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Facts
The assessee filed a return for AY 2015-16, which was assessed under section 143(3). The PCIT initiated revision proceedings under section 263, alleging the assessment order was erroneous and prejudicial to revenue. The PCIT set aside the assessment order, directing the AO to re-examine issues of unexplained capital increase and opening stock mismatch. This led to an appeal by the assessee.
Held
The Tribunal held that the PCIT erred in assuming jurisdiction under section 263 as the AO had conducted adequate inquiries within the scope of limited scrutiny. The issues raised by the PCIT were not part of the limited scrutiny and the PCIT could not travel beyond the assessment year under consideration.
Key Issues
Whether the Principal CIT was justified in invoking Section 263 jurisdiction for issues beyond the scope of limited scrutiny and for extending the examination to prior assessment years, and whether the AO's inquiries were adequate.
Sections Cited
143(3), 263, 143(2), 40A(3), 68, 153(3), 142(1), 144C, 44AD, 144C
AI-generated summary — verify with the full judgment below
Order \nPER LALIET KUMAR, J.M:\nThis is an appeal filed by the Assessee against the order of the Ld. PCIT,\nChandigarh-1 dt. 18/03/2024 pertaining to Assessment 2015-16.\n2.\nIn the present appeal Assessee has raised the following grounds:\n1.\nThat on law, facts & circumstances of the case, the Worthy Pr. CIT has\ngrossly erred in assuming jurisdiction u/s 263 even when:\n1.
1. The original assessment order passed u/s 143(3) did not satisfy the\ntwin conditions of being an 'erroneous order' and 'prejudicial to the interest of\nrevenue'.\n1.2.\nThe original assessment order passed u/s 143(3) was a case of\nLimited scrutiny and the Worthy Pr. CIT in order u/s 263 has gone beyond the\nmandate of Limited scrutiny.\n1.3.\nThe Worthy Pr. CIT has erred in setting aside the assessment order\nand in directing the AO to make assessment afresh on the ground that AO\nhad not conducted worthwhile enquiries during the assessment proceeding\neven when the AO had conducted thorough enquiries and also most\nimportantly the Pr. CIT failed to carry our any enquiry himself and also failed to\ndemonstrate which most necessary enquiry the Ld. AO failed to carry out.\n1.4.\nThe Worthy Pr. CIT failed to appreciate that inadequate inquiry\ndoes not amount to lack of inquiry so as to assume valid jurisdiction u/s 263.\n1.5.\nThe Worthy Pr. CIT has erred in setting aside the original assessment\non the ground that there has been increase in capital and opening stock\ndifference.\n1.6.\nThe Worthy Pr. CIT has conducted the impugned proceedings u/S\n263 in extreme haste and without affording reasonable opportunity of being\nheard to the appellant.\n3.\nBriefly the facts of the case are that the assessee filed its return of\nincome for the Assessment Year 2015-16 on 30/09/2015, declaring an income\nof Rs.7,65,700/-. The case was selected for limited scrutiny under Section\n143(2) of the Income Tax Act, 1961, to examine the source of increase in the\nproprietor's capital account and Mismatch in sales turnover.\n3.1 The assessment was completed under Section 143(3) on 26.12.2017,\naccepting the returned income. Subsequently, the Ld. PCIT initiated revision\nproceedings under Section 263, stating that the assessment order\nwas erroneous and prejudicial to the interests of revenue. The Pr. CIT set aside\nthe assessment order, directing the Assessing Officer (AO) to re-examine the\nfollowing issues i.e; Unexplained increase in capital amounting to Rs.\n58,86,167/- and Mismatch in opening stock amounting to Rs.1,40,52,866/-.\n4.\nAgainst the order of the Ld. Pr. CIT the assessee went in appeal before\nthe ITAT and the Coordinate Bench vide its order dated 05.07.2023, set aside\nthe revision proceedings and remanded the matter back to the file of Ld. Pr.\nCIT for adjudication.\n5.\nIn compliance of the direction of the Coordinate Bench the Ld. Pr. CIT\nhad issued the show cause notice to the ass on the following two aspects:\n2.1 2.2 of the PCIT\n6.\nThe assessee had filed the written submission before the Ld. Pr. CIT and\nraised many objections. The Ld. Pr. CIT, in his order at page 10 has observed\nas under:\nThe submissions of the assessee have carefully been considered with\nreference to the facts of the case from the relevant assessment records. On\nthe first issue of an unexplained change (increase) in capital from its closing\nbalance as on 31.03.2015 to its opening balance as on 01.04.2015, which\namounted to a quantum of Rs.58,86,167/-, the assessee's AR has stated that\nfor the immediately 3 preceding A.Ys.2012-13, 2013-14 and 2014-15, the\nassessee had been filing his Returns of Income u/s 44AD of the Act. This being\non presumptive basis, there was no occasion for the assessee to report and\nfile Audited Balance Sheet alongside the corresponding Returns of Income.