Case Law Details
Brief of the Case
ITAT Delhi held In the case of A2Z Maintenance and Engineering Services Ltd. vs. CIT that the Hon’ble Jurisdictional High Court in the case of DIT vs Jyoti Foundation 357 ITR 388 (Delhi) held that where the order u/s 263 records that the inquiries were not sufficient and further inquiries or details should have been called for by the Assessing Officer, then in such cases, the inquiry should have been conducted by the Commissioner himself to record the finding that the assessment order was erroneous. The CIT should not have set aside the order and directed the Assessing Officer to conduct the said inquiry. The present case of the assessee squarely falls within the ratio of this judgment. Hence order u/s 263 by CIT is not sustainable being bad in law and void ab initio.
Facts of the Case
The Assessing Officer completed the assessment by passing assessment order u/s 143(3) of the Act on 15.12.2009. The Assessing Officer noticed that the assessee company was engaged in the business of providing maintenance services such as housekeeping security services and the Assessing Officer accepted the returned income of the assessee without making any disallowance or addition in the computation of income furnished by the assessee. Subsequently, on 12.3.12, the CIT issued a show cause notice to the assessee company alleging that the perusal of the balance sheet as on 31.3.2007 shows that the assessee has shown an amount of Rs. 11,98,08,876 as deferred revenue income by changing its method of accounting said to be as per Accounting Standard-7 which has resulted in lowering of profits by the same amount. CIT proceeded to invoke revisional powers available to him u/s 263.
The CIT finally passed impugned order dated 27.3.12 by holding that the order of the Assessing Officer is erroneous and prejudicial to the interest of revenue and he set aside assessment order only to this extent and directed the Assessing Officer to make a fresh assessment order on this aspect.
Contention of the Assessee
The ld counsel of the assessee submitted that to follow accounting standard (AS) is mandatory in nature as per directions of the Institute of Chartered Accountants of India (ICAI) and as per section 211(3)(a) of the Companies Act, it has been mandated that every company has to prepare its balance sheet and profit and loss account in accordance with the Accounting Standard framed by the ICAI. Furthermore, ld. Counsel of the assessee also pointed out that as per section 145(4) of the Income Tax Act, it has been radically recast w.e.f. 1.4.1997 so as to promote only cash or mercantile system of accounting as also to enforce adherence to the Accounting Standard notified by the central government.
He further submitted that as per Schedule XIII to the statement of accounts of the assessee, an amount of Rs.11.98 crore was shown under the head of current liability under deferred revenues and in the notes to financial statements Item II(b), it is clear that the reason for the changeover from item AS-9 to AS-7 and item 2(e) deals with revenue recognition. Learned counsel of the assessee vehemently contended that the Assessing Officer inquired into the changed method of accounting vis-à-vis preceding Assessment Year and the issue was properly explained by the assessee vide letter dated 20.10.2009 and 30.10.2009 submitted before the Assessing Officer during assessment proceedings on record. On the issue of consistency, the learned counsel of the assessee pointed out that the assessee has followed the same method of revenue recognition i.e. adoption of Accounting Standard 7 in all the subsequent Assessment Years which is evident from the audited accounts filed before the CIT and before the Tribunal for the financial years ending on 31.3.08, 31.3.09, 31.3.10 and 31.3.2011.
He further submitted that Accounting Standard per assessment orders for Assessment Year 2008-09 and 2009-10 passed u/s 143(3) of the Act, the Assessing Officer has accepted the returned income wherein the revenue has been recognized in accordance with the changed method of accounting vide Accounting Standard-7 which has regularly and consistently been followed by the assessee during all subsequent assessment Years subsequent to the year under consideration i.e. Assessment Year 2007-08.
He further submitted that the position of law is settled with a regular method adopted by the assessee and cannot be rejected merely because it gives benefit to assessee in certain years, more particularly, in the year of change as the choice of method can be changed unilaterally without any prior approval of the Assessing Officer and the assessee has to show that the method employed is regularly followed in the subsequent Assessment Years and the assessee has demonstrated this fact by way of assessment orders passed for subsequent Assessment Years.
He further submitted that adjustment of income due to Accounting Standard-7 was beneficial to the assessee in the first year of change but in the subsequent Assessment Year the assessee has to pay higher amount of tax surcharge and EC by adopting Accounting Standard-7 instead of Accounting Standard-9, therefore, the order of the Assessing Officer cannot be held as erroneous and prejudicial to the interest of revenue.
He further submitted that the Assessing Officer specifically asked the assessee to explain the deferred revenue items, therefore, it cannot be held that the Assessing Officer did not make any inquiry in this regard and thus the action of the CIT invoking revisionary powers u/s 263 is not legal and correct which is not only bad in law but void ab initio and therefore, the impugned order may kindly be quashed.
Contention of the Revenue
The ld counsel of the revenue supported the action of the CIT and pointed out that the Assessing Officer did not apply his mind to the radical change of Accounting Standard by the assessee and the Assessing Officer did not examine and verify the issue of deferred revenue income adopted by the assessee by way of adopting Accounting Standard-7 from 1.4.06. Ld. DR vehemently contended that the Assessing Officer has accepted the assessee’s claim in this regard without making any inquiry as to whether change was bonafide and was also consistently followed for the future Assessment Years.
He further submitted that the Assessing Officer has also not examined as to whether any expenditure corresponding to the deferred revenue income was debited and claimed by the assessee and whether these were allowable in view of the fact that corresponding income is not taken into account. He lastly submitted that the Assessing Officer has not verified that whether the change in Accounting Standard from AS-9 to AS-7 was permitted under the provisions of the Act and up to that extent, the assessment order was rightly held as erroneous and prejudicial to the interest of revenue.
