ITAT Invalidates Section 263 Revision: Questions PCIT's Limited Scrutiny Jurisdiction under Income Tax Act [Read Order]

In a recent ruling decision, the Kolkata Bench of the Income Tax Appellate Tribunal (ITAT) quashed the revisionary order under Section 263 of the Income Tax Act,1961, passed by the Principal Commissioner of Income Tax (PCIT), for the assessment year (AY) 2017-18. The appeal to the ITAT was filed against PCIT’s action, alleging invalid exercise of jurisdiction.

The assessee, Arabinda Paul, filed for his income tax return for the AY 2017-18, declaring a total income ₹4 Lakhs. The case was selected for limited scrutiny to verify cash deposits made during the AY. The assessment was concluded under Section 143(3), with the assessing officer (AO) accepting the returned income after verification of evidence.

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The assessee moved an appeal to the PCIT, where it was observed that there were certain discrepancies regarding certain investments made as loans and advances amounting to ₹78 Lakhs to four parties, for which there were no supporting documents submitted as evidence. The PCIT invoked Section 263, stating that the AO failed to check these transactions, leading to an underassessment of income. The PCIT directed a fresh assessment to be made on the assessee.

Aggrieved by the PCIT’s order, the assessee appealed to the ITAT and contended that the case was selected for limited scrutiny for examining cash deposits as per the notice issued to the assessee under Section 143(2). The assessee contended that the AO assessed the matter within the scope of limited scrutiny and the order was neither wrong nor prejudicial to the revenue; however, the PCIT’s order violated the legal provisions established by the Supreme Court in the case of Malabar Industrial Co.Ltd vs CIT, in which it was held that to invoke provisions of Section 263 both erroneous order and prejudice to revenue must be satisfied. The assessee asserted that these conditions had not been met in the present case.

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After deliberate observations, the tribunal held that the AO adhered to the limited scrutiny extent, examining cash deposits based on the notice issue and the submissions made by the assessee. The ITAT observed that PCIT’s jurisdiction under Section 263 could not be invoked to address issues outside the scope of limited scrutiny unless the case was converted to full scrutiny.

The tribunal further held that the revisionary order failed to establish the conditions considered to be mandatory to invoke Section 263 as per the judgement given by the Supreme Court in the case of Malabar Industrial Co Ltd vs CIT as a mere disagreement with the AO’s conclusions does not render the order erroneous or prejudicial to the revenue.

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The ITAT, consisting of Rajesh Kumar (Accountant Member) and Pradip Kumar Chaoubey (Judicial Member), concluded that the PCIT’s order under Section 263 was invalid and quashed. As a result, the appeal filed by the assessee was allowed

To Read the full text of the Order CLICK HERE

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