\nTherefore, what represented the above increase was in fact the difference\nbetween the closing stock on 31.03.2012 and 01.04.2015 and NOT between\nthe respective values on 31.03.2015 and 01.04.2015. The figures that\ninterspersed between the 2 correct amounts as above constituted the net\nimpact of the transactions that occurred during the 3 sandwiched A.Ys.2012-\n13, 2013-14 and 2014-15 between 31.03.2012 and 01.04.2015, which figures\nwere not reported in the Returns of Income for these 3 sandwiched\n Assessment Years owing to them being filed u/s 44AD of the Act.\nAn analogous position as above was argued in respect of the apparent\nchange in closing/opening stock of Rs.1,40,52,866/-.\nThe above reasoning appears to be acceptable but needs to be\ncomputationally verified and/or examined. It is also true that the Returns of\nIncome, filed for the 3 sandwiched A.Ys.2012-13, 2013-14 and 2014-15 have\nbeen accepted by the department at this time and any possibility of\nreopening/resolving the same in the interests of computational\ncorrectness/reconciliation is to be examined by the Jurisdictional Assessing\nofficer.\nIt needs to be added at this juncture that the Department accepting the\nReturns filed for these sandwiched assessment years 2012-13 to 2013-14\ncannot be held to an automatic acceptance, approval and certification of\nthe correctness of the statements of accounts supporting such Returns of\nIncome and the amounts reported/reflected therein inter alia and\nparticularly, the closing and opening balances of Capital and Stock as\ndiscussed aforesaid. This is because;\n(i) The assessee has not submitted any statements of accounts duly\naudited by a competent professional since the Returns of Income for the\naforesaid 3 Assessment Years were filed u/s 44AD of the Act on a presumptive\nbasis;.\n(ii) The assessments for the 3 aforesaid Assessment Years for the reasons of\npresumptive filing by the assessee as above and/or for other reasons have\nnot been audited by the Department and examined for correctness, through\nformal scrutiny assessment proceedings u/s 143 of the Act.\nThe above actions/events have created a situation wherein, the genesis of\nthe opening balances of Capital and Stock as on 01.04.2015 being the\ncorresponding closing balances of Capital and Stock on 31.03.2015 have\nremained unexamined by the Department because the Department has\nbeen denied the necessary opportunity for such examination.\nThe Jurisdictional Assessing officer may also examine whether any increase in\nopening balance, of capital and stock, as above can be assessed u/s 68 or\nany other provisions of the Act, since all of the material activities/transactions\nleading to the said opening balance have taken place in other, viz., the\nearlier sandwiched A.Ys.2012-13, 2013-14 and 2014-15 and not during the\ninstant A.Y. 2015-16.\n7.\nDespite noticing above, the Ld. PCIT had passed the order under\nsection 263 thereby holding in para 6 & 7as under:\n6. In view of the discussion above, the assessment order passed u/s\n143(3) of the Act dated 26.12.2017 is prima-facie erroneous as well as\nprejudicial to the interests of revenue, as the order has been passed without\nmaking the requisite full and satisfactory inquiries, which should have been\ndone. There is, thus, appears to be a failure on the part of the Assessing\nOfficer which has resulted in the error being the incomplete, unsatisfactory\nand improper, and therefore legally untenable.\n7.\nIn consequence having considered the facts and circumstances of\nthe instant case, I am, at this time of the considered opinion that the\nassessment order u/s 143(3) of the Act dated 26.12.2017 passed by the\nAssessing Officer is erroneous as well as prejudicial to the interests of revenue\nin accordance with the Explanation 2(a) below section 263(1) of the Act. This\nis because the order has been passed without making proper and requisite\ninquiries or verifications which should have been made, thus making the\nassessment order passed not only erroneous but also prejudicial to the\ninterests of revenue inter alia, in the matter of proper, detailed, satisfactory\nand complete inquiries into the matters of increases in capital and stock.