2022 (9) TMI 1239 - AT - Income Tax

Revision u/s 263 by CIT - advances received from customers and capitalization of project expenses - HELD THAT - Admittedly, it is an undisputed fact that assessee has disclosed advances received from customers in its audited balance sheet on the date of 31.03.2016 and 31.03.2017 - It is a rudimentary knowledge of accountancy that balance sheet is prepared with the balances in the books of accounts taken at a particular point of time, which is 31.03.2017 in the present case and a statement of assets, liabilities and capital of a business or an organization is prepared depicting financial picture at a particular given point in time Balance sheet gives the whole picture which is a cumulative reflection of the assets, liabilities and capital on a particular date. The amount of advance from customers reported in the balance sheet as on 31.03.2017 for an amount of Rs. 3,72,77,107/- signifies the amount received from customers as advance upto the date of 31.03.2017 when the said balance sheet was drawn. Thus, this balance as on 31.03.2017 is inclusive of Rs. 20 lacs which was received by the assessee in the period prior to the financial year 2016-17 for which the balance was drawn as on 31.03.2016 wherein the advance received from customers till that date was reported at Rs. 20 lacs in that balance sheet prepared as on 31.03.2016. Lack of such a rudimentary knowledge of accountancy for reading a balance sheet and thereby invoking the revisionary proceedings by holding that Rs. 20 lacs has been understated is not appreciated. Project expenses in the tax audit report - Assessee has accounted for cost of purchases of raw material under an inclusive method but since there has been no sale during the year, the entire project expenses have formed part of the closing stock/work in progress taken on the income side of the profit loss account. Thus the VAT component is on both sides of the P L A/c, on the debit side included in the cost of purchases and on the credit side in the closing stock. Therefore, there is no loss to the revenue on this account. Even if, by adopting the exclusive method of accounting, the VAT component is removed from the cost of purchases then at the same time, it will get removed from the closing stock/work in progress, making it revenue neutral. From the above factual matrix of the two issues raised by the ld. PCIT, we find that ld. PCIT has not applied his mind to arrive at a consideration which is erroneous in so far as prejudicial to the interest of the revenue, for passing the impugned order u/s 263 of the Act. We observe that in the course of proceedings u/s 263 of the Act before the Ld. PCIT, assessee had furnished the relevant details and explained the issues raised through the show cause notice by the Ld. PCIT, supporting its contentions by various decisions. It is well settled law that for invoking the provisions of section 263 of the Act, both the conditions that the order must be erroneous and prejudicial to the interest of revenue needs to be satisfied. We find that the two issues in the present case are purely on facts which are verifiable from the records of the assessee. Examination and verification of the audited financial statements i.e. Balance Sheet and Profit Loss account of the assessee reveals the correct state of their affairs in respect of the two issues raised in the impugned revisionary proceedings for which both, ld. PCIT and the ld. CIT, DR could not bring any material on record to controvert the verifiable factual position. Accordingly, on the issues raised by the Ld. PCIT in the revisionary proceedings, no action u/s 263 of the Act is justifiable which in our considered view cannot be sustained - Decided in favour of assessee.

Summary

Issues Involved:

1. Assumption of jurisdiction by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income-tax Act, 1961.
2. Advances received from customers.
3. Capitalization of project expenses.

Issue-wise Detailed Analysis:

1. Assumption of Jurisdiction by PCIT under Section 263:

The primary issue revolves around the PCIT's invocation of revisionary proceedings under Section 263 of the Income-tax Act, 1961. The PCIT's order dated 14.03.2022 for Assessment Year (AY) 2017-18 questioned the correctness of the original assessment order passed under Section 143(3) of the Act. The grounds for challenging the PCIT's jurisdiction included the alleged under-reporting of advances received from customers and the incorrect method of accounting for project expenses.

2. Advances Received from Customers:

The PCIT raised concerns about the advances from customers reported in the balance sheet for AY 2016-17 and AY 2017-18. Specifically, the PCIT observed that the amount of Rs. 20,00,000/- reported in AY 2016-17 was not included in the total advances of Rs. 3,72,77,107/- reported for AY 2017-18, suggesting an under-reporting of Rs. 20,00,000/-. The assessee contended that the balance sheet reflects cumulative figures, and the amount of Rs. 20,00,000/- from the previous year was included in the total advances reported for the current year. The assessee provided a detailed breakdown of advances received from various customers to substantiate this claim.

3. Capitalization of Project Expenses:

The PCIT also questioned the inclusion of VAT in the project expenses, which was contrary to the exclusive method of accounting reported in the tax audit report. The assessee admitted an inadvertent error by the auditor but clarified that since there were no sales during the year, the entire project expenses, including VAT, were transferred to the closing stock/work in progress. This inclusion did not result in any loss to the revenue, as the closing stock would become the opening stock for the next year, making the accounting treatment revenue-neutral.

Judgment Analysis:

The tribunal examined the issues raised by the PCIT and found that the PCIT had misunderstood the balance sheet figures and the method of accounting for project expenses. The tribunal noted that the balance sheet is a cumulative reflection of assets and liabilities at a particular point in time, and the advances reported were inclusive of the previous year's figures. The tribunal also observed that the VAT component included in the project expenses did not result in any revenue loss, as it was reflected on both sides of the profit and loss account.

The tribunal referenced the Supreme Court's decision in Malabar Industries Ltd. vs. CIT, which established that for invoking Section 263, both conditions of the order being erroneous and prejudicial to the interest of the revenue must be satisfied. The tribunal concluded that the PCIT had not applied his mind adequately and had not demonstrated how the original assessment order was erroneous and prejudicial to the revenue.

Conclusion:

The tribunal quashed the PCIT's order under Section 263, stating that the issues raised were verifiable from the assessee's records and did not justify revisionary proceedings. The appeal of the assessee was allowed, and the original assessment order was upheld. The tribunal emphasized the importance of both conditions being met for invoking Section 263 and highlighted the need for proper application of mind by the PCIT in such proceedings.

Order Pronouncement:

The appeal of the assessee was allowed, and the order was pronounced in the open court on 22.09.2022.