Business Loss Claim was Properly Examined during Income Tax Original Assessment: ITAT Quashes Revision Order [Read Order]

The bench of the Income Tax Appellate Tribunal, Mumbai, held that the revisionary jurisdiction invoked under Section 263 of the Income Tax Act, 1961, could not be sustained since the issues forming the basis of revision had already been duly examined and enquired into during the scrutiny assessment, and certain issues were outside the scope of limited scrutiny.

The appeal was filed by Sameer Ramesh Vashi, an individual engaged in the business of real estate development through his proprietary concern, M/s Samrock Developers. He had filed his return of income declaring ₹1,15,93,120 after setting off a business loss of ₹1,24,19,223. The case was selected under limited scrutiny for the verification of business loss and agricultural income.

The Assessing Officer (AO) issued several notices under Section 142(1), examined the expense details, enquired into deemed rental aspects, and completed the assessment under Section 143(3) accepting the returned income. Subsequently, the Principal Commissioner of Income Tax, Mumbai (PCIT), passed a revisionary order under Section 263 holding that the assessment was erroneous and prejudicial to the Revenue and directed fresh assessment.

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Represented by Dr. K. Shivaram, and Rahul Hakani, the appellant contended that the AO had already conducted a detailed enquiry on business loss through specific queries in the notices issued under Section 142(1). The counsel submitted that as the scrutiny was strictly limited, the AO was not permitted to travel beyond the selected issues, so the allegations regarding non-assessment of deemed rental income could not be a ground for revision.

It was further argued that IND AS-115 applies only to incorporated entities under the Companies Act, 2013, and therefore the PCIT’s reliance on the same was incorrect. It was contended that all administrative expenses were legitimately incurred for business purposes and were not required to be capitalised.

Represented by Satyaprakash R. Singh, the Revenue urged that although replies were filed, the Assessing Officer did not adequately verify the materials submitted and therefore failed in conducting proper scrutiny. It was argued that such inadequate enquiry rendered the assessment order erroneous and prejudicial to the interests of the Revenue, warranting revision under Section 263.

The bench of Judicial Member, Amit Shukla and Accountant Member, Girish Agrawal held that there was no lack of enquiry in respect of the issues covered under limited scrutiny. The Tribunal observed that the AO had specifically examined the claim of business loss and called for and reviewed relevant supporting evidence such as ledger extracts, bills, and vouchers.

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It was ruled that since the deemed rental income issue was not part of limited scrutiny and therefore the PCIT could not expand its scope through revision proceedings. The Tribunal reiterated that for invoking Section 263, the PCIT must clearly establish that the order is both erroneous and prejudicial to the interest of the Revenue, and cannot merely proceed based on disagreement with the AO’s plausible view.

The bench relied upon precedents such as the judgement of Malabar Industrial Co. Ltd. v. CIT (2000), the Tribunal held that the PCIT failed to independently examine the record or demonstrate unsustainability in law before directing a reconsideration. The revisionary order was therefore quashed.

Thus, the appeal was allowed.

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