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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
This appeal filed by the assessee is arising out of the revision order passed by the Pr. Commissioner of Income Tax-1, Mumbai under section 263 of the Income Tax Act, 1961 (hereinafter ‘the Act’) [in short PCIT], vide No. Nil, dated 30.03.2017. The Assessment was framed by the Deputy Commissioner of Income Tax, Circle-1(3)(1), Mumbai (in short ‘DCIT/ AO’) for the A.Y. 2012-13 vide order dated 05.01.2015 under section 143(3) of the Act.
2. The only issue in this appeal of assessee is against the revision order passed by PCIT under section 263 of the Act revising the assessment order dated 05.01.2015 for the reason that the AO’s order is erroneous as the same was accepted without proper enquiries/ verification and causing prejudice to the interest of the revenue. For this assessee has raised the following grounds: - “1. a. The order u/s. 263 of the Income Tax Act, 1961 passed Commissioner of Income Tax is void and bad ab initio. as the order of assessing officer is neither erroneous nor prejudicial to the interest of revenue. b. The learned Commissioner of Income Tax grossly erred in setting aside the assessment made by the assessing officer u/s. 143(3) of the Income Tax Act 1961 and directing afresh assessment even when the order of assessing officer was neither erroneous nor prejudicial to the interest of revenue.
Without prejudice to the foregoing and on the facts of the case
2. The learned Commissioner of Income Tax grossly erred in holding that the order of the assessing officer is erroneous as the same was accepted without proper enquiries/ verification and causing prejudice to the interest of revenue.
3. The learned Commissioner of Income Tax grossly erred in ignoring that: a. specific queries were raised by assessing officer and responded by appellant regarding method of accounting and interest claim by appellant. b. Assessing officer examined past records of the appellant and details of past assessments were on records."
Briefly stated facts are that the assessee company is engaged in the business of builders and developers developing large scale township. Original assessment was completed by the AO under section 143(3) of the Act vide order dated 05.01.2015. Subsequently, the PCIT issue show cause notice and sated that the assessee is maintaining its accounts and computing the profits in the books on project completion method whereas for the tax purposes on percentage completion method but the same was changed in this year for the tax purposes from project completion contract method to Percentage completion method and as a result of which Revenue recognition of ₹ 50,04,70,011/- was not taxed. The relevant clauses of the show cause notice No. Pr.CIT-1/263/Show Cause Notice/2016-17 dated 28.02.2017 Para 2 to 5 reads as under: - “2. It is observed on examination of records, relating to assessment made on 05.01.2015, u/s.143(3) of the I.T. Act, 1961 for A.Y.2012-13, that the Assessing Officer, while completing assessment has failed to carry out relevant and meaningful enquiries as warranted by the facts and circumstances of the case and conclude it correctly as per Law. This will be apparent from the following discussion. It would be also clear from the discussion in the paragraphs below that Assessing Officer 'accepted the various claims of the assessee at face value and also the explanation filed without verifying the veracity of the details on account of non-application of mind.
3. The return of income for A.Y.2012-13 was filed on 28.09.20 12 declaring total income at Rs. Nil. and Rs.35,88,88,394/- u/s. I 15JB of the Act. Subsequently, the case was 'selected for scrutiny. The assessment u/s.143 (3) of the Act, was completed on 05.01.2015 accepting the return income at Rs. Nil.
4. On examination of assessment records, it is observed that the assessee has been historically maintaining its accounts and computing the profit in the books as well as in its return for tax purpose on "Percentage Completion Method" but the same ''as changed in this year only for tax purposes to "Project Completed Contract Method" as a result of which project/ revenue recognition of Rs50,04,70,01l/- was avoided. Further, the assessee as per Note 24 transferred interest cost of Rs.16,93,62,309/- to Work-in-progress. It is also observed that the assess" even though has not recognized the sales receipts of Rs.50,04,70,01/-' on change of accounting has not removed the proportionate cost from the profit and loss accounts. It is apparent that the Assessing Officer has failed to examine these relevant aspects of the assessment and pass a speaking order. He has also failed to him discharge his duty to make proper enquiry on available leads in the material before hi. All these failures have tax implications in crores.
