2023 (1) TMI 1347 - AT - Income Tax

AO erred by not converting limited scrutiny to comprehensive when penny stock issues arose beyond original scope

ITAT Mumbai held that AO erred in not converting limited scrutiny to comprehensive scrutiny when penny stock sale issues arose beyond the original ... Scope of ‘limited scrutiny’ - conversion of the case from limited scrutiny to complete scrutiny - whether assessment order can’t be revised other than the reason(s) of ‘limited scrutiny’ assessment? - sale of penny stock - whether the reasons (issues) other than reasons for selection of the case under ‘Limited Scrutiny’ were so glaring that the Assessing Officer should have considered the matter for converting limited scrutiny to comprehensive scrutiny? HELD THAT:- We are of the opinion that an AO having entrusted of the duty of scrutinizing the assessment, his investigative skill would have ignited him to believe that those matters prima facia have potential scope of escapement of income, and correspondingly, in view of instructions reproduced above he should have acted upon for converting the case of limited scrutiny to complete scrutiny. These instructions have been issued by the CBDT for guidance of the AO and are binding on the Income-tax Authorities concerned. We are of the opinion that there is a clear fault on the part of the AO in not referring the matter of converting the limited scrutiny case into complete or comprehensive scrutiny and this inaction is without application of the mind which bring the assessment order under the category of “order erroneous insofar as it is prejudicial to the interest of the Revenue” without enquiring and accepting the claims blindly, which resulted in loss to Revenue. Taxation of ‘whole of the sale consideration’ on sale of shares as against ‘long term capital gain’ on such sale of shares or penny stock considered by the AO - We have already held in preceding paragraphs that the issue of sale of penny stock is germane to the issue of limited scrutinty of examining increase in capital of the assesee during the year. PCIT has held that the Assessing Officer has given erroneous finding on this issue of limited scrutiny. In the case in hand before us, the assessing Officer has treated the amount of long-term capital gain arising from sale of penny stock only as unexplained cash credit for section 68 of the Act, which was computed by way of reducing cost of acquisition of penny stock out of sale consideration of those penny stock. In our opinion, when entire credit from whole of sale consideration of Penny stock was received during the year under consideration, the Assessing Officer is not justified in making addition for only a part of the same and not to make addition for the remaining part. There are no two views on this issue. Either the entire credit is liable for addition or not, there is no middle path. Therefore, the Assessing Officer has committed an error on the issue in dispute. Counsel has not pointed out any decision where a part of the credit has been added by the Assessing Officer and part has been left over or not considered for addition without any justifiable reasons. In such circumstances, we uphold the finding of the PCIT on the issue in dispute that whole of the sale consideration was required to be assessed by the AO Instead of only long term capital gain - order of the AO is erroneous to this extent. The Ground Nos. 3,5 &6 of the appeal of the assessee are accordingly dismissed. Whether PCIT was not justified in revising the assessment order on the issue which was already pending available before the Ld.CIT(A) for consideration? - We find that the Ld.PCIT has held that the particular issue will be out of the jurisdiction of the Ld.PCIT if the Ld.CIT(A) has considered and decided the matter by giving his finding. PCIT has relied on the decision of Ranka Jewellers [2008 (1) TMI 497 - ITAT PUNE-A] wherein the Tribunal has held that in view of Explanation (c) of section 263, the assessment considered and decided are conjoined with a conjunction and therefore, both the conditions have to be fulfilled. PCIT has also referred to the judgement of Panna Knitting Industries [2000 (12) TMI 23 - GUJARAT HIGH COURT] wherein it is held that if part of the claim was considered by the Ld.CIT(A) and rest of the part undecided, then portion of the claim cannot be said to be merged with the order of the Ld.CIT(A) and order of the revision in respect of the part which remained undecided was held to be valid. In view of above, we do not find any infirmity in the findings of the Ld.PCIT. Taxation of entry operator charges - assessee submitted that this issue was not raised in the show cause notice issued by the Ld.PCIT and, therefore, in the final part of the order he cannot hold the order erroneous insofar as it is prejudicial to the interest of the Revenue on this issue without providing opportunity of being heard - HELD THAT:- In our opinion, the submission of the Ld. Counsel of the assessee are justified. Before holding the order of the Assessing Officer as erroneous insofar as it is prejudicial to the interest of the Revenue on any particular issue, it is sine qua non to issue notice to the assessee and the action of the Ld.PCIT is in violation of the principles of natural justice. To this extent, we are of the opinion that the order of the Ld.PCIT cannot be sustained. Issues which were not covered under limited scrutiny - We are of the opinion that under the mandate of ‘Limited Scrutiny’, the Assessing Officer was not authorised to enquire on the issues other than the reasons for which it was taken for scrutiny purpose unless approved so by higher authorities. Since no approval was taken for converting the case from ‘Limited Scrutiny’ to ‘comprehensive or complete scrutiny’, the Assessing Officer was not authorised for enquiry on the issues challenged by the assessee in ground Nos. 8 to 15. The Ld. PCIT can find fault for not referring the matter of converting ‘Limited Scrutiny’ case to ‘Comprehensive Scrutiny’ case, but no such approval has been taken by the Assessing Officer and hence the Assessing is barred from examining those issues under the mandate of limited scrutiny. Thus, the assessment order cannot be held erroneous