The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) held that that there is no reason to disbelieve the value of closing work in progress disclosed by the assessee, thus set aside the order passed by the Commissioner of Income Tax (Appeals) [ CIT(A)] and directed the Assessing Officer (AO) to accept the value of closing work in progress declared by the assessee and delete the consequential addition made.
The assessee Mr. Sanjeev Motwani is an individual and is the proprietor of M/s Jeevat Construction and this concern was undertaking construction contract works from Indian Railways. The assessee had executed certain projects and the amount spent on those projects was shown as Closing work in progress (closing stock) of Rs.49,44,536/- in the preceding year, which was brought forward as opening stock during the year under consideration.
The assessee did not execute any project during the year under consideration. It is the submission of the assessee that in view of the passage of time, the value of Closing Work in progress has gone down and hence the assessee has adjusted the value by revaluing the same at Rs.39,43,256/-. It is the submission of the assessee that he did so following the accounting principle of valuation of stock at “Cost or market value, whichever is lower”.
Before the Assessing Officer (AO) , the assessee submitted that he shall be offering the arbitration award amount received as his income by adjusting the same against stock. The AO took the view that the assessee did not provide any basis for revaluing the stock and the revaluation has been done on the whims of the assessee. He also took the view that the Accounting Standards do not permit such a revaluation. Accordingly, he did not permit the revaluation, which resulted in an addition of Rs.10,01,280/- to the income of the assessee.
Aggrieved by the order the assessee filed an appeal before CIT(A), which held that the assessee has failed to produce any evidence to justify the value of closing stock adopted by him. Accordingly, the CIT(A) upheld the addition made by the AO.
Further aggrieved the assessee filed ana appeal before the Tribunal and contended that according to the assessee, the stock has to be valued at cost or market value, whichever is less and the said accounting principle has been followed in reducing the value of stock. Since the assessee did not furnish any basis for reducing the value, the tax authorities rejected the said action of the assessee.
The Bench comprising of B.R. Baskaran Accountant Member and Rahul Chaudhary Judicial Member noted that assessee has received arbitration award of Rs.24,88,231/- and Rs.6,16,571/during the years relevant to the AY 2018-19 and 2019-20. The above said awards were adjusted against the value of closing stock. After the receipt of above said award, the value of closing stock stood at Rs.7,95,000/- .
Valuing the closing stock at cost or market value is a recognized accounting principle. There is one more principle, i.e., the Principle of Prudence, as per which, all known losses should be provided for, even if it is not actually incurred. In our view, the wisdom of the assessee in reducing the value of closing stock (work in progress) could be covered under the Principle of Prudence also and the said action of the assessee stands vindicated by the future events.
The action of the assessee in reducing the value of closing work in progress may be substantiated under this principle also. If the assessee receives any money in excess of the value of WIP (work in progress), the same shall be taxable in the year of receipt. Accordingly, in the facts and circumstances of the case, the Bench was of the view that there is no reason to disbelieve the value of closing work in progress disclosed by the assessee.
Accordingly, The Tribunal set aside the order passed by the CIT(A) on this issue and directed the AO to accept the value of closing work in progress declared by the assessee and delete the consequential addition made.
Hence the appeal filed by the assessee is allowed.
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