D. Karunakara Rao, AM:
1. This appeal filed by the assessee on 3.4.2012 is against the order of the Commissioner of Income Tax-15, Mumbai dated 27th March, 2012 for the assessment year 2007-2008.
2. In this appeal, assessee raised the following grounds which read as under:
"1. The CIT (Adm) erred in invoking the provisions of section 263 of the Income Tax Act, 1961 when the conditions precedent for attracting section 263, are not satisfied in the appellant's case and subsequently, in setting aside the original assessment order dated 13.7.2009.
2. The Ld CIT (Adm) further erred in this connection in directing the Assessing Officer to compute the income of the appellant from the Link Corner Project for assessment year 2007-2008 by applying the percentage completion method.
3. The Ld CIT (Adm) further erred in this connection in holding that:-
a) in almost all cases, the appellant has received advances from buyers in excess of 70% of the agreement value;
b) the payments received indicate the commitment of the buyer and seller as also indicates transfer of significant risk and reward to buyer;
c) applying Accounting standard 9, the appellant should have recognized revenue;
d) notwithstanding non-recognition by the appellant, the AO ought to have recognized it; and
e) in the premises, the foregoing non-action on the part of the AO is erroneous and prejudicial to the interest of the Revenue.
4. The Ld CIT (Adm) failed to appreciate that the appellant under section 145 of the Income Tax Act, 1961 follows the project completion method of accounting and accordingly, already offered the income arising from the Link Corner project in the Assessment Year 2008-2009.
5. The Ld CIT (Adm) further erred in this connection in passing the impugned revision order in contravention of the principles of natural justice."
3. Briefly stated relevant facts of the case are that the assessee is engaged in the business of building and developing residential as well as commercial properties. Assessee filed return of income declaring income at Rs. 1,51,05,598/- and the same was scrutinized u/s 143(3) of the Act determining the total income at Rs. 1,58,68,700/-. At the end of the scrutiny assessment proceedings, additions were made on account of disallowances u/s 14A, 40(a)(ia) and on account of sundry debtors written off. As per the records, the assessee follows 'project completion method' in respect of both the projects namely (i) Link Corner Project and (ii) Gym View Project. The CIT (Adm)-15, Mumbai reviewed the order of the AO and issued a show cause notice dated 13.4.2010 u/s 263 of the Act and few of the issues raised in the show cause notice relate to recognizing of income in respect of Link Corner Project and Gym View Project and also AO's failure to disallow the provisions relating to Direct Expenses pertaining to Gym View Project. Finally, CIT passed order dated 27th March, 2012 directed the AO to compute the income of the assessee from Link Corner Project for the assessment year 2007-2008 by applying the 'percentage completion method' and lodged other issues. Para 4.4 is relevant in this regard which reads as under:
"4.4 To sum up, the assessee has received significant deposits from the buyers representing are of 15,959.16 sq. ft. out of the total are of 2323,595.16 sq. ft. The assessee has completed 88.78% of the work. Therefore, applying the Accounting Standard 9 (as illustrated), the assessee should recognize revenue. Notwithstanding the non-recognition of revenue ;by the assessee, the Assessing Officer should have recognized revenue. This non-action on the part of the Assessing Officer, is erroneous and prejudicial to the Revenue. Accordingly, the assessment made u/s 143(3) is set aside with a direction to the Assessing Officer to compute the income of the assessee from Link Corner Project for Assessment Year 2007-2008 by applying Percentage Completion Method."
3.1. Aggrieved with the same, assessee filed an appeal before the Tribunal.
4. During the proceedings before us, Shri Sanjiv M. Shah, Ld Counsel for the assessee demonstrated that the assessee consistently following Project Complete Method in the earlier assessment years also, therefore, the CIT cannot substitute the one method for other whether it is better one or otherwise. Further, he mentioned that the Project Complete Method cannot be replaced by the Percentage Completion Method without satisfying the conditions relating to expression 'prejudicial to the interests of the Revenue'. In this regard, Ld Counsel relied on various decisions and conclusions to demonstrate that the decision of the AO/CIT(A) are invalid and the same are mentioned here under:
"1. CIT vs. Bilahari Investment 299 ITR 1 (SC)
Conclusion: Assessees subscribing to chits having all along followed the completed contract method in the context of discount and the Department having accepted the same over several years, the completed contract method adopted by the assessees is not required to be substituted by percentage completion method in the absence of any finding of the AO that the completed contract method distorts the profits of a particular year.
