2023 (4) TMI 1301 - AT - Income Tax

Revision u/s 263 - as per CIT activity of taking loans not examined by AO - extension of scope of limited scrutiny - queries so raised by the AO during the course of assessment proceedings which was for Limited Scrutiny only to verify the Deduction against income from other sources - HELD THAT - The assessee had filed, names, complete address, IT PAN of persons to whom said interest paid along with their confirmation letters. The said documents have also been placed on record before us in paper book and all the said details so filed before Revenue Authorities goes to show that those were examined by the AO and accordingly order of assessment accepting the returned income was passed. Verification of extra interest PCIT raised the issue of non verification of fresh loans by the AO, but in this context we further noticed that the assessee had filed confirmation letters of each of the fresh unsecured loan creditors having complete address and PAN number and that being so, assessee had already discharged his onus to prove the genuineness and identity of the said loan creditors, so the conduct of the assessee cannot be said to be found to be faulty. Even otherwise, the case of the assessee was selected for Limited Scrutiny to verify the Deduction against income from other sources only. Therefore, by any stretch of imagination it was out of purview of the AO to verify the fresh loan creditors. The ambit of the assessment for Limited Scrutiny under CASS was admittedly in relation to the verification of Deduction against interest income from other sources in response to which the assessee had already furnished complete documents relating to interest expenses claimed against the interest income under section 56 of the IT Act under the head Income from other sources. Even otherwise, the AO could not have travelled beyond enquiry into the interest expenses in view of CBDT Instruction No. 7/2014, 20/2015 and 5/2016 and also the CBDT letter dated 30 Nov. 2017 and thus asking for further details was beyond the purview of assessment. AO made enquiries on the issue and the assessee complied with the enquiry and filed all the required details. Thus, it is not a case where the AO made no enquiry or verification which should have been made. Thus the proceedings under section 263 is a step to start again a second scrutiny/investigation of facts without there being any material to hold even prima facie that the assessment order passed by AO was erroneous which was not valid in the eyes of law. Thus in case of limited scrutiny, the AO is duty bound to restrict himself to examine the matters for which matter was selected for limited scrutiny and where the AO takes a view and forms a reasonable belief that some other matters are required to be examined, the same will in effect be traversing beyond the scope of limited scrutiny which is not permissible unless the matter is converted into complete scrutiny and which has not happened during the course of present assessment proceedings. Therefore, the issue of activity of taking loans, i.e. how the amount is utilized, what is the rate of interest paid, what is the rate of interest charged, which are held by the ld PCIT as matters not being examined by the AO, are matters which are not part of the reasons for which the case was selected for limited scrutiny, therefore, no fault lie on the part of the AO resulting in order being held as erroneous and prejudicial to the interest of revenue. As far as matters for which case was selected for limited scrutiny for the reason of Deduction against income from other sources , the same has been duly examined by the AO - Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Jurisdiction of Principal Commissioner of Income Tax (Pr. CIT) under section 263 of the Income Tax Act, 1961.
2. Adequacy of the Assessing Officer's (AO) inquiries and verification during limited scrutiny.
3. Compliance with CBDT instructions and guidelines for limited scrutiny cases.

Summary of Judgment:

Issue 1: Jurisdiction of Pr. CIT under Section 263
The assessee challenged the jurisdiction of the Pr. CIT, arguing that the assessment order passed by the AO under section 143(3) was not erroneous or prejudicial to the interest of the revenue. The Pr. CIT had invoked section 263, claiming the AO failed to make proper inquiries and verifications regarding:
- Utilization of loans raised.
- Rate of interest on loans received and advanced.
- Nexus between loan taken and loan advanced.
- Reason for excess interest paid over interest earned.

The Tribunal held that the Pr. CIT's assumption of jurisdiction under section 263 was not justified. The AO had conducted inquiries and verifications within the scope of limited scrutiny, and the Pr. CIT could not expand the scope of scrutiny without following proper procedures.

Issue 2: Adequacy of AO's Inquiries and Verification
The Tribunal found that the AO had issued notices under section 142(1) and conducted inquiries regarding the deduction claimed against income from other sources. The assessee had provided necessary details, including names, addresses, and PAN numbers of loan creditors, and the AO had verified these details.

The Tribunal noted that the AO had limited jurisdiction to inquire into matters specified in the limited scrutiny notice. The AO had satisfied himself with the explanations and documents provided by the assessee, and therefore, the assessment order could not be deemed erroneous or prejudicial to the interest of the revenue.

Issue 3: Compliance with CBDT Instructions
The Tribunal emphasized that the AO must adhere to CBDT instructions for limited scrutiny cases, which restrict the scope of inquiries to specific issues for which the case was selected. The AO had complied with these instructions, and the Pr. CIT's attempt to expand the scope of scrutiny was beyond his jurisdiction.

The Tribunal referred to various judicial precedents, reinforcing that the AO's inquiries were adequate and within the permissible scope of limited scrutiny. The Tribunal concluded that the Pr. CIT's order under section 263 was invalid and set it aside.

Conclusion:
The appeal of the assessee was allowed, and the order of the Pr. CIT under section 263 was set aside. The Tribunal upheld the AO's assessment order, confirming that it was neither erroneous nor prejudicial to the interest of the revenue.