2022 (7) TMI 472 - AT - Income Tax

Tribunal overturns PCIT order in appeal, finding assessment not erroneous or prejudicial.

Rushabhdev Infra Project Pvt. Ltd. Versus The Principal Commissioner of Income Tax-3, Ahmedabad

The Tribunal allowed the appeal of the assessee, setting aside the order of the Principal Commissioner of Income Tax (PCIT). The Tribunal found that the ... Revision u/s 263 - Error in computing capital WIP - assessee despite following the Project Completion Method for accounting of Revenue and having debited interest to the profit and loss account, however the same was not included in the capital work in progress as at the end of the year - AO failed to verify whether the assessee had followed the Percentage Completion Method for recognizing revenue as prescribed by the guidance note issued by the Institute of Chartered Accountants of India(ICAI) for accounting income from Real Estate business - HELD THAT:- Assessee had explained all these facts to the Ld.PCIT also pointing out firstly to him that the assessee had all along been consistently following this method of recognizing Revenue and it had also been demonstrated to him from the Guidance Note of the ICAI(Revised in 2012) on accounting for Real estate transactions, that the project completion method was also recommended in the said Guidance Note in specific circumstances ,which the assessee had demonstrated existed in its case justifying the adoption of even as per the guidance note of the ICAI. This issue too had been duly examined during assessment proceedings and it had duly demonstrated to the PCIT also that the project completion method of revenue recognition followed by the assessee was in compliance with the accounting guidelines issued by the ICAI for Real Estate revised in 2012 in this regard. PCIT has not pointed out any infirmity in the above explanation, but simply dismissed it by stating that the assessee has not followed the Guidelines issued by the ICAI and the AO has not examined the issue, both observations we find are factually incorrect. Therefore vis a vis the issue of accounting for income by the assessee whether in accordance with the Guidelines of the ICAI, we find that there is no error in the order of the AO who had accepted the method followed by the assessee, i.e Project Completion, on being demonstrated that it was in accordance with the Guidelines issued by the ICAI, which fact has not been controverted by the Ld.PCIT when demonstrated to him also during revisionary proceedings. Also the uncontroverted fact that the assessee has been consistently following this method of accounting also renders the acceptance of the same by the AO to be correct and in accordance with law. Appeal of assessee allowed. Issues Involved:1. Delay in filing the appeal.2. Validity of the order passed under Section 263 of the Income Tax Act, 1961.3. Examination of interest expenditure included in the closing work in progress (WIP).4. Verification of the method of accounting for revenue recognition.Detailed Analysis:1. Delay in Filing the Appeal:The appeal was marked as delayed by 9 days. However, due to the exclusion of the period from March 15, 2020, to February 2022 for the purposes of limitation by the Hon’ble Apex Court due to the Covid-19 pandemic, there was no delay in filing the appeal.2. Validity of the Order Passed Under Section 263:The assessee challenged the order passed under Section 263 on the grounds that the assessment order sought to be revised was neither erroneous nor prejudicial to the interests of the revenue. The Principal Commissioner of Income Tax (PCIT) had set aside the assessment order under Section 143(3) on the basis that the Assessing Officer (AO) failed to properly verify certain issues, thereby making the order erroneous and prejudicial to the interests of the revenue.3. Examination of Interest Expenditure Included in the Closing Work in Progress (WIP):The PCIT found that the assessee had debited interest of Rs. 1,47,08,801/- to the profit and loss account but did not include it in the capital work in progress (WIP) despite following the Project Completion Method. The assessee contended that the interest was indeed included in the WIP, as evidenced by the audited financial statements and the detailed breakup of closing WIP submitted during the assessment proceedings. The Tribunal found that the AO had duly examined and verified this issue during the assessment proceedings, and the interest was included in the WIP. Therefore, there was no error in the AO's order regarding this issue.4. Verification of the Method of Accounting for Revenue Recognition:The PCIT also noted that the AO failed to verify whether the assessee followed the Percentage Completion Method for recognizing revenue as prescribed by the ICAI's guidance note. The assessee argued that it consistently followed the Project Completion Method, which was permissible under the ICAI guidelines in specific circumstances. The Tribunal observed that the AO had inquired into the method of accounting during the assessment proceedings and was satisfied that the Project Completion Method was appropriate for the assessee's case. The Tribunal found no infirmity in the AO's acceptance of this method, as it was in compliance with the ICAI guidelines and had been consistently followed by the assessee.Conclusion:The Tribunal concluded that the findings of the PCIT were contrary to the facts on record and not sustainable. The issues of interest expenditure and the method of accounting for revenue recognition had been duly examined and verified by the AO during the assessment proceedings. Therefore, the assessment order was not erroneous or prejudicial to the interests of the revenue. The Tribunal set aside the order of the PCIT and allowed the appeal of the assessee.Order:The appeal of the assessee is allowed. Order pronounced in the open court on 29-04-2022.