2021 (4) TMI 173 - AT - Income Tax

Conversion of complete scrutiny from the limited scrutiny - Correct head of income - income from sale of shares - re-characterization of the income from capital gains to business - disallowance of set off of capital loss - HELD THAT - The assessment order as well as the appellate order also did not show that any such exercise was carried out. Instead of that, the notices issued during the years of assessment proceedings emphatically shows that the case was of limited scrutiny for verification of deduction under the head capital gains claimed by the assessee. Reasons for selection of the limited scrutiny was for verifying the deduction claimed Under the head capital gain by the assessee which was examined by the learned assessing officer and he was satisfied and thus allowed the claim. However, the learned assessing officer found that there are shares of two companies, which are purchased by the assessee, bonus was declared on them, and assessee sold part of the shares and has resultantly shown capital loss on those transactions. Such losses were set off against the capital gain earned by the assessee in mutual funds and other securities. There is no evidence placed before us that such a limited scrutiny assessment proceedings have been converted into complete scrutiny proceedings. The assessment order as well as the orders of the learned and CIT A also does not show any indication of the same. If the Assessing Officer desires to look into any other adjustment or examination of any issue, then what is mentioned as reasons for limited scrutiny, the CBDT has issued a clear instruction No. 5 of 2016 dated 14.07.2016 wherein after obtaining the administrative approval from the Pr. Commissioner of Income Tax or CIT, as the case may be, he can embark upon other issues by converting it into a complete scrutiny case from limited scrutiny case. In the present case, no such exercise has been shown to us. The AO is also required to intimate the assessee regarding such conversion of case into complete scrutiny. In the present case, it is apparent that the ld. AO has touched upon the issues, which are not part of the limited scrutiny. Therefore, the same deserves to be deleted on this account only. In view of this, we direct the ld. Assessing Officer to delete the disallowance of set off of capital loss Enhancement made by the CIT (Appeals) - We hold that when the case of the assessee was selected for limited scrutiny, the ld. CIT (Appeals) can make enhancement only with the aspect of issues that were part of the limited scrutiny. Otherwise, it may happen that the ld. Assessing Officer may pass an order on the issues related to limited scrutiny and the ld. CIT (Appeals) may enhance the income of the assessee on issues other than limited scrutiny issues. This will amount to bypassing the above quoted instructions of the CBDT. It also shows that if that happens then without obtaining the approval of Commissioner of Income Tax and CCIT, the whole assessment of the assessee remains open, despite the fact that the learned assessing officer has looked into the issues contained in the limited scrutiny notice. We do not find such an intention of the CBDT in issuing the instructions of limited scrutiny case. On this score, we do not approve the enhancement made by the ld. CIT (Appeals) on issues, which were not part of limited scrutiny. Correct head of income - The purchase and sale of the above isolated securities were not at all related to the business of assessee or show any trade activity. The transactions in the shares were merely an occasional independent activity. The scale of the activity is also not substantial, looking at the income offered by the assessee in the return of income. The transactions were also not regular basis and the purchases are not shown to have been made out of borrowings. In view of this, we do not find any merit in the findings of the ld. CIT (Appeals) that the above transactions are chargeable to tax under the head business income. In view of this fact, the enhancement of income made by the ld. CIT (Appeals) deserves to be deleted and hence deleted. - Appeal of the assessee are allowed.

Summary

Issues:
1. Re-characterization of income from capital gains to business income
2. Limited scrutiny assessment and authority to make adjustments
3. Enhancement of income by the CIT (Appeals)

Re-characterization of income from capital gains to business income:
The appellant contested the re-characterization of income from capital gains to business income by the ld. CIT (Appeals). The appellant claimed that the income from the sale of shares should be treated as capital gains, not business income, citing CBDT circulars in support. The ld. CIT (Appeals) disagreed, determining that the profits from the sale of shares were chargeable to tax as business income. The appellant argued against this decision, stating that the transactions were not related to business activities and were occasional independent activities. The Tribunal found merit in the appellant's arguments, concluding that the transactions did not qualify as business income but as capital gains. Consequently, the enhancement of income made by the ld. CIT (Appeals) was deemed unjustified and was therefore deleted.

Limited scrutiny assessment and authority to make adjustments:
The appellant raised concerns regarding the authority of the ld. Assessing Officer and the ld. CIT (Appeals) to make adjustments beyond the issues identified in the limited scrutiny notice. The Tribunal noted that the case was selected for limited scrutiny to examine the deduction claimed under the head of capital gains. However, the assessing officer disallowed a capital loss not part of the limited scrutiny issue, which was not converted into complete scrutiny as per CBDT instructions. The Tribunal emphasized that any such adjustment beyond the limited scrutiny issue should follow a specific procedure, including converting the case into complete scrutiny and notifying the assessee. As the case was not converted, the Tribunal directed the assessing officer to delete the disallowance of the set off of capital loss.

Enhancement of income by the CIT (Appeals):
The ld. CIT (Appeals) enhanced the income of the appellant based on the re-characterization of income from capital gains to business income. The Tribunal noted that the ld. CIT (Appeals) could only make enhancements on issues within the limited scrutiny scope. The Tribunal highlighted that the ld. CIT (Appeals) exceeded this scope by enhancing income on matters not part of the limited scrutiny. The Tribunal emphasized the importance of obtaining approval before enhancing income on issues beyond limited scrutiny. Moreover, on the merits of the case, the Tribunal found that the transactions in question did not qualify as business income but as capital gains. Consequently, the Tribunal disapproved of the enhancement made by the ld. CIT (Appeals) and directed its deletion.

In conclusion, the Tribunal allowed the appeal of the assessee, directing the deletion of the disallowed set off of capital loss and the enhancement of income by the ld. CIT (Appeals). The Tribunal emphasized adherence to the limited scrutiny scope and the need for proper authorization before making adjustments or enhancements beyond the identified issues.