TMI Blog2019 (11) TMI 1786X X X X Extracts X X X X X X X X Extracts X X X X ..... duty bound to make a prima facie inquiry as to whether there is any other items which requires examination and in the event, the potential escapement of income would have exceeded Rs.10 lakh and he ought to have sought the permission of the CIT / DIT to convert a `limited scrutiny assessment to a `complete scrutiny assessment . Having failed to do so, the CIT, who was the authority to have granted permission for converting a `limited scrutiny assessment to a `complete scrutiny assessment is fully justified in invoking his revisionary jurisdiction u/s 263. CIT in his 263 order has categorically found that the A.O. is erroneous and prejudicial to the interests of revenue on account of failure of the A.O. to examine the applicability of section 56(2)(viia) or section 68 of the I.T.Act for the issue / allotment of OPCCPS. CIT had only set aside the assessment and directed the AO, to examine the valuation of OPCCPS. CIT need not in view of Explanation 2(a) to section 263 of the I.T.Act, come to a categorical finding that the valuation of OPCCPS is far exceeding the fair market value of shares. The A.O. has to examine these issues whether issue price of OPCCPS is exceeding FMV o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00. The return of income was processed u/s 143(1) of the I.T.Act on 30.11.2014. The assessment was taken up for scrutiny under CASS for the reason that (i) large interest expenses relating to exempted income u/s 14A, and (ii) huge interest paid which is not commensurate to the loans raised and has shown less turnover. The assessment u/s 143(3) was completed vide order dated 16.12.2016 accepting the returned income of Rs.14,97,304. 4. Subsequently the CIT issued notice u/s 263 of the I.T.Act for the following reasons:- During the previous year the company had issued 30,00,000 optional convertible cumulative preference shares of Rs.10 each, fully paid up amounting to Rs.3,00,00,000/- along with securities premium of Rs.57,00,00,000/- to Shri M.P.Ramachandran, one of the Directors of the company. This issue is not seen to have been examined by the Assessing Officer. The securities premium of Rs.57,00,00,000/- may have to be brought to tax under section 56(2)(viib) or 68. This issue is also be examined. 5. In response to the notice issued u/s 263 of the I.T.Act, the assessee s Chartered Accountant appeared on 25.03.2019 and the case was heard. The assessee has also filed ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s u/s.56(2)(viib). Section 56(2) is triggered at the stage of computation of income itself when the share application money received from a resident by a company in which the public are not substantially interested is above the face value. Hence, the assessment order passed, in my view, is prejudicial to the interests of revenue erroneous. Consequently, the assessment order dated 16/12/ 2016 is set aside with a direction to the AO to obtain all relevant details and examine the valuation of optionally convertible cumulative preference shares in accordance with Rule 11 UA for determining the net value of the shares and to verify applicability of provisions of section 56(2)(viib) / 68 and re-do the assessment de novo after giving opportunity to the assessee. Assessee is also instructed to co-operative with the Assessing Officer in fresh assessment proceedings. 6. The learned AR filed a paper book enclosing copy of notice issued u/s 143(2) of the I.T.Act for scrutiny assessment and also the case law relied on. The learned AR has also filed a brief written submission. The relevant portion of the same reads as follow:- Re: Reasons (or issuing notice under section 143(2) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If the Assessing Officer has no power to pass an order on a particular issue, then PCIT also has no power on that issue under section 263: At the outset, it is respectfully submitted that scope of revisionary jurisdiction depends upon the scope of order sought to be revised under section 263 of the Act. Issues which are outside the scope of particular assessment would, as a necessary corollary, be outside the scope of revisionary proceedings undertaken to revise the said assessment. In other words, what the assessing officer could not do directly, the PCIT cannot do indirectly. In this regard, reliance is placed on the following decisions: Paul John, Delicious Cashew Co: 94 1TD 131 (Cochin Trib.) (Upheld by Kerala HC in 200 Taxman 154) Abad Fisheries v. DCIT: 80 ITD 153 (Cochin Trib.) In this regard, reliance is placed on the decisions mentioned in Annexure B, wherein it has been held that where a case was selected for 'limited scrutiny', the PCIT/CIT cannot hold the assessment order as erroneous and prejudicial to the interest of the revenue in respect of an issue which was not a reason for selection of the case for 'limited scrutiny'. In the prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mited scrutiny under CASS for the reason of (i) large interest expenses relatable to exempt income u/s 14A of the I.T.Act, and (ii) huge interest paid which are not commensurate with the loans raised and had shown less turnover. The assessment was set aside in proceedings u/s 263 of the I.T.Act for the purpose of examination of impact of section 56(2)(viib) or section 68 of the I.T.Act, as regards the issue of 30 lakh OPCCPS of Rs.10 each fully paid up amounting to Rs.3 crore along with security premium of Rs.57 crore to Sri.M.P.Ramachandran. (one of the Directors of the assessee-company). The procedure for assessment is mentioned in Chapter XIV of the Income-tax Act. The concept of limited scrutiny and complete scrutiny assessment is alien to the provisions of the Act. The CBDT Instructions have laid down guidelines for a limited scrutiny assessment and circumstances when limited scrutiny assessment can be converted into a complete scrutiny assessment. The CBDT has the power to issue such instructions as per provisions of section 119 of the I.T.Act. The CBDT Instruction relevant for the period as regards the limited scrutiny assessment is Instruction No.7/2014 dated 26.09.2014. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efforts would be made to ensure that assessment proceedings are completed expeditiously in minimum possible number of hearings without unnecessarily dragging the case till the time-barring date. 4. In case, during the course of assessment proceedings it is found that there is potential escapement of income exceeding Rs. 10 lakhs (for nonmetro charges, the monetary limit shall be Rs. 5 lakhs) on any other issue(s) apart from the information based on which the case was selected under CASS requiring substantial verification, the case may be taken up for comprehensive scrutiny with the approval of the Pr.CIT/DIT concerned. However, such an approval shall be accorded by the Pr. CIT/DIT in writing after being satisfied about merits of the issue(s) necessitating wider and detailed scrutiny in the case. Cases so taken up for detailed scrutiny shall be monitored by the Jt. CIT/Addl. CIT concerned. 5. The contents of this Instruction should be immediately brought to the notice of all concerned for strict compliance. 8.1 The above Instructions have been modified subsequently vide Instruction No.20/2015 dated 29.12.2015 and Instruction No.5/2016 dated 14.07.2016. From para 4 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the Assessing Officer had proceeded to initiate penalty proceedings u/s 271B of the I.T.Act. In para 4 of the A.O., it was stated as follows Since the assessee has not complied with the notices issued from time to time and also had not been cooperating with the department to complete the assessment, the case was found to be a fit case for levying a penalty u/s 271(1)(b) r.w.s. 274 of the I.T.Act. Due to assessee s non-cooperation during the assessment proceedings, the Assessing Officer did not have occasion to verify the details regarding the applicability of provisions of section 56(2)(viib) and section 68 of the I.T.Act in respect of the issue / allotment of shares (OPCCPS). The Assessing Officer ought to have, even in a limited scrutiny assessment, prima facie examined whether there is a case of escapement of income exceeding the amount prescribed under the Board Instructions. The A.O. after prima facie examination, has found this a fit case for expanding the scope of scrutiny assessment, ought to have sought the permission / approval of Pr.CIT / DIT for comprehensive scrutiny assessment. The Assessing Officer in this case had totally failed to examine this aspect of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra) considered by the Cochin Bench of the Tribunal, it was held that the completed assessment cannot be reopened by the A.O. in view of the proviso to section 14A of the I.T.Act. It was further held by the Tribunal that if the Assessing Officer does not have power to reopen an assessment, which is already concluded, the CIT could not have exercised his powers u/s 263 of the I.T.Act directing the A.O. to pass assessment making disallowance u/s 14A of the I.T.Act. The above view taken by the Tribunal was upheld by the Hon ble High Court. In this case, the Assessing Officer has the power to convert a limited scrutiny assessment into a complete scrutiny assessment if the escapement of income exceeds Rs.10 lakh with permission of the authorities concerned. Therefore, the case relied on by the learned AR does not render any assistance to the assessee. 8.7 The learned AR further submitted that when the assessment is taken up for `limited scrutiny , the Pr.CIT / CIT cannot hold the assessment order as erroneous and prejudicial to the interest of the revenue in respect of an issue which was not a reason for selection of the case for `limited scrutiny . In this context, the learned A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation, which should have been made. As mentioned earlier, in this case the assessment order was passed without making inquiry / verification as regards the potential escapement of income mentioned in the Board Instructions for the relevant period. Therefore, even in case of limited scrutiny assessment, the A.O. is duty bound to make a prima facie inquiry as to whether there is any other items which requires examination and in the event, the potential escapement of income would have exceeded Rs.10 lakh and he ought to have sought the permission of the CIT / DIT to convert a `limited scrutiny assessment to a `complete scrutiny assessment . Having failed to do so, the CIT, who was the authority to have granted permission for converting a `limited scrutiny assessment to a `complete scrutiny assessment is fully justified in invoking his revisionary jurisdiction u/s 263 of the I.T.Act. The CIT in his 263 order has categorically found that the A.O. is erroneous and prejudicial to the interests of revenue on account of failure of the A.O. to examine the applicability of section 56(2)(viia) or section 68 of the I.T.Act for the issue / allotment of OPCCPS. The CIT had only set aside the a ..... 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