2022 (11) TMI 1129 - AT - Income Tax

Scope of limited scrutiny - Conversion of Partenrship into LLP - Securities premium reserve which stood transferred by the erstwhile company to the assessee-LLP upon conversion as a taxable profit - whether the said addition could have been made in a limited scrutiny, which has been selected by a notice u/s 143(2) for examination of investment in unlisted equities, low income and high loans/advances/investments and low income and high investments without converting the same into unlimited scrutiny - HELD THAT - A.R relied on the decision wherein issue decided in favour of assessee - As in the subsequent decision in the case of ITO Vs. M/S Godhuli Dealcom LLP 2022 (6) TMI 1276 - ITAT KOLKATA the coordinate bench has taken a view which is against the assessee but in that decision the earlier decision as cited above was neither noticed nor referred. Under the present facts we are guided by the decision of the coordinate bench in the case of M/S Royal Calcutta Turf Club Vs DCIT 2017 (11) TMI 1200 - ITAT KOLKATA wherein it has been held that where there are two conflicting decisions, then in that scenario the earlier has to be followed as in the latter decision the earlier one was neither noticed nor referred. Even the ratio laid down by the Hon ble Supreme Court in the case of Vegetable Products Ltd. 1973 (1) TMI 1 - SUPREME COURT is applicable in this case. Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition of Rs. 8,55,00,000/- as taxable profit due to securities premium reserve transfer upon conversion to LLP.
2. Validity of the Assessing Officer's (AO) addition beyond the scope of limited scrutiny.

Detailed Analysis:

Issue 1: Deletion of Addition of Rs. 8,55,00,000/- as Taxable Profit

The revenue challenged the order of the Ld. CIT(A) for deleting the addition of Rs. 8,55,00,000/- made by the AO on account of securities premium reserve. The AO argued that upon the conversion of the erstwhile company into an LLP, the share premium reserve of Rs. 8,55,00,000/- became available to the partners of the LLP and should be treated as taxable profit. The AO contended that this premium reserve, which was previously not available to shareholders except for issuing bonus shares, should be considered as profit on the date of conversion and thus be brought to tax.

The assessee countered this by arguing that the AO exceeded his jurisdiction by making this addition, as the case was selected for limited scrutiny to examine specific issues such as investment in unlisted equities, low income, and high loans/advances/investments. The assessee relied on the decision of the Co-ordinate Bench of ITAT, Kolkata in similar cases, which held that the AO should restrict his jurisdiction to the issues specified in the limited scrutiny notice.

The Tribunal, after reviewing the submissions and the material on record, found that the issue was covered in favor of the assessee by the decision of the Co-ordinate Bench in the case of ITO vs. M/s Dhanterash Financial Advisory LLP. The Tribunal noted that the AO had made additions on grounds that were not part of the limited scrutiny notice, which was impermissible. The Tribunal emphasized that the AO should have confined his assessment to the issues mentioned in the limited scrutiny notice and that any expansion of the scope required prior approval from the competent authority.

Issue 2: Validity of AO's Addition Beyond the Scope of Limited Scrutiny

The assessee raised a legal issue regarding the validity of the AO's addition beyond the scope of limited scrutiny. The assessee argued that the AO's addition of Rs. 8,55,00,000/- was beyond the scope of the limited scrutiny notice issued under Section 143(2) of the Income Tax Act. The assessee cited several judicial pronouncements to support their argument that the AO could not travel beyond the issues specified in the limited scrutiny notice without obtaining the necessary approval from the higher authorities.

The Tribunal agreed with the assessee's contention, citing the decision in the case of Sanjeev Kr. Khemka vs. Pr. CIT, where it was held that the AO could not expand the scope of limited scrutiny without proper authorization. The Tribunal also referred to other cases such as M/s Chengmari Tea Co. Ltd. vs. ACIT and JDB Finance vs. DCIT, which reinforced the principle that the AO's jurisdiction in limited scrutiny cases is confined to the issues identified in the scrutiny notice.

The Tribunal concluded that the AO had exceeded his jurisdiction by making additions on issues not covered in the limited scrutiny notice and without obtaining the required permissions. Consequently, the assessment order passed under Section 143(3) of the Act was deemed void ab initio and liable to be quashed.

Conclusion:

The appeal of the revenue was dismissed, and the cross-objection of the assessee was allowed. The Tribunal held that the AO's addition of Rs. 8,55,00,000/- was beyond the scope of the limited scrutiny notice and thus invalid. The order pronounced on 16th November 2022 affirmed the assessee's position and provided relief by quashing the assessment order.