Parameters for selection of cases for scrutiny during the financial year 1996-97. - Income Tax - 1939/1996

INSTRUCTION NO. 1939/1996 Dated: May 17, 1996 Section(s) Referred: 143 Statute: Income - Tax Act, 1961 The following are the parameters for selection of cases for scrutiny during the financial year 1996-97 in respect of the returns of income filed during the Financial year 1996-97: I. CLASS 'A' (CASES FOR COMPULSORY SCRUTINY) i) all assessments relating to searches conducted on or before 30-6-95 (The procedure for assessment of cases where search was conducted after 30-6-95 will be governed by the provisions contained in Chapter XIV-B of I.T.Act.); ii) all assessments involving survey u/s. 133A; iii) all reassessments u/s.147 set aside assessments and assessments requiring compulsory scrutiny u/s. 44AD or 44AE of the Act; iv) any other assessment where scrutiny is recommended by the Investigation wing based on information in their possession; v) cases of assessees having turnover in excess of Rs. 25 crores in other CCIT Regions; vi) Company cases where total income as returned by the assessee is less than 50% of 'book profit' subject to a minimum variation of Rs.10 lakhs. NOTE: For the purpose of this clause 'book profit' would mean the net profit as shown in the profit and loss account of the relevant previous year prepared in accordance with the Companies Act, 1956; vii) cases where there is an increase in share capital or introduction of share application money and/or unsecured loan of Rs.1 crore or more in aggregate during the relevant previous year. II.CLASS 'B'(SAMPLE SCRUTINY CASES): After selection of cases for compulsory scrutiny under class 'A' and after excluding exceptions provided in para 2 below, the officer will select cases for sample scrutiny out of the remaining cases in the following manner:- i) 50% of the returns with income or loss of Rs.10.lakhs and above; ii)33% of the returns with income or loss of Rs. 2 lakhs and above but below Rs.10 lakhs(in case of company returns Rs.'2 lakhs' may be read as Rs.'50,000'); and iii) 3% of the returns with income or loss of less than Rs.2 lakhs( in case of company returns Rs.2 lakhs may be read as Rs.50,000'). III. CLASS 'C'-(INFORMATION BASED SCRUTINY CASES) In addition to the above categories, the cases where information has been received from the CIB of I.T.Department, sales-tax Department, Customs and Central Excise Department, FERA, any other Assessing Officer or similar other source, the Assessing officer will select the case for scrutiny with the approval of CIT. IV. LIMITED SCRUTINY OF CASES NOT COVERED IN CLASSES 'A', 'B' 'C' ABOVE IN DCIT(SR) AND COMPANY CASES: All the remaining returns falling within the jurisdiction of DCIT(SR) and all the returns of corporate assessees shall be examined for limited scrutiny in terms of CBDT Instruction No.1938 (F.NO.225/11/96/ITA.II) dated 17.5.96. The Board desires that all the returns received for Assessment Year 1995-96 as also the returns received for Assessment Year 1996-97 may be processed for limited scrutiny. 2. Following categories of cases falling in Class 'B' (Sample Scrutiny cases ) shall not be picked up for scrutiny: i) all cases of individual residents with returned income of Rs.1.20 lakhs or less where such income does not include income from business or profession and also there is no b/f and c/f loss (other than c/f loss from house property); ii) all other cases covered by CBDT Instructions No.1932 F.no.225/125/94/ITA.II dated 27.10.95 in respect of cases covered u/s 44AD(1) and 44AE (1) and (2) and Instructions No.1935 (F.No.225/62/96/ITA.II dated 12.3.96 in respect of cases where total income returned is more than 30% of the preceding year. For removal of doubts, even in respect of cases covered by para 2(i) and 2(ii) above, scrutiny is compulsory if the conditions mentioned in Class 'A' above prevail. 3. So far as the cases mentioned in Class B(i) and B(ii) in the first para are concerned, no special procedure for selection of the sample is needed since in the first category, each case will be taken up once in two years and in the second category, each case will be taken up once in three years. Thus in respect of cases mentioned in Class B(i) if the return of income for A.Year 1994-95 has been scrutinised, normally the return of income for A.Year 1995-96 will not be picked up for scrutiny. Similarly in respect of a case mentioned in Class B(ii) if the return of an assessee has been scrutinised for A.Y. 1994-95 the returns for A.Y. 1995-96 AND 1996-97 will not normally be picked up for scrutiny. As regards the cases mentioned in Class B(iii) the sample should be selected purely on a random basis. For this purpose, the returns falling under that category should first be serially numbered for each ward according to the acknowledgement number assigned to the returns of that Ward. Thereafter the Range Dy.Commissioner will allot a random number out of Nos.1 to 33 to each of the Assessing Officers Working in his jurisdiction, under intimation to the Commissioner of Income-tax. That number will be the random start for that Ward. Thus, if the selected number for example is 12 then 12th, 45th, 78th, 111th etc., returns of that Ward will be chosen for scrutiny. 