Income Tax Appellate Tribunal - Kolkata
Nayek Paper Converters vs Asstt. Commissioner Of Income Tax on 30 November, 2004
Equivalent citations: [2005]93ITD144(KOL), (2005)93TTJ(KOL)574
ORDER
Limited scrutiny of the case made by AOOn the AO issuing notice under section 143(2)(i), the assessee realised that interest and penalty on sales tax and firm s income-tax were wrongly claimed in the original return. Thereafter, the assessee filed revised return and withdrew its claim on the aforestated items. The AO completed assessment under section 143(3)(i) on these limited issues. Subsequently, the CIT invoked section 263 and directed the AO to make comprehensive scrutiny of the assessee s case and termed the AO s order passed under section 143(3)(i) as erroneous and prejudicial.
Held: The grounds on which the assessment made by the AO under section 143(3)(i) had been set aside by the CIT were not permitted or covered while making an assessment on limited issues envisaged under section 143(3)(i) because on issuing notice under section 143(2)(i) only the order under section 143(3)(i) can be passed and not the order of comprehensive scrutiny as enumerated in section 143(3)(ii). Therefore, revision under section 263 was not in order.
Income Tax Act, 1961 s.143 ORDER C.L. Sethi, Judicial Member
1. The present appeal is filed by the assessee against the order passed under Section 263 of the Act by the ld.CIT, Burdwan in the matter of an assessment made under Section 143(3)(i) of the Income Tax Act. 1961 by the A.O. for the assessment year 2002-03.
2. Under various ground of appeal raised by the assessee, the assessee has agitated that the order of the ld.CIT made under Section 263 is bad-in-law and without jurisdiction inasmuch the assessment made by the A.O. under Section 143(3)(i) was neither erroneous nor prejudicial to the interest of the Revenue.
3. Material facts related to the issue in brief are as under :-
In the present case, the assessee, a partnership firm, filed its return of income for the year under consideration on 29th October, 2002 declaring a total income at nil. The return of income filed by the assessee was processed under Section 143(1) on 26-12-2002 and a refund of Rs. 31,840/- was granted to the assessee. It was noticed by the A.O. that the following deductions were claimed by the assessee in so far as they were debited in the Profit & Loss A/c. -
i) Interest and penalty on sales tax...............Rs. 22,287/-
ii) Firm's income-tax.................................Rs. 1,70,000/-
Rs. 1,92,287/-
The A.O. was of the view that these deductions were not legally admissible. The A.O., therefore, has taken up the case for scrutiny on these two limited issues and for that matter a notice under Section 143(2)(i) was issued on 5.2.2003 requiring the assessee to produce or cause to be produced the evidence or particulars in support of assessee's claim of deduction of the aforesaid two amounts. The assessee having received the notice issued by the A.O. under Section 143(2)(i) intimated in writing on 24.2.2003 that these deductions were wrongly claimed, and on realizing the mistake the assessee had filed a revised return on 18.2.2003 withdrawing the claim of said deductions. The A.O., therefore, completed the assessment under Section 143(3)(i) by taking the note of the revised return filed by the assessee. In other words, the aforesaid two deductions claimed by the assessee in the original return of income has stood disallowed and the total income was computed accordingly under Section 143(3)(i) of the Act.
4. Subsequently, the assessment records of the assessee for the year under consideration were examined by the ld.CIT and on examination thereof, the ld.CIT found that the A.O. failed to examine the following important aspects of the case :-
a) Examination of the balance-sheet for assessment year 2002-03 indicates that there were the following reduction of liabilities by you during the relevant previous year :-
i) HBFC Loan : Rs. 6,30,000/- ii) M/s. Auto Investors : Rs. 4,51,600/- iii) M/s. Tata Finance Ltd. : Rs. 1,68,000/- Total : Rs. 12,49,600/-
The source(s) of payment of the above amount were not examined or investigated by the A.O.
b) Schedule 'C' to the balance-sheet indicates that the following capital expenditure were made by the assessee during the relevant previous year :-
i)Factory shed and building : Rs. 12,936/- ii)Plant & Machinery, electrical Installation & tools & implements : Rs. 13,66,322/- Total : Rs. 13/79,258/-
The A.O. failed to examine or investigate the source(s) of the above investment.
