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Facts
The assessee company, engaged in manufacturing specialty chemicals, filed its return of income. The case was selected for limited scrutiny. The PCIT invoked Section 263, citing errors in the assessment order regarding CSR expenses and education cess, and set aside the assessment order. The assessee appealed this.
Held
The Tribunal held that the PCIT's revisionary power under Section 263 requires both an error in the AO's order and prejudice to the revenue, which must co-exist. In this case, the issues raised by the PCIT were outside the scope of the limited scrutiny. Thus, the revisional order was not sustainable.
Key Issues
Whether the PCIT can exercise revisionary powers under Section 263 when the issues raised were outside the scope of the limited scrutiny conducted by the AO.
Sections Cited
263, 143(3), 144B, 40(a)(ia), 80G, 143(1)
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Income Tax Appellate Tribunal, MUMBAI BENCH “F”, MUMBAI
Before: SHRI NARENDRA KUMAR BILLAIYA & SHRI ANIKESH BANERJEE
The instant appeal of the assessee filed against the order of the Principal Commissioner of Income-tax, Mumbai-4 [for brevity, ‘Ld.PCIT’] passed under section 263 of the Income-tax Act, 1961 (in shot, ‘the Act) for the Assessment Year 2020-21, date of order 20/03/2025. The impugned order emanated from the order of the Assessment Unit, Income-tax Department (in short, ‘Ld.AO’), passed under section 143(3) r.w.s 144B of the Act, date of order 08/09/2022.
Fineotex Chemical Limited 2. The brief facts of the case are that the assessee is a company engaged in business of manufacturing specialty chemicals, which are dominantly used as performance chemicals in textile processing. The assessee filed its return of income on 06/02/2021 declaring total income at Rs.29,15,66,300/-. The return was processed under section 143(1) of the Act. The case was selected for scrutiny through CASS for verification of – (i) Capital gain / loss; and (ii) loss from currency fluctuation. Both the issues were duly scrutinized by the Ld.AO and no addition was made in respect of CASS issue. After that, by invoking provisions of section 263, the Ld. PCIT issued the notice u/s 263 related to the issue of expenses under CSR head vis-à-vis donation u/s 80G of the Act to the tune of Rs. 25,23,000/- and the levy of education cess amounting to Rs. 27,18,773/- which is not allowable as per section 40(a)(ia) of the Act introduced in Finance Act, 2022 with retrospective effect from 01/04/2005 is clarificatory in nature and the assesse was not eligible to claim such deduction. The assessee donated various trusts amount to Rs. 50,46,000/- out of that 50% of the donation amount to Rs. 25,23,000/- was claimed U/s 80G of the Act. During the proceeding U/s 263 of the Act, the assessee argued that the claim of 80G is duly tested by the jurisdictional Tribunal related to CSR expenses vis-à-vis deduction u/s 80G. The verification of the Ld. AO is only confined on the limited scrutiny. Considering the impugned assessment order as erroneous and prejudicial to the interest of the revenue by invoking provisions of section 263, the Ld.PCIT set aside the assessment order for adjudication of two alleged issues. Being aggrieved, the assesse filed an appeal before us.
The Ld.AR filed a paper book containing pages 1 to 14, which is placed on record, and argued that the issue related to CSR expenses claiming the deduction Fineotex Chemical Limited u/s 80G is duly covered by the order of co-ordinate bench of ITAT, in the case of the WNS Global Services (P) Ltd (2025) 174 taxmann.com 1031 (Mumbai- Trib.), Motilal Oswal Securities Ltd. (ITA No. 1795/Mum/2023, order dated 18.08.2023), Allegis Services India Pvt. Ltd. (ITA No. 1693/Bang/2019) and JMS Mining Pvt. Ltd. [130 taxmann.com 118 (Kolkata Trib.). As the issue is highly debatable, any view taken by the Ld. AO during the course of original assessment proceeding has to be considered as a plausible view and the view taken by the Ld. PCIT, howsoever plausible, is nothing but a change of opinion for which jurisdiction u/s 263 of the Act cannot be assumed. Further, he argued that the assessment was completed through CASS for limited scrutiny, so the Ld.AO had no jurisdiction for verification of other issues, except the two issues, as directed CASS system. Further, related to education cess, the Ld.AR stated that the amendment was brought in Finance Act, 2022 with retrospective effect from 01/04/2005. But the Ld. AO had no jurisdiction to verify the issue in limited scrutiny.
