Conversion of scrutiny from “limited scrutiny” into “complete scrutiny without prior approval and permission of Pr. CIT/CIT is bad in law
Short Overview Where no administrative approval from the competent authority was obtained by AO for converting the case of the assessee from “limited scrutiny” into “complete scrutiny”, procedure of which has been laid down in Instruction No. 5 of 2016, dated 14-7-2016 issued by CBDT, the impugned assessment order passed by AO under section 143(3) was to be null and void.
Assessee filed appeal against assessment order passed under section 143(3) by AO on the ground that no prior approval and the permission of Pr. CIT/CIT was obtained before conversion of its case from “limited scrutiny” into “complete scrutiny” while completing assessment, and passing assessment order.
It is held that Admittedly, no administrative approval from the competent authority was obtained by AO for converting the case of the assessee from “limited scrutiny” into “complete scrutiny” procedure of which has been laid down in Instruction No. 5 of 2016, dated 14-7-2016 issued by CBDT. Further, revenue has neither pointed out any distinguishing features in the facts of the present case and that of Urban Improvement Cooperative Bank Limited (ITA No. 7496/Del/2019 Order, dated 7-2-2020) nor has placed any material on record to demonstrate that the order of the Tribunal in the case of Urban Improvement Cooperative Bank Limited (ITA No. 7496/Del/2019 Order, dated 7-2-2020) has been set aside/stayed/overruled by higher judicial forum. Therefore, following the aforesaid decision in the case of <i>Urban Improvement Cooperative Bank Limited (ITA No. 7496/Del/2019 Order, dated 7-2-2020) and for similar reasons, it was held that the impugned assessment order passed by the AO under section 143(3) to be null and void.
Decision: In assessee’s favour.
Followed: Urban Improvement Cooperative Bank Limited (ITA No. 7496/Del/2019 Order, dated 7-2-2020)
IN THE ITAT, DELHI BENCH
BHAVNESH SAINI, J.M. & ANIL CHATURVEDI, A.M.
Brite Infrastructure (P) Ltd. v. ACIT
ITA No. 3508/Del/2019
23 November, 2020
Assessee by: Raj Kumar, CA & Sumit Goel, CA
Revenue by: Bhopal Singh, Sr. Departmental Representative
ORDER
Anil Chaturvedi, A.M.
The present appeal filed by the assessee is directed against the Order, dated 14-3-2019 of the Commissioner (A)-12, New Delhi relating to assessment year 2015-16.
2. The relevant facts as culled from the material on records are as under :–
3. Assessee is a company which is stated to be engaged in the business of Civil Construction, Highway, Airport, Real Estate share Trading etc,. Assessee electronically filed its return of income for assessment year 2015-16 on 21-9-2015 declaring income of Rs. 44,42,609. The case was selected for scrutiny through CASS and thereafter assessment was framed under section 143(3) vide Order, dated 1-8-2016 and the total income before adjustment of brought forward losses was determined at Rs. 55,48,011.
4. Aggrieved by the order of the assessing officer, assessee carried the matter before the Commissioner (Appeals) who vide Order, dated 14-3-2019 in Appeal No. 10115/17-18/99/18-19 dismissed the appeal of the assessee.
5. Aggrieved by the order of Commissioner (Appeals), assessee is now in appeal before us and has raised the following grounds :–
“1. That under the facts and circumstances the addition/disallowance of Rs. 11,05,.402 under section 14A read with rule-8D is illegal, unjustified and unsustainable in law and on merits.
1.1 That without prejudice, the issue of section 14 since not covered in the limited scrutiny asstt., hence, the issue of addition under section 14A read with rule-8D is outside the scope of impugned asstt. proceedings.
1.2 That without prejudice, as no expenditure has been incurred for earning the exempted income and also no such expense has been identified by the lower authorities, hence the disallowance under section 14A read with rule-8D in unwarranted.
1.3 That without prejudice, in the absence of recording of satisfaction of assessing officer as required by law for incurring expenditure by the assessee on earning exempted income and that the claim of assessee that no such expenditure has been incurred, the learned assessing officer could not had assumed jurisdiction to make any disallowance under section 14A of the Income Tax Act.
