RESTRICTED SCOPE OF SCRUTINY IN CASES SELECTED FOR SCRUTINY THROUGH "CASS" IN THE "AST" MODULE!

[C.A. DEV KUMAR KOTHARI]

Issue on discussion forum of TMI:

In Issue ID number 924 an issue was raised as to whether the A.O. has scope to examine other matters when the case is selected through CASS in the AST   module or on the basis of information gathered through  Annual Information Return AIR?

Shri CA Surendra Gupta, learned  editor of  this website, has  expressed his views on this issue to which the author agreed in principal on the basis of practical aspects in administration of the provisions in this regard.

However, the author  had  also expressed his view that in such cases a case is not selected for scrutiny by application of mind by the A.O. as required u/s 143(2) (ii),but the selection is in a automated or mechanical manner, therefore, reading between lines , very reasonably a plea can be taken that the A.O. has restricted scope of enquiry. The contents of issue and views expressed are reproduced below for ready reference:

Issue ID = 924            Submitted on : - 07-10-2008

                   Submitted by: - CA GOPAL JI AGRAWAL

If a case is taken into scrutiny on the basis of AIR, can asseessee has any right to restrict the AO to the inquiry covered under AIR or AO has similar powers in other cases picked up in scrutiny. I think some board instructions had been issued in past and later modified or so. Please help me out.

Replies:

Date of submission: - 12-10-2008   By: - DEV KUMAR KOTHARI

 Prima facie I agree with Mr. Surendra Gupta that the A.O. can proceed to examine all aspects for assessment even if notice u/s 143(2) is issued on the basis of AIR. However, reading between lines of s. 143 (2) (ii) it can be said that the expressions used therein like "...if he (AO) consider it necessary or expedient to ensure that the assessee had not understated..." mean that the A.O. should have so considered by application of his mind, and therefore, there should also be recording for the same because otherwise it cannot be said that he has actually applied his mind and so considered about need of enquiry beyond what is suggested by AIR. If the notice is issued in mechanical manner based on AIR alone, and without any other reason recorded by the A.O. , the assessee can request the A.O. to restrict scope of enquiry to the aspects covered by AIR. For this purpose the assessee must have copy of order sheet and other relevant records, to establish that notice has been issued only on the basis of AIR and not in terms of necessity or expediency found by the A.O. after application of his mind. The matter will involve litigation and further professional assignments.

Date of submission: - 09-10-2008   By: - Surender Gupta

 There is no provision in Income Tax to restrict the power of AO to make assessment as a whole under section 143(2), (3). Once assessment proceedings are started, AO is duty bound to complete the assessment for the whole assessment year by computing the whole income.

Up date on the issue:

Recently author had received copy of some of assessment orders passed under section 143(3), of my clients, (case was represented by other A/R) for review and perusal and further suggestions. In these orders learned A.O. has restricted his scope of enquiry to the extent of verifying the  information found in  AIR in relation to the assesse. The A.O. has mentioned this fact in the assessment orders. The learned A.O. has followed some instructions , but reference thereof has not been given. Extracts / relevant part of orders, so far required in the context of this article, are appended below in little modified manner to keep secrecy in mind, but without disturbing reasoning of the A.O. , only for illustrative purposes:

Examples of preamble and findings:

a.  The case was selected for scrutiny through CASS in the AST module.

b.   In connection with the scrutiny, the notice u/s 143(2) of the income Tax Act, 1961 was issued and served on the assessee on ….. The formal notice u/s 142(1) of the Income Tax Act, 1961 was issued and served on the assessee asking him to produce and submit certain details and documents to substantiate his Return of Income.

c.   In response to the said notices Mr….. A/R appeared from time to time and produced various details and accounts to explain the source of investment. The same were test checked and examined.

d.  Information available through CASS in the AST module was that the assesse had made investment in IPO of  shares/ units of Mutual Funds….. etc. as per details.

e.  The A/R placed documents and details to substantiate the details of the investment and that the assesse had made the said investment through his own funding. Copies of Bank Statements were test checked and examined during the hearing proceedings.

Relevant portion of order , with highlights, as used by the A.O.:

No other details were checked/ examined as the case is selected after receipt of A I R information, as per the instructions.   

The Return of income submitted by the assessee is accepted.

  Hence the computation of the Total income of the assessee is here as under:-

Returned income  Rs. Seven lakh.

Assessed income   Rs. Seven Lakh.

Assessed as above u/s 143(3)….

In view of the above illustrations from orders passed by A.O.'s it is clear that there are certain instructions for limiting scope of scrutiny. The advocate who appeared before the A.O. wanted a copy of the instructions, however, learned A.O. did not provide the same. Author has advised him to again ask for the copy of such  instructions and  if necessary to apply for the same, because in view of findings recorded by the A.O. in his order, now the assessee has right to obtain a copy of the same.

Readers are requested to place a copy of  such instructions if any  one has the same. After all we can improve ourselves only by exchange of information.

Readers are also requested to make discussion forum  and article sections more useful by providing their views while sending issue and  more discussions on the same. 

Discussions to this article

[DEV KUMAR KOTHARI]

On the subject readers may refer to the folowing Circular.

F.No.225/26/2006-ITA-II(Pt.)
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
New Delhi

Dated: September 8, 2010

Subject: Selection of cases for scrutiny on the basis of data in AIR returns and subsequent assessment proceedings - regarding.

Reference is invited to Board's letter of even number dated 23rd May, 2007 regarding scope of enquiry in the scrutiny cases selected only on the basis of information received through the AIR returns.

2. The above mentioned guidelines have been reconsidered by the Board and it has been decided that the scrutiny of such cases would be limited only to the aspects of information received through AIR. However, a case may be taken up for wider scrutiny with the approval of the administrative Commissioner, where it is felt that apart from the AIR information there is a potential escapement of income more than Rs. 10 Lacs.

3. It has also been decided that in all the cases which are picked un for scrutiny only on the basis of AIR information, the notice u/s 143(2) of Income Tax Act should clearly be stamped with "AIR Case".

This should be immediately brought to the notice of all the officers working in your region. “