Whether if closing stock value is enhanced by Revenue, it would concomittantly increase profit from business - NO: ITAT

THE issues before the Bench are - Income Tax - Section 263 - Whether if the closing stock value is enhanced by the Revenue, it would concomittantly increase the profit from business and Whether any prejudice is caused to the Revenue if the gains from sale of immovable properties is treated as STCG rather than business income. And the verdict goes in favour of the assessee.

Facts of the case

The assessments were completed in the hands of the assessee u/s. 143(3) r.w.s. 153C. The assessee had declared income from STCG arising from purchase and sale of immovable properties and the same was accepted by the AO without making any discussion about it. The CIT noticed that the assessee had undertaken many transactions of purchase and sale of immovable properties and accordingly, he took the view that the assessee was carrying on business in immovable properties. The CIT concluded that the income of the assessee has not been assessed fully and correctly which was erroneous and prejudicial to the interests of revenue. The CIT set aside the assessment orders with the direction to the AO to treat the transactions in real estate as a business venture carried on by the assessee.

On Appeal before the Tribunal the A.R submitted that the CIT has reached conclusions on the basis of presumptions only and he has not brought any material on record to substantiate his views. The AR further submitted that the rate of tax leviable on the income arising on sale of immovable properties is one and same, if it was assessed either under the head "income from business" or under the head "income from short term capital gain". Accordingly no prejudice would be caused to the revenue. The A.R also submitted that the issue relating to the fund deficiency got merged with the order of the CIT(A) and the Tribunal and hence, the CIT was not legally correct in invoking revision proceedings on this issue. The DR submitted that the AO did not discuss anything about the STCG in the assessment order and it clearly shows that the AO has not applied his mind on this issue. With regard to the peak deficiency, the D.R submitted that in respect of the difference between that worked out by the CIT the question of merger of the issue does not arise in A.Y 2008-09.

Having heard the parties, the Tribunal held that,

++ the CIT appears to be under the impression that if the gains are assessed as "Business income", the assessee would be disclosing the value of "Closing stock" of immovable properties and it will increase the profit amount declared by the assessee. The view entertained by the CIT is not correct. Whether the gain arising on sale of immovable properties is assessed as "Business income" or as "Short term Capital gain", what is required to be deducted is the cost relatable to the portion of land sold by the assessee. It is to be appreciated that the closing stock is credited to the Profit and Loss account only for the purpose of matching the "cost relatable to sales" under Revenue - Cost matching Principle. Hence, the closing stock value will not increase the profit from business as presumed by the CIT. Since no prejudice is caused to the Revenue on assessing the gain arising on sale of immovable properties, one of the twin conditions does not get satisfied, in which case, the revision order passed by CIT on this issue shall fail;

++ with regard to the issue relating to "Peak fund deficiency" relating to the A.Y 2008-09, it is not disputed that the assessee has accepted the assessment order. The amount of deficiency assessed by the AO was Rs.12,48,040 for this year, whereas the CIT has worked out the deficiency at Rs.20,85,111/-. Thus, there is difference between the two figures, which needs to be reconciled. No infirmity in the direction issued by the CIT on this issue in A.Y 2008-09.In A.Y 2007-08, the CIT appears to have considered cash outflow in excess of that considered by the AO, in which case, the excess portion of the cash outflow requires examination at the end of the AO. No infirmity in the order of CIT on this issue to the extent of items of cash outflow, which were not considered by the AO.