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Facts
The assessee's case for AY 2015-16 was selected for limited scrutiny. The Principal Commissioner of Income Tax (PCIT) initiated revision proceedings under Section 263 of the Act, contending that the assessment order was erroneous and prejudicial to the revenue. The PCIT's order was passed due to a perceived error in the assessment, which the assessee later discovered to be based on a mischaracterization of the scrutiny as 'complete' instead of 'limited'. The assessee filed an appeal with a significant delay.
Held
The Tribunal held that the PCIT, while exercising revisionary powers under Section 263, cannot travel beyond the scope of the limited scrutiny issues identified during the original assessment. The CBDT instructions clearly state that limited scrutiny cases should be confined to the specific aspects for which the case was selected. Therefore, the PCIT's assumption of jurisdiction on issues not covered by the limited scrutiny was not justified.
Key Issues
Whether the PCIT can travel beyond the scope of limited scrutiny while passing an order under Section 263 of the Income Tax Act.
Sections Cited
143(3), 263, 40A(3), 143(2), 184(5), 144, 14A, 8D, 57, 40A(2)(b), 54B
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Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: DR. A.L.SAINI, AM & DIESH MOHAN SINHA, JM
(�नधा�रणवष� / Assessment Year: (2015-16) (Hybrid Hearing) Shreeji Ceramic Industries, The Principal Commissioner of Vs. 8/A National Highway, Lalpar Income Tax – 1, Morbi - 363642 Rajkot �थायीलेखासं./जीआइआरसं./PAN/GIR No.: AALFS8846B (Appellant) (Respondent) Appellant by : Shri D. M. Rindani, Ld. AR Respondent by : Shri Sanjay Punglia, CIT (DR) सुनवाईक�तार�ख/ Date of Hearing : 17/07/2025 घोषणाक�तार�ख/Date of Pronouncement : 12/08/2025 आदेश / O R D E R
PER DINESH MOHAN SINHA, JM:
1. This appeal has been filed by the assessee against the order of Learned Principle Commissioner of Income Tax, Rajkot – 1 [in short, “the Ld. PCIT”], dated 30.03.2021 for the Assessment Year (AY) 2015-16.
2. The grounds of appeal raised by the Assessee are as follows.
1. The learned Principal Commissioner of Income Tax, Rajkot-1 erred in holding that the assessment order dated 29-12-2017 passed u/s. 143(3) of the Act was erroneous and prejudicial to the interest of Revenue and thus assuming jurisdiction u/s. 263of the Act and hence the impugned order is bad in law.
2. The learned Principal Commissioner of Income Tax, Rajkot-1erred in stating that the assessment order u/s 143(3) was under complete scrutiny although it was under ‘limited scrutiny’ as evident from the notice u/s. 143(2) read with the assessment order u/s. 143(3) of the Act.
The learned Principal Commissioner of Income Tax, Rajkot-1 erred in assuming jurisdiction u/s. 263 on an issue of S. 40A(3) which was ipso facto beyond the scope of limited scrutiny issues u/s 143(3) order. 4. The appellant craves leave to add, amend, alter and withdraw any ground of appeal anytime up to the hearing of this appeal.
Assessment Year.2015-16 Shreeji Ceramic 3. The brief facts of the case are as under. The Assessee has filed return of income electronically for A.Y. 2015- 16 on 25.09.2015. Case has been selected for limited scrutiny by CASS and accordingly the Assessing Officer has issued notice to the Assessee u/s. 142(1) and after hearing the ld. AR of the Assessee and taking necessary material on record he has finalized assessment u/s. 143(3) of the Act. Ld. PCIT exercised the revision of the order u/s. 263 as according to him the order of Assessing Officer is erroneous and prejudicial to the interest of Revenue. Ld. PCIT has passed the order u/s. 263 on 30.03.2021. Aggrieved by the order of Ld. PCIT, Assessee has filed an appeal before us on 30.04.2024, which is barred by limitation of time by 1067 days. Therefore, first we adjudicate the ground of delay before entering in to merits of the appeal.
Assessee has submitted application and affidavit along with appeal. The reasons mentioned in the application are as follows.
