2023 (1) TMI 207 - AT - Income Tax

Addition u/s 56(2)(vii)(b) - assessee was selected for limited scrutiny for the reason of substantial increase in capital in a year - scope of converting the limited scrutiny into complete scrutiny with prior approval of PCIT/CIT - HELD THAT - In explanation the assessee furnished all the necessary details in respect of scrutiny under CASS as called by the AO which were examined at length which is reflecting in the assessment order, but however, the AO made addition u/s. 56(2)(vii)(b) of the Act under the head Income from other sources which is evident from the computation made by the AO in respect of discussion made. Therefore, it is clear as rightly pointed by the ld. AR that the AO did not make addition on the reason selected for limited scrutiny i.e. substantial increase in capital in a year, but however, made addition under the head Income from other sources which is, admittedly, not the issue for selecting case under limited scrutiny. This position is not disputed by the CIT(A) nor by the ld. DR. I note that that the AO deviated from the limited scrutiny and made addition other than the reason selected for limited scrutiny which is in my opinion is complete scrutiny as pointed by the ld. AR violating of Instructions of CBDT. When there is a potential escapement of income exceeding Rs.5 lakhs a limited scrutiny cases that the AO required to take prior approval of PCIT/CIT concerned. No such approval brought on record by the ld. DR to show that the AO is well within its jurisdiction to convert limited scrutiny into complete scrutiny taken prior approval from PCIT/CIT concerned. In the absence of such approval I find force in the arguments of ld. AR that the assessment passed by the AO is invalid. Instruction No. 5/2016 dated 14-07- 2016 issued by the CBDT further clarified that the AO shall be required to form a reasonable view that there is possibility of under assessment of income while proposing to take up complete scrutiny in a case which was originally earmarked for limited scrutiny vide para 2 of the said Instruction dated 14-07-2016. There is no dispute with regard to binding nature of these two Instructions on the AO and no reasonable view brought on record to show that the AO formed an opinion to take up as complete scrutiny, in the absence of such reasonable view the assessment made by the AO is in my opinion is bad under law. AO has failed to follow the guidelines issued by the CBDT for converting the limited scrutiny into complete scrutiny without prior approval of PCIT/CIT concerned, therefore, in our opinion, the AO lacks jurisdiction to carry out the assessment and the addition made by the AO u/s. 56(2)(vii)(b) is not justified. Therefore, the order of CIT(A) in confirming the addition made by the AO on account of income from other sources fails and it is set aside. Thus, ground Nos. 1 and 2 raised by the assessee are allowed.

Summary

Issues:
1. Conversion of limited scrutiny assessment into complete scrutiny without necessary approval.
2. Validity of addition made under section 56(2)(vii)(b) of the Act.
3. Charging of interest under sections 234B and 234C of the Act.

Issue 1: The appeal raised concerns regarding the conversion of a limited scrutiny assessment into complete scrutiny without necessary approval. The appellant argued that the Assessing Officer (AO) exceeded jurisdiction by making additions under section 56(2)(vii)(b) of the Act, which was not the reason for selecting the case under limited scrutiny. The appellant cited Instructions issued by the CBDT, emphasizing the requirement for prior approval from the competent authority before converting limited scrutiny into complete scrutiny. The Tribunal noted that the AO deviated from the limited scrutiny and made additions unrelated to the initial reason for scrutiny, violating CBDT Instructions. The Tribunal found that the AO lacked jurisdiction to carry out the assessment without prior approval, rendering the assessment invalid.

Issue 2: The validity of the addition made under section 56(2)(vii)(b) of the Act was also contested. The Tribunal observed that the AO made additions under the head "Income from other sources," not in line with the reason for limited scrutiny. The Tribunal highlighted the lack of approval from the PCIT/CIT concerned for converting limited scrutiny into complete scrutiny, as required by CBDT Instructions. Consequently, the Tribunal held that the addition made by the AO was not justified, setting aside the CIT(A)'s confirmation of the addition.

Issue 3: The appellant challenged the charging of interest under sections 234B and 234C of the Act in ground No. 3. The Tribunal noted that the charging of interest under these sections is mandatory and consequential. As a result, the Tribunal dismissed ground No. 3, upholding the charging of interest under sections 234B and 234C.

In conclusion, the Tribunal allowed the appeal of the assessee based on the issues raised regarding the conversion of limited scrutiny into complete scrutiny without necessary approval and the validity of the addition made under section 56(2)(vii)(b) of the Act. However, the Tribunal upheld the charging of interest under sections 234B and 234C of the Act as mandatory and consequential.