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2021 (7) TMI 90 - AT - Income TaxRevision u/s 263 - scope of limited scrutiny - case of the assessee was selected for limited scrutiny through CASS on account of mismatch of AIR and CIB data, and mismatch in sale turnover reported in audit report and ITR - notice u/s 263 of the Act for taking the cost of complete project while calculating profit for the year under consideration instead of cost debited till the date of Balance sheet AND taking the agriculture income in the capital Account and not in the computation of income - HELD THAT - AO is duty bound to follow the instructions in case limited scrutiny assessment proceeding are proposed to be converted into complete scrutiny and without following said procedure and necessary approval of the competent authority conducting an enquiry on the issue which is outside the limited scrutiny would be beyond the jurisdiction of the AO. As a necessary corollary, the Pr. CIT u/s 263 cannot be permitted to traverse beyond the jurisdiction that was vested with the A.O while framing the assessment as what cannot be done directly cannot be done indirectly - where the matter was selected for limited scrutiny, revisional jurisdiction cannot be exercised for broadening the scope of jurisdiction that was originally vested with the A.O while framing the assessment as also held consistently by various Benches of the Tribunal. The transactions reflected in the financial statements are sum total of various independent transactions undertaken during the year, and the balance sheet represent a consolidated picture of the financial position of the assessee at the end of the year and similarly, the profit/loss account represent the consolidated position of revenues and costs and net profit during the financial year. It is likely that some of the transactions are directed connected and some are indirectly connected, however, they all have a common thread in terms of impacting the financial position of the assessee and for tax purposes, in determination of net taxable income. The reasoning adopted by the PCIT that transactions of cost of construction will have an effect on closing work in progress and taking sales turnover and closing WIP into account, all these transactions taken together will effect the determination of net taxable income is no doubt correct but as far as determination of correct sales turnover is concerned for which the matter was selected for limited scrutiny, the same can be determined on a standalone basis on examination of sale deeds and related documents for sale of flats and is not connected with determination and examination of cost of construction and work in progress. As discussed 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 valuation of closing work-in-progress as well as matter relating to agriculture income, which are held by the ld PCIT as matters not been examined by the AO, are matters which are not part of the reasons for which the case was selected for limited scrutiny and are not even remotely connected, 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 in terms of mis-match of sales turnover, the same has been duly examined by the AO and even the ld PCIT has not recorded any adverse findings in terms of lack of enquiry or inadequate enquiry on part of the AO - we hereby set-aside the order passed by the ld PCIT u/s 263 and the order of the AO is sustained. -Decided in favour of assessee.
Issues Involved:
1. Jurisdiction of the Principal Commissioner of Income Tax (Pr. CIT) under Section 263 of the Income Tax Act. 2. Validity of the Pr. CIT's order for 'Denovo' assessment. 3. Adherence to the scope of 'Limited Scrutiny' by the Assessing Officer (AO). 4. Examination of the valuation of Work-in-Progress (WIP) and agricultural income. Detailed Analysis: 1. Jurisdiction of the Principal Commissioner of Income Tax (Pr. CIT) under Section 263 of the Income Tax Act: The assessee contended that the Pr. CIT had no occasion to initiate proceedings under Section 263 as the assessment order was neither erroneous nor prejudicial to the interest of the revenue. The Pr. CIT's action was deemed unreasonable and bad in law. The tribunal noted that the Pr. CIT can call for and examine the record of any proceeding under the Act and pass an order if the assessment order is erroneous and prejudicial to the interests of the revenue. 2. Validity of the Pr. CIT's order for 'Denovo' assessment: The assessee argued that the Pr. CIT ordered a 'Denovo' assessment without considering the reply filed by the assessee, which is outside the jurisdiction of the Commissioner of Income Tax in a limited scrutiny case. The tribunal found that the Pr. CIT's order for 'Denovo' assessment was not justified as the issues raised were outside the scope of the limited scrutiny. 3. Adherence to the scope of 'Limited Scrutiny' by the Assessing Officer (AO): The tribunal emphasized that the scope of enquiry in a limited scrutiny case is confined to the issues for which the case was selected. The AO had issued a notice under Section 143(2) and examined the issues identified for limited scrutiny, including the mismatch of sales turnover reported in the audit report and ITR. The tribunal noted that the AO had conducted a thorough examination of the sale deeds and reconciled the sales turnover with the financials, ITR, AIR, and CIB data. Therefore, the AO had adhered to the scope of limited scrutiny, and the assessment order was not erroneous or prejudicial to the revenue. 4. Examination of the valuation of Work-in-Progress (WIP) and agricultural income: The Pr. CIT raised issues regarding the valuation of WIP and the treatment of agricultural income. The tribunal found that these issues were outside the scope of the limited scrutiny and were not connected to the reasons for which the case was selected. The AO had followed the accepted method of accounting (Percentage of Completion Method) and had accounted for actual costs incurred. The tribunal held that there was no tangible material or information available during the assessment proceedings that could have led the AO to convert the limited scrutiny into a complete scrutiny. The tribunal also noted that the correct course of action for the revenue would have been to invoke jurisdiction under Section 147 of the Act if there was any potential escapement of income, rather than the Pr. CIT invoking jurisdiction under Section 263. Conclusion: The tribunal concluded that the Pr. CIT's order under Section 263 was not justified as the AO had adhered to the scope of limited scrutiny and there was no material evidence to suggest any potential escapement of income. The tribunal set aside the order passed by the Pr. CIT and sustained the assessment order. The appeal of the assessee was allowed.
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