ACIT vs Lex & Legal Service

“1.

On facts and in law, the Ld. CIT(A) erred in holding that the assessment order passed under section 143(3) was without Jurisdiction on the ground that the case was selected for limited Scrutiny, ignoring the fact that the issues examined by the Assessing Officer were directly connected with the CASS-selected issues of investments/advances/loans and expenses.

2.

On facts and in law, the Ld. CIT(A) erred in holding that prior approval of the Principal CIT for conversion into complete scrutiny was mandatory in the present case, without appreciating that the additions made by the Assessing Officer were incidental and consequential to the issues under limited scrutiny.

3.

On facts in law, the Ld. CIT(A) erred in deleting the disallowances of staff expenses amounting to Rs.40,86,959/- and the addition of reserves and surplus amounting to Rs.1,58,08,966/-without properly appreciating the findings recorded by the Assessing Officer and the failure of the assessee to satisfactorily explain the same.

4.

On facts and in law, the Ld.CIT(A) erred in deleting the addition of notional interest of Rs.88,68,000/- interest-free loans advanced, without appreciating the issue of diversion of funds and the consequential loss of revenue.”

8.1

I have considered the assessment order, submissions of the appellant and facts available on record. In the assessment order the AO stated that the assessment was selected for limited scrutiny and the reasons mentioned are -

1.

Expenses incurred for earning exempt income

2.

Investment/advances/ loans In the assessment order the AO made following disallowances / additions:

1.

Disallowance of staff expenses- Rs.40,86,959/-

2.

Addition of Reserves and Surplus - Rs.1,58,08,966/-

3.

Addition of interest on loan - Rs.88,68,000/-It is evident from above that the additions made on point no.1 & 2 are not at all related to the reasons on which the case was selected for limited scrutiny. Further, even the addition made on point no.3 is not related to the reasons of selections for scrutiny. The issue under consideration is whether the AO was justified in making additions beyond the issues for which the case was selected under limited scrutiny, without following the procedure for conversion into complete scrutiny as per CBDT Instructions.

8.2

The CBDT has issued Instruction No. 20/2015 dated 29.12.2015, and further clarified by Instruction No. 5/2016 dated 14.07.2016, that in limited scrutiny cases, the scope of inquiry should remain confined to the specific reasons/issues for which the case was picked for scrutiny. It is categorically stated that the AO can expand the scope of scrutiny only after obtaining prior written approval from the Principal CIT/CIT, which should be duly recorded.

8.3

In the present case, there is no indication that such approval was either sought or granted. Therefore, additions made on issues beyond the scope of the limited scrutiny selection are in violation of the CBDT’s binding instructions, and hence, are not sustainable in law.

8.4

Various judicial precedents support this view. The Hon'ble Delhi Bench of the TTAT in ACIT Vs. Trehan Properties & Builders Pvt. Ltd. in CO No. 9/Del/2020 vide order dt. 29.10.2022 and in case of Dahila Infrastructure Pvt Ltd vs DCIT (ITA No.5172/Del/2025) have held that additions beyond the scope of limited scrutiny, without following due procedure for conversion into complete scrutiny, are without jurisdiction and liable to be deleted. Therefore, the additions/disallowance made by the AO cannot be sustained. Accordingly, all these additions made by the AO are deleted. Appeal on these grounds is thus ALLOWED.

GROUND No.12 to 14:

In these grounds the appellant has challenged the addition made of Rs.88,68,000/- on account of interest @8% on the loans taken by the appellant.

9.2

In the assessment order, the AO noted that the assessee has received interest free loan of Rs.11,08,50,000/- from two private parties/partners without any security but the same has not been explained. The assessee avoided TDS liability by showing it as an interest free loan. Hence, the AO added 8% notional interest on account of 8,68,000/- is made to the total disallowance interest. Accordingly, addition of Rs.88,68,000/- is made to the total income.

10.

I have considered the assessment order, submission of appellant and facts available on record. It is evident that the appellant has shown interest free loan taken from the partners during the year under consideration. As per the AO the appellant has obtained interest free loan to avoid deduction of TDS on interest. This logic of the AO is an absurd logic which is not as per the provisions of I.T Act. Therefore, this addition made by the AO cannot be sustained. Accordingly, AO is directed to delete the addition of Rs.88,68,000/-. Appeal on these grounds is thus ALLOWED.”

