Revisional jurisdiction under Section 263 is not invokable because the order made by the AO does not meet the two requirements

Fact and issue of the case

The assessee has filed the appeal against the order of the Pr. Commissioner of Income Tax (Pr.CIT)-52, Mumbai passed u/s 263 of the Act. The assessee has raised the fallowing grounds of appeal

The Learned PCIT-5, Mumbai erred in law and in facts in holding that the order 9.12.2019. passed u/s 147/143(3) dated 26.03.2022 was erroneous and prejudicial to the interest of revenue and thereby setting it aside u/s 263 of the Act

The learned PCIT-5, Mumbai erred in setting aside the assessment order by drawing conclusions on incorrect assumptions, that A.O. had not conducted any enquiry and that the method of accounting, consistently followed and accepted by the department, was not valid in the previous year

The learned PCIT-5, Mumbai in his non-speaking order u/s 263 neither refuted the contentions of the appellant (reproduced in his order also) nor the ratio of decisions of the jurisdictional courts, quoted by appellant therein. This makes the order unsustainable

The learned PCIT-5 erred in setting aside the order of the A.O. apparently on the basis of an invalid observation of revenue audit party and therefore his order u/s 263 is unsustainable

The appellant seeks your indulgence in amending, deleting, adding, modifying anyone or all of these grounds of appeal before/at the time of hearing

The brief facts of the case are that the assessee company is engaged in the business activity of construction and has undertaken an Infrastructure project known as World Trade park at Jaipur with various offices, show rooms shops and other commercial spaces for sales. The assessee has filed the return of income for the A.Y 2017-18 on 10.03.2018 disclosing a total income of Rs.Nil and the return of income was processed u/s 143(1) of the Act. Subsequently the case was selected for scrutiny through CASS for complete scrutunity which includes (i)Large investment in immovable property (ii) depreciation claimed (iii) deduction and deposit of TDS (iv) High Loans and Advances and income from House Property. Further notice u/s 143(2) and 142(1) of the Act along with questionnaire issued through ITBA portal. In compliance to the notice the assessee has filed submissions. The AO on perusal of the financial statement and information found that the assessee has disclosed revenue from sale of building/shops/offices, other goods and rent on revenue sharing basis aggregating to Rs. 48,79,77,459/- and has disclosed profit for the period of Rs. 2,96,144/-. The AO found that the assessee has filed the return of income beyond the time limit specified under Sec. 139(1) of the Act and initiated penal provisions under Sec.271B of the Act and denied the claim of loss of set off of carry forward from earlier year and assessed the total income of Rs. 90,16,363/- and passed the order u/s 143(3) of the Act dated 29.12.2019. 3. Subsequently, the Pr. CIT on perusal of the records and information found that the order passed by the AO under section 143(3) of the Act is erroneous and prejudicial to the interest of the revenue and issued revision notice U/sec 263 of the Act as under:

On perusal of the records, it is seen that the assessee company had outstanding advance received against sale of Rs.76,31,53,398/- (as on 31.03.17). Since the said project was completed and was commercially functional, the said advance received against sale amounting to Rs.76,31,53,398/- was to be offered as revenue in books of account. The corresponding & related cost of construction of said sale on proportionate basis is worked out to Rs. 56,50,34,653/-. Accordingly the profit on said advances against sales works out to Rs.19,81,18,745/-. This 19.81 crores should have shown as profit on sale but has not been done so. Therefore, it is clear that the assessment order passed u/s. 143 (3) of the IT Act dated 29.12.2019, is erroneous in so far as it is prejudicial to the interest of revenue, within the meaning of Sec.263 of the Act

In compliance to the notice, the assessee has filed the submissions through ITBA as referred at para 4 of the Pr. CIT order as under:

In view of above facts, notice u/s 263 was issued on 12.03.2022 through ITBA, thereby providing the assessee, an opportunity of being heard. In response to the notice dated 12.03.2022, the assessee company vide letter dated 19.03.2022, has made its submissions electronically. The submission of the assessee company is being reproduced here as under:-

“The return for A.Y 2017-18 filed at NIL income, was assessed at Rs.90,16,360/- u/s 143(3) of the Act vide order dated 29.12.2019. During the course of assessment proceedings, the A.O. raised various and voluminous queries vide notices u/s 142(1) of the Act, (a) dated 31.05.2019 (1-12 pages); (b) dated 30.09.2019 (1-2 pages); (c) dated 25.11.2019 (1-2 pages); and (d) dated 12.12.2019 (1-2 pages). The questionnaires along with these notices included specific queries regarding expenses incurred towards construction of the infrastructure project named WT, the method of accounting being followed and its rationale, (even more specifically in notice ITBA/AST/F/17/2019- 20/1022240110(1) dated 12.12.2019), WDV, Loans & Advances, nature of income, details of properties sold vide registered deeds, details regarding section 43B, 40A(2) (b), deductions claimed, reconciliation of AIR information, modvat & excise, break-up of expenses debited to P&L A/C, TDS made, details of advances received against booking etc. These notices/questionnaires were responded vide replies dated 07.10.2019, 23/25.11.2019, 04.12.2019, 18.12.2019. The A.O has acknowledged that submissions on different dates were filed through e-filing portal

Your Show Cause Notice us 263 states that “On perusal of records, it is observed that the assessee co. had outstanding advance received against sale of Rs. 76,31,53,398/- (as on 31.03.17). Since the said project was completed and was commercially functional from 2013-14. The said advance received against sale amounting to Rs.76,31,53,398/- was to be offered in revenue in books of account. The corresponding & related cost of construction of said sale worked to Rs. 56,50,34,653/- Accordingly the profit on said sale advances worked to Rs.19,81,18,745/-.”

