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Facts
The assessee's assessment for AY 2018-19, completed under Section 143(3) via limited scrutiny for "Capital Gains deduction claimed," was revised by the PCIT under Section 263. The PCIT deemed the AO's order erroneous and prejudicial due to the allowance of full Section 54 deduction instead of proportionate, and the non-invocation of Section 50C for sale consideration.
Held
The Tribunal found that the Section 54 deduction issue was already settled, and the Section 50C applicability was beyond the scope of limited scrutiny. Citing CBDT instructions and judicial precedents, the Tribunal ruled that the AO could not travel beyond limited scrutiny issues without prior approval to convert to full scrutiny, which was absent. Therefore, the PCIT's order under Section 263 was set aside.
Key Issues
Whether the PCIT can invoke Section 263 to revise an assessment completed under limited scrutiny on issues not originally part of the limited scrutiny scope, without the AO having obtained prior approval for conversion to full scrutiny.
Sections Cited
263, 143(3), 143(3A), 143(3B), 54, 50C, 54F, 144B, 143(2)
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Income Tax Appellate Tribunal, DELHI BENCH ‘B’: NEW DELHI
This appeal is filed by the assessee against the order passed u/s 263 of the Income Tax Act, 1961 (the Act, in short) by the ld. Principal Commissioner of Income Tax, vide DIN & Order No: ITBA/REV/F/REV5/2022-23/1051132223(1) dated 22.03.2023 for Assessment Year 2018-19.
Harkiran Commar vs. PCIT 2. Brief facts of the case are that the assessment in this case was completed u/s 143(3) r.w.s 143(3A) and 143(3B) of the Act dated 07.04.2021 accepting the income declared by assessee. The case of the assessee was selected under limited scrutiny for the issue “Capital Gains deduction claimed”. On examination of the assessment record, the Ld. PCIT found that the assessment order so passed by the National E-assessment Centre, Delhi does not speak about any enquiry or investigation done in the matter. He thus opined that the order so passed is erroneous and prejudicial to the interest of the Revenue. Further ld. PCIT observed that the deduction claimed u/s 54 of the Act at Rs.5,00,00,000/- was allowed by the Assessing Officer, however, as the assessee has sold the land and has not invested the entire amount of sale consideration in the acquisition of the house property, only proportionate deduction should be allowed. According to Ld. PCIT, the same is worked out at Rs.4,67,16,151/- as against Rs.5,00,00,000/- allowed by the AO in the order passed u/s 143(3) of the Act. The Ld. PCIT further observed that assessee has declared the sale consideration on the basis of the agreement of sale/registered sale deed whereas the sale price as per provisions of section 50C being higher. Thus, the provisions of section 50C are to be invoked. This fact has not been examined by the Assessing Officer. Accordingly, the Ld. PCIT vide order passed u/s 263 of the Act has held the order so passed u/s 143(3) as erroneous in so far as it is prejudicial to the interest of Revenue and direct the AO for passing fresh a fresh assessment order in accordance with law after making proper enquiry and investigation on both the issues.
4. Against such order, the assessee has preferred the appeal before the Tribunal by taking the following grounds of appeal:-
“1. That on the facts and in law, the Learned Principal Commissioner of Income Tax-10 (Ld. PCIT) has erred in setting aside the assessment order to be redone on two issues in accordance with law by holding the same erroneous in so far as it is prejudicial to the interest of the revenue. 1.1 That the order of Learned Assessing Officer (Ld. AO) is not an erroneous order prejudicial to the interest of the revenue within the meaning of section 263 of the Act on the issues of (i) Applicability of section 50C on sale of farm house and (ii) Deduction claimed and allowed u/s 54. The order of Ld. CIT is unlawful and beyond permissible jurisdiction under section 263 of the Act. As such, the order of Ld. CIT is unlawful and is liable to be quashed.
