Income Tax Appellate Tribunal (ITAT) Delhi in a recent judgment has set aside revision order passed by CIT under section 263 of the Income Tax Act, 1961 on the ground that the change in the method of accounting by the assessee  resulted in lowering the profits

Case Details:
ITA No. 2438//Del/2012 ; AY 2007-08
A2Z Maintenance and Engineering Services Ltd ( (Appellants) vs CIT (Respondent)
Date of Order: 21-10-2015

Brief Facts of the Case:
The assessee company was engaged in the business of providing maintenance services such as house keeping security services.  The returned income of the assessee was accepted by the Assessing Officer (AO) without making any disallowance or addition. However, Subsequently, 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 had shown an amount of Rs. 11,98,08,876 as deferred revenue income by changing its method of accounting from Accounting Standard (AS)-9 to AS-7 which had resulted in lowering of profits. According to CIT, AO had accepted the assessee’s claim in this regard without making any inquiry or verification as to whether the method was bonafide and was consistently followed in future, and whether it was permitted under the provisions of the Act. The CIT also alleged that AO had not examined as to whether any expenditure corresponding to the deferred revenue income was debited/claimed by the assessee and whether these were allowable in view of the fact that corresponding income is not taken into account and thus to that extent the impugned assessment order was prima facie prejudicial to the interest of revenue. Consequently, CIT invoked revisionsal powers u/s 263 of the Act holding the assessment order of the AO erroneous and prejudicial to the interest of revenue and directed AO to make a fresh assessment order on this aspect after making inquiries/verification and after giving reasonable opportunity of hearing to the assessee.

Summary of the Contentions of the Assessee:
(1) A matter considered after due enquiry on the part of the AO cannot be the subject matter of proceedings u/s 263 unless the view expressed is unsustainable in law.
(2) When a regular assessment is made u/s 143(3) a presumption can be raised that the order has been passed upon an application of mind. No doubt this presumption is rebuttable, but there must be some material to indicate that the AO had not applied his mind.
(3) Where details and evidence had been filed by the assessee and assessment framed thereafter u/s 143(3) the fact that in the assessment order there is no mention of any enquiry or a reference to any evidence or the order is brief and cryptic that by itself would not arm the CIT to brand the order as erroneous and prejudicial to the interest of revenue.
(4) If during the assessment, the AO raised queries and replies filed by the assessee were considered, the mere fact that the assessment order was silent on these the same could not be held to be erroneous on account of ‘absence of inquiry. ’
(5) If there is some enquiry by the AO in the original proceedings even if inadequate that cannot clothe the CIT with the jurisdiction under section 263, merely because he can form another opinion.
(6) One has to keep in mind the distinction between ‘lack of inquiry’ and ‘inadequate inquiry’. If there was any inquiry even inadequate that by itself would give no occasion to the CIT to pass orders u/s 263 of the Act, merely because he has a different opinion in the matter.
(7) In the case of ‘inadequate inquiry’ the CIT must himself conduct requisite enquiry before passing the order u/s 263 and the matter cannot be remitted to the AO to conduct such further enquiries.

Excerpts from the ITAT Order:
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. At this juncture, we respectfully take cognizance of order of Hon’ble Jurisdictional High Court of Delhi in the case of CIT vs Vodafone Essar South Ltd. reported in (2012) 212 Taxman 184 (Delhi), as relied by learned counsel of the assessee, wherein it was held that when the AO specifically queried regarding the nature and character of one time fee paid by it as well as the bank and stamp duty charges and the detailed explanation in the form of submissions and other documents required by the Assessing Officer were produced at the stage of original assessment, then clearly this was not a case of no inquiry and the lack of any discussion of the assessment order cannot lead to the assumption that the Assessing Officer did not apply his mind. In this judgement, Hon’ble Jurisdictional High Court has also referred dicta laid down by it 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 of the Act merely because he has a different opinion in the matter. 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. (supra).

the ld. 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 was changed w.e.f. 1.4.2006.

It is also relevant to mention that the CIT has not given any findings on the issue of consistency in following the AS-7…….

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 (assessee’s Paper Book page no. 11) 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.

Learned counsel of the assessee has placed reliance on the judgment of Allahabad High Court in the case of CIT vs Mahendra Kumar 282 ITR 503 (All) wherein it was held that when the Assessing Officer had passed the assessment order after obtaining certain details and after discussion with the assessee, then the mere fact that the Assessing Officer did not mention the fact of detailed inquiry in the assessment order would not make the order erroneous and the CIT(A)’s order setting aside Assessing Officer’s order was not held to be valid. 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

Lastly, we also observe that the CIT has directed the Assessing Officer to make a fresh assessment order on the aspect of deferred revenue by holding the assessment order as erroneous and prejudicial to the interest of revenue on this aspect but the CIT has not drawn any conclusion that the assessment order passed by the Assessing Officer is not in accordance with the provisions of the Act and thus, the same is unsustainable in law. 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 of the Act 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 (supra) 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 of the Act 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. Their lordships explicitly held that the CIT should not have set aside the order and directed the Assessing Officer to conduct the said inquiry.

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