4. The Chief Commissioner/Director General should ensure that there is an even distribution of work in different assessment units, However, if it is found that the workload of any Assessing Officer is either very high or very low, the percentage mentioned for selection of cases for sample scrutiny may be suitably varied by the Chief Commissioner of Income Tax. 5. Procedure for selection of cases for scrutiny in respect of cases of religious and charitable trusts and cases assessed in Central Charges is being prescribed separately by the Board. 6. Board has also decided that the non-filers of returns should be severely dealt with. Accordingly, if returns are not voluntarily filed by the due dates specified in the Act, notices under section 142(1) should be issued in all the cases and also effectively pursued thereafter. However, where the returns are filed in response to the notices, the criteria for selecting cases for scrutiny will be the same as above. 7. In cases selected for scrutiny wealth tax returns should also be taken up simultaneously for disposal. If in any case the wealth tax return is not filed, a prima facie examination of various taxable assets belonging to the assessee should be made to ascertain whether the assessee is liable to pay any Wealth Tax. In such cases further follow up action should be initiated by calling the Wealth-Tax return. If the prima facie examination does not indicate any liability of the assessee under the Wealth Tax Act a note in this regard may be placed on the file. 8. Save as provided in para 1(iv) above, these guidelines will be applicable in respect of returns of income filed on or after 1.4.96. In respect of returns filed prior to 1.4.96, the guidelines issued vide Instruction No.1917 dated 3rd June, 1994 as notified vide Instruction No.1922 dated 9th March, 1995 and Instruction No.1932 dated 27th October, 1995 shall apply. ANNEXURE-A List of adjustments permissible or though admissible, are not allowable to the extent claimed by the assessees. Illustration: (i) Pre-operative expenses which are to be capitalised or claimed as revenue expenses. ii) Incorrect claim of relief under chapter VI-A. iii)Incorrect computation of deduction u/s.32, 35(1), 35AC, 35 CCA, 35 CCB etc., iv) Recomputation of correct 'gross total income' u/s.80-A and total income u/s.80 AB. II. Factual additions to be made on the basis of information available on record. Illustration: (i) Under valuation of closing stock not including excise, import duty component in respect of raw material. (ii) Excise duty not included in the turnover. (iii)Central tax dues such as excise, central sales tax of earlier years paid during this year. (iv) Verification of TDS receipt reveal more than what is disclosed in the return. III. Any addition/disallowance which is required to be made to give effect to departmental instructions and circulars etc., (Illustration: Instruction No.1022 on disallowability of interest for late payment of P.F.dues) IV. cases where there are decisions of High Courts in favour of revenue contrary to which the assessee has made certain claims. (Illustration: Decision of Calcutta High Court in the case of Investors Corpn. Vs. CIT 201-ITR-378). V. Cases where there are decisions of High Courts against the revenue but such decisions have not been accepted by the Department. However, if the judgement is that of jurisdictional High Court the same has to be followed unless stay from Supreme Court against the operation of the judgment has been obtained. VI. Cases where additions/disallowance made in the preceding years has a bearing on the subsequent Assessment years. Illustration: 1)If cash credit is added in the preceeding year, interest paid to the alleged creditors needs to be disallowed in subsequent years. 2) If the rate of depreciation on any asset is changed, the same rate has to be applied in subsequent year after changing the WDV. 3) If in the preceding year value of closing stock changed in the subsequent year value of ending and closing stock on same basis is required to be adjusted. NOTE; However, no G.P. addition or adhoc disallowance out of misc.expenses, car expenses etc. should be made even if such disallowance was made in the preceeding year. VII. Any legal adjustments that are mentioned in auditors report but cannot be made under the provisions of section 143(1)(a). VIII. Claims of treating the income as exempt, but which according to the revenue are not exempt. Illustration: 1. Certain types of subsidies claimed as exempt. 2. Cess or tax collected but not paid. IX. The issue considered in the order u/s.263 by CIT in respect of preceding assessment years or issues based on major audit objections accepted by the Department and remedial action taken. X. Verification of CIB information(however if the number of transactions reported by CIB are many, the case may be examined from the point of view of taking up for 'Investigation)', XI. Any other issue to be taken up with prior approval of DCIT/Addl.CIT/CIT.