\nAccordingly, the impugned assessment order is set aside for re-verification by\nthe Jurisdictional Assessing Officer(JAO) on the issue of re-examination and re-\ninquiry into the facts/details of increases in Capital and Stock in the manners\ndetailed earlier in this order. If the JAO is able to prima facie conclude on the\nbasis of such re-verifications that the matters involved stand reconciled in\nfavour of the assessee in a tax compliant basis, he may drop the proceedings\ninitiated u/s 263 of the Act. In the event of any ambiguity or dissatisfaction, he\nmay process the case for formal assessment on the 2 matters in reference so\nthat the errors and prejudice to the interests of revenue are recovered. The\nassessee is at liberty to adduce the facts as deemed relevant before the\nAssessing Officer at the time of the assessment proceedings in consequence\nto this order. The Assessing Officer shall allow the assessee adequate\nopportunity of being heard and to make relevant submissions. It may be\nensured that the fresh assessment order is passed within the prescribed time\nas stipulated under section 153(3) of the Act.\n8.\nFeeling aggrieved by the order passed by the Ld. Pr. CIT, the assessee is\nin appeal before us on the grounds stated hereinabove.\n9.\nDuring the course of hearing the Ld. Counsel for the Assessee\nsubmitted that the issue raised in the SCN u/s 263 is beyond the scope of\nthe limited scrutiny notice u/s 143(2). The assessment was taken up for limited\nscrutiny only to examine the increase in proprietor's capital\naccount and sales turnover mismatch, as evidenced by the assessment order\ndated 26.12.2017. However, the Pr. CIT raised two issues in the revision\nproceedings:\n•\nIncrease in capital account and opening stock difference.\n•\nThe sales turnover mismatch\n9.1\nThe Ld. AR has submitted that the Ld. Pr. CIT u/s 263 cannot revise\nassessments for Increase in capital account and opening stock difference as\nthis issue was already examined by the AO and detailed show cause notices\nwere issued by him. Further it was submitted that on account of sales turnover\nmismatch, the Ld. Prt. CIT cannot examined as this issue was not part of the\nlimited scrutiny assessment.\n9.2\nThe Ld. AR relied upon the following decision:\nPCIT vs. Rakesh Kumar (P&H High Court, 22.03.2023): The High Court\nheld that the AO was not required to make enquiry regarding cash\npurchases under Section 40A(3), since the case was selected for limited\nscrutiny to verify cash deposits.\nΟ\nPCIT vs. Shark Mines and Minerals (Orissa High Court, 02.03.2023).\nAggarwal Promoters vs. PCIT (ITA No. 1708/Chd/2017) dt.\n16/04/2019 (ITAT Chandigarh)\nRakesh Kumar vs. CIT (ITA No. 6187/Del/2015) (ITAT Delhi)\nSahita Construction Company VS. Pr. CIT (ITA No.\n119/Ind/2021) (ITAT Indore).\n9.3\nThe Assessee filed its reply on merits of issues raised in SCN under\nsection 263 which read as under:\n2. Reply on merits of issues raised in SCN u/s 263 :\n2.1 Arguments on why increase in capital is not unexplained\na. In the subject Show cause notice (SCN), your goodself has raised an\nissue regarding substantial increase in opening capital for the subject\n assessment year. Your goodself has contended that as on 31.13.2012, capital\nwas shown at Rs.24,41,116/- and profits for AY 2013-14 and 2014-15 having\nbeen declared on presumptive basis at Rs.6,85,580/- and Rs.6,81,440/-\nrespectively and therefore, the opening capital as on 01.04.2014 at most could\nhave been Rs.38,08,136/only whereas opening capital in the ITR filed for the\nyear in question has been taken at Rs.96,94,333/-. Therefore, this difference of\nRs.58,86, 197/- is income from undisclosed sources which the Ld. AO has failed\nto examine.\nb.\nIn this regard, it is most respectfully submitted that this issue of increase in\ncapital by making identical kind of calculation was raised by the Ld. AO during\nthe assessment proceedings also. Thereupon the assessee duly submitted\nexplanation to this issue. Copies of relevant replies filed during assessment\nproceedings are enclosed at page no.3-26. In the reply dtd. 10.10.2017, it was\nsubmitted regarding opening capital as under:\n\"1. It is most humbly and respectfully submitted that the present case has been\nselected for examination under \"Limited Scrutiny Guidelines\". In terms of this,\none of the reason under Limited scrutiny was source of increase in capital\".\nDuring the course of previous hearing and as part of our earlier submissions, we\nhad filed copy of our Audited Balance sheet for the year in question wherein\nthe opening balance of capital for the year was Rs.96,94,333/- and closing\nbalance was Rs.1,04,60,033/-. The increase in capital this year is Rs.7,65,700/-\nand this is only the Profit of the proprietorship concern of the assessee for the.\nyear under reference. This profit has been offered to tax in the Return of\nIncome. All this information has already been filed before your goodself.\n2. In your goodself's letter dated 03.10.2017, even when above facts were\napprised to your goodself, now you have sought information regarding\nincrease in capital from FY 2011-12 till the year in question. In this regard, your\ngoodself's kind attention is invited to procedure of finalizing assessments to be\nframed under limited scrutiny guidelines. We are of the opinion that one no\nadverse information has been found for the year in question, asking for\ninformation for prior years is beyond such guidelines. Therefore, we are seeking\nthe guidance from Hon'ble CBDT in this regard.