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TMI Blog2023 (10) TMI 1265X X X X Extracts X X X X X X X X Extracts X X X X ..... ter of limited scrutiny while passing the assessment order. The answer to this question is certainly not without converting the limited scrutiny into complete scrutiny. Therefore, in case the AO proceeded within the scope of limited scrutiny and not taken up any issue beyond the scope of limited scrutiny the same can be held to be erroneous for lack of inquiry. It is not open to the AO take up any issue which is not subject matter of the limited scrutiny until and unless the limited scrutiny is controverted into complete scrutiny. Hence not conducting an inquiry on the issue beyond subject matter of limited scrutiny would not be considered as lack of inquiry on the part of the AO so as to render the order of the AO erroneous so far as prejudicial to the interest of revenue. When the assessee is consistently following the Project Completion Method which is not prohibited by law the acceptance of the same by the AO cannot be held as erroneous decision on the part of the AO and consequently the Pr. CIT cannot invoke the provisions of section 263 of the Act on a claim which is bona fide and a possible view not prohibited by law. Accordingly, in the facts and circumstances of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red examination/investigation which has resulted assessment order being erroneous so far as prejudicial to the interest of the revenue. He has accordingly issued show cause notice u/s 263 on 02.03.2020. In the show cause notice the Pr. CIT has raised the issue of applicability of Percentage Completion Method as against the Project Completion Method adopted by the assessee. There was no response on behalf of the assessee to the notice issued by the Pr. CIT consequently the impugned order was passed by the Pr. CIT whereby the assessment order was set aside and mater was remanded to the record of the Assessing officer with direction to pass fresh assessment order on the line of the observation of the Pr. CIT. Aggrieved by the impugned order the assessee has filed present appeal. 5. The Ld. AR of the assessee has submitted that the assessee followed mercantile system of accounting and consistently following the Project Completion Method of accounting from year after year. The assessee offered the revenue for taxation in the year when the sales were made and sale deed were registered. This method of accounting has been accepted by the revenue in the preceding years of assessment. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme court in case of CIT vs. Aditya Builders 378 ITR 75 (Bom) and in case of Excel Industreis Ltd. 358 ITR 295(SC) . Even otherwise the appropriate accounting method is a matter method of opinion and debate not amenable to revisional jurisdictional u/s 263 as held by the Hon ble Bombay High Court in case of CIT vs. Aditya Builders (supra). 6. The Ld. AR has vehemently contended that when the issue of applicability of the Percentage Completion Method was not subject matter of limited scrutiny then the order of the AO cannot be held as erroneous for want of conducting an inquiry on this issue. He has referred the CBDT Instruction No. 7/2014 and submitted that the CBDT issued guidelines to the assessing officers not to exceed the jurisdiction under limited scrutiny. The CBDT again issued guidelines vide instruction dated 30.11.2017 to remind the assessing officers regarding the instruction for limited scrutiny and also expressed its concern about the exceeding of the jurisdiction by the AO in the limited scrutiny assessment. 7. Thus, the Ld. AR has submitted that the case of the assessee was subjected to limited scrutiny to examine the specific issues which were exa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n (project wise). The details of sundry creditor and advance against booking of the plot are also part of the balance sheet as given in the schedule being farming part of the balance sheet. All the relevant records were available before the AO while conducting scrutiny assessment. The Pr. CIT in the show cause notice issued u/s 263 as taken up the issues as under: 2. In this regard, it is stated that an assessment order u/s 143(3) for A.Y. 2015-16 was passed on 27/12/2017 determining total income at Rs. 39,85,295/- by the Assessing Officer [Income Tax Officer, Dhar] in your case. 3. On perusal and examination of assessment records, it is found that aforesaid order appears to be erroneous as well as prejudicial to the interest of revenue on account of passing the order without making proper enquiry/investigation by the Assessing Officer in levying the correct tax for following reasons- It is observed that your firm is engaged in business of real estate. Having gone through the records, AS-7 deals accounting of construction contracts, whereas AS-9 deals with revenue notes on accounting of real estate transaction in year 2012. This guidance note is based on the principl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te transaction in year 2012. This guidance note is based on the principles laid down in AS-7 and that of revenue recognition in AS-9. This guidance note lays down the guidelines on the applicability and method to invoke percentage of completion method. The assessee firm is clearly in the nature of that of a real estate developer and hence the case should have been examined from the angle of applicability of POCM in general and in particular guidance note issued by ICAI. The assessee firm ought to have returned the real income based on the principle revenue recognition to avoid deferment of taxes. The AO should have examined the provisions of section 145(3) and inter alia with the correctness and completeness of accounts as working of the closing stock was not found placed on record so as to ascertain the basis of the same. The failure of the AO to make necessary inquiry and investigation resulted in assessing the income at lesser value. Therefore, the assessment order passed by the AO for the A.Y. 201516 on 27.12.2017 is not only erroneous but also prejudicial to the interests of the Revenue. 