TaxTMI 
TaxTMI 
2019 (6) TMI 282
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....d not make the assessment order either erroneous or prejudicial to the interest of revenue. 4. The CIT erred on facts and in law in ignoring the definition of construction contracts as provided in accounting standard 7 while concluding that the appellant was not engaged in construction activity. 5. That the CIT erred on facts and in law in not appreciating that since the appellant had booked loss, not computing book profit under section 115jb of the act did not make the assessment order erroneous or prejudicial to the interest of revenue." The Brief facts 1. The assessee filed return of income by declaring a loss of Rs. 1,59,76,460. CIT in order mentioned that it was observed from the note to the accounts that the assessee had changed its accounting policy, from recognise revenue on projects from milestone billing basis to percentage completion method AS 7' to consequent to which revenue from projects was lower by Rs. 237887 and work in progress is lower by Rs. 4,21,51,530/- and thus loss for the year was higher by Rs. 4,23,89,417/-. 2. In view of the above, the Commissioner mentioned that the order passed by the assessing officer was erroneous and pr....
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....imulators. 8.2 It was the contention of the assessee that simulator involve significant civil construction work and installation of complex machinery and equipment that creates a virtual environment of battle field, that may be faced by the aircraft or a battle tank in the battle ground/ space. The contract entered by the assessee with the Ministry of defence was a long-term contract for design, supply and installation of simulator and period of the contract was spread over 2 years, with further warranty of 3 years. As the completion of the construction contract falling in different financial year and it was difficult to assign corresponding revenue for the construction already completed, therefore the AS-7 was applied view a view to give correct state of financials w.e.f. financial year 2007-08 therefore there was a change in accounting policy. This AS-7 was subsequently followed in subsequent years 2008-09 to till date. 8.3 The ld. AR for the assessee relies upon the following decisions on this proposition; • Maruti securities Ltd (53 taxman.com 149) • A2Z Maintenance And Engineering Service Ltd ITA No.2438/Delhi/2012 8.4 On the other hand ,the ....
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....on clause for the purposes of building the Main Battle Tank by the assessee for Ministry of Defence. It was submitted that the scope and ambit of the simulator can be seen from the scope of work given in the agreement which clearly shows that an artificial battle scene was created with the help of visuals and computers, so as to train the officials all Main Battle Tank. On the above basis it was submitted that there was no element of construction in the activities of the best assessee of stimulator and therefore the application of accounting standard 7 is not attracted. 8.8 Further it was submitted that the assessing officer had not discharged his duties in accordance with law as he has not examined and computed the book profits of the assessee under section 115 JB of the Act and had accepted the return filed by the assessee without any verification and Inquiry. Thus the action of the assessing officer was prejudicial to the interest of the of the revenue. Hence the action on the part of the Commissioner was in accordance with law. Order was prejudicial to the interest of the revenue 8.9 On this aspect the Ld. AR of the assessee had submitted that the assessee had mentione....
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....y mentioned that the assessing officer has not considered the notes on account of the auditor and had further committed error in not announcing the profit which had resulted on account of change in accounting policy for competition book profit. In paragraph or it was mentioned as under; - "Furthermore, examination of assessment record and apparent analysis of receipt as shown in TDs certificate and as disclosed in revenue recognised from the project also shows that there are apparent inconsistencies between the 2..........." This clearly shows that there is total application of mind and Inquiry by the CIT therefore the argument of the assessee that there is lack of Inquiry by the CIT was without any basis. 9. We have heard the rival contentions of the parties and perused the material available on record and also gone through the decisions relied upon by Ld.AR for the assessee as well as by the Ld. DR for the revenue. 10. For the purpose of invoking the jurisdiction under section 263 of the Act it is essential to satisfy the twin conditions i.e. (i) the order passed by the assessing officer was erroneous and (ii) prejudicial to the interest of the revenue. The Hon&....
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.... agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income-tax Officer is unsustainable in law." A similar view has also been taken by the Hon'ble Apex Court in the case of CIT Vs Max India Ltd. (2007) 295 ITR 282 (supra), wherein it has been held as under: "The phrase "prejudicial to the interests of the Revenue" in section 263 of the Income-tax Act, 1962, has to be read in conjunction with the expression "erroneous" order passed by the Assessing Officer, Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. For example, when the Assessing Officer adopts one of two courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Assessing Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the Revenue, unless the view taken by the Assessing Officer is unsustainable in law." That the twin tests of the order being erroneous and prejudicial to the interest of revenue are both nec....
