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TMI Blog2022 (12) TMI 584X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - I.T.A. No. 45/GAU/2019 And I.T.A. No. 418/GAU/2019 - - - Dated:- 12-12-2022 - Shri Rajpal Yadav, Vice-President (KZ) And Dr. Manish Borad, Accountant Member For the Assessee : Shri Ved Jain, A.R. For the Revenue : Shri N.T. Sherpa, JCIT ORDER PER DR. MANISH BORAD, ACCOUNTANT MEMBER:- The captioned appeals filed by the assessee are against the order under section 263 of the Income Tax Act of Ld. Principal Commissioner of Income Tax, Shillong dated 12.12.2018 and against order of Ld. CIT(Appeals) dated 26.07.2019. 2. In ITA No. 45/GAU/2019 , the assessee has raised the following grounds:- (1)On the facts and circumstances of the case, the order passed by the learned Pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that the assessee has consistently followed the same accounting treatment in subsequent years. (10) On the facts and circumstances of the case, the learned PCIT has erred both on facts and in law, in ignoring the fact that there is no differential tax if the amounts involved are brought to tax in the impugned assessment year as directed by the PCIT or taxed on a later date on cash basis as offered by the assessee, since the assessee is a company. (11) That the appellant craves leave to add, amend or alter any of the grounds of appeal. 3. In ITA No. 418/GAU/2019 , the assessee has raised the following grounds:- (1) On the facts and circumstances of the case, the order passed by the Learned Commissioner of Income Tax (Appeals) [CIT( A)] is bad both in the eyes of law and on facts. (2) On the facts and circumstances of the case, the Ld. CIT(A) has erred both on facts and in law in confirming the action of AO giving effect to the order of Principal Commissioner of Income Tax passed under section 263 of the Income Tax Act. (3) On the facts and circumstances of the case the Ld CIT(A) has erred both on facts and in law in confirming the action of AO despite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he real income theory whereby income assessed is to be the real income and not hypothetical. (10) That the appellant craves leave to add, amend or alter any of the grounds of appeal. 4. We will first take up ITA No. 45/GAU/2019 for assessment year 2014-15 through which assessee has challenged the revisionary proceedings carried out u/s 263 of the Income Tax Act. 5. Brief facts of the case are that Assessee Company is a public sector enterprise formed in 1976 under the Ministry of power to plan, investigate, design, construct, generate, operate and maintain power stations in the North Eastern Region of the country. The Company has an installed power generation capacity of 1457 Megawatt which is 60% of total installed capacity of North Eastern Region of India. The assessee operates the largest hydro power plant in North Eastern Region. That, the books of accounts of the assessee are regularly audited by statutory auditors appointed under the Companies Act, the Comptroller and Auditor General of India (in short CAG ) as well as Tax auditors. 6. The assessee filed its return of income for AY 2014-15 on 28.11.2014 deciaring total income of Rs. 2,80,44,67,810/- under no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 143(3) of the Act. The issue raised in the SCN is as under: In the assessment order passed u/s 143(3) of Income tax Act for the Assessment Year 2014-15 in your case, vide order dated 24.11.2016 the ACIT, Circle, Shillong determined a total income of Rs. 280,44,67,810/-. On going through the assessment records it is observed that, In the Notes on Accounts and Accounting Policies it is mentioned that interest on debt on account of sale of power (post securitization) is accounted for on case sales . However, on reference to the Balance Sheet, it is seen that the Trade Receivables are shown at Rs. 791.90 crores. Hence, it appears that the sum of Rs. 18.86 crore declared to income only accounts for 2.3% of actual trade receivables of Rs. 791.90 crore. This low percentage of interest booked to income appears to be due to non- accounting of the noncash portion, as required under the mercantile accounting system followed by your company. In view of the above facts, I propose to hold the assessment order passed u/s 143(3) of the I. T. Act to be erroneous in as much as being prejudicial to the interest of the revenue. The order is therefore proposed to be revised in ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losed at PB Pg. 129). (g) The above accounting treatment is consistently followed by NEEPCO thereafter. There has been more cases of write off of LPS in the following years also. However, without appreciating the above detailed submissions, explanations along with the evidences brought on record by the assessee, Id. Pr. CIT held that the asssessment order is erroneous and prejudicial to the interest of the revenue and directed the AO to re-compute the income of the assessee after taking into account the late payment surcharge on accrual basis. 10. Aggrieved by the order of the Pr. CIT, assessee filed an appeal before this Hon ble Tribunal. 