c) Schedule 'D' to the profit & loss accounts indicates that there were the following increase in the expenditure items mentioned over that of the preceding year :-
i) Wages : Rs. 4,80,000/- ii) Fuel and lubrication for car. : Rs. 10,02,181/- Total : Rs. 14,82,981/-
Assessee's accounts indicate that the cost of production increased this year by [Rs. 79,31,330/- less Rs. 63,23,696/-] equal Rs. 16,07,634/-. The sale of finished goods increased by [Rs. 66,91,103/- less Rs. 53,72,503/-] equal Rs. 13,18,600/-. The aggregate increase in your output works out to Rs. 16,07,634/-plus Rs. 13,18,600/- equal Rs. 29,26,234/-. The increase in expenditure of Rs. 14,82,981/- is apparently incongruent with the increase of assessee's output. The A.O. failed to examine the increased expenditure vis-a-vis its relevance.
d) Schedule 'F' to the Profit & Loss Account shows a new item of expenditure of Rs. 2,22,094/- representing payment of commission. This was the first such claim made by the assessee. It needs be mentioned here that even this aspect of assessee's case was not examined by the A.O. while framing the assessment. The justification for such expenditure was thus not examined and scrutinized.
5. In view of the above alleged glaring patent omission on the part of the A.O. to scrutinise the assessee's case properly at all, the ld.CIT found that the order for the year under consideration passed by him under Section 143(3)(i) on 28-2-2003 to be erroneous and suffering from severe infirmities and constituting an assessment which is apparently prejudicial to the interests of revenue. The ld.CIT, therefore, proposed to revise the assessment order dated 28.2.2003 passed by the A.O. by virtue of the power vested on him under Section 263(1) of the Act. The ld.CIT, therefore, issued the notice dated 13.2004 under Section 263 to the assessee giving an opportunity of being heard to show-cause as to why the assessment order made by the A.O. is not to be revised as proposed by him in reply to the show-cause notice issued under Section 263, the assessee submitted before the id. CIT that the assessee was asked by the A.O. vide his notice under Section 143(2)(i) issued on 5.2.2003 to furnish explanations and submissions in respect of inadmissible deductions on account of the claim under the head (i) "interest and penalty on sales tax", & (ii) "Finn's income tax", and no any other further notice under Section 143(2) was ever received by the assessee and consequently the assessee did not receive any order under Section 143(3) dated 28.2.2003 as alleged by the ld.CIT. Even assuming that the initiation of the proceeding under Section 263 was in accordance with law the assessee submitted the detailed explanation in respect of items pointed out by the ld.CIT in his notice under Section 263 of the Act.
6. Having considered the reply of the assessee and considered the facts of the case, the ld.CIT ultimately passed an order under Section 263 of the Act on 24.5.2004 by holding that the assessment order passed on 28.2,2003 under Section 143(3)(i) of the Act was erroneous and prejudicial to the interests of the revenue, inasmuch as, the A.O. had failed to examine the case in all its totality. It is stated by the ld.CIT that the A.O. has failed to examine the aforesaid issues and the case in its entirety. He further stated that the A.O. failed to do his homework and instead framed the assessment order on 28.2.2003 in a rule-of- the thumb manner and thus A.O.'s order was not only erroneous and prejudicial to the interests of revenue but also -perverse in nature. The ld.CIT, therefore, cancelled the A.O.'s assessment order passed on 28.2.2003 under Section 143(3)(i) of the Act vide his impugned order made under Section 263 on 24.5.2004, and directed the A.O. to complete the same denovo and to reassess the income in the light of the directions given by him. Being aggrieved with the ld.CIT's order made under Section 263 cancelling the A.O/s assessment order passed on 28.2.2003 under Section 143(3)(i) of the Act, the assessee has preferred this appeal before the Tribunal.
7. The ld. Counsel for the assessee has contended that the order passed by the A.O. under Section 143(3)(i) was not erroneous and prejudicial to the interests of the revenue, and as such assuming the jurisdiction under Section 263 of the Act by the ld.CIT and then cancelling the assessment order made under Section 143(3)(i) by the A.O. is bad and not sustainable in the eyes of law. He further submitted that the assessee's case was selected for limited scrutiny as provided under Section 143(2)(i) on the point of deduction of interest & penalty on sales tax and first's income-tax, which was rightly disallowed by the A.O. while passing the order under Section 143(3)(i) dated 28.2.2003, and as such there could not be any error or mistake in the said order of the A.O. It was also submitted that the points now raised by the ld.CIT in the proceedings under Section 263 were not the subject matter of limited scrutiny made by the A.O. under Section 143(2)(i) and cannot be allowed to be enquired into in the disguise of exercising of his power under Section 263 of the Act. He further submitted that the Circular No. 176 F. No. RA/1/86187/DIT issued by the Director of Inspection (Audit), New Delhi, has clearly stated that no remedial action is necessary in summary assessment cases, as the revenue loss, if any, is consciously suffered by the Government to utilize resources for scrutiny and investigations of larger cases and the provisions of Section 263 should not be invoked in such cases.
