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2015 (11) TMI 994 - ITAT DELHI

2015 (11) TMI 994 - ITAT DELHI - TMI - Revision u/s 263 - change of accounting policy and standard as assessee started following AS-7 - Held that:- The assessee is following AS-7 not only in the Assessment Year under consideration viz. 2007-08, but the same was consistently followed in the subsequent Assessment Years for recognising revenue from Engineering Business Segment wherein the assessee company has followed percentage completion method as prescribed under AS-7 issued by ICAI for the acco .....

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r sheet entry dated 20.10.09 and the same was replied by the assessee by filing two letters viz. first on 20.10.09 and 30.10.09 along with relevant details.

As we have already noted that the assessee filed tabulation chart showing taxable income and tax effect due to change of accounting policy and standard (assessee's Paper Book page no. 11) wherein it is amply clear that tax surcharge and EC as per AS-7 was calculated at ₹ 8,34,63,477 and tax surcharge and EC payable as per AS .....

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he assessee changed its method of accounting from AS-7 to AS-9 with an intention to avoid tax liability and therefore this resulted into lowering of profits. However, as we have already pointed out that in the very first year of changing of accounting standard, there was a lesser tax liability on the assessee but in the subsequent four years, the tax liability was much higher when the assessee adopted AS-7 as against AS-9. - Decided in favour of assessee. - ITA No. 2438/Del/2012 - Dated:- 21-10- .....

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ct on 15.12.2009. The Assessing Officer noticed that the assessee company was engaged in the business of providing maintenance services such as house keeping security services and the Assessing Officer accepted the returned income of the assessee without making any disallowance or addition in the computation of income furnished by the assessee. Subsequently, on 12.3.12, the CIT issued a show cause notice to the assessee company alleging that the perusal of the balance sheet as on 31.3.2007 shows .....

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ns of the Act. The CIT also alleged that Assessing Officer has not examined as to whether any expenditure corresponding to the deferred revenue income was debited/claimed by the assessee and whether these were allowable in view of the fact that corresponding income is not taken into account and thus to that extent the impugned assessment order is prima facie prejudicial to the interest of revenue. With said observations, the CIT proceeded to invoke revisionsal powers available to him u/s 263 of .....

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e order passed by the CIT u/s 263 of the Income-tax Act, 1961 (the Act) is bad in law, sans jurisdiction in as much as the order of the AO which has been revised is neither erroneous and nor is it prejudicial to the interests of revenue. 2. The order passed by the AO u/s 143(3) of the Act accepting a method of accounting which the assessee was required to adopt as per the mandate of section 145 of the Act read with section 211 (3A) of the Companies Act could not be termed as "erroneous" .....

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beneficial to the department bringing in excess revenues in subsequent assessment years viz. 2008-09 to 2011-12 in which the changed method was continued. 5. Without prejudice to the aforesaid grounds the order passed by the CIT u/s 263 of the Act is in clear violation of the principles of natural justice since the proceedings were initiated at the fag end of the limitation period and there being a hurry to pass the order within time the hearing was a mere formality since the written submissions .....

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terial placed on record. At the outset, learned counsel of the assessee summarized the brief facts of the case and reiterated assessee's submissions/arguments dated 24.8.2015 which read as under: - "(A) The order of Assessment The assessment was framed u/s 143(3) by the learned Additional CIT (the 'AO') after issuing statutory notices u/s 143(2) & 142(1) and obtaining requisite details and written submissions from time to time. The following is extracted from the assessment .....

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of Revenue Recognition at (e) (page 25 of the PB) (3) Schedule 13: Current Liabilities reflecting deferred revenues to the extent of ₹ 119,808,876/- (page 22 of the PB). C) Examination by the AO The AO enquired into the switch over from AS-9 to AS-7 vis- a-vis the preceding assessment year. The same was explained by the assessee vide letters dated 20.10.2009 and 30.10.2009 (pages 1 to 5 of the PB). In fact the annexures to the letter dated 30.10.2009 contained a detailed contract wise work .....

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n an inordinate hurry on 27.03.2012 after a solitary hearing on 26.03.2012. There is no reference to the detailed written submissions as also the judgements cited by the assessee. In other words the order u/s 263 is passed in a mechanical manner without application of mind. Judgements 1. CIT vs Ashish Rajpal 320 ITR 674 (Delhi) (Para 16 at Page 41 of the PB of Judgements to be read along with Para 15 at Page 40 of the PB) "16. The fact that a query was raised during the course £f>S .....

