2025 (5) TMI 1714 - AT - Income Tax

Revision u/s 263 - AO is directed to compute the Income from the area Sold but the Possession Letter (PL) not issued and Not Sold for all the 11 projects - AO is also directed to obtain all necessary documents from assessee and also verify the books of accounts in order to obtain such information and details about receipts Direction of PCIT for re-computation of income of assessee following Percentage of Completion Method ( POCM ) - HELD THAT - From the directions given by the PCIT with respect to the Revenue recognition by following POCM as against CCM we find that the AO himself has rejected the Revenue recognition by the assessee following CCM. It is further seen that Ld. PCIT while giving directions to the AO directed the AO to compute the income of the leftover part of all the 11 completed projects by ignoring the facts that all the details asked by the AO during the course of assessment proceedings were filed by the assessee. In the instant case the issue of Revenue recognition by following POCM as against CCM adopted has already been challenged before the Ld. CIT(A) and therefore it cannot be said that this issue has not been considered/examined. On the other hand the AO has applied his mind and reaches to the conclusion therefore the scope of Ld. PCIT u/s 263 for making further enquiries is nothing but change of opinion which is not permissible u/s 263. Hon ble Supreme Court in the case of Sriji Prints (2021) 2021 (9) TMI 108 - SUPREME COURT has held that once the AO has taken a plausible view the same cannot be considered as erroneous and pre-judicial to the interest of the Revenue Thus we find no error in the order of the AO and none of the condition of Explanation-2 is violated. Accordingly the jurisdiction invoked by Ld. PCIT u/s 263 is hereby held as bad in law and the order passed u/s 263 on this issue is hereby quashed. As a result Ground of the assessee is allowed. Direction of PCIT to examine and verify the financial expenses allowed by the AO which are not in accordance with commercial expediency - From the perusal of this query which was duly replied by assessee with every possible supporting evidence thus it is clear that the AO has made very specific query and after considering the past history wherein the similar claim was allowed by the AO and no disallowance u/s 36(1)(iii) was made towards the financial expenses claimed vis- -vis interest free advances given to group companies. It is further seen that identical issue was come up in case of group company of DLF Assets wherein as held that there is no error in the order of the AO and quash the revisionary jurisdiction assumed by Ld. PCIT on this issue. Ground of the assessee is allowed. Directions of PCIT to examine and analyze the issue related to income from house property and notional rental income on unsold stock - The assessee is engaged in the business of real estate where primary motive of assessee of selling the real estate however the unsold stock was let out for hire and income was shown as income from house property . AO found no error in the details so filed nor Ld. PCIT has pointed out any error or any occasion where the tax could not be less charged therefore it cannot be held that the order is pre-judicial to the interest of Revenue or erroneous and accordingly the direction of Ld.PCIT to make verifications of the standard deduction claimed and notional rental income declared and depreciation is beyond the jurisdiction u/s 263 of the Act more particularly when all the details were filed by the assessee before the AO as well as before Ld. PCIT which were not found to be incorrect. The order of Ld. PCIT on this issue of invoking the jurisdiction u/s 263 of the Act is bad in law. Direction of Ld. PCIT for making verification of claim of writing off towards Madras Race Club property - Assessee in reply to observations No.4 of Ld. PCIT during the course of revisional proceedings has brought these facts to the notice of Ld. PCIT however Ld. PCIT merely for the verification of these facts has hold the order as erroneous and pre-judicial to the interest of the Revenue. It is settled law that merely for verification purposes the order cannot be held as erroneous and pre-judicial to the interest of the Revenue. Ld.PCIT has failed to point out which condition of Explanation 2 of section 263 is applicable on this issue. The order of Ld. PCIT u/s 263 of the Act on this score holds no water and thus is quashed. Ground No.6 raised by the assessee is accordingly allowed. Taxability of transferring of rights in the land at Ranga Reddy District Telangana - It is clear that the assessee has duly offered the income against such cost incurred on the project at Ranga District Telangana in the year when the income was accrued and therefore the assessment order was neither erroneous nor pre-judicial to the interest of the Revenue and accordingly we quash the order of Ld. PCIT passed u/s 263 of the Act on this issue wherein Ld. PCIT has merely direct the AO for making verification of the income offered without in any manner pointing out any error or loss of Revenue. Ground No.7 raised by the assessee is accordingly allowed. Verification of correctness of exceptional gain and exceptional loss - AO has made specific query in this regard and after considering the submissions made by the assessee on this issue has accepted the claim of the assessee. The Ld. PCIT has not found any error either in the submissions made by the assessee before the AO or before Ld. PCIT himself nor brought any instance of incorrect claim which leads the assessment order as pre-judicial to the interest of the Revenue. From the perusal of order of Ld. PCIT we find nowhere Ld. PCIT has been able to make out a case that assessee has violated any of the condition as provided in Explanation 2 of section 263 of the Act. Direction given by PCIT for making examination of the correctness of the current liability shown in the balance sheet - We find that this issue has already been examined by the AO where he has asked the assessee to file necessary details of creditors and liabilities and after considering the same has reached to the conclusion that these are normal business creditors and no adverse inference was recorded. In revisional proceedings the assessee has demonstrated that all the creditors were genuine creditors and no error was found by Ld. PCIT in the same who simply direct the AO for making further verification which is beyond the scope of section 263 of the Act. Order of Ld. PCIT passed u/s 263 on this issue is hereby quashed. Direction of Ld. PCIT for making verification of tax implication on the land parcel at Shivaji Marg to SPV for INR 3700 crores - We find that the assessee in vary specific terms while making reply to the AO as well as before the Ld. PCIT has stated that the relevant consideration of INR 3, 700 crore was offered for tax in AY 2016-17 and necessary details were also filed before Ld. PCIT stating that the transaction was not pertaining to the year under appeal. There is no error in the assessment order in respect of the turnover of INR 3, 700 crores. Therefore mere directions for examination of the taxability and with these directions holding the assessment order as erroneous and pre-judicial to the interest of the Revenue is contrary to the provisions of law as has been held in the case of PCIT vs Shreeji Paints P.Ltd. 2021 (9) TMI 108 - SUPREME COURT Assessee appeal allowed.

