Ahmedabad ITAT Quashes Sec 263 Order Absent Twin Conditions For Exercise Of Power Under Said Provision

The Bench of the ITAT comprising of Madhumita Roy (Judicial Member) and Waseem Ahmed (Accountant Member) observed that, “the value of closing stock becomes the opening stock in the next year, hence the same is also a tax natural exercise. Hence there is no loss of tax, causing prejudice to the revenue due to the method adopted by the assessee which was accepted by the AO in the assessment order. Even if the AO has not properly inquired about the same and assuming that the Action of the AO is erroneous. But in view of the above discussion, there is no prejudice against the revenue. Therefore, the twin conditions to exercise the power under section 263 of the Act have not been satisfied.” (Para 9.3)

As per the brief facts of the case, the Assessee's return was selected for scrutiny, wherein the AO accepted the declared income of the assessee. However, the PCIT on perusal of assessment records found that project being bungalow was completed for more than 83% and till end the of the year under consideration, the total cost was incurred which is 36% of total expected revenue whereas the assessee has shown the sale which is only 6% of expected revenue. Besides, the assessee also received a considerable amount as booking receipt and treated the same as an advance from the customers. As per the PCIT, the assessee being in the business of construction of residential and commercial complex was required to recognize revenue on percentage completion method as provided under accounting standard 7 issued by the ICAI. However, the assessee has not explained the method of accounting employed for revenue recognition and neither did the AO raise any question in this regard. The AO, without verifying correct method of revenue recognition and correct application of accounting standard accepted the returned income of the assessee. The PCIT further found that no inquiry whatsoever was made by the AO regarding the method of valuation of closing stock which was neither anywhere stated by the assessee. The PCIT also found that there were several questions raised in the notice issued u/s 142(1) which were not replied/explained by the assessee, but the AO did not bother to examine the same.

Accordingly, the PCIT held that the AO has passed the assessment order without proper inquiry and application of mind which makes the assessment order as erroneous insofar prejudicial to the interest of the revenue and set aside the assessment order while directing the AO to make fresh assessment.

The Bench noted that the dispute is only regarding the method of revenue recognition and method of valuation of closing stock. There is no dispute or allegation about genuineness of sale value of the bungalow or cost of the project, or any other expenditure incurred by the assessee.

The Bench stated while referring the landmark judgment of Supreme Court in the case of Malabar Industrial Co. Ltd vs. CIT reported in [2000] 243 ITR 83 (SC) that to invoke the provision of section 263, the Commissioner has to satisfy two conditions, the first being order passed by the AO is erroneous and second being the order is prejudicious to the interest of the revenue. In the absence of any one of the conditions, the provision of section 263 cannot be invoked.

The Bench reiterated while referring to the decision of Supreme Court in the case of CIT vs. Bilahari Investment Pvt. Ltd reported in 299 ITR 1 that, “Recognition/identification of income under the 1961 Act is attainable by several methods of accounting. It may be noted that the same result could be attained by any one of the accounting methods. Completed contract method is one such method. Similarly, percentage of completion method is another such method.”

The Bench further reiterated while referring the decision of Bombay High Court in Taparia Tools Ltd.'s case that, “in every case of substitution of one method by another method, the burden is on the Department to prove that the method in vogue is not correct and it distorts the profits of a particular year. Under the mercantile system of accounting based on the concept of accrual, the method of accounting followed by the assessees is relevant.”

Therefore, on finding that the twin conditions to exercise the power u/s 263 have not been satisfied, ITAT allowed the assessee's appeal.

Counsel for Appellant/Taxpayer: Parin Shah

Counsel for Respondent/Department: Sudhendu Das

Case Title: Soham Buildcon verses PCIT

Case Number: ITA No. 105/Ahd/2022

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