The Ld.DR argued and relied on the order of the Ld.PCIT.
5. We have heard the submissions of both parties and carefully perused the material available on record. It is noted that the assessee duly complied with the limited scrutiny assessment proceedings before the Ld. AO by furnishing all requisite documents in support of the return of income. The Ld. AO, after due verification, accepted the returned income of the assessee. It is observed that the issues relating to verification of CSR expenses vis-à-vis deduction under section 80G of the Act, and the disallowance of education cess Fineotex Chemical Limited under section 40(a)(ii), did not fall within the scope of the limited scrutiny framework. Upon completion of the prescribed verification, the Ld. AO did not find it necessary to convert the limited scrutiny into complete scrutiny. As per the Instruction of the CBDT, the Assessing Officer is required to restrict his inquiry to the specific parameters forming the basis of selection for limited scrutiny. Enlargement of the scope of such scrutiny into complete scrutiny is permissible only in revenue-potential cases, upon recording of reasons and obtaining prior approval of the Competent Authority, viz. PCIT/CIT/Pr. DIT. In the present case, no such approval was sought or obtained. Therefore, the issues which could legitimately fall within the scope of revision under section 263 are confined only to the parameters of selection for limited scrutiny, namely: (i) capital gains/loss; and (ii) loss from currency fluctuation. We find support in the judgment of the Hon’ble Supreme Court in Principal Commissioner of Income-tax-1 v. V-Con Integrated Solutions (P.) Ltd. [2025] 173 taxmann.com 774 (SC), wherein it was held: “2. In our opinion, the order passed by the High Court, which upheld the decision of the Tribunal, is correct on facts and in law. This case does not involve a failure by the assessing officer to conduct an investigation. Instead, according to the Revenue, it is a case where the assessing officer having made inquiries erred by not making additions.
3. The assessee does not have control over the pen of the Assessing Officer. Once the Assessing Officer carries out the investigation but does not make any addition, it can be taken that he accepts the plea and stand of the assessee.
4. In such cases, it would be wrong to say that the Revenue is remediless. The power under Section 263 of the Income Tax Act, 1961, can be exercised by the Commissioner of Income Tax, but by going into the merits and making an addition, and not by way of a remand, Fineotex Chemical Limited recording that there was failure to investigate. There is a distinction between the failure or absence of investigation and a wrong decision/conclusion. A wrong decision/conclusion can be corrected by the Commissioner of Income Tax with a decision on merits and by making an addition or disallowance.
There may be cases where the Assessing Officer undertakes a superficial and random investigation that may justify a remit, albeit the Commissioner of Income Tax must record the abject failure and lapse on the part of the Assessing Officer to establish both the error and the prejudice caused to the Revenue.
Recording the aforesaid, the special leave petition is dismissed.” In the present case, no such failure has been established. The Ld. DR has also not placed any contrary precedent or substantive argument to controvert the submissions of the assessee. In our considered view, the Hon’ble Supreme Court in CIT v. Max India Ltd. [2008] 295 ITR 282 (SC) has reiterated the settled law that the twin conditions under section 263—(i) error in the order of the AO, and (ii) prejudice to the interests of the Revenue—must co-exist for valid exercise of revisional jurisdiction. In the absence of fulfilment of these conditions, the order under section 263 cannot be sustained. Accordingly, the revisional order passed under section 263 is hereby set aside and quashed.