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2015 (11) TMI 994 - AT - Income TaxRevision u/s 263 - change of accounting policy and standard as assessee started following AS-7 - Held that - The assessee is following AS-7 not only in the Assessment Year under consideration viz. 2007-08, but the same was consistently followed in the subsequent Assessment Years for recognising revenue from Engineering Business Segment wherein the assessee company has followed percentage completion method as prescribed under AS-7 issued by ICAI for the accounting of contractors. At the cost of repetition, we may also point out that the assessee furnished letters dated 20.10.09 and 30.10.09 showing the cause of change of method of recognition of deferred revenue as per AS-7 instead of AS-9 along with detailed contract wise working which was considered by the Assessing Officer while passing the impugned assessment order. It is also pertinent to mention that there was a specific query from the Assessing Officer during assessment proceedings vide order sheet entry dated 20.10.09 and the same was replied by the assessee by filing two letters viz. first on 20.10.09 and 30.10.09 along with relevant details. As we have already noted that the assessee filed tabulation chart showing taxable income and tax effect due to change of accounting policy and standard (assessee s Paper Book page no. 11) wherein it is amply clear that tax surcharge and EC as per AS-7 was calculated at ₹ 8,34,63,477 and tax surcharge and EC payable as per AS-9 was ₹ 12,37,91,145 and in the very first year, the assessee changed its method of accounting from AS-9 to AS-7, there was an amount of refund of ₹ 4,03,27,668. At the same time, from the said tabulation chart we further observe that in subsequent Assessment Year from 2008-09 to 2011-12 the assessee was under obligation to pay higher amount of tax, surcharge and EC by following AS-7 instead of AS-9, therefore, in the totality of the facts and circumstances, it cannot be held that the assessee changed its method of accounting from AS-7 to AS-9 with an intention to avoid tax liability and therefore this resulted into lowering of profits. However, as we have already pointed out that in the very first year of changing of accounting standard, there was a lesser tax liability on the assessee but in the subsequent four years, the tax liability was much higher when the assessee adopted AS-7 as against AS-9. - Decided in favour of assessee.
Issues Involved:
1. Jurisdiction and legality of the CIT's order under Section 263 of the Income Tax Act. 2. Examination of the method of accounting adopted by the assessee. 3. Consistency and bona fides of the change in accounting method. 4. Allowability of expenditure corresponding to deferred revenue income. 5. Principles of natural justice and procedural fairness. 6. Adequacy of the Assessing Officer's inquiry. Issue-wise Detailed Analysis: 1. Jurisdiction and Legality of the CIT's Order under Section 263: The assessee challenged the CIT's order under Section 263, arguing that the original assessment order was neither erroneous nor prejudicial to the interests of revenue. The Tribunal noted that for the CIT to assume jurisdiction under Section 263, both conditions must be satisfied. The CIT failed to demonstrate that the assessment order was erroneous and prejudicial to the revenue. The Tribunal found that the CIT did not conduct an adequate inquiry and merely directed the Assessing Officer to re-examine the issue, which is not permissible under the law. 2. Examination of the Method of Accounting Adopted by the Assessee: The assessee switched from Accounting Standard (AS) 9 to AS 7, which resulted in deferred revenue income being shown in the balance sheet. The CIT alleged that the Assessing Officer accepted this change without proper inquiry. The Tribunal found that the Assessing Officer had indeed inquired into the change during the original assessment proceedings, as evidenced by the order sheet entries and the assessee's detailed submissions. 3. Consistency and Bona Fides of the Change in Accounting Method: The CIT questioned whether the change in the accounting method was bona fide and consistently followed in subsequent years. The Tribunal observed that the assessee consistently followed AS 7 in the subsequent assessment years, as shown in the audited accounts and assessment orders for those years. This consistency was not disputed by the CIT. 4. Allowability of Expenditure Corresponding to Deferred Revenue Income: The CIT contended that the Assessing Officer did not examine whether the expenditure corresponding to the deferred revenue income was allowable. The Tribunal noted that the assessee provided detailed contract-wise workings and explanations during the assessment proceedings, which the Assessing Officer considered. The Tribunal found no evidence that the Assessing Officer failed to apply his mind to this issue. 5. Principles of Natural Justice and Procedural Fairness: The assessee argued that the CIT violated the principles of natural justice by passing the order hastily without considering the detailed written submissions. The Tribunal agreed, noting that the CIT issued the notice and passed the order within a very short period, without adequately addressing the assessee's submissions. 6. Adequacy of the Assessing Officer's Inquiry: The Tribunal emphasized the distinction between "lack of inquiry" and "inadequate inquiry." It held that if there was any inquiry, even if inadequate, the CIT could not invoke Section 263 merely because he had a different opinion. The Tribunal found that the Assessing Officer had made inquiries and considered the assessee's explanations, thus there was no lack of inquiry. Conclusion: The Tribunal concluded that the CIT did not have valid jurisdiction to invoke Section 263 as the conditions were not met. The original assessment order was neither erroneous nor prejudicial to the interests of revenue. The Tribunal quashed the CIT's order and allowed the assessee's appeal.
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