KNIGHT FRANK PROPERTY SERVICES PRIVATE LIMITED,MUMBAI vs. DY. COMMISSIONER OF INCOME TAX, CIRCLE 6(1)(2), MUMBAI, MUMBAI

As per the brief facts of the case, the assessee is engaged in the business of rendering Facilities Management Services (FMS) and Project Management Services (PMS). The assessee electronically filed its revised return of income ("ROI") for AY 2018-19 on 22.12.2018 vide Acknowledgement No. 392727401221218 declaring a total income of Rs. 71,85,130/- and book profit of Rs. 86,27,274/- under section 115JB of the Act.

The case of the assessee was selected for Limited Scrutiny under CASS, and notice under section 143(2) of the Act dated 22.09.2019 was issued to verify the following issues:

Thereafter, the assessment was completed, and the Assessing Officer passed the assessment order under section 143(3) read with section 144B of the Act on 28.09.2021 determining the total income at Rs. 26,18,19,573/- after making the following additions:

Being aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A), who, vide order dated 29.12.2025, upheld the additions made by the Assessing Officer.

Being further aggrieved by the order of the Ld. CIT(A), the assessee is now in appeal before us by raising the grounds reproduced hereinabove.

Ground Nos. 1 and 2 raised by the assessee are interrelated and interconnected and relates to the challenging the order of the Ld. CIT(A) in upholding the assessment framed under section 143(3) read with section 144B of the Act despite the assessee's contention that the Assessing Officer exceeded the jurisdiction vested in him in a case selected for Limited Scrutiny under CASS. The assessee has also challenged the appellate order on the ground that the Ld. CIT(A) erroneously referred to the assessment as one passed under sections 144/147 instead of section 143(3) read with section 144B, failed to consider the written submissions and documentary evidence furnished during the appellate proceedings, and wrongly concluded that no evidence had been produced to rebut the findings of the Assessing Officer. Accordingly, these grounds are being adjudicated together by way of this consolidated order.

In support of these grounds, the Ld. AR submitted that the assessee had received notice under section 143(2) of the Act dated 22.09.2019 for Limited Scrutiny Assessment for AY 2018-19 on the following issues:

However, to the assessee's surprise, the show cause notice and draft assessment order dated 22.04.2021 stated that the case had been selected under CASS for Limited Scrutiny on the following different issues:

In this regard, the Ld. AR drew our attention to paragraph 1 of the assessment order, wherein it has been stated that the assessee's case was selected for Limited Scrutiny on the issues of refund claim and sales turnover/receipts. However, in paragraph 4 of the same assessment order, the Assessing Officer recorded different reasons, namely, mismatch of tax credit with Form 26AS and claim of large refund. It was thus contended that the reasons recorded by the Assessing Officer were inconsistent with and contradictory to the reasons communicated in the notice issued under section 143(2) of the Act. Accordingly, it was argued that the entire assessment proceedings were without jurisdiction, bad in law and liable to be quashed.

It was further submitted that the Assessing Officer made additions on account of alleged excess consumption of stores and spares under section 37 of the Act and alleged suppression of revenue by invoking section 198 of the Act. According to the Ld. AR, these issues were wholly unrelated to the reasons for which the case had been selected for Limited Scrutiny. Thus, by examining such issues, the Assessing Officer had effectively converted the Limited Scrutiny into a Complete Scrutiny without following the prescribed procedure, thereby acting beyond his jurisdiction in violation of CBDT Instruction No. 20/2015 dated 29.12.2015 and the CBDT Guidelines dated 30.11.2017. 12. It was also pointed out that the assessee had specifically objected during the course of assessment proceedings vide letter dated 26.04.2021 to the expansion of the scope of Limited Scrutiny into Complete Scrutiny, contending that such expansion was beyond jurisdiction and contrary to CBDT Instruction No. 20/2015 [F. No. 225/269/2015-ITA-II] dated 29.12.2015 and the CBDT Guidelines dated 30.11.2017. According to the Ld. AR, where the Assessing Officer is of the view that there is potential escapement of income exceeding the prescribed monetary limit, the case can be converted into Complete Scrutiny only after obtaining prior written approval of the Pr. CIT/CIT upon being satisfied about the merits of such issues. However, in the present case, no such approval was ever obtained by the Assessing Officer.

