2020 (7) TMI 149 - AT - Income Tax

Revision u/s 263 - Case is selected for limited scrutiny u/s 143(2) - inadequate or no inquiry - Large other expenses claimed in the Profit Loss A/c and Mismatch between income/receipt credited to P L A/c considered under other heads of income and income from heads to income other than business/profession - HELD THAT - It is not in dispute that under the limited scrutiny the Ld. A.O is required to keep his investigation and examination limited to the extent of the reasons for which limited scrutiny has been taken up. So his focus should be limited to the reasons but in such situation what is required from the A.O is to put best of his focus and pinpointed examination of information of the assessee so as to arrive at the correct income of the assessee. The file records should speak by itself that the A.O has given/delivered his best to justify that in the scrutiny for limited purpose, no stone is left unturned for the issues raised in the limited scrutiny case by way of in depth examination. Looking to the reasons and the enquiry conducted by the Ld. A.O as far as the reason No.3 Large other expenses claimed in the Profit Loss Account and reason No.5 i.e. Mismatch between income/receipt credited to P L A/c considered under other heads of income and income from heads to income other than business/ profession , are concerned we find that the Ld. A.O has clearly observed in the assessment order that he has checked the books of accounts, bills and vouchers and has conducted sufficient enquiry and had made some disallowance of expenses. Once enquiry has been conducted with specific observation of having checked the books of accounts, bills and vouchers then in these circumstances Ld. PCIT was not justified in invoking the provisions u/s 263 of the Act and holding that the assessment needs to be set aside since the Ld. A.O has not examined properly the reasons No. 3 5 mentioned herein above which were also the reasons for selecting the case of limited scrutiny. High ratio of refund to TDS and low net profit or loss from large gross receipts - The details of sales made in the preceding and current year and the details for increase in purchase cost were the bare minimum details which the Ld. A.O could have gone through to form an opinion. Merely accepting the few liner reply of the assessee cannot be held to be sufficient or minimum enquiry in case of such limited scrutiny. The enquiry conducted by the Ld. A.O in the instant case for reasons 1 2 cannot be termed as adequate enquiry. Rather looking to the reply given by the assessee which is not at all clear in itself, in our view the Ld. A.O has not conducted any enquiry with regard to reasons No. 1 2 relating to High ratio of refund of TDS and Low Net profit or loss shown for large gross receipts. Thus Ld. PCIT was justified in setting aside assessment order by invoking the provisions of Section 263 of the Act and holding that the Ld. A.O has not conducted proper enquiry with reference to Reasons No. 1 2. Mismatch in amount paid to related persons u/s 40A(2)(b) reported in audit report and ITR - One of the information relates to payment to related persons u/s 40A(2)(b). The auditor take information from the assessee and gives the details of the relatives with the amount of payment and the nature of such expenditure in the format provided in Form 3CD. These details may help the Assessing Officer to examine the payment related persons if the case is selected for scrutiny. We can say that these details assist the Assessing Officer to frame a correct assessment and energy is saved to gather related information from the huge financial data maintained by the assessee. There is hardly any occasion that such payment to relatives is disallowed by the Tax Auditor in his report by way of qualification of Audit Report and the same amount is mentioned in the ITR. Since no disallowance is made by the Tax Auditor the details of payment made to the relatives is mentioned in Report but the amount in ITR is NIL there occurs mismatch. Now when the case has been selected for limited scrutiny u/s 143(2) of the Act with one of the reasons relating to the mismatch to payment made to relatives it is not that simple that the Ld. A.O merely matches the I.T return to the Tax Audit return and comes to a conclusion that there is no mismatch. It will be too narrow approach which cannot be accepted in scrutiny cases. So what is required on the part of the Ld. A.O is to call for the details for the payments made to the related persons and examine the transactions as per the provisions of Section 40A(2)(b) of the Act and after examining the details if he frames a view that such payments are neither excessive nor unreasonable with regard to fair market value and goods and services, may infer that no disallowance is called for. This examination of the transaction of payment made to relatives u/s 40A(2)(b) of the Act should be well documented and assessment records should speak by itself about the enquiries conducted by the Ld. A.O. The records of the instant case speaks that no details were filed by the assessee before the Ld. A.O to prove the reasonableness of payments made to relatives nor any indication is there on behalf of the Ld. A.O to call for specific details relating to payment to relatives u/s 40A(2)(b) of the Act. Thus in our considered view there is no enquiry about the reasons No.4 i.e mismatch in amount paid to related persons u/s 40A(2)(b) and therefore Ld. PCITT has rightly invoked his power u/s 263 of the Act setting aside the order of Ld. A.O with regard to these reasons. We are of the considered view that the action of Ld. PCIT of invoking the provisions of Section 263 of the Act and setting aside the assessment order is partly held to be justified. Appeal of the assessee is partly allowed

