ITAT overturns revision order, upholds percentage completion method for revenue recognition and TDR treatment

ITAT Mumbai allowed assessee's appeal against PCIT's revision order u/s 263. PCIT held AO's assessment order was erroneous for not examining revenue recognition method and TDR expenses treatment. ITAT found AO had adequately verified assessee followed percentage completion method, not project completion method as claimed by PCIT. Supporting documents including audit reports and project-wise details were on record. AO had consistently verified this method in previous assessment years. Regarding TDR expenses, ITAT held treating them as capital expenditure was unjustified since TDR represented construction rights forming part of stock-in-trade. PCIT failed to substantiate how assessment order was erroneous and prejudicial to revenue. However, ITAT confirmed PCIT's jurisdiction u/s 263 over faceless assessment orders after record transfer to jurisdictional AO.

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Issues Involved:
1. Validity of the order under Section 263 of the Income Tax Act.
2. Jurisdiction of the Principal Commissioner of Income Tax (PCIT) to pass the order under Section 263.
3. Violation of principles of natural justice.
4. Merits of the assessment order being set aside for fresh inquiries and verification.

Summary:

Issue 1: Validity of the order under Section 263 of the Act
The assessee challenged the order passed under Section 263, arguing that the assessment order dated 02.03.2021 was not erroneous and prejudicial to the interest of revenue. The PCIT had set aside the assessment order, stating that the assessee followed the project completion method, and therefore, the interest on loans taken during the year was not allowable. However, the Tribunal found that the assessee had consistently followed the percentage completion method, as evidenced by the audit report and details submitted during the assessment proceedings. The Tribunal concluded that the PCIT did not disprove the material placed on record by the assessee and that the assessment order was not erroneous or prejudicial to the revenue's interest.

Issue 2: Jurisdiction of the PCIT to pass the order under Section 263
The assessee contended that the PCIT had no jurisdiction to pass the order under Section 263 as the assessment was made under the Faceless Assessment Scheme, supervised by another PCIT. The Tribunal noted that the Faceless Assessment Scheme, notified by the CBDT, provided that after completing the assessment, the electronic records would be transferred to the jurisdictional Assessing Officer for further action. The Tribunal held that the jurisdictional PCIT could exercise revisionary powers under Section 263 after the records were transferred back to the jurisdictional Assessing Officer. The Tribunal dismissed the assessee's ground, stating that the PCIT, Mumbai-27, had the jurisdiction to pass the order under Section 263.

Issue 3: Violation of principles of natural justice
The assessee argued that the PCIT violated the principles of natural justice by not considering the submissions filed by the assessee and changing the basis of invoking jurisdiction. The Tribunal did not find merit in this argument, as the PCIT had provided an opportunity for the assessee to be heard and had issued a show-cause notice detailing the reasons for invoking Section 263.

Issue 4: Merits of the assessment order being set aside for fresh inquiries and verification
The PCIT had set aside the assessment order for fresh inquiries and verification, particularly concerning the method of revenue recognition and the nature of expenses. The Tribunal found that the Assessing Officer had already examined these issues during the original assessment proceedings, as evidenced by the detailed submissions and documentation provided by the assessee. The Tribunal concluded that there was no need for fresh inquiries and verification, as the assessment order was neither erroneous nor prejudicial to the revenue's interest.

Conclusion:
The Tribunal partly allowed the appeal, holding that the assessment order was not erroneous or prejudicial to the revenue's interest, and the PCIT had no jurisdiction to pass the order under Section 263. The Tribunal dismissed the ground related to the violation of principles of natural justice and upheld the jurisdiction of the PCIT to exercise revisionary powers after the records were transferred back to the jurisdictional Assessing Officer.

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