\"\nFurther, in another reply dtd. 14.11.2017, it is was submitted regarding opening\ncapital as under:\n\"Regarding the addition to the capital of assessee, there is no addition to the\ncapital of assessee during the year. Copy of Audited Financial Statements are\nalready provided to your goodself. Further, copy of opening balance sheet as\non 01.04.2014 substantiating the claim of assessee is enclosed herewith.\nRegarding the calculation vide Para no. 4.1 and 4.2 of your notice, the method\nadopted by your goodself to arrive at the value of capital is not a recognized\naccounting method. For arriving at the opening capital, not only the profits, but\nalso other factors for addition in capital in previous years like receipt of gift,\nearning of exempt income, loans raised in personal capacity etc. are also other\nitems which can increase such capital in preceding years. There has been no\nsuch earning in the year in question. Whatever is the opening balance could be\nthe result of above items in the preceding years. We request that such enquiry\nmay not please be made in the assessment for the year in question as there is\nno such increase/raising of capital during the year in question.\"\nC.\nOn the basis of above explanation, it is clear that the journey from\ncapital balance as on 31.03.2012 to 01.04.2014 had its genus and calculations\nin figures of earlier years and there were various factors and not just profit\nearned during intervening periods which could have led to capital balance as\non 01.04.2014. And these factors existed in the earlier years for which\nexamination can not be made by revisiting the assessment for the year in\nquestion. Therefore, the issue raised by your goodself, on merits, do not pertain\nto the year in question and hence, it deserves to be dropped. Further, it was\nalso explained during the assessment proceedings and is being submitted now\nagain that increase in capital amount pertains to opening balances in capital\naccount a/c for the year in question and examination of the same can not be\nmade in assessment for the year in question. It is a settled proposition of law by\nnumber of decisions including in ITO Vs. Ch. Atchaiah (218 ITR 239 (SC) that AO\nmust tax right income in the right year. This is without prejudice to the fact that\naddition on this issue can not even be made in the earlier year(s).+\nd.\nTherefore, it is prayed that this issue may please be dropped in these\nproceedings.2.2 Arguments on why mismatch in opening stock is not\nunexplained.\na.\nIn the subject notice, your goodself has contended that opening stock\nin the relevant columns of ITR for the year in question was taken at Rs.\n1,40,52,866/- whereas the closing stock in the relevant columns of ITR filed for\nthe immediately preceding year was filed as nil and due to said mismatch, it\nshould have been added by Ld. AO as an unexplained income.\nb.\nIn this regard, it is most respectfully submitted that opening stock for the\nyear in question was factually Rs.1,40,52,866/- only. ITR for preceding\n assessment year was filed on presumptive basis u/s 44AD wherein mandatory\nrequirement was to show correct turnover and profit on presumptive basis. It is\ndue to such ignorance that while filing ITR on presumptive basis u/s 44AD for the\nimmediately preceding year, the assessee did not fill the figure of closing stock.\nThe schema of ITR filing accepted the ITR even with non-filling of column of\nclosing stock. It is because of this reason closing stock in ITR for AY 2014-15 was\nshown as nil. Further, even if an error has occurred in disclosing the value of\nclosing stock in ITR for preceding assessment year, the same do not give power\nto make addition in the subject assessment year. But the ITR for the year in\nquestion was filed on the basis of audited financial statements and not u/s\n44AD and therein the proper figure of opening stock of Rs.1,40,52,866/- was\ntaken. In fact, to examine this very issue of opening stock as well as the earlier\nissue of proprietor's capital, the Ld. AO raised query and the assessee filed the\nBalance sheet as on 01.04.2014 on the basis of which balance were taken up in\nthe books for preparation of auditable financial statements. It is only after\nappreciating this opening balance sheet as on 01.04.2014 and comparing it\nwith the figures in the ITR as opening balances that the Ld. AO got satisfied and\naccepted the fact that there is no anomaly in the ITR for the year in question\nand if there be any, it can only be examined in any of the earlier year. The\nsame arguments are being made here also. We are submitting herewith the\nBalance sheet as on 01.04.2014 which was taken up in the auditable books for\nthe year in question. This Balance sheet as on 01.04.2014 is duly tallying, opening\nproprietor's capital as well as opening stock is the same as has been taken in\nthe ITR. Therefore, even on issue of opening stock as on 01.04.2014, no addition\non merits could have been made by the Ld. AO and hence the present\nproceedings u/s 263 on this issue deserves to be dropped.