1.4 That the calculations and the basis of calculating disallowable amount of Rs. 11,05,402 are incorrect and erroneous, even on applying section 14A read with rule-8D correctly, the disallowable amount calculates only Rs. 56,637.”
6. Before us at the outset the learned Authorised Representative submitted that if the issue in ground no. 1.1 is decided in favour of the assessee then the other grounds raised on the merits of disallowance under section 14A would not require any adjudication.
7. With respect to ground No 1.1, learned Authorised Representative pointed to the assessment order passed under section 143(3) and pointing to para 2 of the order submitted that the case was selected for limited scrutiny for examining the following things namely (i) Low income in comparison to high loans/advances/investments in shares. (ii) To examine the large increase in investment in listed equities during the year. He submitted that assessing officer thereafter in the assessment order passed under section 143(3) has made addition by disallowing expenditure under section 14A of the Act which was not part for which the case initially selected for scrutiny under CASS. He submitted that when the case which is initially selected for “limited scrutiny” and is thereafter converted into “complete scrutiny”, the assessing officer is required to take administrative approval from Principal Commissioner/Commissioner in terms of Instructions No. 5/2016, dated 14-7-2016 issued by CBDT and he is also required to comply with the directions contained therein. He submitted that in the present case, no administrative approval from the competent authority was obtained by the assessing officer and in such a situation, the order passed by the assessing officer being contrary to the instructions issued by the CBDT, is null and void and in support of his aforesaid contention, he relied on the following decisions :–
(i) Urban Improvement Company Co. (P) Ltd,. v. ITO in ITA No. 7496/Del/2019 Order, dated 7-2-2020.
(ii) CBS International Projects (P) Ltd., v. ACIT in ITA No. 144/Del/2019 Order, dated 28-2-2019.
(iii) Uday Punj (HUF) v. ITO in ITA No. 643/Del/2020 Order, dated 26-8-2020.
8. On the merits of the disallowance made under section 14A, he submitted that the assessing officer nowhere recorded the mandatory satisfaction as to why the claim of the assessee of having not incurred any expenditure for earning exempt income is not correct and the assessing officer also did not examine the books of accounts to reach a conclusion that the expenses have been incurred which needs to be disallowed under section 14A. He submitted that in the absence of mandatory satisfaction, the assessing officer could not proceed to disallow the expenditure under section 14A and for this proposition, he relied on the decision of Hon’ble Delhi High Court in the case of CIT v. Taikisha Engineering India Limited reported in 2015 (54) taxmann.com 109 Delhi : 2015 TaxPub(DT) 0391 (Del-HC). He thereafter submitted that the assessing officer mechanically applied the format of rule 8D without identifying any expenses incurred for earning exempt income. He submitted that in the absence of identification of such expenses, no disallowance can be made and for this proposition he relied on the decisions in the case of CIT v. Hero Cycles Ltd., (2010) 233 CTR 74 (P&H) : 2010 TaxPub(DT) 0960 (P&H-HC) and CIT v. Torent Power Ltd., (2014) 363 ITR 474 Gujarat : 2014 TaxPub(DT) 1715 (Guj-HC). He thereafter submitted that calculation made by the assessing officer for working out the disallowance under section 14A was also wrong in view of the fact that the assessing officer considered all the investments whether such investments earned exempt income or not and also the shares of unlisted companies which did not declared any dividend at all. He submitted that if the correct calculation by excluding the investments from which assessee has not earned any exempt income is worked out, the disallowance under section 14A will work out to Rs. 50,636. For the proposition that for working out the disallowance only those investments have to be considered from which the assessee has earned exempt income, he relied on the decision of Hon’ble Delhi High Court in the case of ACB India Ltd. v. ACIT (2015) 374 ITR Delhi 178 : 2015 TaxPub(DT) 1966 (Del-HC). He thus submitted that in the present case, no disallowance under section 14A is called for.
9. Learned Departmental Representative on the other hand relying on the order of the Commissioner (Appeals) supported the order of the lower authorities.
10. We have heard the rival submissions, perused the material on record. The issue in the present appeal is with respect to disallowance under section 14A.
