RAJASTHAN STATE INDUSTRIAL DEVELOPMENT AND INVESTMENT CORPORATION LIMITED, V. ASSISTANT COMMISSIONER OF INCOME TAX

ITA/252/2018

AI Insights

The case involves the Rajasthan State Industrial Development & Investment Corporation Limited (RIICO), which appealed against the order of the Income Tax Appellate Tribunal (ITAT) that remitted the matter back to the Assessing Officer regarding the valuation of land under encroachment or litigation. RIICO had valued such land at nil, considering it non-saleable, which was contested by the Assessing Officer and upheld by the CIT(A). The ITAT's decision to remit the matter back for a detailed examination of each piece of land's status was challenged by RIICO in the High Court. The court dismissed the appeal, supporting the ITAT's approach of not applying a standard parameter for all cases of encroachment or litigation.

• Counselvise Citation: [2019] 140 COUNSELVISE.COM (IT) 750852 (HC-RAJASTHAN)
• Appeal Type: Others
• Pronouncement Date: 23-01-2019
• Assessment Year: misc
• Other Referred Cases: CIT vs. Shoorji Vallabhdas & Co.-(1962) 46 ITR 144 (SC), CIT vs. Excel Industries Ltd.-(2013) 358 ITR 295 (SC), CIT vs. Hindustan Housing & Land Development Trust Ltd.-(1986) 161 ITR 524 (SC), CIT vs. Wolkem India Ltd.-(2009) 315 ITR 211 (Raj.)
• Laws Referred To: Income Tax Act, Companies Act
• Result in Favour of: Revenue
• Court: HIGH COURT
• Assessee Lawyers: SIDDHARTH RANKA
• Keywords: Encroachment; Income tax appeal; Litigation; Stock-in-Trade; Valuation of land
• Section: 143(3)

