHILE ARRIVING AT CHARGEABLE INCOME A LTHOUGH THE MARKET VALUE OF THE STOCK IS MORE THAN THE COST VAL UE OF THE STOCK. THE PROFIT EARNED IS ONLY NOTIONAL. THERE IS NO TRANSFER OF THE GOODS AND THE CLOSING STOCK REMAINS THE OPENING STOCK OF THE NEXT ACCOUNTING YEAR. THE INCOME WHICH HAS NOT BEEN DERIVED BY THE ASSESSEE CANNOT BE SAID TO BE THE IN COME CHARGEABLE FOR INCOME-TAX AND, THEREFORE, THE REJEC TION OF THE ACCOUNTS MAINTAINED BY THE ASSESSEE FOR THE VALUATI ON OF THE CLOSING STOCK BY THE ASSESSING OFFICER AND CONFIRME D BY THE HIGH COURT IS IN ACCORDANCE WITH LAW. THE POWER EXE RCISED BY THE ASSESSING OFFICER UNDER SECTION 145 IS AS PER T HE PRINCIPLES ENUNCIATED BY VARIOUS AUTHORITIES AND COURTS. WE DO NOT FIND ANY GOOD OR SUFFICIENT REASON TO INTERFERE WITH THE ORDER PASSED BY THE HIGH COURT. THE APPEALS ARE DISMISSED WITH N O ORDER AS TO COSTS.' 6. NOW, THE DEPARTMENT HAS DISPUTED THE FINDING OF TH E LD. CIT(A) BY TAKING FOLLOWING GROUNDS: 1. THE ORDER OF THE LEARNED CIT(A) IS CONTRARY TO LAW AND FACTS AND CIRCUMSTANCES OF THE CASE. 2.1 THE LEARNED CIT(A) ERRED IN DIRECTING THE ASSE SSING OFFICER TO ADOPT THE REDUCED VALUATION OF CLOSING S TOCK ADMITTED BY THE ASSESSEE IN THE REVISED RETURN OF I NCOME. 2 .2 THE LEARNED CIT(A) OUGHT TO HAVE SEEN THAT A S PER SECTION 145 (1), THE INCOME OF THE ASSESSEE UNDER THE HEAD 'BUSINESS' (OR OTHER SOURCES) IS TO BE COMPUTED IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. 2.3. THE LEARNED CIT(A) FAILED TO NOTE THAT IN THE ASSESSMENT YEARS 2002-03, 2003-04 & 2004-05 , THE ASSESSEE WAS ITA 2217/08 :- 5 -: VALUING THE CLOSING STOCK AT COST PRICE OR MARKET P RICE WHICHEVER IS HIGHER AND HENCE THE INCOME ADMITTED B Y THE ASSESSEE WAS CONSISTENT WITH THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. IN F ACT, EVEN FOR THE ASSESSMENT YEAR UNDER CONSIDERATION, T HE ASSESSEE HAD ADOPTED ONLY THIS METHOD IN ITS BOOKS OF ACCOUNTS AND IT WAS ONLY WHILE FILING THE REVISED R ETURN U/S 139(5), THE ASSESSEE ADMITTED LESSER VALUE OF CLOSI NG STOCK. 2.4. THE LEARNED CIT(A) OUGHT TO HAVE SEEN THAT T HE DECISION OF THE SUPREME COURT IN THE CASE OF SANJEEV WOOLLEN MILLS 279 ITR 434 ACTUALLY SUPPORTS THE CASE OF THE DEPARTMENT AS THE COURT HAS UPHELD THAT SECTION 145 CAN BE APPLIED IF THE CONSISTENT METHOD OF ACCOUNTING I S NOT FOLLOWED BY THE ASSESSEE. 2.5. THE LEARNED CIT(A) OUGHT TO HAVE SEEN THAT T HE ASSESSEE HAS NOT CHANGED THE VALUATION FOR STORES AND SPARES , TRADING GOODS, FINISHED GOODS AND RAW MATERIAL (EXC EPT FOR STEEL ROLLS) WHICH REMAINED THE SAME BOTH IN TH E ORIGINAL AND REVISED RETURN. THE ASSESSEE HAS CHANGED THE VALUE ONLY FOR ONE ITEM OF RAW MATERIAL VIZ. ST EEL ROLLS AND IT HAS REMAINED THE SAME QUANTITY-WISE (5,598.445 MT) BOTH IN OPENING AND CLOSING STOCK. 