Jitender Pal Singh, Hyd, Hyderabad V. ITO, Ward-7(2), Hyderabad, Hyderabad

ITA 603/HYD/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 6338 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 2 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-07-2016
• Appeal Filed By: Assessee
• Bench Allotted: A
• Next Hearing Date: 09-05-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 08-05-2015
• Court: TRIBUNAL
• Department Lawyers: M SITARAM
• Assessee Lawyers: MAHESH KUMAR RATHI
• Section: 143(3); 147; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A (SMC), HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. ASST. YEAR APPELLANT RESPONDENT 153/HYD/2016 2008 - 09 SHRI JITENDER PAL SINGH, L/R. OF LATE PRITAM SINGH MARWAH, HYDERABAD [PAN: AEFPM2640M] INCOME TAX OFFICER, WARD-7(2), HYDERABAD 603/HYD/2015 2008 - 09 SHRI JITENDER PAL SINGH, HYDERABAD [PAN: AEYPS0336K] FOR ASSESSEE : SHRI MAHESH KUMAR RATHI, AR FOR REVENUE : SHRI M. SITARAM, DR DATE OF HEARING : 21-06-2016 DATE OF PRONOUNCEMENT : 15-07-2016 O R D E R THESE TWO APPEALS ARE INTER-RELATED IN THE SENSE THA T ITA NO. 153/HYD/2016 PERTAINS TO LATE PRITAM SINGH MARWAH REPR ESENTED BY HIS SON SHRI JITENDER PAL SINGH AND ITA NO. 603/H YD/2015 PERTAIN TO SHRI JITENDER PAL SINGH. BOTH THE APPEALS ARE FOR THE SAME ASSESSMENT YEAR AND ARE AGAINST THE ORDERS OF COM MISSIONER OF INCOME TAX (APPEALS)-3, HYDERABAD, DATED 02-11-20 15 & 13-02- 2015 RESPECTIVELY. THE ISSUE IN THESE APPEALS IS WI TH REFERENCE TO VALUATION OF STOCK WHEN THE BUSINESS BEING RUN BY LA TE PRITAM SINGH MARWAH, DEVOLVED ON HIS SON ON 30-08-2007. 2. BRIEFLY STATED, LATE PRITAM SINGH MARWAH WAS A TRAD ER IN HARDWARE AND WAS CARRYING ON BUSINESS UNDER THE N AME AND STYLE OF M/S. J.P. TRADE CORPORATION. HE EXPIRED ON 30-08-2007 I.T.A. NOS. 603/HYD/2015 & 153/HYD/2016 :- 2 -: AND HIS ONLY SON SHRI JITENDER PAL SINGH BECAME LEGA L HEIR. THE LEGAL HEIR, SHRI JITENDER PAL SINGH FILED RETURN OF INCOME OF HIS FATHER ON 16-02-2009 DECLARING INCOME OF RS. 1,86,40 0/- FOR THE PERIOD 01-04-2007 TO 30-08-2007. HE ALSO FILED RETUR N OF INCOME ADMITTING INCOME FROM 01-09-2007 TO 31-03-2008 DECLARI NG TOTAL INCOME AT RS. 4,59,010/- ON 30-09-2008. THE RETURN O F FATHER WAS ACCEPTED U/S. 143(1) OF THE ACT, WHEREAS ASSESSMENT U /S. 143(3) HAS BEEN COMPLETED IN THE HANDS OF THE SON ON 31-12-2 010 ASSESSING THE TOTAL INCOME OF RS. 6,66,760/-. THIS A SSESSMENT ORDER WAS SET ASIDE BY THE CIT U/S. 263 DT. 31-03-2013 WITH A DIRECTION TO RE-DO THE SAME AFTER GIVING PROPER OPPOR TUNITY TO ASSESSEE. IN THE REVISED ASSESSMENT, THE AO MADE VARI OUS ADDITIONS. 