TMI Blog2019 (6) TMI 282X X X X Extracts X X X X X X X X Extracts X X X X ..... fault in shifting of the accounting policy by the assessee. Even this simulator with high configuration and technical input in design would definitely fall within the realm of an asset and the construction of such asset would definitely fall within the category of construction of asset and therefore accounting standard 7 had rightly been applied by the assessee and hence the order passed by the Pr. CIT u/s 263 is liable to be quashed and we do accordingly. The facts of the present case are similar to that of the facts mentioned by the Hon'ble High Court in the case of A2Z Maintenance [ 2017 (2) TMI 682 - DELHI HIGH COURT] as in the present case also, the assessee has been consistently following the AS 7 from the financial year 2007-08 and therefore there cannot be any justification for the officer to doubt the bona fide of the assessee in following the AS 7 and therefore also there was no reason for the CIT to come to the conclusion that the order passed by the Assessing Officer was erroneous. - Decided in favour of assessee. - IT (TP) Appeal No. 1143/kol./2013 - - - Dated:- 17-5-2019 - A.K. Garodia, Accountant Member And Laliet Kumar, Judicial Member ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner and has submitted that the accounting standard AS 7 is applicable as the nature of the activity of the assessee is in the form of construction contract only. However, the Commissioner was not satisfied with the submission made before him and had therefore rejected the contention that AS-7 is applicable to the assessee. 3. Further it was mentioned by the Commissioner in paragraph 8 of his order that no book profits have been computed by the assessing officer in the assessment order for the purpose of MAT under section 115 JB. 4. The Commissioner had also mentioned that the order passed by the assessing officer was erroneous and prejudicial to the interest of revenue. It was also mentioned by the Commissioner that the assessing officer had simply accepted whatever the assessee had stated in the written of income and had failed to make enquiries which were called for in the facts and circumstances of the case. In the light of the above the Commissioner had directed the assessing officer to examine the issues discussed in the order and pass the de novo assessment in accordance with law. Submissions by the Ld. AR of the Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the revenue had submitted that the Commissioner had examined the order passed by the assessing officer from the perspective of AS 7 and thereafter had recorded that even as per the definition provided under accounting standard, the activities of the assessee did not fall within the realm of construction contract as defined under accounting standard 7. 8.5 The Ld. DR had drawn our attention to the definition of the word 'construction' given in accounting standard 7 to the following effect: Definitions 2. The following terms are used in this Standard with the meanings specified: 2.1 A construction contract is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 details were made available to AO, it cannot be said that the assessing officer has not made any Inquiry. It was submitted that it is not necessary for the assessing officer to write the voluminous order, without any significance in the assessment order. Further it was submitted that the details of change in revenue and work in progress were very much available with the assessing officer as these details were clearly mentioned and provided by the assessee. 8.10 It was also contended by the Ld. A R of the assessee that it was incumbent upon the Commissioner to himself undertake minimum Inquiry for the purposes of coming to the conclusion that the order passed by the assessing officer was erroneous and prejudicial to the interest of the revenue. It was submitted that in the present case the Commissioner had not undertaken any Inquiry which was required from him before exercising the jurisdiction under section 263 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 bare reading of section 263 of the Income-tax Act, 1961, makes it clear that the prerequisite for the exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent-if the order of the Income-tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue recourse cannot be had to section 263(1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial 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 revisional jurisdiction available to a Commissioner under section 263 of the Act is essentially circumscribed by the determinant that the order of the Assessing Officer is erroneous so much so that it is prejudicial to the interests of the Revenue. This statutory enjoinment carves out an extremely constricted ambit of such discretionary jurisdiction. The word considers applied in the statutory provision involved, signifies a genuine satisfaction of that authority that the order of the Assessing Officer is erroneous and that the interests of the Revenue is prejudicing thereby. Any exercise of the revisional jurisdiction, bereft of such satisfaction and/or finding that the order of the Assessing Officer is erroneous and that it is prejudicial to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 the Assessing Officer has taken one of the possible views, no occasion to exercise powers of revision can arise. It was also held that revisional powers also cannot be exercised for directing a fuller inquiry to find out if the view taken is erroneous, when a view has already been taken after inquiry. This power of revision can be exercised only where no inquiry as required under the law is done. It is not open to enquire in cases of inadequate inquiry. 12. The principles that emerge out of the above cited decisions are that both the twin requirement of the order being erroneous and prejudicial to the interests of revenue should be satisfied and that the CIT should invoke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct 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 period of contract activity entered into and the contract activities completed falls in different accounting period, which requires allocation of contract revenue in different period of constructions. 15. The assessee had entered into two sets of agreements which are placed in the paper book at pages 28 to 128 and from 129 to 189. From the closer scrutiny of the scope of supply, scope of work, project management and specification, it is clear that both the contracts are f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Standard 7 in the Indian accounting standard was to provide/ allocate proportionate revenue on the basis of the percentage completion method so that the total revenue is proportionately correlated with the stage of completion of the construction of the asset. Since the length of the agreement in the present case is 22 months and 24 months respectively, during which the project of simulator of the MBT was to be done by the assessee therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enario 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 purposes of invoking the jurisdiction under section 263. In our view the conclusion drawn by the CIT was not in accordance with law, as, he had nearly relied upon the definition of the construction by resorting to the definition provided under the Oxford dictionary. What is sine qua non, was the definition of asset, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther 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 CIT though acknowledged the receipt of the reply dated 27th Feb. 2013 (page 398 of the paper book) where the assessee had categorically mentioned that the assessee had been following AS 7 consistently from financial year 2007-08 onwards, but had not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .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 response to the show cause notice u/s 263 of the Act, the assessee filed detailed written submissions spread over 5 pages on 26.3.12 along with a Paper Book and the CIT has only considered argumen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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