2007 (7) TMI 424 - AT - Income Tax

Assessment determining the total income or loss - Validity of limited scrutiny - Receipts Of rented income - CIT(A) quashed the order u/s 143(3)(i) passed by the Assessing Officer and holding that the same as null and void ab initio - HELD THAT - It is clear that if the Assessing Officer has reason to believe that any claim of loss, exemption, deduction, allowance or relief made in the return is inadmissible then the Assessing Officer may serve on the assessee a notice specifying the particulars of such claim of loss, exemption, deduction, allowance or relief and require it to produce evidence or particulars specific therein or on which the assessee may rely in support of the claim. Further, if the Assessing Officer considers that it is necessary or expedient to ensure that the assessee had not understated the income or has not computed excessive loss, etc. then he may issue notice u/s 143(ii). The scope of section 143(2)(i) is very limited. It could operate only against the loss, exemption, and allowance or relief claimed which is inadmissible. According to revenue the change of head with regard to income from business to other sources falls within the scope of this limited scrutiny assessment and not within the scope of section 143(2) on which we are unable to subscribe to. Thus, we are of the view that his going beyond the scope of the notice is improper and therefore the CIT(A) rightly decided the issue in favour of the assessee. In the result, appeal by the revenue fails and dismissed.

Issues Involved:

1. Validity of the assessment order under section 143(3)(i) of the Income-tax Act.
2. Jurisdiction of the Assessing Officer to change the head of income under limited scrutiny.
3. Compliance with procedural requirements under section 143(2) and 143(3) of the Income-tax Act.
4. The impact of the CIT(A)'s decision to annul the assessment order on the merits of the case.

Issue-wise Detailed Analysis:

1. Validity of the assessment order under section 143(3)(i) of the Income-tax Act:

The appeal by the revenue challenges the CIT(A)'s decision to quash the assessment order under section 143(3)(i). The CIT(A) held that the Assessing Officer's action of changing the head of income from business to other sources during limited scrutiny was beyond his jurisdiction, rendering the assessment order null and void ab initio. The CIT(A) relied on various High Court decisions to support this view, emphasizing that an order passed without jurisdiction is invalid and can be challenged whenever it is enforced or relied upon.

2. Jurisdiction of the Assessing Officer to change the head of income under limited scrutiny:

The Assessing Officer initially issued a notice under section 143(2)(i) to verify the claim of loss, exemption, deduction, allowance, or relief against rent income. However, he went beyond this limited scope by reclassifying the income from business to other sources and disallowing related expenses. The CIT(A) concluded that the Assessing Officer transgressed his powers under section 143(2)(i) and 143(3)(i) by conducting a detailed scrutiny, which was not permissible under the limited scrutiny provisions.

3. Compliance with procedural requirements under section 143(2) and 143(3) of the Income-tax Act:

The assessee argued that the Assessing Officer should have issued a notice under section 143(2)(ii) for a detailed scrutiny, which he failed to do. The CIT(A) agreed, noting that the Assessing Officer's jurisdiction was limited to the claims specified in the notice under section 143(2)(i). The Tribunal upheld this view, stating that the scope of section 143(2)(i) is restricted to verifying inadmissible claims and does not extend to reclassifying income or conducting a full scrutiny.

4. The impact of the CIT(A)'s decision to annul the assessment order on the merits of the case:

The Tribunal considered whether the assessment order should be set aside and remanded to the Assessing Officer for a fresh decision. However, it concluded that doing so would be improper, as it would effectively allow the Assessing Officer to bypass the procedural limitations and issue a notice under section 143(2)(ii) beyond the prescribed time limits. The Tribunal emphasized that the CIT(A) correctly annulled the assessment order based on procedural grounds, and no further judgment on the merits was necessary.

Conclusion:

The Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s decision to annul the assessment order. It held that the Assessing Officer exceeded his jurisdiction by reclassifying income and conducting a detailed scrutiny under the guise of limited scrutiny, thereby violating the specific provisions of section 143(2)(i) and 143(3)(i). The Tribunal emphasized the importance of adhering to procedural requirements and limitations prescribed by the Income-tax Act.

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