2024 (6) TMI 1127 - AT - Income Tax

Revision u/s 263 - error in revenue recognition Methods - as per CIT AO has not made inquiry regarding the method of revenue recognition and the method of valuation of closing stock employed by the assessee - AO has passed the assessment order u/s 143(3) without proper inquiry and application of mind which makes the assessment order as erroneous insofar prejudicial to the interest of the revenue - HELD THAT - The provision of section 263 of the Act empowered the ld. Commissioner of income tax to call for the records of any proceeding under the Act and examine the same. If the ld. Commissioner considers that the order passed by the AO in any such proceeding is erroneous and prejudicial to the interest of the revenue, then he/she may pass such order as circumstances justify which may include enhancing or modifying the assessment, canceling the assessment, and directing the AO to make fresh assessment. The Hon ble Supreme Court in the landmark judgment in the case of Malabar Industrial Co. Ltd 2000 (2) TMI 10 - SUPREME COURT has analyzed the provisions of section 263 and held that to invoke the provision of section 263 Commissioner has to satisfy two conditions, the first being order passed by the AO is erroneous and second being the order is prejudicious to the interest of the revenue. In the absence of any one of the conditions, the provision of section 263 of the Act cannot be invoked. Determination of method of revenue recognition and method of valuation of closing stock - There is no dispute or allegation about genuineness of sale value of the bungalow or cost of the project, or any other expenditure incurred by the assessee. Accordingly, we are of the considered opinion that there is no prejudice to the revenue caused due to the method adopted by the assessee. As such, the assessee has offered income from the project over the period and paid due taxes. The only difference here may arise as per the method adopted by assessee, the income which should have offered in the year by employing percentage completion method (PCIT method) was deferred in subsequent year but in such a scenario the assessee should have offered less income in subsequent year. Thus, it is a tax natural exercise. See M/S BILAHARI INVESTMENT (P) LTD 2008 (2) TMI 23 - SUPREME COURT Likewise, the value of closing stock becomes the opening stock in the next year, hence the same is also a tax natural exercise. Hence there is no loss of tax, causing prejudice to the revenue due to the method adopted by the assessee which was accepted by the AO in the assessment order. Even if the AO has not properly inquired about the same and assuming that the Action of the AO is erroneous. But in view of the above discussion, there is no prejudice against the revenue. Therefore, the twin conditions to exercise the power under section 263 of the Act have not been satisfied. Hence, we hereby restore the assessment order and set aside the order of learned PCIT. Thus, the grounds of appeal of the assessee is hereby allowed.

Summary

Issues:
- Assessment order challenged as erroneous and prejudicial to revenue.

Analysis:
The appeal was filed against the order of the Principal Commissioner of Income Tax-3, Ahmedabad, under section 263 for the assessment year 2016-17. The main issue raised was the correctness of the assessment order deemed prejudicial to the revenue. The assessee, a partnership firm in real estate construction, sold 8 bungalows during the year for Rs. 4,05,86,464. The PCIT found discrepancies in revenue recognition, as the project was 83% complete with costs of Rs. 22,40,38,488 incurred, while revenue was recognized at only 6% of expected revenue. The PCIT emphasized the need for revenue recognition based on the percentage completion method as per accounting standards. The AO's failure to inquire into revenue recognition methods and valuation of closing stock led the PCIT to set aside the assessment order, citing it as erroneous and prejudicial to revenue.

The Tribunal considered the PCIT's decision and the Supreme Court's interpretation of section 263 requirements. The PCIT's view that revenue should have been recognized based on percentage completion method was contested by the assessee, who claimed consistent revenue recognition over years. The Tribunal noted the absence of disputes regarding sale value, project costs, or other expenditures. Referring to the Bilahari Investment Pvt. Ltd case, the Tribunal highlighted the flexibility in accounting methods for income recognition. The completed contract method and percentage of completion method were compared, emphasizing the periodic recognition of income under the latter. The Tribunal concluded that the assessee's method did not cause revenue prejudice, as income was offered over time, and tax effects were revenue-neutral. The value of closing stock naturally carried over to the next year, posing no loss of tax revenue. Despite the AO's oversight, the Tribunal found no revenue prejudice, thus restoring the assessment order and overturning the PCIT's decision.

In light of the above analysis, the Tribunal allowed the appeal, emphasizing the absence of revenue prejudice due to the assessee's chosen method of revenue recognition and valuation of closing stock. The restoration of the assessment order indicated the Tribunal's view that the twin conditions for invoking section 263 were not met, ensuring no adverse impact on revenue. The decision was pronounced in favor of the assessee on 31-01-2024.