Income Tax Act, 1961 No.,2438/Del/2012
Assessment Year: 2007-08
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `A' NEW DELHI
BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER
AND
SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER
I.T.A.No.2438/Del/2012
Assessment Year : 2007-08
A2Z Maintenance and Engineering vs CIT
Services Ltd., O-116, Delhi-I,
DLIF Shopping Mall, New Delhi.
Arjun Nagar,
DLF Phase-I,
Gurgaon.
(PAN: AAECA1203A)
(Appellant) (Respondent)
Appellant by: Shri R.M. Mehta, Advocate
Respondent by : Shri Ravi Jain, CIT DR
Date of hearing: 3.9.2015
Date of pronouncement: 21.10.2015
ORDER
PER C.M. GARG, J.M.
This appeal by the assessee has been directed against the order of CIT,
Delhi-I, New Delhi dated 27.3.12 for AY 2007-08 passed u/s 263 of the
Income Tax Act, 1961 (for short the Act).
2. Briefly stated the facts giving rise to this appeal are that the Assessing
Officer completed the assessment by passing assessment order u/s 143(3) of the
Act on 15.12.2009. The Assessing Officer noticed that the assessee company
was engaged in the business of providing maintenance services such as house
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Income Tax Act, 1961 No.,2438/Del/2012
Assessment Year: 2007-08
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 that the assessee has shown
an amount of Rs. 11,98,08,876 as deferred revenue income by changing its
method of accounting said to be as per Accounting Standard-7 which has
resulted in lowering of profits by the same amount. The CIT also observed that
the Assessing Officer has accepted the assessee's claim in this regard without
making any inquiry or verification as to whether the method was bonafide and
was consistently followed in future, and whether it was permitted under the
provisions 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 the Act. The CIT finally passed
impugned order dated 27.3.12 by holding that the order of the Assessing Officer
is erroneous and prejudicial to the interest of revenue and he set aside
assessment order only to this extent and directed the Assessing Officer to make
a fresh assessment order on this aspect after making inquiries/verification and
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Income Tax Act, 1961 No.,2438/Del/2012
Assessment Year: 2007-08
after giving reasonable opportunity of hearing to the assessee. Now, the
aggrieved assessee is before the Tribunal with the following grounds:-
"1. The 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" within the meaning of section 263.
3. The CIT erred both on facts and in law in further treating the
order passed by the AO as prejudicial to the interests of revenue
without appreciating that the sum of Rs. 119,808,876/- which had
been deferred in the assessment year 2007-08 had been offered
to tax in assessment year 2008-09 there being no loss to the
revenue.
4. The CIT further erred in ignoring the record of the revenue itself
and which showed that the switch over from AS-9 to AS-7 was
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 were received without any effective oral interaction.
6. Without prejudice to the earlier grounds the order passed by the
CIT is bad in law there being a complete absence in the order
impugned to deal with the detailed written submissions supported
by case law.
7. The appellant reserves to itself, the right to add, alter, amend,
substitute, withdraw and/or any Ground(s) of Appeal on or
before the date of hearing."
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Income Tax Act, 1961 No.,2438/Del/2012
Assessment Year: 2007-08
3. We have heard the rival submissions and carefully perused the relevant
material 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 order.
"In response to the notices, Sri Vijay Bansal who is the authorized
representative of the assessee appeared on various dates and filed
the necessary details. The case was discussed with him. Written
submissions filed along with supporting documents were perused
and placed on record."
B) Disclosure in the audited Accounts
(1) (b)Changes in Accounting Policies disclosing the switch over from
AS-9 to AS-7 with an income impact of Rs. 119,808,876/- (page 24
of the PB)
(2) Basis of Revenue Recognition at (e) (page 25 of the PB)
(3) Schedule 13: Current Liabilities reflecting deferred
revenues to the extent of Rs. 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 working explaining the
difference between AS-9 and AS-7. The order of assessment was
passed on 15.12.2009.
The aforesaid documents when considered in the context of the
observations in the assessment order (reproduced earlier) leaves no
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Income Tax Act, 1961 No.,2438/Del/2012
Assessment Year: 2007-08
doubt about the due application of mind on the part of the AO to the
point at issue. In other words it is a case of `enquiry' and not a case
of `no enquiry' as is the view of the learned CIT.
Order of the CIT passed u/s 263
The order has been passed in 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>Scrutiny which was satisfactorily answered by the assessee but
did not get reflected in the assessment order, would not by itself
lead to a conclusion that there was no enquiry with respect to
transactions carried out by the assessee. The fact that there was an
enquiry can a l s o b e demonstrated with the help of the material
available on record with the Assessing Officer. The material, to
which a reference has been made in the impugned judgment, would
show that there was no "undue haste? in 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 "lack of proper" verification is un sustainable".
