2024 (8) TMI 424 - AT - Income Tax

ITAT allows appeal against revision order for exceeding limited scrutiny scope under section 263

The ITAT Delhi allowed the assessee's appeal against PCIT's revision order u/s 263. The PCIT had directed fresh examination of share valuation u/s ... Revision u/s 263 - CIT setting aside the original assessment order with the direction to examine two issues afresh value of investment u/s 56(2)(via) read with rule 11UA to ascertain income under that provision - Issue referred in SCN though with changed basis and Sources of long terms loans with income thereon. HELD THAT:- From the record and the order of the PCIT, we find that no show cause notice has been issued to the assessee asking for any explanation with regard to sources of long terms loans with income thereon, however, the same has been directed to be examined by the AO. PCIT has fall into error by directing the AO on the issue for which no show cause has been issued to the assessee. We find that the case was selected for “limited scrutiny” to enquire large investment in unquoted share and AO duly examined the source and genuinity of such investment with reason thereof whereby assessee had a vested interest in Sanwariya Gas Ltd., as per scope and ambit of limited scrutiny, therefore the issue of valuation of shares with applicability of provisions of section 56(2)(viib) as raised in SCN u/s 263 being beyond the scope of “limited scrutiny” is also beyond the scope of section 263. Order u/s 263 based partially on the issue raised in the notice and also on entirely new issue without any SCN or without providing any opportunity is beyond the mandate of section 263. Keeping in view the entire facts and circumstances of the case and the judicial pronouncements mentioned above, we hold that, the order of the ld. PCIT passed u/s 263 cannot be affirmed owing to the reasons of, i) the order is passed beyond jurisdiction, ii) the order passed is beyond the limited scrutiny, iii) the order has been passed on the issues for which no show cause notice has been issued, iv) the issues flagged by the PCIT have examined by the AO, v) the decision of the ld. PCIT determining the difference on the value of the shares at Rs. 1.50 per share is against the provisions of the Act as the assessee can resort to the method of valuation as per DCF/NAV as per Rule 11UA at their discretion. Appeal of the assessee is allowed. Issues Involved:1. Jurisdiction of the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961.2. Violation of principles of natural justice due to lack of proper opportunity of being heard.3. Examination of issues beyond the scope of limited scrutiny.Issue-wise Detailed Analysis:1. Jurisdiction of the PCIT under Section 263:The assessee contended that the PCIT erred in law and on facts by invoking the provisions of Section 263 of the Income Tax Act, 1961, without satisfying the mandatory jurisdictional conditions. The initiation of proceedings under Section 263 was deemed illegal, arbitrary, and without application of mind. The Tribunal noted that the original assessment was completed under limited scrutiny, and the PCIT's directions to examine new issues were beyond the scope of the original limited scrutiny. The Tribunal relied on judicial precedents, including PCIT vs. Shark Mines and Minerals (P.) Ltd. and CIT vs. Smt. Padmavathi, which held that the PCIT cannot travel beyond the scope of issues forming part of the limited scrutiny in the original assessment order.2. Violation of Principles of Natural Justice:The assessee argued that the PCIT initiated revision proceedings and passed the order without providing a proper opportunity of being heard, thereby violating the principles of natural justice. The Tribunal found that no show cause notice was issued to the assessee regarding the sources of long-term loans and income thereon, yet the PCIT directed the Assessing Officer (AO) to examine these issues. This lack of opportunity to respond to new issues was deemed a violation of natural justice, rendering the order under Section 263 invalid. The Tribunal cited Krishak Bharati Cooperative Ltd. vs. ACIT and B.S. Sangwan vs. ITO to support this view.3. Examination of Issues Beyond the Scope of Limited Scrutiny:The Tribunal observed that the case was selected for limited scrutiny to inquire into large investments in unquoted shares, low income compared to high loan advances, and large increases in investments in unlisted equities. The AO conducted inquiries and verified the genuineness and sources of investments, completing the assessment accordingly. The PCIT's direction to examine the issue of long-term loans and the valuation of shares under Section 56(2)(viia) was beyond the scope of the limited scrutiny and hence, beyond the jurisdiction under Section 263. The Tribunal referenced judicial pronouncements, including Naga Dhunseri Group Ltd., to affirm that the PCIT cannot make a roving inquiry in the guise of a limited scrutiny.Conclusion:The Tribunal concluded that the order of the PCIT under Section 263 could not be affirmed due to the following reasons:- The order was passed beyond jurisdiction.- The order addressed issues beyond the scope of limited scrutiny.- The order included issues for which no show cause notice was issued.- The issues flagged by the PCIT had already been examined by the AO.- The determination of the difference in the value of shares by the PCIT was against the provisions of the Act, as the assessee could choose the method of valuation as per Rule 11UA.Result:The appeal of the assessee was allowed, and the order pronounced in the open court on 05/08/2024.