Assessment order annulled for lack of scrutiny approval, assessee's appeal allowed, Revenue's appeal dismissed.

The Tribunal allowed the assessee's appeal, finding the assessment order invalid as it was manually selected for scrutiny without the necessary approval, annulling the order. Consequently, the other issues raised became academic. The Revenue's appeal was dismissed.

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Issues Involved:
1. Disallowance of labor payments.
2. Treatment of expenditure on G.I. sheets as capital expenditure.
3. Disallowance under section 40A(3).
4. Disallowance of site expenses.
5. Validity of assessment order under relaxed scrutiny norms.
6. Deletion of addition due to low gross profit and rejection of books.
7. Disallowance of interest paid to a co-operative credit society without tax deduction.
8. Treatment of a co-operative credit society as a co-operative bank.

Detailed Analysis:

1. Disallowance of Labor Payments:
The assessee contested the disallowance of 20% of the total labor payments amounting to Rs. 18,53,885, arguing that the Commissioner of Income Tax (Appeals) [CIT(A)] failed to appreciate the facts and circumstances properly. The CIT(A) had upheld this disallowance, which was challenged by the assessee.

2. Treatment of Expenditure on G.I. Sheets as Capital Expenditure:
The assessee argued that the CIT(A) erred in enhancing the assessment by Rs. 21,70,537 by treating the expenditure on G.I. sheets as capital expenditure instead of revenue expenditure. The assessee claimed that proper notice for such enhancement was not given and that the expenditure was purely revenue in nature.

3. Disallowance under Section 40A(3):
The assessee challenged the CIT(A)'s decision to uphold the disallowance of Rs. 31,000 made by the Assessing Officer (AO) under section 40A(3) of the Income Tax Act, 1961.

4. Disallowance of Site Expenses:
The assessee also contested the CIT(A)'s decision to uphold the disallowance of Rs. 1,51,927 out of site expenses.

5. Validity of Assessment Order under Relaxed Scrutiny Norms:
The assessee argued that the assessment order was invalid as it was passed against the relaxed norms by the Central Board of Direct Taxes (CBDT). The assessee had declared additional income during a survey and claimed that the case should not have been selected for scrutiny as per the relaxed norms.

6. Deletion of Addition Due to Low Gross Profit and Rejection of Books:
The Revenue appealed against the CIT(A)'s deletion of the addition due to low gross profit after rejecting the books of accounts. The AO had rejected the books based on unverifiable labor payments and estimated figures for closing work in progress.

7. Disallowance of Interest Paid to a Co-operative Credit Society Without Tax Deduction:
The Revenue also challenged the CIT(A)'s decision to give relief to the assessee on the disallowance under section 40(a)(ia) of the interest paid to a co-operative credit society without tax deduction. The CIT(A) had directed the AO to verify the position of the share capital of the co-operative society and allow the deduction based on such verification.

8. Treatment of a Co-operative Credit Society as a Co-operative Bank:
The Revenue contested the CIT(A)'s decision to treat a co-operative credit society as a co-operative bank if its share capital exceeded Rs. 1 lakh, based on the Madhava Committee Report, which the Revenue argued was not applicable.

Findings:

Validity of Assessment Order:
The Tribunal focused on the preliminary issue regarding the validity of the assessment order. The assessee claimed that the case was not selected for scrutiny under the Computer-Assisted Scrutiny Selection (CASS) but was manually selected without obtaining the necessary approval from the Chief Commissioner of Income Tax (CCIT). The Tribunal found that the case was indeed manually selected for scrutiny without the required approval, making the assessment order invalid. Consequently, the Tribunal annulled the assessment order, rendering the other issues on merits academic and infructuous.

Conclusion:
The Tribunal allowed the assessee's appeal, holding that the assessment order was bad in law due to the lack of jurisdiction by the AO in selecting the case for scrutiny without the required approval. The Revenue's appeal was dismissed as the issues raised became academic following the annulment of the assessment order.

Order Pronounced:
The order was pronounced on December 21, 2016.

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