Recent Instruction about expanding scope of scrutiny and some related issues- limitation to serve notice for expanded scrutiny

[CA DEV KUMAR KOTHARI]

References and links:

CBDT Instruction: F.NO. DGIT(Vig.)/HQ/SI/2017-18 dt. 30th November, 2017 Earlier instructions referred to in above instruction:

CBDT Instructions dated 26.09.2014, 29.12.2015 and 14.07.2016 about scrutiny.

 Limited scrutiny of ITR:

ITR are selected for limited scrutiny, when it is considered that though full scrutiny of ITR is not required but due to certain specific information found in the ITR or other information gathered by the Income-tax Department, it is desirable to scrutinise certain specific issues related to assessment of income.

Issues for limited scrutiny:

Some illustrative issues for limited scrutiny selection of ITR are:

a. Substantial increase in income or loss.

b. Substantial increase in liabilities.

c. Substantial claims for exemptions and deductions.

d. Contradictory, unreconciled information in ITR.

e. TDS/TCS information and particularly cases of mismatches.

f. Information from other  assesses and  agencies in TDS and TCS returns Annual Information Return particularly about expenses, investments, disinvestments etc.

Notice is issued u.s. 143.2

For limited scrutiny also notice is to be issued u.s. 143.2 by the AO. The notice has to be issued on satisfaction of certain circumstances and within limits prescribed in this regard in the section 143(2). Relevant portion of which is reproduced below with highlights added by author for easy analysis:

[Assessment.

143. [(1) Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, such return shall be processed in the following manner, namely:-

xxx.

²⁶[(2) Where a return has been furnished under section 139, or in response to a notice under sub-section (1) of section 142, the Assessing Officer or the prescribed income-tax authority, as the case may be, if, considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner, shall serve on the assessee a notice requiring him, on a date to be specified therein, either to attend the office of the Assessing Officer or to produce, or cause to be produced before the Assessing Officer any evidence on which the assessee may rely in support of the return:

Provided that no notice under this sub-section shall be served on the assessee after the expiry of six months from the end of the financial year in which the return is furnished.]

On reading of the above provision we find that in case given circumstances exist then the AO is duty bound to serve a notice which can only when a valid notice has been issued. This is so as words used are ‘shall serve’ .

The following are circumstances in which notice has to be served:

  When the Assessing Officer or the prescribed income-tax authority, considers it necessary or expedient to ensure that the assessee has not:

                   a. understated the income or

                   b. has not computed excessive loss or

                  c.  has not under-paid the tax in any manner.

In such circumstances service of a notice for enquiry and scrutiny is mandatory.

Therefore, it can be said that issue of a notice for any type of scrutiny that is limited or complete are mandatory.

The notice should also be issued within limited period.

Therefore, in view of author, notice for extension of scope of scrutiny must also be  served within limitation prescribed that is within six month from the end of financial year in which Return of Income was filed. 

Extension of scrutiny:

It is experienced that in many cases Assessing Officers extend scope of enquiry and go beyond scope as per limited scope for which return was selected for limited scrutiny. This also happens in most of cases after lapse of limitation for service of notice u/s 143.2.

The CBDT has also observed that some AO expand scope of limited scrutiny for some ulterior motive and without complying with procedural requirements and without permission of concerned higher authority.

Recent Circular of Board:

Order-Instruction - Income Tax

F.NO. DGIT(Vig.)/HQ/SI/2017-18

Government of India

Ministry of Finance

Department of Revenue

Central Board of Direct Taxes

New Delhi-110001

Dated: 30th November, 2017

Order-Instruction - Income Tax  - Dated: 30th November, 2017 has been issued on the aspect of expanding scope of scrutiny. The Circular is reproduced below with highlights added:

Subject: Unauthorized expansion of the scope of limited scrutiny - instructions - reg.

CBDT has issued detailed guidelines/ directions for completion of cases of limited scrutiny selected through CASS module. These guidelines postulate that an Assessing Officer, in limited scrutiny cases, cannot travel beyond the issues for which the case was selected. The idea behind such stipulations was to enforce checks and balances upon powers of an AO to do fishing and roving inquiries in cases selected for limited scrutiny.