2. CIT vs Vodafone Essar South Ltd. 212 Taxman 184 (Delhi)
Paras 10 & 11 at Pages 44 & 45 of the PB)
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Income Tax Act, 1961 No.,2438/Del/2012
Assessment Year: 2007-08
10. This Court is conscious that an earlier bench of Court in CIT
vs. Sunbeam Auto Ltd., (2011) 332 ITR 167, had held that if there is
some enquiry by the A.O. in the original proceedings even if
inadequate that cannot clothe the Commissioner with jurisdiction
under Section 263 merely because he can form another opinion. It
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 inquiry". If there was any inquiry,
even inadequate that would not by itself give occasion to the
Commissioner to orders under Section 263 of the Act,
merely because has a different opinion in the matter. It is
only in of "lack of inquiry ".
11. In the present case, the records reveal that the assessee
was specifically queried regarding the nature and character
of the one-time regulatory fee paid by it as well as the bank and
stamp duty charges. A detailed explanation in the form 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 certainly conducted by the
Assessing Officer. It is not a case of no inquiry. The order under
Section 263 itself records that the Director felt that the inquiries
were not sufficient and further inquiries or details should have been
called. However, in such cases, as observed in the case of DG
Housing Projects Limited (supra), the inquiry should have been
conducted by the Commissioner or Director himself to record the
finding that the assessment order was erroneous. He should not
have set aside the order and directed the Assessing Officer to
conduct the said inquiry."
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Income Tax Act, 1961 No.,2438/Del/2012
Assessment Year: 2007-08
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 was framed. Even though in the assessment order
there is no mention that the detailed enquiry has been made nor any
evidence has been discussed yet we find that the returned income
was accepted. The necessity for making assessment under section
143(3)/148 of the Act was on account of the return having been
filed beyond the prescribed period.
In the case of Goyal Private Family Specific Trust [1988] 171 ITR
698, this court has held that the order of the Income-tax Officer
may be brief and cryptic, 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 that
merely because the Income-tax Officer had not written lengthy
order it would not establish that the assessment order passed under
section 143(3)/148 of the Act is erroneous and prejudicial to the
interests of the Revenue without bringing on record specific
instances, which in the present case, the Commissioner of Income-
tax has failed to do."
5. CIT vs Development Credit Bank Ltd. 323 ITR 206 (Bombay)
(Page 34 of the PB)
"We have indicated this only as and by way of an illustration 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 Rs.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 of Income Tax could not have treated
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Income Tax Act, 1961 No.,2438/Del/2012
Assessment Year: 2007-08
this finding to be erroneous or to be prejudicial to the interest of the
Revenue. The observation of the Commissioner of Income Tax that
the Assessing Officer had arrived at his finding without conducting
an enquiry was erroneous, since an enquiry was specifically held
with reference to which a disclosure of details was called for by the
Assessing Officer and made by the assessee."
6. CIT vs Honda Siel Power Products Ltd. (2010) 194 Taxman 175
(Delhi)
(Para 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 law or where two views are
possible and the Income-tax Officer has taken one view, the
Commissioner of Income-tax cannot exercise his powers under
Section 263 to differ with the view of the Assessing Officer even if
there has been a loss of revenue, of course, if the Assessing Officer
takes a view which is patently unsustainable in law, the
Commissioner of Income-tax can exercise his powers under Section
263 where a loss of revenue results as a consequence of the view
adopted by the Assessing Officer. 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/disallowances are made, the mere absence of the
discussion of the provisions of Section 80IB(13) read with Section
80IA(9) would not mean that the Assessing Officer had not applied
his mind to the said provisions. As pointed out in Kelvinator of
India (supra), when a regular assessment is made under Section
143(3), a presumption can be raised that the order has been passed
upon an application of mind. No doubt, this presumption is
rebuttable, but there must be some material to indicate that the
Assessing Officer had not applied his mind."
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Income Tax Act, 1961 No.,2438/Del/2012
Assessment Year: 2007-08
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 that the order has been passed upon an application of
mind. No doubt this presumption is rebuttable, but there must be
some material to indicate that the AO had not applied his mind.