8. The ld.D.R., on the other hand, submitted that since the A.O. has railed to examine the assessee's case in its entirety as pointed out by the ld.CIT in his notice under Section 263, it amounted to an order to be erroneous and prejudicial to the interests of the revenue, and as such the ld.CIT was well within his jurisdiction to cancel the A.O.'s order made under Section 143(3)(i) of the Act and in directing the A.O. to complete the assessment denovo in the light of his observations and findings given in the impugned order made under Section 263 by the ld.CIT. He further submitted that there is no bar in exercising power under Section 263 by the ld.CIT even in cases where the assessment was completed under Section 143(1). In support of this proposition, he relied on the decisions in the case of CIT v. Chidambaram Construction Co. reported in 261 ITR 754 (Mad.), CIT v. Smt. R.G. Umaranee reported in 262 ITR 507 (Mad.) and CIT v. Sri Mahasastha Pictures reported in 263 ITR 304 (Mad.).
9. We have considered the rival contentions of both the parties and have carefully perused the materials on record. It is an admitted position that the assessment order in question was completed by the A.O. on 28.2.2003 under Section 143(3)(i) of the Act. Therefore, to appreciate the controversy in its right and correct perspective, it is necessary to refer the provisions of Section 143 of the Act as were applicable to the year under consideration at the relevant point of time. The A.O.'s power to make the certain prima facie adjustment in the income or loss declared in the return of income as provided earlier tinder the provisions of Sub-section (1) of Section 143 prior to 1.6.1009 has been done away by the Finance Act, 1999 w.e.f. 1.6.1999. On and from 1.6.1999, the Sub-section (1) of Section 143 provides that where a return has been made under Section 139, or in response to a notice under Sub-section (1) of Section 142, if any tax or interest is found due on the basis of such return, after adjustment of any tax deducted at source, any advance tax paid, any tax paid on self assessment and any amount paid otherwise by way of tax or interest, than, without prejudice-to the provisions of Sub-section (2), an intimation shall be sent to the assessee specifying the sum so payable, and such intimation shall be deemed to be a notice of demand issued under Section 156 and all the provisions of this Act shall apply accordingly, and if any refund is due on the basis of such return, it shall be granted to the assessee and intimation to this effect shall be sent to the assessee. In other words, Sub-section (1) of Section 143 as effective on and from 1.6.99 provides for issuing an intimation specifying the sum found due on the basis of return and /or to grant the refund to the assessee found due on the basis of such return. No adjustment whatsoever in the returned income or loss has been provided in Sub-section (1) of Section 143 of the Act as operative from 1.6.1999.
10. Sub-section (2) of Section 143 as substituted by the Finance Act, 2002 w.e.f. 1.6.2002 is as under :-
"(2) Where a return has been furnished under Section 139, or in response to a notice under Sub-section (1) of Section 142, the Assessing Officer shall, -
(i) where he has reason to believe that any claim of loss, exemption, deduction, allowance or relief made in the return is inadmissible, serve on the assessee a notice specifying particulars of such claim of loss, exemption, deduction, allowance or relief and require him on a date to be specified therein to produce, or cause to be produced, any evidence or particulars specified therein or on which the assessee may rely, in support of such claim;
"(ii) notwithstanding anything contained in Clause (i), if he considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner, serve on the assessee a notice requiring him, on a date to be specific therein, either to attend his office or to produce, or cause to be produced, any evidence on which the assessee may rely in support of the return :
Provided that no notice under this sub-section shall be served on the assessee after the expiry of twelve months from the end of the month in which the return is furnished".
11. Sub-section (3) of Section 143 as substituted by the Finance Act, 2002 w.e.f. 1.6.2002 is as under :-
"(3) On the day specified in the notice,-
(i) issued under Clause (i) of Sub-section (2), or as soon afterwards as may be, after hearing such evidence and after taking into account such particulars as the assessee may produce, the Assessing Officer shall, by an order in writing, allow or reject the claim or claims specified in such notice and make an assessment determining the total income or loss accordingly, and determine the sum payable by the assessee on the basis of such assessment.