5. On going through the application, we have observed that, it was not in the mind of Assessee, that order passed u/s. 263 was appealable or not because Assessee has neither entered in to any litigation on perusal of order u/s. 263, dtd. 30.03.2021 nor he has taken care of consequential order passed u/s. 144 rws 263, dtd. 31.03.2022 first time. Thereafter, the Ld. PCIT has again proposed revision u/s. 263 for the second time in respect of interest and remuneration to the partners for the same assessment year. In this situation, Assessee has approached senior Chartered Accountant at Rajkot on the ground of second revision in the month of March-2024 as mentioned in the para no. 15. Since the revision was proposed for second time for the same A.Y., the newly appointed CA has called for old records. While going through old records and the assessement order u/s. 143(3), dtd. 29.12.2017, it has come to notice of CA that the assessment has been initialized on ground of limited scrutiny. Ld. PCIT has incorrectly stated that the assessment completed was a complete scrutiny. From this factual position CA has arrived on inference that first revision order u/s. 263, dtd. 30.03.2021 passed by Ld. PCIT is on wrong footing. Therefore, he has advised the Assessee to prefer an appeal against the order of Ld. PCIT, dtd. 30.03.2021 in the month of April-2024.
Ld. PCIT has passed the order on 30.03.2021 during covid period. As per rule, the appeal was to be filed within 60 days from date of receipt of order, therefore, the appeal wass to be filed on or before 30.05.2021. But in view of the judgement of Hon’ble Supreme Court reported in 134 taxmann.com 307, delay for the period from 15.03.2020 to 28.02.2022 was to be condoned for every appeal.. The delay for the period from 30.05.2021 to 28.02.2022 was attributable to covid period. Therefore, the same is to be condoned. The same view has been taken by Co-Ordinate Bench of ITAT, Rajkot in the case of Rajmoti Road Movers, ITA No. 316/Rjt/2023. Page | 7 Assessment Year.2015-16 Shreeji Ceramic 6. In support of the request to condone the delay, Ld. AR of the Assessee has submitted written submission running from 1 to 24 pages, in which several judgements of Hon’ble Supreme Court, Hon’ble High Court and ITAT are cited. The judgements referred by the Ld. AR for the Assessee are as follows,
Senior Bhosale Estate (HUF) Vs. ACIT, 112 taxmann.com 134 (SC).
Artist Tree (P.) Ltd. Vs. CBDT, 52 taxmann.com 152 (Bombay High Court) 3. Vijayeta Buildcon (P.) Ltd. Vs. ACIT, Cent. Cir.-1, 123 taxmann.com 133 (Jaipur – Trib.) 4. Rajmoti Road Movers Vs. PCIT-1, Rajkot On going through these judgements and various judgements of different High Courts and Hon’ble Apex Court, we are inclined to derive a inference that when the delay is not attributable to the gross negligence or carelessness of the Assessee and when there is sufficient and reasonable cause, by which the delay is occurred, in that case the delay is to be condoned irrespective of length of period.
On the other, Ld. DR has vehemently argued that such a long delay should not be condoned. We have heard both the parties it is considered that, before Assessing Officer AR of the Assessee appeared and submitted all the details and income assessed as per returned income bytaking in to consideration the scope of Limited Scrutiny. However Ld. PCIT has considered this case as full scrutiny. It was covid period and Assessee could not have outcome of the case. To substantiate their request for condonation of delay, Assessee has taken support of three judgements. As mentioned in para 20 of application, Assessee has relied upon judgement of Hon’ble Gujarat High Court in case of Gujarat State Fertilizers & Chemicals Ltd. (283 ITR 149). As mentioned in the judgement, liberal approach is Page | 8 Assessment Year.2015-16 Shreeji Ceramic adopted by the Hon’ble High Court in such a matter so as to ensure that substantive rights are not defeated on the basis of technicalities or limitation. The relevant para of judgement is reproduced in the application under para 20. As mentioned in para 21 of application, Assessee has also taken support of judgement of Hon’ble Supreme Court in case of N. Balakrishnan Vs. M. Krishnamurthy [1998 (7) SCC 123],regarding the length of delay. It is a settled principle of law that in the matter of condonation of delay, the length of delay does not matter but reasonability of explanation matters. Relevant para is reproduced under para 21 of application. It is also observed by the Co-Ordinate Bench of ITAT, Rajkot in case of Rajmoti Road Movers, that “the length of the delay becomes insignificant if there was sufficient cause for such delay which prevented the assessee in filing the appeal. As such we need to consider the cause of the delay and not the length of the delay. Accordingly in our considered view when there was a reasonable cause, the period of delay may not be relevant factor”. we find that Assessee has sufficient and reasonable cause for not filing the appeal within time. In view of the above discussion, the delay is hereby condoned.
