The Delhi bench of Income Tax Appellate Tribunal ( ITAT ) recently quashed an order passed under section 263 of the Income Tax Act 1961 ( ITAT ) by the Principal Commisioner of Income Tax ( PCIT ) noting that the order overreached beyond limited scrutiny jurisdiction.
The assessee, Shail Gas Pvt Ltd, filed a return of income on March 30, 2016, wherein a Nil income was declared.
The assessment was subsequently completed under Section 143(3) of ITA on August 9, 2017, wherein the total income was assessed at Rs. 21,630 after disallowing a certain amount under Section 14A of the Income Tax Legislature.
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However, in 2021, the PCIT exercised its jurisdiction under Section 263 of the tax statute and issued a show cause notice on March 24, 2021, alleging that the Assessing Officer ( AO ) failed to consider the issue of income under Section 56(2)(via) of ITA..
The PCIT fixed the matter for hearing on March 26, 2021.
After considering the replies from the assessee, the PCIT set aside the original assessment order by the AO, and directed the AO to re-examine specific issues, including the valuation of the assessee’s investment in unquoted equity shares of M/s Sanvaria Gas Pvt. Ltd. as per Rule 11UA of the Income Tax Legislature and the sources and interest received on long-term loans advanced by the assessee.
Aggrieved by the PCIT’s decision, the assessee filed an appeal before the Income Tax Appellate Tribunal (ITAT).
Before the tribunal, the assessee’s main arguments were centered on two primary contentions.
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Firstly, it was argued that the original case was selected for limited scrutiny under the Computer Assisted Scrutiny Selection (CASS) mechanism, and the issues now being examined by the PCIT were beyond the scope of this limited scrutiny, thereby making the PCIT’s assumption of jurisdiction illegal.
Secondly, the assessee argued that the PCIT had directed the AO to examine the issue of long-term loans advanced without issuing any show cause notice specific to this head, which constituted a violation of the principles of natural justice.
On the other hand, the Departmental Representative ( DR ) defended the PCIT’s order, contending that the AO had not conducted sufficient inquiries and verifications during the original assessment proceedings, thereby justifying the invocation of Section 263.
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Upon hearing the arguments and examining the material available on record, the bench of Mr BRR Kumar and Mr Sudhir Kumar found that the assessee’s case for the assessment year 2015-16 was indeed selected for limited scrutiny under Section 143(2) of the Income Tax Legislature.
It was observed that the limited scrutiny was specifically to verify three points: the discrepancy between low income and high loan advances or investments, the low income compared to significant investments, and the large increase in investment in unlisted equities during the year.
The bench noted that the AO had issued a notice under Section 142(1) of ITA on August 9, 2016, and raised specific queries under the limited scrutiny parameters, to which the assessee responded with documentary evidence to substantiate the sources and reasons for the investments made.
The AO even conducted direct inquiries under Section 133(6) of ITA to verify the genuineness and sources of the investment in unlisted equities. After considering all the material on record, the AO completed the assessment proceedings on August 9, 2017, under Section 143(3) of the tax statute, making a minor disallowance under Section 14A of ITA.
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It was further observed that during the proceedings before the PCIT, the assessee filed a detailed reply on March 26, 2021, including a valuation certificate from a Chartered Accountant and verified balance sheets.
The valuation of the unlisted equity shares of M/s Sanvaria Gas Pvt. Ltd. was provided, with the Fair Market Value (FMV) of the equity shares calculated as Rs. 9.94 per share as of February 28, 2015, and Rs. 9.79 per share as of March 31, 2015.
Despite this, the PCIT proceeded to pass an order under Section 263 of ITA on March 31, 2021, setting aside the original assessment order and directing the AO to re-examine the valuation of the investment under Section 56(2)(via) read with Rule 11UA and to scrutinize the sources of long-term loans and the income generated thereon.
ITAT noted a critical flaw in the PCIT’s order, observing that no show cause notice had been issued to the assessee concerning the sources of long-term loans, yet the PCIT had directed the AO to examine this issue.
This, the tribunal held, was a clear violation of the principles of natural justice.
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Furthermore, the ITAT pointed out that the issues raised by the PCIT were beyond the scope of the limited scrutiny under which the original assessment was conducted, rendering the PCIT’s directions improper and beyond jurisdiction.
The tribunal referred to several judicial precedents to support its conclusions. It noted that the PCIT, while exercising suo motu revisionary powers under Section 263 of the tax statute, could not exceed the scope of the issues originally subject to limited scrutiny.
Additionally, the ITAT emphasized that any direction issued by the PCIT without a proper show cause notice or without granting the assessee an opportunity to be heard was invalid.
Consequently, the ITAT quashed the order passed by the PCIT, upholding the original assessment order issued by the AO.
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