Revision u/s 263 on issues not covered under limited scrutiny quashed as AO could not had gone into those

Revision u/s 263 on issues not covered under limited scrutiny quashed as AO could not had gone into other issues

ABCAUS Case Law Citation
ABCAUS 3483 (2021) (04) ITAT

Important case law relied referred:
Sanjib Kumar Khemka
M/s Chengmari Tea Co. Ltd.

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

The assessee’s case was taken up for limited scrutiny under CASS. The case had been selected for limited scrutiny under CASS.  From a perusal of the same, we note that the reason for limited scrutiny was for three items only.

The assessee had replied to the notice of AO and the AO after going through the submissions and replies along with supporting documents and after hearing the assessee, the AO passed the assessment order wherein he assessed the total income u/s 115JB of the Act.

The CIT issued a show cause notice (SCN) u/s 263 of the Act to interfere and revise the assessment order passed by the AO. The only issue pointed out by the PCIT in the SCN was regarding deduction on account of Insurance premium to the house property from which rental income had been offered under the head ‘Income from House Property’ after claiming standard deduction u/s 24 of the Act.

The assessee filed its reply objecting to the very invocation of revisional jurisdiction by PCIT.

The assessee clearly stated that his case was selected for scrutiny assessment only for the limited scrutiny under CASS for the three items discussed supra and issue of deduction was not mentioned in the reasons for scrutiny. It was pointed out by the assessee that the insurance premium was mainly related to Keyman Policy and not related to house property as alleged by the PCIT. Hence, it was not been added back to the income and in fact the amount incurred on account of Insurance premium on house property was much less and was duly added back by the assessee to the income while computing the ‘income from business and profession’ as per section 37 of the Act.

It was contended that in view of the above, the assessment order passed by the A.O u/s 143(3) of the Act was not erroneous, therefore, section 263 proceedings were not maintainable.

It was also pointed out by the assessee that as per CBDT Instruction No. 7/2014 dated 26.09.2014 the field officers were directed to confine their enquiries strictly to CASS reasons and they were not permitted to make enquiries in respect to the issues for which case was not selected for limited scrutiny. It was therefore contended that when the CBDT has prohibited the AO from making any other enquiries other than on the issues for which limited scrutiny has been selected for by CASS, the AO could not had gone into any other issues now raised by the PCIT.

Therefore, the case of the assessee before the Tribunal was that by exercising jurisdiction u/s 263 of the Act was akin to PCIT trying to do indirectly what the AO could not have done directly.

The Tribunal opined that the PCIT could not have exercised his revisional jurisdiction on the issue on which he found fault with the action/omission on the part of AO because in the first place the AO could not have been faulted for not conducting any enquiry on the issue of Keyman Policy, since the assessee’s case was selected for scrutiny only for limited purpose under CASS and the issue of Insurance Keyman Policy was not the reason for selection of the case for limited scrutiny.

The Tribunal stated that it is settled law that CBDT circulars are binding on income tax authorities. Therefore, in such a scenario, the PCIT could not have invoked jurisdiction u/s 263 of the Act because he could not have held the AO’s order to be erroneous because the AO was justified in not enquiring in to the issue of Insurance Premium (Keyman Policy).

Therefore, held that the very initiation of jurisdiction by issuing SCN itself was bad in law and therefore it was quashed. Consequently, all further actions/proceeding including the impugned order of PCIT was non-est in the eyes of law.

Thus, the appeal was allowed in favour of the assessee. 

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