2020 (1) TMI 1435 - AT - Income Tax

Tribunal overturns disallowance under Income Tax Act, emphasizing need for prior authorization

Shri. H.N. Ravindra Versus The Income Tax Officer, Ward – 2, Hassan.

The Tribunal allowed the assessee's appeal, deleting the disallowance made by the AO under section 43B of the Income Tax Act, 1961. The disallowance was ... Scope of Limited scrutiny - cash deposit in bank and cash in hand shown in the return of income - no approval from CIT/Pr. CIT - Whether disallowance under section 43B of the IT Act, 1961 for non-payment of VAT is not within the scope of limited scrutiny? - HELD THAT:- Even if some other issue comes to the notice of the AO, he cannot make any other addition / disallowance without obtaining prior approval from concerned CIT/Pr. CIT. - in the absence of such approval from the CIT/PCIT, even the voluntary offer of the assessee also cannot give the AO jurisdiction to make any other addition although such offer by the assessee can be a basis for the AO to seek approval of CIT/PCIT . On this aspect, argument was made before the learned CIT(A) also but in para 5 of his order, he has not decided this aspect. He has simply stated in this para that submission was made before him on the technical issue and the case was selected for scrutiny assessment under the CASS system of selection “limited type” and no prior approval was taken from the higher authorities, have been considered and found that the AO has rightly examined as to whether the cash deposit has been made from disclosed sources and whether cash in hand shown in the return of income is correct for which purpose the case was selected for scrutiny. But after observing so, he has not given any finding as to how the other addition made by the AO under section 43B of the IT Act, 1961 is justified under these facts. - Decided in favour of assessee. Issues:1. Disallowance under section 43B of the Income Tax Act, 1961 for non-payment of VAT.2. Scope of limited scrutiny assessment and authority to make additions outside the scope.3. Requirement of obtaining approval from CIT/Pr. CIT for examining issues beyond limited scrutiny.4. Justification of disallowance without prior approval from higher authorities.Analysis:Issue 1: Disallowance under section 43B of the Income Tax Act, 1961 for non-payment of VAT:The appeal was filed against the order of the CIT(A) sustaining the addition of VAT payable shown as a liability in the Balance Sheet invoking section 43B of the Act. The contention was that since the VAT payable was not debited as an expenditure in the Profit & Loss account, disallowance under section 43B was not justified. The Tribunal noted that the AO had made the addition in a limited scrutiny assessment without obtaining permission from the CIT, which was beyond the scope of the limited scrutiny. Relying on a Tribunal order, the disallowance was deleted as it was not the issue for which the case was selected for limited scrutiny.Issue 2: Scope of limited scrutiny assessment and authority to make additions outside the scope:The AO had selected the case for limited scrutiny based on specific reasons related to cash deposits and cash in hand. However, the disallowance under section 43B for non-payment of VAT was not within the scope of limited scrutiny. The Tribunal emphasized that additions outside the limited scrutiny scope require prior approval from the CIT/Pr. CIT. In this case, since no such approval was obtained, the AO was not justified in making the disallowance under section 43B without the necessary authorization.Issue 3: Requirement of obtaining approval from CIT/Pr. CIT for examining issues beyond limited scrutiny:The Tribunal highlighted that in a limited scrutiny case, issues other than those identified for examination should not be considered without approval from the CIT/Pr. CIT. The AO's examination of depreciation claimed by the assessee was beyond the issues selected for limited scrutiny and lacked prior approval. Without the necessary authorization, any additional disallowance or addition cannot be made, even if voluntarily offered by the assessee.Issue 4: Justification of disallowance without prior approval from higher authorities:The Tribunal emphasized the importance of obtaining approval from higher authorities before making additions or disallowances outside the limited scrutiny scope. The AO's failure to seek approval for examining issues beyond the limited scrutiny parameters led to the deletion of the disallowance made under section 43B of the IT Act, 1961. The Tribunal decision was based on the requirement of prior authorization for expanding the scope of scrutiny assessments.In conclusion, the Tribunal allowed the assessee's appeal, deleting the disallowance made by the AO under section 43B of the Income Tax Act, 1961, emphasizing the necessity of obtaining approval from higher authorities for examining issues beyond the limited scrutiny scope.