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TMI Blog2019 (6) TMI 282X X X X Extracts X X X X X X X X Extracts X X X X ..... l to the interest of revenue. 4. The CIT erred on facts and in law in ignoring the definition of construction contracts as provided in accounting standard 7 while concluding that the appellant was not engaged in construction activity. 5. That the CIT erred on facts and in law in not appreciating that since the appellant had booked loss, not computing book profit under section 115jb of the act did not make the assessment order erroneous or prejudicial to the interest of revenue." The Brief facts 1. The assessee filed return of income by declaring a loss of Rs. 1,59,76,460. CIT in order mentioned that it was observed from the note to the accounts that the assessee had changed its accounting policy, from recognise revenue on projects from milestone billing basis to percentage completion method AS 7' to consequent to which revenue from projects was lower by Rs. 237887 and work in progress is lower by Rs. 4,21,51,530/- and thus loss for the year was higher by Rs. 4,23,89,417/-. 2. In view of the above, the Commissioner mentioned that the order passed by the assessing officer was erroneous and prejudicial to the interest of the revenue and hence issued a show cause notice on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... truction work and installation of complex machinery and equipment that creates a virtual environment of battle field, that may be faced by the aircraft or a battle tank in the battle ground/ space. The contract entered by the assessee with the Ministry of defence was a long-term contract for design, supply and installation of simulator and period of the contract was spread over 2 years, with further warranty of 3 years. As the completion of the construction contract falling in different financial year and it was difficult to assign corresponding revenue for the construction already completed, therefore the AS-7 was applied view a view to give correct state of financials w.e.f. financial year 2007-08 therefore there was a change in accounting policy. This AS-7 was subsequently followed in subsequent years 2008-09 to till date. 8.3 The ld. AR for the assessee relies upon the following decisions on this proposition; * Maruti securities Ltd (53 taxman.com 149) * A2Z Maintenance And Engineering Service Ltd ITA No.2438/Delhi/2012 8.4 On the other hand ,the Id. DR for the revenue had submitted that the Commissioner had examined the order passed by the assessing officer from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seen from the scope of work given in the agreement which clearly shows that an artificial battle scene was created with the help of visuals and computers, so as to train the officials all Main Battle Tank. On the above basis it was submitted that there was no element of construction in the activities of the best assessee of stimulator and therefore the application of accounting standard 7 is not attracted. 8.8 Further it was submitted that the assessing officer had not discharged his duties in accordance with law as he has not examined and computed the book profits of the assessee under section 115 JB of the Act and had accepted the return filed by the assessee without any verification and Inquiry. Thus the action of the assessing officer was prejudicial to the interest of the of the revenue. Hence the action on the part of the Commissioner was in accordance with law. Order was prejudicial to the interest of the revenue 8.9 On this aspect the Ld. AR of the assessee had submitted that the assessee had mentioned the change in accounting policy in the audit report and the details were available with the assessing officer. On the basis of the above, it was submitted that as the deta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of change in accounting policy for competition book profit. In paragraph or it was mentioned as under; - "Furthermore, examination of assessment record and apparent analysis of receipt as shown in TDs certificate and as disclosed in revenue recognised from the project also shows that there are apparent inconsistencies between the 2..........." This clearly shows that there is total application of mind and Inquiry by the CIT therefore the argument of the assessee that there is lack of Inquiry by the CIT was without any basis. 9. We have heard the rival contentions of the parties and perused the material available on record and also gone through the decisions relied upon by Ld.AR for the assessee as well as by the Ld. DR for the revenue. 10. For the purpose of invoking the jurisdiction under section 263 of the Act it is essential to satisfy the twin conditions i.e. (i) the order passed by the assessing officer was erroneous and (ii) prejudicial to the interest of the revenue. The Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. Vs CIT (2000) 243 ITR 83 (supra) has held that both of the above conditions have to be satisfied. It has been held that, "A ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been taken by the Hon'ble Apex Court in the case of CIT Vs Max India Ltd. (2007) 295 ITR 282 (supra), wherein it has been held as under: "The phrase "prejudicial to the interests of the Revenue" in section 263 of the Income-tax Act, 1962, has to be read in conjunction with the expression "erroneous" order passed by the Assessing Officer, Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. For example, when the Assessing Officer adopts one of two courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Assessing Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the Revenue, unless the view taken by the Assessing Officer is unsustainable in law." That the twin tests of the order being erroneous and prejudicial to the interest of revenue are both necessary has been elaborated by the Hon'ble Rajasthan High court in the case of CIT-1 Jaipur vs M/S Green Triveni Developer, ITA No. 114/2015, wherein it was held that, 9.It is no longer res integra that the revi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion but the Assessing Officer had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable. The matter cannot be remitted for a fresh decision to the Assessing Officer to conduct further enquiries without a finding that the order is erroneous. Finding that the order is erroneous is a condition or requirement which must be satisfied for exercise of jurisdiction under Section 263 of the Act. In such matters, to remand the matter/issue to the Assessing Officer would imply and mean the CIT has not examined and decided whether or not the order is erroneous but has directed the Assessing Officer to decide the aspect/question 11. The observation of the Hon'ble Bombay High Court in case of CIT v. Nirav Modi, 390 ITR 292 on this issue is as under : "4 (a) The powers u/s. 263 of the Act can be exercised by the Commissioner on satisfaction of twin conditions viz. the assessment order should be erroneous and prejudicial to the revenue. This power cannot be exercised unless the Commissioner is able to establish that the order of the Assessing Officer is erroneous and prejudicial to the revenue. Thus, where there are two possible views and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endent in terms of their design, technology and function or their ultimate purpose or use. 2.2 A fixed price contract is a construction contract in which the contractor agrees to a fixed contract price, or a fixed rate per unit of output, which in some cases is subject to cost escalation clauses. 