2025 (8) TMI 1167 - AT - Income Tax

Appeal dismissed; Section 263 revision on retention money upheld where AO made no enquiry or verification

ITAT Patna-AT dismissed the appeal challenging revision u/s 263 concerning 'retention money' that was not debited to the P&L but was adjusted in income ... Revision u/s 263 - “retention money” was not debited in the P&L Account but was straightway adjusted in the computation of income - HELD THAT:- As seen that at some stage the assessee had informed the Ld. AO about the facts surrounding the issue of “retention money”. However, it is evident that there is absolutely no discussion in the assessment order regarding this issue and it is not evident as to whether any cognizance was taken at all about the same or not. In the present case, there is no indication whatsoever that the Ld. AO has applied his mind to the issue at hand and we find that the Ld. PCIT has duly noted the lack of enquiry or verification regarding the said issue. Accordingly, we find no merit in the contention of the assessee that assumption of jurisdiction and the subsequent passing of the order by the Ld. PCIT is not as per law and hence we dismiss the present appeal. ISSUES PRESENTED AND CONSIDERED 1. Whether the exercise of revisionary power under Section 263 of the Act was justified where the Assessing Officer's order made no recorded inquiry or application of mind regarding the assessee's claim of 'retention money' excluded from receipts. 2. Whether a mere difference of opinion between the Assessing Officer and the Principal Commissioner (or Commissioner) can constitute a valid ground for invoking Section 263. 3. Whether judicial decisions cited by the assessee holding that retention money may be excluded from taxable receipts require examination of underlying contracts by the Assessing Officer before allowance, and whether failure to examine such contracts renders the assessment order erroneous and prejudicial to revenue. 4. Relevance and application of the post-1.6.2015 legislative amendment to Section 263 (Explanation 2) and CBDT Circular No. 19/2015 in determining when an assessment order is 'erroneous in so far as it is prejudicial to the interests of the revenue'. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of Section 263 revision where AO did not record inquiry into retention money Legal framework: Section 263 empowers revision where the PCIT/CCIT/ CIT considers an AO's order to be 'erroneous in so far as it is prejudicial to the interests of the revenue.' Explanation 2 (w.e.f. 01.06.2015) specifies that an order is deemed erroneous if passed without making inquiries or verifications which should have been made, or allowing relief without inquiry, among other grounds. Precedent treatment: The Circular No.19/2015 clarifies legislative intent that lack of requisite inquiry/verification is a valid ground for revision under Section 263. Prior judicial decisions require factual examination of contracts where retention/part payments are claimed to justify excluding amounts from receipts. Interpretation and reasoning: The Tribunal found no indication in the assessment order that the AO applied his mind or conducted any inquiry/verification into the retention money claim despite submissions by the assessee and case law cited. The absence of any discussion or analysis in the AO's order on this specific claim falls squarely within Explanation 2(a)/(b) - i.e., the order was passed without making inquiries or verification which should have been made and allowing relief without inquiring into the claim. Ratio vs. Obiter: Ratio - Where an assessee claims exclusion of amounts (here, retention money) and the AO records no inquiry or reasoning addressing that claim, the Principal Commissioner is entitled to hold the assessment order erroneous under Section 263 and to exercise revisionary jurisdiction. Conclusion: Revision under Section 263 was validly invoked because the AO did not make requisite inquiry or record reasons regarding the retention money claim; the PCIT's assumption of jurisdiction and order were upheld. Issue 2 - Whether mere difference of opinion is a ground for revision Legal framework: Section 263 post-amendment targets orders passed without necessary inquiries or contrary to board directions or binding judicial decisions; historically courts have held that mere difference of opinion does not suffice for revision. Precedent treatment: The Tribunal reiterated the established principle that a mere difference of opinion between the AO and the PCIT does not, by itself, justify exercise of Section 263. However, where the AO's order shows absence of any inquiry or failure to consider material, that is not merely a difference