Calcutta H.C : the Assessing Officer was not required to adjust the valuation of the stock

High Court Of Calcutta

Bridge & Roof Co. (India) Ltd. vs. CIT, West Bengal-1

Assessment Years : 1987-88 And 1988-89

Section : 145, 154

Bhaskar Bhattacharya And Sambuddha Chakrabarti, JJ.

IT Appeal No. 65 Of 2003

April 29, 2011

JUDGMENT

Bhaskar Bhattacharya, J. – This appeal under section 260A of the Income-tax Act, 1961 is at the instance of an assessee and is directed against an order dated 24-10-2002, passed by the Income-tax Appellate Tribunal, “A” Bench, Kolkata, in ITA No. 466(Cal.)/90 and ITA Nos.1337 and 1338(Cal.)/91 for the assessment years 1986-87, 1987-88 and 1988-89 dismissing the said appeal.

2. Being dissatisfied, the assessee has come up with the present appeal.

3. The facts giving rise to filing of this appeal may be summed up thus:

(a) The assessee company is a Central Government Undertaking deriving income from the execution of contract works that includes construction of Bridge etc. It is also engaged in the business of fabrication of steel structure due to specialization in structural engineering.

(b) Previously, the appellant used to debit the total cost of work-in-progress to the profit and loss account. The realizable value of the completed work for which bills were not submitted was taken as the value of the work-in-progress. The appellant then used to deduct from the valuation of work-in-progress, 10 per cent of the estimated profit as contingent liability to accommodate probable loss in future in course of completion of the particular contract. Such set off at the estimated rate of 10 per cent of the profit to accommodate future losses against the work-in-progress account was not accepted by the Department and the assessment for the years 1978-79 and 1979-80 had been completed by the Income-tax Officer by accepting the aforesaid method of valuation of work-in-progress. Both the assessments were subsequently cancelled under section 163 of the Act.

(c) With effect from the assessment year 1986-87 another method was adopted by the appellant. The valuation of work-in-progress was made in two steps. In the first step, work-in-progress was valued by adopting the contracted rate. In the second step, a deduction was made by an estimated figure which represented an anticipated loss in completing the particular contract. The crux of the matter was that by following the new method of valuing the work-in-progress, the anticipated loss in the future years was provided at Rs. 1,31,88,000 which was set off against the work-in-progress valued at the contractual rate in the first step. Thus, according to the Assessing Officer, the work-in-progress was undervalued by a sum of Rs. 1,31,88,000. The Assessing Officer was of the view that the result of the new method for valuing the work-in-progress was that a provision for future loss was made in the contract amount thereby inflating the actual loss, if any, incurred in the year under the consideration. The Assessing Officer further observed that such an action on the part of the appellant was contrary to sections 3 and 4 of the Income-tax Act inasmuch as in the accounts for the assessment year 1986-87, the appellant made provisions for loss which would arise after the expiry of the year under consideration. The appellant maintained its accounts on mercantile basis and the Assessing Officer observed that loss can be debited only when it had actually accrued and since the appellant debited loss that it had not actually accrued, the action of the appellant in adopting the method of accounting for valuing the work-in-progress was contrary to the principles of mercantile systems of accounting. In other words, the Assessing Officer found no justification in the change of the method of accounting adopted by the appellant with regard to the valuation of the work-in-progress. He also found that such method of accounting was not in conformity with the mercantile system of accounting.

(d) The appellant submitted before the Assessing Officer that the method of accounting for valuing the work-in-progress was in conformity with the National Accounting Standard. It was further alleged that such method had been approved by the Institute of Chartered Accountant.

(e)The Assessing Officer examined the documents furnished by the appellant to show that the change in the method of accounting was in pursuance of National Accounting Standard. After examining the documents, the Assessing Officer observed that there was no specific direction in those documents for valuing the work-in-progress in the manner that has been done by the appellant. The Assessing Officer was of the view that the National Accounting Standard Committee and the Indian Institutions of Chartered Accountants have only suggested that a provision should normally be made for loss that are likely to be incurred on the unfinished part of the work and such a suggestion was made only to ensure that accounts of the company engaged in execution of civil works contract reflected a realistic financial position. A profit in a particular year may simply be swallowed by losses in future. The Assessing Officer, thus, held that the undervaluation of the work-in-progress to the extent of Rs. 1,31,88,000 representing provision for contingent liability should be rejected.

