2020 (3) TMI 961 - AT - Income Tax

Conversion of Limited Scrutiny into Complete Scrutiny - Expanding the scope of limited scrutiny assessment without necessary approval - expanding the scope to changing the head of income without taking necessary approvals of higher authority as required by the instructions given by CBDT - denying the deduction claimed under section 54 - HELD THAT - On perusal of the notice for Limited Scrutiny we find that there was no mentioning/whisper about examination of the fact whether the assessee was engaged in the business of property development. Assessing Officer has exceeded his jurisdiction by denying the deduction claimed u/s 54 of the Act on the reasoning that the assessee is engaged in the business of property development as the same was not mandated under the Limited Scrutiny notice issued under section 143(2) of the Act. DR before us has not brought anything on record justifying that the Limited Scrutiny was converted by the Assessing Officer under normal scrutiny after obtaining necessary approval from the appropriate authority. We are also not convinced with the argument of the DR that the issue raised by the AO is limited to the activity of the sale of the property only. It is because if we admit the contention of the learned DR then the head of income from capital gain will also get change to the business income despite the fact that there was no question raised in the notice issued for the limited scrutiny under section 143(2) of the Act. The right course of action for the AO was to take the approval from the competent authority for expanding the scope of Limited Scrutiny to the regular assessment but he failed to do so. Thus, in our considered view inaction of the AO should not cause any harassment to the assessee. In holding so we draw support and guidance from the order of Rajesh Jain vs. ITO 2005 (4) TMI 629 - ITAT CHANDIGARH held that CBDT Circular clarifies that the Assessing Officer does not have the powers to make the entire assessment of income in limited scrutiny cases. There is no doubt that the power of the Commissioner (Appeals) is co-terminus with the power of the AO In the instant case, when the Assessing Officer did not have the power to make a full-fledged assessment in limited scrutiny cases, the Commissioner (Appeals) s power could not be enlarged beyond the power of the Assessing Officer in limited scrutiny cases. So, it was considered appropriate to remit the issue relating to allowance of depreciation in respect of the plinth to the file of the Assessing Officer for the purpose of fresh decision in accordance with law. Since the notice under section 143(2)(i ) was issued for limited scrutiny, the Assessing Officer was precluded from considering any other issue while making the assessment under section 143(3) under limited scrutiny. The decision of the Commissioner (Appeals) in considering the other claim of the assessee not covered in the notice issued under section 143(2)(i) for limited scrutiny was contrary to the provisions of the Act and, accordingly, was set aside. We are not convinced with the finding of the authorities below. As such the entire issue should have been limited to the extent of the dispute raised in the notice under section 143(2) of the Act for the limited scrutiny but the AO in the present case has exceeded his jurisdiction as discussed above. Thus the ground of appeal of the assessee is allowed

Issues Involved:
1. Expansion of limited scrutiny to complete scrutiny without necessary approvals.
2. Classification of income from capital gains to business income.
3. Disallowance of deduction under section 54F of the Act.
4. Consideration of submissions and evidence during assessment.
5. Partial disallowance of deduction under section 54F for a portion of the property.

Issue-wise Detailed Analysis:

1. Expansion of Limited Scrutiny to Complete Scrutiny Without Necessary Approvals:
The primary issue raised was that the Assessing Officer (AO) expanded the scope of limited scrutiny to complete scrutiny without obtaining necessary approvals from higher authorities. The assessee argued that the AO's actions violated CBDT instructions, which mandate approval from the Principal Commissioner of Income Tax (Pr. CIT) for such expansions. The AO justified the expansion by asserting that the examination was confined to the sale of property and related capital gains, which were within the scope of the limited scrutiny. However, the Tribunal found that the AO exceeded his jurisdiction by reclassifying the capital gains as business income without proper authorization, thus violating the procedural mandate.

2. Classification of Income from Capital Gains to Business Income:
The AO reclassified the income from the sale of land, initially declared as capital gains by the assessee, as business income. This reclassification was based on the AO's observation that the assessee's activities, including land plotting and development, amounted to a business activity. The Tribunal noted that the AO's reclassification was beyond the scope of the limited scrutiny notice, which did not mention examining whether the assessee was engaged in property development as a business. The Tribunal held that the AO's actions were unauthorized and invalid.

3. Disallowance of Deduction Under Section 54F of the Act:
The AO disallowed the assessee's claim for deduction under section 54F of the Income Tax Act, which pertains to the exemption of capital gains on the sale of property if the proceeds are invested in a residential house. The AO's disallowance was based on the reclassification of the income as business income. The Tribunal ruled that since the reclassification itself was unauthorized, the subsequent disallowance of the deduction was also invalid.

4. Consideration of Submissions and Evidence During Assessment:
The assessee contended that the AO did not properly consider the submissions, evidence, and supporting documents provided during the assessment proceedings. The Tribunal's analysis focused on the procedural lapses rather than the merits of the evidence. It concluded that the AO's failure to adhere to the procedural requirements for expanding the scope of scrutiny invalidated the assessment order, making the consideration of submissions and evidence moot.

5. Partial Disallowance of Deduction Under Section 54F for a Portion of the Property:
The AO partially disallowed the deduction under section 54F for a portion of the property, considering it not part of a 'house.' The Tribunal did not delve into the merits of this issue as it had already ruled in favor of the assessee on the procedural grounds, rendering the detailed examination of this partial disallowance unnecessary.

Conclusion:
The Tribunal concluded that the AO had exceeded his jurisdiction by expanding the scope of limited scrutiny without necessary approvals, thereby invalidating the assessment order. As a result, the Tribunal allowed the appeal on procedural grounds and did not address the substantive issues on their merits. The appeal was partly allowed, and the procedural lapses were emphasized as the primary basis for the decision.

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