2. CIT vs. TATA Iron and Steel Co. Ltd. 106 ITR 363 Held: It would be difficult for a company which carries on business of the magnitude of the assessee-company to fix in which particular year a particular plant which was obsolete became non-existent, or in which particular year the company became aware of the non-existence of a particular plant. The Tribunal has, in its order, rightly stressed the method of accounting followed by the assessee-company and has come the conclusion that the method could not be said to be unreasonable even if a better method could, perhaps, be visualized. There is nothing wrong in that view of the Tribunal, and, the allowing of this deduction by the Tribunal cannot be said to be against any provisions of law, having regard, particularly, to s.13 of the Indian IT Act, 1922.
3. Shapoorji Pallonji and Co (Rajkot) (P) Ltd. vs. ITO , 49 ITD (Bom) 479. ............... We therefore, find no error in the assessment orders. Considering the nature of business and the manner in which it was carried on not only the assessee, but the independent Chartered Accountants have also found it appropriate to adopt project completion method for the purpose of true and fair view of the financial position including the profits earned by the assessee on various projects. Merely because the profit on a project is postponed from the year of commencement of the project to the year of completion of the project, the same would not be the basis for considering the assessment made on the basis as erroneous. In this case, the rate of tax is constant and therefore, in the context of the aforesaid circumstances, it cannot be said that the assessments were in any way prejudicial to the interest of revenue. There is one more aspect which requires consideration. The profits of business must be computed in accordance with method of accounting regularly employed by the assessee. The choice of the method of accounting, like the choice to the previous year, lies with the assessee. The only thing is that the assessee must show that he has followed the chosen method of accounting regularly. Even for the very first accounting year, in this case for AY 1982-83, the method of accounting should be deemed to have been regularly employed if the same method is shown to have been employed in the subsequent assessment years. As stated earlier, the assessee has been following the same method of accounting regularly in subsequent assessment years. Therefore, the mandatory provisions of section 145 would apply and the Department is bound by the assessee's choice of method which cannot be rejected as improper merely because it gives the assessee benefit in certain years even if this is assumed to be the case of merely because according to the CIT another method is preferable. It will be worthwhile to recall the case of CIT vs. Sarangpur Cotton Mfg. Co. Ltd (1938) 6 ITR 36 j(PC) where it was opined that s. 145 related to a method of accounting regularly employed by the assessee for its own purposes and in this case for the purpose of company's business and does not relate to a method of making up of the statutory return for assessment to income tax. Moreover, the section clearly makes certain method of accounting a compulsory basis of computation unless the profits cannot properly be deducted therefrom. The Departmental Representative fairly admitted that the method followed by the assessee was also a recognized one and indeed on this aspect there cannot be disputed and that is why the AO not only in AY 1982-83 but also in subsequent two years, found himself duty-bound to compute the profits on the basis of method of accounting adopted by the assessee. When the assessments are made on certain settled principles, we find no reason, why assessments should be reversed. We therefore, hold that assumption of jurisdiction under s. 263 was not in accordance with law, on facts of the case and therefore, we cancel the order passed under s. 263 and restore the assessments framed by the AO. ..... .
4. CIT vs. Advance construction Co. (P) Ltd. 275 ITR 30 (Guj): Conclusion: Assessee contractor having offered profits for tax on the basis of percentage completion method which is a standard accounting practice and has been consistently followed by the assessee in subsequent years, the same could not be rejected and impugned amount which has been deducted in working out the profit is not chargeable to tax in the year under consideration.
5. Commissioner of Income-tax Vs Triveni Engineering and Industries Ltd. (Del) 336 ITR 374
Held: dismissing the appeal, that where in relation to the project works undertaken by the assessee, the completed contract method of accounting is followed, which is consistent with the Accounting Standards and these accounting standards also lay down the norms indicating the particular point of time when provision for all known liabilities and losses has to be made, the making of such a provision by the assessee appeared to be justified especially when the assessee had recognised gain as well on such project during this year itself. This was in consonance with the principle of matching cost and revenue as well. It was a matter of record that against the provision of Rs. 139 lakhs, the assessee had to actually incur expenditure of Rs. 218.03 lakhs, i.e., more than the provision made. It was undisputed that the expenditure incurred by the assessee on the project was admissible. Considering that the assessee was a company assessed at a uniform rate of tax, the entire exercise of seeking to disturb the year of allowability of expenditure was, in any case revenue neutral.
6. CIT vs. Max India Ltd. (2007) 213 CTR (SC) 266 Conclusion: When the CIT passed the impugned order under S. 263, two views were inherently possible on the word "profits" occurring in the proviso to s. 80-HHC(3) and therefore, subsequent amendment of S. 80-HHC made in the year 2005, though retrospective, did not render the order of the AO erroneous and prejudicial to the interest of the Revenue, and CIT could not exercise powers under S. 263.