That the Ld. PCIT has erred in not appreciating that in limited scrutiny case, the Ld. AO had no jurisdiction to go beyond the issues of limited scrutiny as per binding CBDT instructions. Accordingly, Ld. CIT has no jurisdiction to pass revisionary order on other aspects and remit matter to Ld. AO for fresh assessment. As such too the impugned revision order passed by Ld. PCIT being erroneous deserves to be quashed.
That the Ld. CIT has erred in setting aside the assessment order on the erroneous grounds that: (1) Provisions of Section 50C are applicable in this case. (0) Deduction was allowable u/s 54F and not u/s 54 on the incorrect ground that the property sold is "plot of land" as against "Farm House" as claimed by the assessee.
That the order of the Ld. CIT, setting aside the said two issues to be re made in accordance with law after examination and investigation rather than giving a final finding is unlawful, as held by Hon'ble Delhi High Court in the case of Globus Infocom Ltd. 369 ITR14 (Del).
5. That on the facts and in law, the Ld. PCIT has erred in invoking Explanation 2(a) to section 263(1) of the Act.
6. That the order of the Ld. PCIT is based on erroneous views, suspicion and conjectures and non-appreciation of the facts and law involved including binding judicial precedents in favour of the assessee.
7. That the order of the Ld. PCIT does not comply with principles of natural justice and the same has been passed without affording proper specific lawful opportunity to the assessee. As such too, the order u/s 263 deserves to be quashed.
8. That the order of the Ld. PCIT is against law and facts of the case involved.
9. That the Grounds of Appeal
as herein are without prejudice to each other.
10. That the appellant craves leave to add, amend, modify and/or forgo any of the grounds of appeal before or at the time of hearing.”
Before us, the Ld. AR of the assessee argued that the case was selected for limited scrutiny and after examination of the reason for limited scrutiny i.e., deduction claimed against the long term capital gain, the assessment order was passed accepting income declared by the assessee. The allegation of Ld. PCIT with regard to the application of provisions of section 50C, it is submitted that the same is beyond the scope of limited scrutiny, therefore, the same could not be considered for holding the order as prejudicial as well as erroneous, as the AO was not supposed to examine or visit on this issue.
6. With regard to the deduction claimed u/s 54 of the Act, it was submitted by Ld. AR that the issue of allowability of deduction u/s 54 or 54F was neither raised in the notice u/s 263 nor in the course of revision proceedings, therefore, the assessee was not provided any opportunities for objecting this issue, thus, the same cannot be taken for consideration. He further, submit that the Assessing Officer while passing the order in compliance to the directions given u/s 263 of the Act has accepted the deduction claimed by the assessee u/s 54 of the Harkiran Commar vs. PCIT Act and no addition is made on this account in terms of the order passed u/s 143(3) r.w.s 263 of the r.w.s 144B of the Act dated 21.03.2024, a copy of which is placed before us. He also drew our attention to the fact that assessee in AY 2021-22 has paid taxes on the deduction of Rs.5.00 Crores claimed in the year under appeal, thus even otherwise this issue is settled. He, thus, submit that tow issues taken by the Ld. PCIT for holding the assessment order as erroneous and prejudicial to the interest of Revenue are devoid of merit as the issue of deduction claimed is already settled and the other issue is beyond the jurisdiction of scrutiny in the case of the assessee, therefore, the order so passed u/s 263 of the Act deserves to be quashed.
On the other hand, the Ld. CIT-DR vehemently supported the orders of lower authorities and submitted that the issue of limited scrutiny was capital gain deduction claimed and since while computing the amount of capital gains the AO is required to verify the sale consideration in terms of section 50C of the Act and sale consideration ought to be recomputed. Therefore, such error is prejudicial to the interest of the Revenue and can be taken up in the order passed u/s 263 of the Act. In view these facts, the Ld. CIT-DR requested for the confirmation of the order so passed u/s 263 of the Act.
