2023 (5) TMI 706 - AT - Income Tax

Penalty u/s 271(l)(c) - assessee offered additional income only because of search - inaccurate particulars of income for not following recognization of revenue as per AS-9, as the assessee had violated the law by not following percentage of completion method (POCM) as prescribed by ICAI in AS-7 - HELD THAT - Though the assessee had explained that assessee was following Project Completion Method. We are aware that explanation 5A to Section 271(1) has introduced the deeming fiction. In this case the difference in the return of Income is only because of Method of Accounting. It is not disputed that assessee was following Project Completion Method which was allowed for AY 2016-17. Therefore, the explanation submitted by the assessee for the difference in the original return of income and return filed after the search is a valid reason. See TRIDENT ESTATE PRIVATE LTD. 2021 (5) TMI 384 - ITAT MUMBAI as held that the project is incomplete and in substance if assessee wishes to offer for taxation its gain on completion of project i.e. apply completed contract method the same cannot be rejected. A legal claim or change of opinion cannot partake character of concealment. Section 43CB has been inserted w.e.f. 1/4/2017. Hence Section 43CB is not applicable to the year under consideration. Revenue has raised a ground that Assessee had violated law by not following AS-7 method of Accounting, however, it was never, a compulsory method for the year under consideration. Hence, there is no violation qua AS-7. We agree with the Ld. CIT(A) that Penalty u/s 271(1)(c) is not sustainable - Decided against revenue.

Summary

Issues involved:
The judgment involves issues related to penalty under section 271(1)(c) of the Income Tax Act, 1961 for Assessment Year 2016-17, specifically regarding the recognition of revenue and the method of accounting followed by the assessee.

Recognition of Revenue Issue:
The case involved a search conducted under section 132 of the Act, revealing that the ongoing project 'Aurete' had been substantially completed but revenue was not recognized by the assessee. The Architect's certificate indicated completion percentages of 45% and 37% for different projects, prompting the question of revenue recognition. The assessee admitted not recognizing revenue based on completion thresholds as per accounting standards. The Assessing Officer imposed a penalty under section 271(1)(c) for furnishing inaccurate particulars of income. However, the CIT(A) found that the conditions for applying the percentage completion method were fulfilled, making the issue debatable. The CIT(A) concluded that the penalty was not justified as the assessee revised its return to recognize revenue, aligning with the percentage completion method.

Method of Accounting Issue:
The assessee initially filed a return declaring NIL income under the Project Completion Method. After the search, a revised return was filed, disclosing income under the Percentage Completion Method. The Assessing Officer invoked explanation 5A of section 271(1) to levy a penalty, deeming concealment due to the difference in income shown before and after the search. The assessee argued that it followed a recognized method of accounting, and the penalty was unwarranted. The ITAT Mumbai's decision in a similar case supported the assessee's contention that the completed contract method was acceptable for the relevant assessment year. The absence of a legal requirement to follow AS-7 for the year in question further weakened the Revenue's argument. Consequently, the Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal against the penalty.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to delete the penalty under section 271(1)(c). The judgment highlighted the importance of aligning revenue recognition with the chosen accounting method and emphasized that a mere change in accounting approach does not amount to concealment. The legal validity of the penalty was scrutinized in light of the applicable accounting standards and the assessee's compliance with recognized methods.