KGK Homes Vs PCIT (ITAT Jaipur)
ITAT Jaipur held that the difference in the closing stock is emanating from the difference in the working for the preceding years and that such difference cannot be attributed for the year under consideration. Accordingly, order not erroneous and jurisdiction of section 263 not invocable.
Facts- PCIT under section 263 took up two issues i.e. difference in value of closing stock as shown by the assessee firm vis-à-vis working vide order u/s. 263 for the year under consideration amounting to Rs. 16,59,040/- and disclosure made in the income tax return form of closing stock of Rs. 56,82,707/- converted into investment during the year under consideration.
Conclusion- Held that the difference in the closing stock of Rs. 16,59,040/- is emanating from the difference in the working for the preceding years and that such difference cannot be attributed for the year under consideration. Moreover, assessee firm has been consistently following the same methodology for appropriating the expenses which has also been accepted by the Income Tax Department in the past. Considering such factual position, we note that the NFAC accepted the difference and did not make any addition in this regard. NFAC had taken a conscious decision of accepting the working of the assessee firm and the order passed by NFAC cannot be said to be without due application of mind as has been set out by ld. PCIT. Considering the factual and the legal position involved, we do not find that the order of the NFAC, as regards issue number one, is erroneous.
Held that we do not find any error in the order of the NFAC. Also, since the conversion from stock in trade into investment, was not taxable, during the year under consideration, there is no prejudice which has been caused to the Income Tax Department. Since, the conversion has taken place during the year under consideration, ld. PCIT was not correct in treating this conversion to be falling in the subsequent year. Accordingly, for both the issues we hereby set aside the order of the ld. PCIT, passed under Section 263 and sustain the order dated 15.03.2021, passed by NFAC.
FULL TEXT OF THE ORDER OF ITAT JAIPUR
This appeal filed by the assessee is directed against order of the ld. PCIT, Jaipur- 1, Jaipur, dated 27-03-2023 for the assessment year 2018-19 wherein the assessee has raised the solitary ground as under:-.
‘’In the facts and circumstances of the case and in law, the ld. PCIT has erred in assuming jurisdiction u/s 263 when the order of the AO is neither erroneous nor prejudicial to the interest of the Revenue. The action of the ld. PCIT is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by quashing the order passed u/s 263.”
2.1. Brief facts of the case as emerges from the assessment order dated 15-03-2021 are that the case of the assessee was selected for Complete Scrutiny assessment under the E-assessment Scheme on the following issues:-
1. Income from Real Estate Business.
2. Unsecured Loans
It is noted that the assessee firm had e-filed its original return of income on 29-092018 declaring total income at Rs.87,79,510/-. The case was selected for complete scrutiny under CASS. Notice u/s 143(2) was issued on 22-09-2019 and e-mailed to the assessee. Further, notice u/s 142(1) with detailed questionnaire dated 9-122020 and 10-02-2021 was issued to the assessee for which compliance was made by the assessee on 08-01-2021, 22-01-2021 and 23-02-2021. It is pertinent to mention that the assessee firm is engaged in the business of construction and development of residential building. During the year under consideration, the assessee has declared revenue from operation at Rs.16,60,84,000/- and other income as rent received at Rs.26,60,000/-. After examination of the reply submitted by the assessee with regard to books of accounts and audit report, disallowances/ additions were made by the AO. Regarding the issue of income from real estate business, the reason for high closing stock was due to the reason that during the year under consideration, the assessee firm constructed 8 storey residential building comprising of 24 flats and out of total 24 flats, the assessee firm could sold 19 flats only till the end of the relevant financial year and remaining 5 flats were shown as closing stock as on 31-03-2018 by the assessee. Regarding the issue of unsecured loan, the assessee has submitted list of loan providers alongwith copy of ITR, confirmation and bank accounts of the loan providers and the details of squared up of loans during the year. It is also noted from the assessment order where in connection with above main issues the explanation offered and details submitted by the assessee had been examined and found acceptable by the AO.
2.2. On examination of the assessment order, the ld. PCIT observed that the AO failed to apply his mind on the material available on record and failed to invoke the applicable provisions of law. Thus the ld. PCIT observed that order passed by the AO is erroneous in so far as it is prejudicial to the interest of Revenue for the purpose of Section 263 of the Income Tax Act. The ld. PCIT noted that the said assessment order passed by the AO is in a routine and casual manner and it is without verification of the issue. The relevant paras of the ld. PCIT as to passing of order u/s 263 of the Act is as under:-
‘’7. The reply of the assessee has been considered and perused carefully but the same was not found tenable for the following reasons.
7.1 On perusal of assessment records, it was noticed that in the financial statement for the financial year 2017-18, the assesse has shown closing stock of Rs.8,11,67,724/- whereas it was to be shown Rs.8,28,26,764/- as mentioned in para 3 above. Thus,inventoriesofRs.16,59,040/-[Rs.8,28,26,764/-minus Rs.8,11,67,724/-] were under stated in the financial statement which reduced the profit for the financial year 2017-18 by Rs.16,59,040/-.
