Assessment Order Cannot Be Revisioned Under Section 263 for Issues Beyond Limited Scrutiny Scope

ORDER

Madhusudan Sawdia, Accountant Member. – This appeal is filed by M/s. Vivessa Industries Private Limited (“the assessee”), feeling aggrieved by the order passed by the Learned Principal Commissioner of Income Tax-2, Hyderabad (“Ld. PCIT”) dated 20.02.2025 for the A.Y. 202021.

2. The assessee has raised the following grounds of appeal:

3. The brief facts of the case are that the assessee is a private limited company which had filed its return of income for the assessment year 2020-21 on 11.02.2021, declaring total Income of Rs. 29,72,220/- and agricultural income of Rs. 56,47,508/-. The case of the assessee was selected for limited scrutiny under CASS and, accordingly, notice under section 143(2) of the Income-tax Act, 1961 (“the Act”) was issued by the Assessing Officer. After considering the submissions of the assessee, the Assessing Officer was not satisfied with the claim of agricultural income of Rs. 56,47,508/- and treated the same as non-agricultural income. Accordingly, the Assessing Officer completed the assessment under section 143(3) read with section 144B of the Act vide order dated 19.09.2022, making an addition of Rs. 56,47,508/-and assessing the total income of the assessee at Rs. 86,19,728/-. Subsequently, the Ld. PCIT, invoking the revisional jurisdiction under section 263 of the Act, observed that the assessee had debited an amount of Rs. 23,41,200/-towards loss on sale of assets in the profit and loss account. According to the Ld. PCIT, the said loss was in the nature of capital loss and was not an allowable expenditure. The Ld. PCIT observed that the Assessing Officer had neither verified nor examined the claim of the assessee in respect of the aforesaid loss on sale of assets. Accordingly, the Ld. PCIT held that the assessment order was erroneous insofar as it was prejudicial to the interests of the Revenue within the meaning of Explanation- 2(a) and (b) to section 263(1) of the Act. The Ld. PCIT, vide order dated 20.02.2025, set aside the issue to the file of the Assessing Officer with a direction to disallow the amount of Rs. 23,41,200/- claimed towards loss on sale of assets and enhance the income of the assessee by the said amount.

4. Aggrieved by the order passed by the Ld. PCIT under section 263 of the Act, the assessee is in appeal before the Tribunal. The Learned Authorized Representative (“Ld. AR”) submitted that the only issue arising out of the grounds of appeal is regarding the validity of the revisional jurisdiction exercised by the Ld. PCIT under section 263 of the Act. Inviting our attention to para no. 1 of the assessment order, the Ld. AR submitted that the case of the assessee was selected for limited scrutiny for verification of two specific issues, namely, (i) high liabilities as compared to low income, and (ii) agricultural income. Thus, the case was not selected for complete scrutiny and the scope of enquiry of the Assessing Officer was restricted to the issues for which the case had been selected for limited scrutiny. The Ld. AR further submitted that the issue on which the Ld. PCIT has invoked jurisdiction under section 263 relates to the alleged failure of the Assessing Officer to verify the assessee’s claim of Rs. 23,41,200/- towards loss on sale of assets, which, according to the Ld. PCIT, was capital in nature and not allowable as expenditure. He submitted that the first issue for which the case was selected for limited scrutiny was “high liabilities as compared to low income”. The claim of loss on sale of assets had no nexus with the verification of liabilities and, therefore, examination of the allowability of such expenditure did not fall within the scope of the first issue selected for limited scrutiny.

4.1 With regard to the second issue, namely, verification of agricultural income, the Ld. AR invited our attention to para no. 3.5 of the assessment order wherein the Assessing Officer had specifically recorded that the assessee had claimed expenditure of Rs. 4,72,260/- against the agricultural income. He submitted that this itself demonstrates that the expenditure of Rs. 23,41,200/- towards loss on sale of assets was not related to the agricultural activity or agricultural income of the assessee. The scope of enquiry of the Assessing Officer under the second issue was confined to verification of the agricultural income and the expenditure relatable thereto. Therefore, the claim of Rs. 23,41,200/-towards loss on sale of assets was also outside the scope of the second issue selected for limited scrutiny. He further submitted that the Assessing Officer has not accepted the claim of the assessee for agricultural income of Rs.56,47,508/- and has added the same in the hands of the assessee.

4.2 The Ld. AR thus submitted that when the Assessing Officer was not required or authorized, in the course of limited scrutiny, to examine an issue falling outside the specified scope of scrutiny, his failure to examine such an issue could not render the assessment order erroneous merely on the ground that an enquiry contemplated under Explanation-2(a) or verification contemplated under Explanation-2(b) to section 263(1) of the Act had not been made. He, therefore, submitted that there was no lapse on the part of the Assessing Officer in not examining the claim of Rs. 23,41,200/- towards loss on sale of assets and, consequently, the conditions prescribed under section 263 of the Act were not satisfied. Accordingly, he prayed that the order passed by the Ld. PCIT under section 263 of the Act be set aside.

5. Per contra, the Ld. DR relied upon the order passed by the Ld. PCIT and submitted that the claim of Rs. 23,41,200/- towards loss on sale of assets was required to be verified by the Assessing Officer and such verification was covered within the scope of the limited scrutiny relating to high liabilities as compared to low income and agricultural income. The Assessing Officer having failed to make the necessary enquiry and verification, the assessment order was erroneous insofar as it was prejudicial to the interests of the Revenue within the meaning of Explanation-2(a) and (b) to section 263(1) of the Act. Accordingly, the Ld. DR submitted that there was no infirmity in the exercise of revisional jurisdiction by the Ld. PCIT and prayed that the appeal of the assessee be dismissed.