2.6. THE LEARNED CIT(A) OUGHT TO HAVE SEEN THAT O PENING STOCK OF STEEL ROLLS HAS BEEN VALUED AT MARKET RATE OF RS . 23,500 PER MT AND THE CLOSING STOCK HAS BEEN VALUED AT ALLEGED COST PRICE OF RS. 7,066 MT WHICH IS UNBELIEVABLE.(ANNEXURE 1 TO ASSESSEE'S LETTER DATED 21.8.2007) AS THE MARKET VALUE IS SHOWN TO BE MORE THAN THREE TIMES THE COST PRICE. 2.7. THE LEARNED CIT(A) ERRED IN FAILING TO NOTE THAT EVEN IN THE ORIGINAL RETURN AND ITEM 14 OF NOTES ON ACCOUNTS ACCOMPANYING THE RETURN AS WELL AS PARAGRAPH 3(F) O F AUDITOR REPORT HAS BEEN SPECIFICALLY STATED THAT CE RTAIN ITEMS OF RAW MATERIALS WERE VALUED AT MARKET VALUE HIGHER THAN THE COST AND THERE WAS NO REASON TO REV ISE IT IN MARCH 2007 MORE THAN 17 MONTHS AFTER FILING OF T HE RETURN. 2.8. THE LEARNED CIT(A) FAILED TO APPRECIATE THA T THE ASSESSEE HAD REVISED ITS COMPUTATION ONLY WITH A VIEW TO OFF SET THE AMOUNT OF RS. 2.08 CRORES BEING CASH CREDITS OFFERE D AS INCOME. ITA 2217/08 :- 6 -: 3. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDU CED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF T HE LEARNED CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED. 7. THE MAIN THRUST OF THE REVENUE IS THAT BUSINESS INC OME OF THE ASSESSEE AS PER SECTION 145(1) OF THE ACT HAS TO BE COMPUTED IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. AS AGAINST THIS, THE LD.AR HAS HEAVILY R ELIED ON THE REASONS GIVEN BY THE LD. CIT(A). 8. AFTER CAREFULLY COGITATING THE ARGUMENTS OF BOTH S IDES, IT IS FOUND THAT FOR ASSESSMENT YEARS 2002-03 TO 2004-05, THE ASSESSEE WAS VALUING THE CLOSING STOCK AS PER COST PRICE OR MARKET PRICE WHICHEVER WAS HIGHER. BUT DURING THE YEAR UNDER CO NSIDERATION, THE ASSESSEE HAS ADOPTED THE METHOD OF VALUATION OF THE CLOSING STOCK AT MARKET RATE OR COST PRICE WHICHEVER IS LOWER. THE MAIN POINT OF ARGUMENT OF THE REVENUE IS THAT THE ASSESSEE CANNOT BE ALLOWED TO CHANGE ABRUPTLY THE METHOD WHICH HAS BEEN REGULARLY FOLLOWED BY IT. BUT THE FACT REMAINS THAT THE SETTLED POSITION REGA RDING ACCOUNTING IN RELATION TO CLOSING STOCK IS TO VALUE IT ON THE COS T BASIS OR AT THE MARKET VALUE BASIS IF THE MARKET VALUE OF THE STOCK IS LES S THAN THE COST PRICE. THE HON'BLE SUPREME COURT HAS CORRECTLY GIVEN A STR ONG RULING THAT THERE IS NO HEROISM IN PERPETUATING THE WRONG COMMI TTED BY ANY PARTY. IF THE ASSESSEE WAS VALUING ITS CLOSING STOCK BY AD OPTING A WRONG ITA 2217/08 :- 7 -: METHOD, IT WOULD NOT BE APPROPRIATE TO CONTINUE THE WRONG THING BECAUSE IT HAS TO END SOMEWHERE TO CORRECT THE WRON G METHOD SO ADOPTED BY IT. OTHERWISE ALSO, THE ASSESSEE-FIRM C ANNOT MAKE ANY PROFIT OUT OF THIS CALCULATION BY WAY OF OVER VALUA TION OF CLOSING STOCK BECAUSE IT WILL BE ONLY A NOTIONAL INCOME AS IT DOE S NOT INVOLVE