Judgement Text

"HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No.252/2018 Rajasthan State Industrial Development And Investment Corporation 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 Having Its 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 Judgment 23/01/2019 This appeal filed by the M/s. Rajasthan State Industrial Development & Investment Corporation Limited (hereinafter called as the “RIICO”) is directed against the order dated 28.05.2018 passed by the Income Tax Appellate Tribunal, whereby the learned Tribunal has remitted back the matter to the Assessing Officer. The facts of the case are that the assessee appellant- RIICO is a Rajasthan State Government Enterprise. The Board of Directors of the assessee-appellant consists of senior officers of the cadre of Indian Administrative Services and overall management and control is under the supervision of Government of Rajasthan. The assessee-appellant is regularly filing its income tax returns under the provisions of Income Tax Act from time to (2 of 11) [ITA-252/2018] time after getting the books of accounts audited as per the provisions of Companies Act and Income Tax Act. The books are also separately audited by the office of Comptroller & Auditor General. For the assessment year 2006-2007, the assessee appellant filed its return of income on 27.10.2006 declaring therein total income at Rs. 43,73,82,600/-. The return of income was subsequently revised on 24.08.2007 declaring therein total income at Rs. 43,73,82,600/-. The assessee appellant’s primary objective was to set up of industrial areas in the State of Rajasthan such as SEZ parks, Information Technology parks, Bio- Technology parks, Stone parks, Textile parks, Agro parks, etc., for which it acquired lands and spent substantial amount towards creating infrastructural facilities so as to enable setting up of industries in such industrial parks by way of allotment/auction. The land acquired by the assessee appellant for the purpose of creating industrial parks is stock-in-trade and the assessee appellant carries out development activities in such industrial areas. Assessee appellant valued its closing stock of land at actual direct development expenditure (less grant utilized) incurred on the area in stock. The management realizing that disposal/realization of land under litigation/encroachment is not possible in near future, it was considered appropriate to value such stock of land at ZERO price. Accordingly datas were collected from various regional managers of such land. After getting the feedback, such land under litigation/encroachment was valued at Rs.NIL. The following disclosure was made in the notes to accounts: (3 of 11) [ITA-252/2018] “2.6. At few industrial areas some portion of land is under litigation and/or under encroachment aggregating to 384.23 acres valuing Rs. 1042.85 lacs. The value of stock of such land 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 which was duly approved by the Board of Directors and thereafter by share holders in their Annual General Meeting. Learned counsel for the appellant submits that the Comptroller & Auditor General (C&AG) also raised the query with regard to valuation of such encroached/litigated land and after considering the reply of the assessee appellant it was satisfied and dropped the Audit Para for assessment year 2010-2011. The return filed by the assessee appellant for the assessment year 2006-2007 was selected for scrutiny assessment and relevant notices were issued by the Assistant Commissioner of Income Tax, Circle 6, Jaipur, i.e., the Assessing Officer from time to time. The assessee appellant appeared through its authorized representative and furnished reply from time to time on various queries raised by the Assessing Officer. The Assessing Officer passed an order dated 25.11.2008 under Section 143(3) of the Act wherein various disallowances/additions were made and total income was determined therein at Rs.61,12,82,240/- as against Rs.43,73,82,600/- declared by the assessee appellant. With regard to valuation of encroached/litigated land, the Assessing Officer held that the value of land cannot be taken at NIL and further held that the assessee appellant has changed its method of valuation during the year under consideration and accordingly an addition of Rs.10,42,85,000/- was made by the Assessing (4 of 11) [ITA-252/2018] Officer. Against the impugned assessment order dated 25.11.2008, the assessee-appellant preferred first appeal before the Commissioner of Income Tax (Appeals), Jaipur (for short-’the CIT(A)’) wherein the assessee appellant challenged the various disallowances/additions made by the Assessing Officer. The matter was transferred to CIT(A), Bikaner who by its order dated 29.09.2017 partly allowed the appeal of the assessee appellant. It is contended that with reference to valuation of encroached/litigated land, the CIT(A) concurred with the view of the Assessing Officer and has held that the value of land cannot be taken at NIL and has further upheld that the assessee appellant has changed its method of valuation during the year under consideration. Against the order dated 29.09.2017 passed by the CIT(A), the assessee appellant preferred appeal before the ITAT. The ITAT by impugned order dated 28.05.2018 has remitted back 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 appreciate that valuing the closing stock of encroached/litigated land at actual direct development expenditure upto assessment year 2005-2006 is against the principle of prudence. The settled principle of valuation of closing stock is Cost or Market value which is lower. Even when in the notes to accounts for the assessment year 2005-06 it is stated that at few industrial area some of the portion of land is under litigation as well as under encroachment aggregating to 263.03 acres as on 31.03.2005 and the statutory auditors in their auditors’ report have themselves (5 of 11) [ITA-252/2018] qualified that stock of land under litigation is treating as saleable whereas it was not and therefore the assessee changed the method of valuation of stock of encroached/litigated land in the year under consideration. It is contended that in the assessment year under consideration, the statutory auditors in their audit report have stated some of the portion of the land is under litigation as well as under encroachment aggregating to 384.23 acres as on 31.03.2005 and have further observed that stock of land under litigation/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 and litigation, highlighted before the ITAT. There were instances of the lands which were being used as cremation ground/temple land/tribal hostel under control of forest department/court litigations etc., and which were not readily available to the assessee for industrial development activity and hence, the value of such land at NIL is proper and justified. However, the learned ITAT failed to even consider the same. Learned counsel submitted that the Board of Directors after considering all the facts and circumstances had approved the method of valuation, which was subsequently also approved in the Annual General Meeting of the assessee appellant. Learned counsel submitted that similar issue was also raised by the Comptroller & Auditor General (C&AG) who after considering the reply of the assessee appellant was satisfied and dropped the Audit Para for assessment year 2010-2011. (6 of 11) [ITA-252/2018] Learned counsel contended that as per the Accounting Standard 2 issued by the Institute of