Facts of the Case

The assessee, engaged in construction and maintenance services including housekeeping and security services, filed its return for Assessment Year 2007-08. The assessment was completed under Section 143(3) after scrutiny, wherein the Assessing Officer accepted the returned income without making any disallowance.

Subsequently, the Commissioner invoked revisionary jurisdiction under Section 263 on the ground that the assessee had shown ₹11.98 crores as deferred revenue income by changing the method of accounting in accordance with AS-7, which allegedly reduced taxable profits.

The Commissioner held the assessment order to be erroneous and prejudicial to the interests of the revenue and remanded the matter back to the Assessing Officer.

The assessee challenged the revision before the ITAT, which allowed the appeal holding that invocation of Section 263 was unjustified. The Revenue thereafter filed an appeal before the Delhi High Court.

Issues Involved

  1. Whether the Commissioner was justified in invoking Section 263 of the Income Tax Act?
  2. Whether the Assessing Officer’s acceptance of revenue recognition under AS-7 made the assessment erroneous and prejudicial to the interests of revenue?
  3. Whether consistency in following AS-7 in subsequent years validated the assessee’s accounting method?

 Petitioner’s Arguments (Revenue’s Arguments)

  • The Revenue contended that the assessee changed its accounting method resulting in deferment of revenue recognition of ₹11.98 crores.
  • Such deferment led to reduction in taxable profits for the relevant assessment year.
  • The Assessing Officer failed to properly examine the implications of the changed accounting method.
  • Therefore, the assessment order was erroneous and prejudicial to the revenue, justifying revision under Section 263.

 Respondent’s Arguments (Assessee’s Arguments)

  • The assessee argued that the method of accounting under AS-7 was consistently followed from 01.04.2006 onwards.
  • The same method was accepted by the department in subsequent assessment years under scrutiny assessments under Section 143(3).
  • Detailed explanations and documentation regarding change in accounting methodology had already been furnished during original assessment proceedings.
  • Since the Assessing Officer had applied his mind and accepted the method, revision under Section 263 was not permissible merely on a change of opinion.

 Court Findings / Order

The Delhi High Court upheld the ITAT’s order and dismissed the Revenue’s appeal.

The Court held that:

  • The Assessing Officer had already examined the accounting treatment during the original scrutiny assessment.
  • The assessee consistently followed AS-7 in subsequent years.
  • AS-7 is a recognized and valid method of accounting for revenue recognition.
  • Merely because the Commissioner held a different view, revision under Section 263 could not be sustained.
  • No substantial question of law arose for consideration.

Accordingly, the appeal of the Revenue was dismissed.

 Important Clarification

For invoking Section 263, the Commissioner must establish both:

  1. The assessment order is erroneous; and
  2. It is prejudicial to the interests of revenue.

Where the Assessing Officer has conducted inquiry, examined the issue, and adopted one permissible view, Section 263 cannot be invoked merely because the Commissioner prefers another view.

Consistency in accounting treatment across assessment years strengthens the assessee’s case.

 Link to download the order -  https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:761-DB/NAW08022017ITA4522016.pdf

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