2021 (10) TMI 1400 - AT - Income Tax

Revision u/s 263 - scope of limited scrutiny or expanded the scope of limited scrutiny - assessee s case was selected under limited scrutiny category on Low income in comparison to high loan / advances / investments in shares appearing in balance-sheet and Minimum alternate tax (MAT) liability mismatch - HELD THAT - Perusal of the notices issued u/s 142(1) as well as 143(2) make it clear that in course of assessment proceedings, AO did examine both the issues for which assessee s case was selected for scrutiny - in response to query raised by the AO from time to time, the assessee had furnished all relevant and necessary details relating to loans and advances given and investment made in shares as appearing in balance sheet. AO has conducted necessary enquiry on the issues for which case was selected for scrutiny and after applying his mind to the materials on record, has completed the assessment. As per CBDT instruction No.20/2015 dated 29-12-2015, in limited scrutiny cases the reasons / issues shall be verified as communicated to the assessee concerned and the questions u/s 142(1) of the Act shall remain confined only to a specific reasons / issues for which the case has been taken up for scrutiny - the scope of enquiry by the assessing officer shall be restricted to the limited scrutiny issue. The aforesaid position stands reiterated in CBDT Instrn. No.5 of 2016 dated 14-07-2016. Thus, the assessing officer being bound by instructions issued by CBDT from time to time, could not have gone beyond the scope and ambit of limited scrutiny for which the case was selected. AO was required to strictly confine himself to conduct necessary enquiry relating to issues for which limited scrutiny was required. AO while completing the assessment has restricted himself and, rightly so, to the scope and ambit of the limited scrutiny. Thus, unless the scope of scrutiny is expanded by converting it to a complete scrutiny with the approval of the higher authority, the assessing officer could not have travelled beyond his mandate. That being the case, the assessment order cannot be considered to be erroneous and prejudicial to the interest of revenue for not examining the loans taken by the assessee and their utilization as well as capitalization of interest. The material on record clearly establishes that the assessing officer adhering to the scope of limited scrutiny has enquired into and examined the specific issues. When the assessing officer is not empowered to do certain acts directly, the revisionary authority certainly cannot direct the assessing officer to do so indirectly by exercising power u/s 263 of the Act. While coming to such conclusion, we get support from the decision of M/s Su-Raj Diamond Dealers Pvt Ltd vs PCIT 2019 (12) TMI 26 - ITAT MUMBAI - The assessment order cannot be considered to be erroneous and prejudicial to the interest of revenue. In view of the aforesaid, we set aside the impugned order of PCIT passed u/s 263 of the Act and restore the order of assessment. Appeal of assessee allowed.

Summary

Issues Involved:
1. Delay in filing the appeal.
2. Validity of the assessment order under section 143(3) of the Income Tax Act, 1961.
3. Jurisdiction of the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income Tax Act, 1961.
4. Scope of limited scrutiny and whether it can be expanded.

Detailed Analysis:

1. Delay in Filing the Appeal:
The tribunal noted a delay of 55 days in filing the appeal. However, considering the submissions and the materials on record, it was observed that the period of limitation for filing appeals had been extended by the Supreme Court due to the Covid-19 lockdown. Therefore, the tribunal concluded that there was no delay in filing the appeal and admitted it for adjudication on merit.

2. Validity of the Assessment Order under Section 143(3):
The assessee, a resident company engaged in the business of building and development, filed its return of income declaring a loss. The return was selected for limited scrutiny, and the assessment was completed under section 143(3) of the Act. The Additional Commissioner of Income Tax observed that the assessing officer did not verify the increase in loans, the purpose of loans and advances, and the capitalization of interest paid. Consequently, a proposal was submitted to the PCIT to revise the assessment order under section 263.

3. Jurisdiction of the PCIT under Section 263:
The PCIT issued a show cause notice under section 263, stating that the assessment order was erroneous and prejudicial to the interest of revenue due to the non-verification of increased loans and capitalization of interest. The assessee contended that the assessment order was not erroneous as the assessing officer had thoroughly enquired into the issues for which the case was selected for scrutiny. However, the PCIT was not convinced and held that the assessment order was erroneous and prejudicial to the interest of revenue, setting it aside with a direction to the assessing officer to conduct proper and necessary enquiry.

4. Scope of Limited Scrutiny:
The tribunal examined whether the limited scrutiny encompassed the examination of loans taken and capitalization of interest expenditure. It was noted that the case was selected for limited scrutiny to examine low income compared to high loans/advances/investments in shares and MAT liability mismatch. The tribunal observed that the PCIT attempted to expand the scope of limited scrutiny by including the verification of increased loans and capitalization of interest, which was beyond the scope of the issues for which the case was selected.

The tribunal referred to CBDT instructions which mandate that in limited scrutiny cases, the enquiry should be confined to the specific reasons/issues for which the case was selected. The assessing officer, bound by these instructions, could not have expanded the scope of scrutiny without proper approval. Therefore, the assessment order could not be considered erroneous and prejudicial to the interest of revenue for not examining the loans taken and their utilization as well as capitalization of interest.

The tribunal concluded that the PCIT could not direct the assessing officer to go beyond the scope of limited scrutiny indirectly by exercising power under section 263. Consequently, the tribunal set aside the impugned order of the PCIT and restored the assessment order.

Conclusion:
The appeal was allowed, and the order pronounced on 22/10/2021. The tribunal held that the assessment order was not erroneous and prejudicial to the interest of revenue, and the PCIT could not expand the scope of limited scrutiny under section 263.