2023 (12) TMI 1117 - AT - Income Tax

AO exceeded limited scrutiny scope making section 68 additions without PCIT approval for complete scrutiny

The ITAT Delhi held that the AO exceeded the scope of limited scrutiny by making additions under section 68 for unsecured loans and unaccounted ... Scope of limited scrutiny - mandation of recording satisfaction before extending/expanding scope of scrutiny - case of the Assessee was selected for ‘limited scrutiny’ for the purpose of verifying Large interest expenses relatable to exempt income (u/s 14A) and High interest expense as compared to business turnover, but the additions have been made other than the reasons for which the limited scrutiny has been selected for, which is not only illegal, arbitrary but also contrary to the circulars of the CBDT - HELD THAT:- As found that the AO travelled beyond the issues involved in the “limited scrutiny” and made enquiries and the additions u/s 68 on account of unsecured loan, on account of unaccounted expenditure and further made addition on account of interest expenses. We find it handy to refer the instructions of CBDT issued in respect of examination of issue other than the reasons taken up in limited scrutiny case. 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. CBS International Projects Pvt. Ltd. [2019 (2) TMI 1748 - ITAT DELHI] and Best Plastics Pvt. Ltd. [2006 (4) TMI 53 - HIGH COURT, DELHI] Considering CBDT Circular and the Judicial Precedents, 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 PCIT 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 Assessing Officer on the issues which are not inconsonance of the instruction of CBDT are liable to be quashed. The additions made by the Assessing Officer being beyond the scope of the limited scrutiny and the same is deleted. Decided in favour of assessee. Issues Involved: Jurisdiction of the Assessing Officer (AO), Unexplained Cash Credit u/s 68, Unaccounted Expenditure u/s 69C, Interest Disallowance u/s 36(1)(iii), and Scope of Limited Scrutiny.Jurisdiction of the Assessing Officer (AO):The Assessee contended that the AO made additions beyond the scope of 'limited scrutiny' without proper jurisdiction, which is contrary to CBDT circulars. The Tribunal found that the AO traveled beyond the issues involved in the limited scrutiny and made additions without obtaining the required approval from the Principal Commissioner of Income Tax (PCIT), thus violating CBDT instructions. The Tribunal quashed the assessment framed by the AO on issues beyond the limited scrutiny.Unexplained Cash Credit u/s 68:The AO added Rs. 4,96,00,000/- as unexplained cash credit, treating it as unsecured loans from bogus companies. The Tribunal noted that the AO failed to confine the enquiry to the limited scrutiny issues and made the addition without proper jurisdiction. Consequently, the addition was deleted.Unaccounted Expenditure u/s 69C:The AO made an addition of Rs. 11,52,000/- on account of unaccounted commission expenditure. The Tribunal found this addition beyond the scope of the limited scrutiny and without the necessary approval for expanding the scrutiny. Hence, the addition was deleted.Interest Disallowance u/s 36(1)(iii):The AO disallowed Rs. 36,66,823/- as interest expenses, claiming the loans were from bogus companies. The Tribunal held that this disallowance was also beyond the scope of the limited scrutiny and lacked the required approval for a complete scrutiny. Therefore, the disallowance was deleted.Scope of Limited Scrutiny:The Tribunal emphasized the importance of adhering to CBDT instructions regarding limited scrutiny. It reiterated that the AO must seek prior approval from the PCIT to expand the scope of scrutiny, which was not done in this case. The Tribunal relied on judicial precedents to support its decision to quash the additions made by the AO beyond the scope of limited scrutiny.Conclusion:The Tribunal allowed the appeal of the Assessee, deleting all the additions made by the AO due to the lack of jurisdiction and non-compliance with CBDT instructions on limited scrutiny.Order Pronounced:The order was pronounced in open Court on 21st December, 2023.