of opinion but a jurisdictional defect contemplated by Explanation 2. Interpretation and reasoning: The assessee argued the PCIT wrongly exercised jurisdiction based solely on a difference of opinion. The Tribunal distinguished mere difference of opinion from the present facts: the AO's order contained no discussion on the retention money, evidencing lack of inquiry rather than a deliberate difference of view. Given Explanation 2 and the facts, the PCIT's action was not founded on mere difference of opinion but on the AO's failure to make enquiries which should have been made. Ratio vs. Obiter: Ratio - Mere difference of opinion is not a ground for revision under Section 263; but failure to make required inquiry/verifications (an absence of application of mind) is a valid ground and is distinguishable from mere difference of opinion. Conclusion: The contention that revision was based on mere difference of opinion fails because the AO had not recorded any inquiry or reasoning; therefore the PCIT's intervention was permissible. Issue 3 - Need to examine contracts and applicability of cited judicial decisions on retention money Legal framework: Taxability of retention money depends on the contractual arrangements and the accounting/taxation principle applicable to accrual/receipt; judicial decisions have emphasized examination of contracts to determine whether the right to payment has accrued or whether amounts are only contingently receivable. Precedent treatment: The assessee relied on cases holding that where agreement provides for payment of only part of contracted amount or retention arrangements exist, only actual receipt may be taxable; some judgments required close scrutiny of contracts to decide taxability. The PCIT noted these authorities but observed that in those cases the assessing authority examined contracts and facts before drawing conclusions. Interpretation and reasoning: The Tribunal observed that the precedents cited require factual and contractual examination by the AO. Because the AO's order lacked any record of such examination, the precedents could not be applied administratively in favour of the assessee. The PCIT's concern was that the AO did not consider the contracts or reconcile prior year disallowances mentioned in the computation, evidencing a lack of verification. Ratio vs. Obiter: Ratio - Application of precedents which make contract-specific findings requires that the AO examine contracts and facts; absence of such examination invalidates a conclusion based on those precedents. Obiter - Noting that the precedents exist and may support the assessee if proper inquiry were made. Conclusion: The AO's failure to examine contracts meant the cited judicial rulings could not be treated as having been properly applied; this supported the PCIT's view that the assessment order was erroneous and prejudicial to revenue. Issue 4 - Effect of Explanation 2 to Section 263 and CBDT Circular No.19/2015 Legal framework: Explanation 2 to Section 263 (effective 01.06.2015) and CBDT Circular No.19/2015 clarify that an assessment order is deemed erroneous and prejudicial if passed without necessary inquiries or allowing relief without inquiry, among other specific situations. Precedent treatment: Both legislative amendment and the Circular were relied on by the PCIT and accepted by the Tribunal as authoritative guidance limiting and clarifying the scope of Section 263. Interpretation and reasoning: The Tribunal applied Explanation 2 and the Circular to the facts, finding that the AO did not make necessary inquiries about retention money and did not explain or record reasons; this omission falls squarely within the statutory criteria for revision. The legislative change shifts focus to whether the AO made required inquiry/verification rather than relying on an amorphous 'erroneous' standard. Ratio vs. Obiter: Ratio - Where Explanation 2/CBDT guidance demonstrates that an AO failed to make inquiries or verify claims that should have been verified, the Principal Commissioner may validly regard the order as erroneous and prejudicial to revenue and initiate revision under Section 263. Conclusion: The amendment and circular are applicable; they validate the PCIT's invocation of Section 263 in the present facts because of the AO's lack of inquiry/verification. Overall Conclusion The Tribunal concluded that the AO's assessment order contained no recorded inquiry, verification, or reasoning on the retention money claim; in view of Explanation 2 to Section 263 and CBDT Circular No.19/2015, the PCIT rightly held the assessment order to be erroneous and prejudicial to revenue. The appeal against the exercise of revisionary jurisdiction was dismissed.