\n2.3 It is further submitted that your goodself is proposing to make addition on\naccount of increase in opening capital on one hand and addition on account\nof opening stock on the other hand. One of these items is on liabilities side and\nother is on assets side of the balance sheet. Increase in one figure will lead to\nincrease in the other. Making addition for both capital and stock will lead to\ndouble taxation. It is on this score also that the subject issues deserves to be\ndropped.\n9.4\nLd. Counsel for the Assessee also submitted his legal arguments before\nus which read as under:\n3. Legal Arguments\n3.1\nFirstly, the contention raised in the SCN u/s 263, that these issues were\nnot examined by the Ld. AO, is factually incorrect. The scrutiny proceedings\nwere initiated on these very issues and following replies were submitted during\nthe assessment. In our earlier portion of this reply, we have clearly\ndemonstrated that these issues were raised during assessment proceedings and\nproper replies were furnished. It is only after appreciating these replies that the\nLd. AO chose not to make any addition.\n3.2\nFurther, as regards examination of the issue regarding the mismatch in\nthe value of stock, it is submitted that when the opening balance sheet as well\nas the closing balance sheet for the subject assessment was submitted during\nthe assessment proceedings after it being called for by the Ld. AO and the Ld.\nAO duly examined them which included the value of stock also, it cannot be\nsaid that the issue regarding stock was not examined. The entire balance sheet\nof the assessee was not only examined but nothing adverse was found.\n3.3\nAll the above replies and explanations goes to show that the issues\nraised in the various notices had been adequately enquired by the Ld. AO and\nall these issues are neither erroneous nor prejudicial to the revenue so as to\nassume valid jurisdiction u/s 263 of the Act. It is a settled proposition of law that\njurisdiction u/s 263 cannot be assumed if adequate enquiry had been\nconducted by Ld. AO. For this proposition, we rely upon the ratio of following\njudgments:\nPCIT vs. Brahma Centre Development Pvt. Ltd. 4371TR 285\n\"Revision-Order erroneous and prejudicial to interest of revenue Assessment\norders were passed under Section 143(3) read with Section 144C although, in\nopening sheet of assessment order concerning AY 2013-2014, there is only a\nreference to Section 143(3) PCIT has interfered with assessment orders passed\nby AO concerning respondent/assessee Reason why PCIT had interfered with\noriginal assessment orders was on account of a view held by him that interest\nearned by assessee against fixed deposits was adjusted, ie., deducted from\nvalue of inventory and not credited to Profit and Loss Account-Record also\nshows that, after PCIT had passed order AO as directed, passed a fresh order\nby conducting \"proper enquines-Tribunal has in turn set aside two separate but\nsimilar orders passed by PCIT in exercise of his powers under Section 263-Held, having regard to documents, it cannot be said that enquiry or verification was not carried out by AO-A perusal of impugned orders passed by Tribunal would show that findings of fact concerning enquiry made by AO have been recorded-Fact that AO has not given reasons in assessment order is not indicative, always, of whether or not he has applied his mind-Therefore, scrutiny of record, is necessary and while scrutinising record Court has to keep in mind difference between lack of enquiry and perceived inadequacy in enquiry- Inadequacy in conduct of enquiry cannot be reason based on which powers under Section 263 can be invoked to interdict an assessment order-AO, having received a response to his query about adjustment of interest, in concerned AYs, against inventory, concluded that, there was a nexus between receipt of funds from investors located abroad and real estate project, which upon being invested generated interest-Thus, it cannot be said that conclusion arrived by AO, that such adjustment was permissible in law, was erroneous- Since Tribunal has returned a finding of fact that there was indeed an enquiry carried out by AO as to nexus between funds invested in fixed deposits (on which interest was earned) and real estate project undertaken by assessee, no interference is called for by Court-Revenue's appeal dismissed.