ANTARIKSH REALTORS P. LTD.,MUMBAI vs. PR. CIT-12,, MUMBAI

Briefly the facts are, the assessee is a resident company and engaged in business as a builder and developer. For the assessment year under dispute, assessee filed its return of income on 23-10-2015 declaring loss of Rs.14,34,236/-. The return of income filed by the assessee was selected under ‘limited scrutiny’ category for examining couple of issues and assessment in case of the assessee was ultimately completed under section 143(3) of the Act on 29-06-2017. After reviewing the assessment order, the Additional Commissioner of Income Tax in charge of the range found that the increase in loan taken by the assessee from Rs.8.57 crores in the preceding year to Rs.10.42 crores in the current year was not verified by the assessing officer. Further, he observed, the assessing officer did not also verify assessee’s claim that all loans and advances given are for the purpose of business, by calling for details of transactions in subsequent years along with supporting documents. Further, he observed, the assessing officer did not verify the capitalization of interest paid. In view of these facts, a proposal was submitted to the learned PCIT for exercising powers under section 263 of the Act to revise the assessment order. Based on such proposal, a show cause notice under section 263 of the Act was issued to the assessee on 12-09-2018 on the following grounds:- "Please refer to the Assessment order passed u/s 143(3) of the I T Act in your case I for A.Y 2015-16 on 29/06/2017 assessing the total income at Rs. 34,824/- after making additions of Rs 14,69,060/- being expenses claimed during the year without carrying out any business activity.

On perusal of assessment records, it is seen that loans taken by you for the year under consideration has increased from Rs. 8.57 crores to Rs. 10.42 crores. As one of the reasons for scrutiny selection is "Low income comparison to high loans/advances/investment in shares appearing in Balance Sheet", this loan issue needs verification, which has not been done by the AO. The verification should have been seen from the angle, whether the increased loans are for the purpose of business by calling details of the transaction in subsequent years with supporting documents. 2.1. Also further it is seen that you have capitalized interest paid, the same needs verification as to how the interest paid is being capitalized.

In response to the show cause notice, the assessee not only furnished its reply but also appeared before learned PCIT and submitted that the assessment order cannot be considered to be erroneous and prejudicial to the interest of revenue as the assessing officer has thoroughly enquired into the issues for which the case was selected for scrutiny. However, learned PCIT was not convinced with the submissions of the assessee. He observed, though, the loan availed by the assessee during the year has increased from Rs.8.57 crores to Rs.10.42 crores, the assessing officer has not verified whether the increase in loan was for the purpose of business or not. He observed, the assessing officer had also not verified the capitalization of interest on unsecured loan. While so observing, learned PCIT observed that though assessee’s case was selected for limited scrutiny, however, loan taken by the assessee was also part of the scrutiny. Referring to Explanation 2 to section 263 of the Act, learned PCIT opined that the assessing officer completed the assessment without making relevant enquiries. Therefore, he 4 ITA 1626/Mum/2020 exercised power under section 263 of the Act as the assessment order is erroneous and prejudicial to the interest of revenue due to non enquiry by the assessing officer. Relying upon certain judicial precedents, ultimately, learned PCIT held the assessment order passed to be erroneous and prejudicial to the interest of revenue on the issues raised by him and set it aside with a direction to the assessing officer to examine the relevant details as observed in the revision order and complete the assessment after conducting proper and necessary enquiry.

The learned counsel for the assessee submitted, assessee’s case was selected for limited scrutiny to examine, firstly, the issue of low income in comparison to high loan / advances / investment in shares appearing in balance- sheet and secondly, mismatch in minimum alternate tax (MAT) liability. He submitted, in course of assessment proceedings, the assessing officer had examined and enquired into both these aspects and completed assessment with due application of mind. He submitted, the verification of loans taken by the assessee or the capitalization of interest were never within the scope of the scrutiny. He submitted, once a case is selected under limited scrutiny category, the assessing officer has jurisdiction to examine only those issues for which the case was selected for scrutiny. He submitted, neither the assessing officer nor the learned PCIT can enlarge the scope of the limited scrutiny. To demonstrate that the assessing officer has examined and enquired into the issues on which case was selected for limited scrutiny, learned counsel drew our attention to notices issued under section 143(2) and 142(1) of the Act. He submitted, in course of assessment proceedings, the assessee, in response to the query raised by the assessing officer has furnished all necessary and relevant details not only 5 ITA 1626/Mum/2020 regarding loans / advances / investments in shares appearing in the balance- sheet, but has also furnished the details of loans and advances taken from related parties. He submitted, though, the scope of scrutiny was confined to the loans and advances given by the assessee and investments made in shares; however, the assessing officer has also examined the loans taken during the year. He submitted, loan taken during the year is from related parties, either directors of the company or sister concern and all loans taken are unsecured loans. Drawing our attention to Note 17 of the audit report, he submitted, the assessee has made disclosure of capitalization of borrowing cost. Thus, he submitted, even the issues on which learned PCIT has assumed jurisdiction under section 263 of the Act were examined by the assessing officer. Thus, he submitted, it is not a case where the AO has not made any enquiry. He submitted, learned PCIT in the revision proceeding cannot expand the scope of limited scrutiny. He submitted, in case, revenue wanted to examine other details / aspects, it should have converted the limited scrutiny to complete scrutiny. Further, he submitted, even on the issues of capitalization of interest and loans taken the assessment order is not erroneous and prejudicial to the interest of revenue as not only the assessing officer has examined these aspects but the assessee has not claimed the borrowing cost as expenditure. Thus, he submitted, the assessment order cannot be considered as erroneous and prejudicial to the interest of revenue to enable learned PCIT to revise it under section 263 of the Act. In support, learned counsel relied upon the following decisions:- 1. CIT vs Nirav Modi (2016) 71 taxmann.com 272 (Bom) 2. CIT vs Nirav Modi (2017) 77 taxmann.com 15 (SC) 3. Sir Dorabji Tata Trust vs Dy.CIT(Exemption), Cir.2(1), Mumbai (2020) 122 taxmann.com 274 (Mumbai-Trib)

