SHRI HEMRAJSINH KIRANSINH RATHOD,DADRA & NAGAR HAVELI vs. PRINCIPAL COMMISSIONER OF INCOME TAX, VALSAD

The grounds of appeal

raised by the assessee are as follows: “1. On the facts and circumstances of the case as well as law on the subject, the revision order passed by the learned Principal Commissioner of Income Tax, Valsad u/s 263 of the Act for assessment year 2018-19 without considering out detailed submission made in reply to the show cause notice issued.

The facts necessary for disposal of the appeal are stated in brief. The assessee before us is an Individual and filed return of income for assessment year (A.Y.) 2018-19, declaring total income at Rs.1,40,74,210/-. The assessee`s case was selected for limited scrutiny and assessment was completed u/s 143(3) of the Act on 24.02.2021, determining total at Rs. 1,42,58,400/-. The assessee`s case was subjected to audit and the audit party observed that the assessee has debited the loan processing fee amounting Rs.59,236/- to the profit and loss account. Prima facie, this amount appeared to be a capital expenditure and should have been added back in computation of income. The ACIT and the Range Head both have accepted the audit objection and recommended the case for action u/s 263 of the Act.

Therefore, ld PCIT issued show cause notice vide DIN No. ITBA/COIWS/91/2022-23/1050602706(1) dated 10.03.2023. The show cause notice u/s 263 is reproduced below: “Sub: Notice u/s. 263 of the IT. Act in case of Shri Hemrajsinh Kiransinh Rathod (PAN: AIHPR4957N) for A.Y. 2018-19-reg. Kindly refer to the above. 2. In this case assessment u/s. 143(3) of the IT. Act, 1961 was completed on 24.02.2021 determining the total income at Rs.1,42,58,400/- In this case it is noticed that the assessee under the head 'Indirect Expenses' has debited an amount of Rs.59,236/- as loan processing charges which is in the nature of capital expenditure. The AO should have disallowed the same. The failure to do so has made assessment erroneous as well as detrimental to the interest of revenue.