13. Thus, the order of the AO was held as erroneous so far as prejudicial to the inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of the assessee to follow percentage completion method only. Before insertion of this section person engaged in construction and service contracts were free to follow either the project completion/Completed project method or percentage completion method in accordance with the provisions of Section 145 of the Act. In the instant appeal assessee even though not directly involved in the construction activity and it is merely gave its land for development and it was agreed between the assessee-company and the developer that 32% of the saleable area shall be given to the assessee. The assessee is constituently followed completed project contract/percentage completion method as recognized its revenue at the time of execution of getting the sale deed registered and before that it has to be consistently showing the advance from sale of flats as the liability in the balance sheet. 14. Even otherwise when the legislature has specifically stated that this amendment is applicable w.e.f. 01.04.2017 then the same cannot be applied for A.Y. 2015-16. Therefore, we concur with the view of the Coordinate Bench of this Tribunal on this point. 15. Having held that the provision of sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was maintained very perfunctorily. This gave rise to a very strong suspicion of mala fide intentions. The Officer concerned has been placed under suspension. 4. In view of discussion in the preceding paragraphs it is once again reiterated that the Assessing Officers should abide by the instructions of CBDT white completing limited scrutiny assessments and should be scrupulous about maintenance of note sheets in assessment folders. 17. Thus, it is not open to the AO take up any issue which is not subject matter of the limited scrutiny until and unless the limited scrutiny is controverted into complete scrutiny. Hence not conducting an inquiry on the issue beyond subject matter of limited scrutiny would not be considered as lack of inquiry on the part of the AO so as to render the order of the AO erroneous so far as prejudicial to the interest of revenue. Even otherwise the Project Completion Method of accounting is well recognized and accepted method and if the assessee is following this method regularly and consistently then the revenue cannot force the assessee to adopt different method not mandated by statute. The coordinate bench of this tribunal in case of Ashoka Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trade cannot be property deduced there from (as per provisions of 1922 Act in force at that time, presently only if case falls in sub section (3) of section 145). 30. Further in another judgment of Hon'ble Supreme Court in the case of Krishnaswami Mudaliar (supra), their Lordship's of Apex court while dealing provisions of section 13 of 1922 Act (the provisions of which are in pari materia of section 145 of 1961 Act) have held as under Section 13 of 1922 Act merely prescribes that the computation of taxable profits shall be made according to the method of accounting regularly employed. Where in the opinion of the ITO the income, profits and gains cannot be properly deduced from the method of accounting, it is open to ITO to compute the income upon such basis and in such manner as he may determine . Comparing the provisions with the English provisions, it is held: the only departure made by section 13 of 1922 Act from tax legislation in England is that whereas under English legislation the commissioner is not obliged to determine profits of a business venture according to method of accounting adopted by the assessee, under the Indian Income Tax Act, prima f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y followed this method and appellant's assessment has been completed by the Ld AO for first two years Viz, AYS, 2010-11 2011-12, In both these years also the appellant has credited the advance received against proposed sales of flats to a separate account and shown as a liability in balance sheet At this stage it may be relevant to mention that in those years also the appellant has credited the advance Received against proposed sale of flats to the Advance against sale of Flat Aler and not treated the same a income for said years on the basis that revenue in respect of sale of said flats would be recognized only execution and registration of sale deeds of flats. The assessment of the said years have been completed by AD by the same common order, accepting the method of accounting and method of recognition of revenue. Thus the method followed by appellant is a consistent method which has been accepted by AO for two years i.e. AY. 2010-11 2011-12 Since the said method has been consistently followed by appellant and even accepted by department, the same cannot be deviated in the present two years without there being any finding as contemplated u/s 145(3) on the basis of satisf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer's decision to reject the book results during the year under consideration was not justified. We are of the opinion that the Tribunal committed no error. If as per the accounting standard available, the assessee was entitled to claim the entire income on completion of the project and if such accounting standard was accepted by the Revenue in the earlier years, in the present year, the Assessing Officer could not have taken a different sand and that too, without hearing the assessee . 