2. Further, the guidelines for proper maintenance of order sheets have been given in the Manual of Office Procedure issued by the Directorate of Organisation and Management Services. The Manual clearly lays down: -

A. The minutes of the hearing must be entered with date, in the order-sheet.

B. Make proper order-sheet entries for each posting, hearing and seeking and granting of adjournments.

C. If nobody attends a hearing or the request for adjournment comes after the hearing date, enter the facts in the order-sheet.

Maintenance of a cursory and cryptic order sheet shows irresponsible, ad hoc and undisciplined working of any officer.

3. Instances have come to notice of CBDT where some Assessing Officers are travelling beyond their jurisdiction while making assessments in Limited Scrutiny cases by initiating inquiries on new issues without complying with mandatory requirements of the relevant CBDT Instructions dated 26.09.2014, 29.12.2015 and 14.07.2016. These instances have been viewed very seriously by the CBDT and in one case the Central Inspection Team of the CBDT was tasked with examination of assessment records on receipt of allegations of several irregularities. Amongst other irregularities, it was found that no reasons had been recorded for expanding the scope of limited scrutiny, no approval was taken from the PCIT for conversion of the limited scrutiny case to a complete scrutiny case and the order sheet was maintained very perfunctorily.

This gave rise to a very strong suspicion of mala fide intentions. The Officer concerned has been placed under suspension.

In view of discussion in the preceding paragraphs it is once again reiterated that the

4. Assessing Officers should abide by the instructions of CBDT while completing limited scrutiny assessments and should be scrupulous about maintenance of note sheets in assessment folders.     

(Rakesh Gupta) 

ADG (V) HQ-I  New Delhi

Care on part of Assessee:

Ground reality is that on considering of power to harass, which AO has, many of assesses do not want to challenge action of AO when he ask information, details and explanations beyond scope of enquiry stipulated in limited scrutiny. This is because if he challenge the possibility is that AO will be annoyed and will harm assessee because there is hardly any action against erring officers. Some actions taken by higher authorities are generally for name sake and there is hardly any fear amongst government officers for any subtle action being ultimately taken against them. Few days suspension or transfer and  posting at unfavourable place or delay in promotion by few years hardly have any deterrent on government officers   who are in habit of harassing public and making money by adopting arm twisting tactics by denying legally available benefit, and threatening public ( tax payers) with penal provisions.

When a case is selected for limited scrutiny, the assessee can very well say that he is not required to explain beyond scope of limited scrutiny. In case AO want to expand scope of scrutiny, then the AO must issue a show cause notice and give opportunity of hearing as to why scope of scrutiny should not be expanded. Even the Principal CIT or other senior officer whose permission is required to expand scope of scrutiny must be required to give an opportunity of hearing to assessee.

Limitation and notice for expansion of scrutiny:

In case service of any notice for expanded scrutiny is beyond the limitation period as per proviso to S.143.2,  the assessee can also raise objection on ground of limitation. Though in  this regard there is no precedence noticed by author, however, in view of purpose of scrutiny as stated in S. 143.2  and  limitation for service of notice, it is fair enough that even notice for increased scope of scrutiny should be within such limitation. If the notice was not served within such limitation period, then it can be considered as time barred.

CBDT Suspends AO For Converting Ltd Scrutiny Into Full Scrutiny With Mala Fide Intention

The CBDT has sent a strong message to all unscrupulous AOs that it will no longer tolerate their shenanigans of harassing taxpayers with a view to extort bribes. The usual modus operandi of such AO’s is to conduct roving inquiries and threaten to make huge additions unless the hapless taxpayer agrees to pay a bribe. The CBDT has put an end to this nefarious practice by directing that all cases where a limited scrutiny is converted into a full scrutiny should be backed with an order sheet entry in which reasons are given. The approval of the Pr CIT has also been made a precondition. An officer who defied this directive has been placed under suspension as his action gave rise to a “very strong suspicion of mala fide intentions“.