5. It is settled proposition of Law that failure of the AO to carry out relevant and meaningful enquiries as warranted by the facts and circumstances of the case renders the assessment order erroneous and prejudicial to the interest of the revenue. "
Finally, PCIT-1, Mumbai revised the assessment only one aspect that the AO did not examine the implication of different accounting methods followed by the assessee for the purpose of maintenance of the books of accounts and for the computation of income for tax purposes under the head of profits and gains of business or profession. He also observed that its implication on computation of tax was also not examined. He also noted that the AO has not verified the previous years assessment records regarding the method of accounting followed by assessee. Accordingly, the PCIT revised the assessment under section 263 of the Act by observing in Para 6 and 7 of his order as under:-
“6. When the facts of this ease and the submission made are tested against discussion made above, it is apparent that the assessment made by the A.O. on all the accounts raised in the Show Cause Notice and replied by the assessee is erroneous and prejudicial to the interest of revenue. I find from the assessment record that the Assessing officer did not examine the implication of different accounting methods being followed by the assessee for the purpose of books of account and for the purpose of computation of income under the head "Profits and gains of business or profession. Its implications on computation of tax was also not examined. He also did not verify from the previous records regarding the method of accounting followed by the assessee in its books of account and for income-tax purposes. As admitted by the assessee, it has been following Percentage Completion Method (PCM) for preparation of its financial statements and Completion Contract Method (CCM) for income-tax purpose. However, this issue was not at all examined by the Assessing Officer while completing the assessment u/s 143(3) of the Act. The assessment order is therefore, erroneous and is prejudicial to the interest of revenue. After considering the arguments put forth on behalf of the assessee, it is clear that many aspects related to revenue recognition, method of accounting as per books vis-à-vis as per Income-tax Act and the impact of above two items of expense and revenue on the assessment requires deeper examination from all the aspects of the issue. These errors have already been considered for action u/s. 263 of the I.T. Act and I find no reason for not proceeding ahead in section 263 of the I. T. Act.
In view of the above facts and circumstances and after considering the submissions made by the assessee company, I am convinced that A.O. has committed errors described above which are also prejudicial to the interest of revenue considering the same, in exercise of powers conferred u/s. 263 of the I. T. Act, I set aside the order made u/s. 143(3) of the I. T. Act. The A.O. is directed to reframe the assessment afresh alter giving due opportunity to assessee and the A.O. shall examine the taxability of sale receipts of Rs5004,70,01I/- and shall also examine the allowability of interest expenses of Rs.16,93,62,309/- pertaining to work-in-progress vis-a-vis percentage completion method adopted by the assessee. The A.O. will complete the assessment in the light of the discussion made in this order after considering the prevailing Law and the submissions of the assessee. "
Aggrieved, assessee is in appeal before Tribunal.
We have heard rival contentions and gone through the facts and circumstances of the case. Before us, the learned Counsel for the assessee Shri Madhur Agarwal, first of all took us through the letter of the assessee filed before AO dated 05.01.2015 filed during the course of scrutiny assessment, wherein the complete details in respect of method of accounting followed while preparing books following Percentage completion method (PCM) and for income tax purposes following Completed Contract Method (CCM) on the basis of original contract price received for the project cost for all the profits on actual sale after reducing the actual cost of construction is disclosed and filed. The learned Counsel for the assessee referred the letter dated 05 January 2015, the relevant facts disclosed vide Para 1 as under: - “1. Your goodselves have desired our explanation as to why we have followed the percentage of completion method for preparation of financial statement and completion contract method for IT purposes. We submit that accounting is done in the book following percentage completion method for the reason that the assessee accounts or the basis of percentage of work completed. This would reflect the cost debited to profit and loss on a budgeted basis (per sq. ft) and it is in accordance with Accounting Standard -7 Construction Contracts' laid down by ICAI. Further revenue in the accounts is booked on actual sales subject to work completed which is following matching principle. For Income Tax purposes the assessee follows completed contract method on the basis of original contract price received for the project and accounts for all the profits on the actual sales made after reducing the actual cost of construction. This reflects the true profits from the project. Your goodselves will appreciate that a project may be completed over a period of time wherein in the initial years there will be no sates and booking profits on notional basis is avoided for Income Tax purposes whereas following the percentage completion in books reflects a correct position of booking cost in books.
Further your goodselves desired the history of parent company of the assessee. In this regard, we state that the assessee is 100% subsidiary of MIs. Tata Housing Development Company Limited ('THDC'). THDC is a Public Limited Company carrying on the business of developing residential and commercial areas. The assessee's holding company i.e. THDC continued to offer its income under completed contract basis for IT purposes. The said method of accounting has been constantly followed by THDC over all these years. ITAT since inception i.e. from A.Y. 83-84 upto AN 2002-03 and the Commissioner of income Tax (Appeals) upto A.Y. 2008-09 has all along upheld THOC method of accounting for income-tax purposes i.e completed contract method offered by the THOC. Your goodselves will appreciate that the Bombay High Court in case of parent company i.e. MIs. THDC passed an order rejecting a reference made by the 1 department against the [TAT order for A.Y. 1983-84 to A.Y. 1987-88. Copy of order of Bombay High Court disposing the application is enclosed herewith as annexure 1. The department has not filed any leave petition to the Supreme Court against this order and therefore it can be said that the method adopted for income tax proceedings i.e. Completed Contract Method has been approved by the Bombay High Court. Moreover, in A.Y. 2010-11 and AY 2011-12 in case of MIs. THDC, the assessing officer himself has accepted the method of accounting followed for income-tax purposes while passing the assessment order u/s. 143(3) of the Income Tax Act, 1961 i.e. completed contract method. Enclosed herewith are ITAT orders for AY 1997-98 to AY 2002-03 and assessment order of AY 2010-11 as annexure 2-4.