(f) The appellant on May 9, 1989 filed an application for rectification under section 154 of the Income-tax Act by taking the following plea:

“Your honour have not allowed deductions as follow in computing the total income, on the basis of departments own treatment of provision for loss on incomplete contracts as reduced from work-in-progress in earlier years –

Asst. Year Closing figure of Provision allowed (in Lakhs) Deduction to be allowed (in Lakhs)
1986-87 131.88 (Considered in Assessment)
1987-88 49.14 82.74
1988-89 27.77 21.37

“The quantum details of above provision was already supplied to you in course of assessment for assessment year 1986-87. The deduction is allowable as per Departments own basis of adjustment in work-in-progress in earlier years on the principle that closing stock of one year is necessarily the opening stock of next year.As such as per departments past practice, opening work-in-progress and closing work-in-progress should have been adjusted so as to allow a deduction of Rs. 82.74 lakhs in assessment year 1987-88 and Rs. 21.37 lakhs in assessment year 1988-89 because of decline in the quantum of provisions for loss which has been adjusted from work-in-progress in the account.

“As the above mistake are apparent from record your honour is requested to rectify the assessments after allowing the above deductions as per departments own practice in this regard in the past.” [Emphasis supplied]

(g)The Deputy Commissioner of Income-tax, Special Range-II, by order dated 7-8-1990 rejected such application on the ground that assessment year would show that the returned income had been accepted without any modification and as such, there was no scope of any rectification under section 154 of the Income-tax Act.

(h)Being dissatisfied, the appellant preferred an appeal before the Commissioner of Income-tax (Appeals) and the said appellate authority dismissed the appeal with the following observations:

“The ground of appeal/statement of facts only says that the Assessing Officer rejected the petition under section 154 that had been moved for rectification of mistake apparent from record. The mistake, if any, was however, not specified. In reply to the query in appeal the A/R. refers to the persisting conflicting between the Department and the appellant regarding the method of accounting that is being followed by the appellant which has not been accepted conclusively by the Department. The appellant sometime in the past adopted the International Accounting Standard – 7 and gave up the earlier method of accounting. Such adoption was rejected as it was not in tandem with the charging sections of the Act read with section 145 of the Act. Thus, and quite natural in order to identify the mistake, which according to the appellant was committed in the return, the A/R. refers to the Chain re-action that has been set emotion on I.T. record for the past few years. Consequently, the reply of the A/R. called for a probe by way of deep application of mind. It is settled that when an exercise of mind to probe into facts is called for the section 154 cannot be applied. The A/R. for the appellant was told that he had the option to move a petition under section 143(1)(a ). Since in the Scheme of the Act different provisions are meant for remedying different situation, one provision cannot be supplanted by another.”

(i)Being dissatisfied, the appellant preferred an appeal before the Tribunal below and by the order impugned herein, the said Tribunal has dismissed the appeal. While dismissing the appeal, the Tribunal held that the deviation from the system followed for a long time should upset the maintenance of accounts and observed of wrong system over a certain period of time and acceptance by the Assessing Officer did not land it to the colour of correct system. The Tribunal held that the argument of the assessee that it had estimated future loss to make provision in the accounts for the year under consideration did not appeal to them and according to the Tribunal, loss must occur during business operation and must be incidental to the business carried on. According to the Tribunal, the loss to be allowed must be an accrued loss and not a contingent liability and thus, the Tribunal did not find any reason to interfere with the view of the First Appellate Authority.

4. Being dissatisfied, the assessee has come up with the present appeal.

5. A Division Bench of this Court at the time of admission of this Appeal formulated the following substantial question of law for decision:

“Whether and in any event the Tribunal was justified in law in holding that the Assessing Officer was not required to adjust the valuation of the stock in the assessment years 1987-88 and 1988-89 in accordance with the stand taken by him in the assessment year 1986-87 on the ground that such an exercise required a probe or could not be done under section 154 of the Income-tax Act, 1961?”