“Considered the rival submissions and material placed on record on the issue of expanding the limited scrutiny into complete scrutiny. In this regard, we observe that the coordinate Bench in the case of Balvinder Kumar vs. PCIT in ITA No.485/Del/2020 dated 10.12.2020 held as under:-

“We have gone through the record in the light of the submissions made on either side. There is no dispute that the case of the assessee was picked up for scrutiny under the category of limited scrutiny. This fact is established from the assessment order and also the notice issued under section 143(2) of the Act. It is also not in dispute that the CBDT issued the instructions relied upon by the assessee and for the sake of convenience we extract the relevant portions thereof hereunder: -

“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. 20/2015

As far as the returns selected for scrutiny through CASS-2015 are concerned, two type of cases have been selected for scrutiny in the current Financial Year- one is 'Limited Scrutiny' and other is Complete Scrutiny'. The assessees concerned have duly been intimated about their cases falling either in 'Limited Scrutiny' or 'Complete Scrutiny' through notices issued under section 143(2) of the Income-tax Act, 1961 ('Act'). The procedure for handling 'Limited Scrutiny' cases shall be as under:

(a)

….

(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.

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 Scrutiny' in such cases.”

CBDT Letter dated 30.11.2017

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, it 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.”

9.

The above CBDT instructions and the letter clearly establish that it’s not open for the learned Assessing Officer to travellers beyond the reason for selection of the matter for limited scrutiny and on that aspect the assessment order in this case is in accordance with the instructions governing the field. In such circumstances it has to be seen whether the Ld. PCIT is justified in holding the assessment order to be erroneous insofar as it is prejudicial to the interest of the Revenue for the learned Assessing Officer not considering the aspects which are beyond the purview of limited scrutiny.

10.

In the Deccan Paper Mills Co. Ltd. vs. CIT in ITA 1013 AND 1635/PUN/2015, Pune Bench of the Tribunal held, that,

“40.

Now, coming to the aspect of book profits which was considered by the Commissioner and the order of the Assessing Officer was held to be erroneous and prejudicial to the interest of revenue. In this regard, it may be pointed out that the case of assessee was picked up for scrutiny under CASS for the limited purpose of verifying the Chapter VI-A deduction. Once the case is picked up for specific purpose under CASS, then it is outside the purview of the Assessing Officer to look into any other aspect other than the aspect for which it is picked up. Hence, the Assessing Officer has not formed any opinion in respect of computation of book profits in the hands of assessee. Once, no such opinion has been formed by the Assessing Officer, the Commissioner has erred in holding the order of the Assessing Officer to be erroneous and prejudicial to the interest of revenue in this regard. Accordingly, we reverse the findings of the Commissioner. Accordingly, we hold that the order passed by the Commissioner under section 263 of the Act is invalid and the same is quashed for both the assessment years.”

In M/s R.H. Property vs. PCIT, ITA No. 1906/Mum/2019 it was held that,-

“As a matter of fact, what cannot be done directly cannot be done indirectly. Accordingly, in terms of our aforesaid observations, we are of the considered view that as the A. O had aptly confined himself to the issue for which the case of the assessee was selected for limited scrutiny, therefore, no infirmity can be attributed to his order for the reason. that he had failed to dwell upon certain other issues which were clearly beyond the realm of the reason for which the case of the assessee was selected for limited scrutiny as per the AIR information. We thus not being able to concur with the view taken by the ld. CIT that the order passed by the A.O under Sec. 143(3), dated 10.10.2016is erroneous, therefore, set aside his order and restore the order passed by the A.O. As we have quashed the order passed by the Pr. CIT under Sec. 263 on the ground of invalid assumption of jurisdiction by him, therefore, we refrain from adverting to and therein adjudicating the contentions advanced by the Id. A. Ron the merits of the case, which thus are left open.”

11.

Similarly, is the view taken consistently by the benches of this Tribunal in the other two cases also, relied upon by the assessee. In the circumstances, in view of the consistent view taken in similar matters we are of the considered opinion that when the assessing officer is bound to follow the CBDT instructions and while following such instructions and after verification of the material furnished by the assessee on the aspect covered by the limited scrutiny, is not open for the Ld. PCIT to say that not adverting to the other aspects of the competition would render the assessment order erroneous and prejudicial to the interest of the Revenue. With this view of the matter we find that the impugned order cannot be sustained and, therefore, the same is liable to be quashed. We accordingly quash the same.”

8.

Respectfully following the above decision, in our considered view, the AO has proceeded to touch upon the issue which was not the mandate of the limited scrutiny and he proceeded to make the addition without converting the limited scrutiny into complete scrutiny. This itself is in violation of jurisdiction of the AO. Accordingly, additional ground raised by the assessee is valid and accordingly, we allow the additional ground raised by the assessee.”