(ii) issued under Clause (ii) of Sub-section (2), or as soon afterwards as may be, after hearing such evidence as the assessee may produce and such other evidence as the Assessing Officer may be require on specified points, and after taking into account, all relevant material which he has gathered, the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him or refund of any amount due to him on the basis of such assessment".
12. Prior to the amendment in Section 143(2) and 143(3) of the Act made by the Finance Act, 2002 w.e.f. 1.6.2002, under procedure of assessment laid down in then existing Section 143, the A.O. if he considers it necessary or expedient, issues a notice under Section 143(2), requiring the assessee to produce any evidence which he may rely on in support of the return. Then Section 143(3) provides that after hearing such evidence and after taking into account all relevant material which he has gathered, the A.O. shall pass an order of assessment determining the total income or loss, and the sum payable or refundable to the assessee. By the Finance Act, 2002, Section 143(2) and 143(3) has been amended to introduce a concept of limited scrutiny on and from 1.6.2002 as contemplated under Section 143(2)(i) read with Section 143(3)(i) of the Act in addition to existing comprehensive scrutiny. However, the concept of limited scrutiny has now been done away with by the Finance Act, 2003 w.e.f. 1.6.2003.
13. On bare reading of the provisions of Clause (i) Sub-section (2) of Section 143 as effective from 1st June, 2002, it is clear that if an A.O. has reason to believe that an assessee has made a claim of any loss, exemption, deduction, allowance or relief which is inadmissible, the A.O. is empowered to issue notice under Section 143(2)(i) for a limited purpose to examine as to whether claim of any loss, exemption, deduction, allowance or relief made in the return is inadmissible and shall after hearing the assessee and taking into account such evidence and particulars as the assessee may produce, shall allow or reject the assessee's claim or claims of any loss, exemption, deduction, allowance or relief as specified in his notice issued under Section 143(2)(i) and then to make an assessment determining the total income or loss accordingly and determine the sum payable by the assessee on the basis of such assessment. In other words, where the A.O. has reason to believe that claim of loss, exemption, deduction, allowance or relief made in the return is inadmissible, the purpose of issuing notice under Section 143(2)(i) was to examine and consider the assessee's claim or claims of any loss, exemption, deduction, allowance or relief as specified by the A.O. in his notice issued under Section 143(2)(i) of the Act. The A.O. shall limit himself to the claims he had set out in the notice issued under Section 143(2)(i) to verify. The A.O. while assuming the power conferred upon him under Section 143(2)(i) read with Section 143(3)(i) cannot go beyond the limited subject matter of allowability or otherwise of the assessee's claim or claims of any loss, exemption, deduction, allowance or relief made in the return of income. In case, the A.O. considers that it was necessary or expeditious to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner, the A.O. is free to issue notice under Section 143(2)(ii) initiating comprehensive scrutiny of the return and then to complete the assessment under Section 143(3)(ii) of the Act as would be clearly evident from the reading of the provisions of Sub-section (2) & Sub-section (3) of Section 143 as effective from 1st June, 2002. It is provided in Section 143(2)(ii) that notwithstanding the fact that a case has been selected for limited scrutiny and notice under Clause (i) of Sub-section (2) of Section 143 has been issued, if the A.O. considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner, he is free to issue and serve on assessee, a notice under Clause (ii) of Sub-section (2) of Section 143 of the Act requiring him, on a date specified in the said notice, either to attend his office or to produce, or cause to be produced, any evidence on which the assessee may rely in support of the return and then, as provided in Sub-clause (ii) of Sub-section (3) of Section 143, on the day specified in the said notice, or as soon afterwards as may be, after hearing such evidence as the assessee may produce and such other evidence as the A.O. may require on specified points and after taking into account all relevant material which he has gathered, the A.O. shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by the assessee or refund of any amount due to the assessee on the basis of such assessment. It is thus clear that the purpose of notice issued under Section 143(2)(i) is not the same and one to that of notice issued under Section 143(2)(ii). The notice under Section 143(2)(i) may be issued where the A.O. has reason to believe that any claim of loss, exemption, deduction, allowance or relief made in the return is inadmissible, whereas, the notice under Section 143(2)(ii) may be issued where the A.O. considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under paid the tax in any manner. Consequently, the power of the A.O. under Section 143(3)(i) is limited to allow or reject the assessee claim of any loss, exemption, deduction, allowance or relief he had set out in the notice issued under Section 143(2)(i) verify and then to make an assessment determining the total income or loss and determine the sum payable by the assessee on the basis of such assessment; whereas in the case of comprehensive scrutiny initiated on issuing a notice under Section 143(2)(ii) the A.O. has power to make a comprehensive assessment of the total income or loss of the assessee, and determine the sum payable by him and refund of any amount due to him on the basis of such "assessment as spelt out in the Clause (ii) of Sub-section (3) of Section 143 of the Act. The amended provisions of Sub-section (2) and (3) of Section 143 provides for making two types of assessment, one being assessment on limited points as specified in Clause (i) of Sub-section (2) and (3) of Section 143 and the other being comprehensive assessment as provided under Clause (ii) of Sub-section (2) and (3) of Section 143 of the Act. There is no bar under the Act to issue notice under Section 143(2)(ii) and then to complete the assessment under Section 143(3)(iii) even in cases where a notice under Section 143(2)(i) has already been issued or an assessment has been made under Section 143(3)(i) provided the same is served within the period specified in the proviso to Sub-section (2) of Section 143 of the Act, It is provided in Section 143(2)(ii) that notwithstanding anything contained in Clause (i) of Sub-section (2) of Section 143, notice under Section 143(2)(ii) can be issued for comprehensive scrutiny and assessment under Section 143(3)(ii) can be made accordingly.