In response to the show cause notice of the ld. PCIT, the assessee has submitted its written submission before ld. PCIT, which is reproduced below: “Vide above mentioned notice your honour stated that “it is noticed that the assessee under head indirect Expenses has debited an amount of Rs.59,236/-as loan processing charges, which is in nature of capital expenditure. The AO should have, disallowed the same. from the reading of your honour's notice, it seems that your honors is having the objection that loan processing charges of Rs.59,236 , debited to profit & loss a/c of the assessee should have been disallowed by the AO being capital expenditure. In this regard, we submit as under; During the year under consideration the assessee had taken the working capital loan in form of Overdraft facility from Central Bank of India and accordingly, paid the loan processing charges of Rs.59,326 to the Bank. Copy of Sanctioned letter is enclosed herewith for your honour's perusal Kindly Refer to End (1) We further submit that said overdraft Facility was availed to manage the day-to-day business activities of the assessee and Further, this loan was neither for purchase of any fixed assets nor for purchase of any properties of business. Since said overdraft facility was to manage day to day business of the assessee, the loan processing charges paid of Rs.59326/- is a revenue nature, and it is not a capital nature and accordingly, the assessee had debited said processing charges to his profit and loss a/c. We further submit that; We submit that Assessee's return was selected for limited scrutiny through CASS (in faceless mode) on issue of substantial increase in capital. Copy of Notice u/s 143(2) is enclosed herewith for your honour's perusal. Kindly Refer to Encl (2) Later, to verify the sources of substantial increase in capital, the LD AO had issued detailed questionnaire u/s 142(1) of the IT Act and asked /AY.2018-19 Hemrajsinh Kiransinh Rathod explanation and justification of sources of substantial increase in capital with evidences. Copy of notice u/s 142(1) of the IT Act is enclosed herewith for your honour's perusal. Kindly Refer to Encl (3) Against the said notice u/s 142(1) of the IT Act, the assessee had submitted his detailed reply and explanation along with all required relevant evidences (including audited Balance sheets, profit and loss a/c etc. Bank statements, fund flow statements etc.) in support of his contention and also explained sources for substantial increase in capital of the assessee before Ld. AO. Copy of said submission made against notice u/s 142(1) of the IT Act is enclosed herewith for your honour's perusal. Kindly Refer to Encl (4) Hence, we submit that as the case was selected for limited scrutiny purpose to verify the sources of substantial increase in capital, the LD AO had rightly raised query regarding sources of substantial increase in capital vide notice u/s 142(1) of the IT Act and the assessee had also submitted his detailed reply and explanation with supporting evidences against notice u/s 142(1) of the IT Act before LD AO, and after proper examining and verifying the details and submission along with evidences of the assessee and after satisfying with sources of substantial increase in capital of assessee, the LD AO completed the assessment and passed the order u/s 143(3) of the IT Act. We further submit that an assessment or re-assessment could only be revised u/s 263 in case it satisfies the twin conditions of erroneous as well as causing prejudice to the interest of revenue, in case of assessee, order passed u/s 143(3) of the IT Act by the LD AO is neither erroneous nor prejudice to the revenue, as it was passed after detailed examination and proper verification of all documents of subjected matter of limited scrutiny. We submit that in case of “Limited Scrutiny” the assessing officer can only examine those issues for which the case has been selected or the issue mentioned therein. We further submit that after properly examined and verifying all the submitted documents of the assessee and after satisfying with sources of capital introduction of the assessee, the LD AO had completed the assessment and accordingly, passed the order u/s 143(3) of the IT Act. We further submit that section 263 of the IT Act cannot be invoked if matter of limited scrutiny were duly examined after perusal of evidence. Hence, we submit that LD AO is rightly discharged his liability while verifying the matter required to be verified under Limited Scrutiny. Further, 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 /AY.2018-19 Hemrajsinh Kiransinh Rathod 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. As per the CBDT instruction No.20/2015 dated 29/12/2015 and instruction no 05/2016 dated 14-07-2016 the Assessing Officer in case of "Limited Scrutiny" can only examine those issues for which, the case has been selected or the issue mentioned therein. If the AO of the view that there is a potential escapement of income, he may convert, the "Limited Scrutiny" into "Complete Scrutiny" but such view should be reasonable view based on credible information or material available on record. Furthermore, there should be direct nexus between such, view and information/material.”

However, the ld. PCIT has rejected the contentions of the assessee and directed the assessing officer to examine other issue which was not the subject matter of notice under section 263 of the Act. The ld. PCIT observed that from the perusal of balance sheet from “addition to the asset” it was noted that assessee has purchased fixed assets amounting Rs.19,61,254/- and for which neither any details have been given nor the sources of acquisition have been established. In these circumstances and especially when AO has not enquired into anything, the assessment order is not only erroneous but also prejudicial to the interest of revenue. Therefore, ld PCIT held that it is clear that the A.O. has passed the assessment order without making inquiries or verification on this issue which ought to have been made in this case. During ongoing proceedings, no clarification regarding the issue was made and, therefore, ld PCIT held that the assessment order u/s 143(3) of the I.T. Act, 1961 in the case of Hemrajsinh Kiransinh Rathod for A.Y. 2018-19 passed on 24.02.2021 by the Assessing Officer is erroneous in so far it is prejudicial to the interest of revenue. Therefore, ld PCIT set-aside the assessment order with the direction to the assessing officer to frame the assessment de novo after making proper enquiries.

Aggrieved by the order of ld. PCIT, the assessee is in appeal before us.