Summary

Issues Presented and Considered

The core legal questions addressed by the Tribunal in this appeal under section 263 of the Income Tax Act, 1961 ("the Act") are:

• Whether the order passed by the Assessing Officer (AO) under section 143(3) for assessment year 2019-20 was erroneous and prejudicial to the interest of revenue so as to justify revision under section 263.
• Whether the Principal Commissioner of Income Tax (PCIT) was justified in assuming jurisdiction under section 263 to revise the assessment order without recording specific findings of error or prejudice to revenue.
• Whether the directions issued by the PCIT for re-examination and verification on various issues such as revenue recognition method (Completed Contract Method (CCM) vs Percentage of Completion Method (POCM)), financial expenses, income from house property, exceptional gains and losses, taxability of land transactions, and current liabilities were legally sustainable.
• Whether the PCIT's directions amounted to impermissible change of opinion or were based on lack of enquiry or verification by the AO as contemplated under Explanation 2 to section 263.
• Whether the factual and accounting treatments adopted by the assessee, including compliance with Ind AS 115, were duly considered and accepted by the AO, and whether the PCIT's revision order ignored such considerations.
• Whether the revision order by PCIT was arbitrary, without application of mind, or contrary to binding judicial precedents.

Issue-wise Detailed Analysis

1. Legality of Assumption of Jurisdiction under Section 263

Legal Framework and Precedents: Section 263 empowers the PCIT/CIT to revise an order passed by the AO if it is "erroneous" and "prejudicial to the interest of revenue." Explanation 2 (inserted by Finance Act, 2015) clarifies that an order shall be deemed erroneous if it was passed without making inquiries or verifications which should have been made, or allowing relief without inquiry, or not in accordance with Board's directions or binding judicial precedents. The twin conditions of error and prejudice must be satisfied cumulatively before revision jurisdiction can be exercised. The Supreme Court in Malabar Industrial Co. Ltd. v. CIT and subsequent cases have established that mere difference of opinion or reappreciation of evidence is not sufficient to invoke section 263. Revision cannot be used as a substitute for appeal or to reopen concluded issues where AO has applied mind and taken a plausible view.

