2021 (7) TMI 202 - AT - Income Tax

Revision u/s 263 - takeover of the limited company by the L.L.P. - non-conversion of a limited scrutiny into a complete scrutiny by the AO - Interest Expenses,Investment in Unlisted Equities, Low income and high loans/advances/investments AND Low income and high investments - HELD THAT - Non-conversion of a limited scrutiny into a complete scrutiny by the AO cannot be considered as a ground for making a revision u/s 263 of the Act. Further the ld. Pr. CIT states that the AO should have made enquiry into the conversion certificate filed by the assessee. The nature of enquiry or the possible prejudice to the Revenue is not stated by the Pr. CIT. As ssessee submits that this is not a case of conversion but a case of takeover. There is no finding or even a whisper that the certificate is not genuine. As regards, the assets of the company and investments, we find from the copy of audited balance sheet of the company and copy of the audited balance sheet of the L.L.P., that there is no variation in figures and hence in our view there is no error which causes prejudice to the interest of the Revenue. The ld. Pr. CIT has not brought out any variations. It is also not true on the part of the Pr. CIT that the order was passed in a haste for the reason that, three hearings were taken place after the proceedings was initiated on 09.09.2017 and the assessment was completed on 11.12.2017. Even otherwise unless there is an error which is prejudicial to the interest of the Revenue it cannot be said that power u/s 263 of the Act can be invoked. In view of the above discussion we quash the order passed u/s 263 of the Act and allow this appeal of the assessee.

Issues Involved:
1. Interest Expenses
2. Investment in Unlisted Equities
3. Low Income and High Loans/Advances/Investments
4. Low Income and High Investments
5. Conversion of Company into LLP
6. Verification of Assets Transferred
7. Application of Mind by AO
8. Adequacy of Enquiries/Verifications by AO
9. Expansion of Limited Scrutiny to Complete Scrutiny

Detailed Analysis:

1. Interest Expenses:
The case was selected for limited scrutiny, including the verification of interest expenses. The Assessing Officer (AO) issued a notice under section 142(1) of the Income Tax Act, 1961, and called for details on this issue. The assessee provided explanations, and the AO found that no interest expense was claimed by the assessee. The Income Tax Appellate Tribunal (ITAT) noted that the AO applied his mind to this issue, and there was no error that was prejudicial to the interest of the revenue.

2. Investment in Unlisted Equities:
The assessment was also selected for scrutiny to verify investments in unlisted equities. The AO found that the amount was brought forward from the company that was taken over by the LLP. The Principal Commissioner of Income Tax (Pr. CIT) argued that the AO did not make adequate inquiries into the valuation of these unlisted securities or the source of the premium received. However, the ITAT observed that the AO had indeed examined these issues and accepted the explanations provided by the assessee. There was no acquisition of new assets post-conversion, and the figures in the balance sheet remained consistent.

3. Low Income and High Loans/Advances/Investments:
The AO examined the issue of low income despite high loans, advances, and investments. The assessee explained that the conversion took place towards the end of the financial year, resulting in fewer operational days. The AO accepted this explanation. The ITAT found that the AO had applied his mind and made necessary inquiries, and the Pr. CIT did not point out any specific errors that were prejudicial to the revenue.

4. Low Income and High Investments:
Similar to the previous issue, the AO examined the low income in relation to high investments and accepted the assessee's explanation that the conversion happened towards the end of the year. The ITAT upheld that the AO had considered the relevant facts and there was no lack of inquiry or application of mind.

5. Conversion of Company into LLP:
The Pr. CIT noted that the AO did not make any inquiries about the conversion of the company into an LLP, which took place on 03.02.2015. The Pr. CIT argued that the AO should have verified the registration certificate and the transfer of assets worth ?12.84 crore. The ITAT found that the AO had considered the conversion and the related documents. The ITAT also noted that the Pr. CIT did not specify how this lack of inquiry was prejudicial to the interest of the revenue.

6. Verification of Assets Transferred:
The Pr. CIT contended that the AO did not verify the assets transferred from the company to the LLP. The ITAT observed that the balance sheets of both entities showed consistent figures, and there was no variation in the value of assets. Thus, there was no error that caused prejudice to the revenue.

7. Application of Mind by AO:
The Pr. CIT criticized the AO for not applying his mind and passing the order in a perfunctory manner. The ITAT, however, found that the AO had conducted multiple hearings and made inquiries into the issues flagged for limited scrutiny. The AO’s actions were found to be adequate and not hasty.

8. Adequacy of Enquiries/Verifications by AO:
The Pr. CIT argued that the AO did not carry out adequate inquiries or verifications. The ITAT disagreed, stating that the AO had issued notices, called for explanations, and reviewed the documents provided by the assessee. The ITAT emphasized that the AO’s actions were within the scope of limited scrutiny and were sufficient.

9. Expansion of Limited Scrutiny to Complete Scrutiny:
The Pr. CIT held that the AO should have sought approval to convert the limited scrutiny into complete scrutiny. The ITAT referred to multiple case laws, including the decision in "Binod Kumar Mahato vs. Pr. CIT," to conclude that failure to seek such approval does not render the assessment order erroneous or prejudicial to the interest of the revenue. The ITAT ruled that non-conversion of limited scrutiny to complete scrutiny cannot be a ground for revision under section 263 of the Act.

Conclusion:
The ITAT quashed the order passed under section 263 of the Income Tax Act by the Pr. CIT, holding that the AO had conducted adequate inquiries and applied his mind to the issues flagged for limited scrutiny. The appeal filed by the assessee was allowed, and the ITAT directed the AO to initiate fresh assessment proceedings, if necessary, and provide reasonable opportunities to the assessee to substantiate their claims.

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