2022 (8) TMI 24 - AT - Income Tax

Revision u/s 263 - Revenue recognition against advances received - As per CIT AO has not carried out requisite enquiries and also not applied his mind with respect to revenue recognition in respect of the advances received by the assessee and with respect to and utilisation of these advances - excess advance beyond 5% under current liabilities which should have taken to the profit and loss account - PCIT observed that the advance received for the purpose of the projects was diverted and used for illiquid investments in private limited companies which cannot be liquidated - HELD THAT - Given the accepted past history of the case, and given the fact that there were no material factual or legal developments in the relevant financial period, it was not at all unreasonable on the part of the Assessing Officer not to question the revenue recognition policy followed by the assessee. There were no reasons to provoke such an inquiry. The revenue recognition policy followed by the assessee is in accordance with the Accounting Standard 7 Construction Contracts to recognise revenue on project completion basis which is a generally acceptable accounting policy and is undisputed. Investment made by the assessee in the illiquid funds, in our view, this is the decision of the board to decide how the funds of the company to be utilised in its best interest and it is the affected party i.e., Lalitpur Power Generation Co Ltd, who had paid the contract price more than the certified work completion, can object the diversion of funds other than intended purpose. The revenue has no role to play how the funds are being utilized by the assessee, it can only analyse the method of accounting adopted consistently and offered the proper income for taxation. Beyond that they don t have any role to play and they are not expected to enter the shoes of the assessee how their affairs have to be carried out. In the given case, the Assessing Officer had verified the method of accounting in detail and the assessment was also selected (limited scrutiny- to verify contract receipt and current liabilities are genuine) for specifically to verify the recognition of revenue adopted by the assessee. It is fact on record that assessee is following recognised method accounting standard, AS-7 published by ICAI and Assessing Officer has not found any mistake in the revenue recognition and moreover, the revenue can be recognised only on the agreement of both parties by critically evaluating the progress of the project, it merely cannot be based on the receipt of funds. It is the other party who makes the payment, who has not objected or had not made any claim against the misuse of the advance of funds other than the intended purpose. As long as the contracting parties are in agreement with the certification of the progress of the project, the revenue has very little role to play in the revenue recognition and investment activities. We do agree that revenue can always make enquiries and once the assessing authority is satisfied with the submissions on the revenue recognition, which the assessee is following consistently then the matter has to rest at that stage. The Ld.Pr.CIT cannot impose of his another possible view in this circumstances even after detailed enquiry by the Assessing Officer. Thus assessment order passed by the AO is neither erroneous nor prejudicial to the interest of the revenue as the issue of advances received by the assessee has been thoroughly examined by the AO as is evident in the light of evidence filed by the assessee during the course of assessment proceedings. Pr.CIT was incorrect in setting aside the assessment order passed by the Assessing Officer u/s 143(3) of the Act. Hence, we set aside the order passed by the Ld. Pr.CIT u/s 263 restore the assessment order passed by the Assessing Officer u/s 143(3) of the Act. - Decided in favour of assessee.

Issues Involved:
1. Whether the advance received from Lalitpur Power Generation Co. Ltd. should be recognized as revenue.
2. Whether the investments made in private limited companies constitute a diversion of funds.
3. Whether the Principal Commissioner of Income Tax (Pr.CIT) was justified in invoking Section 263 of the Income Tax Act.

Detailed Analysis:

1. Advance Received from Lalitpur Power Generation Co. Ltd.:
The assessee, a publicly listed company engaged in EPC contracts, received an advance of Rs. 632.75 crores from Lalitpur Power Generation Co. Ltd., which was shown as a current liability. The Pr.CIT argued that the advance exceeded the 5% specified in the original and revised contracts and should have been recognized as revenue. However, the assessee contended that the revenue was recognized based on the percentage of completion method as per Accounting Standard (AS) 7. The assessee provided detailed submissions and supporting documents during the assessment proceedings, which were accepted by the Assessing Officer (AO).

2. Investments in Private Limited Companies:
The Pr.CIT observed that the advance received was used for investments in private limited companies, which were illiquid and could not be liquidated. The assessee argued that these investments were strategic moves to increase business opportunities and were made in Zero Percent Optionally Convertible Debentures of companies engaged in infrastructure activities. The assessee further submitted that even if there was a diversion of funds, it could not be treated as income of the assessee.

3. Invocation of Section 263 by Pr.CIT:
The Pr.CIT invoked Section 263, claiming that the AO's order was erroneous and prejudicial to the interest of the revenue. The Pr.CIT argued that the AO failed to examine the nature of the advances and their revenue recognition. The assessee contended that the AO conducted detailed scrutiny and made a well-considered order after being satisfied with the explanations provided. The assessee relied on various judicial precedents to argue that the revision action under Section 263 was unwarranted.

Tribunal's Findings:

On the Advance Received:
The tribunal found that the AO had conducted necessary enquiries and was satisfied with the assessee's explanation regarding the advance received and its revenue recognition policy. The tribunal noted that the AO had examined the replies and submissions made by the assessee and had passed the order after due consideration.

On Investments in Private Companies:
The tribunal held that the investments made by the assessee were strategic decisions and could not be considered a diversion of funds. The tribunal emphasized that the revenue authorities have no role in deciding how the company's funds should be utilized as long as the method of accounting is consistent and proper income is offered for taxation.

On Invocation of Section 263:
The tribunal concluded that the AO's order was neither erroneous nor prejudicial to the interest of the revenue. The tribunal observed that the AO had made necessary enquiries and applied his mind to the issues under consideration. The tribunal relied on the decision of the Hon'ble Supreme Court in Malabar Industrial Co. Ltd. vs. CIT, which held that for Section 263 to be invoked, the order must be both erroneous and prejudicial to the interest of the revenue. The tribunal also cited various judicial precedents supporting the principle of consistency in tax assessments.

Conclusion:
The tribunal set aside the order passed by the Pr.CIT under Section 263 and restored the assessment order passed by the AO under Section 143(3). The appeal filed by the assessee was allowed.

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