2024 (11) TMI 970 - AT - Income Tax

Scope of limited Scrutiny - Validity of Notice u/s 143(2) - case of the assessee was selected for limited scrutiny i.e. for verifying the cash deposits during demonetization - DR concluded that notice would indicate that the case was selected for scrutiny assessment, thus tried converting the limited scrutiny to a full scrutiny, HELD THAT - Though in the heading, it exhibits limited scrutiny (Computer Aided Scrutiny Selection) but thereafter in the first paragraph, it only talks of scrutiny and then in second paragraph, it talks upon the opportunity being provided to the assessee what he wants to say in support of the return. It is pertinent to observe that in para one, the ld. AO has to identify the issues for examination. If this proforma is being read with the first paragraph of the assessment order, then, it would reveal that in the third line of the first paragraph, ld. AO has used the expression this return was selected for scrutiny in CASH on the issue of cash deposits during demonetization period . It would indicate that the case was selected for scrutiny but for the issue of cash deposit during demonetization, this mention of the issue would indicate that it was for a limited purpose of scrutinizing the cash deposits during demonetization. Its scope for making other additions would only be enlarged by following due procedure laid down by the CBDT vide its Instruction No. 5 AO has not made any addition of cash deposit during demonetization period. The assessee has deposited small amounts, which have been accepted by the ld. Assessing Officer. Therefore, the assessment order itself is not sustainable because it has been passed by the AO by exceeding his limited powers. The ld. Assessing Officer ought to have followed the procedure contemplated in CBDT Instruction bearing No. 5 of 2016 for converting a limited scrutiny assessment into a full scrutiny. Accordingly, we quash the assessment order. Appeal of the assessee is allowed.

Summary

Issues Involved:

1. Validity of Notice under Section 143(2) of the Income Tax Act.
2. Jurisdictional error in assessment order due to limited scrutiny selection.
3. Non-compliance with CBDT Instructions for converting limited scrutiny to full scrutiny.

Detailed Analysis:

1. Validity of Notice under Section 143(2):

The assessee challenged the validity of the notice issued under Section 143(2) of the Income Tax Act, arguing that it was not compliant with the CBDT Instruction F. No. 225/157/2017/ITA-II dated 23.06.2017. The instruction mandates specific formats for notices, distinguishing between limited scrutiny, complete scrutiny, and compulsory manual scrutiny. The notice issued to the assessee did not specify the type of scrutiny, rendering it invalid as per the legal requirements. The Tribunal accepted this argument, noting that the notice must adhere to the prescribed formats to be valid.

2. Jurisdictional Error in Assessment Order:

The assessee's return was selected for limited scrutiny specifically to verify "cash deposit during demonetization." However, the assessment order included additions unrelated to this issue, such as disallowance of trawler-related expenses, additions on account of sundry creditors, and others. The Tribunal found that the Assessing Officer exceeded his jurisdiction by addressing issues beyond the scope of the limited scrutiny without following the proper procedure for converting it to full scrutiny. The Tribunal relied on the CBDT Instruction No. 5 of 2016, which outlines the procedure for expanding the scope of scrutiny, emphasizing the need for credible material and administrative approval.

3. Non-compliance with CBDT Instructions for Converting Limited Scrutiny to Full Scrutiny:

The Tribunal highlighted that the Assessing Officer failed to comply with the CBDT Instruction No. 5 of 2016, which requires a reasonable view of potential under-assessment and approval from higher authorities before converting a limited scrutiny case to full scrutiny. The Tribunal noted that the Assessing Officer did not record reasons or obtain necessary approvals, rendering the assessment order unsustainable. The Tribunal cited the case of Principal Commissioner of Income Tax v. Weilburger Coatings (India) (P.) Ltd, where similar procedural lapses led to the quashing of the assessment order.

Conclusion:

The Tribunal quashed the assessment order, ruling that it was passed without proper jurisdiction and in violation of CBDT instructions. The appeal of the assessee was allowed, and the Tribunal did not address other issues on merit, as they became academic in nature following the quashing of the assessment order. The decision underscores the importance of adhering to procedural requirements and jurisdictional limits in tax assessments.