(3) Where details and evidence had been filed by the assessee and
assessment framed thereafter u/s 143(3) the fact that in the
assessment order there is no mention of any enquiry or a reference
to any evidence or the order is brief and cryptic that by itself would
not arm the CIT to brand the order as erroneous and 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 has to keep in mind the distinction between `lack of inquiry'
and `inadequate inquiry'. If there was any inquiry even inadequate
that by itself would give no occasion to the CIT to pass orders u/s
263 of the Act, merely because he has a different opinion in the
matter.
(7) In the case of `inadequate inquiry' the CIT must himself conduct
requisite enquiry before passing the order u/s 263 and the matter
cannot be remitted to the AO to conduct such further enquiries."
Ld. 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
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Income Tax Act, 1961 No.,2438/Del/2012
Assessment Year: 2007-08
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 and the AO has accepted the assessee's claim
without making any inquiry/verification. Ld. Counsel further submitted that the
CIT also alleged that the AO has not observed whether the change in the
method of accounting was bona fide and the same was consistently followed in
the future and the AO has not considered whether the change in the method of
accounting was permitted under the provisions of the Act. Ld. Counsel
contended that the last allegation of the CIT is that the AO has not examined
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 ICAI. Furthermore, ld. Counsel of the assessee also
pointed out that as per section 145(4) of the Income Tax Act, it has been
radically recast w.e.f. 1.4.1997 so as to promote only cash or mercantile system
of accounting as also to enforce adherence to the Accounting Standard notified
by the central government.
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Income Tax Act, 1961 No.,2438/Del/2012
Assessment Year: 2007-08
4. Elaborating the facts and circumstances of the present case, the learned
counsel of the assessee submitted that as per Schedule XIII to the statement of
accounts of the assessee, an amount of Rs.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 Assessment Year and the
issue was properly explained by the assessee vide letter dated 20.10.2009 and
30.10.2009 submitted before the Assessing Officer during assessment
proceedings on record. Learned counsel of the assessee vehemently contended
that the assessee had, in fact, filed contract wise working in support of the
changed method of revenue recognition and all expenditure pertaining to
deferred revenue was taken into account while recognizing the revenue in the
financial statement of the assessee. 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
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Income Tax Act, 1961 No.,2438/Del/2012
Assessment Year: 2007-08
2009-10 passed u/s 143(3) of the Act, the Assessing Officer has accepted the
returned income wherein the revenue has been recognized in accordance with
the changed method of accounting vide Accounting Standard-7 which has
regularly and consistently been followed by the assessee during all subsequent
Assessment Years subsequent to the year under consideration i.e. Assessment
Year 2007-08.
5. Learned counsel of the assessee also submitted that the position of law is
settled with a regular method adopted 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 assessee also pointed
out that the assessee was statutorily bound to prepare its accounts and to
recognize its revenue as per Accounting Standard framed by ICAI and the
Assessing Officer accepted the changed method of accounting after due
examination and deliberations with the assessee's representative. Learned
counsel of the assessee also pointed out that the method of accounting approved
by ICAI having been accepted by the Assessing Officer after due verification
and examination cannot be rejected at the threshold in the revisionary
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Income Tax Act, 1961 No.,2438/Del/2012
Assessment Year: 2007-08
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 Year the assessee has to pay higher amount of tax surcharge and
EC by adopting Accounting Standard-7 instead of Accounting Standard-9,
therefore, the order of the Assessing Officer cannot be held as erroneous and
prejudicial to the interest of revenue.
6. Learned counsel of the assessee further elaborated that it is for the
Commissioner to exercise jurisdiction u/s 263 of the Act to show that the order
sought to be revised is erroneous and prejudicial to the interest of revenue and
both the conditions 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 application of mind and after
considering all relevant facts disclosed by the assessee for recognition of
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Income Tax Act, 1961 No.,2438/Del/2012
Assessment Year: 2007-08
revenue as per relevant provisions of the Act and company law. Learned
counsel of the assessee further pointed out that in the proceedings u/s 263 of the
Act, the Assessing Officer cannot be faulted for accepting the method of
accounting approved by the ICAI and mandated by the statute which otherwise
is beneficial to the Revenue Accounting Standard compared to the method of
accounting followed 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 held as unsustainable or not in
accordance with the provisions of the Act, therefore, the notice u/s 263 of the
Act as well as impugned order may kindly be quashed.
7. Last but not the least, learned counsel of the assessee submitted that as
per order sheets of the assessment proceedings dated 20.10.09, it is amply clear
that the Assessing Officer specifically asked the assessee to explain the deferred
revenue items and to give submissions as to how they are taken to the next year
fixing the case 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
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Income Tax Act, 1961 No.,2438/Del/2012
Assessment Year: 2007-08
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 and therefore, the impugned
order may kindly be quashed.