14. In the present case before us, no notice under Section 143(2)(ii) was ever issued by the A.O. to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner, and as such no question of making comprehensive scrutiny as contemplated by Clause (ii) of Sub-section (2) of Section 143 and then completing the assessment under Section 143(3)(ii) did or could arise. The case before us is a case where notice under Section 143(2)(i) was only issued to examine and verify the assessee's claim of deduction on account of interest and penalty on sales tax and firm's income-tax, and then to allow or reject the said claim specified in the said notice issued under Section 143(2)(i) and to make an assessment determining the total income or loss accordingly under Section 143(3)(i) of the Act. In other words, the impugned assessment order made by the A.O. is under Section 143(3)(i) and not under Section 143(3)(ii) of the Act. It is, therefore, to be seen as to whether the assessment order made by the A.O. under Section 143(3)(i) on 28.2.2003 is erroneous and prejudicial to the interest of the revenue for the reasons as pointed out by the ld.CIT in his order made under Section 263 of the Act. A copy of notice issued under Section 143(2)(i) of the Act is placed on record, and on perusing the same, it is seen that the said notice was issued with a view to examine and verify the assessee's claim of deduction on account of interest and penalty on sale tax and firm's income-tax. By the impugned notice issued under Section 143(2)(i) of the Act, the assessee was asked to produce, or cause to be produced, the evidences and particulars in support of its claim on account of interest and penalty on sale tax and firm's income-tax. These two items specified by the A.O. in his notice issued under Section 143(2)(i) were duly examined and verified by the A.O., and were disallowed by the A.O. as the assessee himself admitted that these two items were inadmissible. Since, in the assessment order accordingly made under Section 143(3)(i) of the Act, these two claims made by the assessee in the original return had stood disallowed, and as far as the disallowability of these two items are concerned, no infirmity or illegality is found in A.O.'s order, the order passed by the A.O. under Section 143(3)(i) in pursuance to his notice issued under Section 143(2)(i) of the Act is found to be in accordance with the provisions of law contained in the Sections 143(2)(i) and 143(3)(i) of the Act. The ld.CIT has not pointed out any defect or illegality or irregularity in the A.O.'s order made under Section 143(3)(i) by saying that the A.O. has failed to examine and verify the claims specified, in his notice issued under Section 143(2)(i) of the Act or the A.O. has allowed the assessee's said claim wrongly. The A.O.'s order under Section 143(3)(i) was only for a limited purpose to examine and verify the assessee's claim of deduction on account of interest and penalty on sale tax and firm's income-tax and then to allow or reject the same and then determine the total income or loss accordingly as provided under Section 143(3)(i) of the Act. No other item or matter other man the items specified in the notice issued under Section 143(2)(i) could be dealt with or examined or verified or adjudicated upon by the A.O. while passing the order under Section 143(3)(i) of the Act. In the present case, the A.O.'s power to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any mariner as contemplated under Clause (ii) of Sub-section (2) of Section 143 was never assumed and exercised by the A.O., and as such any question to look into the matters covered under a comprehensive scrutiny contemplated under Clause (ii) of Sub-section (2) of Section 143 did or could not arise while passing the assessment order under Section 143(3)(i) of the Act. The ld.CIT by his impugned order under Section 263 of the Act has directed the A.O. to examine