2019 (8) TMI 980 - AT - Income Tax

Reopening of assessment u/s 147 - reasons to believe - revenue recognition of PSG fees - change in the basis of revenue recognition of fees from PSG by the assessee - HELD THAT - In a case where the purchase of flat would either not materialize or stood terminated, no fees on account of PSG in respect of such contract would be receivable by the assessee from its builder clients, as a result whereof the assessee would have to write off the receivables in its books of accounts . Be that as it may, the aforesaid bonafide change in the method of recognizing the fees from PSG by the assessee from the year under consideration onwards had brought the same in conformity with AS-9, which had resulted into facilitating the accounting of its true income during a year. Now when the change in the method of accounting by the assessee is a bonafide change, which thereafter had been consistently followed by it in the subsequent years, therefore, no addition could have been made by the A.O on account of such change in the method of recognizing the fees from PSG by the assessee. See M/S. MODERN TERRY TOWELS LTD., 2012 (8) TMI 776 - BOMBAY HIGH COURT CIT(A) even in the case of an assessee following mercantile system of accounting, an item would be regarded as accrued income only if there was certainty of receiving it and not when it had been waived. We find that a coordinate bench of the Tribunal in the case of Addl. CIT Vs. Hill County Properties Ltd. 2015 (5) TMI 930 - ITAT HYDERABAD had after deliberating on somewhat similar facts as are involved in the case of the assessee before us, observed that where some extraordinary events created uncertainty with regard to completion of project by the assessee, which resulted in cancellation of property booking/filing of legal cases, the assessee who was a property developer was justified in changing the method of recognition of income and adopting registration of agreement for sale or handing over of possession of flats and bungalows as the basis for recognition of income, as against execution of agreement for sale that was adopted in the earlier years - Decided in favour of assessee.

Issues Involved:
1. Validity of the reopening of assessment under Section 147 of the Income Tax Act, 1961.
2. Change in the income recognition policy related to fees from Property Service Group (PSG) and its compliance with Accounting Standard-9 (AS-9).
3. Addition of ?13,16,72,984/- to the taxable income of the assessee due to the change in income recognition policy.

Issue-Wise Detailed Analysis:

1. Validity of the Reopening of Assessment under Section 147 of the Income Tax Act, 1961:

The assessee challenged the reopening of its assessment on the grounds that it was based on a "change of opinion" and that the Assessing Officer (A.O) had reopened the assessment solely based on an audit objection without independent application of mind. The CIT(A) upheld the reopening, stating that it was within four years from the end of the assessment year and thus the proviso to Section 147 was not applicable. The CIT(A) also noted that the original assessment did not specifically examine the issue of change in revenue recognition policy.

However, the Tribunal found that the A.O had reopened the assessment merely by adopting the audit objection without any independent application of mind. The Tribunal emphasized that reopening an assessment based solely on an audit objection without the A.O's independent belief is not permissible. The Tribunal concluded that the A.O had failed to arrive at a bonafide belief for reopening the assessment, thereby making the reopening invalid.

2. Change in the Income Recognition Policy Related to Fees from Property Service Group (PSG) and Compliance with AS-9:

The assessee had changed its income recognition policy from recognizing the entire fees on rendering of services to recognizing fees to the extent of invoices raised on customers. This change was made to align with AS-9 issued by the Institute of Chartered Accountants of India, which requires revenue to be recognized when it is measurable and there is reasonable certainty of its ultimate collection.

The CIT(A) accepted the assessee's contention that the change was bonafide and in conformity with AS-9. The CIT(A) observed that the earlier method led to significant write-offs when transactions did not materialize, and the new method provided a more accurate reflection of income. The Tribunal agreed with the CIT(A), noting that the change in the method of recognizing fees from PSG was bonafide, consistently followed in subsequent years, and in accordance with AS-9.

3. Addition of ?13,16,72,984/- to the Taxable Income of the Assessee Due to the Change in Income Recognition Policy:

The A.O had added ?13,16,72,984/- to the assessee's income, arguing that the income had accrued to the assessee and should have been recognized. The CIT(A) deleted the addition, reasoning that the change in the income recognition policy was bonafide and in line with AS-9, which allows revenue recognition to be postponed where there is uncertainty about its ultimate collection.

The Tribunal upheld the CIT(A)'s decision to delete the addition, agreeing that the change in the method of recognizing fees from PSG was a bonafide change that provided a more accurate reflection of the assessee's income. The Tribunal also noted that the change was in conformity with AS-9 and that the revenue recognition policy was consistently followed in subsequent years.

Conclusion:

The Tribunal dismissed the revenue's appeal and partly allowed the assessee's cross-objections. The Tribunal found that the reopening of the assessment was invalid as it was based solely on an audit objection without independent application of mind by the A.O. On merits, the Tribunal upheld the CIT(A)'s decision to delete the addition of ?13,16,72,984/- made by the A.O, concluding that the change in the income recognition policy was bonafide and in conformity with AS-9.

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