2.1. THE ISSUE IN APPEAL OF THE SON IS WITH REFERENC E TO AN AMOUNT OF RS. 10,80,100/- BEING ADDED AS EXCESS OF A SSETS OVER LIABILITIES WHICH WAS CONFIRMED BY THE CIT IN APPELLA TE ORDER PASSED PRIOR TO THE APPELLATE ORDER IN THE FATHERS CASE, STATI NG THAT THE ISSUE IN DISPUTE DEPENDS ON A DECISION IN FATHERS CA SE. THUS HOLDING, THE LD. CIT(A) CONFIRMED THE ADDITION OF RS. 10,80,100/-, WHILE DELETING THE OTHER ADDITIONS MADE BY AO ON WHICH REVENUE HAS NOT PREFERRED ANY APPEAL. INCIDENTALLY, THE SAME AMOUNT WAS ADDED AS AN ADDITION TO THE CLOSING STOCK BY THE AO IN THE ASSESSMENT THAT WAS REOPENED U/S. 147 IN THE HANDS OF LATE PRITAM SINGH. THIS ORDER WAS ALSO DISPUTED BEFORE THE LD. CIT(A), WHO VIDE ORDER PASSED ON 02-11-2015 I.E., SUBSEQUEN T TO THE ORDER IN SONS CASE, UPHELD THE ADDITION IN THE HANDS OF LA TE PRITAM SINGH MARWAH AND GAVE A DIRECTION TO GIVE THE BENEFIT O F OPENING STOCK IN THE HANDS OF SHRI JITENDER PAL SINGH. THUS, BOTH THE APPEALS ARE IN A WAY INTER-CONNECTED AND THE ONLY ISSU E TO BE I.T.A. NOS. 603/HYD/2015 & 153/HYD/2016 :- 3 -: ADJUDICATED IS ABOUT THE AMOUNT OF RS. 10,80,100/- BEIN G ADDED AS ADDITION TO THE CLOSING STOCK IN THE HANDS OF LATE PRITAM SINGH MARWAH. 2.2. AS NOTICED FROM THE ASSESSMENT ORDER, ASSESSEE H AD SHOWN CLOSING STOCK OF RS. 58,05,000/- ON 31-08-200 7 IN HIS TRADING ACCOUNT, WHEREAS THE AO COMPUTED THE VALUE OF C LOSING STOCK AT RS. 68,85,100/- AS UNDER: AS PER TRADING ACCOUNT OPENING STOCK RS. 57,74,766 ADD: PURCHASES RS. 24,69,476 FREIGHT RS. 1,12,074 -------------------- TOTAL RS. 83,56,310 THE ASSESSEE DECLARED SALE OF GOODS AT RS. 30,70,67 5/- IN THE TRADING A/C. HOWEVER, HE REPORTED SALES OF RS. 29, 46,082/- IN VAT RETURNS FOR THE SAME PERIOD. NO RECONCILIATION IS FILED. THEREFORE, THE SALES ARE TAKEN AT RS. 29,46,082/- AND THE VALUE OF CLOSI NG STOCK IS WORKED OUT. SALES AS PER VAT RETURNS RS. 29,46,082 LESS: PROFIT THERE FROM = 29,46,082 X 100/16.67% = RS. 4,91,112 ----------------------- COST OF GOODS SOLD RS. 24,54,970 RS. 24,54,970 ----------------------- -------------- -------- RS. 59,01,340 VALUE OF CLOSING STOCK AT MARKET PRICE = COST PRICE X PROFIT = 59,01,346 X 16.67% = RS. 68,85,100 THUS, THE AO ARRIVED AT CLOSING STOCK AND DIFFERENCE O F AMOUNT OF RS. 10,80,100/- WAS ADDED TO THE VALUE OF THE STOCK, H OLDING THAT THERE WAS TRANSFER OF BUSINESS FROM FATHER TO THE SON. BEFORE LD. CIT(A), ASSESSEE CONTENDED THAT THERE IS NO TRANSFER OF BUSINESS AND IT WAS DEVOLVED ON THE SON BY WAY OF WILL WHIC H CANNOT BE CONSIDERED AS TRANSFER. IT WAS ALSO CONTENDED THAT AS SESSEE I.T.A. NOS. 603/HYD/2015 & 153/HYD/2016 :- 4 -: CONTINUED THE BUSINESS AND SO, QUESTION OF REVALUATION DOES NOT ARISE ON THE CLOSING STOCK. IT WAS ALSO SUBMITTED THAT ASSESSEE HAS VALUED THE STOCK AT MARKET VALUE OR COST PRICE WHICHEV ER IS LESS, AS PER THE ACCOUNTING