6. Mr. Khaitan, learned Senior Advocate appearing on behalf of the appellant, has strongly relied upon the decision of the Supreme Court in the case of Mahendra Mills Ltd. v. P.B. Desai, AAC[1975] 99 ITR 135 in support of his contention that the record showing the closing stock of the earlier year found a part of evidence relevant to the assessment for the subsequent year to the extent that for ascertaining the closing and opening stock positions, the two assessments telescoped into each other. According to Mr. Khaitan, the authorities below erred in law in not taking into consideration the fact that in this case, there was a mistake apparent on the face of record inasmuch as the valuation of the closing stock of the previous year did not result in the same opening stock for the subsequent year. According to Mr. Khaitan, the aforesaid error was one apparent on the face of record and thus, the authorities below should have rectified the said mistake in terms of section 154 of the Act.

7. Mr. Bhowmick, the learned counsel appearing on behalf of the Revenue, has, on the other hand, opposed the aforesaid contention of Mr. Khaitan and has supported the assessment orders passed by the Assessing Officer, and the orders passed by the CIT (Appeals) and the Tribunal.

8. Mr. Bhowmick points out that the assessee submitted the annual income-tax return for the relevant assessment years 1987-88 and 1988-89 along with the profit and loss and balance-sheet and the auditor’s report and the said account was duly audited by the Chartered Accountant as per provision of section 44AB of the Income-tax Act. Mr. Bhowmick submits that the Assessing Officer completed the assessment for the years 1987-88 and 1988-89 as per return without any modification but in spite of the said fact, subsequently, the assessee filed an application for rectification for those two years. Mr. Bhowmick submits that as there was no mistake appearing in the original return, the Assessing Officer rightly refused the prayer of rectification. Mr. Bhowmick further submits that in course of hearing of the appeal, the Commissioner of Income-tax (Appeals) asked the assessee to specify the mistake which the assessee wanted to rectify but the assessee could not point out any such mistake. According to Mr. Bhowmick, even before the Tribunal, as it appears from its order impugned, the assessee was asked to specify the mistake but the same could not be pointed out. In such circumstances, according to Mr. Bhowmick, in view of the decisions of the Supreme Court in the cases of CIT v. Hero Cycle (P.) Ltd. [1997] 228 ITR 463/ 94 Taxman 271 and Mepco Industries Ltd. v. CIT [2009] 319 ITR 208 / 185 Taxman 409 (SC), the Tribunal rightly dismissed the appeal filed by the assessee. Mr. Bhowmick submits that for the first time before this Court, the learned Senior Counsel for the assessee has argued the mistake regarding identity of the Closing Stock of the earlier year and the Opening Stock for the next year which was never argued before the Tribunal below. Mr. Bhowmick, therefore, prays for dismissal of this appeal.

9. After hearing the learned counsel for the parties and after going through the materials on record, we find that for the assessment year 1986-87, in accordance with the International and Indian Accounting Standards, for determining its profits, the assessee changed to the “cost to complete” method. Under the changed method, in respect of the each contract, at the end of each year, the cost required to complete the contract was estimated and compared with the total contract value. In case, the contract showed a profit on completion, such profit proportionate to the work done up to the end of the year was taken into consideration for arriving at that year’s income. However, if the contract showed a loss on completion, the total loss was accounted for by adjusting the value of the work-in-progress. The said changed method was consistently followed by the assessee with effect from the assessment year 1986-87.

10. By the order of assessment made on 7-2-1989 for the assessment year 1986-87, the Assessing Officer did not accept the changed method and increased the closing value of the work-in-progress by Rs. 1,31,88,000 by adding back the adjustment made for the losses. It appears from record, that the assessee preferred an appeal against such order, but was unsuccessful up to the Tribunal. The Committee on disputes did not permit the assessee to pursue the matter before this Court under section 260A of the Act and, thus, the order dated 7-2-1989, passed by the Assessing Officer for the assessment year 1986-87 has since attained finality.

