2022 (12) TMI 584 - AT - Income Tax

Revision u/s 263 by CIT - accrual of income - accounting of delayed payment surcharge ( LPS ) on cash basis - assessee was declaring LPS on outstanding credit receivables on accrual basis - hybrid system of accounting - HELD THAT - AO has conducted the necessary enquiry on the said issue referred in the show-cause notice u/s 263 called for the details, made proper applcation of mind on the said details, considering the fact that the said treatment of LPS on cash basis is consistently being followed from AY 2003-04 onwards and accepted by predecessors and financial statements are duly audited by three auditors including CAG and the assessee has followed the directions of Ministry of Power dated 19.08.2003 and also considering the fact that in the past also huge amount of outstanding LPS are waived of and there is no certainity of receiving LPS charges from the Government companies and also considering the fact that similar views of accepting such treatment of LPS charges on cash basis even when the books of account are maintained on mercantile system have been taken by judicial forums, the view taken by the ld. AO was permissible in the law and not unsustainable and, therefore, in our considered view, the order of the ld. AO is neither erroneous nor prejudicial to the interest of revenue. We accordingly quash the revisionary proceedings carried out under section 263 by ld. PCIT and allow the grounds of appeal raised by the assessee.

Issues Involved:
1. Validity of the order passed under Section 263 of the Income Tax Act.
2. Legitimacy of the Principal Commissioner of Income Tax's (PCIT) actions in canceling the assessment order.
3. Examination of whether the issues raised in the notice under Section 263 were already considered during the original assessment.
4. Appropriateness of the PCIT's rejection of the assessee's contentions.
5. Validity of the PCIT's actions in setting aside the assessment order without adverse material.
6. Examination of the PCIT's substitution of the Assessing Officer's (AO) opinion with his own.
7. Justification for invoking revisionary power under Section 263.
8. Recognition of interest due from debtors and the consistency of the assessee's accounting treatment.
9. Impact of the differential tax timing on the assessment year and subsequent years.
10. Reasonable opportunity of being heard and adherence to the principle of natural justice.
11. Confirmation of additions made by the AO based on the directions of the PCIT.
12. Examination of the Late Payment Surcharge (LPS) as accrued income.
13. Jurisdiction of the AO in making additions beyond the directions of the PCIT.
14. Consideration of real income theory in the assessment of LPS.

Detailed Analysis:

1. Validity of the Order Under Section 263:
The assessee challenged the order passed by the PCIT under Section 263, arguing that it was both legally and factually incorrect. The Tribunal examined the provisions of Section 263 and relevant judicial precedents, including the Supreme Court's rulings in Malabar Industrial Co. Ltd. vs. CIT and CIT vs. Max India Limited, which clarified that an order can only be revised if it is erroneous and prejudicial to the interest of the Revenue.

2. Legitimacy of PCIT's Actions:
The PCIT's actions in canceling the assessment order were scrutinized. The Tribunal noted that the PCIT must establish that the AO's order was erroneous and prejudicial to the interest of the Revenue. The Tribunal found that the AO had conducted a detailed inquiry and accepted the assessee's accounting treatment of LPS on a cash basis, which was consistent with past assessments and supported by multiple auditors, including the Comptroller and Auditor General (CAG).

3. Examination of Issues Raised in Section 263 Notice:
The Tribunal observed that the issues raised by the PCIT in the notice under Section 263 were already considered by the AO during the original assessment proceedings. The AO had specifically asked for details of other income, including LPS, and accepted the assessee's explanation and accounting treatment.

4. Appropriateness of PCIT's Rejection:
The PCIT's rejection of the assessee's contentions was deemed inappropriate as the AO had already examined the issues and taken a permissible view. The Tribunal emphasized that the PCIT cannot substitute his opinion for that of the AO if the AO's view is legally sustainable.

5. Validity of PCIT's Actions Without Adverse Material:
The Tribunal found that the PCIT set aside the assessment order without any adverse material, which was not justified. The AO's acceptance of the assessee's accounting treatment was based on a thorough examination and consistent with past practices.

6. PCIT's Substitution of AO's Opinion:
The Tribunal held that the PCIT cannot use revisionary powers to substitute the AO's opinion with his own. The AO had taken a permissible view supported by facts and consistent with past assessments.

7. Justification for Invoking Revisionary Power:
The Tribunal concluded that the PCIT's invocation of revisionary power under Section 263 was not justified as the AO's order was neither erroneous nor prejudicial to the interest of the Revenue. The AO had conducted a proper inquiry and accepted the assessee's accounting treatment based on consistent past practices.

8. Recognition of Interest Due from Debtors:
The Tribunal examined the assessee's consistent accounting treatment of recognizing interest due from debtors on a cash basis due to uncertainty in realization. This treatment was accepted by statutory auditors, CAG, and tax auditors, and was in line with the directions from the Ministry of Power.

9. Impact of Differential Tax Timing:
The Tribunal noted that the differential tax timing did not result in any loss to the Revenue as the LPS was eventually offered to tax on a cash basis. The dispute was only regarding the year of taxability, making it revenue-neutral.

10. Reasonable Opportunity and Natural Justice:
The Tribunal found that the CIT(A) had erred in passing the order without giving the assessee a reasonable opportunity of being heard, violating the principle of natural justice.

11. Confirmation of Additions by AO:
The Tribunal observed that the CIT(A) wrongly confirmed the additions made by the AO based on the directions of the PCIT. The additions were made without proper justification and contrary to the established accounting treatment.

12. Examination of LPS as Accrued Income:
The Tribunal held that the LPS should be recognized on a cash basis due to the high uncertainty of recovery, consistent with the assessee's accounting policy and supported by judicial precedents.

13. Jurisdiction of AO in Making Additions:
The Tribunal found that the AO had acted beyond his jurisdiction by making additions on account of LPS without specific directions from the PCIT, which was not justified.

14. Real Income Theory:
The Tribunal emphasized the real income theory, stating that income should be assessed based on actual realization rather than hypothetical accruals. The AO's acceptance of LPS on a cash basis was in line with this theory.

Conclusion:
The Tribunal quashed the revisionary proceedings under Section 263 and the consequential assessment order, allowing the assessee's appeal in ITA No. 45/GAU/2019 and dismissing the appeal in ITA No. 418/GAU/2019 as infructuous. The Tribunal upheld the principle of consistency and the real income theory, reinforcing the AO's acceptance of the assessee's accounting treatment of LPS on a cash basis.

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