Summary

Issues Involved:
1. Invocation of Section 263 of the Income Tax Act by the Principal Commissioner of Income Tax (PCIT).
2. Adequacy of the Assessing Officer’s (AO) enquiry during limited scrutiny.
3. Jurisdiction and legality of the PCIT’s order under Section 263.
4. Examination of specific issues raised during limited scrutiny.

Detailed Analysis:

1. Invocation of Section 263 of the Income Tax Act by the Principal Commissioner of Income Tax (PCIT):
The primary issue is whether the PCIT was justified in invoking Section 263 of the Act, which allows the revision of an assessment order if it is erroneous and prejudicial to the interests of the revenue. The PCIT observed that the AO failed to examine the reasons for which limited scrutiny was initiated, such as high ratio of refund to TDS, low net profit from large gross receipts, large other expenses claimed in the Profit & Loss Account, and mismatches in amounts paid to related persons under Section 40A(2)(b) and income heads.

2. Adequacy of the Assessing Officer’s (AO) enquiry during limited scrutiny:
The PCIT noted that the AO did not conduct a thorough investigation into the issues flagged for limited scrutiny. Specifically, the AO made ad-hoc disallowances without adequately verifying expenses related to salary and wages, subcontract expenses, and other expenses. The AO's failure to verify attendance registers, salary registers, provident fund challans, and other relevant documents was highlighted. The PCIT emphasized that the AO's acceptance of the assessee's explanations without further enquiry rendered the assessment order erroneous and prejudicial to the revenue.

3. Jurisdiction and legality of the PCIT’s order under Section 263:
The assessee challenged the PCIT’s order on the grounds that the proceedings under Section 263 were initiated based on a change of opinion, which is not permissible by law. The assessee argued that the AO had scrutinized all details, made proper enquiries, and verified records before making disallowances. The Tribunal examined whether the PCIT overstepped by prescribing specific documents and methods for verification that the AO should have followed. It was determined that the AO has discretionary power to decide the manner and extent of verification required.

4. Examination of specific issues raised during limited scrutiny:
- High Ratio of Refund to TDS and Low Net Profit from Large Gross Receipts:
The Tribunal found that the AO did not conduct adequate enquiry into the reasons for low net profit and high ratio of refund to TDS. The AO accepted the assessee's brief explanations without further investigation into the decrease in turnover and increase in material costs.

- Large Other Expenses Claimed in Profit & Loss Account:
The Tribunal noted that the AO had verified books of accounts, bills, and vouchers, and made some disallowances. Therefore, the PCIT's invocation of Section 263 for this issue was not justified as proper enquiry was conducted.

- Mismatch in Amount Paid to Related Persons under Section 40A(2)(b):
The AO accepted the assessee's explanation without verifying the reasonableness of payments made to related persons. The Tribunal agreed with the PCIT that the AO failed to conduct necessary enquiries, rendering the assessment order erroneous.

- Mismatch between Income/Receipt Credited to P&L Account and Other Heads of Income:
The Tribunal found that the AO had conducted sufficient enquiry into this issue. Therefore, the PCIT's direction for further enquiry was unwarranted.

Conclusion:
The Tribunal partly upheld the PCIT's order under Section 263. It confirmed the PCIT's action for issues related to high ratio of refund to TDS, low net profit from large gross receipts, and mismatch in amounts paid to related persons under Section 40A(2)(b). However, it disagreed with the PCIT's invocation of Section 263 for issues concerning large other expenses and mismatch in income heads, as the AO had conducted proper enquiries for these issues. The appeal of the assessee was thus partly allowed.