2024 (11) TMI 1556 - AT - Income Tax

ITAT quashes additions for jurisdictional error; AO exceeded CASS limited scrutiny without converting as per CBDT Instruction 5/2016

ITAT set aside the assessment, holding that the case was selected under CASS for limited scrutiny confined to examination of large cash deposits during ... Limited scrutiny or complete scrutiny - specific issue of large cash deposits during the demonetization period - HELD THAT:- We find that the case of the assessee was selected under Computer Assisted Scrutiny Selection (CASS) for scrutiny to examine the issue that the assessee has deposited huge cash into its bank account during demonetization period though it was not stated in the notice that whether it was limited scrutiny or complete scrutiny. The case of the assessee supported by the decision of Dev Milk Foods Pvt. Ltd. [2020 (6) TMI 317 - ITAT DELHI] held that instant conversion of the case from limited scrutiny to complete scrutiny cannot be upheld as the same is found to be in total violation of CBDT Instructions No.5/2016. We are of the view that it is a case of limited scrutiny which was not converted into complete scrutiny in terms of CBDT Circular no.5 of 2016 and therefore, the additions made by the ld. AO are without jurisdiction and invalid. Accordingly, we are inclined to hold that the assessment order passed by the AO is invalid. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the Tribunal could admit additional grounds raising a pure question of law based on facts already on record regarding the scope of scrutiny and jurisdiction of the Assessing Officer. 1.2 Whether, in a case selected under Computer Assisted Scrutiny Selection (CASS) for 'limited scrutiny' on the specific issue of large cash deposits during the demonetization period, the Assessing Officer had jurisdiction to make additions on other issues (share capital, unsecured loans, sundry creditors) without converting the case into 'complete scrutiny' in accordance with CBDT Instructions. 1.3 Consequent upon the above, whether the assessment order and the additions made therein were valid in law or were without jurisdiction and liable to be treated as null and void. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Admission of additional grounds raising legal issue on jurisdiction and scope of scrutiny Legal framework 2.1 The Tribunal considered the principle laid down by the Supreme Court in National Thermal Power Co. Ltd. v. CIT that the Tribunal has discretion to admit a new ground, particularly where it raises a question of law arising from facts already on record in the assessment proceedings and its consideration is necessary to correctly assess the tax liability. Interpretation and reasoning 2.2 The Tribunal found that the additional grounds challenged the jurisdiction of the Assessing Officer to make additions beyond the scope of limited scrutiny, and that the necessary facts were already available in the assessment records. 2.3 The issue was purely legal and did not require any fresh factual verification at the stage of the Assessing Officer. Conclusions 2.4 The Tribunal exercised its discretion to admit the additional grounds and proceeded to adjudicate them. Issue 2: Jurisdiction of Assessing Officer in limited scrutiny and validity of additions/assessment Legal framework 2.5 The case was selected for scrutiny under CASS on the specific reason of 'large cash deposits during demonetization period.' 2.6 The Tribunal examined CBDT Instruction No. 20/2015 and CBDT Instruction No. 5/2016, as reproduced and analysed in the coordinate bench decision in Dev Milk Foods Pvt. Ltd. v. ACIT, which collectively lay down: (a) The distinction between 'Limited Scrutiny' and 'Complete Scrutiny' cases selected under CASS; (b) That in 'Limited Scrutiny' cases, the enquiry and questionnaire under section 142(1) must remain confined to the specific reason/issue for which the case has been selected; (c) That wider or complete scrutiny can be undertaken only if there is potential escapement of income beyond prescribed monetary limits, and only after obtaining written administrative approval of the Principal CIT/CIT in terms of laid-down procedure; (d) That these instructions seek to prevent 'fishing and roving enquiries,' ensure objectivity, and enforce checks and balances on the Assessing Officer's powers. 2.7 The Tribunal also relied on the reasoning in Dev Milk Foods Pvt. Ltd., which held that non-compliance with these CBDT Instructions vitiates the conversion from limited to complete scrutiny and renders the assessment a nullity. Interpretation and reasoning 2.8 The Tribunal recorded that the CASS selection reason/issue in the present case was limited to examination of 'huge cash deposits during demonetization period.' 2.9 The Assessing Officer ultimately made no addition on the cash deposit issue, but instead made additions in respect of: (i) Share capital of Rs. 5,00,000/-; (ii) Unsecured loans of Rs. 25,79,791/-; (iii) Sundry creditors of Rs. 84,03,000/-; aggregating to Rs. 1,98,82,791/- (noting the aggregate figure as per the assessment order) without first converting the case from limited scrutiny to complete scrutiny with approval of the competent authority. 2.10 The Department argued that, since the notice under section 143(2) did not expressly state whether the scrutiny was 'limited' or 'complete,' the Assessing Officer was competent to examine all issues arising during assessment. 2.11 The Tribunal rejected this contention, holding that the determination of limited versus complete scrutiny flows from the CASS selection reason and CBDT framework, not merely from the text of the notice. The record showed that the selection was specifically for large cash deposits during demonetization. 2.12 Applying the ratio of Dev Milk Foods Pvt. Ltd., and in the light of CBDT Instructions, the Tribunal held that: (a) The present case was one of 'limited scrutiny' restricted to the cash deposit issue; (b) There was no material to show that the case was lawfully converted into 'complete scrutiny' by following the mandatory procedure, including obtaining written approval of the competent authority; (c) Consequently, the Assessing Officer lacked jurisdiction to travel beyond the limited scrutiny issue and to make additions on account of share capital, unsecured loans and sundry creditors. Conclusions 2.13 The Tribunal concluded that the additions made by the Assessing Officer in respect of share capital, unsecured loans and sundry creditors were beyond his jurisdiction and therefore invalid. 2.14 On this basis, the Tribunal held that the assessment order itself was invalid and treated it as without jurisdiction. 2.15 Having allowed the appeal on the additional grounds and quashed the assessment, the Tribunal did not adjudicate the other grounds raised in the memorandum of appeal, leaving them open as academic.