ANY TRANSFER OF GOODS AND CLOSING STOCK OF ONE YEAR WIL L BE THE OPENING STOCK OF THE NEXT ACCOUNTING YEAR. THE HON'BLE SUP REME COURTS DECISION RELIED ON BY THE LD. CIT(A), THE RELEVANT PORTION OF WHICH HAS BEEN EXTRACTED HEREIN ABOVE, IS A STRONG NOTE OF GU IDE FOR ALL THE PERSONS DEALING WITH SUCH MATTERS. WE ALSO FIND TH AT IF THE ASSESSEE FOLLOWED A WRONG METHOD IN EARLIER YEARS IT SHOULD ALSO BE CARRIED ON IN YEARS TO FOLLOW. ON THE OTHER HAND, IT WAS THE PIO US DUTY OF THE ASSESSING OFFICER TO VALUE THE STOCK AS PER THE SET TLED NORMS WHICH HE FAILED TO DO IN EARLIER YEARS. THE ASSESSING OFFIC ER HAS VALUED THE CLOSING STOCK AS PER THE LOWER OF THE COST OR MARKE T PRICE METHOD. THE ASSESSEE CAN REVISE ITS RETURN U/S 139(5) AS HAS BE EN APTLY OBSERVED BY THE LD. CIT(A) IN HIS ORDER. THE ASSESSEE HAS P OWER TO RECTIFY THE WRONG STATEMENT FURNISHED ALONGWITH THE RETURN OF I NCOME AND IT CANNOT BE DENIED U/S 139(5). WHATEVER CASH CREDIT HAS BEEN OFFERED BY THE ASSESSEE TO THE TUNE OF ` 2.08 CRORES HAS BEEN TAXED IN ITS HANDS BY THE ASSESSING OFFICER. THIS FACT SHOULD N OT BE READ OTHERWISE ITA 2217/08 :- 8 -: WITHOUT THERE BEING STRONG PROOF THEREOF. THE CONTE NTION OF THE ASSESSING OFFICER TO TAX ONLY PROFIT MARGIN DOES NO T MAKE SENSE IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE. THE ASS ESSEE HAD CREDITED AN AMOUNT OF ` 2.08 CRORES IN THE NAME OF 91 PERSONS DURING FINAN CIAL YEAR 2004-05. A LIST OF THESE PERSONS WAS SUBMITTE D BUT, AS THE ASSESSEE COULD NOT PROVE THE SAME, IT WAS OFFERED F OR TAXATION IN THE REVISED RETURN. IN OUR OPINION, THERE IS NO MUCH F ORCE IN THE SUBMISSION OF THE LD. DR THAT THE ASSESSEE HAS REVI SED ITS COMPUTATION ONLY WITH A VIEW TO OFF SET THE AMOUNT OF ` 2.08 CRORES TO ENCASH THE CREDIT OF OFFERED INCOME. HENCE, WE FIND THE APPEL LATE ORDER TO BE CORRECT AND NO INTERFERENCE IS THUS WARRANTED. BUT IN THE INTEREST OF JUSTICE, IT IS DESIRABLE THAT THE PARTY, WHO COMMIT S A MISTAKE ADVERTENTLY IN ORDER TO JEOPARDIZE THE INTEREST OF OTHER PARTY, SHOULD NOT GO SCOT- FREE. THE DEPARTMENT IS AT LIBERTY TO VALUE THE CLOSING STOCK OF THE JUST EARLIER YEAR OR OTHER YEARS PRIOR TO THAT, ON THE SAME BASIS, WHICH IS NOW TREATED AS A CORRECT METHOD WIT H THE AIM TO NEUTRALIZE THE WRONG BENEFIT EARNED BY THE ASSESSEE BY ABRUPT CHANGE OF METHOD OF VALUATION OF THE CLOSING STOCK. THE A SSESSING OFFICER IS AT LIBERTY TO TAKE RECOURSE WHATEVER IS PERMISSIBLE UN DER THE LAW. ITA 2217/08 :- 9 -: 9. IN THE RESULT, THE APPEAL OF THE REVENUE STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 13 .8.2010. SD/- SD/- (N. BARATHVAJA SANKAR) VICE-PRESIDENT ( HARI OM MARATHA ) JUDICIAL MEMBER DATED: 13 TH AUGUST, 2010 RD COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR