AO cannot examine any other issue except the issue as selected for limited scrutiny assessment: ITAT

Admitted position of facts in the present case before us is that the original scrutiny assessment was taken up for limited scrutiny under the following two heads:

i. Import turnover mismatch

ii. Custom Duty Payment Mismatch

The PCIT passed revision order to revise the assessment u/s.263 of the Act, for making disallowance of pre-operative expenses i.e. depreciation expenses debited only relating to employee benefits, administrative expenses, etc., amounting to Rs.1,40,01,528/-. According to the PCIT, the AO has accepted the claim of the assessee without making any due verification and without conducting the necessary enquiries. Hence, he set aside the assessment. Now before us, the same was challenged on the issue that once the assessment framed u/s.143(3) of the Act, by issuing notice u/s.142(1) of the Act, for limited scrutiny can PCIT revise the assessment order on some other issue, which is not connected with the issues raised in limited scrutiny by the AO.

ITAT Observation and Order

After going through the case law of the Hon’ble Madras High Court in the case of Smt. Padmavathi (supra) as well as the Tribunal decision in the case of M/s.Sahayamatha Salterns Pvt. Ltd. v. DCIT in ITA No.1498/Chny/2019 dated 11.12.2019 cited by the CIT-DR and also the case law cited by the Ld.Counsel for the assessee, at first, we have gone through various CBDT Instructions issued from time to time and for the sake of convenience and clarity, we extract the relevant portions thereof as under:

“CBDT Instruction No. 7/2014

The reason(s) for selection of cases under CASS are displayed to the Assessing Officer in AST application and notice u/s 143(2), after generation from AST, is issued to the taxpayer with the remark “Selected under Computer Aided Scrutiny Selection (CASS)”. The functionality in AST is being modified suitably to flag the reasons for scrutiny selection in AIR/CIB/26AS cases. This functionality is expected to be operationalized by 15th October, 2014. Further, the Assessing Officer while issuing notice under section 142(1) of the Act which is enclosed with the first questionnaire would proceed to verify only the specific aspects requiring examination/verification. In such cases, all efforts would be made to ensure that assessment proceedings are completed expeditiously in minimum possible number of hearings without unnecessarily dragging the case till the time-barring date.

CBDT Instruction No. 5/2016

“4. It is further clarified that in cases under ‘Limited Scrutiny/the scrutiny assessment proceedings would initially be confined only to issues under ‘Limited Scrutiny’ and Questionnaires, enquiry, investigation etc. would be restricted to such issues. Only upon comers ion of case to ‘Complete Scrutiny’ after following the procedure outlined above, the AO may examine the additional issues besides the issue(s) involved in ‘Limited Scrutiny’. The AO shall also expeditiously intimate the taxpayer concerned regarding conducting ‘Complete Scrutiny1 in such cases.”

CBDT Letter dated 30-11-2017

J Instances have come to notice of CBDT where some Assessing Officers are travelling beyond their jurisdiction while making assessments in Limited scrutiny cases by initiating inquiries on new issues without complying with mandatory requirements of the relevant CBDT Instructions dated 26-9-2014, 29-12-2015 and 14-7-2016. These instances have been viewed very seriously by the CBDT and in one case the Central Inspection Team of the CBDT was tasked with examination of assessment records on receipt of a I lee at ions of several irregularities. Amongst other irregularities, i; was found that no reasons had been recorded for expanding the scope of limited scrutiny, no approval was taken from the PCIT for the conversion of the limited scrutiny case to a complete scrutiny case and the order sheet was maintained very perfunctorily. This gave rise to a very strong suspicion of mala fide intentions.”

16. Now, under contentions are, the CBDT Instruction No.20/2015 dated 29.12.2015, which are relevant to the assessment year, the clause (b) &
(d) are very important, which clarifies the issue and for the sake of clarity, these are extracted as under:

b) The Questionnaire under section 142(1) of the Act in ‘Limited Scrutiny’ cases shall remain confined only to the specific reasons/issues for which case has been picked up for scrutiny. Further, the scope of enquiry shall be restricted to the ‘Limited Scrutiny’ issues.

d) During the course of assessment proceedings in ‘limited Scrutiny’ cases, if it comes to the notice of the Assessing Officer that there is potential escapement of income exceeding Rs. five lakhs (for metro charges, the monetary limit shall be Rs. ten lakhs) requiring substantial verification on any other issue(s), then, the case may be taken up for ‘Complete Scrutiny’ with the approval of the Pr. CIT/CIT concerned. However, such an approval shall be accorded by the Pr. CIT/CIT in writing after being satisfied about merits of the issue(s) necessitating ‘Complete Scrutiny’ in that particular case. Such cases shall be monitored by the Range Head concerned. The procedure indicated at points (a), (b) and (c) above shall no longer remain binding in such cases. (For the present purpose, ‘Metro charges’ would mean Delhi, Mumbai, Chennai, Kolkata, Bengaluru, Hyderabad and Ahmadabad).

