2021 (3) TMI 1197 - AT - Income Tax

Revision u/s 263 - AO estimated the income at 8% on the cash deposits without examining source of each cash deposit - HELD THAT - AO has verified the source of cash deposits and taken a conscious decision that the source of deposits made in the bank account was related to the turnover. The cash deposits made in the savings bank was duly verified by the AO. As discussed earlier, this case was selected for limited scrutiny for verification of deposits made in the savings bank account and the case was not converted into full scrutiny. AO is not permitted to travel beyond the scope of the case for which it was selected, unless the case is being converted into full scrutiny with the approval of Chief Commissioner of Income Tax or Commissioner of Income Tax as the case may be, as per the instructions given by the Board to the field functionaries. Calling for the details of movable and immovable properties, unexplained investments and any other information not related to limited scrutiny amounts to travelling beyond the scope of scrutiny for which the case was selected. AO acted within the scope of limited scrutiny and assessed the income, after verification of the details. The Ld.Pr.CIT intends to substitute his view in place of decision taken by the AO, which is not permissible in the guise of revision u/s 263. No other evidence was collected by the department to show that the assessee has understated the income. As argued by the Ld.AR, inadequate enquiry is not the reason for taking up the case for revision u/s 263 as decided by the Tribunal in the case of M/s Naveena Rice Industries 2018 (7) TMI 2170 - ITAT VISAKHAPATNAM relied upon by the assessee. Though the Ld.DR tried to distinguish the case of the assessee with the Naveena Rice Industries, we find that the observation of the Tribunal is squarely applicable to the assessee s case also. In the cited case, this Tribunal held that though lack of enquiry is the reason or for taking up the case for revision, inadequate enquiry cannot be held to be erroneous and prejudicial to the interest of the revenue. We hold that there is no error which is prejudicial to the interest of the revenue in the order passed by the AO u/s 143(3) dated 16.08.2016. Hence, we set aside the order of the Ld.Pr.CIT and allow the appeal of the assessee.

Summary

Issues Involved:
1. Legitimacy of the Principal Commissioner of Income Tax (Pr.CIT) invoking Section 263 of the Income Tax Act.
2. Adequacy of the Assessing Officer's (AO) examination of cash deposits.
3. Scope of limited scrutiny versus full scrutiny.
4. Applicability of precedents regarding inadequate versus lack of enquiry.

Detailed Analysis:

1. Legitimacy of the Pr.CIT invoking Section 263 of the Income Tax Act:
The Pr.CIT invoked Section 263, asserting that the AO's assessment was erroneous and prejudicial to the interest of the revenue. The Pr.CIT observed that the AO estimated the income at 8% on cash deposits of ?88.93 lakhs without examining the source of each deposit. The Pr.CIT held that the AO should have treated the entire amount of cash deposits as income, as the assessee failed to submit proof for each entry of the cash deposit as forming part of the total deposit. Consequently, the Pr.CIT directed the AO to make proper enquiries and obtain complete information regarding the sources of the cash deposits in the bank account.

2. Adequacy of the AO's examination of cash deposits:
The assessee argued that the AO had verified the sources of cash deposits and treated them as turnover, estimating the income at 8% on the turnover. The AO had called for details by issuing a notice under Section 142(1) and completed the assessment after verifying the details provided by the assessee. The Tribunal noted that the AO had taken a conscious decision that the source of deposits made in the bank account was related to the turnover, and thus, prima facie, the AO had verified the source of cash deposits.

3. Scope of limited scrutiny versus full scrutiny:
The Tribunal emphasized that the case was selected for limited scrutiny to verify cash deposits, which were more than the turnover admitted by the assessee. The AO is not permitted to travel beyond the scope of limited scrutiny unless the case is converted into full scrutiny with the approval of the Chief Commissioner of Income Tax or Commissioner of Income Tax. The Tribunal found that calling for details of movable and immovable properties, unexplained investments, and other unrelated information amounts to traveling beyond the scope of limited scrutiny.

4. Applicability of precedents regarding inadequate versus lack of enquiry:
The Tribunal referred to its earlier decision in the case of M/s Naveena Rice Industries, where it was held that inadequate enquiry is not a valid reason for revision under Section 263. The Tribunal reiterated that the Pr.CIT cannot substitute his view in place of the AO's decision under the guise of revision. The Tribunal found that the AO had conducted adequate enquiry within the scope of limited scrutiny and that the Pr.CIT's direction to treat the entire cash deposits as income was not justified. The Tribunal noted that the department did not present any contrary decision from the High Court or Supreme Court to challenge the decision relied upon by the assessee.

Conclusion:
The Tribunal concluded that the AO's order was not erroneous or prejudicial to the interest of the revenue. Hence, the Tribunal set aside the order of the Pr.CIT and allowed the appeal of the assessee. The appeal was pronounced in the open court on 26th March 2021.