STANDARDS AND NECESSARY VALUATION W AS FURNISHED TO THE AO. 2.3. LD. CIT(A), HOWEVER, INITIALLY PASSED THE ORDER STATING AS UNDER: 2.2 IT IS AN ESTABLISHED ACCOUNTING PRINCIPLE THAT THE CLOSING STOCK SHOULD BE VALUED AT COST OR MARKET PR ICE WHICHEVER IS HIGHER. THEREFORE, I DO NOT FIND ANY INFIRMITY IN THE ACTION OF THE AO. THEREFORE, THE ADDITION MADE OF RS. 10,80,100 IS CO NFIRMED. SINCE THE ADDITION OF RS. 10,80,100 IS MADE TO THE CLOSIN G STOCK IN CASE OF LATE PRITHAM SINGH MARWAH, LEGALLY REPRESENTED BY H IS SON SRI JITENDER PAL SINGH, AND SINCE THE SAME BUSINESS WAS CONTINUED BY HIS SON, THE CLOSING STOCK OF RS. 68,85,100 SHALL B ECOME OPENING STOCK AS ON 01-09-2007 IN THE HANDS OF MR. JITENDER PAL SINGH. HOWEVER, BY WAY OF A CORRIGENDUM DT. 01-03-2016, LD. CIT(A) MODIFIED THE ORDER AS UNDER: 2. PARA 2.2 OF THE SAID ORDER SHALL READ AS UNDER: IT IS AN ESTABLISHED ACCOUNTING PRINCIPLE THAT TH E CLOSING STOCK SHOULD BE VALUED AT COST OR MARKET PRICE WHICHEVER IS LOWER. HOWEVER, IN THIS CASE, THE BUSINESS OF THE FATHER WAS TAKEN OVE R BY THE SON, AND THEREFORE, THE CLOSING STOCK WAS RIGHTLY VALUED AT MARKET PRICE AND DIFFERENCE BETWEEN MARKET PRICE AND COST PRICE OF C LOSING STOCK OF RS. 10,80,100 WAS BROUGHT TO TAX. THEREFORE, I DO NOT FIND ANY INFIRMITY IN THE ACTION OF THE AO. THEREFORE, THE ADDITION MADE OF RS. 10,80,100 IS CONFIRMED. SINCE THE ADDITION OF RS. 10,80,100 IS MADE TO THE CLOSING STOCK IN CASE OF LATE PRITHAM SINGH MARWAH, LEGALLY REPRESENTED HIS SON SRI JITENDER PAL SINGH, AND SINCE THE SAME BUSINESS WAS CONTINUED BY HIS SON, THE CLOSING STOCK OF RS. 68,85,100 SHALL BECOM E OPENING STOCK AS ON 01-09-2007 IN THE HANDS OF MR. JITENDER PAL SINGH. 3. AGGRIEVED, ASSESSEE JITENDER PAL SINGH PREFERRE D THESE APPEALS, ONE IN HIS OWN HAND AND OTHER AS LEGAL REPR ESENTATIVE OF LATE PRITAM SINGH MARWAH (FATHER). I.T.A. NOS. 603/HYD/2015 & 153/HYD/2016 :- 5 -: 4. LD. COUNSEL REITERATED THE FACTS AND SUBMITTED THAT ACTION OF THE AO CANNOT BE UPHELD AS BOOKS OF ACCOUNT WERE NOT REJECTED AND NO VERIFICATION OF ASSESSEES CLOSING S TOCK VALUATION WAS UNDERTAKEN BY THE AO. FURTHER, LD. COUNSEL RELIE D ON THE DECISIONS OF THE HON'BLE SUPREME COURT IN THE CASE O F SAKTHI TRADING CO., VS. CIT [250 ITR 871] (SC) WHEREIN, THE HON'BLE SUPREME COURT HAS HELD THAT IN THE CASE OF DISSOLUTION OF ANY FIRM, THE CLOSING STOCK IS NOT TO BE RE-VALUED, IF THE BUSINE SS IS CONTINUED AND THE STOCKS IN SUCH CASE ARE TO BE VALUED AT LOWER O F THE COST OR MARKET VALUE, FOLLOWING BASIC TENETS OF ACCOUNTANCY PRI NCIPLES. 5. LD. DR HOWEVER, SUPPORTED THE ORDERS OF THE AO AND CIT(A). 