CIT Revision u/s 263 for failure of AO to convert limited scrutiny into complete scrutiny quashed

CIT Revision u/s 263 for failure of AO to convert limited scrutiny into complete scrutiny quashed as no credible material was available

In the instant case, the assessee had challenged the revisionary order u/s 263 of the Income Tax Act, 1961 (the Act) passed by the CIT.

The assessee challenged the invocation of revisionary jurisdiction u/s 263 of the Act by the PCIT without satisfying the condition precedent as prescribed by Section 263 of the Act i.e. without making out a case that the AO’s order was erroneous as well as prejudicial to the revenue. 

ABCAUS Case Law Citation
ABCAUS 3522 (2021) (07) ITAT

Important case law relied referred:
Malabar Industries Ltd.  vs.  CIT [2000] 243 ITR 83(SC)  
Ashoka Refractories (P) Ltd.  vs.  CIT  279 ITR 457 (Cal)
Pandit Brothers 26  ITR 159 (Punj)

The return of the assessee was duly processed u/s 143(1) of the Act.  Thereafter, the case was selected for scrutiny and notice u/s 143(2) and 143(1) were issued to produce/submit certain details/ documents to substantiate the return of income.

The Assessing Officer completed the assessment by making certain disallowance.

Thereafter, the PCIT proposed to exercise his revisional jurisdiction  u/s  263  of  the  Act  by taking note that the case of the assessee was selected for limited scrutiny under CASS due to  mismatch  of  sales  turnover  reported  in  audit  report  and  ITR. 

Further, according to PCIT on examination of assessment records, he found fault with the AO in not enquiring into three issues even though the fact was that the case of the assessee was selected for scrutiny only for one purpose. However according to PCIT in addition to the issue for which the assessee’s case was picked up for Limited Scrutiny three more issues need to have been looked into.

Accordingly, the PCIT set aside the order of AO and directed him to pass a fresh assessment order.

The Tribunal tested the impugned order passed by the PCIT in the light of legal principle laid by Hon’ble Supreme Court PCIT as to whether the condition precedent was satisfied or not.

The Tribunal noted that the issue on which the limited scrutiny was pointed out by the CASS, was duly enquired into by the AO by issuing notice u/s 142(1) of the Act.

Being satisfied with the reply of the assessee, the AO did not draw any adverse view against the assessee.

However, the PCIT exercising jurisdiction u/s 263 of the Act alleged that the AO ought to have taken up with the competent authority for complete scrutiny in respect of three issues with which he found fault. The main fault according to PCIT was that the AO during assessment proceedings failed to take up with the competent authority to expand the scope of scrutiny as per the CBDT Instruction No. 5/2016 dated 14.07.2016. 

According to the PCIT on three issues the AO ought to have enquired other than the issue on which the limited scrutiny was selected by CASS.

The Tribunal observed that as per the said Instruction, the AO can convert limited scrutiny only if he can form a reasonable view that there is possibility of under assessment of income, if the case is not examined under “Complete Scrutiny”. The parameters/standard laid down by the CBDT is almost similar to that envisaged for the AO to reopen the assessment u/s. 147 of the Act.

The Tribunal opined that in the light of the CBDT Instruction, the AO could not have enlarged the scope of the scrutiny, because there was no credible material or information before him for forming such a reasonable view that there is a possibility of under assessment of income. Therefore, the AO might have made a conscious decision not to take up the case for complete scrutiny as stipulated in CBDT Instruction.

The Tribunal opined that the PCIT misdirected himself in law and facts to find that AO failed to take up the case of assessment of assessee from Limited Scrutiny to complete scrutiny

Accordingly, the impugned action of PCIT was held to be unsustainable and quashed. The appeal was allowed in favour of the assessee.  

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