8. Ld. DR supported the action of the CIT and pointed out that the
Assessing Officer did not apply his mind to the radical change of Accounting
Standard by the assessee and the Assessing Officer did not examine and verify
the issue of deferred revenue income adopted by the assessee by way of
adopting Accounting Standard-7 from 1.4.06. Ld. DR vehemently contended
that the Assessing Officer has accepted the assessee's claim in this regard
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 whether the
change in Accounting Standard from AS-9 to AS-7 was permitted under the
provisions of the Act and up to that extent, the assessment order was rightly
held as erroneous and prejudicial to the interest of revenue.
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Income Tax Act, 1961 No.,2438/Del/2012
Assessment Year: 2007-08
10. Ld. DR finally submitted that assessee would be given an opportunity of
being heard during the assessment proceedings in pursuance to the impugned
order and therefore no prejudice would be caused to the assessee if the issue is
again verified and examined by the Assessing 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 as on 31.03.2007 shows that the
assessee has shown an amount of Rs.11,98,08,876/- as deferred
revenue income by changing its method of accounting, said to be
as per AS-7. This has resulted in lowering of profits by
Rs.11,98,08,876/-. The AO has accepted the assessee's claim in
this regard without making any inquiry/verifications, as to
whether the change was bonafide & was consistently followed in
future, and whether it was permitted under the I.T. Act, The AO
has also 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 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 AS-
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Income Tax Act, 1961 No.,2438/Del/2012
Assessment Year: 2007-08
7 has resulted into lowering of profits and the Assessing Officer has accepted
the assessee's claim without making any inquiry/verification so as to whether
the change was bona fide and was consistently followed in the subsequent
Assessment Years; ii) the Assessing Officer has not also examined as to
whether any expenditure related to the deferred revenue income was
debited/claimed by the assessee and whether these were allowable in view of
the fact that corresponding income has not been taken into account.
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 assessee has also submitted detailed contract wise working
pertaining to the deferred revenue. However, from a careful reading of the
impugned assessment order, we note that there is no detailed deliberation on
this issue and there is a bare mention of presence of assessee's representative on
various dates and it has been also noted that the AR filed necessary details and
after discussion with him, written submissions filed along with supporting
documents were perused and placed on record and the Assessing Officer
accepted the returned income of the assessee.
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Income Tax Act, 1961 No.,2438/Del/2012
Assessment Year: 2007-08
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 counsel of the assessee, wherein
it was held that when the AO specifically queried regarding the nature and
character of one time fee paid by it as well as the bank and stamp duty charges
and the detailed explanation in the form of submissions and other documents
required by the Assessing Officer were produced at the stage of original
assessment, then clearly this was not a case of no inquiry and the lack of any
discussion of the assessment order cannot lead to the assumption that the
Assessing Officer 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. The present case is
squarely covered in favour of the assessee by the dicta of Hon'ble Jurisdictional
High Court of Delhi in the case of CIT vs Sunbeam Auto Ltd. (supra).
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Income Tax Act, 1961 No.,2438/Del/2012
Assessment Year: 2007-08
15. The next issue for our consideration is that whether the assessee
consistently followed the same Accounting Standard (AS-7) through
subsequent Assessment Years. When we analyse written submissions of the
assessee placed before the CIT dated 26.3.12 available at pages 207 to 211 of
the assessee's Paper Book, it is 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 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 ld. 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
u/s 143(3) of the Act on 15.12.09 and the CIT issued impugned notice u/s 263
19
Income Tax Act, 1961 No.,2438/Del/2012
Assessment Year: 2007-08
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 arguments
of the learned counsel of the assessee in regard to assessee's letters dated
20.10.09 and 30.10.09 and after reproducing the contents of these letters, the
CIT jumped to record his conclusion without any deliberation on the detailed
written submissions and Paper Book of the assessee. The relevant operative
para 3 of the impugned order of the CIT reads as under:-
"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 Investigations to satisfy himself about the
bonafides of the change in the policy. There is also nothing on the record
to show that the AO verified that the changed policy was consistently
followed in future. There is also nothing on record to show that the AO
had made any examination to find out 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. 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 Rs. 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 above and after
20
Income Tax Act, 1961 No.,2438/Del/2012
Assessment Year: 2007-08
giving reasonable opportunity to the assessee company of being heard."