17. Combined reading of instructions issued by CBDT and particularly, the CBDT Instruction No.20/2015 dated 29.12.2015, sub-clause (b) of Clause (3) categorically states that questionnaire issued u/s.142(1) of the Act, in a limited scrutiny case, shall remain confine only to the specific reasons/issues for which case has been picked up for scrutiny. Further, the scope of enquiry shall be restricted to the limited scrutiny issues. Sub clause (d) of Clause-3 further reads the expansion of the scope of limited scrutiny and there are certain conditionality. The conditionalities are that during the course of assessment proceedings, in a limited scrutiny case, if it comes to notice to the AO that there is a potential escapement of income exceeding Rs.5 lakhs for normal CIT charge and for metro CIT charge, monetary limit shall be Rs.10 lakhs requiring substantial verification on any other issue, then the case may be taken up for complete scrutiny with the prior approval of the PCIT/CCIT concerned. The another condition put forth by the CBDT is that such approval thereof accorded by the PCIT in writing after being satisfied about imports of the issues necessitating complete scrutiny in that particular case. Further condition that such cases shall be monitored by the Range Head and procedure indicated in Sub-clauses (a) (b) (c) above no longer be remain pending in such cases, which means and reading together clause (b) and (d) itself clarified that in case, the limited scrutiny cases are picked up for scrutiny assessment, the AO shall remain confine to the only reasons / issues for which case has been picked up for scrutiny and the scope of enquiry be restricted to the limited scrutiny issues only. The expansion of scope of scrutiny from limited scrutiny to complete scrutiny is that during the course of assessment proceedings, which comes to the notice of the AO that the potential escapement of income exceeding Rs.5 lakhs for normal CIT charge and exceeding Rs.10 lakhs for monetary limits for metro CIT charge. The case can be taken up for complete scrutiny with the approval of the PCIT / CCIT concerned, which means that the AO is empowered to enlarge the scope of limited scrutiny case to the complete scrutiny assessment in view of the above condition only and that also through quasi-judicial powers.

18. Now, we have to examine what the PCIT can do while invoking the revision power u/s.263 of the Act, for revising the assessment order framed by the AO. According to us, the AO while passing an order of assessment performs a quasi-judicial functions, revision power lies with the PCIT. It is trite law that the jurisdiction exercised by the revisional authority pertains to his appellate jurisdiction. The jurisdiction u/s.263 of the Act can be exercised only when the following two conditions are satisfied.

a) The order passed by the AO should be erroneous and
b) It should be prejudicial to the interest of the Revenue.

These conditions are conjective. The order of assessment passed by the AO cannot be interfered by any other reason. The object of the provisions of Sec.263 of the Act, is to correct an order which is erroneous as well as prejudicial to the interest of the Revenue. The purpose behind incorporating the said provision in the statute is to ensure that interest of the Revenue is safeguarded against erroneous order passed by the AO as the Department, has no right to file an appeal against the order of the AO. It has no power as a substitute of the power of the AO to make assessment, whereas the revision power u/s.263 of the Act, is certainly available where the order of the AO is erroneous as well as prejudicial to the interest of the Revenue. But, according to us, there is no straight jacket formula for categorizing an order to be erroneous as well as prejudicial to the interest of the Revenue, but depends upon the facts of each case.

19. In the present case, now whether the AO has power to examine in other aspect in a limited scrutiny or not is vital question. The CBDT Instruction No.20/2015 dated 29.12.2015 sub-clause (b) to Clause (3) categorically limits the power in limited scrutiny case and which confines only to the specific reasons/issues for which case has been picked up for scrutiny and further, the scope of enquiry shall be restricted to limited scrutiny issues only. This is the clear intention of the CBDT. Further, going through the above said instructions, we noted that the limited scrutiny can be enlarged to complete scrutiny, but subject to certain conditions that during the course of assessment proceedings, if it comes to the notice of the AO that there is a potential escapement of income exceeding Rs.5 lakhs in normal CIT charge and in metro CIT charge Rs.10 lakhs requiring special verification on any other issue, then he can take up for complete scrutiny with the approval of the PCIT concerned. But, in this case, the AO was not of such view that any other issue requires verification. The above CBDT Instructions later clearly establishes that it is not open for the AO to travel beyond the reasons for selection of the scrutiny for limited scrutiny and on that aspect the assessment order completed in this case in accordance with the CBDT Instruction No.20/2015 dated 29.12.2015.

20. In view of the above discussions, considering the instruction issued by the CBDT No.20/2015 dated 29.12.2015 and in particular sub-clause (d) of Clause-3, we are of the view that once the AO cannot examine any other issue except the issue as selected for limited scrutiny assessment, the PCIT can examine the only issue which was before the AO during the course of scrutiny assessment and not any other issue, which has not been subject matter of the AO for the assessment in a limited scrutiny assessment. Hence, we quash the revision order and allow the appeal filed by the assessee.

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