Chartered Accountants of India, the closing stock is to be valued at cost or market value whichever is less and since in the instant matter the assessee appellant was not having even physical possession over the land as the same was under encroachment/litigation and since the land was 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 argued that earlier assessee was valuing the closing stock of land at actual direct development expenditure, however, in the notes to accounts for the assessment year 2005-06 it is stated that at few industrial area some of the portion of the land is under litigation as well as under encroachment aggregating to 263.03 crores as on 31.03.2005. The statutory auditors in their audit report have observed that stock of land under litigation is treated as saleable, therefore, the observation of the statutory auditor was considered by the assessee and consequently a Board Resolution was passed whereas the valuation of such land has been taken at Nil as on 31.03.2006. The land was not available to the assessee as on 31.03.2006, therefore, the realization value of the land at the end of the financial year was Zero and accordingly, the assessee has considered the same at Nil which is justified as per the principle of prudence accounting policy. It is contended that whenever the assessee retrieves the lands from encroachment, the same is offered to tax, therefore, the said method of valuing the closing stock adopted by the assessee is Revenue in nature. The assessee is consistently (7 of 11) [ITA-252/2018] following the said method of closing stock and therefore, the addition made by the AO is not justified. Learned counsel produced the details of the land which was under encroachment and litigation; and submitted that there were instances that some of the land is used as cremation ground cannot be readily available to the assessee for industrial development activity and hence, the value of such land at Nil was proper and justified. Learned counsel in support of his arguments has relied on the judgement 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 & Land Development 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 the learned Tribunal has observed that though the land which was under encroachment and litigation cannot be valued at the cost or prevailing market price but the value of such land would definitely be very less due to defects and deficiency of not available to the assessee for immediate use. However, the land in litigation or encroachment which is still shown as part of the closing stock of the assessee cannot be value at nil. Further the valuation of the land has to be determined on the basis of the actual status of the land in each case and it cannot be valued applying a standard parameter for each and every case of encroachment or litigation. Even the Tribunal in assessee's own case for the assessment year 2007-08 in ITA No. 1267/JP/2010 & 1387/JP/2010 vide order dated 24.06.2011 has considered this issue and remitted the matter back to the file of the AO for proper verification and adjudication. Similarly for the assessment years 2009-10 to 2012- (8 of 11) [ITA-252/2018] 13 the Coordinate Bench of this Tribunal vide order dated 23.02.2018 in ITA No. 311/JP2014, 420/JP2014 and others has considered this issue in para 5. For ready reference, para 5 reads as under:- \"5. We have considered the rival submissions as well as relevant material on record. At the outset we note that this Tribunal in assessee's own case for the assessment year 2007-08 vide order dated 24.06.2011 in ITA No. 1267 & 1387 of 2010 has considered this issue in para 5.7 as under:- \"5.7 During the course of hearing, the ld. AR was asked 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 informed 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 litigation 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 Section and according to which income tax is to be charged in respect of total 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 relevant to assessment year under consideration. In case the litigation and encroachment were existing at the time when the assessee acquired the land and filed the dispute before 31-03-06 then why such (9 of 11) [ITA-252/2018] reduction was not considered when the assessee was changing the method of accounting in the assessment year 2006-07. As per charging Section, tax is levied on the actual income of the previous year. It means that facts which existed during previous year are to be considered. When the assessee makes his purchases, he enters his 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 accounts thus canceling out the 12 entries relating to the same unsold stock in the accounts; and then that it is carried forward as the opening balance in the next year's account. This canceling out of the unsold stock from both the sides of the accounts leaves only the transactions on which there have been actual sales and gives a true and actual profit or loss on his year's dealings. The only exception is that unsold stock can be valued at the cost price or market 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 the 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 Rs. 145.33 lacs on the ground of not accepting the change in method of valuation. However, the AO has not considered the aspects as to whether events in respect of reduction in valuation of stock have occurred during 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 (10 of 11) [ITA-252/2018] were acquired and when the assessee became aware of encroachment or litigation. Hence, the issue of addition of Rs. 145.33 lacs is restored back on the file of the AO. We do feel that litigation and encroachment will affect 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.\" In view of the earlier decision of this Tribunal and to maintain the rule of consistency, we are of the view that the addition made by the AO for the under year under consideration is dependent on the outcome to the addition made by the AO on this account in the earlier year. Therefore, in the facts and circumstances of the case we set aside this issue to the record of the Assessing Officer for deciding the same afresh in terms of the directions as given by the Tribunal for the A.Y. 2007-08.\" The Tribunal considering the decisions of Coordinate benches of the Tribunal itself in assessee's own case, set aside the issue to the record of the Assessing officer for fresh adjudication after conducting a proper verification and enquiry. The assessee was also directed to produce all the relevant facts in respect of each and every piece of land under litigation and encroachment so as to reveal the actual status of the land for the purpose of determination of value. Moreover, in the subsequent assessment year viz assessment year 2007-08 in the case of assessee, the Tribunal vide order dated 24.06.2011, restored back the matter to the Assessing Officer for deciding the issue and even in subsequent years i.e. 2009-10, 2010-11, 2011-12, 2012-13, vide order dated (11 of 11) [ITA-252/2018] 23.02.2018, the Tribunal set aside this issue to the record of the Assessing Officer for deciding the same afresh in terms of the directions as given by the Tribunal in the assessment year 2007- 2008 and no appeal has been filed against the aforesaid orders by the assessee before this Court or before the Supreme Court. In view of above discussion, no question of law does arise in this present appeal, which is accordingly dismissed. (GOVERDHAN BARDHAR),J (MOHAMMAD RAFIQ),J RS/27 "