We have heard the rival submissions and perused the materials available on record. At the outset, the it is seen that the Ld. PCIT has Harkiran Commar vs. PCIT raised two issues in the order passed u/s 263 of the Act which are as under:- (i) allowability of deduction claimed u/s 54 or 54F and the amount of deduction whether it should be Rs.5,00,00,000/- or Rs.4,67,16,151/- (ii) the application of section 50C and re-computation of sale consideration.
With regard to the first issue, we find that the AO himself while passing the order in compliance to the directions given in the order u/s 263 has allowed the deduction u/s 54 of the Act at Rs.5,00,00,000/- as claimed by the assessee, and, therefore, their remained no question to hold to assessment order as erroneous and prejudicial to the interest of Revenue on this point. It is also seen from the effect order dated 21.03.2024 that the deduction claimed/s 54 of the Act at Rs.5,00,00,000/- was offered for the tax after expiry of three years in AY 2021-22 when the assessee has failed to make investment as per law, therefore, if any further addition/disallowance is made in the year under appeal it would be double taxation. Thus, this issue does not service for consideration at this stage.
With regard to the second issue of application of provisions of section 50C, it is seen that in the instant case, the case of assessee was selected for limited scrutiny for the reason “Capital Gains deduction claimed”. The Assessing Officer while completing the assessment has already examined this issue and completed the Harkiran Commar vs. PCIT assessment. Now alleging that the AO has not examined the applicability of section 50C is beyond the jurisdiction of the Assessing Officer under limited scrutiny, and therefore, he cannot make any enquiry on the same. In this regard, the CBDT has issued instruction No.20/2015 wherein it is clearly stated that it is not open for AO to travel beyond the reason of limited scrutiny except in the event where the AO during his examination found certain facts which requires further investigation. In that case, the AO should take necessary approval from the higher authorities to convert the assessment from limited scrutiny to complete scrutiny and then can examine such other issues. Since, in the instant case, no such procedure was followed nor such satisfaction was recorded, therefore, it is not a case where the AO could examine the application of provision of section 50C which otherwise is beyond his jurisdiction. This view is supported by the decision of P&H High Court in the case of PCIT vs. Rakesh Kumar [2023] 152 taxmann.com 398 wherein the Hon’ble Court has observed as under: “Assessee's case was selected for limited scrutiny for verification of cash deposits in bank account of assessee Assessing Officer after considering submissions made by assessee passed assessment order Principal Commissioner invoked revisionary proceedings on ground that assessee made purchases in cash in contravention to section 40A(3) and Assessing Officer failed to verify said payments - Tribunal observed that case of assessee was selected for scrutiny on limited aspect to verify cash deposits - Tribunal held that even though Assessing Officer had obtained explanation with respect to cash purchases he was not required to make enquiry on said issue and thus, order of Assessing Officer could not be said to erroneous - Whether findings recorded by Tribunal did not suffer from any infirmity and thus, no substantial question of law arose for consideration - Held, yes [Paras 8 and 10] [In favour of assessee ] Harkiran Commar vs. PCIT The Hon’ble Calcutta High Court in the case of Pr. CIT vs Naga Dhunseri Group Ltd. reported in [2023] 146 taxmann.com 424 (Cal.HC has held as under:
4. The short question involved in this case is whether the assumption of jurisdiction by the Principal Commissioner of Income-tax under section 263 of the Act was justified. The learned Tribunal has analysed the factual position and found that the case of the assessee was selected for limited scrutiny under CASS and the issue which the Commissioner sought to reopen namely, the issue of disallowance under section 14A of the Act, read with Rule 8D in respect of the exempt income was not one of the issues which was selected for scrutiny. The learned Tribunal in paragraph 2 of its order has set out the three items which have been selected for scrutiny namely, (i) Introduction of capital in NBFC/investment company; (ii) large deduction claimed u/s. 57 of the Act; and (iii) Mismatch of amount paid to related persons u/s. 40A(2)(b) reported in audit report and ITR.