Now we proceed to adjudicate the appeal on merit.
That the Assessee is in appeal before us. Ld. AR of the Assessee has drown our attention to the first para of Ld. PCIT’s order in which Ld. PCIT has mentioned that the case was selected for complete scrutiny under CASS and the assessment was finalized u/s. 143(3) of the Act on 29.12.2017. He has further drown our attention to the first para of assessment order in which Ld. AO has mentioned that the case was selected for limited scrutiny through CASS. According to him, the selection of case for revision of Page | 9
We have perused order of Ld. PCIT as well as Ld. AO. On going through both the orders it has come to our notice that Ld. PCIT has discussed issue regarding transport charges paid by the Assessee and according to him payments were in contravention of section 40A(3) of the Act. Where as in assessment order, this point has never been discussed by Ld. AO as the case is pertaining to limited scrutiny. The point included in limited scrutiny was regarding mismatch of custom duty paid as shown in the ITR with the duty paid as per CBEC tab of ITS and verification of Duty- Drawback received as shown in the CBEC tab of ITS etc. Ld. AO has called for all the details and after due verification of the record, he has completed the assessment accepting the returned income of Assessee for Rs. 3,09,82,520/-.
11. On perusing both the orders, it is clear that the bone of contention before us is “while passing order u/s 263, Ld. PCIT can travel beyond scope of limited scrutiny or not”.
Ld. AR has submitted several judgements and CBDT instruction in support of his arguments regarding the above mentioned issue Ld. which are mentioned as under. 1. PCIT Vs. Naga Dhunseri Group Ltd. [2023]146 taxmann.com 424 (Calcutta) 2. PCIT Vs. Shark Mines and Minerals (P.) Ltd. [2023] 151 taxmann.com 71 (Orissa) 3. Vijay Rajnikant Patel Vs. PCIT [2024] 160 taxmann.com 178 (Ahmedabad – Trib) 4. Mind Sports League (P.) Ltd. Vs. PCIT [2023] 157 taxmann.com 815 (Kolkata – Trib) Page | 10 Assessment Year.2015-16 Shreeji Ceramic 5. Sanjeev Garg Vs. PCIT [2025] 179 taxmann.com 79 (Chandigarh - Trib) 6. Ranchhodbhai Jerambhai Meghani Vs. The Income Tax Officer – Direct Tax Online 7. CBDT instruction No. 20/2015, dtd. 29.12.2015
The appeal pertains to A.Y. 2015-16, i.e. F.Y. 2014-15. Therefore, it is covered by the CBDT instruction No. 07/2014, dtd. 26.09.2014 read with CBDT instruction No. 20/2015, dtd.29.12.2015. Instruction no. 7/2014 clearly deals with the cases pertaining to F.Y. 2014-15. It is clearly mentioned in the instruction that “CBDT by virtue of its powers under section 119 of the Act, in supersession of earlier instructions/guidelines on this subject, hereby directs that the cases selected for scrutiny during the Financial year 2014-15 under CASS, on the basis of either AIR data or CIB information or for non-reconciliation with 26AS data, the scope of enquiry should be limited to verification of these particular aspects only”. The relevant paras of instruction no. 7/2014 are reproduced as under.
Assessment Year.2015-16 Shreeji Ceramic 14. Further clarification regarding the applicability of the same has been given by CBDT vide instruction No. 15/2015, dtd. 29.12.2015. The relevant paras of this instruction are reproduced as under.
