Notices to suspend activities and Maintain Status Quo Not Seizure: ITAT Rules closing stock cannot be valued at Nil, Remands for valuation

The Bangalore Bench of the Income TaxAppellate Tribunal (ITAT) ruled that administrative notices directing a taxpayer to suspend mining activities and maintain status quo did not constitute a legal seizure or confiscation of property. It was also held that the closing stock cannot be valued at Nil for tax purposes.

Srinivasulu Metri (the assessee), engaged in mining activities in the Gulbarga area, filed a return of income for Assessment Year 2011-12 declaring a taxable income of ₹1,98,72,650. Following a search and seizure operation in September 2010, reassessment proceedings were initiated.

The Assessing Officer (AO) noted that the assessee’s Profit & Loss account showed a substantial opening stock of over ₹10.54 crores but reported no closing stock. The assessee claimed a loss of stock amounting to ₹1,32,26,706 and argued that the value of the closing stock was "NIL".

This was due to the Department of Mines & Geology and the Forest Department had suspended mining activities and "seized" the stock due to border issues and alleged violations.

Aggrieved by the AO’s order, the assessee filed an appeal before the commissioner of Income Tax (appeals) [CIT(A)]. The CIT(A) dismissed the appeal of the assessee. Aggrieved by this dismissal, the assessee approached ITAT.

The assessee contended that because the Mining and Geological Department had suspended activities and ordered the maintenance of "status quo" on the ore. The assessee further argued that there was no "reasonable certainty" of realization and so the assessee followed a conservative accounting approach by valuing the stock at zero.

The Department argued that the suspension of activities was not synonymous with the confiscation of property. The Revenue pointed out that the landmark Supreme Court judgment classifying mining violations (Categories A, B, and C) was pronounced on July 29, 2011, which was after the close of the relevant financial year.

The two-member bench comprising Laxmi PrasadSahu (Accountant Member) and Soundararajan K (Judicial Member) observed that the letters dated March 4, March 22, and March 24, 2011, only directed the assessee to "suspend mining activities temporarily" and "maintain status quo" regarding the stocked ore.

The tribunal found that "there was no seizure of stock" in the legal sense. It held that ownership remained with the assessee as of March 31, 2011, and the stock should have been valued and shown in the books of accounts.

The bench noted that while the assessee had a remaining stock of approximately 1,02,400 metric tonnes, the valuation methods used by both the assessee and the AO were unclear and lacked proper explanation.

It was concluded that the authorities below erred in using the word "seized" when only a suspension of activity had occurred. The bench held that the ownership had not transferred to the government by the end of the financial year, the closing stock could not be valued at Nil.

The tribunal remitted the matter back to the AO for a de novo reassessment to determine the fresh and accurate valuation of the stock lying at the site. The appeal of the assessee was allowed for statistical purposes.

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