CIT's revision under Section 263 unsustainable as Section 43CB not applicable for assessment year and AO's limited scrutiny acceptance valid

ITAT Indore held that CIT's revision u/s 263 was unsustainable. AO conducted limited scrutiny through CASS and accepted assessee's Project Completion Method for construction contracts. CIT erred in finding AO's order prejudicial to revenue for not examining Percentage Completion Method u/s 43CB. Section 43CB was not applicable for the assessment year as it became effective from 01.04.2017. AO cannot examine issues beyond limited scrutiny scope without converting to complete scrutiny. Assessee's consistent use of Project Completion Method, being legally permissible, cannot render AO's acceptance erroneous. Appeal decided in favor of assessee.

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Issues Involved:
1. Invocation of Section 263 by the Principal Commissioner of Income Tax (PCIT).
2. Allegation of the assessment order being erroneous and prejudicial to the interest of the revenue.
3. Applicability of the Percentage Completion Method versus the Project Completion Method.
4. Jurisdiction of the PCIT in the context of limited scrutiny.

Summary:

1. Invocation of Section 263 by the Principal Commissioner of Income Tax (PCIT):
The appeal by the assessee is directed against the revision order dated 28.11.2022, passed by the PCIT under Section 263 of the Income Tax Act for the Assessment Year 2015-16. The PCIT invoked Section 263, alleging that the assessment order passed under Section 143(3) was erroneous and prejudicial to the interest of the revenue.

2. Allegation of the Assessment Order Being Erroneous and Prejudicial to the Interest of the Revenue:
The PCIT found that certain points were not considered by the Assessing Officer (AO) while completing the assessment order. Specifically, the PCIT noted that the AO did not examine the applicability of the Percentage Completion Method, which led to the assessment order being deemed erroneous and prejudicial to the revenue's interest.

3. Applicability of the Percentage Completion Method versus the Project Completion Method:
The assessee, a real estate developer, consistently followed the Project Completion Method of accounting. The PCIT raised the issue of adopting the Percentage Completion Method. However, the tribunal noted that the Percentage Completion Method was not mandatory for the real estate business before the introduction of Section 43CB by the Finance Act 2018, which is applicable from 01.04.2017. The tribunal cited various precedents, including the Supreme Court and High Courts, affirming that the Project Completion Method is a recognized and acceptable method of accounting.

4. Jurisdiction of the PCIT in the Context of Limited Scrutiny:
The tribunal emphasized that the case was selected for limited scrutiny through CASS on specific issues such as income from real estate business, sundry creditors, and sales turnover mismatch. The AO conducted due inquiries within the scope of limited scrutiny. The tribunal referred to CBDT instructions, which mandate that AO should not exceed the jurisdiction under limited scrutiny unless converted into complete scrutiny. The tribunal concluded that the PCIT's invocation of Section 263 on an issue beyond the scope of limited scrutiny was not justified.

Conclusion:
The tribunal held that the AO's acceptance of the Project Completion Method, consistently followed by the assessee, was not erroneous. Consequently, the tribunal set aside the PCIT's order under Section 263, stating it was not sustainable in law. The appeal of the assessee was allowed.

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