Held by CIT (A)
CIT (A) partly allowed the appeal of the assessee. It was held that It is also a fact on record that Hon’ble Tribunal vide order dated 12.3.2010 has cancelled DIT (E) order u/s. 12AA(3). So assessee has been granted exemption u/s. 12A. So in view of my findings in the appellate order for the A.Y. 2006-07 and in view of the Hon’ble ITAT decision, by which assessee has been granted exemption u/s. 12A , this ground is allowed in favor of the Appellant.
Held by ITAT
The crux of the allegations are mainly on two counts viz. i) the change in the Accounting Standard by the assessee from AS-9 to AS 7 has resulted into lowering of profits and the Assessing Officer has accepted the assessee’s claim without making any inquiry/verification so as to whether the change was bona fide and was consistently followed in the subsequent Assessment Years; ii) the Assessing Officer has not also examined as to whether any expenditure related to the deferred revenue income was debited/claimed by the assessee and whether these were allowable in view of the fact that corresponding income has not been taken into account.
On first allegation, we note that as per order sheet entry dated 20.10.09, the Assessing Officer asked the assessee to explain the deferred revenue items and to give submissions as to how they are taken into the next year. The assessee filed two replies wherein the assessee has also submitted detailed contract wise working pertaining to the deferred revenue. However, from a careful reading of the impugned assessment order, we note that there is no detailed deliberation on this issue and there is a bare mention of presence of assessee’s representative on various dates and it has been also noted that the AR filed necessary details and after discussion with him, written submissions filed along with supporting documents were perused and placed on record and the Assessing Officer accepted the returned income of the assessee. In this situation, it is clear that the Assessing Officer made inquiries on the issue of deferred revenue which were replied by the assessee by submitting its stand along with contract wise detailed working. The present case is squarely covered in favour of the assessee by the dicta of Hon’ble Jurisdictional High Court of Delhi in the case of CIT vs Sunbeam Auto Ltd. (2011) 332 ITR 167 (Delhi) wherein it was held that one has to keep in mind the distinction between lack of inquiry, even inadequate inquiry and if there was any inquiry, if inadequate, that would not by itself give occasion to the Commissioner to pass order u/s 263 merely because he has a different opinion in the matter. Also 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 was changed w.e.f. 1.4.2006.
As we have already noted that the assessee filed tabulation chart showing taxable income and tax effect due to change of accounting policy and standard wherein it is amply clear that tax surcharge and EC as per AS-7 was calculated at Rs.8,34,63,477 and tax surcharge and EC payable as per AS-9 was Rs.12,37,91,145 and in the very first year, the assessee changed its method of accounting from AS-9 to AS-7, there was an amount of refund of Rs.4,03,27,668. At the same time, from the said tabulation chart we further observe that in subsequent Assessment Year from 2008-09 to 2011-12 the assessee was under obligation to pay higher amount of tax, surcharge and EC by following AS-7 instead of AS-9, therefore, in the totality of the facts and circumstances, it cannot be held that the assessee changed its method of accounting from AS-7 to AS-9 with an intention to avoid tax liability and therefore this resulted into lowering of profits.
In the present case, the Assessing Officer has not expressly mentioned about the consideration of change in Accounting Standard by the assessee from AS-9 to AS-7 but from the order sheet entries and written submissions of the assessee filed during the assessment proceedings, it is clear that the assessee considered the issue and applied his mind towards change in Accounting Standard and the issue of deferred revenue and merely because the Assessing Officer did not mention the deliberations regarding inquiry would not make the order erroneous. Per contra, as we have already noted that the assessment order was passed after due consideration of the issue of deferred revenue after considering the submissions and contract wise detailed submission by the assessee.
It is relevant to mention that the CIT has passed impugned order in a hasty manner without any deliberation on the written submissions submitted by Paper Book of the assessee filed in response to the show cause notice u/s 263 and he jumped to the conclusion without any adjudication on the submission and explanation of the assessee, therefore, we are inclined to hold that the impugned order has been passed by the CIT without following the well-accepted principles of adjudication and without application of mind. Our view also finds support from the judgment of Hon’ble High Court in the case of CIT vs Development Credit Bank Ltd. 323 ITR 206 (Bombay).
The CIT has not made any inquiry in regard to the allegations raised by him in the show cause notice issued by him u/s 263 and in the light of written submissions and Paper Book of the assessee filed in response to the said notice. In this situation, the impugned order falls within the ambit of dicta laid by Hon’ble Jurisdictional High Court of Delhi in the case of DIT vs Jyoti Foundation 357 ITR 388 (Delhi) wherein, after considering the ratio of its own decision in the case of CIT vs DG Housing Project Ltd. , the Hon’ble Jurisdictional High Court held that where the order u/s 263 records that the inquiries were not sufficient and further inquiries or details should have been called for by the Assessing Officer, then in such cases, the inquiry should have been conducted by the Commissioner himself to record the finding that the assessment order was erroneous. The CIT should not have set aside the order and directed the Assessing Officer to conduct the said inquiry. The present case of the assessee squarely falls within the ratio of the judgment of Hon’ble High Court in the case of Jyoti Foundation and hence we reach to a conclusion that the notice u/s 263 and impugned order of the CIT was not passed under valid assumption of revisional jurisdiction available and thus, the same are not sustainable being bad in law and void ab initio.
Accordingly appeal of the assessee allowed