Court's Reasoning and Findings: The Tribunal found that the AO had conducted detailed inquiries and verifications on all the issues raised, with the assessee providing voluminous documentary evidence and detailed submissions. The AO had applied his mind and passed the assessment order after considering the relevant facts and accounting treatments. The PCIT's order did not record any specific error or instance where the AO's order was contrary to law or binding precedents. The directions issued by PCIT were general and amounted to a call for further verification rather than pointing out any concrete error. The Tribunal held that such directions amounted to impermissible change of opinion and were beyond the scope of section 263.

Application of Law to Facts: The Tribunal emphasized that since the AO had made specific inquiries and reached a considered conclusion, the PCIT could not exercise revision jurisdiction merely because it disagreed with the AO's view. The absence of any finding of error or prejudice to revenue rendered the revision order invalid. Reliance was placed on Supreme Court decisions and coordinate bench rulings, including PCIT vs Shreeji Paints and Malabar Industrial Co. Ltd.

Conclusion: The Tribunal quashed the revision order on grounds of jurisdictional infirmity and lack of satisfaction of the twin conditions under section 263.

2. Method of Revenue Recognition: CCM vs POCM

Legal Framework and Precedents: Ind AS 115 mandates revenue recognition based on performance obligations and timing, leading to adoption of Completed Contract Method (CCM) over Percentage of Completion Method (POCM) for real estate transactions. Judicial precedents including CIT v. Bilahari Investments and decisions of coordinate benches have recognized both methods but mandate consistency and adherence to accounting standards.

Court's Reasoning and Findings: The AO rejected the assessee's change from POCM to CCM and recomputed revenue on POCM basis. The assessee challenged this before the First Appellate Authority (CIT(A)/NFAC), where the matter was sub-judice. The PCIT invoked revision jurisdiction to direct recomputation on POCM basis despite the issue being under appeal. The Tribunal noted that the AO had applied his mind and taken a plausible view, and the issue was already decided by coordinate benches in favor of the assessee. The Tribunal held that the PCIT's order was an impermissible change of opinion and the revision jurisdiction could not be exercised on this ground.

Application of Law to Facts: The Tribunal relied on the coordinate bench decision in the group company's case, which held that the shift from POCM to CCM was mandated by Ind AS 115 and was revenue neutral. The Tribunal found that the PCIT's directions were contrary to binding judicial precedents and the settled accounting principles.

Conclusion: The revision order on this issue was quashed and the ground was allowed in favor of the assessee.

3. Financial Expenses and Interest Claims

Legal Framework and Precedents: Section 36(1)(iii) permits deduction of interest expenditure if incurred for business purposes and commercially expedient. The AO's role is to verify genuineness and commercial expediency. Judicial precedents require specific findings of error or lack of inquiry before invoking revision jurisdiction.

Court's Reasoning and Findings: The AO had made specific queries regarding financial expenses and interest free advances to group companies and after considering detailed submissions allowed the claims. The PCIT issued general directions for verification without pointing out any specific error or illegality. The Tribunal found that such general directions without any recorded error were impermissible under section 263.

Application of Law to Facts: The Tribunal relied on coordinate bench decisions in group company cases, holding that the AO's order was a plausible view and revision jurisdiction could not be invoked. The PCIT failed to identify any violation of Explanation 2 conditions.

Conclusion: The revision order on financial expenses was quashed.

4. Income from House Property and Notional Rental Income

Legal Framework and Precedents: Income from house property is taxable under a separate head, and standard deductions are allowed. Notional rental income on vacant stock-in-trade is recognized based on valuation reports. The AO is required to verify classification and claims.

Court's Reasoning and Findings: The AO had specifically queried the assessee regarding rental income and depreciation claims and accepted the submissions. The PCIT ignored these facts and issued general directions for verification without identifying any error. The Tribunal held that such directions without any error finding were beyond the scope of section 263.

Application of Law to Facts: The Tribunal noted that the issue was recurring and accepted in past and future years, and no prejudice to revenue was shown.

Conclusion: The revision order on this issue was quashed.

5. Write-off of Rs. 336.47 Crores on Madras Race Club Property

Legal Framework and Precedents: Impairment provisions and write-offs must be justified and pertain to the relevant assessment year. Claims disallowed in prior years cannot be reopened without cause.