11. For the assessment years 1987-88 and 1988-89, the assessee had prepared its accounts according to the changed method and submitted its income-tax return accordingly and in respect of the said returns, on 23-3-1989, the Assessing Officer passed order under section 143(1) of the Act accepting the returned income. It further appears from record, that on 9-5-1989 the assessee made an application under section 154 of the Act for the assessment years 1987-88 and 1988-89 requesting the Assessing Officer to rectify the assessments in accordance with the Department’s own stand for the assessment year 1986-87. It was specifically pointed out that the closing stock of the assessment year 1986-87 as determined by the Assessing Officer by order dated 7-2-1989 is to be taken as opening stock for the assessment year 1987-88 and the figures of the provision for losses had already been provided in course of the assessment proceedings for the assessment year 1986-87.

12. The Assessing Officer, however, by order dated 7-8-1990 stated that there was no scope of any rectification since the returned income had been accepted without any modification.

13. It is now a settled principle of accountancy that the closing stock of a year furnishes the figure of the opening stock for the succeeding year Mahendra Mills Ltd.’s case (supra).

14. We find substance in the contention of Mr. Khaitan, the learned counsel appearing on behalf of the assessee that the Assessing Officer having rejected the changed method of valuation and determined the closing value of the work-in-progress for the assessment year 1986-87 higher by Rs. 1,31,88,000 by adding back the adjustment for losses, it was incumbent upon him to follow the same principle in the subsequent years. In the assessment made on 23-3-1989 for the assessment year 1987-88, the Assessing Officer should have taken the closing value of the work-in-progress as determined in the assessment for the assessment year 1986-87 as the opening work-in-progress and should have determined closing stock for the assessment year 1987-88 on the same basis as in the preceding year. Such closing stock for the assessment year 1987-88 should have been taken as the opening stock for the assessment year 1988-89 and closing stock for that year should have been determined on the same basis as for the assessment year 1986-87. The aforesaid mistake will appear from the record of the case and thus, no question of entering into any new material arises for the purpose of detecting the said mistake. As pointed out by the Supreme Court in the case of Mahendra Mill’s Ltd. ( supra) , such mistake should be treated to be apparent on the face of record as would appear from the following observations of the Supreme Court:

“This Court then noticed Venkatachalam’s case, 1959 SCR 703 = (AIR 1958 SC 875) and Khem Chand’s case 6 ITR 414 = 65 Ind App 236 = (AIR 1938 PC 175) (supra) in support of the view taken by it. Counsel for the then appellant sought to distinguish those cases on the ground that the record there considered was the assessment record of that year and the Income-tax Officer did not have to go to the records of the previous year. This argument was repelled in these terms:

“That is a distinction without a difference. If, for instance, the Income-tax Officer had found that in the assessment year 1952-53 there was an apparent arithmetical mistake in the account of the Written Down Value of the properties which resulted in a corresponding mistake in the assessment of the year in controversy could he not take the corrected figure for the purposes of the assessment and could it be said that the mistake was not apparent from the record. A fortiori if he discovered that the very basis of the different assessments was erroneous because of an initial mistake in determining the Written Down Value could it be said that this would not be a mistake apparent from the record. And if in order to determine the correct Written Down Value the Income-tax Officer makes correct calculations can it be said that that is not rectifying a mistake apparent from the record but de hors it.”