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n examining the material prior to the passing of the assessment order dated 24.03.2005. At least four letters dated 27.04.2004, 22.02.2005, 28.02.2005, and 18.03.2005 were addressed by the assessee to the Assessing Officer giving details, documents and information pertaining to various queries raised by the Assessing Officer. These have been examined by the Tribunal. We have no reason to believe that examination was less than exacting. Therefore, the conclusion of the Commissioner that there was .....

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was emphasized here that the notice and questionnaire given to the assessee which were duly replied, were evidence of full and due enquiry about this expenditure. After satisfying himself that they were in fact revenue expenditure, the assessee's claim was upheld under Section 37. The Court in Sunbeam Auto (supra) held as follows: "Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between "lack of inquiry" and inadequate .....

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of statements and other documents required of by the Assessing Officer were produced at the stage of original assessment. Clearly this was not a case of "No Enquiry". The lack of any discussion on this cannot lead to the assumption that the Assessing Officer did not apply his mind." 3. DIT vs Jyoti Foundation 357 ITR 388 (Delhi) (Para 5 at Page 49 to be read alongwith Para 15 at Page 48 and Paras 16 & 17 at Page 49 of the PB) "5. In the present case, inquiries were certai .....

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der and directed the Assessing Officer to conduct the said inquiry." 4. CIT vs Mahendra Kumar Bansal 297 ITR 99 (ALL) (Pages 3 & 4 of the Judgement) "So far as the assessment for the assessment year 1983-84 is concerned, we find that the assessment has been made under section 143(3)/148 of the Act. The date fixed by the assessing authority was 18th July, 1986 and on that very date the assessee's counsel had filed certain details and evidences and after discussion the assessment .....

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c, but that by itself is not sufficient reason to brand the assessment order as erroneous and prejudicial to the interests of the Revenue and it was for the Commissioner to point out as to what error was committed by the Income-tax Officer in having reached to his conclusion and in the absence of which proceedings under section 263 of the Act is not warranted." "As held by this court in the case of Goyal Private Family Specific Trust [1988] 171 ITR 698, we are of the considered opinion .....

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n in aid of our finding that there was no basis or justification for the Commissioner of Income Tax to invoke the provisions of Section 263. In the order of assessment, the Assessing Officer had after making an enquiry and eliciting a response from the assessee come to the conclusion that the assessee was entitled to depreciation to the extent of ₹ 622.39 lakhs on the value of securities held on the trading account. In the absence of any tangible material to the contrary, the Commissioner .....

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ara 18 of the Judgement to be read alongwith Paras 14 to 17) "18. From the aforesaid discussion, it is apparent that the expression prejudicial to the interest of revenue appearing in Section 263 has to be read in conjunction with the expression "erroneous" and that every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of the revenue. In cases where the Assessing Officer adopts one of the courses permissible in .....

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fficer. It is also clear that while passing an order under Section 263, the Commissioner of Income-tax has to examine not only the assessment order, but the entire record of the profits. Since the assessee has no control over the way an assessment order is drafted and since, generally, the issues which are accepted by the Assessing Officer do not find mention in the assessment order and only those points are taken note of on which the assessee's explanations are rejected and additions/disall .....

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ing Officer had not applied his mind." F) Summary of the Submissions Restricting the submissions to the question of application of mind and due verification on the part of the AO the following legal propositions emerge from the judgements relied upon. (1) A matter considered after due enquiry on the part of the AO cannot be the subject matter of proceedings u/s 263 unless the view expressed is unsustainable in law. (2) When a regular assessment is made u/s 143(3) a presumption can be raised .....

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prejudicial to the interest of revenue. (4) If during the assessment, the AO raised queries and replies filed by the assessee were considered, the mere fact that the assessment order was silent on these the same could not be held to be erroneous on account of 'absence of inquiry. ' (5) If there is some enquiry by the AO in the original proceedings even if inadequate that cannot clothe the CIT with the jurisdiction under section 263, merely because he can form another opinion. (6) One ha .....

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Counsel of the assessee further elaborated his submissions dated 26.3.12 filed before the CIT in response to the show cause notice issued u/s 263 of the Act and submitted that the ld. CIT proposed to revise the assessment order on the ground that the same is erroneous and prejudicial to the interest of revenue. Ld. Counsel further pointed out that as per allegations in the notice u/s 263 of the Act, the assessee has shown lower profits by changing its method of accounting on the basis of AS-7 a .....

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d the allowability of expenditure relatable to the income nor booked vis-à-vis the changed method of accounting. Ld. Counsel further pointed out that to follow accounting standard (AS) is mandatory in nature as per directions of the Institute of Chartered Accountants of India (ICAI) and as per section 211(3)(a) of the Companies Act, it has been mandated that every company has to prepare its balance sheet and profit and loss account in accordance with the Accounting Standard framed by the .....