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....making the order unsustainable in Law. In some cases possibly though rarely, the CIT can also show and establish that the facts on record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the Assessing Officer had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable. The matter cannot be remitted for a fresh decision to the Assessing Officer to conduct further enquiries without a finding that the order is erroneous. Finding that the order is erroneous is a condition or requirement which must be satisfied for exercise of jurisdiction under Section 263 of the Act. In such matters, to remand the matter/issue to the Assessing Officer would imply and mean the CIT has not examined and decided whether or not the order is erroneous but has directed the Assessing Officer to decide the aspect/question 11. The observation of the Hon'ble Bombay High Court in case of CIT v. Nirav Modi, 390 ITR 292 on this issue is as under : "4 (a) The powers u/s. 263 of the Act can be exercised by the Commissioner on satisfaction of twin conditions viz. the assessment order should be err....
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....f contractors. Definitions 2. The following terms are used in this Standard with the meanings specified: 2.1 A construction contract is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use. 2.2 A fixed price contract is a construction contract in which the contractor agrees to a fixed contract price, or a fixed rate per unit of output, which in some cases is subject to cost escalation clauses. 2.3 A cost plus contract is a construction contract in which the contractor is reimbursed for allowable or otherwise defined costs, plus percentage of these costs or a fixed fee. 3. A construction contract may be negotiated for the construction of a single asset such as a bridge, building, dam, pipeline, road, ship or tunnel. A construction contract may also deal with the construction of a number of assets which are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use; examples of such contracts includ....
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....he assessee i.e. on percentage completion method was appropriate. 16. Further after going through the scope of work mentioned in the agreement. Now we to find out whether construction of an asset or combination of assets which are closely interdependent in terms of their design technology and functions were carried out by the construction contract or not. 17. The tanks simulator made by the assessee comprising of driving stimulator and turret stimulator. Undoubtedly the design, technology and functions of various parts of stimulators were interdependent upon each other which are clear from the reading of the scope of work. As per internal page 5 of the agreement the delivery schedule was mentioned as 22 months from the date of release of the contract. Further the agreement also provides for warranty for a period of 3 years from the date of commissioning of each tank simulator at CVRD E. For the perusal of the scope of work and the specification of the work to be executed by the assessee it is abundantly clear that the work undertaken by the assessee was the convergence of various technological designs and functions for the purposes of main battle tank training. In our view th....
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.... machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed;] 22. It is abundantly clear from the reading of the above definition that block of asset is not restricted to building machinery plant or furniture but is extended to know-how patents Copyright etc. Therefore, whenever there is a construction of an asset and a contract is negotiated for that on standalone basis or for closely interrelated or interdependent in terms of design technology and function than in set scenario the Accounting Standard 7 shall be applicable. In view of the above the change in accounting policy by the assessee from milestone billing to percentage completion method is a plausible view and therefore even if the view has not been examined specifically by the Assessing Officer, we do not find any fault in shifting of the accounting policy by the assessee. In view of the above discussion we are of the opinion that the order passed by the assessing officer is not erroneous. 23. As we had ....
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....ove, the restrictive definition of the 'construction contract' cannot be applied as argued by the learned DR. 26. Further we may mention that the assessee after FY 2007-08, had been using the same method of accounting in the subsequent years. The assessee before the Principal CIT had categorically submitted that the assessee had been using AS 7 in the subsequent years. The order u/s 263 was passed on 15/03/2013 and the assessment order for the assessment year 2009-10 was passed on 31/12/2011. Thus, it is clear that before passing of the order u/s 263, the assessment order for the subsequent year 2009-10 and return of income for all other years were up to 2011-2012 were available with the Principal CIT before passing of order u/s 263. Beside this, the Audit reports for all the subsequent years were available with Principal CIT wherein all the subsequent years at Sl.No.3, the assessee had mentioned in all the Audit reports for 2009-10 to 2011-12 as under: "3. As required by the Companies (Auditor's) Report Order, 2003, as amended by the Companies (Auditor's Report) (Amendment) Order, 2004 (together 'the order') issued by the Central Government of I....
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....issions of the assessee placed before the CIT dated 26.3.12 available at pages 207 to 211 of the assessee's Paper Book, it is clear that in column 'E' page 3, it has been explicitly mentioned that the audited accounts filed for the financial year ending on 31.3.08, 31.3.09, 31.03.10 & 31.3.11, it is clear that the assessee has followed the same system of revenue recognition i.e. AS-7 in all the subsequent Assessment Years. It was also submitted on behalf of the assessee that as per Assessment orders passed u/s 143(3) of the Act on 29.10.10 for Assessment Year 2008-09 and on 13.5.2011 for 2009-10, the Assessing Officer has accepted the returned income of the assessee wherein the Revenue has been booked in accordance with the changed method of accounting i.e. AS-7. In view of these submissions, the Id. DR could not show us that the assessee did not follow AS-7 in the subsequent Assessment Years and in view of the documents submitted by the assessee pertaining to subsequent Assessment Years i.e. annual accounts and assessment orders for Assessment Year 2008- 09, 2009-10, it is amply clear that the assessee consistently followed AS-7 for recognition of revenue which w....