5. If that is the undisputed factual position, we find the reasoning given by the learned Tribunal is fully justified. That apart, the learned Tribunal has rightly pointed issued out that the CBDT has issued…………………..
A bare reading of the of the above Instruction clearly shows that the PCIT cannot make a roving enquiry in the quise of a limited scrutiny and as such the instruction issued by the CBDT is binding on the Department. Hon’ble Orrisa High High Court on similar circumstances in the case of Pr. CIT v. Shark Mines & Minerals (P.) Ltd. [2023] 151 taxmann.com 71 (Orissa) has held as under:
10. What persuades this Court to reach this conclusion is the requirement in law that if the AO has to go beyond the scope of the issues for which 'limited scrutiny' has to be undertaken by him, he has to seek prior permission of the superior officer in terms of the CBDT Instruction No. 7/14 dated 26th September, 2014 and Instruction No. 20/15 dated 19th December, 2015. Consequently, it was not open to the Pr. CIT while exercising suo motu revisional power under section 263 of the Act to find fault with the assessment order of the AO on the ground of its being erroneous on an issue not covered by the 'limited scrutiny' when the AO could not have possibly examined such issue.
Harkiran Commar vs. PCIT To reiterate, in the present case, the limited scrutiny was in respect of excess disallowance under section 40A(3) of the Act whereas the SCN under section 263 was regarding the FIFO method of valuation of closing stock adopted by the Assessee. These were, as rightly noted by the ITAT, unconnected issues and the assessment order could not have been held to be "erroneous and prejudicial to the interest of Revenue" when the AO could not have travelled beyond the issues forming subject matter of the 'limited scrutiny.
The Coordinate Bench of ITAT, Delhi in the case of Balvinder Kumar v. Principal Commissioner of Income Tax-16, New Delhi [2021] 125 taxmann.com 83 (Delhi - Trib.) has held as under:-
"8. We have gone through the record in the light of the submissions made on either side. There is no dispute that the case of the assessee was picked up for scrutiny under the category of limited scrutiny. This fact is established from the assessment order and also the notice issued under section 143(2) of the Act. It is also not in dispute that the CBDT issued the instructions relied upon by the assessee and for the sake of convenience we extract the relevant portions thereof hereunder.- 9. The above CBDT instructions and the letter clearly establish that it's not open for the learned Assessing Officer to travellers beyond the reason for selection of the matter for limited scrutiny and on that aspect the assessment order in this case is in accordance with the instructions governing the field. In such circumstances it has to be seen whether the Ld. PCIT is justified in holding the assessment order to be erroneous insofar as it is prejudicial to the interest of the Revenue for the learned Assessing Officer not considering the aspects which are beyond the purview of limited scrutiny.
11. Similarly, is the view taken consistently by the benches of this Tribunal in the other two cases also, relied upon by the assessee. In the circumstances, in view of the consistent view taken in similar matters we are of the considered opinion that when the assessing officer is bound to follow the CBDT instructions and while following such instructions and after verification of the material furnished by the assessee on the aspect covered by the limited scrutiny, is not open for the Ld. PCIT to say that not adverting to the other aspects of the competition would render the assessment order erroneous and prejudicial to the interest of the Revenue. With this view of the matter we find that the impugned order cannot be sustained and, therefore, the same is liable to be quashed. We accordingly quash the same.
12. In the result, appeal of the assessee is allowed."
In view of the above discussion and by respectfully following the decisions of various High Courts and Co-ordinate Bench of Tribunal, in our opinion the AO has no jurisdiction to examine the issue which is beyond his jurisdiction, therefore, there is no error in the assessment order of the AO for which the same could be held as erroneous and prejudicial to the interest of Revenue. Thus, the order passed u/s 263 is set aside. Accordingly, all the grounds of appeal of the assesse are allowed.
In the result, the appeal of the assessee is allowed. Order pronounced on 21/03/2025.