6. I HAVE CONSIDERED THE ISSUE AND EXAMINED THE FACTS ON RECORD. AS FAR AS ACTION OF THE AO IN RE-VALUING THE CLOSING STOCK IS CONCERNED, THE SAME CANNOT BE UPHELD FOR THE SIMPLE RE ASON THAT THE GP RATE ADOPTED BY THE AO AND ACCEPTED AS A BASIS FOR WORKING OUT THE SO CALLED REVALUATION, IS ARRIVED AT AFTER TAKIN G THE CLOSING STOCK, AS PER THE VALUES ADOPTED BY THE ASSESSEE. IN FACT, AO HIMSELF NOTICES THAT ASSESSEE DECLARED A GROSS PROFIT OF RS. 5,19,358/- ON A TURNOVER OF RS. 39,70,675/- WHICH C OMES A PROFIT RATE OF 16.91% FOR THE PERIOD FROM 01-04-2007 TO 31-0 8-2007 AND AFTER TAKING OVER THE BUSINESS BY THE LR, THE GP RATE DECLARED WAS AT 16.67% FOR THE PERIOD FROM 01-09-2007 TO 31-03-200 8. ACCORDINGLY, HE ACCEPTS THE GP RATE AT 16.67% FOR WORK ING OUT THE CLOSING STOCK AS EXTRACTED ABOVE EARLIER. THE MOOT PO INT WHICH THE AO MISSED IS THAT THE PROFITS OF ASSESSEE WERE WORKED OUT, AFTER ADOPTING THE OPENING STOCK, PURCHASES AND THE CLOSING STOCK IN THE TRADING ACCOUNT, WHICH GIVES RISE TO GROSS PROFIT AND THE RATE OF I.T.A. NOS. 603/HYD/2015 & 153/HYD/2016 :- 6 -: GROSS PROFIT. IGNORING THIS FUNDAMENTAL PRINCIPLE, THE AO WITH THE VERY SAME GP RATE, RE-WORKED OUT THE CLOSING STOCK B Y AGAIN WORKING OUT THE COST PRICE AND FINDING OUT THE DIFFERENC E AS A SHORT VALUE OF THE CLOSING STOCK. I AM UNABLE TO UNDERSTAND THE LOGIC OF AO, AS IT INVOLVED DOUBLE ADDITION OF THE SAME. GP RA TE ORIGINALLY WAS ARRIVED AT AFTER ADOPTING CLOSING STOCK VALUE, WHI CH IN THE SUBMISSIONS OF ASSESSEE, WAS TAKEN AT MARKET VALUE AS ON 30-08- 2007. THEREFORE, AGAIN ADOPTING A DIFFERENT METHOD O R A CONVOLUTED METHOD TO ARRIVE AT SO CALLED MARKET VALUE IS NOT CORRECT. IF THIS AMOUNT IS SUBSTITUTED TO THE CLOSING STOC K VALUE, THE GP RATE WOULD CERTAINLY GO UP MORE THAN 16.67% THAT WAS ACCEPTED BY THE AO AS GENUINE GP RATE. THUS, THE WOR KING MADE BY THE AO IN ARRIVING AT THE DIFFERENCE AMOUNT ITSELF I S PERVERTED AND NOT BASED ON ANY FACTUAL VERIFICATION. MOREOVER, ASSESSEE ADMITTED THAT THE CLOSING STOCK DECLARED IS AS PER THE ACC OUNTING PRINCIPLES OF COST PRICE OR MARKET VALUE WHICHEVER LESS. THIS HAS NOT BEEN COUNTERED BY THE AO AND ON THE BASIS OF THE SA ME VERY BOOK RESULTS ACCEPTED BY THE AO, THE SO CALLED DIFFEREN CE IN VALUATION WAS WORKED OUT. THIS CANNOT BE ACCEPTED AS A VALID METHOD. 7. COMING TO THE LEGAL PRINCIPLES, IT IS ALSO A CONTE NTION THAT ASSESSEE HAS SUCCEEDED THE BUSINESS AND CONTINUED THE BUSINESS AND THERE IS NO TRANSFER OF ANY BUSINESS OR DISSOLUTION OF BUSINESS AS ON 30-08-2007. THE PRINCIPLES LAID DOW N BY THE HON'BLE SUPREME COURT IN THE CASE OF SAKTHI TRADING CO., VS. CIT [250 ITR 871] (SC) (SUPRA) GIVEN IN THE CONTEXT OF DI SSOLUTION OF A FIRM ON DEATH OF ONE PARTNER WILL EQUALLY APPLY TO T HE FACTS OF THE CASE. THE HON'BLE SUPREME COURT HAS HELD THAT IT IS A N ESTABLISHED RULE OF