and look into such matters which could only be dealt with by the A.O. by assuming jurisdiction conferred upon him under Clause (ii) of Section 143(2) of the Act. As stated above herein, the notice under Clause (ii) of Sub-section (2) of Section 143 of the Act can only be issued by the A.O. if the A.O. considers it necessary or computed excessive loss or has not underpaid the tax in any manner! Meaning thereby that it is exclusively the jurisdiction of the A.O. to decide, on the facts and circumstances of each and every case, as to whether he should assume Jurisdiction under Section 143(2)(ii) or not. Having regard to the provisions contained in Clause (i) and (ii) of Sub-section (2) and Sub-section (3) of Section 143 of the Act and having regard to the nature of the order that was passed by the A.O. under Section 143(3)(i) of the Act, we are of the considered view that the order made by the A.O. under Section 143(3)(i) of the Act cannot be held to be erroneous and in so far as prejudicial to the interest of the Revenue, inasmuch as the purpose of issuing notice under Section 143(2)(i) was to exiamine and verify the assessee's claim of deduction of interest and penalty on sale tax and firm's income-tax, which was fully examined and verified by the A.O. and was tightly decided by him. There was no failure on the part of the A.O. to examine the matter within the meaning of Clause (i) of Sub-section (2) of Section 43 of the Act. The impugned order passed by the A.O. under Section 143(3)(i) of the Act is, therefore, found to be in accordance with the provisions contained in Clause (i) of Sub-section (3) of Section 143 of the Act, as the A.O. has rightly examined and decided the issues covered by Clause (i) of Sub-section (2) of Section 143 as specified by him in his notice issued under Section 143(2)(i) of the Act and has completed the assessment accordingly under Section 143(3)(i) limiting himself to allow or reject the said claims he had set out in his notice issued under Section 143(2)(i) to verify. It is not the case of the ld.CIT that any item of claim specified in Clause (i) of Section 143(2) or in A.O.'s notice issued under Clause (i) of Sub-section (2) of Section 143 was not examined by the A.O. or was not decided properly while passing the order under Section 143(3)(i) of the Act. If however, it were found that the assessment completed by the A.O. under Section 143(3)(i), it would be an erroneous order in law and could be set aside by the CIT by exercising the revisionary jurisdiction under Section 263 of the Act. That is not the case here. The items specified by the ld.CIT in his notice under Section 263 of the Act are not covered by the Clause (i) of Sub-section (2) of Section 143 of the Act, but are of such a nature that can only be examined or enquired into in the course of making comprehensive scrutiny as contemplated under Clause (ii) of Sub-section (2) of Section 143 and then in making assessment under Clause (ii) of Sub-section (3) of Section 143 of the Act after issuing notice under Section 143(2)(ii) of the Act. The grounds on which the assessment made by the A.O. under Section 143(3(i) has been set aside by the ld.CIT are, in our considered opinion, not permitted or covered while making an assessment on limited issues envisaged under Section 143(3)(i) of the Act. However, if the A.O.'s order were under Section 143(3)(ii), in course of which if the A.O. were railed to examine the case in its entirety or were failed to examine important aspects of the case as pointed out by the ld.CIT in his order made under Section 263 or the A.O.'s order completed under Section 143(3)(ii) were not in accordance with the provisions of Section 143(3)(ii), it would surely be an erroneous order giving jurisdiction to CIT under Section 263 of the Act to set aside the same and to direct the A.O. to make de novo assessment accordingly. But that is also not the case here.