\"\nITO vs. DG Housing Projects Ltd. 343 ITR 329 (Del)\nPower of Commissioner under s.263 Scope Held, the Commissioner cannot\nremit the matter for a fresh decision to the Assessing Officer to conduct further\nenquiries without a finding that the order of Assessing Officer is erroneous - Such\nfinding that the order is erroneous is a condition precedent for exercise of\njurisdiction under s.263.\nCIT vs. Sunbeam Auto Ltd. 332 ITR 167 (Del)\n9.\nRevision-Erroneous and prejudicial order-Lack of proper enquiry There is a\ndistinction between \"lack of enquiry\" and \"inadequate enquiry\"-If there is an\nenquiry, even inadequate, that would not by itself give occasion to the CIT to\npass order under s.263, merely because he has a different opinion in the\nmatter-Such a course of action is open only in cases of \"lack of enquiry-\nContention of the Revenue that the AO did not consider as to whether the\nexpenditure in question was capital or revenue expenditure cannot be\naccepted-Although apparently the assessment does not give any reasons for\nallowing the entire expenditure as revenue expenditure, that by itself would not\nbe indicative of the fact that the AO has not applied his mind to the issue-AO is\nnot required to give detailed reason in respect of each and every item of\ndeduction in the assessment order AO had called for explanation regarding this\nvery item and the assessee had furnished its explanation This fact has been\nnoticed by the CIT himself in his order Thus, it cannot be said that it is a case of\nlack of enquiry-Further, even the CIT was not clear as to whether the said\nexpenditure is to be treated as capital or revenue expenditure-Dyes used by\nthe assessee, a manufacturer of car parts, are the components of the\nmachines and need constant replacement as their life span is not more than a\nyear-With the replacement of such tools and dyes, no new asset comes into\nexistence, nor there is benefit of enduring nature-It does not enhance the life of\nthe existing machine or increase its production capacity-Therefore, the view\ntaken by the AO was one of the possible views and the assessment order\npassed by the AO could not be held to be prejudicial to the Revenue.\nFurther, the replies submitted during the assessment proceedings above also\ngoes to show that the issued raised by your goodself do not satisfy the twin\nconditions of erroneous as well as prejudicial to the interest of revenue and\ntherefore, jurisdiction u/s 263 cannot be assumed as held in under mentioned\njudgments:\n■ Malabar Industrial Co. Ltd. vs CIT [2000] 243ITR 83 (SC)\nRevision-Erroneous and prejudicial order-Conditions precedent-CIT can invoke\ns.263 if the order of AO is erroneous and it is also prejudicial to interests of the\nRevenue-Both conditions must coexist-Phrase 'prejudicial to the interests of the\nRevenue' is of wide import and is not confined to loss oftax-Ifdue to an\nerroneous order of the AO, the Revenue is losing tax lawfully payable by a\nperson, it will certainly be prejudicial to the interests of the Revenue-However,\nevery loss of revenue as a consequence, of an order of AO cannot be treated\nas prejudicial to the interests of Revenue There was no material to support the\nclaim of assessee that the amount received from purchaser of rubber estate for\ndelayed payment represented compensation for loss of agricultural income-AO\naccepted the claim of assessee without making any enquiiy Order of AO was\nerroneous-Exercise of jurisdiction by CIT under s.263(1) justified.\n4. In view of the above submissions and arguments, it is most humbly prayed\nthat the proceedings u/s 263 may please be dropped. We shall be highly\nobliged \"\nThe Ld. Counsel made the prayer that the proceeding under section\n263 may please be dropped and order of the Ld. Pr CIT(A) be dismissed.\n10.\nPer contra, the Ld. DR relied on the order of the Ld. Pr. CIT and also\nsubmitted that the AO failed to conduct necessary enquiries regarding\nunexplained increase in capital and opening stock. It was submitted by the\nLd DR that the assessment order was erroneous and prejudicial to the interest\nof the Revenue, therefore the Ld. Pr. CIT was justified in setting aside the\nassessment order.\n11.\nWe have heard the rival contention and perused the material\navailable on the record. For the purposes of invoking the jurisdiction under\nsection 263 of the Act, the Ld. Pr. CIT is required to ascertain the twin\ncondition namely that the order passed by the AO was erroneous and\nprejudicial to the interest of the Revenue. In the present case as noted down\nby the Id. Pr. CIT that the AO was assigned the job of making the assessment\non the limited 2 issues i.e;\nα.\nMismatch in Sales turnover and ;\nb.\nIncrease in capital during the year.\n11.