Hon’ble Kolkata High Court in case of PCIT Vs. Naga Dhunseri Group Ltd. has dealt with this issue. Hon’ble High Court has dealt with this issue by taking in to consideration the CBDT instruction no. 7/2014. The finding of Hon’ble High Court is given below.
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.
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 that the CBDT has issued instructions as to the manner in which the limited Page | 12 Assessment Year.2015-16 Shreeji Ceramic scrutiny should be carried out. In CBDT Instruction No. 7 of 2014, dated 26.09.2014, the relevant portion of the said instruction reads as follows:- 3. The reason(s) for selection of cases under CASS are displayed to the Assessing Officer in AST application and notice u/s. 143(2), after generation from AST, is issued to the taxpayer with the remark “Selected under Computer Aided Scrutiny Selection (CASS)”. The functionality in AST is being expected to be operationalised by 15th October, 2014. Further, the Assessing Officer while issuing notice under section 142(1) of the Act which is enclosed with the first questionnaire would proceed to verify only the specific aspects requiring examination/verification. In such cases, all efforts would be made to ensure that assessment proceedings are completed expeditiously in minimum possible number of hearings without unnecessarily dragging the case till the time-barring date.”
6. A bare reading of the above Instruction clearly shows that the PCIT cannot make a roving enquiry in the guise of a limited scrutiny and as such the instruction issued by the CBDT is binding on the Department.
Same observation has been made by Hon’ble Orissa High Cout in case of PCIT Vs. Shark Mines and Minerals (P) Ltd. The relevant paras are reproduced here as under: “9. Indeed, the Court finds that the Madras High Court has while affirming the decision of the ITAT in Smt. Padmavathi (Supra) taken the view that while exercising suo motu revisional power under section 263 of the Act, the CIT cannot travel beyond the scope of the issues which form part of the ‘limited scrutiny’ in the original Assessment Order. This Court concurs with the above view. 10. What persuades this Court to reach this conclusion is the requirement in law that if the AO has to go beyond 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 datd 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 Page | 13 Assessment Year.2015-16 Shreeji Ceramic 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. To reiterate, in the present case, the limited 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. There were, as rightly noted by the ITAT, unconnected issue s 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 Court is unable to find any error having been committed by the ITAT in coming to the conclusion. No substantial question of law arises. The appeal is accordingly dismissed.
Same view has been taken by Co-Ordinate Bench of ITAT, Rajkot in case of Ranchhodbhai Jerambhai Meghani Vs. ITO. The relevant para is reproduced here as under. 14. We note that assessee’s case was selected for limited scrutiny to examine two issues, viz: (i) Large investment and (ii) Deduction claimed u/s. 54B of the Act, however, the assessing officer has not made addition on both the issues of Limited Scrutiny Notice. The assessing officer can not travel beyond the issue raised under Limited Scrutiny, as stated in the two instructions of CBDT, which are binding to all the Assessing Officer, viz, (i) Instruction No. 20/2015, dated 29.12.2015 and (ii) Instruction No. 5/2016, dated 14.07.2016. The Limited Scrutiny has narrow scope of inquiry, as mentioned in para 3(d) of Instruction No. 20/2015 and Para No. 4 od Instruction No. 5/2016 of the CBDT. 17. As discussed at length, in the light of CBDT instruction No. 7/2014 and 20/2015 and also considering the judgements of Hon’ble Kolkata High Court and Hon’ble Orissa High Court delivered in the light of these Assessment Year.2015-16 Shreeji Ceramic instructions, we are of the view that while passing order u/s. 263 Ld. PCIT can not travel beyond scope of limited scrutiny. Ld. CIT (DR) has also not controverted this observation.
9. Ld. PCIT has violated the instruction of CBDT by considering the case as complete scrutiny and contrary to the judgements of Hon’ble High Courts and ITAT. In view of this discussion we quash the order of Ld. PCIT u/s. 263.
In the result, the appeal filed by the assessee is allowed.
Order is pronounced on __12/08/2025_in the open court.