7.2 Further, in schedule PL (Profit & Loss) and BS (Balance sheet) of the Income Tax Return, the land valuing Rs.56,82,707/- was shown as closing stock and in the schedule BS of the ITR, no investment was shown by the assessee. Also, in the form 3CD certified by the Tax Auditor, value of the above land was included with the inventory. Thus, stock of land valuing Rs.56,82,7071-shown as investment was to be treated as stock-in-trade (closing stock) for the assessment year 201819. The above issues as not verified by the AO during the course of assessment proceedings.
8. As discussed above, the Assessing Officer failed to apply his mind on the material available on record and failed to invoke the applicable provisions of law. This is turn has resulted in passing of an erroneous order by the Assessing Officer in the case due to non-application of mind to relevant material, an incorrect assumption of facts and an incorrect application of mind to the law which is prejudicial to the interest of the revenue and hence liable for revision under section 263 of the Income Tax Act. The Hon’ble Supreme Court in the case of Malabar Industrial Limited Vis CIT 243 ITR it has held as under-
‘’…. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind.”
9. Considering all the facts and circumstances of the case and for the reasons discussed above, the assessment order dated 15.03.2021 for A.Y, 2018-19 passed by the AO is held erroneous in so far as it is prejudicial to the interests of the revenue for the purpose of section 263 of the Income Tax Act, 1961. The said order has been passed by the Assessing Officer in a routine and casual manner without verification of the issues discussed above. The Assessing Officer was required to make the disallowances discussed in the paras above which he failed to do. The order of the Assessing Officer is, therefore, liable to revision under the explanation (2) clause (b) and clause (a) of section 263 of the Income Tax Act, 1961. The assessment order is set aside to be made afresh in the light of the observations made in this order. The AO is required to make necessary verification and finalize the assessment in accordance with the prevailing low to determine the correct income of the assessee liable to tax for the A.Y.2018-19 after allowing reasonable opportunity to the assessee.”
2.3. During the course of hearing, the ld. AR of the assessee argued that NFAC has exercised the quasi judicial power vested in it in accordance with law and arrived at a conclusion which cannot be considered as erroneous as the ld. PCIT is not satisfied with the conclusion arrived at by the AO. To this effect, the ld. AR of the assessee filed the following written submission with the prayer that the ld. PCIT has grossly erred in assuming jurisdiction u/s 263 of the Act and such proceedings initiated by the ld. PCIT needs to be quashed.
‘’Ground No. 1: Ld PCIT erred in assuming jurisdiction u/s 263
SUBMISSIONS
1. Case of the assessee firm, was selected for “complete scrutiny”, for the year under consideration, by the National Faceless Assessment Centre (“NFAC”) and order dated 15.03.2021, was passed, under Section 143(3) of the Income Tax Act, 1961 (“ITA”). In the said order, passed by NFAC, the returned income of the assessee firm was accepted, without any additions made. [PB: 13 to 15].
2. For the purpose of assuming jurisdiction by the ld. PCIT, under Section 263 of the ITA, two issues were raked up, which are summarized as under (PCIT Order Page 1-2): –
2.1 ISSUE 1: Difference in the value of Closing Stock, as shown by the assessee firm vis-à-vis the working at Page 1-2 of the order under Section 263, for the year under consideration, amounting to Rs. 16,59,040.
2.2 ISSUE 2: Disclosure made in the Income Tax Return Form of Closing Stock of Rs. 56,82,707, converted into Investment, during the year under consideration.
Submissions regarding both the issues are set-out hereunder.
3. ISSUE 1: Difference in the value of Closing Stock, as shown by the assessee firm vis-à-vis the working at Page 1-2 of the order under Section 263, for the year under consideration, amounting to Rs. 16,59,040.
3.1 At the outset it is submitted that the assessee firm is in the business of Real Estate Development. During earlier year, i.e. during FY 2012-13, assessee firm started construction of a Residential Project, by the name of THE ADDRESS, in Jaipur (“the project”). Construction of the project was fully completed after the relevant previous year. During such period, as an when different units in the project got completed, they were sold.
3.2. During the year under consideration also, some units of the project were sold, with some units of the project remaining unsold. Unsold area on the project, as at the end of the year formed part of the closing inventory of the assessee firm. Apart from the closing inventory pertaining to the project, assessee firm also had a standalone land, situated at D-45, C-Scheme, Jaipur, which formed part of its Stock in Trade, however, during the year under consideration, the same was converted into Investment.
3.3. In the order, at Page 1-2, calculation has been provided of the Closing Stock of Inventory, for the year under consideration. As per the calculation, the Closing Stock of the assessee firm, should have been Rs 8,28,26,764. Whereas, the assessee firm has shown Closing Stock of Rs. 8,11,67,724, as per the Audited Financial Statements, filed for the year under consideration [PB: 16-24]. Accordingly, it has been stated that there has been an undervaluation of Closing Stock, to the extent of Rs.16,59,040 [Rs 8,28,26,764 Minus Rs. 8,11,67,724]
3.4. In the working so provided, ld. PCIT considered the Opening Stock of the assessee firm, for the year under consideration to be Rs. 21,98,06,480. Whereas, the Opening Stock as per Financial Statements of the assessee firm was Rs. 22,10,00,000 [PB : 16], breakup of which is as under:-