1. The AO had issued the notice under section 142(1) on 05/07/2017\ncalling upon various information from the assessee. Thereafter the assessee\nhad filed his reply on 18/07/2017 and furnished various information. At part\n'C' of his reply of the even date, the ass has provided the copy of capital\naccount of the assessee for the A.Y. 2014-15.\n11.2 thereafter the AO further called upon by letter dt. 16/08/2017 to\nprovide the particulars for increase in capital. In response thereto, the\nassesssee vide letter dt. 27/09/2017 has responded as under:\n\" During the year in question, increase in capita is of Rs.7,65,700/-. The\nincrease of Rs.7,65,700/- was duly offered to tax in Income Tax Return\nof the assessee The Income Tax Return substantiate claim of\nassessee.\"\n11.3 The AO again issued the notice on 28/09/2017 and sought further\ninformation from the assessee, the assessee has provided the requisite\ninformation vide communication dt. 29/09/2017. The AO, had further called\nupon to provide the following information vide letter dt. 10/10/2017 “ 2. In this\nregard, you are requested to furnish a copy of your Income Tax Reutrns for\nthe A.Y. 2012-13, 2013-14 & 2014-15 alongwith their computation of income,\nTrading Account, P&L Account and Balance Sheet alnongwith Auditi Report\nin respect of each such assessment year\".\n11.4 The assessee replied to the above noted letter on 10/10/2017 and\n12/10/2017. However the AO was not satisfied with the reply thereafter\nanother notice dt. 20/10/2017 was issued to the assessee whereby the\nfollowing issues were raised by the AO.\nTel. No. 01893221358\nआयकर विभाग\nGovernment of India\nIncome Tax Department\nIncome Tax Officer, Nurpur\nNo. ITO/Nurpur/2017-18/2425\nFax No. 01893221358\nDuted: 20.10.2017\nTo\nSh. Sant Kumar Suri,\nProp. M/s S.K.Suri Goldsmith,\nMain Bazar, Nurpur,\nDistt. Kangra, HP.\nSir,\nSub: Assessment proceedings for the A.Y. 2015-16-reg.\n*****\nPlease refer to your reply dated 12.10.2017 in response to this office letter No. 2388\ndated 10.10.2017 on the captioned subject.\n2.\nI have carefully gone through your above mentioned reply dated 12.10.2017 wherein\nyou have stated that your petition before Hon'ble CBDT is pending. Moreover, it has been\nrequested that the assessment proceedings may be kept in abeyance till the disposal of your\npetition by Hon'ble CBDT.\n3.\nAs neither you have not forwarded a copy of any circular/instruction issued by\nHon'ble CBDT nor of any order of Hon'ble CBDT refraining/abstaining the undersigned\nfrom completing the assessment in respect of A.Y. 2015-16 in your case, therefore, you are\nrequested to furnish a copy of any such order/circular/instruction of Hon'ble CBDT which\nrefrains/abstains the undersigned by completing the assessment in respect of A.Y. 2015-16 in\nyour case.\n4.\nOther-wise, you are required to show-cause as to why an addition of Rs.62,46,197/-\nbe not made as your undisclosed income from the sources beyond the known sources of your\nincome under the provisions of Section 68 of the Income Tax Act, 1961 in respect of A.Y.\n2015-16, which is worked out as under:-\nReturned Income of A.Υ. 2015-16\nAdd:\nIncome from undisclosed sources\nAssessed income of A.Υ. 2015-16\nRs.7,65,700/-\nRs.62.46,197/-\nRs.70,11,897/-\n4.1 Undisclosed income as mentioned above is worked out as below:-\nProprietor's capital\n(Opening balance as on\n01.04.2014 as per the\nbalance sheet\nfor A.Y. 2015-16)\n: Rs.96,94,333/-\nLess:\nProprietor's capital\n(as on 31.03.2014)\nUndisclosed income\nRs.34,48,136/-\nRs.62,46,197/-\n4.2 Proprietors capital as on 31.03.2014 is derived as below:-\nProprietor's capital\nas on 31.03.2012\n(as reported by you in your ITR for\nΑ.Υ. 2012-13)\nProprietor's capital\nas on 31.03.2013\n[Proprietor's capital as\non 01.04.2012 + {Net Profit\nof A.Y. 2013-14 (-) Personal expenses\n@Rs.15,000/- PM}]\nProprietor's capital\nas on 31.03.2014\n[Proprietor's capital as\non 01.04.2013+ (Net Profit\nof A.Y. 2014-15 (-) Personal expenses\n@Rs.15,000/- PM}]\n: Rs.24,41,116/-\nRs.29,46,696/-\n[Rs.24,41,116/- + {Rs.6.85,580/- (-) Rs.1,80,000}]\nRs.34,48,136/-\n[Rs.29,46,696/- + (Rs.6,81,440/- (-) Rs.1,80,000/-}]\nThe assessment proceedings have been fixed for hearing on 27.10.2017 at 11:30 AM.\nStatutory Notice u/s 142(1) is enclosed for compliance.\nYours faithfully,\nSanjeev Jahalan\n(Sanjeev Gahalan)\nIncome Tax Officer,\nNurpur, HP.\n11.5 The assessee provided the information to the AO vide letter 14/11/2017\nand at page 2 of his reply (at page 36 of the PB) it was submitted that there\nwas no increase in capital as projected by the AO, however there was an\nincrease of capital is of Rs.7,65,700/-. which was duly offered in the return of\nincome.\n11.6 Having satisfied with the replies and the document submitted by the\nassessee the AO passed the order on 26/12/2017 thereby accepting the\ncontention of the assessee. No addition were made on account of increase\nin capital by the AO in the assessment order.