35. Further in another judgment by CIT Vs. Umang Hiralal Thakur (2014) 42 taxmann.com 194 (Guj) is placed on the following paragraphs of its judgment. In the present case, it is not the Assessing Officer's case that the appellant is not reporting or under reporting its income. In fact, I find in the subsequent assessment year, i.e. the assessment year 2007-08, the appellant has disclosed substantial income from the projects undertaken in the business proprietary concerns, viz, M/s. Neelkanth Enterprises, M/s. Ghanshyam Enterprises and M/s. Swaminarayan Enterprises. In the subsequent year, i.e. the assessment year 200708 the profit declared from the project ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 19 to 21 of 1993 . This, it is observed that the issue which requires our adjudication is that the income in the instant case is to be computed as per system of accounting followed by the assessee or as per accounting followed by the assessee or as per accounting standard AS7 for the purpose of charging of income tax. We find that the issue is to be decided in accordance with the provisions of section 145 of the Act shows that the business income which is assessable under the Income tax Act is to be computed in accordance with the consistent system of accounting followed by the assessee unless such system, of accounting is defective and/or from such system of accounting, profit cannot be deduced. Thus, in our considered opinion, the option for choosing the system of account is with the assessee and not with the learned Assessing Officer provided the system chosen by the assessee is consistently followed by him and such system is not a defective system. In our considered view, provisions of AS7 cannot override the provisions of section 145 in so far as the computation of business income under the Income Tax Act for the purpose of determining income is concerned. In the instant ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 taxmann.com 179 (Mum.) deal with the similar issue wherein the assessee was constructing a project and was consistently following project completion method and the assessing officer rejected the method of project completion adopted by the assessee on observing that 8% of the total project has been incurred up to the relevant assessment year the income should have declared on the percentage completion method. The Co-ordinate Bench decided in favour of the assessee holding that the results declared by the assessee on the basis of method of accounting consistently followed and the entire profit of the project has been offered in subsequent assessment year therefore there is no justification in rejecting the method of accounting followed by the assessee and substituting the same by adopting accounting AS-7 issued by ICAI and followed it for accounting. 38. Similarly Hon'ble High Court of Punjab Haryana in the case of Commissioner of Income Tax (Central), Gurgaon V. Principal Officer, Hill View Infrastructure (P) Ltd (2017) 81 taxmann.com 58 (Punjab Haryana) order dated 13.8.2015 confirmed the view taken by the Tribunal deciding in favour of the assessee relating to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Tribunal read thus:- We have heard the rival contentions and perused the record. The issue arising in the present appeal before us is in relation to the method to be applied for recognizing the revenue generated by the assessee in the course of carrying on the business of real estate developers. The case of the assessee is that it is following one of the accepted accounting standards approved by ICAI for recognizing the revenue generated by it. The assessee had followed project completion method which had been consistently followed by the assessee for the preceding years also. The Assessing Officer on the other hand, had applied percentage completion method to compute the income in the hands of the assessee. The Commissioner of Income Tax (Appeals) had allowed the claim of the assessee. Both the methods of accounting are i.e. project completion method and percentage completion method is accepted standards of accounting and either of the methods can be applied by the assessee. In the facts of the present case before us, the assessee had chosen to compute its income on the basis of project completion method i.e. recognizing the income on the completion of the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erogative of the assessee to arrange its affairs in such a manner and follow any recognized method of accounting to compute its profits. In view thereof, we find no merit in the order of the Assessing Officer in recomputing the income in the hands of the assessee. Upholding the order of Commissioner of Income Tax (Appeals), we dismiss ground of appeal raised by the revenue . The Delhi High Court in CIT v Manish Build Well (P) Ltd (2011) 16 taxmann.com 27(2002) 204 Taxman 106 noted that project completion method is one of the recognized methods of accounting. It was held as under:- It is well settled that the project completion method is one of the recognized methods of accounting. It cannot be said that the project completion method followed by the assessee would result in deferment of the payment of the taxes which are to be assessed annually under the IT Act The assessee respondent had been consistently following one of the recognized methods of accountancy, i.e project completion method, for computation of its income. In the absence of any prohibition or restriction under the Act for doing so, it cannot be held that the approach of the CIT(A) and the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proportion that costs incurred to date bears to the estimated total costs of contract. The above indicates the difference between the completed contract method and the percentage of completion method. (underlining ours) 40. After the above judgments of the Supreme Court it cannot be said that the project completion method followed by the assessee would result in deferment of the payment of the taxes which are to be assessed annually under the Income Tax Act. Accounting Standards 7 (AS7) issued by the Institute of Chartered Accountants of India also recognize the position that in the case of construction contracts, the assessee can follow either the project completion method or the percentage completion method. In view of the judgments of the Supreme Court (Supra), the finding of the CIT(A), upheld by the Tribunal, does not give rise to any substantial question of law. Further, the Tribunal has also found that there was no justification on the part of the assessing officer to adopt the percentage completion method for one year(the year under appeal) on selective basis. This will distort the computation of the true profits and gains of the business. For these reasons, we a ..... 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