2018 (5) TMI 1855 - AT - Income Tax

Tribunal deems assessment unlawful due to procedural irregularity, partially allows assessee's appeal.

The Tribunal found that the Assessing Officer (AO) acted unlawfully by making additions outside the limited scrutiny scope without approval from the ... Scope of scrutiny in cases selected under CASS - conversion the limited scrutiny in to unlimited - CBDT Instruction No.7/2014, dated 26-09-2014 - approval of the Pr.CIT/DIT for taken up for comprehensive scrutiny - case was picked up for limited scrutiny relates to the AIR information on the cash deposits in the savings bank account - HELD THAT:- It is an undisputed fact that the reason for which the case was picked up for limited scrutiny relates to the AIR information on the cash deposits in the savings bank account. It is also an undisputed fact that the AO did not obtain the written approval of the concerned Commissioner before extending the scope of scrutiny to the interest disallowed and denial of claim of deduction u/s.54 of the Act. It is on record that the Board did not permit the AO to extend the scope of scrutiny to the issues other than the ones which are authorised the Board in this regard under CASS. It is also a fact that judgment cited by the DR for the Revenue in the case of Banque Nationale De Paris Vs. CIT [1999 (2) TMI 61 - BOMBAY HIGH COURT] was not issued in connection with the jurisdiction of the AO in matters relating to extension of areas of scrutiny to the ones than the authorised ones by the Board. Board circular do not permit the AO from converting the limited scrutiny case like the present one to the unlimited one without the approval of Administrative Commissioner of Income Tax. AO did not mention the reasons for not taking such an administrative approval before making the said addition. As such, the Pune Bench of the Tribunal has already taken the favourable view in these matters in favour of the assessee. We do not understand why AO failed to take approval for such conversion. Considering the settled nature of the issue, we allow the legal ground raised by the assessee vide Ground No.1 and hold that the assessment order passed by the AO is bad in law and void-ab initio. Appeal of the assessee is partly allowed. Issues Involved:1. Legality of additions made by the Assessing Officer (AO) outside the scope of limited scrutiny under Computer Aided Scrutiny Selection (CASS) without prior approval from the administrative Commissioner.2. Disallowance of interest paid to the bank.3. Rejection of the claim of Long Term Capital Gain (LTCG) and treating the surplus from the sale of plots and agricultural land as business income.Detailed Analysis:1. Legality of Additions Outside Limited Scrutiny:The primary issue raised by the assessee was that the AO made additions beyond the scope of the limited scrutiny for which the case was selected under CASS without obtaining the necessary approval from the administrative Commissioner. The limited scrutiny was initially intended to examine the source of cash deposits in the savings bank account.The assessee argued that the AO's actions violated the Board's instructions, which mandate that any extension of scrutiny beyond the specified issues requires written approval from the concerned Commissioner. The assessee supported this argument with references to Board’s Instruction No.07/2014 and other relevant circulars, emphasizing that the AO did not follow the required procedure.The Tribunal agreed with the assessee, noting that the AO did not obtain the necessary approval before extending the scope of scrutiny to include interest disallowance and denial of deduction under Section 54 of the Income Tax Act. The Tribunal cited previous decisions, including those of the Pune Bench, which had ruled in favor of the assessee under similar circumstances. Consequently, the Tribunal held that the assessment order was 'bad in law and void-ab initio,' rendering the other grounds of appeal academic.2. Disallowance of Interest Paid to the Bank:The AO had disallowed an interest claim of Rs. 1,89,991/- on a loan taken from Jalgaon Janta Sahakari Bank, arguing that the loan was not utilized as per the law. The CIT(A) upheld this disallowance.Given the Tribunal's decision on the primary issue of the legality of the assessment order, the ground related to the disallowance of interest was deemed academic and was not adjudicated upon.3. Rejection of Long Term Capital Gain (LTCG) Claim:The AO rejected the assessee's claim of LTCG on the sale of plots and agricultural land, treating the surplus as business income instead. The CIT(A) confirmed this treatment, leading to an addition of Rs. 9,89,538/-.As with the interest disallowance, this issue also became academic following the Tribunal's ruling that the assessment order was void-ab initio due to procedural irregularities in extending the scope of scrutiny without proper approval.Conclusion:The Tribunal concluded that the AO's failure to obtain the necessary approval from the administrative Commissioner before extending the scope of scrutiny rendered the assessment order invalid. Consequently, the Tribunal held that the assessment order was 'bad in law and void-ab initio,' and the other grounds of appeal were dismissed as academic. The appeal of the assessee was partly allowed.