Section 263 revision cannot expand limited scrutiny, and treaty-based capital gains treatment may coexist with carry forward of capital loss.

Section 263 revision requires an assessment order that is both erroneous and prejudicial to the interests of the Revenue; it cannot be used to enlarge a limited-scrutiny assessment beyond the issues the Assessing Officer was authorised to examine. In the 2016-17 year, the Tribunal noted that the assessee disclosed capital gains and capital losses, and held that the Act and treaty benefit under section 90(2) permitted the more favourable treatment, so acceptance of carry forward of capital loss was not erroneous in law. In the 2017-18 year, the revision failed because the proposed issue was outside the scope of limited scrutiny and the scrutiny had not been expanded to complete scrutiny.

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Issues: (i) Whether the revision under section 263 of the Income-tax Act, 1961 was valid for assessment year 2016-17 on the ground that the Assessing Officer accepted carry forward of capital loss without proper enquiry while the assessee had claimed treaty exemption for capital gains; (ii) Whether the revision under section 263 of the Income-tax Act, 1961 was valid for assessment year 2017-18 when the assessment was under limited scrutiny and the issue of carry forward of capital loss was outside its scope.

Issue (i): Whether the revision under section 263 of the Income-tax Act, 1961 was valid for assessment year 2016-17 on the ground that the Assessing Officer accepted carry forward of capital loss without proper enquiry while the assessee had claimed treaty exemption for capital gains.

Analysis: The assessee had disclosed the capital gains and capital losses in the return, but the Assessing Officer did not make further enquiry before accepting the claim. The Tribunal held that capital gains and capital losses arising from different streams could be segregated within the head of capital gains, and that the assessee could take the more beneficial treatment available under the Act and the treaty in terms of section 90(2). Relying on the distinction between source of income and head of income, and on earlier Tribunal decisions permitting carry forward of capital losses while claiming exemption for capital gains under the treaty, the Tribunal held that the assessment order was not erroneous in law.

Conclusion: The revision under section 263 for assessment year 2016-17 was not sustainable and the assessee succeeded on this issue.

Issue (ii): Whether the revision under section 263 of the Income-tax Act, 1961 was valid for assessment year 2017-18 when the assessment was under limited scrutiny and the issue of carry forward of capital loss was outside its scope.

Analysis: The assessment for assessment year 2017-18 was selected for limited scrutiny on specified foreign remittance issues. The Tribunal held that the revisional jurisdiction could not be used to widen the scope of assessment beyond the parameters of limited scrutiny, and that the Commissioner could not invoke section 263 on an issue that the Assessing Officer had no jurisdiction to examine in that scrutiny. Since the scrutiny was not expanded to complete scrutiny, the revision was held to be beyond jurisdiction.

Conclusion: The revision under section 263 for assessment year 2017-18 was not sustainable and the assessee succeeded on this issue.

Final Conclusion: The common revisional orders were set aside and the assessee's challenge succeeded in both assessment years.

Ratio Decidendi: Section 263 cannot be invoked unless the assessment order is both erroneous and prejudicial to the interests of the Revenue, and that revisional power cannot be used to enlarge the scope of a limited-scrutiny assessment beyond the matters for which the Assessing Officer was authorised to enquire.

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