Strongly opposing the contentions of the assessee learned departmental representative submitted, the scope of scrutiny also encompassed the loans taken and whether they were utilized for the purpose of business. He submitted, the notices issued under section 143(2) and 142(1) in course of assessment proceedings indicate, whatever enquiry has been conducted by the assessing officer is of general nature and he has not specifically examined the purpose of loan taken by the assessee. He submitted, if loan taken is not for the purpose of business, the interest cost on such loan cannot be allowed. Drawing our attention to the factual details relating to trade advances, learned departmental representative submitted, the trade advances shown in respect of parties do not match. He submitted, various aspects relating to loan taken and the purpose of such loan as well as the capitalization of borrowing cost had not been examined by the assessing officer. Therefore, he submitted, the assessment order being erroneous and prejudicial to the interest of revenue, learned PCIT was justified in exercising his powers under section 263 of the Act to revise the same. In support 7 ITA 1626/Mum/2020 of his contention, learned departmental representative relied upon the following decisions:- 1. CIT vs Amitabh Bachchan in Civil Appeal No.5009 of 2016 [Arising out of S.L.P.(C) No.11621 of 2009] 2. Appollo Tyres Ltd vs ACIT 65 ITD 263 (Delhi)

We have considered rival submissions in the light of decisions relied upon and perused materials on record. Undisputedly, assessee’s case was selected under limited scrutiny category for examining the following issues:- (i) Low income in comparison to high loan / advances / investments in shares appearing in balance-sheet; and (ii) Minimum alternate tax (MAT) liability mismatch.

The aforesaid factual position is also accepted by learned PCIT, as evident from the show cause notice issued under section 263 of the Act as well as the opening paragraph of the order passed under section 263 of the Act. Therefore, the two issues which require examination are, whether the limited scrutiny for which assessee’s case was selected encompassed examination of loans taken by the assessee and capitalization of interest expenditure and if it is not so, whether the assessment order can be held to be erroneous and prejudicial to the interest of the revenue for not examining the issues relating to loan taken and interest expenditure capitalized. In other words, whether the assessing officer could have acted beyond the scope of limited scrutiny or expanded the scope of limited scrutiny.

We have noted, learned PCIT while exercising power under section 263 of the Act has attempted to expand the scope of limited scrutiny by observing that the assessing officer had not examined the increase of loan taken from Rs.8.57 8 ITA 1626/Mum/2020 crore to Rs.10.42 crore (increase of `. 1.67 crore) and whether the loans taken were for the purpose of business as well as the capitalization of interest.

As already discussed, the scope of limited scrutiny was to examine the reason of low income compared to high loans / advances / investments in shares. To our understanding, the expression “low income in comparison to high loan / advances / investments in shares in balance-sheet” read conjunctively would mean– compared to loans and advances given and investments in shares, why the income of the assessee is low. Perusal of the notices issued under section 142(1) as well as 143(2) make it clear that in course of assessment proceedings, the assessing officer did examine both the issues for which assessee’s case was selected for scrutiny. In fact, in response to query raised by the assessing officer from time to time, the assessee had furnished all relevant and necessary details relating to loans and advances given and investment made in shares as appearing in balance sheet. It is also evident, the assessing officer has conducted necessary enquiry on the issues for which case was selected for scrutiny and after applying his mind to the materials on record, has completed the assessment.

As per CBDT instruction No.20/2015 dated 29-12-2015, in limited scrutiny cases the reasons / issues shall be verified as communicated to the assessee concerned and the questions under section 142(1) of the Act shall remain confined only to a specific reasons / issues for which the case has been taken up for scrutiny. It further clarifies, the scope of enquiry by the assessing officer shall be restricted to the limited scrutiny issue. The aforesaid position stands reiterated in CBDT Instrn. No.5 of 2016 dated 14-07-2016. Thus, the assessing officer being bound by instructions issued by CBDT from time to time, could not have gone beyond the scope and ambit of limited scrutiny for which the case was selected.

Therefore, the assessing officer while completing the assessment has restricted himself and, rightly so, to the scope and ambit of the limited scrutiny. Thus, unless the scope of scrutiny is expanded by converting it to a complete scrutiny with the approval of the higher authority, the assessing officer could not have travelled beyond his mandate. That being the case, the assessment order cannot be considered to be erroneous and prejudicial to the interest of revenue for not examining the loans taken by the assessee and their utilization as well as capitalization of interest. The material on record clearly establishes that the assessing officer adhering to the scope of limited scrutiny has enquired into and examined the specific issues. When the assessing officer is not empowered to do certain acts directly, the revisionary authority certainly cannot direct the assessing officer to do so indirectly by exercising power under section 263 of the Act. While coming to such conclusion, we get support from the decision of the co- ordinate bench in case of M/s Su-Raj Diamond Dealers Pvt Ltd vs PCIT (supra). Therefore, for the reasons stated above, the assessment order cannot be considered to be erroneous and prejudicial to the interest of revenue. In view of the aforesaid, we set aside the impugned order of learned PCIT passed under section 263 of the Act and restore the order of assessment.

In the result, appeal is allowed as indicated above.