7. CIT vs. Gabrial India Ltd. (1993) 203 ITR 108 (Bom) Conclusion: In order to exercise jurisdiction under S. 263, Commissioner must have material to prima facie come to a conclusion that order ITO is erroneous as also prejudicial to interest of Revenue.
5. Referring to the contents of para 4.1 of the impugned order with reference to accounting principle ie AS-9, Ld Counsel took objection to the manner in which the said AS-9 was interpreted by the CIT and stated that AS-9 does not apply to the facts of this case, in so far as the fact that the agreements for sale of the stocks were not signed in the year under consideration. For this purpose, Ld Counsel took us through page 46 of the paper book and mentioned that AS-7 or AS-9 are not notified by the Government unlike the other accounting principles ie AS-1 and AS-2 and therefore, the Assessee is not under statutory obligation to maintain his accounts in tune with the AS-and or AS-9. Therefore, AS-7 is not statutorily binding on the assessee and the same is not legally enforceable. Ld Counsel also filed written submissions elaborating various decisions and the relevant parts to be noted while taking decision by the Tribunal.
6. Per contra, Ld DR dutifully relied on the order of the CIT. Shri Manoj Kumar, Sr AR who argued the case stated that the AS-9 applied to the facts of this case. In this regard, some agreements which are not signed between the parties were also brought to our notice relying on the date mentioned on page 46 of the impugned order.
7. We have heard the parties and perused the facts relating to the issue raised before us. It is undisputed fact that the assessee has two different projects, namely (i) Link Corner Project and (ii) Gym View Project. Total income of the assessee includes the business income from both the projects. Assessee recognized income from both the projects based on the 'project completion method' consistently followed over the years. AO accepted the method of recognizing the income from these projects for this AY 2007-2008. However, the CIT reviewed the order of the AO and attempted to thrust on the assessee the percentage completion method of recognizing the income only on the Link Corner Project only leaving the income from other project to be recognized based on the 'project completion method' of accounting. Why this discrimination? Apparently, the Gym View Project is already completed in the year under consideration; whereas the Link Corner Project is yet to be completed as on 31st March of this PY. This approach of the CIT in our opinion is not proper. There is no discussion in the order how the method of accounting followed by the assessee in respect of Link Corner Project is inappropriate. There is no discussion in his review order how following Project completion method is prejudicial to the interest of review and what is the revenue loss in this process. CIT has not demonstrated in his review order how AS-7 or AS-9 are legally binding on the assessee in matters of recognizing the income of the project when the said AS-7 and AS-9 are not notified by the CBDT for the purpose of section 145 of the Act. If they are binding on project say Link Corner Project of the assessee, the same is binding on the other project ie Gym View Project too. In that sense, the CIT turned Nelson's Eye to the method adopted in respect of the other project as the same is inconvenient to him. This approach of the CIT is not valid.
8. Further, the perusal of the legal propositions extracted above suggest that the revenue cannot trust a method of accounting on the assessee though that method is superior and therefore, substitution of method of accounting is not allowed unless, the loss of revenue is made out of the project of the assessee. CIT has not made out that by following project completion method, the assessee fulfilled the condition relating to 'prejudicial to the interest of revenue' used in section 263 of the Act. Therefore, when the assessee is not held by the revenue guilty of change of method of accounting with the mala fide intention to reduce the tax liability, the CIT cannot allege the mala fide in the method followed by the assessee in respect of the income of the Link Corner project. Further, it is a settled law that the CIT cannot assume jurisdiction u/s 263 of the Act, when the issue relating to selection of method of account is debatable one in nature. Should the assessee follow 'Percentage Completion Method' in respect of 'Link Corner Project', when the Project Completion Method is undisputedly followed in respect of 'Gym View Project', in our view, constitutes a debatable issue. Assessee has not committed any legal error by uniformly and consistently following 'Project Completion Method' in respect of his project. AO's order does not suffer from any error both on law or fact. Further, it is a trite law that the CIT can only assume jurisdiction when there is erroneous assumption of law or fact or where the AO failed to apply his mind to an issue during making of an assessment or where AO failed to conduct reasonable enquiry into the claim made in the return.
9. In this instant case, there is no such lapse on part of the AO. In our opinion, the assumption of jurisdiction by the CIT is not valid. Therefore, the grounds raised by the assessee are allowed. Accordingly, the ground is allowed. Consequently, the other issues raised in other grounds and their adjudication merely an academic exercise. Therefore, the same are dismissed as academic.
10. In the result, the appeal of the assessee is allowed pro-tanto.