2022 (4) TMI 901 - AT - Income Tax

Tribunal overturns Pr. CIT's Section 263 order, finding AO's inquiries valid under limited scrutiny rules.

The Tribunal quashed the order passed by the Principal Commissioner of Income Tax (Pr. CIT) under Section 263, holding that the Assessing Officer (AO) had ... Revision u/s 263 by CIT - fresh unsecured loans & fresh capital introduced - Proof of lack of enquiry - HELD THAT:- Assessee case was selected for limited scrutiny on the issue of Interest expenses and Increase in Capital. The AO also issued notice under section 142(1) dated 20.09.2016 along with a questionnaire. Thereafter upon change of incumbent of charges, notice u/s 142(1) along with questionnaire issued on 18.12.2017 fixing the hearing on 19.12.2017. Thus in response to the notice issued under section 142(1), the assessee attended the proceedings through his A/R and also furnished the required details/documents as well as books of account which were examined by the AO. There is no dispute that the AO(s) has conducted the enquiry on the issue for which the case was selected for scrutiny and after satisfying himself the AO finally concluded that the assessee is engaged in the business of real estate and after examining the details and records produced before him and discussion with the A/R the returned income is accepted. Thus it is not a case of lack of enquiry on the part of the AO as once he was satisfied with the supporting evidences produced by the assessee he has accepted the claim. Question of lack of enquiry does not arise when the AO has taken up the scrutiny and issued the notice under section 142(1) along with a questionnaire calling for all the details relevant to the Interest expenses and Increase in Capita - assessee produced the relevant details and evidences and specifically the purchase bills of the assets, return of income, computation of total income, balance sheet, profit & loss account, capital account and personal bank statement of the assessee and complete books of accounts. It is further noticed from the reply furnished by the assessee to the AO as well as to the ld. PCIT that the interest expenditure claimed in Profit & Loss account were of car loan and there was no work-in-progress, and no other interest was claimed out of business income on account of alleged addition to fixed assets. In the fixed assets the additions were of computer for ₹ 11,700/- and Refrigerator & AC of ₹ 38,800/- during the year. Accordingly no high interest expenses were claimed very against the new capital added and addition made to the fixed assets. Regarding the addition in capital account, the assessee furnished a copy of his personal bank account explaining the nature and source of the credit entries and the ld. AO after verification of the same from the relevant records and books of account accepted the same. It is evident and verifiable from the order passed by the ld. PCIT that he has not doubted/pointed out any deficiency in the said details. Thus the provisions of section 263 were invoked by the ld. PCIT due to the reason that he has a different view regarding the allowability of deduction under section 57 & section 68 of the IT Act in respect of the Interest expenses and Increase in Capital respectively. There is no quarrel on the point that lack of enquiry renders the order of the AO as erroneous so far as prejudicial to the interests of the revenue. However, when there is no allegation and even otherwise it is manifest from the record that this is not a case of lack of enquiry on the part of the AO but the AO after satisfying himself about the claim of Interest expenses and Increase in capital consequent upon the examination and verification of the concerned details, evidences and books of account produced by the assessee, allowed the claim of the assessee and accepted the source of addition made to the capital. We find that when the explanation furnished by the assessee on this issue is satisfactory and the AO has taken a possible view then the ld. PCIT is not permitted to take a different view merely because the view taken by the AO was not acceptable to the ld. PCIT. Therefore, the proceedings which are beyond the scope of the revisional proceedings, are not permissible. In view of the above undisputed facts and legal position on the issue decided by various courts, and also clarifications issued by the CBDT by way of various circulars which are binding on the taxing authorities, we quash the order passed u/s 263 - Addition u/s 68 - As submitted by the ld. A/R that the said capital was transferred from his personal bank account, and a copy of bank account explaining the nature and source of credit which were either withdrawal from the partnership firm’s capital account or realization from debtors. The said copy of bank account along with copy of Balance Sheet and other financial statements were duly produced before the ld. AO and the copy of bank statement and other relevant supporting documentary evidences were also filed before the ld. Pr. CIT. The ld. A/R further submitted that the ld. Pr.CIT has also not pointed out any defect or deficiency in the said documents filed. In view of the above facts duly supported by documentary evidences available on assessment record, the sources of fresh capital introduced were duly explained by the assessee and which were after taking possible view and a considered opinion the ld. AO has correctly accepted as explained.- Decided in favour of assessee. Issues Involved:1. Jurisdiction of the Principal Commissioner of Income Tax (Pr. CIT) under Section 263.2. Validity of the assessment order under Section 143(3) of the Income Tax Act, 1961.3. Verification of fresh unsecured loans and the increase in capital.Issue-wise Detailed Analysis:1. Jurisdiction of the Principal Commissioner of Income Tax (Pr. CIT) under Section 263:The appeal by the assessee challenges the revision order passed by the Pr. CIT, Jaipur-2, under Section 263 of the IT Act, 1961, claiming it was 'erroneous and prejudicial to the interest of the revenue.' The Pr. CIT's jurisdiction under Section 263 was questioned on the grounds that the assessment order was based on a limited scrutiny notice, and the Pr. CIT did not exercise his own discretion and judgment but acted on the suggestion of the audit party.2. Validity of the assessment order under Section 143(3) of the Income Tax Act, 1961:The assessee argued that the assessment order dated 21.12.2017 was not erroneous or prejudicial to the revenue. The case was selected for limited scrutiny to verify 'High interest expenditure against new capital added in work in progress or addition made to fixed assets' and 'Substantial increase in capital in a year.' The assessee provided explanations and documentary evidence for both issues, which were accepted by the Assessing Officer (AO). The AO was satisfied with the submissions and evidences furnished by the assessee, thus accepting the returned income.3. Verification of fresh unsecured loans and the increase in capital:The Pr. CIT opined that the AO did not properly verify the fresh unsecured loans of Rs. 2,59,25,611 and the source of the increase in capital. The assessee contended that the AO had verified these aspects during the assessment proceedings. The interest expenses of Rs. 39,94,965 were claimed under Section 57 against interest income, and the increase in capital was explained with supporting documents, including personal bank statements. The Pr. CIT's revision order was based on the belief that the AO failed to make proper inquiries, but the assessee argued that the AO had conducted sufficient inquiries within the scope of the limited scrutiny.Tribunal's Findings:The Tribunal examined the assessment record and found that the AO had indeed conducted inquiries and verified the details provided by the assessee. The Tribunal noted that the case was selected for limited scrutiny, and the AO could not travel beyond the issues identified for examination. The Tribunal cited various judicial precedents and CBDT instructions, emphasizing that the AO's inquiries were confined to the specific reasons for limited scrutiny. The Tribunal concluded that the Pr. CIT's order under Section 263 was not justified as the AO had made sufficient inquiries and the assessment order was neither erroneous nor prejudicial to the interest of the revenue.Conclusion:The Tribunal quashed the order passed under Section 263 by the Pr. CIT, holding that the AO had conducted proper inquiries and verification within the scope of the limited scrutiny. The appeal of the assessee was allowed, and the assessment order under Section 143(3) was upheld.