2024 (6) TMI 1508 - AT - Income Tax

Assessing Officer exceeded limited scrutiny, reworked construction costs and recalculated capital gains; assessment under section 143(3) quashed

ITAT DELHI - AT held that the AO exceeded the scope of 'limited scrutiny' by reworking cost of construction/improvement and recasting capital gains ... Assessment completed under 'limited scrutiny'- validity of the assessment order and the jurisdiction of the AO in completing the assessment without complying with the mandatory CBDT Instructions/Guidelines in relation to cases selected under limited scrutiny HELD THAT:- AO has expanded the limited scrutiny by tinkering with cost of construction/improvement and total recasting the capital gains shown by the assessee. There is nothing on record to suggest that the AO obtained any permission to convert limited scrutiny into complete scrutiny. Therefore, the action of the AO is clearly in violation of the CBDT Instructions. Thus, the assessment order passed u/s 143(3) for the AY 2014-15 is in violation of the CBDT Instructions and, therefore, the same is quashed. Additional ground raised by the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether an additional ground challenging validity of an assessment completed under 'limited scrutiny' without complying with CBDT instructions may be admitted by the Tribunal. 2. Whether an assessing officer (AO) who selects a return for limited scrutiny may, without prior approval as required by CBDT instructions, expand the scope of inquiry to matters beyond the specific reasons for limited scrutiny. 3. Whether an assessment completed under section 143(3) that expands inquiry beyond limited-scrutiny reasons without required prior approval is vitiated for non-compliance with mandatory CBDT instructions, thereby rendering the assessment order invalid. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Admission of additional ground challenging validity of assessment Legal framework: Principles permitting admission of additional grounds that raise pure questions of law going to the root of the matter (validity/jurisdiction) are recognized; such grounds may be entertained even if raised later in appeal, provided they challenge legal validity rather than merely factual determinations. Precedent Treatment: The Tribunal followed the established approach of higher courts that permit admission of additional legal grounds attacking jurisdiction/validity of statutory action. Interpretation and reasoning: The additional ground challenged the very validity of the assessment on the basis of non-compliance with mandatory CBDT instructions governing limited scrutiny selection and conduct. Because the ground raised a legal jurisdictional question (validity of the assessment itself), the Tribunal found it admissible for adjudication. Ratio vs. Obiter: Ratio - additional grounds asserting jurisdictional invalidity are admissible; Obiter - none additional. Conclusion: The additional ground was admitted as it raised a legal jurisdictional issue going to the root of the assessment's validity. Issue 2 - Scope of enquiry in limited scrutiny and requirement of prior approval to expand scope Legal framework: CBDT instructions for computer-assisted selection (CASS/CASS-derived procedures) distinguish 'limited scrutiny' from 'complete scrutiny.' For limited scrutiny the AO's initial communication must indicate selection as limited and questionnaires and subsequent verification are to be confined to specific points for which the return was selected. Expansion of scope beyond the limited issues is permissible only after following prescribed procedure (including prior approval of higher authority) to convert to complete scrutiny. Precedent Treatment: Coordinate tribunal decisions and a High Court decision addressing identical facts were cited and relied upon by the Tribunal to interpret the binding effect of CBDT instructions; those authorities held that expansion of inquiry prior to required approval is impermissible and renders the assessment process invalid. The Tribunal followed these authorities. Interpretation and reasoning: The Tribunal examined the record and portal screenshot showing selection under limited scrutiny and noted that notices under section 143(2) did not inform the taxpayer of limited scrutiny scope, and the first questionnaire under section 142(1) sought broad information (business modus operandi, multiple bank accounts, comprehensive computations) unrelated to the limited scrutiny reason (understatement of sale consideration). The AO subsequently altered cost computations and recast capital gains - actions not encompassed by the stated limited-scrutiny reason and undertaken without any record of prior approval to expand scope. Ratio vs. Obiter: Ratio - where a return is selected for limited scrutiny, the AO must confine initial enquiry to specified limited issues and may expand the scope only after obtaining and recording the prescribed prior approval; deviation from this procedure vitiates the assessment process. Obiter - the specific content of particular questionnaires may be fact-sensitive. Conclusion: The AO exceeded the scope of limited scrutiny without obtaining any recorded prior approval; such expansion was contrary to the CBDT instructions and impermissible. Issue 3 - Effect of non-compliance with CBDT instructions on validity of assessment under section 143(3) Legal framework: Administrative instructions that prescribe mandatory procedural steps for selection and conduct of scrutiny (including notice content and scope limitations for limited scrutiny) are intended to be followed in completing assessments; failure to follow mandatory procedural safeguards that affect the jurisdictional boundary of the AO may invalidate the assessment. Precedent Treatment: The Tribunal relied on decisions of coordinate benches and a High Court ruling which held that assessments framed after expanding limited scrutiny inquiries without required approval are not in consonance with CBDT instructions and deserve to be quashed. The Tribunal applied these authorities in the present factual matrix. Interpretation and reasoning: The AO's recomputation of capital gains by reducing cost of construction/improvement (a matter beyond the stated limited scrutiny reason of understatement of sale consideration) constituted a substantive expansion of inquiry. There was no record of any permission from competent authority to convert limited scrutiny into complete scrutiny prior to undertaking the broader enquiries. Given that the CBDT instructions mandate confinement to specified issues unless and until formal conversion occurs, the Tribunal treated the AO's actions as legal non-compliance affecting the validity of the assessment order. Ratio vs. Obiter: Ratio - an assessment order passed pursuant to enlarged enquiries beyond limited scrutiny, without the requisite prior authorization, is vitiated for non-compliance with mandatory administrative directions and must be quashed. Obiter - the decision did not decide merits of the disputed additions after quashing; merits remain academic pending fresh proceedings compliant with instructions. Conclusion: Non-compliance with CBDT instructions by expanding limited scrutiny without prior approval rendered the section 143(3) assessment order invalid and the Tribunal quashed the assessment. Consequentially, the Tribunal did not decide merits of other grounds raised, as those became academic upon quashing the assessment.