2.3 A cost plus contract is a construction contract in which the contractor is reimbursed for allowable or otherwise defined costs, plus percentage of these costs or a fixed fee. 3. A construction contract may be negotiated for the construction of a single asset such as a bridge, building, dam, pipeline, road, ship or tunnel. A construction contract may also deal with the construction of a number of assets which are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use; examples of such contracts include those for the construction of refineries and other complex pieces of plant or equipment." 14. From the conjoint reading of objective and clause 2.1 TO 3 of AS-7 it is abundantly clear that the standard would be applicable in respect of the construction contract where the period of completion of the contract and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the construction contract or not. 17. The tanks simulator made by the assessee comprising of driving stimulator and turret stimulator. Undoubtedly the design, technology and functions of various parts of stimulators were interdependent upon each other which are clear from the reading of the scope of work. As per internal page 5 of the agreement the delivery schedule was mentioned as 22 months from the date of release of the contract. Further the agreement also provides for warranty for a period of 3 years from the date of commissioning of each tank simulator at CVRD E. For the perusal of the scope of work and the specification of the work to be executed by the assessee it is abundantly clear that the work undertaken by the assessee was the convergence of various technological designs and functions for the purposes of main battle tank training. In our view the construction of simulator is high end technical asset for the purposes of training on battle tank and would definitely fall within the definition of construction of an asset and therefore in our view the Accounting Standard 7 would be applicable to such an activity. 18. The intention behind introduction of Accounting Standa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is not restricted to building machinery plant or furniture but is extended to know-how patents Copyright etc. Therefore, whenever there is a construction of an asset and a contract is negotiated for that on standalone basis or for closely interrelated or interdependent in terms of design technology and function than in set scenario the Accounting Standard 7 shall be applicable. In view of the above the change in accounting policy by the assessee from milestone billing to percentage completion method is a plausible view and therefore even if the view has not been examined specifically by the Assessing Officer, we do not find any fault in shifting of the accounting policy by the assessee. In view of the above discussion we are of the opinion that the order passed by the assessing officer is not erroneous. 23. As we had already held that the order passed by the assessing officer was not erroneous, therefore there is no requirement of making any discussion on the aspect of whether the order passed by the assessing officer was prejudicial to the interest of the revenue or not. Undoubtedly both the conditions as mentioned hereinabove are required to be fulfilled by the CIT for the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t years. The order u/s 263 was passed on 15/03/2013 and the assessment order for the assessment year 2009-10 was passed on 31/12/2011. Thus, it is clear that before passing of the order u/s 263, the assessment order for the subsequent year 2009-10 and return of income for all other years were up to 2011-2012 were available with the Principal CIT before passing of order u/s 263. Beside this, the Audit reports for all the subsequent years were available with Principal CIT wherein all the subsequent years at Sl.No.3, the assessee had mentioned in all the Audit reports for 2009-10 to 2011-12 as under: "3. As required by the Companies (Auditor's) Report Order, 2003, as amended by the Companies (Auditor's Report) (Amendment) Order, 2004 (together 'the order') issued by the Central Government of India in terms of sub-section (4A) of section 227 of the Companies Act, 1956; of India (the Act) and on the basis of such checks of the books and records of the company as we considered appropriate and according to the information and explanations given to us, we give in the Annexure a statement on the matters specified in paragraphs 4 and 5 of the said Order." 27. The learned C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . AS-7 in all the subsequent Assessment Years. It was also submitted on behalf of the assessee that as per Assessment orders passed u/s 143(3) of the Act on 29.10.10 for Assessment Year 2008-09 and on 13.5.2011 for 2009-10, the Assessing Officer has accepted the returned income of the assessee wherein the Revenue has been booked in accordance with the changed method of accounting i.e. AS-7. In view of these submissions, the Id. DR could not show us that the assessee did not follow AS-7 in the subsequent Assessment Years and in view of the documents submitted by the assessee pertaining to subsequent Assessment Years i.e. annual accounts and assessment orders for Assessment Year 2008- 09, 2009-10, it is amply clear that the assessee consistently followed AS-7 for recognition of revenue which was changed w.e.f. 1.4.2006. 16. It is relevant to mention that the assessment proceedings were completed under Section 143(3) of the Act on 15.12.2009 and the CIT issued impugned order u/s 263 of the of the Act on 12.3.12 and impugned order was passed on 27.3.12 and entire proceedings of issuance of notice and passing order were completed within 15 days time. We further observe that in respons ..... X X X X Extracts X X X X X X X X Extracts X X X X
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