2023 (3) TMI 41 - AT - Income Tax

Revision u/s 263 by CIT - deposit of huge cash during the demonetization period in various installments in several bank accounts - assessment proceedings were initiated under limited scrutiny assessment under CASS for the reason default in TDS and disallowance for such defaults - HELD THAT - The fact that cash deposits were made in the bank account held by the assessee during the demonetization period does not by itself lead to the conclusion that there was an understatement of income on part of the assessee or there was unexplained income on the part of the assessee and therefore this alone cannot be a reason for converting limited scrutiny to full/complete scrutiny - we observe that the AO called for details of deposits made in the bank accounts held by the assessee and in response thereto the assessee also submitted details of cash deposits made in the bank accounts held by him during the demonetization period. During the course of assessment the above details were scrutinized by the AO and no infirmity was found with respect to the same. Whether scope of limited scrutiny assessment can be expanded by PCIT in 263 proceedings? - Since the assessee s case was selected for limited scrutiny on certain issues and Ld. AO has examined these issues and framed the assessments and the issue of examination of payment to contractors was not a part of the limited scrutiny reasons in our considered view Ld. Pr. CIT erred in assuming jurisdiction u/s 263 of the Act and also erred in holding that assessment order is erroneous and prejudicial to the interest of revenue. In the case of Balvinder Kumar 2021 (3) TMI 649 - ITAT DELHI the ITAT held that in case of limitedscrutiny Assessing Officer could not go beyond reason for which matter was selected for limited scrutiny thus it would not be open to Principal Commissioner to pass revisionary order under section 263 on other aspects and remit matter to Assessing Officer for fresh assessment. Thus we hold that Ld. Pr. CIT erred in assuming revisionary powers u/s 263 of the Act and the impugned order of Ld. Pr. CIT is hereby set aside. Decided in favour of assessee.

Summary

Issues Involved:
1. Legality of the Revision Order under section 263 of the Income Tax Act.
2. Whether the Assessing Officer (AO) conducted adequate inquiries/verification.
3. Appropriateness of initiating proceedings under section 263.
4. Whether the scope of limited scrutiny assessment can be expanded by the Principal Commissioner of Income Tax (PCIT) in section 263 proceedings.
5. Adherence to principles of natural justice.

Detailed Analysis:

1. Legality of the Revision Order under section 263 of the Income Tax Act:
The assessee contended that the Revision Order under section 263 was bad in law and contrary to the facts of the case. The PCIT observed discrepancies in the cash deposits made by the assessee during the demonetization period and the amounts declared in the Income Tax Return (ITR). The PCIT issued a notice under section 263, asserting that the AO failed to inquire into the source of significant cash deposits, thereby rendering the assessment order erroneous and prejudicial to the interests of the revenue.

2. Whether the Assessing Officer (AO) conducted adequate inquiries/verification:
The PCIT held that the AO did not conduct sufficient inquiries into the cash deposits made during the demonetization period. Specifically, the AO failed to verify the sources of these deposits, compare them with previous years, or conduct outdoor inquiries to ascertain the genuineness of the cash sales. The PCIT emphasized that the AO should have extended the limited scrutiny to full scrutiny with the approval of higher authorities, as per CBDT instructions.

3. Appropriateness of initiating proceedings under section 263:
The PCIT justified the initiation of proceedings under section 263 by stating that the AO's failure to conduct necessary verifications and inquiries made the assessment order erroneous and prejudicial to the revenue. The PCIT directed the AO to make a fresh assessment after conducting the required verifications and inquiries.

4. Whether the scope of limited scrutiny assessment can be expanded by the PCIT in section 263 proceedings:
The assessee argued that the scope of limited scrutiny could not be expanded by the PCIT during section 263 proceedings. The Tribunal cited various judicial precedents supporting this view, including cases like Sahita Construction Company Vs Pr.CIT and Balvinder Kumar v. Principal CIT, which held that the PCIT cannot expand the scope of limited scrutiny to issues not originally selected for scrutiny. The Tribunal concluded that the AO had confined himself to the issues for which the case was selected for limited scrutiny and had examined these issues adequately.

5. Adherence to principles of natural justice:
The assessee argued that the PCIT's order was illegal, unjustified, and against the principles of natural justice. The Tribunal observed that the AO had called for and scrutinized various details, including bank statements, during the assessment proceedings. The Tribunal found that the AO had not ignored any instructions or failed to apply his mind, as claimed by the PCIT.

Conclusion:
The Tribunal held that the PCIT erred in assuming revisionary powers under section 263 and expanding the scope of limited scrutiny. The Tribunal set aside the PCIT's order, emphasizing that the AO had conducted adequate inquiries within the scope of limited scrutiny and that the PCIT could not expand this scope during section 263 proceedings. The appeal of the assessee was allowed, and the order pronounced in the open court on 24-02-2023.