Court's Reasoning and Findings: The Tribunal found that the write-off pertained to AY 2018-19 and was disallowed by the assessee itself in that year's computation. The PCIT ignored this and directed verification for AY 2019-20 without any error finding.

Application of Law to Facts: The Tribunal held that mere direction for verification does not amount to error and prejudice to revenue.

Conclusion: The revision order was quashed on this ground.

6. Taxability of Transfer of Rights in Land at Ranga Reddy District

Legal Framework and Precedents: Taxability arises when revenue is recognized in the correct assessment year. Development agreements and revenue recognition must be consistent with accounting and tax principles.

Court's Reasoning and Findings: The assessee had disclosed the transaction and offered income for tax in the correct year. The PCIT issued directions without pointing out any error or prejudice.

Application of Law to Facts: The Tribunal found the AO's order was not erroneous and the PCIT's directions were unwarranted.

Conclusion: The revision order was quashed.

7. Verification of Exceptional Gains and Losses

Legal Framework and Precedents: Exceptional items must be disclosed and explained. AO must verify but cannot be faulted if claims are substantiated and accepted.

Court's Reasoning and Findings: The AO had made specific queries, and the assessee had offered gains for tax and disallowed losses appropriately. PCIT gave general directions without specific findings.

Application of Law to Facts: The Tribunal held that no error or prejudice was shown and the revision order was without basis.

Conclusion: Revision order quashed on this ground.

8. Examination of Current Liabilities

Legal Framework and Precedents: Current liabilities are part of normal business transactions. AO must verify genuineness but general directions without specific errors are impermissible.

Court's Reasoning and Findings: AO had made inquiries and accepted the liabilities. PCIT's directions were general and lacked specific findings.

Application of Law to Facts: The Tribunal held that the revision order was not sustainable.

Conclusion: Revision order quashed.

9. Verification of Tax Implications on Land Parcel at Shivaji Marg

Legal Framework and Precedents: Transactions must be taxed in the relevant assessment year. Revisional powers cannot be used to reopen closed years.

Court's Reasoning and Findings: The transaction related to AY 2016-17 and was offered for tax in that year. PCIT's direction for verification in AY 2019-20 was unwarranted.

Application of Law to Facts: The Tribunal found no error in AO's order for AY 2019-20.

Conclusion: Revision order quashed.

Significant Holdings

"The Tribunal held that the twin conditions under section 263 of the Income Tax Act, 1961, namely, that the order of the Assessing Officer must be both erroneous and prejudicial to the interest of the revenue, must be satisfied cumulatively before the Principal Commissioner of Income Tax can exercise revisionary jurisdiction."

"Merely for the purpose of verification or to re-examine issues on which the Assessing Officer has applied his mind and taken a plausible view, the revision jurisdiction under section 263 cannot be invoked as it amounts to impermissible change of opinion."

"The Tribunal held that the directions issued by the PCIT in the present case were general in nature, lacked specific findings of error or prejudice, and were contrary to binding judicial precedents, including the decisions of the Supreme Court and coordinate benches of the Tribunal."

"The Tribunal emphasized that adoption of Completed Contract Method (CCM) for revenue recognition in real estate transactions in compliance with Ind AS 115 is a recognized accounting practice and the AO's acceptance of this method cannot be interfered with under section 263."

"The Tribunal observed that the revision order was quashed on all grounds as the AO had conducted detailed inquiries, the assessee had furnished voluminous evidence, and no error or prejudice to revenue was established by the PCIT."

"The Tribunal reiterated the settled principle that the Commissioner's revisional powers under section 263 are quasi-judicial and cannot be exercised arbitrarily or to substitute his opinion for that of the Assessing Officer."

"The Tribunal relied on authoritative precedents including Malabar Industrial Co. Ltd. v. CIT, PCIT vs Shreeji Paints P. Ltd., CIT v. Bilahari Investments, and various coordinate bench decisions to hold that the revision order was bad in law."

"Accordingly, the Tribunal allowed the appeal, quashed the revision order passed under section 263, and held that the assessment order under section 143(3) was neither erroneous nor prejudicial to the interest of revenue."