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2020 (6) TMI 317 - AT - Income TaxScrutiny assessment - conversion of the case from limited scrutiny to complete scrutiny - Bogus purchases - AO held that the purchase of shares did not take place and the transactions were sham in view of documentary evidences, circumstantial evidences, human conduct and preponderance of probabilities - HELD THAT - There is not an iota of any cogent material mentioned by the Assessing Officer which enabled him to have reached the conclusion that this case was a fit case for conversion from limited scrutiny to complete scrutiny. We have also gone through the statement of assessee s Director Mr. Rohit Verma which was recorded on 18.07.2017 i.e., after the conversion of the case and even in his statement nothing adverse is coming out vis. a vis. the impugned transactions. If the proposal of the AO dated 05.10.2017 and the approval of the Ld. Pr. Commissioner of Income Tax dated 10.10.2017 are examined on the anvil of paragraph 3 of CBDT Instruction No.5/2016, it is very much clear that no reasonable view is formed as mandated in the said CBDT Instruction No.5/2016 in an objective manner and secondly merely suspicion and inference is the foundation of the view of the AO. There is no direct nexus brought on record by the AO in the said proposal and, therefore, it is very much apparent that the proposal of converting the limited scrutiny to complete scrutiny was merely aimed at making fishing enquiries. We also note that the Ld. Pr. Commissioner of Income Tax has accorded the approval in a mere mechanical manner which is in clear violation of the CBDT Instructions No.20/2015. The Co-ordinate bench in PAYAL KUMARI 2011 (2) TMI 1578 - ITAT CHANDIGARH , has held that even Section 292 BB of the Act cannot save the infirmity arising from infraction of CBDT Instructions dealing with the subject of scrutiny assessments where assessment has been framed in direct conflict with the guidelines issued by the CBDT. The instant conversion of the case from limited scrutiny to complete scrutiny cannot be upheld as the same is found to be in total violation of CBDT Instructions No.5/2016. - Decided in favour of assessee.
Issues Involved:
1. Validity of conversion from limited scrutiny to complete scrutiny. 2. Legality of disallowance of short-term capital loss. 3. Legality of addition for unexplained commission expenditure. 4. Opportunity for cross-examination and reliance on investigation reports. Detailed Analysis: 1. Validity of Conversion from Limited Scrutiny to Complete Scrutiny: The primary issue was whether the conversion of the case from limited scrutiny to complete scrutiny was legally valid. The assessee argued that the conversion was based on mere suspicion and invalid approval by the Principal Commissioner of Income Tax (PCIT), violating CBDT Instructions No. 19 & 20/2015. The Tribunal examined the CBDT Instructions and emphasized that the conversion should be based on credible material or information, not mere suspicion or conjecture. The Tribunal found that the Assessing Officer (AO) and PCIT did not provide any direct nexus or credible material for the conversion, making it a fishing expedition. Consequently, the Tribunal held that the conversion was invalid, rendering the entire assessment null and void. 2. Legality of Disallowance of Short-Term Capital Loss: The AO disallowed the assessee's claim of short-term capital loss of ?4,20,94,764/- on the grounds that it appeared suspicious and was possibly created to reduce tax on long-term capital gains. The CIT(A) upheld this disallowance, citing the involvement of the brokers in providing accommodation entries and the nature of the shares as penny stocks. The assessee argued that the disallowance was made without any specific material evidence and that the burden of proof was not discharged by the revenue. However, since the Tribunal quashed the assessment order due to the invalid conversion of scrutiny, the issue of disallowance became academic. 3. Legality of Addition for Unexplained Commission Expenditure: The AO added ?8,41,895/- to the assessee's income for unexplained commission expenditure. The CIT(A) upheld this addition. The assessee contended that the addition was made in a perfunctory manner without proper evidence. Similar to the disallowance of short-term capital loss, this issue also became academic following the Tribunal's decision to quash the assessment order. 4. Opportunity for Cross-Examination and Reliance on Investigation Reports: The assessee requested an opportunity to cross-examine the persons whose statements were relied upon by the AO and CIT(A) in making the disallowance and addition. The AO denied this request, and the CIT(A) upheld the denial. The Tribunal noted that the assessee was not confronted with the investigation report and that the denial of cross-examination was against the principles of natural justice. The Tribunal emphasized that the assessment could not stand solely on the investigation report without providing the assessee an opportunity for cross-examination. However, this issue also became academic due to the quashing of the assessment order. Conclusion: The Tribunal quashed the assessment order as null and void due to the invalid conversion from limited scrutiny to complete scrutiny, rendering the other grounds raised by the assessee academic. The appeal of the assessee was allowed, and the assessment order was declared null and void.
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