insofar as prejudicial to the interest of Revenue for not making enquiry on those issues. The relevant grounds of the appeal of the assessee are accordingly allowed. Finding of PCIT that Assessing Officer has failed to examine the issue properly and applied his mind - As the finding of AO on the issue of increase in capital (i.e. the one of the reasons of limit scrutiny) is erroneous and due to consequential revenue loss, the assessment order is erroneous in so far as prejudicial to the interest of revenue to that extent. As far as other issues on which the Ld. PCIT has held the order as erroneous in so far as prejudicial to the interest of revenue are concerned, we have rejected the finding of the Ld PCIT and held that the assessment order is erroneous to the extent that the AO has not followed the instruction of the CBDT. Therefore, it is open for the Assessing Officer during consequential proceedings to seek approval from the higher authoritiesin compliance to the instructions of the CBDT (supra) for converting the limited scrutiny case to complete scrutiny. Appeal of the assessee is accordingly partly allowed. Issues Involved:1. Limited Scrutiny Assessment2. Taxation of Whole Sale Consideration on Sale of Shares as Against Capital Gain on Such Sale3. Taxation of Entry Operator Charges (Commission)4. Allowance of Brought Forward Losses5. Application of Provisions of Section 115BBE with Regards Rate of Taxation6. Taxation of Property Rights and Sale of Property7. Genuineness of Unsecured Loans and Creditworthiness of CreditorsDetailed Analysis:1. Limited Scrutiny Assessment:The assessee challenged the initiation of proceedings under section 263 of the Income Tax Act, 1961, arguing that the Principal Commissioner of Income Tax (Pr. CIT) erred by addressing issues outside the limited scrutiny assessment. The Tribunal noted that the case was selected for limited scrutiny on two issues: whether the deduction against income from other sources was correctly shown, and whether the share capital was genuine and from disclosed sources. The Tribunal found that the Pr. CIT's direction to convert the limited scrutiny to full scrutiny was justified, as the Assessing Officer (AO) failed to seek approval for comprehensive scrutiny despite potential escapement of income. The Tribunal upheld the Pr. CIT's decision, emphasizing that the AO should have acted upon the instructions of the CBDT to convert the scrutiny when necessary.2. Taxation of Whole Sale Consideration on Sale of Shares as Against Capital Gain on Such Sale:The Pr. CIT held that the AO erred by not considering the whole sale consideration of Rs. 5,59,72,000/- as unexplained cash credit under section 68 of the Act. The AO had only added the long-term capital gain amount of Rs. 4,96,64,448/-. The Tribunal agreed with the Pr. CIT, stating that the AO should have considered the entire sale consideration as unexplained cash credit, as there was no justification for only adding a part of it. The Tribunal dismissed the assessee's grounds on this issue.3. Taxation of Entry Operator Charges (Commission):The assessee argued that the issue of taxation of entry operator charges was not raised in the show cause notice, and thus, the Pr. CIT's decision on this matter violated the principles of natural justice. The Tribunal agreed with the assessee, stating that the Pr. CIT should have provided an opportunity for the assessee to be heard on this issue. Consequently, the Tribunal allowed the assessee's grounds on this matter.4. Allowance of Brought Forward Losses:The Pr. CIT found that the AO failed to examine the issue of brought forward losses properly. The Tribunal noted that under the mandate of limited scrutiny, the AO was not authorized to enquire into issues other than those selected for scrutiny without approval from higher authorities. Since no such approval was taken, the Tribunal held that the assessment order could not be considered erroneous for not examining these issues. The Tribunal allowed the assessee's grounds on this issue.5. Application of Provisions of Section 115BBE with Regards Rate of Taxation:The Pr. CIT held that the AO incorrectly calculated the special rate on Rs. 58,30,655/- at 20% instead of applying the provisions of section 115BBE. The Tribunal noted that the AO should have sought approval for converting the limited scrutiny to comprehensive scrutiny to address this issue. The Tribunal held that the AO's failure to do so rendered the assessment order erroneous and prejudicial to the interest of the Revenue. The Tribunal upheld the Pr. CIT's decision on this matter.6. Taxation of Property Rights and Sale of Property:The Pr. CIT found that the AO did not examine the sale of property rights and the potential under-declaration of income under section 50C. The Tribunal noted that the AO should have sought approval for converting the limited scrutiny to comprehensive scrutiny to address this issue. The Tribunal held that the AO's failure to do so rendered the assessment order erroneous and prejudicial to the interest of the Revenue. The Tribunal upheld the Pr. CIT's decision on this matter.7. Genuineness of Unsecured Loans and Creditworthiness of Creditors:The Pr. CIT held that the AO failed to examine the genuineness of unsecured loans and the creditworthiness of creditors. The Tribunal noted that the AO should have sought approval for converting the limited scrutiny to comprehensive scrutiny to address this issue. The Tribunal held that the AO's failure to do so rendered the assessment order erroneous and prejudicial to the interest of the Revenue. The Tribunal upheld the Pr. CIT's decision on this matter.Conclusion:The Tribunal partly allowed the assessee's appeal. It upheld the Pr. CIT's decision on issues related to the scope of limited scrutiny, taxation of whole sale consideration on the sale of shares, application of section 115BBE, taxation of property rights, and genuineness of unsecured loans. However, it allowed the assessee's appeal on the issue of taxation of entry operator charges due to the violation of natural justice principles. The Tribunal directed that the AO could seek approval from higher authorities to convert the limited scrutiny to comprehensive scrutiny during consequential proceedings.