Case Law Details
Shail Gas Pvt Ltd Vs PCIT (ITAT Delhi)
ITAT Delhi held that order under section 263 of the Income Tax Act passed on the issues for which no show cause notice has been issued is unjustifiable and hence liable to be quashed.
Facts- The assessee filed return of income on 30.03.2016 declaring Nil income and the assessment u/s 143(3) was completed on 09.08.2017 assessing the total income at Rs.21,630/- after making disallowance u/s 14A of the Income Tax Act, 1961. Thereafter PCIT exercising its jurisdiction u/s 263 issued show cause notice on 24.03.2021 fixing matter for 26.03.2021 with the allegation that AO failed to omitted to consider issue in respect of income u/s 56(2)(via). After receiving the replies from the assessee, PCIT set aside the Assessment Order and directed the AO to assess the case afresh. Being aggrieved, the present appeal is filed.
Conclusion- Order u/s 263 based partially on the issue raised in the notice and also on entirely new issue without any SCN or without providing any opportunity is beyond the mandate of section 263.
Held that, the order of the ld. PCIT passed u/s 263 cannot be affirmed owing to the reasons of, i) the order is passed beyond jurisdiction, ii) the order passed is beyond the limited scrutiny, iii) the order has been passed on the issues for which no show cause notice has been issued, iv) the issues flagged by the ld. PCIT have examined by the AO, v) the decision of the ld. PCIT determining the difference on the value of the shares at Rs.1.50 per share is against the provisions of the Act as the assessee can resort to the method of valuation as per DCF/NAV as per Rule 11UA at their discretion.
FULL TEXT OF THE ORDER OF ITAT DELHI
The present appeal has been filed by the assessee against the order of ld. PCIT, Delhi-7 dated 31.03.2021.
2. Following grounds have been raised by the assessee:
“1. Because the Ld. Pr. CIT erred in law and on facts in invoking the provisions of Sec. 263 of the Income-tax Act, 1961 and issued notice on 24/03/2021, assuming jurisdiction illegally without satisfying the mandatory jurisdictional conditions as per law, and therefore the initiation of proceedings u/s 263 of the Act, is grossly illegal, arbitrary, without application of mind, without jurisdiction, and bad in law, and thus the entire revision proceedings are liable to be quashed.
2. Because the Ld. Pr. CIT initiated revision proceedings by issuing Notice on 24/03/2021 fixing the date of hearing on 26/03/2021, and thereafter passed the order on 31/03/2021, without any proper opportunity of being heard and thus the order passed is in gross violation of the principles of natural justice, and thus liable to be quashed.
3. Because the Ld. Pr. CIT erred in law and on facts in passing the order u/s 263 of the Act on 31/03/2021, without appreciating the facts of the case, without inquiring into the evidence on record, in an grossly arbitrary manner, without satisfying the mandatory jurisdictional conditions as per law, and therefore the order passed u/s 263 of the Act, setting aside the assessment order and directing the AO to assess the case afresh, is grossly illegal, arbitrary, without application of mind, without jurisdiction and bad in law, and thus liable to be quashed.”
3. The assessee filed return of income on 30.03.2016 declaring Nil income and the assessment u/s 143(3) was completed on 09.08.2017 assessing the total income at Rs.21,630/- after making disallowance u/s 14A of the Income Tax Act, 1961. Thereafter Ld. PCIT exercising its jurisdiction u/s 263 issued show cause notice on 24.03.2021 fixing matter for 26.03.2021 with the allegation that AO failed to omitted to consider issue in respect of income u/s 56(2)(via). After receiving the replies from the assessee, the ld. PCIT set aside the Assessment Order and directed the AO to assess the case afresh after examining the issues namely,
- Value of the investment in unquoted equity of M/s Sanvaria Gas Pvt. Ltd. as per Rule 11UA of the Income Tax Rules, 1962 r.w.s 56(2)(viia) of the Income Tax Act, 1961.
- The Long Term loans advanced, sources thereof and receipt of income and interest thereon.
4. Aggrieved, the assessee filed appeal before the Tribunal.
5. The main arguments of the ld. AR were that the case has been originally selected for limited scrutiny by CASS and hence the issues that were examined by the ld. PCIT were beyond the scope of limited scrutiny and hence beyond jurisdiction. Secondly, the ld. AR argued that the ld. PCIT has directed the AO to examine the issue of Long Term loans advanced, even though the issue is beyond the scope of limited scrutiny and also without issuing any show cause notice on this head. On the other hand, the ld. DR relied on the order of the ld. PCIT and argued that the AO has not conducted sufficient enquiries and verifications which should have been made.
6. Heard the arguments of both the parties and perused the material available on record.
7. We find that the case of the assessee was selected for limited scrutiny u/s 143(2) of the Income Tax Act, 1961 for A.Y. 2015-16. The assessment proceedings for A.Y. 2015-16 were initiated vide notice dated 27.07.2016 as is also mentioned in the Assessment Order and reproduced in the impugned order u/s 263.
8. The points taken up for limited scrutiny are, 1) low income in comparison to high loan advances, investment in shares, 2) low income in comparison very high investment & 3) large increase in investment in unlisted equities during the year.
9. Notice u/s 142(1) dated 09.08.2016 issued and queries raised specifically on issues under ‘limited scrutiny’ vide point 10 to 12 of questionnaire. The assessee duly submitted the documentary evidence in relation to the all the queries and explained reason to low income to investments made with the source of investment in unlisted equities with reason thereof.
10. The AO conducted direct enquiries u/s 133(6) to verify the genuinity and source of investment in unlisted equities. The AO after duly considering replies and material on record including 133(6) replies, completed the assessment proceedings u/s 143(3) vide Assessment Order dated 09.08.2017 after making disallowance of Rs. 21,633/- u/s 14A of Act.
11. Before the ld. PCIT, the assessee filed its reply on 26.03.2021 including Valuation Certificate by Chartered Accountant along with duly verified balance sheet on the valuation date 28.02.2015 by him and audited/approved balances sheet as on 31.03.2015 in support of valuation of market rate in terms of Rule 11UA, whereby it was demonstrated that FMV of equity share as on date of valuation 28.02.2015 is Rs. 9.94 per share and as on 31.03.2015 is Rs.9.79 per share.
12. The proceedings u/s 263 were completed on 31.03.2021 setting aside the original assessment order dated 09.08.2017 with the direction to examine two issues afresh:
a. Value of investment u/s 56(2)(via) read with rule 11UA to ascertain income under that provision —Issue referred in SCN though with changed basis.
b. Sources of long terms loans with income thereon.
13. From the record and the order of the ld. PCIT, we find that no show cause notice has been issued to the assessee asking for any explanation with regard to sources of long terms loans with income thereon, however, the same has been directed to be examined by the Assessing Officer. The ld. PCIT has fall into error by directing the AO on the issue for which no show cause has been issued to the assessee.
14. Further, we find that the case was selected for “limited scrutiny” to enquire large investment in unquoted share and ld. AO duly examined the source and genuinity of such investment with reason thereof whereby assessee had a vested interest in Sanwariya Gas Ltd., as per scope and ambit of limited scrutiny, therefore the issue of valuation of shares with applicability of provisions of section 56(2)(viib) as raised in SCN u/s 263 being beyond the scope of “limited scrutiny” is also beyond the scope of section 263.
15. Reliance is placed on the following Judicial Pronouncements:
i) PCIT vs. Shark Mines and Minerals (P.) Ltd. [2023] 151 com 71 (Orissa)
“9. Indeed, the Court finds that the Madras High Court has while affirming the decision of ITAT in Smt. Padmavathi (supra) taken the view that while exercising suo motu revisional power under section 263 of the Act, the CIT cannot travel beyond the scope of the issues which form part of the ‘limited scrutiny’ in the original Assessment Order. This Court concurs with the above view.
10. What persuades this Court to reach this conclusion is the requirement in law that if the AO has to go beyond the scope of the issues for which ‘limited scrutiny’ has to be undertaken by him, he has to seek prior permission of the superior officer in terms of the CBDT Instruction No. 7/14 dated 26th September, 2014 and Instruction No. 20/15 dated 19th December, 2015. Consequently, it was not open to the Pr. CIT while exercising suo motu revisional power under section 263 of the Act to find fault with the assessment order of the AO on the ground of its being erroneous on an issue not covered by the ‘limited scrutiny’ when the AO could not have possibly examined such issue. To reiterate, in the present case, the limited scrutiny was in respect of excess disallowance under section 40A(3) of the Act whereas the SCN under section 263 was regarding the FIFO method of valuation of closing stock adopted by the Assessee. These were, as rightly noted by the IT A T, unconnected issues and the assessment order could not have been held to be “erroneous and prejudicial to the interest of Revenue” when the AO could not have travelled beyond the issues forming subject matter of the ‘limited scrutiny.’
ii) CIT vs. Smt. Padmavathi [2020] 120 com 187 (Madras)
“15. The substantial question nos. 1 and 2 are interconnected namely, the power of the PCIT under section 263 of Act and whether he could have set aside the assessment on the ground that the assessing officer did not invoke Section 56(2)(vii)b(ii). The reading of the assessment order shows that the case was selected for limited scrutiny only on this aspect regarding the sale consideration paid by the assessee for purchase of the immovable property and the source of funds. The assessing officer has noted that the sale consideration paid by the assessee was Rs. 41,50,000/- and she has paid stamp duty and other expenses of Rs. 5,75,000/-. The source of funds was verified and the assessing officer was satisfied with the same. The PCIT while invoking his power under section 263 of Act, faults the assessing officer on the ground that he did not make proper enquiry. It is not clear as to what in the opinion of the PCIT is ‘proper enquiry’. By using such expression, it presupposes that the assessing officer did conduct an enquiry. However, in the opinion of the PCIT, the enquiry was not proper in absence of not clearly stating as to why in the opinion of PCIT, the enquiry was not proper, we have to necessarily hold that the invocation of the power under section 263 of the Act was not justified.”
