1. Introduction

The case of Surekha Builders & Developers Pvt. Ltd. v. Principal Commissioner of Income Tax-1, Bhubaneswar serves as a pivotal precedent in the realm of income tax assessment, particularly concerning the application of the Percentage Completion Method (PCM) for revenue recognition in the real estate sector. Decided by the Income Tax Appellate Tribunal (ITAT) on July 17, 2020, this judgment underscores the imperative for tax authorities to conduct thorough and objective inquiries before challenging established accounting methods adopted by taxpayers.

2. Summary of the Judgment

Surekha Builders & Developers Pvt. Ltd., herein referred to as the assessee, appealed against the order passed by the Principal Commissioner of Income Tax-1, Bhubaneswar, under Section 263 of the Income Tax Act for the assessment year 2013-14. The crux of the dispute was the recognition of revenue from the Surekha Vatika Project. The assessing authority contended that the assessee had under-recognized revenue by not adhering to the PCM as per prescribed norms, leading to a demand of approximately ₹3.45 lakhs.

The ITAT, after meticulous examination of the submissions and records, dismissed the appeal, holding that the revisional authority lacked the jurisdiction to set aside the original assessment order. The tribunal emphasized that the assessee had consistently applied the PCM, supported by adequate documentation and previous acceptance by the revenue authorities. Moreover, the tribunal found that the revisional authority failed to conduct an independent inquiry before directing a denovo assessment.

3. Analysis

3.1 Precedents Cited

Throughout the judgment, several key precedents were cited to support the tribunal's stance:

• CIT vs Reita Biscuits Co.(P) Ltd. (309 ITR 154 (P&H)) - Emphasized that once the merits are decided against the revenue, revisional authority should not interfere on technical grounds.
• DIT vs Jyoti Foundation (357 ITR 388 (Del)) - Asserted that proper inquiry must be conducted before revising an assessment order.
• Nanda Kishore Agarwalla vs Pr. CIT (ITA No.212/CTK/2017)
• Pr. CIT vs Kessoram Industries Ltd. (105 CCH 99 (Kol)) - Highlighted that revisional authority should act only when there's a clear error or prejudice to revenue.
• ITO vs DG Housing Projects (343 ITR 329 (Del)) - Stressed that revisional authority must conduct its own inquiry if it finds the initial assessment inadequate.
• CIT v. Jawahar Bhattacharjee (342 ITR 74 (Gau)) - Cited in relation to the necessity of applying mind and conducting inquiry before revising orders.

These precedents collectively reinforced the principle that revisional authorities must undertake independent assessments and cannot merely rely on technicalities or perceived errors without substantive inquiry.

3.2 Legal Reasoning

The tribunal's legal reasoning was anchored on several key points:

• Consistency in Accounting Method: The assessee had consistently employed the PCM across multiple assessment years, a practice that was neither contested in previous years nor during the scrutiny assessment proceedings.
• Adequate Enquiry by Assessing Officer: The original Assessing Officer (AO) had issued notices under Section 142(1) and sought detailed information, which the assessee duly provided. This demonstrated that the AO conducted a thorough and sufficient inquiry into the revenue recognition methods.
• Work in Progress (WIP) Consideration: The tribunal noted that the revenue recognition by the assessee included not just the realized sales but also the WIP, which amounted to a figure exceeding the revenue estimated by the Revisional authority. This indicated that the assessee's revenue recognition was, in fact, more comprehensive.
• Jurisdictional Limitation: The Revisional authority failed to conduct its own independent inquiry and instead relied on the findings of the AO without applying adequate mind to the material.

By integrating these points, the tribunal concluded that the Revisional authority's action was unwarranted and lacked the necessary substantiation to deem the original assessment as erroneous.

3.3 Impact

This judgment has significant implications for both taxpayers and tax authorities:

• For Taxpayers: It reaffirms the security provided to taxpayers who adhere to consistent and widely accepted accounting practices, such as the PCM, provided they maintain adequate documentation and transparency.
• For Tax Authorities: It underscores the necessity for revisional authorities to conduct independent and thorough inquiries rather than relying solely on initial assessments or technical interpretations.
• Legal Precedent: The case sets a precedent reinforcing the principles established in earlier rulings, thereby providing a more robust framework for future disputes related to revenue recognition and assessment revisions.

4. Complex Concepts Simplified

5. Conclusion

The ITAT's judgment in Surekha Builders & Developers Pvt. Ltd. v. Pr. CIT-1, Bhubaneswar serves as a crucial reminder of the balance between taxpayer rights and revenue authorities' oversight responsibilities. By adhering to consistent accounting practices and ensuring thorough documentation, taxpayers can safeguard against arbitrary or unwarranted reassessments. Simultaneously, tax authorities are reminded of the importance of conducting independent and comprehensive inquiries before challenging established assessments. This judgment not only clarifies the application of PCM in revenue recognition but also reinforces the procedural safeguards essential for fair taxation practices.