2023 (6) TMI 400 - AT - Income Tax

Tribunal Invalidates PCIT's Order for Overreach in Limited Scrutiny, Misclassification of High Sea Sales as Speculative.

Sh. Gagandeep Garg, Prop. M/s Rama Traders Versus Pr. Commissioner of Income Tax-1, Amritsar

The Tribunal quashed the order passed by the PCIT under Section 263 of the Income Tax Act, ruling it invalid. The Tribunal found that the PCIT ... Revision u/s 263 - selection of the case under limited scrutiny - expansion scope of limited scrutiny - As per CIT high sea sales is speculative transaction and therefore disallowance of loss arising therefrom against the non speculative business income - HELD THAT:- As it is evident that the issue for which the PCIT issued the show cause notice was entirely different than the issues of selection of the case under limited scrutiny by the assessing officer. The Board in its circular mentioned the procedure for converting the limited scrutiny case into full-fledged scrutiny. From the perusal of the above said circular, it is abundantly clear that the conditions, which are sine qua non were non – existence, the AO did not have to make a request to convert a limited scrutiny case into full-fledged scrutiny. On similar facts, the coordinate bench, Amritsar in the case of Paradise Rubber Industries [2021 (10) TMI 444 - ITAT AMRITSAR] has held that revisionary jurisdiction shall not be invoked by the Pr. CIT to look into the issues which were not within the purview of limited scrutiny. AO cannot go beyond reasons for of limited scrutiny and thus, it would not be open to the PCIT to pass revisionary order u/s 263 on other aspects and remit matter to AO for fresh assessment. Assessee appeal allowed. Issues Involved:1. Expansion of the scope of Limited Scrutiny.2. Classification of high sea sales as speculative transactions.3. Validity of the order passed under Section 263 of the Income Tax Act.Summary:1. Expansion of the scope of Limited Scrutiny:The assessee argued that the Principal Commissioner of Income Tax-1 (PCIT) expanded the scope of limited scrutiny beyond the issues initially selected under CASS, which were: unsecured loans from persons who have not filed their return of income, large increase in unsecured loans during the year, and large squared-up loans during the year. The PCIT issued a notice under Section 263 of the Act, stating that the loss from speculative business was adjusted against interest income, which was not part of the original scrutiny. The Tribunal noted that the case was selected for limited scrutiny on specific issues and the Assessing Officer (AO) was not required to look into matters outside this scope. The Tribunal cited previous judgments, including 'Paradise Rubber Industries' and 'Baljeet Yadav v. The Pr.CIT,' which supported the position that the AO cannot go beyond the reasons for limited scrutiny without proper administrative approval. The Tribunal concluded that the PCIT's expansion of the scope was not justified.2. Classification of high sea sales as speculative transactions:The assessee contended that high sea sales should not be classified as speculative transactions and therefore, the loss arising from these transactions should not be disallowed against non-speculative business income. The Tribunal observed that the PCIT did not provide a satisfactory explanation for treating high sea sales as speculative transactions. The Tribunal agreed with the assessee's argument that high sea sales do not fall under speculative transactions and hence, the loss should not be disallowed.3. Validity of the order passed under Section 263 of the Income Tax Act:The Tribunal examined whether the order passed by the PCIT under Section 263 was valid. The PCIT had held that the AO's order was erroneous and prejudicial to the interest of revenue because it did not address the adjustment of speculative loss against interest income. The Tribunal noted that the AO had completed the assessment based on the issues selected for limited scrutiny and had no obligation to investigate beyond those issues. The Tribunal relied on the judgment in 'Naveen Bajaj Jal v. Pr. CIT-1, Jalandhar' and concluded that the PCIT's order under Section 263 was invalid as it addressed issues outside the scope of limited scrutiny. Consequently, the Tribunal quashed the PCIT's order.Conclusion:The Tribunal held that the expansion of the scope of limited scrutiny by the PCIT was not justified and the classification of high sea sales as speculative transactions was incorrect. The order passed under Section 263 was deemed invalid and quashed. The appeal of the assessee was allowed.