6. We have heard the rival submissions and perused the material available on record. We have gone through para no. 1 of the assessment order, which is to the following effect:

“The assessee company filed its return of income for the A Y 2020-21 on 11.02.2021 declaring income of Rs. 29,72,220/-. The assessee also claimed agriculture income for Rs. 56,47,508/-. The case was selected for limited scrutiny under CASS and the reason for selection of this case for scrutiny is for verification of

7. On perusal of the above, we find that the case of the assessee was selected for limited scrutiny and the scope of verification by the Assessing Officer was restricted to the following two issues: (i) high liabilities as compared to low income; and (ii) agricultural income. Thus, admittedly, the case of the assessee was not selected for complete scrutiny and the enquiry to be conducted by the Assessing Officer was confined to the aforesaid issues. The Ld. PCIT has invoked jurisdiction under section 263 of the Act on the ground that the Assessing Officer failed to examine the allowability of Rs. 23,41,200/-debited by the assessee in its profit and loss account towards loss on sale of assets. According to the Ld. PCIT, such loss was capital in nature and, therefore, could not have been allowed as an expenditure while computing the taxable income of the assessee. The question before us, therefore, is whether the Assessing Officer, in the course of the aforesaid limited scrutiny assessment, was required to examine this issue and whether his failure to do so could render the assessment order erroneous and prejudicial to the interests of the Revenue for the purpose of section 263 of the Act.

8. So far as the first issue of limited scrutiny, namely, “high liabilities as compared to low income”, is concerned, we find substance in the submission of the Ld. AR that examination of the allowability of loss on sale of assets does not fall within the ambit of verification of high liabilities. The issue identified for scrutiny required the Assessing Officer to examine the liabilities disclosed by the assessee vis-a-vis its income. The allowability or otherwise of a loss arising on sale of a capital asset is distinct from the verification of liabilities appearing in the accounts. Nothing has been brought before us by the Revenue to establish any nexus between the impugned loss on sale of assets and the liabilities which were required to be examined under the first issue of limited scrutiny.

9. Similarly, we find that the impugned expenditure does not fall within the scope of the second issue, namely, verification of agricultural income. In this regard, para no. 3.5 of the assessment order assumes significance, which is to the following effect:

“3.5 The main expenditure incurred for carrying on agriculture activity is Fertilizers, Manure and labour. For 281 acres of agriculture land the assessee has shown expenditure as low as of Rs. 4,72,260/-. The assessee was asked to furnish books of accounts and other documents in support of expenditure incurred. The assessee has filed balance sheet and P&L a/c. The assessee did not furnish any ledger account of fertilizers, sales registers, copies of sale bills, bank statement etc. to substantiate his claim.”

10. On perusal of the above, we find that the Assessing Officer has specifically recorded therein that the assessee had claimed expenditure of Rs. 4,72,260/- against its agricultural income. Thus, the expenditure pertaining to the agricultural activity was separately identified and examined by the Assessing Officer. There is nothing on record to suggest that the amount of Rs. 23,41,200/- representing loss on sale of assets had any connection with the agricultural activity or the agricultural income of the assessee. Therefore, examination of the allowability of the said loss cannot be regarded as forming part of the verification of agricultural income merely because the case of the assessee was selected for limited scrutiny on that issue. Further, we observed that the Assessing Officer has not accepted the claim of the assessee for agricultural income of Rs.56,47,508/- and has added the same in the hands of the assessee.

11. It is settled that in a case selected for limited scrutiny, the scope of enquiry of the Assessing Officer is ordinarily confined to the specific issues identified for scrutiny unless the limited scrutiny is converted into complete scrutiny in accordance with the prescribed procedure. Consequently, an assessment order cannot be held to be erroneous merely because the Assessing Officer did not conduct an enquiry into an issue which was outside the permissible scope of the limited scrutiny assessment. The revisional jurisdiction under section 263 of the Act cannot be exercised on the premise that the Assessing Officer ought to have examined an issue which he was not required to examine within the limited scope of scrutiny assigned to him. The reliance placed by the Ld. PCIT upon Explanation-2(a) and (b) to section 263(1) of the Act also does not advance the case of the Revenue. The deeming provisions contained therein regarding failure to make enquiries or verification which should have been made cannot be read in isolation from the lawful scope of the assessment proceedings before the Assessing Officer. Where the Assessing Officer was confined to specified issues in a limited scrutiny assessment, the enquiry or verification contemplated by Explanation 2 must necessarily be understood with reference to matters falling within such permissible scope. An enquiry into an issue falling wholly outside the scope of limited scrutiny cannot be regarded as an enquiry which the Assessing Officer “should have made” for the purpose of invoking Explanation 2(a) or 2(b) to section 263 (1) of the Act. In the present case, the issue relating to the allowability of Rs. 23,41,200/- towards loss on sale of assets was neither one of the issues identified for limited scrutiny nor shown to have any nexus with either of the two issues selected for verification. There is also nothing on record to show that the limited scrutiny was converted into complete scrutiny in accordance with the prescribed procedure. Therefore, the Assessing Officer cannot be faulted for not examining the allowability of the said loss while completing the limited scrutiny assessment.

12. In view of the above, we hold that the assessment order cannot be regarded as erroneous and prejudicial to the interests of the Revenue on account of the Assessing Officer’s failure to examine an issue which was beyond the scope of the limited scrutiny assessment. Consequently, the jurisdiction assumed by the Ld. PCIT under section 263 of the Act on the aforesaid issue is not sustainable. We, accordingly, set aside the impugned order passed by the Ld. PCIT under section 263 of the Act and restore the assessment order passed by the Assessing Officer.

13. In the result, the appeal of the assessee is allowed.