PCIT’s Different Views on Unrelated Issues do not Justify Invoking S.263 in Limited Scrutiny: ITAT [Read Order]

The Ahmedabad Bench of the Income Tax Appellate Tribunal ( ITAT ) ruled that the Principal Commissioner of Income Tax ( PCIT ) cannot invoke Section 263 of the Income Tax Act, 1961, simply because it holds differing views on issues that are unrelated to the original scope of limited scrutiny.

Hirenkumar Lavjibhai Kanani (assessee) filed his income tax return for the assessment year 2015-16 declaring Rs.4,79,940 as the total income. The assessing officer found that the assessee had received unsecured loans from Yash EPC Projects Pvt. Ltd., where the assessee held a significant shareholding. The assessing officer initiated reassessment proceedings under Section 147 of the Income Tax Act for limited scrutiny purposes.

The AO’s limited scrutiny proceedings aimed to verify the applicability of Section 2(22)(e) of the Act, which deals with Deemed Dividend. After considering the submissions from the assessee, the AO completed the assessment by adding Rs.3,50,000 to the total income of the assessee, treating it as deemed dividend.

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The Principal Commissioner of Income Tax ( PCIT ) found that the AO had not properly examined the assessment. PCIT initiated revisionary proceedings on the grounds that the AO failed to examine the cash deposits and purchase of two immovable properties. The PCIT set aside the AO’s order passed under Section 147 read with Section 144 and Section 144B, suggesting it was erroneous and prejudicial to the interests of the revenue.

Aggrieved by the PCIT’s order, the assessee appealed before the Ahmedabad Bench of ITAT where the assessee’s counsel contended that the reassessment was solely for verifying the applicability of Section 2(22)(e), and the AO completed the assessment appropriately on this limited issue. The counsel argued that the PCIT had wrongly invoked Section 236 on unrelated issues.

On the contrary, the revenue counsel argued that under Explanation 3 to Section 147, the AO is authorized to assess or reassess any income on any matter that comes to their attention during the reassessment proceedings, even if it was not initially included in the reasons recorded under Section 148(2).

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The two-member bench comprising Suchitra Kamble (Judicial Member) and Makarand Vasant Mahadeokar (Accountant Member) noted that the reassessment proceedings were initiated solely to examine the applicability of Section 2(22)(e) of the Act concerning deemed dividends and the  AO acted within his jurisdiction and made an addition based on his findings.

The tribunal acknowledged that Explanation 3 to Section 147 allows the AO to assess new issues that emerge during reassessment. However, the tribunal emphasized that the scope of reopening cannot be expanded by the PCIT beyond the original purpose of the reassessment.

The tribunal held that the PCIT’s invocation of jurisdiction under Section 263 was not justified because the order of the AO was neither erroneous nor prejudicial to the interests of the revenue concerning the issues for which the reassessment was originally initiated. Therefore, the tribunal set aside PCIT’s order and the appeal of the assessee was allowed.

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