2022 (9) TMI 973 - AT - Income Tax

Revision u/s 263 by CIT - revisionary order in the case of limited scrutiny - As per CIT, order of AO is erroneous on non-verification of utilization of the accumulated fund and non-verification of reduction in tangible assets and capital work-in-progress - return of income filed by the assessee for year under consideration was selected for limited scrutiny for verification of payment made to the specified persons - HELD THAT - Assessing Officer has carried out the enquiry on the issue of verification of limited scrutiny reason. On perusal of the impugned order of the CIT, we find that he has nowhere stated that no verification or any further verification has not been done by the AO on the issue of scrutiny for which the case was selected as limited scrutiny case - CIT has held the order of the AO as erroneous on the ground of no enquiry on other issues i.e. the issue of non-verification of utilization of the accumulated fund and non-verification of reduction in tangible assets and capital work-in-progress. As far as scope of verification in limited scrutiny cases is concerned the CBDT in instruction No. 7/2014 vide letter dated 26/09/2014 has specified that scope of enquiry in limited scrutiny cases should be limited to verification of those particular aspects only and therefore the AO shall confine the questionnaire and subsequent enquiry or verification only on the specific points on the basis of which the particular return has been selected for scrutiny. It is further provided that if there s a potential escapement of the income then Assessing Officer may convert the case into detail scrutiny after prior approval of the higher authorities. For cases selected through CASS cycle 2015 and 2016 the CBDT has further emphasized that scrutiny proceeding in limited scrutiny should be restricted to the relevant parameters which formed the basis for selecting the case for the scrutiny and the Assessing Officer shall not proceed to make other inquiries except with the prior approval of the higher authorities Assessing Officer was not authorized to travel beyond the enquiry on the issue for which case was selected for scrutiny and enquiry on the issues as observed by the Ld. CIT in order under section 263 of the Act on the issue of non-verification of utilization of the accumulated fund and reduction in sale of asset and capital work in progress, were beyond the scope of the limited scrutiny. The Ld. DR has not brought before us whether any permission was sought by the Assessing Officer for converting the limited scrutiny case into a completely scrutiny case. Tribunal in the case of Balvinder Kumar 2021 (3) TMI 649 - ITAT DELHI after analyzing CBDT instructions on the issue of the scope of limited scrutiny held that it would not be open for the PCIT to pass revisionary order under section 263 in the case of limited scrutiny, where the Assessing Officer could not go beyond reason for which matter was selected for limited scrutiny. We hold that in the instant case the Assessing Officer was not authorized to carry out enquiry beyond the scope of the reasons for which the case was selected under limited scrutiny and therefore the Ld. CIT is not justified in directing the Assessing Officer to carry out the enquiry on the issues other than the issues for which case was selected for limited scrutiny and holding the order as erroneous insofar prejudicial to the interest of the revenue. Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the revision order under section 263 of the Income-tax Act.
2. Scope of limited scrutiny and whether the Assessing Officer (AO) exceeded his jurisdiction.
3. Non-verification of utilization of accumulated funds.
4. Non-verification of reduction in fixed assets and capital work in progress.

Issue-wise Detailed Analysis:

1. Validity of the Revision Order under Section 263:
The assessee challenged the revision order passed by the Commissioner of Income-tax (Exemptions) [CIT(E)], Mumbai, under section 263 of the Income-tax Act, asserting that the original assessment order passed under section 143(3) was neither erroneous nor prejudicial to the interest of the revenue. The CIT(E) had set aside the original assessment order on the grounds of non-verification of utilization of accumulated funds and reduction in fixed assets and capital work in progress.

2. Scope of Limited Scrutiny and Jurisdiction of the AO:
The case was selected for limited scrutiny to verify payments made to specified persons. The AO issued notices under section 143(2) and 142(1) and received the necessary replies from the assessee. The AO confined his enquiry to the specific issues for which the case was selected for scrutiny, as per the CBDT instructions, and did not convert the limited scrutiny into a complete scrutiny. The Tribunal held that the AO acted within his jurisdiction by limiting the enquiry to the issues flagged for limited scrutiny, and any expansion of the scope would require prior approval from higher authorities, which was not sought in this case.

3. Non-verification of Utilization of Accumulated Funds:
The CIT(E) observed that the AO did not verify the utilization of Rs. 2,50,00,000 set aside under section 11(2) for the "development fund," which was deemed vague and not specific. The Tribunal noted that the AO was restricted to the limited scrutiny parameters and could not be faulted for not expanding the scope of the enquiry without proper authorization. The Tribunal emphasized that the AO followed the CBDT instructions, which mandate that the scope of limited scrutiny should be confined to the specific issues for which the case was selected.

4. Non-verification of Reduction in Fixed Assets and Capital Work in Progress:
The CIT(E) contended that the AO did not examine the reduction in tangible assets and capital work in progress, amounting to Rs. 43,18,981 and Rs. 40,39,390, respectively. The Tribunal reiterated that these issues were beyond the scope of the limited scrutiny and the AO was not authorized to investigate them without converting the case to complete scrutiny with the necessary approvals. The Tribunal found that the CIT(E) exceeded his jurisdiction by directing the AO to conduct enquiries beyond the limited scrutiny scope.

Conclusion:
The Tribunal quashed the revision order passed by the CIT(E) under section 263, holding that the AO acted within the scope of limited scrutiny and followed the CBDT instructions. The Tribunal emphasized that the AO was not authorized to expand the scope of the enquiry without proper approval, and the CIT(E) could not hold the assessment order as erroneous and prejudicial to the interest of the revenue based on issues outside the limited scrutiny scope. The appeal filed by the assessee was allowed.