In support of the above submissions, reliance was placed on the following:

It was further submitted that although the assessee had specifically raised the jurisdictional issue relating to Limited Scrutiny before the Ld. CIT(A), the same was dismissed without proper consideration of the submissions made by the assessee and without passing a reasoned or speaking order.

The Ld. AR further contended that the impugned appellate order had been passed mechanically and without application of mind. It was submitted that the Ld. CIT(A) merely reproduced the assessment order and the submissions of the assessee and incorrectly observed that the assessment had been framed under sections 144/147 of the Act, whereas, in fact, it had been passed under section 143(3) read with section 144B of the Act, thereby demonstrating complete non-application of mind and causing grave prejudice to the assessee.

It was further argued that the Ld. CIT(A) failed to consider, inter alia, the written submissions dated 19.02.2025, 11.04.2025 and 29.07.2025 while passing the appellate order and wrongly concluded that the assessee

On the other hand, the Ld. DR relied upon the orders of the lower authorities and submitted that the Assessing Officer had acted strictly within the scope of the Limited Scrutiny. It was contended that while examining the issue of refund claim and sales turnover/receipts, the Assessing Officer was fully empowered to examine the entries appearing in Form 26AS as well as the Profit and Loss Account of the assessee.

We have heard the counsels for both the parties, perused the material available on record, the judicial precedents relied upon by both the parties, and the orders passed by the Revenue authorities. From a perusal of the assessment order, we notice that in paragraph 4 thereof, the Assessing Officer has recorded that...

Further, the Ld. CIT(A) dismissed the relevant ground raised by the assessee by holding that the AO had acted within the scope of the Limited Scrutiny while framing the assessment order and had not exceeded his jurisdiction.

However, in our considered view, the contentions advanced by the assessee are well founded. The AO was not justified in travelling beyond the scope of his jurisdiction, particularly when the CBDT Instructions issued under section 119 of the Act are binding upon the departmental authorities. In the present case, if the issue of 'Claim of Large Value of Refund' necessarily warranted a complete examination, the case ought to have been selected for Complete Scrutiny itself. However, since the case was admittedly selected for Limited Scrutiny, the scope of enquiry was confined to verification of the specific issue and could not be expanded so as to empower the AO to examine each and every item appearing in the Profit & Loss Account and Balance Sheet, which would, in effect, amount to conducting a Complete Scrutiny. As consistently held by the Hon'ble Supreme Court and various Hon'ble High Courts, the Assessing Officer is bound by the CBDT Instructions and cannot enquire into issues other than those for which the case was selected under Limited Scrutiny unless prior written approval of the Pr. CIT/CIT for conversion into Complete Scrutiny has been obtained.

In the facts of the present case, the Assessing Officer expanded the scope of enquiry without complying with the prescribed procedure and without obtaining the requisite approval. Such action is, therefore, without jurisdiction and consequently bad in law. Accordingly, the additions made by the Assessing Officer are void ab initio and liable to be deleted. Ground No. 1 raised by the assessee is, therefore, allowed.

We further observe that the Ld. CIT(A) has substantially reproduced the assessment order as well as the submissions of the assessee in the appellate order. The discussion contained in the appellate order, being merely summary in nature, does not indicate that a thoughtful and independent consideration was accorded to the issues raised or to the written submissions filed by the assessee. We also notice that while the Assessing Officer has extensively discussed the provisions of section 198 of the Act, the relevant provision governing the issue is section 199 read with Rule 37BA(3)(i) of the Income-tax Rules, 1962, which aspect, in our opinion (subject to the merits of the issue), has also been overlooked by the Ld. CIT(A). Accordingly, Ground No. 2 raised by the assessee is also allowed.

Consequently, the assessment order passed under section 143(3) read with section 144B of the Act is hereby quashed.

Ground No. 3 raised by the assessee relates to challenging the order of the Ld. CIT(A) in confirming the disallowance of Rs.6,14,00,000/- on account of alleged excess consumption of stores and spares.

In this regard, we have heard the rival submissions, perused the material available on record, the judicial precedents relied upon, and the orders of the lower authorities. From the record, we notice that during the course of the assessment proceedings, the AO observed that the total turnover of the assessee had decreased from Rs. 290.38 crores during FY 2016-17 to Rs. 70.32 crores during FY 2017-18, whereas the consumption of stores and spares had increased from Rs. 4.61 crores to Rs. 7 crores during the same period. Accordingly, the AO called upon the assessee to explain the alleged abnormal increase in the consumption of stores and spares.

