2024 (2) TMI 1332 - AT - Income Tax

Scope of Limited Scrutiny - Accrual of income - Addition towards advance fees and deposits from old students - AO attempt to convert limited scrutiny into complete scrutiny - HELD THAT - AR before us made a statement from the Bar that similar accounting treatment of advance fees and deposits from old students done by the assessee was duly accepted by the revenue in the earlier years even in scrutiny assessment proceedings and that there was no change in factual matrix during the year when compared to earlier years. Even in AY 2015-16, the treatment of the same in the books of accounts was accepted by the ld. AO u/s 143(3) proceedings dated 18.12.2017. In any event, he also stated that the entire issue is revenue neutral as assessee has been consistently following the practice of offering the earlier advance fees to income and whatever fee that is received for the period beyond the financial year is treated as advance fees, which would become income in the succeeding year. DR could not bring any contrary material to this argument. We find that CIT(A) had elaborately dealt with the issues in dispute and had granted relief to the assessee both on legal issue as well as on merits. As per the scheme of the Act, AO if he desires to convert limited scrutiny into complete scrutiny, he has to obtain prior permission from the competent authority to do so and only then could assume jurisdiction to examine other issues. In the instant case, the same was admittedly not done by the AO. CIT(A) was duly justified in quashing the additions made by the ld. AO on this ground. CIT(A) had elaborately given a categorical finding that the income had been properly accounted and offered by the assessee in accordance with the provisions of the Act and there is no scope for making any addition even on merits. Appeal of the revenue is dismissed.

Summary

Issues Involved:
1. Expansion of scope of inquiry by the Assessing Officer (AO) without permission.
2. Addition of advance fees as income.
3. Addition of old students' credit balances as income.

Summary:

1. Expansion of Scope of Inquiry:
The primary issue was whether the AO expanded the scope of inquiry beyond the permissible limits of limited scrutiny without obtaining prior permission from the Principal Commissioner of Income Tax (Pr. CIT). The AO examined advance fees and deposits from old students, which were not part of the initial limited scrutiny parameters. The Tribunal upheld the CIT(A)'s observation that the AO acted in violation of CBDT's Instruction No. 20/2015 by not seeking the necessary approval to convert the limited scrutiny into complete scrutiny. Citing relevant case laws, the Tribunal emphasized that the AO's actions were without jurisdiction and thus, the additions made were not legally sustainable.

2. Addition of Advance Fees as Income:
On the merits, the AO had added Rs. 5,12,68,594/- as income, arguing that the advance fees should be treated as income in the year of receipt. The CIT(A) found that the AO did not adequately consider the refund policy and the matching principle in accounting, which states that revenue should be recognized when services are rendered. The CIT(A) noted that the assessee had consistently followed this method of accounting since 2008-09, and the Department had accepted it in previous assessments. The Tribunal agreed with the CIT(A) that the advance fees should remain a liability and not be taxed in the year of receipt, especially since the fees were already offered as income in the subsequent year.

3. Addition of Old Students' Credit Balances:
The AO added Rs. 23,54,033/- related to credit balances of old students as income. The CIT(A) observed that this issue was also beyond the scope of limited scrutiny and the AO did not follow the proper procedure to expand the inquiry. On merits, the CIT(A) found that the AO did not provide evidence to dispute the assessee's policy of treating such balances as liabilities for three years. The Tribunal upheld the CIT(A)'s decision to delete this addition, noting the lack of proper inquiry and evidence.

Conclusion:
The Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s decision to quash the additions made by the AO on both legal and substantive grounds. The Tribunal emphasized the importance of adhering to procedural requirements for expanding the scope of scrutiny and recognized the consistency in the assessee's accounting practices. The appeal of the revenue was dismissed, and the order was pronounced in the open court on 23/02/2024.