COMMERCIAL PRACTICE AND ACCOUNTANC Y THAT I.T.A. NOS. 603/HYD/2015 & 153/HYD/2016 :- 7 -: WHERE THERE IS NO DISCONTINUANCE OF BUSINESS, THE CLOS ING STOCK IS TO BE VALUED AT COST OR MARKET PRICE WHICHEVER IS LOWER . THIS IS WHAT THE ASSESSEE HAS ADOPTED AND THE ACCOUNTS OR ACCOU NTING PRINCIPLES HAVE NOT BEEN DOUBTED BY THE AO, WHO ACCEPT ED THE GP RATE AS SUCH OFFERED BY ASSESSEE IN BOTH THE RETURNS FILED FOR THE SAME ASSESSMENT YEAR IN TWO DIFFERENT HANDS. IN VIEW OF THAT, I AM OF THE OPINION THAT THE ADDITION OF RS. 10,80,100/- HAS NO BASIS BOTH ON FACTS AS WELL AS ON LAW. IN VIEW OF THAT, I HAVE NO HESITATION IN DELETING THE ADDITION. 8. EVEN THOUGH, LD. CIT(A) ORIGINALLY CONFIRMED THE ADDITION STATING THAT IT IS AN ESTABLISH ACCOUNTANCY PRINCI PLE THAT CLOSING STOCK SHOULD BE VALUED AT COST OR MARKET PRIC E WHICHEVER IS HIGHER, ON THE BASIS OF WHICH THE GROUNDS WERE RAISE D BY ASSESSEE, SUBSEQUENTLY, BY WAY OF CORRIGENDUM, THE ABOVE SENTENC E WAS MODIFIED; BUT STILL THOUGHT IT FIT TO CONFIRM THE ADDITION. I DO NOT FIND ANY RATIONALE IN CONFIRMING THE ADDITION, WHICH I S NOT SUPPORTED BY THE FACTS OR LAW. IN VIEW OF THAT, THE GR OUNDS RAISED BY ASSESSEE IN ITA NO. 153/HYD/2016 ON THE ADDITION O F RS. 10,80,100/- ARE UPHELD AND ADDITION SO MADE IS DELET ED. 9. CONSEQUENTLY, THERE IS NO QUESTION OF ANY MODIFICA TION OF THE OPENING STOCK IN THE HANDS OF SHRI JITENDER PAL SINGH IN ITA NO. 603/HYD/2015. EVEN THOUGH THE LD. CIT(A) VIDE TH E ORDER DT. 13-02-2015 I.E., PRIOR TO THE DECISION IN THE CASE OF LATE PRITAM SINGH MARWAH, HAS CONFIRMED THE ADDITION, THE CIT(A) I N THE LATER ORDER DIRECTED THE AO TO ADOPT THE CLOSING STOCK VALU ATION AS THAT OF OPENING STOCK VALUATION IN THE HANDS OF THE SON. THIS SITUATION DOES NOT ARISE AS THE ADDITION MADE BY THE AO IN THE FA THERS HAND STANDS DELETED. CONSEQUENTLY, THE GROUNDS RAISED BY A SSESSEE ARE I.T.A. NOS. 603/HYD/2015 & 153/HYD/2016 :- 8 -: ALLOWED AND AO IS DIRECTED TO ACCEPT THE INCOMES RETURN ED AS SUCH ON THIS ISSUE. THE OTHER ADDITIONS WHICH WERE DELETE D BY THE LD. CIT(A) ARE NOT APPEALED BY THE REVENUE. CONSEQUENTLY, AO IS DIRECTED TO MODIFY THE ORDERS ACCORDINGLY. 10. IN THE RESULT, BOTH THE APPEALS ARE TREATED AS ALLOW ED. ORDER PRONOUNCED IN THE OPEN COURT ON 15 TH JULY, 2016 SD/- (B. RAMAKOTAIAH) ACCOUNTANT MEMBER HYDERABAD, DATED 15 TH JULY, 2016 TNMM COPY TO : 1. SHRI JITENDER PAL SINGH, L/R. LATE PRITAM SINGH MARWAH, HYDERABAD. C/O. SHRI M.K. RATHI & CO., CHARTERED ACCOUNTANTS, 15-9-182/1, 1 ST FLOOR, MAHARAJGUNJ, HYDERABAD. 2. THE INCOME TAX OFFICER, WARD-7(2), HYDERABAD. 3. COMMISSIONER OF INCOME TAX(APPEALS)-3, HYDERABAD , 4. THE PR. COMMISSIONER OF INCOME TAX-3, HYDERABAD. 5. D.R. ITAT, HYDERABAD. 6. GUARD FILE.