11. Before us, ld. Counsel for the assessee firstly took us through the following submission made before the ld. CIT(Appeals), which are incorporated at page 2 of the impugned order:- Prior to the financial Year 2002-03 interest on outstanding (surcharge) on account of sale of power was accounted for on accrual basis and applicable income tax was duly paid thereon. However, the outstanding Trade Receivable from the state beneficiaries were not regular and huge amount trade receivable become due from the beneficiary States. Due to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld. Assessing Officer, the assessee filed complete details of other income on 27.10.2016. Since the issues have already been examined by the ld. Assessing Officer and has taken one out of the two possible views to which the ld. PCIT does not agree, the assessment order cannot be treated as erroneous so far as prejudicial to the interest of the revenue unless the view taken by the ld. Assessing Officer is unsustainable in the eyes of law. Reliance placed on the judgment of Hon ble Punjab Haryana High Court in the case of CIT vs.-Max India (2004) 268 ITR 128 . Further, it was submitted that the issue is revenue neutral since the LPS, which are offered to tax on cash basis and not on accrual basis, then the dispute at best is with regard to the year of taxability and, therefore, there is no loss to the revenue and thus the assessment order dated 24.11.2016 cannot be said to be prejudicial to the interest of revenue. Reliance placed on the judgment of the Hon ble Delhi High Court in the case of CIT vs.- Dinesh Kumar Goel (2011)331 ITR 10 . Ld. Counsel for the assessee further submitted that the delayed payment surcharge is to be recognized on cash basis due to uncetainity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a special situation/one time situation and there has been no waiver again since FY 2002-03. (E) That, the letter of Deputy Secretary (Finance) requiring the assessee and other CPSUs to recognize delayed payment surcharge on cash basis cannot override provision of Income Tax Act. (F) That, reliance was placed by AO on the judgment of Tuticorin Alkali Chemicals and Fertilizers Limited vs CIT (1997)227ITR 172(SC) to conclude that provisions of law gain precedence over the AS-9. (G) That, the principle of res-judcata is not applicable to income tax proceedings. (H) That the judgments relied upon by the assessee pertain to period prior to amendment made in section 145 of the Act. 14. We have heard the rival contentions and perused the relevant material placed before us as well as the decisions referred by the ld. Counsel for the assessee. Though the assessee has raised six grounds of appeal, but the main grievance of the assessee is that the order under section 263 of the Act passed by the ld. PCIT is bad both in the eyes of law and on the facts and also the ld. CIT(Appeals) erred in cancelling the assessment order passed by the ld. Assessing Officer treating i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A; (ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorized by the Board in this behalf under section 120; (b) record shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner; (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal. (2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertinent to take note of the fundamental tests propounded in various judgments relevant for judging the action of the CIT taken u/s 263. 17. Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 243 ITR 83 (SC) has laid down following ratio with regard to provisions of section 263 of the Act: There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interests of the revenue has to be read in conjunction with an 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 an ITO adopted one of the courses permissible in law and it has resulted in loss of reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interests of the Revenue has to be correctly and soundly understood. It precisely means an order which has not been passed in consonance with the principles of law which has in ultimate eventuate affected realization of lawful revenue either by the State has not been realized or it has gone beyond realization. These two basic ingredients have to be satisfied as sine qua non for exercise of such power. On a perusal of the material brought on record and the order passed by the CIT it is perceptible that the said authority has not kept in view the requirement of s. 263 of the Act inasmuch as the order does not reflect any kind of satisfaction. As is manifest the said authority has been governed by a singular factor that the order of the AO is wrong. That may be so but that is not enough. What was the sequitur or consequence of such order qua prejudicial to the interest of the Revenue should have been focused upon. That having not been done, in our considered opinion, exercise of jurisdiction under s. 263 of the Act is totally erroneous and cannot withstand scrutiny. Hence, the Tribunal has correctly unsettled and dislodged the order of the CIT. [Emphasis supplied] 20. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ole make it incumbent upon the CIT before exercising revisional powers to: (i) call for and examine the record, and (ii) give the assessee an opportunity of being heard and thereafter to make or cause to be made such enquiry as he deems necessary. It is only on fulfillment of these twin conditions that the CIT may pass an order exercising his power of revision. Minutely examined, the provisions of the section envisage that the CIT may call for the records and if he prima facie considers that any order passed therein by the AO is erroneous insofar as it is prejudicial to the interest of the Revenue, he may after giving the assessee an opportunity of being heard and after making or causing to be made such enquiry as he deems necessary, pass such order thereon as the circumstances of the case justify. The twin requirements of the section are manifestly for a purpose. Merely because the CIT considers on examination of the record that the order has been erroneously passed so as to prejudice the interest of the Revenue will not suffice. The assessee must be called, his explanation sought for and examined by the CIT and thereafter if the CIT still feels that the order is erroneous and pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Malabar Industries 243 ITR 83 and has propounded the following broader principle to judge the action of CIT taken under section 263: (i) The CIT must record satisfaction that the order of the AO is erroneous and prejudicial to the interest of the Revenue. Both the conditions must be fulfilled. (ii) Sec. 263 cannot be invoked to correct each and every type of mistake or error committed by the AO and it was only when an order is erroneous that the section will be attracted. (iii) An incorrect assumption of facts or an incorrect application of law will suffice the requirement of order being erroneous. (iv) If the order is passed without application of mind, such order will fall under the category of erroneous order. (v) Every loss of revenue cannot be treated as prejudicial to the interests of the Revenue and if the AO has adopted one of the courses permissible under law or where two views are possible and the AO has taken one view with which the CIT does not agree. If cannot be treated as an erroneous order, unless the view taken by the AO is unsustainable under law (vi) If while making the assessment, the AO examines the accounts, makes enquiries, ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if the CIT had examined and verified the said transaction himself and given a finding on merits. As held above, a distinction must be drawn in the cases where the Assessing Officer does not conduct an enquiry; as lack of enquiry by itself renders the order being erroneous and prejudicial to the interest of the Revenue and cases where the Assessing Officer conducts enquiry but finding recorded is erroneous and which is also prejudicial to the interest of the Revenue. In latter cases, the CIT has to examine the order of the Assessing Officer on merits or the decision taken by the Assessing Officer on merits and then hold and form an opinion on merits that the order passed by the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. In the second set of cases, CIT cannot direct the Assessing Officer to conduct further enquiry to verify and find out whether the order passed is erroneous or not. 25. Now examining the facts of the insant case in the light of the judicial precedence as referred above, we observe that three issues need to be adjudicated, firstly whether the ld. Assessing Officer has made enquiry on the issue raised in the impugned show-cause n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overnmen recommended that 60% of the outstanding dues on account of late payment charges be waived. This created typical situation because the assessee was accounting the LPS on accrual basis and offering it to tax and all of a sudden, 60% of the outstanding of LPS charges were waived and since the assessee as well as most of its debtors are Government companies, such directions have to be followed on outstanding dues. Thereafter Deputy Secretary (Finance), Ministry of Power dated 19.08.2003 gave direction for changing the method of accounting in respect of the items of accrued interest, i.e. LPS on unrealised sales amount to be accounted for only on cash basis. Subsequently on the basis of this direction as well as taking support from the Accounting Standard, the assessee stopped to book income of LPS on accrual basis and offered it to tax when actually received by it, i.e. on cash basis. 28. We further notice that this change of system of accounting, the LPS on cash basis from the earlier system of accrual basis is revenue neutral because the quantum of late payment charges is not in dispute and only year of taxability is on dispute. Since the assessee offers the income of LPS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which may be provided by the instructions of the dedared policy of the government. 5.3. In view of these tacts, coupled with the fact that assessee changed its method of accounting after seeking necessary approval of CAG, shows that as far as the assessee is concerned, the colection of surcharge was contingent and did not accrue due to assessee. The feabfity will accrue on the basis of crystallization i.e. the payment of the surcharge or passing of a suitable order by the appropriate authority on the dispute raised by the customer. 