In response, the assessee submitted that purchases of traded goods aggregating to Rs. 6,14,00,000/- had inadvertently been grouped under the head "Consumption of Stores and Spares" instead of "Purchases", which was merely a classification error and did not affect the substance of the claim. It was explained that the actual expenditure towards consumption of stores and spares amounted only to Rs. 0.85 crore and, when compared with the corresponding expenditure of Rs. 4.61 crores in the preceding year, the expenditure had, in fact, substantially declined. The assessee further pointed out that the total purchases had decreased from Rs. 14.27 crores in the preceding year to Rs. 9.34 crores during the year under consideration. However, the AO observed that although purchases had reduced in absolute terms, the ratio of purchases to sales had increased from 4.91% in the preceding year to 13.30% during the relevant year.

The assessee further explained that it was engaged in two business segments, namely, Project Management Services ("PMS") and Facility Management Services ("FMS"). It was submitted that the PMS segment included Engineering, Procurement and Construction (EPC) contracts, wherein procurement of materials is entirely dependent upon the specifications and requirements of the clients. Consequently, the quantity and value of purchases vary according to the nature of projects undertaken and are not within the independent control of the assessee.

During the appellate proceedings, the assessee furnished comparative details for AYs 2015-16 to 2018-19 demonstrating substantial growth in the PMS business. Relying upon the said comparison, it was submitted that the increase in purchases during AY 2018-19 was directly attributable to the increase in PMS activities, whereas the proportion of FMS business had comparatively reduced, resulting in lower FMS-related expenditure. It was therefore contended that comparison of the overall expenditure vis-à-vis the revenue was a more appropriate benchmark and clearly established that the expenditure claimed was consistent with earlier years. The assessee also furnished another comparative chart to demonstrate that the operating profit percentage during AY 2018-19 was higher than in the earlier assessment years. It was further submitted that the assessee had earned profits during the year under consideration, unlike the immediately preceding assessment years relied upon by the AO. Accordingly, it was contended that comparison of purchases with sales alone was not an appropriate basis for drawing adverse inferences.

We further notice that during the assessment proceedings, the assessee furnished complete party-wise details relating to the expenditure of Rs. 6,14,00,000/-, including PAN, addresses and sample invoices aggregating to Rs. 2.68 crores. The assessee also requested the AO to independently verify the transactions by issuing notices under section 133(6) of the Act to the concerned vendors, if considered necessary. However, no such verification was carried out by the AO.

The assessee submitted that, apart from making an arithmetic comparison, the AO had not undertaken any independent enquiry or verification regarding the genuineness of the expenditure. It was contended that it is a settled principle of law that no addition or disallowance can be made merely on the basis of conjectures and surmises without any direct and cogent evidence establishing that the expenditure was bogus or not incurred wholly and exclusively for the purposes of business.

The assessee further submitted that the expenditure incurred towards consumption of stores and spares constituted genuine business expenditure allowable under section 37 of the Act. It was emphasized that the AO neither doubted the identity or genuineness of the vendors nor disputed the actual incurrence of the expenditure, and that the disallowance had been made solely on the basis that the purchases appeared disproportionately high in comparison to the turnover.

The assessee also submitted that the expenditure towards consumption of stores and spares and purchase of traded goods was 16 regularly incurred in the ordinary course of its FMS and PMS business activities. It was further pointed out that no such disallowance had been made in the preceding assessment years in respect of similar expenditure.

With regard to the AO's observation that the assessee was "constantly changing its stand regarding consumption of stores and spares", it was submitted that every possible effort had been made to explain and substantiate the genuineness of the claim; however, the AO failed to properly appreciate the explanations and material placed on record.

In support of its contentions, reliance was placed upon the following judicial precedents:

We have heard the counsels for both the parties and perused the material available on record, judgment cited before us and also the orders

We further note that the assessee furnished detailed party-wise particulars of the expenditure, along with PAN, addresses and supporting invoices, and also explained that a substantial portion of the amount had been inadvertently classified under the head "Consumption of Stores and Spares" instead of "Purchases". The assessee has also demonstrated that the expenditure pattern was consistent with the nature of its PMS and FMS business, wherein procurement is driven by client-specific requirements and is inherently variable.

