AO exceeded jurisdiction converting limited scrutiny to full scrutiny without following CBDT Instruction No. 5 of 2016 procedure

The ITAT Kolkata quashed an assessment order where the AO exceeded jurisdiction by converting limited scrutiny into full scrutiny without following proper procedure. The case was originally selected for limited scrutiny to verify cash deposits during demonetization. Despite the notice indicating limited scrutiny for cash deposits, the AO attempted to conduct full scrutiny without adhering to CBDT Instruction No. 5 of 2016, which prescribes the procedure for converting limited scrutiny to full scrutiny. Since no additions were made regarding cash deposits and the AO exceeded limited powers, the assessment order was deemed unsustainable. The assessee's appeal was allowed.

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Issues Involved:

1. Validity of Notice under Section 143(2) of the Income Tax Act.
2. Jurisdictional error in assessment order due to limited scrutiny selection.
3. Non-compliance with CBDT Instructions for converting limited scrutiny to full scrutiny.

Detailed Analysis:

1. Validity of Notice under Section 143(2):

The assessee challenged the validity of the notice issued under Section 143(2) of the Income Tax Act, arguing that it was not compliant with the CBDT Instruction F. No. 225/157/2017/ITA-II dated 23.06.2017. The instruction mandates specific formats for notices, distinguishing between limited scrutiny, complete scrutiny, and compulsory manual scrutiny. The notice issued to the assessee did not specify the type of scrutiny, rendering it invalid as per the legal requirements. The Tribunal accepted this argument, noting that the notice must adhere to the prescribed formats to be valid.

2. Jurisdictional Error in Assessment Order:

The assessee's return was selected for limited scrutiny specifically to verify "cash deposit during demonetization." However, the assessment order included additions unrelated to this issue, such as disallowance of trawler-related expenses, additions on account of sundry creditors, and others. The Tribunal found that the Assessing Officer exceeded his jurisdiction by addressing issues beyond the scope of the limited scrutiny without following the proper procedure for converting it to full scrutiny. The Tribunal relied on the CBDT Instruction No. 5 of 2016, which outlines the procedure for expanding the scope of scrutiny, emphasizing the need for credible material and administrative approval.

3. Non-compliance with CBDT Instructions for Converting Limited Scrutiny to Full Scrutiny:

The Tribunal highlighted that the Assessing Officer failed to comply with the CBDT Instruction No. 5 of 2016, which requires a reasonable view of potential under-assessment and approval from higher authorities before converting a limited scrutiny case to full scrutiny. The Tribunal noted that the Assessing Officer did not record reasons or obtain necessary approvals, rendering the assessment order unsustainable. The Tribunal cited the case of Principal Commissioner of Income Tax v. Weilburger Coatings (India) (P.) Ltd, where similar procedural lapses led to the quashing of the assessment order.

Conclusion:

The Tribunal quashed the assessment order, ruling that it was passed without proper jurisdiction and in violation of CBDT instructions. The appeal of the assessee was allowed, and the Tribunal did not address other issues on merit, as they became academic in nature following the quashing of the assessment order. The decision underscores the importance of adhering to procedural requirements and jurisdictional limits in tax assessments.

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