The observations of this Court, quoted above, fully apply to the facts of the case in hand. It will bear repetition that the closing stock for the assessment year 1959-60 as entered in the books of the assessee was Rs. 5,89,439 and as found by the Income-tax Officer was Rs. 8,04,121. Since the closing stock of one assessment year furnishes the figure of the opening stock for the succeeding year, it follows that the record showing the closing stock of assessment year 1959-60 formed a part of the evidence relevant to the assessment for the assessment year 1960-61. Thus to the extent of ascertaining the closing and opening stock positions, the two assessments telescoped into each other. Indeed, it was on this basis that the Appellate Assistant Commissioner had by his decision dated 30-6-1965 allowed the assessee’s appeal regarding assessment year 1960-61. The Tribunal’s finding, that the value of the closing stock for assessment year 1959-60 should be Rs. 5,89,439, had completely replaced the Income-tax Officer’s finding in regard to that fact with effect from the date of the Income-tax Officer’s order relating to assessment year 1959-60. If the ITO’s, finding with regard to the closing stock for assessment year 1959-60 was relevant to any part of the “record of appeal” the Tribunal’s decision which superseded that finding was equally so within the contemplation of section 35 of the Act. It cannot be gainsaid that the mistake in regard to the opening stock for assessment year 1960-61 being Rs. 8,04,121, was quite apparent when the Appellate Assistant Commissioner undertook to rectify his appellate order dated 30-6-1965. The correct figure of finally determined by the Tribunal being Rs. 5,89,439. Thus considered, it is clear that for the purpose of ascertaining the true stock position the record of the assessment for assessment year 1959-60, including the Tribunal’s decision was not extraneous or irrelevant to the record of the appeal and could legitimately be looked into for the purpose of correcting the mistake by the Appellate Assistant Commissioner.” [Emphasis supplied].

15. We find that all the authorities below ignored the aforesaid point in their respective orders and thus, there was apparent error on the face of record justifying rectification. Merely because in the original return, there was a mistake on the part of the assessee, such fact cannot be a ground for refusing the prayer of rectification, when the mistake is apparent from the record and the dispute is also not debatable in view of the law settled by the Supreme Court long ago. As pointed out by the Supreme Court in the case of CIT v. P. Firm Muar AIR 1965 SC 1216, if a particular income is not taxable under the Income-tax Act, it cannot be taxed on the basis of estoppel or any other equitable doctrine. Equity is out of place in tax law and if a particular income is not taxable, the Income-tax Officer has no power to impose tax on the said income.

16. We now propose to deal with the decisions cited by Mr. Bhowmick.

17. In the case of Mepco Industries Ltd. (supra), the Supreme Court was dealing with a case of rectification under section 154 of the Act where the question was whether subsidy was a revenue receipt when in the order sought to be rectified it was held to be capital receipt. In such a case, the Supreme Court held that in order to determine whether subsidy is revenue receipt or not, the nature of the subsidy is to be examined and such question does not come within the purview of section 154 of the Act. In the case before us, the mistake is in not treating the closing balance of an year as the opening balance of the next year which is apparent on the face of record. Thus, the said decision does not help the revenue.

18. In the case of Hero Cycles (P.) Ltd. (supra), the Supreme Court held that rectification in exercise of power under section 154 of the Act can only be made when a glaring mistake of fact or law committed by the officer passing the order is apparent from record and that rectification is not permissible if the question is debatable. According to the Supreme Court, the point which was not examined on fact or on law cannot be dealt with as a mistake apparent on record. In the case before us, the point regarding the method of valuation had already been examined by the Assessing Officer in the assessment year 1986-87 and he had also examined the closing stock for that year. However, while passing order for the assessment years 1987-88 and 1988-89, the Officer ignored his own finding made for the assessment year 1986-87 by not following the well-settled law of accountancy that the closing stock of an assessment year should be the opening stock of the next assessment year and thus, there was a glaring mistake apparent on the record. The said decision thus supports the Appellant before us.

19. Thus, the decisions cited by Mr. Bhowmick do not help his client in any way.

20. We, therefore, set aside the order passed by the Tribunal below and send the matter back to the Assessing Officer for reassessing the return of the assessee for the assessment years 1987-88 and 1988-89 by treating closing stock of the previous assessment years respectively as the opening work-in-progress of those assessment years as in our opinion there is an error apparent on the face of record in ignoring the aforesaid well-known principle of accounting which comes within the purview of section 154 of the Act.

21. The appeal is thus allowed by setting aside the order of the Tribunal and remanding the matter to the Assessing Officer after answering the formulated question in the negative against the revenue.

In the facts and circumstance of the case, there will be, however, no order as to costs.

Sambuddha Chakrabarti, J. – I agree.

[Citation : 338 ITR 15]

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