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ount of ₹ 11.98 crore was shown under the head of current liability under deferred revenues (PB page no. 22) and in the notes to financial statements Item II(b), it is clear that the reason for the changeover from item AS-9 to AS-7 and item 2(e) deals with revenue recognition (pages 24 & 25 of the assessee's paper book). Learned counsel of the assessee vehemently contended that the Assessing Officer inquired into the changed method of accounting vis-à-vis preceding Assessmen .....

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On the issue of consistency, the learned counsel of the assessee pointed out that the assessee has followed the same method of revenue recognition i.e. adoption of Accounting Standard 7 in all the subsequent Assessment Years which is evident from the audited accounts filed before the CIT and before the Tribunal for the financial years ending on 31.3.08, 31.3.09, 31.3.10 and 31.3.2011. Ld. Counsel also submitted that Accounting Standard per assessment orders for Assessment Year 2008-09 and 2009- .....

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d by the assessee and cannot be rejected merely because it gives benefit to assessee in certain years, more particularly, in the year of change as the choice of method can be changed unilaterally without any prior approval of the Assessing Officer and the assessee has to show that the method employed is regularly followed in the subsequent Assessment Years and the assessee has demonstrated this fact by way of assessment orders passed for subsequent Assessment Years. Learned counsel of the assess .....

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ed at the threshold in the revisionary proceedings u/s 263 of the Act. Learned counsel of the assessee has also drawn our attention towards assessee's Paper Book page no. 11 wherein a chart showing taxable income and tax effect due to change of accounting policy and standards from Assessment Year 2008-09 to 2011-12 has been tabulated and submitted that adjustment of income due to Accounting Standard-7 was beneficial to the assessee in the first year of change but in the subsequent Assessment .....

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ditions must exist to enable the Commissioner to act and in absence of any one of the conditions would be a rider for invoking revisional powers u/s 263 of the Act. Learned counsel of the assessee also pointed out that the order passed by the Assessing Officer after due verification and examination of the issue on deferred revenue cannot be held as erroneous and prejudicial to the interest of revenue inasmuch as he has accepted the change of Accounting Standard adopted by the assessee by proper .....

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wed till 31.3.2006 i.e. Accounting Standard-9. Learned counsel of the assessee contended that neither of the conditions required and stipulated u/s 263 of the Act are specified in this case viz. the order of the Assessing Officer is neither erroneous nor prejudicial to the interest of revenue and therefore, the CIT had no valid jurisdiction to invoke revisionary powers of section 263 of the Act. Learned counsel of the assessee lastly pointed out that the order of the Assessing Officer cannot be .....

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e for 26.10.09 and the assessee submitted its written submissions from same date i.e. 20.10.09 and also filed another return dated 30.10.09 along with detailed contract wise working detail and show cause for adopting Accounting Standard-7 from 1.4.06, therefore, it cannot be held that the Assessing Officer did not make any inquiry in this regard and thus the action of the CIT invoking revisionary powers u/s 263 of the Act is not legal and correct which is not only bad in law but void ab initio a .....

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without making any inquiry as to whether change was bonafide and was also consistently followed for the future Assessment Years. 9. Ld. DR also pointed out that the Assessing Officer has also not examined as to whether any expenditure corresponding to the deferred revenue income was debited and claimed by the assessee and whether these were allowable in view of the fact that corresponding income is not taken into account. Ld. DR lastly submitted that the Assessing Officer has not verified that .....

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Officer after allowing opportunity of being heard to the assessee . 11. On careful consideration of above submissions of both the sides and careful perusal of relevant material placed on record inter alia Paper Book of the assessee spread over 211 pages, impugned order passed u/s 263 of the Act and brief synopsis of submissions by the assessee , we note that the CIT issued a show cause notice u/s 263 of the Act dated 12.3.12 to the assessee which reads as under:- "The Perusal balance sheet .....

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mined as to whether any expenditure corresponding to the deferred revenue income was debited/claimed by the assessee and whether these were allowable in view of the fact that corresponding income is not taken into a/c. Hence to that extent the assessment order is prime facie prejudicial to-the interest of the Revenue." 12. The crux of the allegations mentioned therein are mainly on two counts viz. i) the change in the Accounting Standard by the assessee from AS-9 to ASIncome 7 has resulted .....

