AO converted limited scrutiny into complete scrutiny without obtaining permission and in violation of CBDT Instruction – ITAT quashed Assessment order.
In a recent judgment, ITAT Delhi has quashed the assessment order because the Assessing Officer (AO) converted limited scrutiny into complete scrutiny without obtaining permission and in violation of CBDT Instruction
ABCAUS Case Law Citation:
ABCAUS 4119 (2024) (06) ITAT
In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming complete scrutiny.
The assessee raised an additional ground challenging the very validity of the assessment order and the jurisdiction of the Assessing Officer in completing the assessment without complying with the mandatory CBDT Instructions/Guidelines in relation to cases selected under limited scrutiny.
Placing reliance on the judgment of the Hon’ble Supreme Court, it was submitted that the additional ground was a legal ground going to the root of the matter i.e. the very validity of assessment and, therefore, the additional ground may be admitted for adjudication. The Tribunal admitted the additional ground.
The assessee submitted that assessment had been completed on the basis of selection of the case under CASS for limited scrutiny with the reason “sale consideration of property is less than the sale consideration of property reported in AIR”. It was further submitted that as per para 3 of CBDT Instruction notice u/s 143(2) of the Income Tax Act, 1961 (the Act) is required to be issued to the tax payer with remarks “selected under computer added scrutiny”.
It was submitted that in the CBDT Instruction it was also mentioned that the first questionnaire issued u/s 142(1) of the Act thereafter should confine the enquiry of verification only on the specific facts requiring examination/verification under limited scrutiny. However, the assessee was never intimated of the fact that the assessment was initiated for limited scrutiny for verification of a particular issue.
It was further submitted that in the first notice issued under 142(1) of the Act, the Assessing Officer had treated the scope of enquiry as if case was a complete scrutiny and had not mentioned the reason for selection of the case under limited scrutiny. This was yet another non-compliance of the Instruction by the Department in its Circular No. 7/2014 dated 26.09.2014. However, no enquiry was raised on the issue for the verification for which the case was selected for limited scrutiny.
It was further submitted that the AO at a later stage appraised the Counsel of the assessee about the reason for limited scrutiny and for the first time query on the limited issue was raised. Therefore, it was a case of violation of CBDT Instruction which required the AO to communicate the limited scrutiny reason in the first communication after issue of notice u/s 143(2) of the Act.
It was further submitted that there was another violation of CBDT Instruction which required the scope of enquiry in the case of limited scrutiny needed be confined to verification of the particular aspects of the matter of limited scrutiny. However, the AO conducted various enquiry and none of which were related to the issue under limited scrutiny.
The assessee submitted that in fact AO made reduction of cost of construction/improvement without enlarging the scope of enquiry without complying with the CBDT Instruction. The AO had recomputed the capital gain by taking the stamp duty valuation as the sale consideration which is the action undisputedly as per the reason for selection but the AO had also reduced the cost of construction/improvement The later action of the Assessing Officer was not covered by the reason for limited scrutiny selection as the reason in question was for understatement of sale consideration. The reason is clearly defined in its scope and cannot be extended to verification of cost of construction unless the case is converted into complete scrutiny and hence, the reduction in cost of construction/improvement was outside the scope of power under limited scrutiny defined in its scope and cannot be extended to verification of cost.
It was submitted that from assessment order it was evident that the AO had initiated enquiry on issues other than limited scrutiny issues prior to approval by the Pr CIT in complete defiance of above binding CBDT instructions.
It was submitted that the Kolkata Bench of ITAT held the adoption of such procedure in complete derogation to the instruction of CBDT. The above decision of the Kolkata Tribunal had been approved by the Hon’ble High Court. In view of above, it was submitted that the assessment order passed u/s 143(3) was invalid and such invalid order could not be subjected to revision by the Pr CIT.
It was submitted that the co-ordinate Bench held that the instructions of the CBDT permits the AO to widen the scope of enquiry for limited scrutiny cases but condition precedent for such action is that prior approval of higher authorities. When perusal of assessment order does not find mention of any permission taken from Pr CIT/DIT for further enquiries in the case, the assessment order so framed was not found in consonance with CBDT instructions and therefore, the order was quashed without dwelling into merits of the case.
Limited scrutiny converted into complete scrutiny without permission illegal
The Tribunal noted that the AO issued notice u/s 142(1) of the Act for verifying various details and documents, bank statement, nature of business activities, details of bank whether used for business purposes or for personal purposes to explain the credits and debits in the bank account where amount succeeding Rs.1 lakh. All these showed that the AO exceeded the scope of enquiry what was mentioned in the limited scrutiny reasons. The AO also did not mention whether he has taken any approval to exceed the enquiries other than the one specified in limited scrutiny. Further, the AO recomputed the entire capital gains by reducing the cost of construction of improvement which was not covered under reason for limited scrutiny selection, as the limited scrutiny reason was only to verify the understatement of sale consideration.
The Tribunal observed that AO had expanded the limited scrutiny by tinkering with cost of construction/improvement and total recasting the capital gains shown by the assessee. There was nothing on record to suggest that the AO obtained any permission to convert limited scrutiny.
Accordingly, the Tribunal held that the action of the AO was clearly in violation of the CBDT Instructions. As a result, the assessment order passed u/s 143(3) of the Act was held to be in violation of the CBDT Instructions and, therefore, the same was quashed allowing the additional ground raised by the assesse.
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