2022 (8) TMI 1334 - AT - Income Tax

Tribunal Overturns Revisionary Order, Emphasizes Limits on Scrutiny Scope Without Explicit Permission.

M/s. Shark Mines & Minerals Pvt Ltd Versus Pr. CIT, Cuttack  

The Tribunal allowed the assessee's appeal, quashing the Pr. CIT's order under Section 263 of the Income-tax Act. It ruled that the Pr. CIT's revisionary ... Revision u/s 263 - CIT modifying the assessment order passed u/s.143(3) under “limited scrutiny”- whether the Pr. CIT could use his revisionary powers to direct to make the addition by holding the assessment order erroneous and prejudicial to the interest of the Revenue on issues which are not connected issues to the issues which have been raised in the limited scrutiny in an assessment proceedings? - HELD THAT:- In the Instructions, it is categorically mentioned that in the case of Limited Scrutiny, AO cannot go beyond the issues which have been directed under the limited scrutiny. Once such fetters are placed on the AO in respect of limited scrutiny, the AO is barred from looking into any other issues other than those issues which are raised in the limited scrutiny. There could be such cases, where the AO while looking into issues which have been raised in the limited scrutiny, connected issues come up which could result in under assessment or escapement of assessment. It is in such cases, the AO is to take permission from the CCIT/Pr. CIT to expand the scope from limited scrutiny to complete scrutiny. Once such permission is granted and complete scrutiny is permitted, everything is opened to the AO to examine. Thus, in order to convert into a completed from limited scrutiny, connected issues should come up from limited scrutiny to give powers of the AO is to expand and get the permission for the complete scrutiny. In no other cases, the AO can go beyond what is directed in the limited scrutiny. Limited scrutiny was in relation to excess liability shown in respect of trade payable and second issue was disallowance u/s 40A(3) - The show cause notice in respect of 263 shows that the issue was in respect of adoption of FIFO method of valuation of its closing stock. This issue is nowhere connected to the issue of excess liability shown or disallowance u/s.40A(3) of the Act. This is absolutely fresh unconnected issues, which the Pr.CIT has picked up. A revision u/s.263 is permissible when an assessment order is shown to be erroneous and prejudicial to the interest of the Revenue. Both the conditions are compulsorily to be there. In the present case, admittedly, the assessment order is a limited scrutiny assessment and no error in respect of the said assessment order passed in respect of limited scrutiny issues have been pointed out by the Pr. CIT for the purpose of invoking the powers u./s.263 of the Act. On this ground itself, the order passed by the Pr. CIT u/s.263 is liable to be quashed and we do so. Coming to the issue of the decision in the case of Sri Sushant Kumar Choudhury [2020 (10) TMI 249 - ITAT CUTTACK] - The facts in the said case were that the CIT mentioned that the order of the AO is erroneous insofar as he did not ask for permission for complete scrutiny and to that extent, the assessment order was erroneous and prejudicial to the interest of the Revenue. In the present case, there is no such averment by the pr. CIT. Even assuming such averment is there, the order of revision would be unsustainable insofar as the issue raised by Pr. CIT is in no way connected to the issues that have been raised in the limited scrutiny assessment. Thus, the decision in the case of Sri Sushanta Kumar Choudhury (supra) is clearly distinguishable. Therefore, the prayer of the ld CIT DR that the matter be referred to Larger Bench also does not survive insofar as the facts of the present case and in the said decision in the case of Sri Sushanta Kumar Choudhury (supra) is fully distinguishable. This view of ours in respect of revision u/s.263 vis-à-vis limited scrutiny is also supported by the decision in the case of Smt. Padmavathi [2019 (12) TMI 399 - ITAT CHENNAI] which has been approved by Hon’ble Madras High Court as also the decision in the case of Balvinder Kumar [2021 (3) TMI 649 - ITAT DELHI] and Rajani Venkata Naga Annavarapu Narayana [2021 (7) TMI 607 - ITAT DELHI] and case of Akash Ganga Promoters and Developers [2019 (12) TMI 973 - ITAT CUTTACK] - In the circumstances, the revisionary order passed by Pr. CIT is found to be erroneous and same is quashed. Appeal of the assessee is allowed. Issues Involved:1. Jurisdiction of Pr. CIT under Section 263 of the Income-tax Act.2. Scope of Limited Scrutiny and its implications on assessment orders.3. Validity of invoking Section 263 for issues not covered under Limited Scrutiny.Issue-wise Detailed Analysis:1. Jurisdiction of Pr. CIT under Section 263 of the Income-tax Act:The primary issue was whether the Pr. CIT was justified in invoking jurisdiction under Section 263 of the Income-tax Act to revise the assessment order passed under Section 143(3) of the Act. The assessee argued that the original assessment was completed under Limited Scrutiny, focusing on excess liability shown and disallowance under Section 40A(3). The Pr. CIT's revisionary powers were challenged on the grounds that they should be confined to the issues considered in the Limited Scrutiny assessment. The Tribunal referred to various precedents, including the Chennai Bench's decision in Smt. Padmavathi vs ITO and the Delhi Tribunal's decision in Balvinder Kumar vs Pr. CIT, which held that the Assessing Officer (AO) cannot look beyond the issues for which the case was selected for scrutiny.2. Scope of Limited Scrutiny and its implications on assessment orders:The Tribunal emphasized that the AO is bound by CBDT Instructions, which restrict the scope of Limited Scrutiny to specific issues. The Pr. CIT had directed the AO to make additions under the head 'under valuation of closing stock,' which was not part of the Limited Scrutiny. The Tribunal noted that the AO must seek permission from the Pr. CIT to expand the scope from Limited Scrutiny to complete scrutiny if connected issues arise during the assessment. The Tribunal cited multiple cases, including Rajani Venkata Naga Annavarapu Narayana vs Pr. CIT, to support the view that directions beyond the scope of Limited Scrutiny are not legally valid.3. Validity of invoking Section 263 for issues not covered under Limited Scrutiny:The Tribunal found that the Pr. CIT's invocation of Section 263 was not justified as the issue of 'under valuation of closing stock' was unrelated to the issues identified in the Limited Scrutiny. The Tribunal distinguished the present case from the decision in Shri Sushanta Kumar Choudhury vs Pr. CIT, where the Pr. CIT had mentioned that the AO did not seek permission for complete scrutiny. The Tribunal concluded that the Pr. CIT's order was unsustainable as it addressed issues not connected to the Limited Scrutiny. The Tribunal quashed the revisionary order passed by the Pr. CIT under Section 263, aligning with the decisions in Smt. Padmavathi, Balvinder Kumar, and Rajani Venkata Naga Annavarapu Narayana.Conclusion:The Tribunal allowed the appeal of the assessee, holding that the Pr. CIT's order under Section 263 was erroneous and prejudicial to the interest of the Revenue, as it addressed issues beyond the scope of the Limited Scrutiny. The Tribunal emphasized the importance of adhering to CBDT Instructions and the limitations imposed on the AO in Limited Scrutiny cases.