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2024 (7) TMI 590 - HC - Income TaxValidity of Revision u/s 263 - subsequent revision orders - first order set aside by PCIT - ITAT quashing the revisionary proceedings - adoption of Accrual Basis of Accounting - assessee company followed mercantile system of accounting and showed trade receivables - Whether the Hon ble Tribunal has erred in law and facts in allowing the appeal of the assessee which is following hybrid system of accounting with respect to interest on debtors on cash basis in contravention of the provisions of Section 145 of the IT Act, 1961? - whether assessee was bound to adhere to the direction of the Ministry of Power to account for interest on cash basis? HELD THAT - In this case, the Assessing Officer had passed an order u/s 263 of the Act, 1961, which was admittedly set aside by the Principal Commissioner of Income Tax, Shillong and thereafter, the order of reassessment was passed by the AO u/s 263 r/w 143(3). Once the order u/s 263 of the Act, 1961 has become final and stood quashed, no question of passing another order will arise in view of the fact that the subsequent order passed by the Assessing Officer is invalid in the eye of law, as the opinion formed by the Assessing Officer is not sustained on the reasoning that revision under Section 263 is not permissible. When the order of assessment is found to be erroneous and prejudicial to the interest of Revenue, the right vests with the Principal Commissioner to review the order and since the said stipulation has not been satisfied, the order passed under Section 263 cannot stand on its leg. Whether Tribunal has erred in law and facts in allowing the appeal of the assessee, which is following hybrid system of accounting with respect to interest on debtors on cash basis in contravention of the provisions of Section 145 of the IT Act, 1961? - It is true that the term res judicata cannot be blindly applied to the income-tax proceedings as held by the Supreme Court in the case of Parashuram Pottery Works Ltd 1976 (11) TMI 1 - SUPREME COURT but at the same time, in the absence of challenge to the fundamental aspect permeated through different assessment years, no attempt could be made to alter the position in the subsequent year. That apart, the Punjab Haryana High Court elaborately dealt with this aspect, which got the assent from the Supreme Court as well. Thus, in the considered opinion of this Court, the order of the Tribunal is wholly justified, as we do not find any infirmity or irregularity in the order.
Issues Involved:
1. Quashing of revisionary proceedings under Section 263 of the Income Tax Act, 1961. 2. Mercantile system of accounting and trade receivables. 3. Hybrid system of accounting and interest on debtors on cash basis. 4. Adherence to Ministry of Power's direction on accounting for interest on cash basis. Detailed Analysis: Issue 1: Quashing of Revisionary Proceedings under Section 263 of the Income Tax Act, 1961 The Department challenged the Income Tax Appellate Tribunal's (ITAT) decision to quash the revisionary proceedings under Section 263 of the Act, 1961. The Principal Commissioner of Income Tax, Shillong, had initially set aside the assessment order for the year 2014-2015, directing a re-computation of the Company's income. The ITAT quashed these proceedings, leading to the Department's appeal. The High Court observed that once the order under Section 263 was quashed, any subsequent order based on it was invalid. The Principal Commissioner did not satisfy the conditions under Section 263, and thus, the revisionary order could not stand. Issue 2: Mercantile System of Accounting and Trade Receivables The Department argued that the Company followed the mercantile system of accounting and had shown Rs. 791.90 crores as trade receivables. The ITAT and the CIT (Appeals) had rightly set aside the assessing officer's order, adding surcharge to the income of the assessee. The High Court referenced the Punjab and Haryana High Court's judgment in "The Commissioner of Income Tax, Hisar Vs. Dakshin Haryana Bijli Vitran Nigam Ltd., Hisar," which held that hypothetical income should not be taxed merely because of an entry in the books of account. The High Court found no error in the ITAT's decision. Issue 3: Hybrid System of Accounting and Interest on Debtors on Cash Basis The Department focused on the Company's use of a hybrid system of accounting, particularly regarding "interest on debtors on a cash basis," which they argued contravened Section 145 of the IT Act, 1961. The High Court noted that the issue involved a question of fact already decided by the Punjab and Haryana High Court and upheld by the Supreme Court. The High Court cited the Supreme Court's judgment in "Commissioner of Income Tax vs. M/s Excel Industries Ltd.," which emphasized that hypothetical income should not be taxed and that consistent judicial views should not be altered without convincing reasons. Issue 4: Adherence to Ministry of Power's Direction on Accounting for Interest on Cash Basis The Department argued that the Company was obliged to follow the Ministry of Power's direction to account for interest on a cash basis. The High Court noted that the method of Late Payment Surcharge (LPS) on a cash basis had been consistently followed by the Company since 2003-2004 and recognized through various judicial pronouncements. The High Court found no reason to interfere with the ITAT's decision, which was consistent with previous judicial views and the Company's established accounting practices. Conclusion: The High Court dismissed the Department's appeal, finding no merit in the arguments presented. The ITAT's order quashing the revisionary proceedings under Section 263 was upheld, and the Company's accounting practices were found to be consistent with judicial precedents. The High Court emphasized that hypothetical income should not be taxed and that consistent judicial views should not be altered without compelling reasons. The appeal was dismissed with no costs.
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