15. By directing the A.O. to examine the case in its entirety on the issues pointed out in the CIT's impugned order dated 24.5.2004 made under Section 263 of the Act, the CIT has given to the A.O. such sorts of power of assessment, which are beyond the scope of assessment to be completed under Clause (i) of Sub-section (3) of Section 143 of the Act, as those can only be exercised or assumed in the course of assessment proceedings to be initiated by issuing notice under Clause (ii) of Sub-section (2) of Section 143 of the Act. It is an admitted position that A.O. did not assume his jurisdiction conferred upon him / under Clause (ii) of Sub-section (2) of Section 143 of the Act as no notice under that Clause was ever issued. It is also not in dispute that notice under Clause (ii) of Sub-section (2) of Section 143 can not be served on the assessee after the expiry of twelve months from the end of the month in which the return is furnished as provided in the proviso to Section 143(2) of the Act. In the instant case, the revised return of income was furnished by the assessee on 18-02-2003. Therefore, notice under Clause (ii) of Sub-section (2) of Section 143 could have been served on the assessee by 29-2-2004, i.e. within one year from the end of the month, in which the revised return was furnished. The time limit to serve the notice under Section 143(2)(ii) had, therefore, expired on 29-2-2004. The ld.CIT by his impugned order dated 24.5.2004 made under Section 263 has directed the A.O. to examine the case in its totality on comprehensive scale, which could be done only after issuing notice under Section 143(2)(ii) within the specified time. In other words, the time limit to assume jurisdiction by the A.O. under Section 143(2)(ii), which had already expired on 29-2-2004, has been indirectly extended by the ld.CIT in the garb of his direction given in the impugned order made under Section 263 of the Act on 24.5.2004, which in our considered opinion, is not the intent and purpose of exercising jurisdiction conferred upon CIT under Section 263 of the Act. The A.O.'s decision not to initiate the comprehensive scrutiny of the return furnished by the assessee by issuing a notice under Section 143(2)(ii) of the Act cannot be a basis or reason to render the assessment order made by the A.O. under Section 143(3)(i) as erroneous and in so far as prejudicial to the interests of revenue. Non-initiation of comprehensive scrutiny by issuing notice under Section 143(2)(ii) by the A.O. cannot be a subject matter of revisional power of the CIT under Section 263 in the matter of an assessment completed by the A.O. under Section 143(3)(i) on limited issues as envisaged under Section 143(2)(i).
16. It is by now well settled as held in number of decisions that the Commissioner can exercise his power of revision conferred upon him under Section 263 of the Act if following two pre-requisites are satisfied :-
i) Firstly, the order passed by the A.O. is erroneous and;
ii) Secondly, the order passed by the A.O. is prejudicial to the interests of the revenue as well.
Both the conditions must co-exist. If the order is erroneous but it is not prejudicial to the interests of the revenue, the Commissioner cannot exercise the revisional jurisdiction under Section 263 of the Act. Similarly, if the order is not erroneous but is prejudicial to the revenue, recourse cannot be had to Section 263(1) of the Act. An order cannot be termed as 'erroneous' unless it is not in accordance with the law. In the present case, the order under Section 143(3)(i) made by the A.O. is found to be in accordance with the provisions of and intent and purpose of Section 143(2)(i) and 143(3)(i) as discussed and pointed out above herein. On the facts found, the A.O.'s order passed under Section 143(3)(i) can not be termed, by any stretch of imagination, as an erroneous and in so far as prejudicial to the interest of revenue as well. In this view of the matter, CIT's assuming jurisdiction conferred upon him under Section 263 in respect of A.O.'s order made under Section 143(3)(i) is not lawful and thus the ld.CITs order made under Section 263 cancelling A.O.'s order passed under Section 143(3)(i) on 28.2.2003 rendering the same as erroneous and in so far as prejudicial to the interest of revenue for the reasons given by him, is not justified and valid in the eyes of law.
17. The issue in controversy may also be viewed from some other angle. It is widely known that certain guidelines are now-a-days given by the C.B.D.T. for selecting the cases for scrutiny whereunder the A.O. is required to follow the criterias laid down for selecting the case for scrutiny and to give reasons for selecting the case for scrutiny and then to obtain prior approval of his superior-in-Office mentioned in me instructions containing guidelines issued by the C.B.D.T. from time to time. Under such scheme or guidelines issued by the C.B.D.T., a minuscule percentage of returns filed are taken up for scruting under Section 143(2)(ii) of the Act. The A.O. is not expected to go beyond the guidelines or norms set up by the C.B.D.T. in selecting the cases for scrutiny Thus, initiating assessment proceedings under Section 143(2)(ii) and then making the assessment under Section 143(3)(ii) accordingly by the A.O. is dependent upon the guidelines of the C.B.D.T. issued and in force at the relevant point of time. The C.B.D.T. has itself limited the scope of scrutiny