2024 (1) TMI 109 - AT - Income Tax

Validity of assessment order passed u/s 143(3) - scope of limited scrutiny - conversion of limited scrutiny into complete scrutiny - addition u/s 69A on unsecured loan - HELD THAT - The case of the assessee was selected for limited scrutiny for the specific purpose as specifically stated in the assessment order itself. AO had made enquiry on the point of notices issued and in this respect assessee also had furnished necessary submission as asked for. AO without converting the limited scrutiny into complete scrutiny issued notice to the assessee on 22.11.2018 raising new issues which is beyond the purview of the limited scrutiny and without obtaining necessary approval from the competent authority. Therefore, the order is bad in law. The assessee has challenged the issue before the ld. CIT(A). However, the ld. CIT(A) did not consider the same and sustained the order passed by the AO. A perusal of the above instruction of the CBDT 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. AO has merely made certain disallowance on adhoc 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. In view of this, 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 adhoc basis and further confirmed by the CIT(A) are not sustainable in the eyes of law. Unsecured loan addition - Assessee filed complete details including the Pan No of the persons who provided funds to the assessee. In the instant case once the appellant had produced all documents in order to establishing the identity and capacity of the creditors as well as genuineness of the transaction, the initial onus cast upon the assessee was discharged and the onus shifted to the AO to bring material on record to the effect that in spite of identity and creditworthiness of the creditor being proved, the transaction was still not genuine. AO has not made any further inquiries and has not brought any material on record to controvert the documentary evidences submitted by the assessee. In this case assessee gave the names and address of the creditors. It was in the knowledge of the revenue that the creditors were income-tax assessees. The revenue apart from issuing notices under section 131 did not pursue the matter further. It did not examine the source of income of the alleged creditors to find out whether they were creditworthy. Therefore, it was held that in these circumstances, assessee could not do any further and it had discharged the burden laid on it. Identity, creditworthiness and genuineness of the transaction cannot be doubted as all the transactions were made through banking channels and the assessee produced all the necessary supported documents before the authorities below by providing name and PAN no. of the assessee and therefore hardly remains any reason to doubt the genuineness, identity and creditworthiness of the transaction by the authorities below. Thus we after considering the above find that the addition made by the authorities below are not correct - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the assessment order under Section 143(3).
2. Addition of Rs. 33,50,000/- under Section 69A of the Income Tax Act, 1961.
3. Disallowance of set-off loss of Rs. 1,00,572/- against income from business and profession.

Summary of Judgment:

Issue 1: Validity of the Assessment Order
The assessee argued that the assessment order passed under Section 143(3) was erroneous as the case was selected for limited scrutiny but was converted into complete scrutiny without proper approval. The Tribunal noted that the Assessing Officer (AO) issued notices beyond the scope of limited scrutiny without obtaining necessary approval from the competent authority. The Tribunal referred to CBDT Instruction No. 5/2016, which mandates that conversion from limited to complete scrutiny requires credible material and administrative approval. The Tribunal held that the AO's action was against the spirit of CBDT instructions and thus, the assessment order was bad in law.

Issue 2: Addition under Section 69A
The AO added Rs. 33,50,000/- as unexplained money under Section 69A, citing that the loan givers did not appear in response to summons. The assessee provided the names, addresses, PAN numbers, and bank statements of the loan givers, proving their identity and creditworthiness. The Tribunal referred to various judicial precedents, including the Supreme Court's decision in CIT vs. Orissa Corpn. (P) Ltd., which held that once the assessee provides sufficient evidence, the burden shifts to the AO to disprove the genuineness of the transactions. The Tribunal found that the AO did not pursue further inquiries and failed to bring any material to rebut the evidence provided by the assessee. Consequently, the Tribunal deleted the addition of Rs. 33,50,000/-.

Issue 3: Disallowance of Set-off Loss
The AO disallowed the set-off loss of Rs. 1,00,572/- against income from business and profession. Since the Tribunal decided the primary issues in favor of the assessee, the remaining issues were deemed consequential and did not require separate adjudication.

Conclusion
The Tribunal allowed the appeal of the assessee, holding that the assessment order was invalid due to improper conversion from limited to complete scrutiny, and deleted the addition of Rs. 33,50,000/- under Section 69A. The disallowance of set-off loss was also overturned as a consequence of the primary findings. The appeal was allowed for statistical purposes.