Shri Hardik Vora, Learned Counsel for the assessee begins by pointing out that ld PCIT has issued the notice under section 263 of the Act about the issue of “Loan Processing fee” wherein ld PCIT has stated that assessing officer has not examined the “Loan Processing fee”. However, at the end of his revision order, the Learned Principal Commissioner of Income Tax, has directed the assessing officer to examine the other issue, namely, the issue of “addition of fixed assets”. The “addition of fixed assets” was not the subject matter of revision under section 263 of the Act. However, ld PCIT has directed the assessing officer to examine other issue namely, “addition of fixed assets” without giving opportunities to the assessee of being heard, hence it is against the principle of natural justice. Therefore, Ld. Counsel contended that ld. PCIT, without giving show cause notice to initiate the proceedings on different issue, which was not the subject matter of ‘limited scrutiny’ also, has exercised his jurisdiction under section 263 of the Act, which is bad in law, therefore order passed by the ld. PCIT may be quashed.

Shri Hardik Vora, Learned Counsel also argued that assessee’s case was selected for “limited scrutiny” to verify the share capital or other capital. In this regard, the ld Counsel took us through the findings of the assessing officer, which are reproduced below: “1. The case was selected for Limited Scrutiny assessment under the E- assessment Scheme, 2019 on the following issues:- S. No. Issues i. Share Capital/Other capital /AY.2018-19 Hemrajsinh Kiransinh Rathod 2. After perusal of the return of income, material available on record and the reply filed to the notice u/s 142(1) of the Income Tax Act, 1961, the explanation of the assessee on the above issue is accepted and no addition is made. 3. The assessment of income is done as per computation sheet and the sum payable is determined as per the demand notice.” 10. Therefore, Ld. Counsel contended that the assessee’s case was selected for ‘limited scrutiny’ to verify the share capital or other capital. However, the ld. PCIT has exercised the jurisdiction on the issue which was not subject matter of ‘limited scrutiny’. In the case of ‘limited scrutiny’, the Assessing Officer does not have power to examine the entire items of the return of income and, the Assessing Officer restricted only to the extent of issues for which the ‘limited scrutiny, has been initiated. Therefore, ld Counsel contended that the jurisdiction exercised by the ld PCIT is beyond the scope of ‘limited scrutiny’ for that, Ld. Counsel relied on the following judgments: (i) PCIT v. Shark Mines and Minerals (P.) Ltd. (2023) 151 taxmann.com 71 (Orissa) (ii) Chaitanya Bansibhai Nagori vs PCIT-4, Ahmedabad, (iii) Balvinder Kumar v. PCIT (2021) 125 taxmann.com 83 (Del. Trib.) (iv) Spotlight Vanijya Ltd. vs PCIT-2, Kolkata, ITA No.353/Kol/2020.

On the other hand, Learned Departmental Representative (ld. DR) for the Revenue submitted that the ld. PCIT has wide powers to review the orders of the assessing officer and the assessment record, therefore the powers of ld. PCIT are not restricted up to ‘limited scrutiny’ and hence order passed by the ld. PCIT is within the /AY.2018-19 Hemrajsinh Kiransinh Rathod framework of the law. Therefore ld. DR for the Revenue contended that the order passed by the Assessing Officer is erroneous and prejudicial to the interest of Revenue.