to utilize its resources for scrutiny of few cases that are to be selected as per its guidelines The guidelines given by the C.B.D.T. for selecting the cases for scrutiny are to be followed by all the concerned Department personnels either for obtaining or giving the approval for scrutiny. Thus A.O.'s decision not to select the present case for comprehensive scruting in the light of guidelines given by the C.B.D.T. is otherwise also not bad. On perusal of assessment records, we find that the A.O. has selected the present case only for limited scrutiny under Section 143(2)(i) and not under Section 143(2)(ii), to examine or verify the assessee's claim of deduction of payment of interest and penalty on sales tax and firm's income-tax, and has recorded the reasons therefor and then accordingly obtained the prior approval of his Addl. CIT before issuing notice for limited scrutiny under Section 143(2)(i) of the Act in the light of C.B.D.T. instruction dated 28.6.2002 containing guidelines in respect of limited scrutiny. The A.O.'s letter dated 3.2.2003 seeking approval of Addl.CIT, Range-2, Burdwan, contains the reasons for selecting the case for limited scrutiny to examine and verify the admissibility or otherwise of asessee's claim of deduction of payment of interest and penalty on sales tax and firm's income-tax, and accordingly an approval to select the case for said limited scrutiny was given by the Addl. CIT, Range-2, Burdwan on 4.2.2003 by making endorsement on A.O.'s letter dated 3.2.2003. In this view of the matter also, the A.O.'s order made under Section 143(3)(i) examining and considering the assessee's claim on limited issues he had set out in his notice issued under Section 143(2)(i) after obtaining necessary approval of his Addl. CIT, is in accordance with the intent and purpose of Section 143(2)(i) and 143(3)(ii), and is in accordance with the CBDT instruction dated 28.6.2002 containing guidelines in respect of limited scrutiny. In this sense, it is, therefore, not correct to say as stated by the ld.CIT in his order made under Section 263 that the A.O. failed to do his home work and instead framed the assessment order on 28.2.2003 in a rule-of-the-thumb manner. In the instant case, where the case was selected for limited scrutiny as envisaged under Section 143(2)(i), the A.O. by any stretch of imagination cannot be expected to make an enquiry of the items pointed out by the ld.CIT in his order under Section 263 of the Act, inasmuch as, to make an enquiry of the said items pointed out by the ld.CIT was beyond the powers conferred upon the A.O. under Section 143(2)(i) read with Section 143(3)(i) of me Act or were beyond the scope of limited scrutiny of assessee's any claim of loss, exemptions, deductions, allowances or relief as envisaged by Section 143(2)(i) of the Act. On the facts so found by us, we arc, therefore, of the considered opinion that in the course of completing the assessment under Section 143(3)(i) of the Act, the A.O. has not failed to make an enquiry of the items specified in Section 143(2)(i) or the items he had set out in his notice issued under Section 143(2)(i) to verify, and thus his order made under Section 143(3)(i) cannot be termed as erroneous and prejudicial to the interests of the revenue.
18. Before parting with the case, it may be stated that in support of the assessee's contention that the ld.CIT has no jurisdiction to set aside the assessment completed under Section 143(1) of the Act, putting reliance by the ld. Counsel for the assessee on the Circular issued by the Directorate of Inspection (I.T. and Audit), New Delhi, F.No. RAI/86-87/IT dated 26.8.1987 is out of context inasmuch as the assessment order made by the A.O. is not under then Section 143(1) but is under the new scheme of limited scrutiny assessment provided under Section 143(3)(i) as introduced by the Finance Act, 2002 w.e.f. 1.6.2002, which was in force at the time when the impugned assessment order was made by the A.O. on 28.2.2003. We have already stated hereinbefore that if it is found that the limited scrutiny assessment completed by the A.O. Under Section 143(3)(i) is not in accordance with the provisions contained in Section 143(3)(i) it would be an erroneous order in law and can be set aside by the CIT by exercising the revisionary jurisdiction under Section 263 of the Act. Hence, this contention of the Id. Counsel for the assessee is without any merit and is liable to be rejected. On the other hand, the decisions relied upon the Id. Departmental Representative, viz. in 261 ITR 754(Mad), 262 ITR 507 (Mad), and 263 ITR 304 (Mad.) (supra) holding that the CIT has jurisdiction under Section 263 of the Act to revise the assessment completed under Section 143(1) and the said Circular issued by the Directorate of Inspection (IT and Audit). New Delhi is not of a binding nature, are of no help to the revenue in the light of our findings on merits that the impugned assessment order made under Section 143(3)(i) by the A.O. is not an erroneous order and in so far as prejudicial to the interest of revenue giving no jurisdiction to CIT to set aside the same by exercising his revisionary powers under Section 263 of the Act.
19. For the foregoing reasons, the order passed by the ld.CIT Under Section 263 of the Act in the matter of an assessment made Under Section 143(3)(i) by the A.O. is cancelled.
20. In the result, the appeal filed by the assessee is allowed.