2023 (10) TMI 1265 - AT - Income Tax

Revision u/s 263 - scope of limited scrutiny - as per CIT AO's order as held as erroneous so far as prejudicial to the interest of the revenue on the ground that the AO has not examined applicability of the Percentage Completion Method - Computation of income from construction and service contracts u/s 43CB - HELD THAT - It is pertinent to note that the method of accounting was not subject matter of limited scrutiny taken up through CASS. Percentage Completion Method has been made compulsory for the real estate business vide amendment by Finance Act 2018 whereby section 43CB was introduced w.e.f. 01.04.2017. Prior to the said amendment it was not mandatory for the real estate business to apply Percentage Completion Method as for the year under consideration the newly inserted section 43CB is not applicable Having held that the provision of section 43CB are not applicable for the year under consideration the question arises is whether the AO can go beyond the subject matter of limited scrutiny while passing the assessment order. The answer to this question is certainly not without converting the limited scrutiny into complete scrutiny. Therefore, in case the AO proceeded within the scope of limited scrutiny and not taken up any issue beyond the scope of limited scrutiny the same can be held to be erroneous for lack of inquiry. It is not open to the AO take up any issue which is not subject matter of the limited scrutiny until and unless the limited scrutiny is controverted into complete scrutiny. Hence not conducting an inquiry on the issue beyond subject matter of limited scrutiny would not be considered as lack of inquiry on the part of the AO so as to render the order of the AO erroneous so far as prejudicial to the interest of revenue. When the assessee is consistently following the Project Completion Method which is not prohibited by law the acceptance of the same by the AO cannot be held as erroneous decision on the part of the AO and consequently the Pr. CIT cannot invoke the provisions of section 263 of the Act on a claim which is bona fide and a possible view not prohibited by law. Accordingly, in the facts and circumstances of the case and following the decision of Ashoka Hitech Builders (P.) Ltd. 2018 (8) TMI 440 - ITAT INDORE we hold that the impugned order passed u/s 263 of the Act is not sustainable in law and liable to be set aside. Decided in favour of assessee.

Summary

Issues Involved:
1. Invocation of Section 263 by the Principal Commissioner of Income Tax (PCIT).
2. Allegation of the assessment order being erroneous and prejudicial to the interest of the revenue.
3. Applicability of the Percentage Completion Method versus the Project Completion Method.
4. Jurisdiction of the PCIT in the context of limited scrutiny.

Summary:

1. Invocation of Section 263 by the Principal Commissioner of Income Tax (PCIT):
The appeal by the assessee is directed against the revision order dated 28.11.2022, passed by the PCIT under Section 263 of the Income Tax Act for the Assessment Year 2015-16. The PCIT invoked Section 263, alleging that the assessment order passed under Section 143(3) was erroneous and prejudicial to the interest of the revenue.

2. Allegation of the Assessment Order Being Erroneous and Prejudicial to the Interest of the Revenue:
The PCIT found that certain points were not considered by the Assessing Officer (AO) while completing the assessment order. Specifically, the PCIT noted that the AO did not examine the applicability of the Percentage Completion Method, which led to the assessment order being deemed erroneous and prejudicial to the revenue's interest.

3. Applicability of the Percentage Completion Method versus the Project Completion Method:
The assessee, a real estate developer, consistently followed the Project Completion Method of accounting. The PCIT raised the issue of adopting the Percentage Completion Method. However, the tribunal noted that the Percentage Completion Method was not mandatory for the real estate business before the introduction of Section 43CB by the Finance Act 2018, which is applicable from 01.04.2017. The tribunal cited various precedents, including the Supreme Court and High Courts, affirming that the Project Completion Method is a recognized and acceptable method of accounting.

4. Jurisdiction of the PCIT in the Context of Limited Scrutiny:
The tribunal emphasized that the case was selected for limited scrutiny through CASS on specific issues such as income from real estate business, sundry creditors, and sales turnover mismatch. The AO conducted due inquiries within the scope of limited scrutiny. The tribunal referred to CBDT instructions, which mandate that AO should not exceed the jurisdiction under limited scrutiny unless converted into complete scrutiny. The tribunal concluded that the PCIT's invocation of Section 263 on an issue beyond the scope of limited scrutiny was not justified.

Conclusion:
The tribunal held that the AO's acceptance of the Project Completion Method, consistently followed by the assessee, was not erroneous. Consequently, the tribunal set aside the PCIT's order under Section 263, stating it was not sustainable in law. The appeal of the assessee was allowed.