iii) Naga Dhunseri Group Ltd. [2023] 146 taxmann.com 424 (Calcutta)
“(iii) Whether on the facts and circumstances of the case and in law Learned Income-tax Appellate Tribunal is justified in not appreciating the facts that one of the reasons for selection of the case for limited scrutiny was to verify the introduction of capital in NBFC/In vestment Companies which is connected with the issue of disallowance under section 14A of the Income-tax Act, 1961?”
6. A bare reading of the above instruction clearly shows that the PCIT cannot make a roving enquiry in the guise of a limited scrutiny and as such the instruction issued by the CBDT is binding on the Department.’
16. Order u/s 263 based partially on the issue raised in the notice and also on entirely new issue without any SCN or without providing any opportunity is beyond the mandate of section 263.
17. Further, reliance is placed on the following case laws:
(i) Krishak Bharati Cooperative Ltd. Vs. ACIT [2016] 67 taxmann.com 138 (Delhi)
“14. Keeping in view of the facts and circumstances of the case and the precedents relied upon, the validity of the order passed u/s. 263 needs to be considered. As per the admitted position, show cause notice was issued only with regard to one issue whereas order u/s. 263 has been passed on certain other issues also as discussed above. Admittedly on the other issues, we find that there was complete denial of opportunity to the assessee-society, which is violative of well established principles of natural justice……………..In the case of Ashish Rajpal (supra), the Hon’ble Delhi High Court have further observed that the threshold condition for setting aside the assessment u/s. 263 is that before passing an order, opportunity has to be granted to the assessee and such opportunity is a necessary concomitant of the inquiry the Commissioner is required to conduct to come to a conclusion. The defect of not allowing opportunity cannot be cured by first reopening assessment and then granting an opportunity to respond to the issue before the Assessing Officer during the course of the fresh assessment proceedings. Having regard to the legal position emerging from various cases including Hon’ble Jurisdictional High Court case, we are of the view that lack of opportunity on some of the issues in the show cause notice, vitiates the proceedings u/s. 263 and consequently the order u/s. 263 passed by the learned PCIT is also rendered bad in law.”
Above case is affirmed in CIT vs. Krishak Bharati Cooperative Ltd. (2017) 80 taxmann.com 326(DEL HC)
(ii) B.S. Sangwan vs. ITO [2015] 53 taxmann.com 402 (Delhi)
“where specific addition sought to be made as per SCN but ultimately directed to conducted enquiries on the issue thus the basis is changed which is not allowable u/s 263.”
(iii) Electra Paper and Board Pvt. Ltd. vs. Income Tax Officer in ITA No. 222/Chd./2021
“8 In other words, the twin conditions mandated under Rule 11U(b) for a balance sheet on the basis of which valuation is to be made i.e.
(i) The Balance Sheet should be drawn of the date of valuation; and
(ii) The Balance Sheet should be audited by the Auditors of the Company appointed under the provisions of the Companies Act;
are satisfied in present case. In our considered opinion, the emphasis is on drawing of balance sheet on the date of valuation. The rule does not mandate that the balance sheet should also be audited on the date of valuation. Even if the balance sheet is audited subsequently, it would be sufficient compliance of the provisions of Rule 11U(b). However, in spirit and purpose of the provisions of rule defining ‘balance sheet ’, there should not be material change in the financials of the Balance Sheet after audit so that it may not lose the tenacity and relevance of ‘balance sheet on the date of valuation ’.
9. In light of the facts discussed above, we hold that the balance sheet on the basis of which FMV of shares allotted on 31.3.2016 was determined by the assessee falls within the meaning of ‘Balance Sheet’ as envisaged under Rule 11U. Hence, we find no error in the FMV of shares determined by the assessee on the basis of balance sheet drawn on 31.3.2016.”
18. Hence, keeping in view the entire facts and circumstances of the case and the judicial pronouncements mentioned above, we hold that, the order of the ld. PCIT passed u/s 263 cannot be affirmed owing to the reasons of, i) the order is passed beyond jurisdiction, ii) the order passed is beyond the limited scrutiny, iii) the order has been passed on the issues for which no show cause notice has been issued, iv) the issues flagged by the ld. PCIT have examined by the AO, v) the decision of the ld. PCIT determining the difference on the value of the shares at Rs.1.50 per share is against the provisions of the Act as the assessee can resort to the method of valuation as per DCF/NAV as per Rule 11UA at their discretion.
19. In the result, the appeal of the assessee is allowed.
Order Pronounced in the Open Court on 05/08/2024.
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