2016 (11) TMI 435 - AT - Income Tax

Tribunal upholds tax order citing AO's failure to verify expenses, stresses importance of accurate assessments

M/s Ashiana Housing Ltd. Versus DCIT, Circle-8 (1), Kolkata

The Tribunal upheld the Principal Commissioner of Income Tax's order under Section 263, finding that the Assessing Officer's failure to verify the 'future ... Revision u/s 263 - as per CIT(A) future development expenses were not verified by the AO at the time of assessment and that the future development expenses represents the cost which will be incurred in future and the therefore the same has not been crystallised in the year under consideration - Held that:- We disagree with the argument of the ld. AR that the twin conditions as specified under section 263 of the Act have not been satisfied for holding the order of the AO erroneous and prejudicial to the interest of Revenue. In the instant case the AO has failed to make sufficient enquiries at the time of assessment with regard to the future development cost expenses claimed by the assessee. Accordingly in this case where the tax is paid under normal provisions of tax or under the provisions of MAT under section 115JB of the Act, it does not make any difference. It is because the Hon’ble High Court of Delhi in the case of GEE VEE Enterprises (1974 (10) TMI 29 - DELHI High Court ) has held the order of the appeal in the aforesaid facts and circumstances as erroneous and prejudicial to the interest of revenue. In view of above we do not find any reason to interfere in the order of learned CIT passed under section 263 of the Act. Hence this ground of appeal of the assessee is dismissed. Issues Involved:1. Validity of the revision order passed under Section 263 of the Income Tax Act, 1961.2. Whether the Assessing Officer (AO) conducted sufficient enquiry regarding 'future development expenses.'3. Whether 'future development expenses' represent crystallized costs.4. Whether the assessment order is erroneous and prejudicial to the interest of revenue.Detailed Analysis:1. Validity of the Revision Order under Section 263:The assessee challenged the revision order passed by the Principal Commissioner of Income Tax (Pr. CIT) under Section 263 of the Income Tax Act, 1961, arguing that the original assessment order was not prejudicial to the interest of revenue. The Pr. CIT had invoked Section 263, claiming that the AO's order was erroneous and prejudicial to the revenue because it allowed 'future development expenses' without proper verification.2. Enquiry Conducted by the AO:The Pr. CIT noted that the AO did not verify the 'future development expenses' claimed by the assessee, which amounted to Rs. 2,24,85,000/-, under the head 'Other Project Related Cost.' The Pr. CIT argued that these expenses were not ascertainable at the time of finalizing the balance sheet and thus should not have been allowed. The AO's failure to conduct an enquiry into these expenses rendered the assessment order erroneous and prejudicial to the revenue.3. Crystallization of Future Development Expenses:The assessee contended that in the real estate business, it is common to incur costs after handing over possession of units, and these costs were estimated based on work orders or purchase orders. The assessee argued that these expenses should be matched with the revenue as per the mercantile accounting method. However, the Pr. CIT rejected this argument, stating that the future expenses were not crystallized at the time of filing the income tax return, and thus, the AO should have verified these expenses.4. Erroneous and Prejudicial to the Interest of Revenue:The Tribunal examined whether the AO's order was erroneous and prejudicial to the interest of revenue. It was found that the AO did not conduct necessary enquiries regarding the 'future development expenses.' Citing the Delhi High Court's judgment in Gee Vee Enterprises vs. ACIT, the Tribunal emphasized that the AO is not just an adjudicator but also an investigator who must ascertain the truth of the facts stated in the return. The failure to make such an enquiry rendered the AO's order erroneous.The Tribunal also addressed the assessee's argument that tax was paid under Section 115JB (Minimum Alternate Tax) and that even after disallowing the future development expenses, the tax liability would remain the same. The Tribunal disagreed, stating that the twin conditions of the assessment order being erroneous and prejudicial to the interest of revenue were satisfied, irrespective of whether the tax was paid under normal provisions or MAT.Conclusion:The Tribunal upheld the Pr. CIT's order under Section 263, stating that the AO's failure to verify the 'future development expenses' rendered the assessment order erroneous and prejudicial to the interest of revenue. Consequently, the appeal filed by the assessee was dismissed.