It is also not the case of the Revenue that the identity of the suppliers, the genuineness of the transactions, or the business purpose of the expenditure has been doubted or disproved. The disallowance has been made solely on the basis of ratio analysis and perceived abnormality in comparison with earlier years, which, in the absence of any supporting material or independent enquiry, cannot justify the impugned addition.

In view of the totality of the facts and circumstances of the case, and respectfully following the settled legal position that no disallowance can be made merely on the basis of surmises and conjectures without bringing any adverse material on record, we are of the considered opinion that the disallowance of Rs. 6,14,00,000/- is unsustainable in law. Accordingly, the same is directed to be deleted. Ground No. 3 raised by the assessee is allowed.

Ground No. 4 raised by the assessee relates to challenging the order of the Ld. CIT(A) in confirming the addition of Rs. 19,30,75,943/- on account of alleged suppression of revenue based on the difference between the revenue disclosed in the books of account and the figures reflected in Form 26AS.

In this regard, the Ld. AR submitted that during the course of assessment proceedings, the Ld. AO observed that the total receipts reflected in Form 26AS amounted to Rs. 91,74,74,943/-, whereas the total revenue disclosed in the audited financial statements was Rs. 65,98,99,918/-. Accordingly, the assessee was called upon to reconcile the receipts and corresponding TDS appearing in Form 26AS with the revenue recorded in the books of account. Consequently, the Ld. AO alleged a mismatch of Rs. 25,75,75,025/- between the receipts appearing in Form 26AS and the revenue disclosed in the audited financial statements.

In response thereto, the assessee furnished a detailed reconciliation before the Ld. AO and specifically explained that an amount aggregating

The assessee submitted before the lower authorities that Form 26AS is merely a statement of tax deducted and deposited by third parties and cannot, by itself, be regarded as conclusive evidence for determining the year of taxability of income. In the instant case, the assessee had offered the income in the preceding year following the mercantile system of accounting, whereas the payer had recognised the expenditure and deducted TDS in the impugned assessment year based on the event of payment. The timing of reflection of receipts in Form 26AS is, therefore, dependent upon the accounting practices, reporting mechanisms, and timing adopted by the deductors, over which the assessee has no control.

Such differences may arise due to several bona fide and practical reasons, including, but not limited to, the following:

The assessee further submitted before the lower authorities that its books of account had been duly audited under the provisions of the Income-tax Act, 1961 ("the Act") as well as the Companies Act, 2013. The revenue recognised by the assessee in its audited financial statements had consistently been accounted for in accordance with the applicable accounting standards and had been duly offered to tax in the correct assessment year. In the absence of any defect being pointed out in the 21 books of account or the method of accounting regularly followed by the assessee, no adverse inference could have been drawn merely on the basis of entries appearing in Form 26AS.

The assessee submitted that the AO, instead of drawing adverse conclusions solely on the basis of Form 26AS, ought to have exercised the powers available under section 133(6) of the Act by issuing notices to the concerned deductors to independently verify the transactions and ascertain the reasons for the timing differences. Such an exercise would have enabled proper reconciliation of the transactions appearing in the deductors' records vis-à-vis the books of account of the assessee. However, no such verification was undertaken by the AO before making the impugned addition of Rs. 19,30,75,943/-.

There is no provision under the Act which mandates that the year of reflection of income in Form 26AS shall conclusively determine the year of taxability of such income. Accordingly, the assumption of the AO that all deductors necessarily follow the mercantile system of accounting uniformly, without appreciating the factual and practical realities governing such transactions and ignoring the TDS provisions, which mandate deduction of TDS at the time of credit or payment, whichever is earlier, is wholly erroneous and unsustainable in law.

Without prejudice to the aforesaid submissions, and while reiterating that the amount of Rs. 19,30,75,943/- had already been offered to tax in AY 2017-18, the assessee further submitted that the AO had erred in 22 invoking the provisions of section 198 of the Act by treating the gross receipts on which tax was deducted at source as deemed income of the assessee for the year under consideration. The AO failed to appreciate that section 198 merely creates a limited deeming fiction whereby tax deducted at source is deemed to be income received for the purpose of granting credit of taxes deducted and cannot be extended to determine the year of taxability of the underlying income itself. The relevant provision in this regard is section 199 read with Rule 37BA(3)(i) of the Income-tax Rules, 1962. 48. The assessee had specifically submitted before the AO during the course of assessment proceedings, including during the hearing conducted through video conferencing, that the provisions of section 198 cannot be read in isolation and must necessarily be construed harmoniously with sections 4 and 5 of the Act, section 199, and Rule 37BA of the Income-tax Rules, 1962. A conjoint reading of these provisions establishes that income is chargeable to tax in the year in which it accrues or is received, in accordance with the method of accounting regularly followed by the assessee, whereas credit for TDS is to be granted in the year in which the corresponding income is assessable to tax. Therefore, merely because tax has been deducted and reflected in Form 26AS in a particular year cannot lead to the conclusion that the corresponding income is taxable in that very year.