It is also relevant to mention that the CIT has not given any findings on the issue
of consistency in following the AS-7 in the subsequent Assessment Years and
when he is issuing notice on 12.3.12 and passing orders on 23.12.12, it is
obvious that the copies of the annual accounts for the year ending on 31.3.07,
31.3.08, 31.3.09, 31.3.10 and also copies of the assessment orders for
Assessment Year 2008-09 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
followed percentage completion method as prescribed under AS-7 issued by
ICAI for the accounting of contractors. At the cost of repetition, we may also
point out that the assessee furnished letters dated 20.10.09 and 30.10.09 showing
the cause of change of method of recognition of deferred revenue as per AS-7
instead of AS-9 along with detailed contract wise working which was
considered by the Assessing Officer while passing the impugned assessment
order. It is also pertinent to mention that there was a specific query from the
Assessing Officer during assessment proceedings vide order sheet entry dated
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Income Tax Act, 1961 No.,2438/Del/2012
Assessment Year: 2007-08
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 per AS-7 was calculated at Rs.8,34,63,477 and tax surcharge and EC
payable as per AS-9 was Rs.12,37,91,145 and in the very first year, the assessee
changed its method of accounting from AS-9 to AS-7, there was an amount of
refund of Rs.4,03,27,668. At the same time, from the said tabulation chart we
further observe that in subsequent Assessment Year from 2008-09 to 2011-12
the assessee was under obligation to pay higher amount of tax, surcharge and EC
by following AS-7 instead of AS-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 against AS-9.
18. Learned counsel of the assessee has placed reliance on the judgment of
Allahabad High Court in the case of CIT vs Mahendra Kumar 282 ITR 503
(All) wherein it was held that when the Assessing Officer had passed the
22
Income Tax Act, 1961 No.,2438/Del/2012
Assessment Year: 2007-08
assessment order after obtaining certain details and after discussion with the
assessee, then the mere fact that the Assessing Officer did not mention the fact
of detailed inquiry in the assessment order would not make the order erroneous
and the CIT(A)'s order setting 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 because the Assessing
Officer did not mention the deliberations regarding inquiry would not make the
order erroneous. Per contra, as we have already noted that the assessment order
was passed after due consideration of the issue of deferred revenue after
considering the submissions and contract wise detailed submission by the
assessee. At this juncture, it is relevant to mention that the CIT has passed
impugned order in a hasty manner without any deliberation on the written
submissions submitted 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
23
Income Tax Act, 1961 No.,2438/Del/2012
Assessment Year: 2007-08
High Court in the case of CIT vs Development Credit Bank Ltd. (supra).
19. Lastly, we also observe that the CIT has directed the Assessing Officer to
make a fresh assessment order on the aspect of deferred revenue by holding the
assessment order as erroneous and prejudicial to the interest of revenue on this
aspect but the CIT has not drawn any conclusion that the assessment order
passed by the Assessing Officer is not in accordance with the provisions of the
Act and thus, the same is unsustainable in law. The CIT has not made any
inquiry in regard to the allegations raised by him in the show cause notice issued
by him u/s 263 of the Act and in the light of written submissions and Paper
Book of the assessee filed in response to the said notice. In this situation, the
impugned order falls within the ambit of dicta laid by Hon'ble Jurisdictional
High Court of Delhi in the case of DIT vs Jyoti Foundation (supra) wherein,
after considering the ratio of its own decision in the case of CIT vs DG Housing
Project Ltd. , the Hon'ble Jurisdictional High Court held that where the order u/s
263 of the Act records that the inquiries were not sufficient and further inquiries
or details should have been called for by the Assessing Officer, then in such
cases, the inquiry should have been conducted by the Commissioner himself to
record the finding that the assessment order was erroneous. Their lordships
explicitly held that the CIT should not have set aside the order and directed the
Assessing Officer to conduct the said inquiry. The present case of the assessee
squarely falls within the ratio of the judgment of Hon'ble High Court in the case
24
Income Tax Act, 1961 No.,2438/Del/2012
Assessment Year: 2007-08
of Jyoti Foundation (supra) and hence we reach to a conclusion that the notice
u/s 263 of the Act dated 12.3.12 and impugned order of the CIT was not passed
under valid assumption of revisional jurisdiction available to the CIT(A) u/s 263
of the Act and thus, the same are not sustainable being bad in law and void ab
initio. Accordingly, the appeal of the assessee is allowed and the impugned
notice and order u/s 263 of the Act are hereby quashed.
20. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 21.10.2015.
Sd/- Sd/-
(N.K.SAINI) (C.M. GARG)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 21st October, 2015
`GS'
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT 4.CIT(A)
5. DR
Asst. Registrar
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