5.4. Coming to the case laws, Hon ble Supreme Court in the case of Shoorji Vallabh Das Co. had to deal with an issue of managing agency commission transferred by the assessee to two other companies. Subsequent agreement after the end of accounting year resulted in assessee s receiving lesser commission, though book entries of higher amount were made. Revenue sought to tax the higher income, Hon ble Court held that assessee cannot be taxed on the basis of hypothetical income. In our view this judgment is applicable to the facts of assessee s case, keeping in mind following prepositions: (i) Assessee s method of accounting has been accepte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thkeyan (supra) also w#l not benefft the revenue as it did not decide any controversy of accrual or mercanfie system of accounting. The judgment deals with winning from gambling and batting income, there is no issue about accounts or accrual in this case. 5.11. Coming to learned DR reliance on the case of Tuticorin Alkali Chemicals (supra the same deals with the receipts being in the nature of capital or revenue. The factum of receipt was not disputed and whether the receipt was capital or revenue Hon ble Supreme Court held that while deciding the question, the same has to be on the basis of principle of law and not in accordance with the accountancy practice. In our view the case before us pauses a picture on different facts wt- ch have been mentioned in detail above. 5.12. In our considered opinion, all the above judgments clearly favour the stand taken by the assessee may hasten to mention that looking at the intricacies the facts may vary, therefore case pnciples of accrual or mercantile system as laid down by various authorities are to be applied in a careful manner. The assessee being a state PSU; the surcharge on delayed payment being disputable item; was not manda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue to take one view in certain years and another view in another years. Thus once an issue has been examined, treatment remains the same over the years and the fundamental facts remain the same, the Depatment should not be entitled to take a different stand in view of the principle of consistency. We find support on this principle of consisency by the following decisions:- (1) CIT v. Rajasthan Breweries: SLP (C) 1379/2014 (SC) (2) CIT v. Reaiest Builders and Services: 307 ITR 202 (SC) (3) Radhasoami Satsang v. CIT 193 ITR 321 (SC) (4) CIT v. Excel Industries: 358 ITR 295 (SC) (5) CIT V. Daimia Promoters Developers (P) Ltd: 281 ITR 346 (Del.) (6) DIT v. Escorts Cardiac Diseases Hospital: 300 ITR 75 (Del.) (7) CIT V. A.K.J. Security Printers: 264 ITR 276 (Del) (8) DIT v. Apparel Export Promotion Council 244 ITR 734 (Del) (9) CIT v. Neo Poly Pack (P) Ltd. 245 ITR 492 (Del) (10) CIT v. Gilds'- Mohan Ganeriwala: 260 ITR 417 (P H) (11) Thirani Chemicals Ltd. v. DCIT 153 Taxman 45 (Del) 12. Vesta Investmemnt and Trading Co. (P) Limited vs.- CIT: 70 ITD 200(Chd. ) 31. Further we observe that the assessee is maintaining mercantile system of accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of ITAT, Chennai Bench in the case of M/s. NLC India Limited vs.-DCIT in ITA Nos. 868 869/CHNY/2018 relied by the ld. D.R. is not applicable in the present case on account of the following reasonings:- (i) in the said case, in para 5.3, it has been stated that there is a Tri-party Agreement between Government of India, RBI and the assessee. However, this is factually incorrect. The assessee is not a party to the Tri-party agreement. The agreement is between Government of India, RBI and the State Government. Thus, the assessee has no legal right to enforce the said agreement. Consequently, the analysis made by the Hon ble ITAT is based on incorrect facts. (ii)In the said case, in para 5.3, it has been stated that The assessee has accounted surcharge receivable from Electricity Boards on accrual basis in the books of accounts, but for the purpose of taxation, the same has been offered to tax as and when the amount is received from Electricity Boards. Accordingly, in the said case, the assessee admitted that accrual took place for AS-9 and that there was reasonable certainty, however, denied the same for the purpose of Income Tax Act. However, in the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferent as guarantee is not sacrosanct and recovery remains doubtful. (vi) Moreover, the said judgment has been rendered without taking note of the earlier judgment of ITAT Delhi in the case of Dakshin Haryana as well as the judgment of Punjab and Haryana High Court which has affirmed it and against which SLP has also been dismissed despite the fact that these judgments were rendered prior in time and are directly on the same issue. ITAT Chennai was bound to follow the earlier judgments and the judgment of a higher forum as it was binding on it. 33. We, therefore, in view of the above discussion and respectfully following the ratio laid down by the Hon ble Courts, are of the view that since the ld. Assessing Officer has conducted the necessary enquiry on the said issue referred in the show-cause notice under section 263 of the Act, 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 M ..... X X X X Extracts X X X X X X X X Extracts X X X X
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