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2021 (7) TMI 1186 - AT - Income TaxRevision u/s 263 - method of accounting adopted by the assessee for revenue recognition - CIT directing the A.O. to adopt percentage completion method to determine the profit of the project as according to AS-7 revised in 2002 w.e.f. 1.4.2003 the completed contract method has been scrapped and ICAI guidelines preferred the percentage completion method and interest on advances received from customers cannot be treated as business income and should be treated as income from other sources - HELD THAT - We find that this is a peculiar situation where in the immediately preceding assessment year 2014-15, the A.O. made addition disputing the method of accounting adopted by the assessee for revenue recognition, which was project completion method and this addition was deleted by Ld. CIT(A) As noted no appeal has been filed by the revenue against the said order of the Ld. CIT(A) till date, therefore, we safely presume that the department has accepted the order of the Ld. CIT(A) for the assessment year 2014-15 without any further dispute and litigation. Further, since the project was completed during immediately succeeding assessment year 2016-17 and the assessee offered to tax the income accrued to it from the said project and also paid all due taxes etc. thereon. Therefore, we are unable to agree with the allegation of Pr. CIT that the orders of the authorities below are erroneous and prejudicial to the interest of the revenue. Pr. CIT is not empowered to invoke revisionary powers u/s 263 of the Act in such a situation, where a view has been taken by Ld. CIT(A) in the similar facts and circumstances of the case, which has been accepted by the department without any further dispute or litigation. As decided in case of Coffeeday Global Ltd. 2021 (3) TMI 1030 - KARNATAKA HIGH COURT the principle of res judicata does not applicable to tax proceedings and principle of consistency must be followed by the revenue authorities which is a mandate of tax jurisprudence. This principle supports the case of the assessee challenging the invocation of revisionary powers u/s. 263 of the Act. Competent authority including ld. Pr. CIT can call and examine the record of any proceedings under the Act and if he consider that any order passed therein by the 'Assessing Officer' is erroneous and prejudicial to the interest of the revenue legislature, to its wisdom, has not used any word that the order of higher authority i.e. CIT(A) can be reversed by invoking provisions of section 263 of the Act and thus, order of the ld. Pr. CIT revising the first appellate authority of Ld. CIT(A) is not sustainable as per the provisions of the Section 263 of the Act. Amount of interest income has been received from the surplus amount of advance from customers during the period and interest income was earned thereon which was inextricably linked with the project of the assessee and the same was rightly treated as business income and the assessee utilized the same for setting off the interest paid by it - In the present case, undisputedly, the project was completed during immediately subsequent assessment year 2016-17 and all income including impugned interest income was offered to tax and due taxes etc thereon were also paid by the assessee but as we have observed above the tax on the interest income, which was to be charged in A.Y. 2015-16, was paid by delay of one year. The total effect is that the tax on the interest income which was to be received by the department during A.Y. 2015-16 was actually received in A.Y. 2016-17 i.e. after one year and the payment of tax thereon was made by the assessee after one year. Undisputedly, since assessee is a company and rate of tax etc were the same for both the years, thus, we observe that there is no loss of tax on the interest income except delay of one year in receipt due tax by the Revenue. This factual position was emerged and agreed by both the parties during the arguments. We always follow and approve a well recognized principle of tax jurisprudence that the income should be taxed in the right hands in the right relevant period of assessment and all possible leakage of revenue including interest on delayed payment of tax should be taken care and covered in the interest of Revenue. We accordingly up-hold the impugned order of the ld. Pr. CIT passed u/s. 263 to the extent that there was an error in the assessment order passed by the A.O. in not bringing to tax the interest income in the year under consideration under the head income from other sources . Once, this interest income is brought to tax in A.Y. 2015-16, closing WIP for A.Y. 2015-16 will be increased to that extent and the income of the assessee chargeable to tax for A.Y. 2016-17 will be reduced consequently. We modify the impugned order of the Ld. Pr. CIT and direct the A.O. to bring to tax interest income in A.Y. 2015-16 under the head income from other sources and increase the closing work in progress of A.Y. 2015-16 and opening work in progress for A.Y. 2016-17 to that extent and to recalculate tax liability for both the years accordingly within a period of two months. Appeal of the assessee is partly allowed
Issues Involved:
1. Justification of the Pr. CIT in setting aside the assessment order under section 263 of the Income Tax Act, 1961. 2. Treatment of revenue recognition method (percentage completion method vs. project completion method). 3. Classification of interest income (business income vs. income from other sources). 4. Validity of the order passed beyond the statutory period under section 263. Detailed Analysis: 1. Justification of the Pr. CIT in setting aside the assessment order under section 263: The primary issue raised by the assessee was that the Pr. CIT was not justified in setting aside the assessment order passed under section 143(3) by directing the A.O. to adopt the percentage completion method to determine the profit of the project. The Tribunal observed that the Pr. CIT had exercised his power under section 263 due to the A.O.'s failure to convert the case from limited scrutiny to complete scrutiny, which was necessary to ascertain the correct income. The assessee contended that the project completion method had been consistently followed and accepted in previous assessments, including by the CIT(A) for the assessment year 2014-15, and thus, the Pr. CIT's revision was not justified. 2. Treatment of Revenue Recognition Method: The Pr. CIT directed the A.O. to adopt the percentage completion method as per AS-7, which has been mandatory since FY 2003-04. The assessee argued that it followed the project completion method as per AS-9, and the revenue from the project was recognized only upon completion. The Tribunal noted that the project was completed in the subsequent assessment year 2016-17, and the entire income was offered to tax in that year. The Tribunal found that the Pr. CIT's direction to adopt the percentage completion method was not sustainable, as the project completion method had been consistently followed and accepted in previous assessments, including by the CIT(A) for the assessment year 2014-15. 3. Classification of Interest Income: The Pr. CIT held that the interest income received from advances should be treated as "income from other sources" rather than "business income." The assessee contended that the interest income was inextricably linked with the project and should be treated as business income. The Tribunal agreed with the Pr. CIT that the interest income should be classified as "income from other sources." However, it acknowledged that this would result in a revenue-neutral situation, as the increased work-in-progress would ultimately reduce the profit in the subsequent assessment year. The Tribunal directed the A.O. to bring the interest income to tax under "income from other sources" for the assessment year 2015-16 and adjust the work-in-progress accordingly. 4. Validity of the Order Passed Beyond the Statutory Period: The assessee raised an additional ground that the order under section 263 was passed beyond the statutory period. The Tribunal noted that the Government of India had extended the time-barring date for such matters till 30.6.2020, through a Gazette Notification dated 31.3.2020. Therefore, the order passed by the Pr. CIT on 10.6.2020 was within the extended period, and the additional ground raised by the assessee was not accepted. Conclusion: The Tribunal partly allowed the appeal of the assessee. It held that the Pr. CIT was not justified in directing the adoption of the percentage completion method, as the project completion method had been consistently followed and accepted in previous assessments. However, the Tribunal upheld the Pr. CIT's classification of interest income as "income from other sources" and directed the A.O. to bring the interest income to tax for the assessment year 2015-16 and adjust the work-in-progress accordingly. The additional ground regarding the validity of the order passed beyond the statutory period was dismissed.
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