2017 (2) TMI 682 - HC - Income Tax

Revision u/s 263 - deferred revenue income showed by changing the method of accounting as per Accounting Standard (AS) -7, and it has resulted in lowering of profit - Held ITAT concluded that the invocation of Section 263 was not warranted in the circumstances of the case - that - Ruling of the ITAT is largely based upon the recognition of AS-7 in the given facts and circumstances of the case and that in fact the matter had received scrutiny by the A.O. at the stage of the original assessment. Besides, this Court in Paras Buildtech India Pvt. Ltd. v. Commissioner of Income Tax (2015 (11) TMI 1217 - DELHI HIGH COURT ) had noted that this method is a known and recognised method of accounting, and was approved as a proper one. The Court had also relied on CIT v. Bilahari Investment Pvt. Ltd. (2008 (2) TMI 23 - SUPREME COURT ). Having regard to the factual findings of the ITAT, the Court is of the opinion that no substantial question of law arises.

Summary

Issues:
1. Interpretation of Section 263 of the Income Tax Act, 1961.
2. Application of Accounting Standard (AS)-7 for revenue recognition.
3. Consideration of consistency in following AS-7 in subsequent Assessment Years.
4. Judicial precedent on recognized methods of accounting.

Analysis:
1. The main issue in this case was the interpretation of Section 263 of the Income Tax Act, 1961. The Revenue contended that the ITAT erred in holding that Section 263 was invoked erroneously. The ITAT concluded that the invocation of Section 263 was not warranted in the circumstances of the case, as discussed in paragraphs 11 & 14 of the order.

2. The second issue revolved around the application of Accounting Standard (AS)-7 for revenue recognition. The CIT(A) alleged that the Assessee showed deferred revenue income of `11.98 crores by changing the accounting method as per AS-7, resulting in a lower profit. However, the ITAT found that the Assessee consistently followed AS-7 in subsequent Assessment Years, as evidenced by audited accounts and assessment orders for those years.

3. Another critical issue was the consideration of consistency in following AS-7 in subsequent Assessment Years. The ITAT emphasized that the Assessee consistently applied AS-7 for revenue recognition in subsequent years, which was also acknowledged in the assessment orders for those years. The CIT did not provide findings on this consistency, despite the evidence presented by the Assessee.

4. The final issue involved judicial precedent on recognized methods of accounting. The Court referred to previous cases such as Paras Buildtech India Pvt. Ltd. v. Commissioner of Income Tax and CIT v. Bilahari Investment Pvt. Ltd., highlighting that the method of accounting followed by the Assessee was known and approved. Based on the factual findings of the ITAT and the precedent cited, the Court concluded that no substantial question of law arose, leading to the dismissal of the appeal.

In conclusion, the judgment focused on the correct interpretation of Section 263, the application of AS-7 for revenue recognition, the consistency in following AS-7 in subsequent Assessment Years, and the judicial precedent supporting the recognized method of accounting used by the Assessee.