2019 (12) TMI 822 - AT - Income Tax

Disallowance of deduction u/s 54B - Validity of assessment framed by the AO for want of jurisdiction to take up the issue of disallowance of deduction u/s 54B without having necessary approval of conversion of limited scrutiny to comprehensive scrutiny - HELD THAT - In the proceedings for limited scrutiny the AO was satisfied with the source of increase in the capital of the assessee and even did not proceed further after the reply and documents filed by the assessee in response to the notice u/s 142(1) dated 4-07-2016. Only after dropping the said notice, the AO issued fresh notice u/s 142(1) on 25-11-2016. The AO has finally made addition only on account of disallowance of deduction u/s 54B. Therefore, at the time of initiating the complete scrutiny, the issue under limited scrutiny was not pending with the AO as he was satisfied with the reply and documentary evidence on the said issue. In the case in hand, the AO has not intimated the assessee about the conversion of limited scrutiny to complete scrutiny which is a serious violation of the instructions issued by the CBDT. AO has taken up the issue and initiated proceedings for complete scrutiny without necessary approval with him. Therefore, the issue taken up by the AO regarding disallowance of deduction u/s 54B is prior to the necessary approval communicated to the AO and therefore, in the absence of communication in writing to the AO about the approval, the assumption of jurisdiction by the AO is invalid. Consequently, the addition made by the AO by denying the deduction u/s 54B is not sustainable and the same is deleted. - Decided in favour of assessee.

Summary

Issues Involved:

1. Validity of converting limited scrutiny to complete scrutiny without proper approval.
2. Disallowance of deduction under section 54B.
3. Allegation of sham transaction and afterthought by the assessee.
4. Addition of share application money.
5. Interpretation of provisions giving incentive for growth and development.
6. Classification of agricultural land as capital assets under section 2(14).

Detailed Analysis:

1. Validity of Converting Limited Scrutiny to Complete Scrutiny:

The primary issue was the validity of the assessment framed by the AO for converting the case from limited scrutiny to complete scrutiny without the necessary approval. The assessee argued that the AO did not have jurisdiction to scrutinize the claim of deduction under section 54B without prior approval for conversion from limited to complete scrutiny. The assessee submitted that the AO issued notices under sections 143(2) and 142(1) without proper jurisdiction and beyond the limitation period for issuing such notices. The CBDT instructions clearly mandate that cases selected for limited scrutiny cannot be converted to complete scrutiny without prior approval from the competent authority. The AO claimed to have obtained approval from the Pr. CIT, but the assessee contended that this approval was an afterthought and pre-dated. The Tribunal found that the approval from the Pr. CIT was communicated to the AO only after the notice for complete scrutiny was issued, rendering the AO’s actions invalid and the assessment order null and void.

2. Disallowance of Deduction under Section 54B:

The AO disallowed the deduction claimed under section 54B, allowing only ?24,32,800/- against the claimed ?89,77,226/-. The Tribunal did not delve into the merits of this disallowance due to the invalidity of the AO’s jurisdiction in converting the scrutiny type.

3. Allegation of Sham Transaction:

The AO held that the agreement for sale dated 1/4/2013 was a sham transaction and an afterthought by the assessee. However, this issue was not further elaborated upon in the judgment due to the primary focus on the procedural invalidity of the assessment.

4. Addition of Share Application Money:

The AO made an addition of ?65,44,426/- in the name of 'Share application money,' which the assessee contended was not applicable. This issue was also not addressed in detail due to the procedural invalidity.

5. Interpretation of Provisions for Growth and Development:

The assessee argued that the AO did not follow binding decisions of the Supreme Court and other High Courts, which hold that provisions giving incentives for growth and development should be interpreted liberally. The Tribunal did not need to address this argument due to the procedural invalidity of the assessment.

6. Classification of Agricultural Land as Capital Assets:

The assessee claimed that the agricultural land sold was outside the purview of the definition of capital assets under section 2(14) of the Income Tax Act, and thus no capital gains tax was chargeable. This ground was dismissed as not pressed by the assessee during the hearing.

Conclusion:

The Tribunal concluded that the AO's actions in converting the case from limited scrutiny to complete scrutiny without proper approval were invalid. Consequently, the assessment order was quashed, and the addition made by denying the deduction under section 54B was deleted. The appeal was allowed in favor of the assessee.