2001 (1) TMI 209 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction of CIT u/s 263.
2. Error prejudicial to the interest of revenue.
3. Method of accounting as per ICAI standards.
4. Income assessment on project completion.

Summary:

1. Jurisdiction of CIT u/s 263:
The assessee challenged the jurisdiction of the CIT in invoking provisions of section 263 of the Income-tax Act. The CIT had assumed jurisdiction u/s 263, concluding that the orders of assessment were erroneous and prejudicial to the interests of Revenue. The Tribunal held that the CIT erred in invoking revisionary powers under section 263, as the method of accounting followed by the assessee was a recognized method and not erroneous.

2. Error Prejudicial to the Interest of Revenue:
The CIT argued that the method of accounting employed by the assessee did not correctly depict the taxable profits, thus being prejudicial to the revenue. However, the Tribunal found that the method adopted by the assessee, which is the completed contract method, was consistent with the accounting standards issued by the ICAI, and therefore, the assessment orders were not erroneous or prejudicial to the interests of Revenue.

3. Method of Accounting as per ICAI Standards:
The assessee followed the completed contract method, recognized by the ICAI's Accounting Standard (AS 7). The Tribunal noted that the method adopted by the assessee was prudent, recognized by the ICAI, and depicted a true and fair view of the state of affairs. The Tribunal emphasized that the CIT's proposed method was unscientific and contrary to well-recognized accounting principles.

4. Income Assessment on Project Completion:
The Tribunal supported the assessee's method of recognizing income only upon the completion of the project, aligning with the ICAI standards. The Tribunal rejected the CIT's methodology of estimating net profit annually, finding it impractical and leading to absurd results. The Tribunal cited various judicial precedents supporting the completed contract method and concluded that the CIT's directions were not justified.

Conclusion:
The Tribunal set aside the CIT's orders invoking section 263, holding that the method of accounting followed by the assessee was recognized and accepted, and the assessment orders were neither erroneous nor prejudicial to the interests of Revenue. The appeals of the assessee were allowed.