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2019 (6) TMI 282 - AT - Income TaxRevision u/s 263 by CIT - Change in accounting policy - assessee had changed its accounting policy, from recognise revenue on projects from milestone billing basis to percentage completion method AS 7' to consequent to which revenue from projects and work in progress is lowered and thus loss for the year was shown higher - meaning of construction of asset - HELD THAT - It is abundantly clear from the reading of the definition that block of asset is not restricted to building machinery plant or furniture but is extended to know-how patents Copyright etc. Therefore, whenever there is a construction of an asset and a contract is negotiated for that on standalone basis or for closely interrelated or interdependent in terms of design technology and function than in set scenario the Accounting Standard 7 shall be applicable. In view of the above the change in accounting policy by the assessee from milestone billing to percentage completion method is a plausible view and therefore even if the view has not been examined specifically by the Assessing Officer, we do not find any fault in shifting of the accounting policy by the assessee. Even this simulator with high configuration and technical input in design would definitely fall within the realm of an asset and the construction of such asset would definitely fall within the category of construction of asset and therefore accounting standard 7 had rightly been applied by the assessee and hence the order passed by the Pr. CIT u/s 263 is liable to be quashed and we do accordingly. The facts of the present case are similar to that of the facts mentioned by the Hon'ble High Court in the case of A2Z Maintenance 2017 (2) TMI 682 - DELHI HIGH COURT as in the present case also, the assessee has been consistently following the AS 7 from the financial year 2007-08 and therefore there cannot be any justification for the officer to doubt the bona fide of the assessee in following the AS 7 and therefore also there was no reason for the CIT to come to the conclusion that the order passed by the Assessing Officer was erroneous. - Decided in favour of assessee.
Issues Involved:
1. Jurisdiction and validity of the order under section 263 of the Income Tax Act, 1961. 2. Whether the assessment order under section 143(3) was erroneous and prejudicial to the interest of the revenue. 3. Applicability of Accounting Standard 7 (AS-7) to the assessee's activities. 4. Non-computation of book profit under section 115JB of the Act. 5. Adequacy of the inquiry conducted by the Assessing Officer (AO). Detailed Analysis: 1. Jurisdiction and Validity of the Order under Section 263: The assessee contended that the order under section 263 was without jurisdiction, bad in law, and void ab initio. The Commissioner of Income Tax (CIT) must satisfy twin conditions: the order of the AO must be erroneous and prejudicial to the interests of the revenue. The Supreme Court in Malabar Industrial Co. Ltd. vs. CIT emphasized that both conditions must be satisfied for invoking section 263. If the order is not erroneous but prejudicial, or vice versa, section 263 cannot be invoked. 2. Erroneous and Prejudicial to the Interest of the Revenue: The CIT concluded that the assessment order was erroneous and prejudicial to the revenue because the AO accepted the assessee's return without adequate inquiry. The CIT highlighted that the AO failed to compute book profits under section 115JB and did not question the change in the accounting policy from milestone billing to the percentage completion method (AS-7). The CIT directed the AO to re-examine these issues. 3. Applicability of Accounting Standard 7 (AS-7): The assessee argued that AS-7 was applicable as their activities involved long-term construction contracts for simulators, which included significant civil construction work and installation of complex machinery. The CIT disagreed, stating that the assessee's activities did not fall within the definition of a construction contract under AS-7. The Tribunal analyzed the contracts and concluded that the construction of simulators, involving interdependent design, technology, and function, qualified as construction contracts under AS-7. The Tribunal found the adoption of AS-7 by the assessee appropriate. 4. Non-computation of Book Profit under Section 115JB: The CIT noted that the AO did not compute book profits for Minimum Alternate Tax (MAT) purposes under section 115JB. The assessee contended that since they booked a loss, computing book profit was unnecessary. The Tribunal did not specifically address this issue, focusing instead on the erroneous nature of the order. 5. Adequacy of Inquiry by the Assessing Officer: The assessee argued that the AO had sufficient information, including audit reports and notes on changes in accounting policy. The CIT failed to conduct a minimum inquiry before exercising jurisdiction under section 263. The Tribunal emphasized that the CIT must establish the twin conditions through an inquiry. The Tribunal found that the AO's acceptance of the assessee's method was a plausible view, and the CIT's order lacked the necessary inquiry and justification. Conclusion: The Tribunal held that the order passed by the AO was not erroneous, as the adoption of AS-7 was appropriate for the assessee's construction contracts. Consequently, the CIT's order under section 263 was quashed, and the appeal of the assessee was allowed. The Tribunal underscored that the CIT must conduct a thorough inquiry and establish both conditions of section 263 before revising an assessment order. The principle of ejusdem generis was rejected, affirming that the definition of construction contracts under AS-7 was broad and inclusive of the assessee's activities.
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