It is a settled position of law that Form 26AS is only a corroborative document and cannot override the audited books of account maintained by 23 the assessee on a consistent basis. The impugned addition made solely on the basis of Form 26AS, without rejecting the books of account under section 145 of the Act and without bringing any independent material on record to establish escapement of income, is arbitrary, contrary to settled judicial principles, and liable to be deleted.

We have heard the counsels for both the parties and perused the material available on record, judgment cited before us and also the orders passed by the Revenue Authorities from the records we noticed that the addition made by the AO is based solely on the difference between the receipts reflected in Form 26AS and the revenue disclosed in the audited financial statements, without bringing any independent evidence on record to establish that the impugned amount constituted income chargeable to tax for the year under consideration. The assessee has furnished a plausible and duly supported reconciliation demonstrating that a substantial portion of the alleged mismatch pertains to income already offered to tax in AY 2017-18 and that the difference arose on account of delayed deduction/reporting of TDS by the deductors and change of year.

The AO has neither rejected the books of account under section 145 of the Act nor conducted any independent verification from the concerned deductors under section 133(6) of the Act. Further, mere reflection of an amount in Form 26AS cannot conclusively determine the year of taxability of income, particularly when the assessee consistently follows a recognised method of accounting and the books are duly audited. The invocation of section 198 by the AO is also found to be misconceived, as the said

In view of the aforesaid facts and settled legal position, the addition made by the AO is unsustainable and is accordingly directed to be deleted. Thus, Ground No. 4 raised by the assessee is allowed.

Ground No. 5 raised by the assessee relates to challenging the order of the Ld. CIT(A) in confirming the computation of book profit under section 115JB of the Act by upholding the enhancement of the net profit by Rs. 6,14,00,000/- on account of disallowance of consumption of stores and spares and Rs. 19,30,75,943/- on account of alleged suppression of revenue.

In this regard, the Ld. AR submitted that the AO had erred in adding the aforesaid amounts while computing book profit under section 115JB of the Act. The assessee contended that such additions are wholly unsustainable in law and contrary to the settled legal position governing computation of book profits under the Minimum Alternate Tax (MAT) provisions.

The assessee submitted that section 115JB is a self-contained code and the computation of book profit thereunder can be altered only to the extent specifically provided in Explanation 1 to section 115JB of the Act. The AO has no power to make any adjustment to the net profit as per the 25 audited Profit and Loss Account except those expressly contemplated under the said Explanation.

In this regard, reliance was placed on the judgment of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd., wherein it has been held that the Assessing Officer does not have jurisdiction to go behind the net profit shown in the Profit and Loss Account prepared in accordance with the provisions of the Companies Act, except to the limited extent of adjustments specifically permitted under Explanation 1 to section 115JB.

The assessee argued that in the present case, the amounts of Rs. 6,14,00,000/- and Rs. 19,30,75,943/- do not fall within any of the items prescribed under Explanation 1 to section 115JB. The impugned additions have been made merely on the basis of additions/disallowances considered under the normal provisions of the Act and not on account of any adjustment specifically envisaged under section 115JB.

We have heard the counsels for both the parties and perused the material available on record, judgment cited before us and also the orders passed by the Revenue Authorities from the records we noticed that the AO has made additions to the book profit under section 115JB in respect of amounts which do not fall within the ambit of adjustments specifically prescribed under Explanation 1 to section 115JB of the Act. The law is well settled by the judgment of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. that the Assessing Officer cannot travel beyond the net

Since the impugned additions do not qualify for adjustment under Explanation 1 to section 115JB, the same cannot be added while computing book profit. Accordingly, the additions made by the AO under section 115JB are directed to be deleted. Thus, Ground No. 5 raised by the assessee is allowed.

In the result, the appeal filed by the assessee stands allowed.