\n11.7 From the details of the show cause notices and the reply submitted by\nthe assessee before the AO it is abundantly clear that the AO had made a\nsufficient inquiry and examined the issues of increase in capital before\npassing the assessment order. The Ld. Pr. CIT, had also found substance in the\nsubmission of the assessee that there was no increase in share capital in the\nimpugned order in A.Y. under consideration and for this reason only he had\nmentioned at page 10 of his order that\n“Therefore, what represented the above increase was in fact the\ndifference between the closing stock on 31.03.2012 and 01.04.2015\nand NOT between the respective values on 31.03.2015 and 01.04.2015.\nThe figures that interspersed between the 2 correct amounts as above\nconstituted the net impact of the transactions that occurred during the\n3 sandwiched A.Ys.2012-13, 2013-14 and 2014-15 between 31.03.2012\nand 01.04.2015, which figures were not reported in the Returns of\nIncome for these 3 sandwiched Assessment Years owing to them being\nfiled u/s 44AD of the Act.\"\n11.8 In our view once the Ld. Pr CIT is satisfied that the material activities /\ntransaction leading to increase in the opening balance have taken place in\nthe sandwich years i.e; A.Y. 2012-13 to 2014-15 and not in A.Y. 2015-16 then in\nour considered opinion it cannot be alleged that there was a failure on the\npart of AO to examine the increase in opening balance / increase in capital\nin the A.Y. 2015-16. In our view the reason for increase in capital was relatable\nto the earlier year i.e; 2012-13 to 2014-15 and not for the A.Y 2015-16 and\ntherefore there was no reason for the AO to make additions for the AY 2015-\n16. On account of the above we are of the opinion that no fault can be\nfound in the order passed by the AO. There is yet another reason for not\nagreeing with the Ld. Pr. CIT as the Ld. Pr. CIT cannot travelled beyond the\nA.Y 2015-16 and examined the legality of the A.Y 2012-13 to 2014-15. The\nassessment order passed for these assessment years have attained finality\nand accepted by the Department. Once the return of income have been\naccepted by the Department for the A.Y. 2012-13 to 2014-15, the closing\nbalance / closing capital for the A.Y 2014-15 would be the opening capital\nfor A.Y 2015-16 and once the increase in capital was accepted at the end of\nthe A.Y 2014-15 the same cannot be subject matter of scrutiny at the level of\nLd. Pr. CIT for the A.Y. 2015-16. The accepted position cannot be disturbed by\nthe Id .Pr. CIT for the earlier years in the garb of exercising the revisionary\npowers for the A.Y. 2015-16. The scope and ambit of the power of the Ld. Pr.\nCIT is only confined to examine the facts and record of the A.Y under\nconsideration and should not travelled beyond the impugned A.Y. In view of\nthe above, we are of the considered opinion that the order passed by the\nLd. Pr. CIT for increase in capital was incorrect and accordingly we quashed\nthe same.\n11.9 With respect to the second issue which was subject matter of 263\nproceedings, as noted hereinabove the case was selected for limited\nscrutiny i.e; \" Sale Turnover Mismatch” and “Increase in Capital”. Admittedly,\nthe issue sought to have been raised by the Ld. Pr. CIT in the show cause\nnotice was not the subject matter of the limited scrutiny. The law is fairly\nsettled that the AO is only duty bound to examine the issues for which the\ncase was selected. Admittedly, the second issue under section 263\nproceedings was not subject matter of examination by the AO and\ntherefore, the order passed by the AO cannot be said to be erroneous or\nprejudicial to the interest of the Revenue. Once the AO is prohibited to\nexamined any issue which is not the subject matter of the limited scrutiny, it is\npreposterous, to suggest that the AO should have examine the issue. We do\nnot agree with the order passed by the Ld . Pr. CIT as the AO was required to\nact and decide the issues assigned to him only and should not expand the\nscope of limited scrutiny to full scrutiny unless he is permitted to do so in\naccordance with the CBDT Circulars and other notifications. On account of\nthe above, we do not find the exercise of jurisdiction by the Ld. Pr. CIT under\nsection 263 was in accordance with law. We are of the opinion that the\ndecisions relied upon by the assessee in support of his case are applicable to\nthe facts and therefore we rely upon the said decision and quash the order\nof the Ld. Pr. CIT under section 263 of the Act.\n12.\nIn the result, the appeal of the assessee is allowed.\nOrder pronounced in the open Court on 13/03/2025\nSd/-\nकृणवन्त सहाय\n(KRINWANT SAHAY)\nलेखा सदस्य / ACCOUNTANT MEMBER\nSd/-\nललित कुमार\n(LALIET KUMAR)\nन्यायिक सदस्य /JUDICIAL MEMBER\nAG\nआदेश की प्रतिलिपि अग्रेषित /