11. We first proceed to dispose ground no 1.1 raised by the assessee. From the fact noted by the assessing officer in the assessment order, it is an undisputed fact that the case of the assessee was selected for limited scrutiny through CASS. The relevant portion noted by the assessing officer in para 2 of the assessment order reads as under :–
“2. The case was selected in Limited Scrutiny through CASS for examining the details in complete manner with specific emphasis on the following items/information available in the return of income filed by the assessee company :–
–Low Income in comparison to high loans/advances/investment in shares
–Large increase in investment in listed equities during the year.”
12. It is also an undisputed fact that no administrative approval from the competent authority was obtained by the assessing officer for converting the case of the assessee from “limited scrutiny” into “complete scrutiny” case. We find that Instruction No. 5 of 2016, dated 14-7-2016 issued by CBDT has inter alia laid down the procedure which is required to be followed by the assessing officer to consider the case which are originally earmarked for “limited scrutiny” to “complete scrutiny” and also requires the administrative approval from Principal Commissioner/Commissioner.
13. We find that on identical issue, the Coordinate Bench of the Tribunal in the case of Urban Improvement Cooperative (P) Ltd., (supra) after considering the instructions issued by CBDT has noted as under :–
“12. The crux of the instructions are summarized as under :–
(i) The questionnaire under section 142(1) shall be confined only to the issue of limited scrutiny.
(ii) Approval of Principal Commissioner/Commissioner concern
(iii) Principal Commissioner/Commissioner concern shall grant approval in writing and after being satisfied on the merits of the case.
(iv) Such cases shall be monitored by range head.
(v) In limited scrutiny cases enquiry shall be restricted only on the issues of limited scrutiny.
(vi) Only after conversion of case to complete scrutiny and after following the procedure outlined above the assessing officer may examined the issues other than limited scrutiny issues.
(v) The assessing officer shall intimate the assessee regarding conducting complete scrutiny.
(vi) The provisions of section 144A should be invoked in suitable cases.
(vii) To prevent the roving and fishing enquiries, such cases should be picked up for review and inspection by administrative authorities.
13. Reliance is also being placed in the order of the Co-ordinate Bench of ITAT in the case of CBS International Projects (P) Ltd. v. ACIT, New Delhi in ITA No. 144/Del/2019 and order of the Hon’ble Jurisdictional High Court in the case of Best Plastics (P) Ltd. (2007) 295 ITR 256 (Del) : 2007 TaxPub(DT) 0258 (Del-HC) wherein it was held that the assessment order passed by the assessing officer disregarding the instructions of the CBDT are liable to the set aside and no substantial of law arises. The said judgment relied upon the decision of Hon’ble Supreme Court in the case of Commissioner of Customs v. Indian Oil Corporation and also the judgment of Hon’ble Supreme Court in the case of UCO Bank v. CIT (1999) 237 ITR 889 (SC) : 1999 TaxPub(DT) 1303 (SC). Hence, we hold that the assessing officer can widen the scope of scrutiny even the case is selected for limited scrutiny under CASS, however, the condition precedent for such widening of the scope is that the assessing officer has to seek prior approval of the authorities mentioned. Such prior approval and the permission of the Principal Commissioner is lacking in the instant case. There was no satisfaction about the merits of the issue which necessitated complete scrutiny in the instant case. Hence, the assessment framed by the assessee on the issues which are not inconsonance of the instruction of CBDT are liable to be quashed. The addition under section 43CA, since beyond the scope of the limited scrutiny is hereby ordered to be deleted.”
14. Before us Revenue has neither pointed out any distinguishing features in the facts of the present case and that of Urban Improvement Cooperative Bank Limited (supra) nor has placed any material on record to demonstrate that the order of the Tribunal in the case of Urban Improvement Cooperative (P) Ltd., (supra) has been set aside/stayed/overruled by higher judicial forum. We therefore, following the aforesaid decision of the Coordinate Bench in the case of Urban Improvement Co-operative (P) Ltd. (supra) and for similar reasons hold that the impugned assessment order passed by the assessing officer under section 143(3) to be null and void and thus the ground no. 1.1 of the assessee is allowed.
15. Since we have held the assessment order passed by the assessing officer to be null and void, the other grounds raised by the assessee on merits have been rendered academic and therefore do not require any adjudication.
16. In the result, the appeal of the assessee is allowed.
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