Your goodselves will appreciate that there is no prescribed method of accounting in the Income Tax Act, 1961 for construction for the year under consideration. There are two methods under which the construction accounting can be done i.e. percentage completion method and completed contract method. The assessee has the choice to adopt any one method however it is essential that consistency should be maintained in following whichever method is once opted for, else it would lead to erroneous results.
In the present case, your goodselves will appreciate that the assessee company is following the method adopted by holding company in order to maintain the consistency. In AY 2011-12, the case of the assesses was subject to scrutiny u/s. 143(3) of the Income Tax Act, 1961. The Addl. CIT Range 1(3)! Mumbai after thoroughly verifying the facts passed an order accepting the Percentage completion method in books and Competed contract method for Income Tax purposes. Copy of the order is enclosed herewith as annexure 5."
The learned Counsel for the assessee further explained that the interest expenditure by the assessee to the extent paid under section 36(1)(iii) read with section 43B of the Act is disclosed in its return of income and assessee does not claim the entire interest as deductible expenditure for the year. This was replied in the later dated 05.01.2015 as under: - “The assessee follows Percentage Completion Method (PCM) in its books of accounts whereas follows Completed Contract Method (CCM) regularly since inception while reporting income under the ITA. This has been accepted in the past assessment i.e. in AY 2011-12. Further with respect to interest expenditure the assessee claims the same to the extent paid u/s. 36(1)(iii) r.w.s. 438 of ITA in its return of income. in books of accounts, the assessee does not claim the entire interest as a deductible expenditure for the year. Rather to the extent the funds are availed by project, the same are added to capital work in progress based on scientific allocation.
The assesses carries out business of real estate development and during the course of business is required to borrow funds. Such borrowings are inevitable without which large projects cannot be undertaken. In the business of the assessee, interest incurred is treated as finance cost. None of the borrowings are made for the specific project but. funds are borrowed generally for the purpose of business of the assessee company. These sums were borrowed and utilized on various projects under constructions.
The assessee has incurred interest cost on the borrowings in the course of running its business. Wherever the funds were used for construction purposes the appellant has tied the interest on such use of funds to the work-in-progress and the balance of interest was charged to the profit and loss in the books of accounts.
During the year under consideration, the assessee has paid a sum of Rs. 188,977,964/- as interest on borrowed funds and accordingly claimed it as deductible u/s. 36(1)(iii) of ITA. In the books of accounts, out of this, Rs. 169,362,309/- has been apportioned to projects as explained above on utilization basis.
In the Profit / Loss account interest cost is reflected as follows: - Interest Expenses 188,977,964 Less:- Appointment to projects 169,362,309 Charged to Profit/Loss 19,615,655 Kindly appreciate this allocation of funds to various projects in books, cannot be equated with project specific borrowings. Thus in the books of accounts it is only the balance ₹ 19,615,655 which is claimed in the Profit & Loss account."
7. The AO after going through the details framed assessment and there is no issue of non-verification of facts or non-application of mind by the Assessing Officer. Here, in the present case, the AO has properly completed the assessment after raising a query and after receiving reply was satisfied about the claim of the assessee. Even otherwise, on merits the learned Counsel argued that this system of accounting followed by assessee regularly has been approved by Tribunal in assessee’s own case for AY 1997-98 to 2002-03 in & 2666/Mum/2004 vide para 14 reads as under: - “14. We have heard the learned representatives of the parties and perused the record. We find that issue is covered in favour of the assessee to follow the completing method of accounting, by the earlier orders of the ITAT for AY 83,84 / 87-88 which have been confirm the Hon’ble Jurisdiction High court vide judgement dated 31.07.2006. the CIT(A) has followed earlier years order of ITAT and the view taken by the ITAT has been confirmed by the Hon’ble jurisdiction High Court, therefore in the light of that we do not find any error in the order of the CIT(A). the order of the CIT(A) on the issue is confirmed."