We have heard both the parties and carefully gone through the submissions put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the facts of the case including the findings of the ld. PCIT and other material brought on record. We find merit in the submission of ld Counsel for the assessee, as he pointed out that ld PCIT has issued the notice under section 263 of the Act about the issue of “Loan Processing fee” wherein ld PCIT has stated that Assessing Officer has not examined the “Loan Processing fee”. However, at the end of his revision order, the Learned Principal Commissioner of Income Tax, has directed the assessing officer to examine the other issue, namely, the issue of “addition of fixed assets”. The “addition of fixed assets” was not the subject matter of revision under section 263 of the Act. If the ld PCIT wants to exercise his jurisdiction on other items then in that circumstances, the minimum expectation is that ld PCIT has to provide an opportunity of hearing to the assessee. However, ld PCIT did not provide opportunity to the assessee for hearing on the issue of “addition of fixed assets”, hence direction given by the ld PCIT to the assessing officer to examine the issue of “addition of fixed assets” is against the principle of natural justice. We note that the Hon’ble Supreme Court in M. S. Gill vs The Chief Election Commission 1978 AIR SC 851 held “The dichotomy between administrative and quasi- judicial function vis-à-vis the doctrine of natural justice is presumably obsolescent after Kraipak (A.K. Kraipak vs UOI AIR 1970 SC 150) which makes the water-shed in the application of natural justice to /AY.2018-19 Hemrajsinh Kiransinh Rathod administrative proceedings. The rules of natural justice are rooted in all legal systems and are not any new theology. They are manifested in the twin principles of nemo judex in parte sua (no person shall be a judge in his own case) and audi alterem partem (the right to be heard). It has been pointed out that the aim of natural justice is to secure justice.

We note that Hon`ble Supreme Court in the case of Amitabh Bachchan 384 ITR 0200 (SC), held that opportunity of hearing should be provided by Principal Commissioner of Income Tax (PCIT) to the assessee during revision proceedings. The findings of the Hon`ble Supreme Court is reproduced below ( to the extent useful for our analysis):

Reverting to the specific provisions of Section 263 of the Act what has to be seen is that a satisfaction that an order passed by the Authority under the Act is erroneous and prejudicial to the interest of the Revenue is the basic pre- condition for exercise of jurisdiction under Section 263 of /AY.2018-19 Hemrajsinh Kiransinh Rathod the Act. Both are twin conditions that have to be conjointly present. Once such satisfaction is reached, jurisdiction to exercise the power would be available subject to observance of the principles of natural justice which is implicit in the requirement cast by the Section to give the assessee an opportunity of being heard. It is in the context of the above position that this Court has repeatedly held that unlike the power of reopening an assessment under Section 147 of the Act, the power of revision under Section 263 is not contingent on the giving of a notice to show cause. In fact, Section 263 has been understood not to require any specific show cause notice to be served on the assessee. Rather, what is required under the said provision is an opportunity of hearing to the assessee. The two requirements are different; the first would comprehend a prior notice detailing the specific grounds on which revision of the assessment order is tentatively being proposed. Such a notice is not required. What is contemplated by Section 263, is an opportunity of hearing to be afforded to the assessee. Failure to give such an opportunity would render the revisional order legally fragile not on the ground of lack of jurisdiction but on the ground of violation of principles of natural justice. Reference in this regard may be illustratively made to the decisions of this Court in Gita Devi Aggarwal vs. Commissioner of Income Tax, West Bengal and others1 and in The C.I.T., West Bengal, II, Calcutta vs. M/s Electro House2. Paragraph 4 of the decision in The C.I.T., West Bengal, II, Calcutta vs. M/s Electro House (supra) being illumination of the issue indicated above may be usefully reproduced hereunder……….:”

From the above judgment of Hon`ble Supreme Court in the case of Amitabh Bachchan (supra), it is vivid that what is contemplated by Section 263, is an opportunity of hearing to be afforded to the assessee. Failure to give such an opportunity would render the revisional order legally fragile not on the ground of lack of jurisdiction but on the ground of violation of principles of natural justice. Now coming to the assessee`s facts, we note that ld PCIT has issued the notice under section 263 of the Act about the issue of “Loan Processing fee”, whereas at the end of revision order, the Learned Principal Commissioner of Income Tax, has directed the assessing officer to examine the other issue, namely, the issue of “addition of fixed assets”, which is without giving an opportunity of hearing to the assessee, hence order passed by ld PCIT is not in /AY.2018-19 Hemrajsinh Kiransinh Rathod accordance with the mandatory provisions of section 263 of the Act, therefore we quash the order of ld PCIT.

In the result, appeal filed by the Assessee is allowed.