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. 13. When we analyse the facts and circumstances of the first allegation, we note that as per order sheet entry dated 20.10.09, the Assessing Officer asked the assessee to explain the deferred revenue items and to give submissions as to how they are taken into the next year. The assessee filed two replies in this regard; first on 20.10.09 available at page 1 of assessee's Paper Book and second on 30.10.09 which is also available at pages 2 to 5 of assessee's Paper Book wherein the asses .....

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Assessing Officer accepted the returned income of the assessee. 14. In this situation, it is clear that the Assessing Officer made inquiries on the issue of deferred revenue which were replied by the assessee by submitting its stand along with contract wise detailed working. At this juncture, we respectfully take cognizance of order of Hon'ble Jurisdictional High Court of Delhi in the case of CIT vs Vodafone Essar South Ltd. reported in (2012) 212 Taxman 184 (Delhi), as relied by learned co .....

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ficer did not apply his mind. In this judgement, Hon'ble Jurisdictional High Court has also referred dicta laid down by it in the case of CIT vs Sunbeam Auto Ltd. (2011) 332 ITR 167 (Delhi) wherein it was held that one has to keep in mind the distinction between lack of inquiry, even inadequate inquiry and if there was any inquiry, if inadequate, that would not by itself give occasion to the Commissioner to pass order u/s 263 of the Act merely because he has a different opinion in the matter .....

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clear that in column 'E' page 3, it has been explicitly mentioned that the audited accounts filed for the financial year ending on 31.3.08, 31.3.09, 3103.10 & 31.3.11, it is clear that the assessee has followed the same system of revenue recognition i.e. 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 Assessi .....

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ssee 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 u/s 143(3) of the Act on 15.12.09 and the CIT issued impugned notice u/s 263 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 response to the show cause notice u/s 263 of the Act, the asses .....

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er:- "3. It can be seen that the assessee company has merely filed some details regarding the amount of excess billing and the change in assessee's revenue recognition policy. This does not show that the AO has made relevant enquiry/verification as to whether the change was bonafide and was consistently followed in future. The Ld. Counsel was not able to point out that the AO has made any enquiry/verification into these aspects. There is nothing on record to show that the AO has made In .....

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count. Since the AO has accepted the change in the revenue recognition policy i.e. method of accounting without any inquiry/verification which has resulted in lowering of profits by ₹ 11,98,08,876/-, the assessment order dated 15/12/2009 passed u/s 143(3) of the I.T. Act, 1961 is erroneous and prejudicial to the interest of the Revenue. The assessment order to this extent is set aside and AO is directed to make a fresh assessment order on this aspect after making inquiries/verifications as .....

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9 and 2009-10 (supra) were part of assessment records and if the same were taken into consideration in the light of submissions and contentions of the assessee in response to notice u/s 263 of the Act, then the CIT could have noticed that the assessee is following AS-7 not only in the Assessment Year under consideration viz. 2007-08, but the same was consistently followed in the subsequent Assessment Years for recognising revenue from Engineering Business Segment wherein the assessee company has .....

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ere was a specific query from the Assessing Officer during assessment proceedings vide order sheet entry dated 20.10.09 and the same was replied by the assessee by filing two letters viz. first on 20.10.09 and 30.10.09 along with relevant details. 17. As we have already noted that the assessee filed tabulation chart showing taxable income and tax effect due to change of accounting policy and standard (assessee's Paper Book page no. 11) wherein it is amply clear that tax surcharge and EC as p .....

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S-9, therefore, in the totality of the facts and circumstances, it cannot be held that the assessee changed its method of accounting from AS-7 to AS-9 with an intention to avoid tax liability and therefore this resulted into lowering of profits. However, as we have already pointed out that in the very first year of changing of accounting standard, there was a lesser tax liability on the assessee but in the subsequent four years, the tax liability was much higher when the assessee adopted AS-7 as .....

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etting aside Assessing Officer's order was not held to be valid. In the present case, the Assessing Officer has not expressly mentioned about the consideration of change in Accounting Standard by the assessee from AS-9 to AS-7 but from the order sheet entries and written submissions of the assessee filed during the assessment proceedings, it is clear that the assessee considered the issue and applied his mind towards change in Accounting Standard and the issue of deferred revenue and merely .....

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by Paper Book of the assessee filed in response to the show cause notice u/s 263 of the Act and he jumped to the conclusion without any adjudication on the submission and explanation of the assessee, therefore, we are inclined to hold that the impugned order has been passed by the CIT without following the well-accepted principles of adjudication and without application of mind. Our view also finds support from the judgment of Hon'ble High Court in the case of CIT vs Development Credit Bank .....

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