2014 (8) TMI 58 - AT - Income Tax

Revision order u/s 263 Reframing of assessment u/s 143(3) Held that - The AO has accepted accounting entries as it is without making any inquiry on the issues entertained by the CIT in the 263 proceedings - the cost incurred by the assessee towards the club house has to be examined - assessee will not have any say in admission of the members in the club house or it will not enroll any outsider as a member - relying upon Mrs. Khatiza S. Oomerbhoy Vs. ITO, Mumbai 2006 (2) TMI 201 - ITAT BOMBAY-H - The bylaws of the Society or of the club not framed not shown - It was a crucial question whether expenditure incurred on construction of club house ought to be allowed to the assessee while recognizing the revenue under the percentage completion method - Commissioner has rightly held that the assessment order is erroneous which has caused prejudice to the Revenue Decided against Assessee.

Issues Involved:
1. Legitimacy of the action taken under Section 263 of the Income Tax Act, 1961.
2. Revenue recognition based on the percentage of completion method.
3. Inclusion of the cost of the clubhouse in the estimated cost for revenue recognition.
4. Adequacy of the inquiry conducted by the Assessing Officer.

Detailed Analysis:

1. Legitimacy of the action taken under Section 263 of the Income Tax Act, 1961:
The primary issue revolves around whether the learned Commissioner was justified in invoking Section 263 to set aside the assessment order passed under Section 143(3). The assessee firm contended that the Commissioner erred in taking this action. The Tribunal referred to broader principles established in various authoritative pronouncements, including the decision of the Hon'ble Supreme Court in Malabar Industries and the Hon'ble Bombay High Court in Gabriel India Ltd. These principles state that the Commissioner must record satisfaction that the order of the Assessing Officer (AO) is erroneous and prejudicial to the interest of the Revenue, and both conditions must be fulfilled. The Tribunal found that the Commissioner had valid grounds to invoke Section 263, as the assessment order was deemed erroneous and prejudicial to the interests of the Revenue.

2. Revenue recognition based on the percentage of completion method:
The assessee firm recognized revenue from its project "Apna Ashiana" based on the percentage of completion method, adopting Rs. 450 per sq.ft for estimating sale proceeds. However, the Commissioner noted that no documentary evidence was furnished to support this estimation. The Tribunal upheld the Commissioner's view that the AO failed to verify the computation of percentage completion with documentary evidence, rendering the assessment order erroneous.

3. Inclusion of the cost of the clubhouse in the estimated cost for revenue recognition:
The assessee included Rs. 4.82 crores as the proportionate cost of the clubhouse in the estimated cost for revenue recognition. The Commissioner argued that since the ownership of the clubhouse remained with the firm, this expenditure should not have been considered. The Tribunal agreed, noting that the cost of the clubhouse constituted almost 59% of the total cost, which appeared high and unreasonable. The Commissioner's findings emphasized that the firm continued to enjoy the clubhouse facilities, and there was no transfer of ownership to the project purchasers. The Tribunal found no evidence that the expenditure on the clubhouse would be accounted for in the buyer's accounts or that the firm would not enroll outsiders as members. Thus, the inclusion of the clubhouse cost in revenue recognition was deemed inappropriate.

4. Adequacy of the inquiry conducted by the Assessing Officer:
The Tribunal examined whether the AO conducted an adequate inquiry during the assessment proceedings. The assessee argued that all financial statements and relevant documents were provided to the AO, implying that a proper inquiry was conducted. However, the Commissioner and the Tribunal found that the AO accepted the accounting entries without sufficient inquiry into the issues raised. The Tribunal referred to the Hon'ble Delhi High Court's distinction between "lack of inquiry" and "inadequate inquiry," emphasizing that the AO's failure to investigate the facts made the assessment order erroneous. The Tribunal concluded that the AO did not adequately examine the cost towards the clubhouse or its impact on revenue recognition, justifying the Commissioner's action under Section 263.

Conclusion:
The Tribunal dismissed the appeal filed by the assessee, upholding the Commissioner's decision to set aside the assessment order under Section 263. The Tribunal found that the assessment order was erroneous and prejudicial to the interests of the Revenue due to the lack of adequate inquiry and improper inclusion of the clubhouse cost in revenue recognition. The appeal was dismissed, and the order was pronounced in the Open Court on 25th July 2014.

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