The learned Counsel for the assessee also drew our attention to the judgement of Hon’ble Bombay High Court in assessee’s own case in Income Tax Application No. 215 of 2000, 216 of 2000,217 of 2000 & 218 of 2000 in the case of The Commissioner of Income Tax vs. Tata Housing Development Co. Ltd. dated 3rd July 2006 confirmed the order of Tribunal, wherein method followed by assessee i.e. project completion method of accounting was accepted by Hon’ble High Court. Even Tribunal in AY 2001-02 and 2002-03 in assessee’s own case vide order dated 30.09.2010 accepted the project on completed method vide Para 4 as under: - "4. After hearing both the sides, we find identical issue has been decided by the Tribunal in the assessee’s own case for the asst. years 1998-99 and 1999 2000 vide & 2666/Mum/2004. We find the Tribunal, vide order dated 05-04-2010, while dismissing the appeals filed by the Revenue, has held as under:
We have heard the learned representatives of the parties and perused
the record. We find that issue is covered in favour of the assessee to follow ‘completion method of accounting’, by the earlier orders of the ITAT for AY 83-84/87-88 which have been confirm the Hon’ble jurisdiction High Court vide judgment dated 31.7.2006. The CIT(A) has followed earlier years order of ITAT and the view taken by the ITAT has been confirmed by the Hon’ble jurisdiction High Court, therefore in the light of that we do not find any error in the order of the CIT(A). The order of the CIT(A) on the issue is confirmed.
Since the AO, following the orders for the asstt. year 1999-2000 and earlier years, has changed the method of accounting from ‘completed contract method’ to ‘percentage completion method’ and since the CIT(A), following the decision of the Tribunal in the assessee’s own case in earlier years, has directed the AO to assess the income from projects on completed contract method, therefore, in the absence of any contrary material brought to our notice by the Revenue, we do not find any infirmity in the order of the CIT(A). This ground by the Revenue is accordingly dismissed.”
It means that in earlier years this is a consistent practice, followed by assessee, there is no change in the method of accounting in this year which give rise to any taxable income or taxable profit. Further, the AO in AY 2013-14 and 2014-15 has accepted this method as it is while framing assessment under section 143(3) vide order dated 09.03.2016 and 16.12.2016 respectively. The learned CIT Departmental Representative heavily relied on the following case laws: - “1. CIT vs Amitabh Bachchan [69 taxmann.com (SC).
Arvee International vs. Additional CIT (ITA No. 3543/M/03, ITAT, Mumbai Bench)
3. Deniel Merchants Vs. ITO [SL To Appeal - 23976/2017]
4. Horizon Investment Co. Ltd vs. CIT [ITA No. 1593/M/13, ITAT, Mumbai Bench]
5. CIT vs. Ballarpur Industries Ltd. [2017 Tax Pub(DT) 4015 High Court Bombay]” and supported the order of PCIT revising the assessment under section 263 of the Act.
We find from the above facts of the case, that there is no change in method for computing profit rather the assessee is consistently following percentage completion method and even in future years, the Revenue has accepted the same method without any tinkering. In the present case before us, the entire details were filed before AO and AO after going through the details has passed the assessment order under section 143(3) of the Act. The completed Projection completion method was explained before the AO by assessee vide letter dated 05.01.2015 filed during the course of assessment proceedings under section 143(3) of the Act. The AO has gone into the details and made enquiry about the completed project completion method and made assessment thereafter.
As relied on by the learned CIT Departmental Representative, of the case laws of Amitabh Bachchan (supra), wherein Hon’ble Supreme Court has clearly laid down that in case a view taken by AO is one of the possible view, the same should not be interfere with by the CIT while revising the assessment under section 263 of the Act. This situation has been explained by Hon’ble Supreme Court in Para 21 and the relevant para reads as under: - "21. There can be no doubt that so long as the view taken by the Assessing Officer is a possible view the same ought not to be interfered with by the Commissioner under Section 263 of the Act merely on the ground that there is another possible view of the matter. Permitting exercise of revisional power in a situation where two views are possible would really amount to conferring some kind of an appellate power in the revisional authority. This is a course of action that must be desisted from. However, the above is not the situation in the present case in view of the reasons stated by the learned C.I.T. on the basis of which the said authority felt that the matter needed further investigation, a view with which we wholly agree. Making a claim which would prima facie disclose that the expenses in respect of which deduction has been claimed has been incurred and thereafter abandoning/withdrawing the same gives rise to the necessity of further enquiry in the interest of the Revenue. The notice issued under Section 69-C of the Act could not have been simply dropped on the ground that the claim has been withdrawn. We, therefore, are of the opinion that the learned C.I.T. was perfectly justified in coming to his conclusions insofar as the issue No. (iii) is concerned and in passing the impugned order on that basis. The learned Tribunal as well as the High Court, therefore, ought not to have interfered with the said conclusion.”
But in the present case there is no other possible view taken by the AO because this view has been confirmed by Hon’ble Bombay High Court and also Tribunal consistent taken a view that the assessee’s consistent method for determining income is completed project completion method and there is no change in the same. Once, this is the position there is no question of revision. Hence, in the given facts and circumstances, we quash the revision order passed by PCIT and allow the appeal of the assessee.
In the result, the appeal of assessee is allowed.
Order pronounced in the open court on 26-09-2018.