“Therefore, it is clear that the assessment order passed u/s 143(3) of the IT Act dated 29:12.2019, is erroneous in so far as it is prejudicial to the interest of revenue, within the meaning of Section 263 o, the Act. Therefore, it is proposed to revise the aforesaid order u/s 263 of the Act.”

At the outset, it may be pointed out that you have considered incorrect and invalid amounts which give a distorted picture of the stated error and prejudice caused without specifying it. Thus, as per you the corresponding & related cost of construction of said sale worked to Rs. 56,50,34,653/- This is incorrect and and inflated arbitrarily since, the total expenses, as per note 3.6 to 4.3 of the audited P&L A/C itself comes to Rs. 51,15,34,408/-i.e an arbitrary increase of Rs.5,35,00,245/- by you

Similarly, you have considered the incorrect and invalid arount of advance received against sale amounting to Rs. 76,31,53,398/-. This is incorrect and inflated arbitrarily, since booking advances as per note 2.6 of the audited balance sheet as on 31.03.2017 itself is Rs71,12,41,050/-an arbitrary increase of Rs, 5,19,12,343/-by you. Thus, the distortion in the amounts considered by you itself is Over Rs.10,54 Crores and indicates the lack of application of mind. Moreover, the consideration of factually incorrect details is fatal to the validity of the proposed action us 263 of the Act, as held in case of Sagar Enterprises Vs. ACIT 257 TR 335 (Gujarat);- “the settled legal position is that in such circumstances, it would not be possible to say with certainty as to which factor would have weighed with the officer concerned and Once it is shown that an irrelevant fact has been taken into consideration, to what extent the decision is vitiated would be difficult to say. On this count alone, the petition requires to be accepted.”

Similarly, it was held by the jurisdictional court in the case of PCIT Vs. Shodimal Investments (P) Ltd, 422 TR 337 (Bombay), that-

“This is a settled position as observed by the Supreme Court inS. Narayanappa v. CIT (1967) 63 TR 219, that it is open to examine whether the reason to believe has rational connection with the formation of the belief. To the same effect, the Apex Court in TO v. Lakhmani Merwal Das (1976) 103 TR 437 had laid down that the reasons to believe must have rational connection with or relevant bearing on the formation of belief i.e. there must be a live link between material coming the notice of the Assessing Officer and the formation of belief regarding escapement of income. If the aforesaid requirement are not met, the Assessee is entitled to challenge the very act of reopening of Assessment and assuming jurisdiction on the part of the Assessing Officer.” The ratio of this decision is analogical to the facts in this case

Observation of the court

The assessee is engaged in construction of mall on its own, it was contend by the Ld.AR that the ICDS notified under section145(2) of Act applicable to construction contracts and in the instant case, it is not just construction contract but it is a construction of building and sale of flats and office space and the provisions U/sec43CB of the Act are not applicable.Therefore the method of accounting regularly followed by the assessee has to be adopted. We find that the A.O has considered one of the possible views based on the information and it is not necessary that the A.O should put all the discussions/observations in the assessment order, as per explanations (2) to sec 263 of the Act the authority has to invoke provisions only when there is no verification and enquiry conducted by the A.O. Whereas the A.O has applied his mind and verified the facts. The Ld. AR referred to the submissions, financial statements, judicial decisions and explanations filed before the A.O. We find the Hon’ble High Court of Bombay in CIT Vs. Gabriel India Ltd.(203 ITR 108) has observed as under:

Section 263 of the Income-tax Act, 1961 – Revision – Of orders prejudicial to interests of revenue – Assessment year 1973-74 – Assessee claimed a sum of Rs. 99,326 described ‘as plant relay out expenses’ as revenue expenditure and ITO, after making enquiries in regard to nature of said expenditure and considering explanation furnished by assessee in that regard, allowed assessee’s claim – Subsequently, Commissioner, exercising powers under section 263, cancelled order of ITO observing that order of ITO did not contain discussion in regard to allow ability of claim for deduction which indicated non-application of mind and that claim of assessee required examination as to whether expenditure in question was a revenue or capital expenditure and directed ITO to make a fresh assessment on lines indicated by him – Whether under section 263 substitution of judgment of Commissioner for that of ITO is permissible – Held, no – Whether ITO’s conclusion can be termed as erroneous simply because Commissioner does not agree with his conclusion – Held, no – Whether ITO’s order could be held to be ‘erroneous’ simply because in his order he did not make an elaborate discussion – Held, no – Whether provisions of section 263 were applicable to instant case and Commissioner was justified in setting aside assessment order – Held, no

We Considering the overall facts, circumstances, ratio of the judicial decision and the details submitted in the course of hearing are of the view that the if any query is raised in the assessment proceedings and it was responded by the assessee, mere fact that it is not dealt within by the A.O. in the order cannot implied that there is no application of mind and the A.O. has applied one of the possible view. Hence, the action of the Pr.CIT cannot be acceptable as the order passed by the A.O. does not satisfy the twin conditions of erroneous and prejudicial to the interest of the revenue. Accordingly, we set aside the order of the Pr.CIT and allow the grounds of appeal in favour of the assessee

In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on 17.03.2023