When the A.O. is not empowered to do certain acts directly, the revisionary authority certainly cannot direct him to do so indirectly by exercising power u/s 263. Accordingly, limited scrutiny assessment cannot be revised u/s 263 beyond the scope of scrutiny

FACTS
The assessee, a company engaged in business as a builder and developer, filed its return of income declaring a loss of Rs. 14,34,236. The case was selected under ‘limited scrutiny’ for examination of two issues, viz., (i) Low income in comparison to high loan / advances / investments in shares appearing in balance sheet; and (ii) Minimum Alternate Tax (MAT) liability mismatch. The A.O. upon examining these two issues completed the assessment.

Subsequently, after reviewing the assessment order, the Additional Commissioner of Income-tax in charge of the range found that the increase in loan taken by the assessee from Rs. 8.57 crores in the preceding year to Rs. 10.42 crores in the current year was not verified by the A.O. He observed that the A.O. also did not verify the assessee’s claim that all loans and advances given are for the purpose of business, by calling for details of transactions in subsequent years along with supporting documents. He also observed that the A.O. did not verify the capitalisation of interest paid. In view of these facts, the Additional Commissioner submitted a proposal to the PCIT for exercising the powers u/s 263 to revise the assessment order.

The PCIT issued a show cause notice u/s 263. The assessee submitted that the A.O. had thoroughly inquired into the issues for which the case was selected for scrutiny. However, the PCIT was not convinced. He held that the assessment order was erroneous and prejudicial to the interest of the Revenue due to non-inquiry by the A.O. He set aside the assessment order with a direction to examine the relevant details as observed in the revision order and complete the assessment after conducting proper and necessary inquiry.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the two issues which require examination are whether the limited scrutiny for which the assessee’s case was selected encompassed examination of loans taken by the assessee and capitalisation of interest expenditure, and if it was not so, whether the assessment order can be held to be erroneous and prejudicial to the interest of the Revenue for not examining the issues relating to loan taken and interest expenditure capitalised.

The Tribunal noted that the PCIT while exercising power u/s 263 has attempted to expand the scope of the limited scrutiny. It observed that the A.O. did examine both the issues for which the assessee’s case was selected for scrutiny and the A.O. had also conducted necessary inquiry on the issues for which the case was selected for scrutiny and he completed the assessment after applying his mind to the materials on record.

The A.O. being bound by CBDT Instruction No. 20/2015 dated 29th December, 2015 and CBDT Instruction No. 5 of 2016 dated 14th July, 2016, could not have gone beyond the scope and ambit of limited scrutiny for which the case was selected. He had rightly restricted himself to the scope and ambit of limited scrutiny. Unless the scope of scrutiny is expanded by converting it into a complete scrutiny with the approval of the higher authority, the A.O. could not have travelled beyond his mandate. The Tribunal held that the assessment order cannot be considered to be erroneous and prejudicial to the interest of Revenue for not examining the loans taken by the assessee and their utilisation as well as capitalisation of interest.

When the A.O. is not empowered to do certain acts directly, the revisionary authority certainly cannot direct the A.O. to do so indirectly by exercising power u/s 263. For this proposition the Tribunal relied upon the decision of the Coordinate Bench in the case of Su-Raj Diamond Dealers Pvt. Ltd. vs. PCIT, ITA No. 3098/Mum/2019; order dated 27th November, 2019.

The appeal filed by the assessee was allowed.