2021 (1) TMI 877 - AT - Income Tax

Revision u/s 263 - wrong working of WIP - AO had in fact collected information on the issue of work-in-progress etc. and had just placed them in the file but has not applied his mind to the information so collected - HELD THAT - The assessee in this case has been following percentage completion method of accounting for its construction contracts. The assessee is engaged in the business of construction engineering, encompassing mechanical and electrical installation, instrumentation and civil, architectural and/or structural works. The assessee has given detailed replies during the course of assessment proceedings to the queries of the ld. AO. Before the Pr. CIT the assessee had made elaborate submissions CIT has not pointed out any specific error in the order of the AO. He states that there was inadequate enquiry. It is well settled that inadequate enquiry is no ground to set aside an assessment order as erroneous and prejudicial to the interest of the Revenue. The Pr. CIT had a suspicion that income liable to tax has escaped assessment as in his view the AO should have conducted more enquiries. What is the nature of further enquiries or what the AO missed to examine and what would have been the income that has escaped is not made clear by the Pr. CIT. The assessee is following percentage completion method of accounting. In this method, at best the dispute can be the year of taxation of a particular receipt as income but not the total escapement of income. The Pr. CIT is wrong in his understanding of accounting of opening work-in-progress and closing work-in-progress. The assessee maintains project-wise accounts. The assessee is determining the turnover to be disclosed in a year by following AS-7. The revenues are recognised proportionately. Order-wise, Project-wise, Year-wise details are given in a scientific manner. Pr. CIT has not pointed out as to where the error has occurred. He had a suspicion that income is not accounted for correctly. Mere suspicion is no ground for exercise of power u/s. 263 of the Act. No verification or examination of the audited accounts is done by the Pr. CIT. As he has suspicion, he simply set aside the matter to the file of the AO for fresh adjudication. This is not permitted in law. CIT should have conducted enquiries and should have verified the accounts and other documents and details himself and pointed out specifically as to where an error has occurred which is prejudicial to the interest of the Revenue and which in his opinion would result in the assessee being not assessed at the correct amount of income and only after such enquiries, examination and verification he can come to a conclusion that there is an error insofar as it is prejudicial to the interest of the Revenue. The Pr. CIT is not authorized to simply set aside an assessment order by making certain general observations based on suspicion and wrong working out of the WIP - Decided in favour of assessee.

Summary

Issues Involved:
1. Delay in filing the appeal.
2. Validity of the revision order passed under Section 263 of the Income Tax Act, 1961.
3. Adequacy of the Assessing Officer's (AO) enquiry into the assessee's accounts.
4. Application of Accounting Standards (AS-7) and the treatment of Work-in-Progress (WIP).

Detailed Analysis:

1. Delay in Filing the Appeal:
The appeal was filed with a delay of 233 days. The Tribunal reviewed the petition for condonation of delay and the supporting affidavit. It concluded that the assessee had sufficient cause for the delay. Thus, the delay was condoned, and the appeal was admitted.

2. Validity of the Revision Order Passed Under Section 263:
The appeal was against the order of the Principal Commissioner of Income Tax (Pr. CIT) under Section 263, which proposed to revise the assessment order for the Assessment Year (AY) 2013-14. The Pr. CIT's revision was based on the alleged underassessment of income due to the incorrect accounting of WIP. The Pr. CIT argued that the AO's order was erroneous and prejudicial to the interests of the revenue because the AO did not conduct adequate enquiries into the WIP figures.

3. Adequacy of the AO's Enquiry:
The assessee argued that the AO had indeed conducted detailed enquiries during the assessment proceedings, as evidenced by the requisition under Section 142(1) and the replies provided by the assessee. The AO had examined the details and accepted the assessee's accounts and computation of income. The Tribunal noted that the Pr. CIT did not allege a lack of enquiry but rather termed it as inadequate. It is well-established that inadequate enquiry is not a sufficient ground for revision under Section 263.

4. Application of AS-7 and Treatment of WIP:
The Pr. CIT questioned the accounting treatment of WIP under AS-7, suggesting that the increase in WIP was not properly accounted for in the Trading & Construction P/L account, leading to underassessment of income. The assessee countered that it had consistently followed AS-7 for its construction business and provided detailed explanations and reconciliations to the AO. The Pr. CIT's suspicion of incorrect income recognition was not substantiated with specific errors or discrepancies in the assessee's accounts.

Tribunal's Conclusion:
The Tribunal held that the Pr. CIT had not pointed out any specific error in the AO's order. The Pr. CIT's suspicion of income escapement was not backed by concrete evidence or verification. The Tribunal emphasized that mere suspicion or inadequate enquiry does not justify the revision of an assessment order under Section 263. The Pr. CIT should have conducted a thorough examination and pointed out specific errors that were prejudicial to the revenue.

The Tribunal quashed the Pr. CIT's order under Section 263, holding that it was based on general observations and suspicions without specific findings of error. The appeal of the assessee was allowed.

Result:
The appeal was allowed, and the revision order under Section 263 was quashed.