Commissioner of Income Tax vs Krishna Gopal Kapoor and Sons

The present appeal u/s 260A of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), has been admitted vide order dated August 10, 2000 on the following two substantial questions of law:

(i) Whether on the facts and in the circumstances of the case and material available on the records, the Income Tax Appellate Tribunal is legally justified in holding that the Assessing Officer was not justified in disturbing the system of accounting regularly adopted by the assessee without appreciating the fact that the assessee''s true and correct income could not be ascertained on the basis of it.

(ii) Whether on the facts and in the circumstances of the case and material available on the records, the Income Tax Appellate Tribunal is legally justified in not appreciating the fact that the full value of closing stock of work-in-progress should be considered for the computation of assessee''s correct income.

Briefly stated facts giving rise for filing of the present appeal are as follows:

The appeal relates to the assessment year 1987-88. The respondent-assessee is a registered firm. The previous year relevant to the assessment year 1987-88 ended on January 30, 1986. The assessee filed its return of income on March 31, 1987, showing the net income of Rs. 4,88,026 which was revised on August 7, 1989, showing the net income of Rs. 3,96,020. The assessee carried on the business on commercial scale as real estate developer, promoters, builders, property developers and selling agent of flats to be constructed thereon. It had entered into an agreement dated January 2, 1985 with the Reserve Bank of India for developing the property on commercial scale and thereafter to sell the land and property on package deal basis. The assessee was required to construct 88 flats and community hall under the agreement. The assessee had adopted a consistent practice of not disclosing the work-in-progress while working its profit and loss. The profits as disclosed during the previous assessment year, i.e., 1986-87 and the subsequent assessment year 1988-89 on this basis had been accepted by the Department. However, during the assessment years in question the Assessing Officer made an addition of Rs. 5,47,000 being the value of the work-in-progress. The matter was taken up in appeal before the Commissioner of Income Tax (Appeals) who even though held that the value of the work-in-progress ought to be disclosed and taken into account while working out the profits, yet in the special circumstances of the present case as the trade results have been accepted both in the previous year and the subsequent year, it will disturb the entire method adopted by the assessee and would lead to reopening and adjustment in the opening and closing stock of the previous and subsequent year. The Commissioner of Income Tax (Appeals), therefore, accepted the claim of the assessee in the following words:

But it is found that the income for the assessment years 1986-87 and 1988-89 have been computed by the Assessing Officer on the basis of profit and loss account, prepared without including either opening of closing work-in-progress. The fact remains that sale value of closing work-in-progress in question had already been included in the next year''s income returned by the assessee and it stands duly assessed by the Revenue. In such a situation, the question is not of a scientific method to be applied this year. In fact, the question is whether or not the method of C(IT) should be applied for the past assessment years and subsequent assessment years for which assessments have been completed according to law.

The Revenue challenged the decision of the Commissioner of Income Tax (Appeals) before the Income Tax Appellate Tribunal without success.

We have heard Sri Shambhu Chopra, learned standing Counsel appearing for the Revenue.

He submitted that the work-in-progress ought to have been counted while computing the true profits and the failure to do so cannot be condoned. The submission though in law is correct but in the special circumstances of the present case as found by the Commissioner of Income Tax (Appeals) reproduced above and also upheld by the Tribunal, we are of the considered opinion that if the value of the work-in-progress is taken in the closing stock, the opening stock shall have to be adjusted in this assessment. The rate of profits shown by the assessee is more than 10 per cent, without retention money and the profits result of the year is fair and reasonable by any standard and the books of account have been regularly maintained and no fault has been found in them. Further the expenses allowed in the past had not been claimed against the money received this year and for the work done in the last year.

In view of these findings, we are of the considered opinion that the Tribunal was justified in upholding the deletion of Rs. 5,47,000 being the value of goods used in work-in-progress.

The appeal fails and is accordingly dismissed.