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2021 (5) TMI 958 - AT - Income TaxConversion of limited scrutiny into complete scrutiny - HELD THAT - Instruction of the CBDT instruction No. 5/2016 dated 14.07.2016 shows that to convert the limited scrutiny into complete scrutiny, the Assessing Officer shall be required to form a reasonable view that there is a possibility of under statement of income and that view should be based on credible material or information available on record and such a view should not be based on mere suspicion, conjecture or unreliable resources and there should be a direct nexus between available material and formation of view. However, the above conditions are not fulfilled in this case. AO has not referred to any credible or reliable material or information to form the view that there was a possibility of under assessment of income in this case. The AO has merely made certain disallowance on ad hoc basis without pointing out any information or material available to him which has a direct nexus to show that there was possibility of under assessment of income. Conversion of limited scrutiny into complete scrutiny is against the spirit of CBDT mandate which is binding on the AO. Therefore, the conversion of limited scrutiny into complete scrutiny being not valid, the consequential additions made by the AO on ad hoc basis and further confirmed by the CIT(A) are not sustainable in the eyes of law. Same are ordered to be deleted. Appeal of the assessee stands allowed.
Issues Involved:
1. Conversion of limited scrutiny into full scrutiny assessment without valid reasons. 2. Disallowance of expenses on ad hoc basis without credible material. 3. Compliance with CBDT instructions for converting limited scrutiny to complete scrutiny. Analysis: Issue 1: Conversion of Limited Scrutiny into Full Scrutiny Assessment The appeal was filed against the order of the Commissioner of Income Tax (Appeals) converting the limited scrutiny assessment into a full scrutiny assessment. The Assessing Officer (AO) made disallowances on an ad hoc basis without valid reasons. The counsel for the assessee argued that the AO lacked reliable reasons for converting the assessment. The CBDT instruction No. 5/2016 highlighted the need for a reasonable view based on credible material to convert limited scrutiny into complete scrutiny. However, the AO failed to provide any credible material or information to support the conversion. The Tribunal found the conversion invalid as it did not comply with the CBDT mandate, leading to unsustainable additions by the AO. Issue 2: Disallowance of Expenses on Ad Hoc Basis The AO disallowed various expenses, including advertisement expenses, donation, and development expenses, on an ad hoc basis without substantial evidence. The counsel for the assessee argued that the disallowances were made without proper justification or reliable material. The Tribunal observed that the disallowances lacked a direct nexus between the available material and the possibility of under assessment of income. As a result, the disallowances were deemed unsustainable in the eyes of the law, and the Tribunal ordered their deletion. Issue 3: Compliance with CBDT Instructions The Tribunal emphasized the importance of adhering to CBDT instructions when converting limited scrutiny assessments into full scrutiny assessments. The instructions required a reasonable view based on credible material to justify such a conversion. In this case, the AO failed to meet the criteria set out in the CBDT instructions, rendering the conversion and subsequent additions unsustainable. The Tribunal upheld the appeal of the assessee, highlighting the necessity of following procedural guidelines and ensuring a valid basis for scrutiny assessments. In conclusion, the Tribunal allowed the appeal, emphasizing the significance of following procedural requirements and basing assessments on credible material rather than ad hoc decisions. The judgment underscored the need for assessments to be conducted in accordance with legal provisions and established guidelines to maintain fairness and objectivity in tax proceedings.
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