2025 (3) TMI 946 - AT - Income Tax

AO exceeded jurisdiction making deemed dividend addition under section 2(22)(e) in limited scrutiny without mandatory PCIT permission for conversion to complete scrutiny

ABIL Realty Pvt. Ltd. Versus ITO, Ward 1 (1), Pune

ITAT Pune held that AO exceeded jurisdiction in limited scrutiny proceedings by making deemed dividend addition u/s 2(22)(e) without mandatory permission ... Scope of limited scrutiny proceedings - Deemed dividend addition u/s 2(22)(e) - HELD THAT:- Once the case is selected for limited scrutiny under CASS for certain issues, AO cannot make any other addition by travelling beyond the issues for which the case was selected for limited scrutiny without taking the mandatory permission from the concerned PCIT / Pr.CIT for conversion of such “limited scrutiny” to “complete scrutiny”. It is the settled proposition of law that the CBDT circulars are binding on the department and it has to be strictly followed by the officers of the department. Since the AO in the instant case has travelled beyond the issues for which the case was selected for limited scrutiny without taking mandatory permission from the concerned PCIT or Pr.CCIT, therefore, the addition u/s 2(22)(e) of the Act made by the AO which was not the issue as per limited scrutiny, cannot be sustained. We, therefore, allow the additional ground raised by the assessee and direct the AO to delete the addition made by him u/s 2(22)(e) - Decided in favour of assessee. 1. ISSUES PRESENTED and CONSIDEREDThe primary legal issue considered in this judgment was whether the addition made by the Assessing Officer (AO) under section 2(22)(e) of the Income Tax Act, 1961, as deemed dividend, was justified. This issue was further dissected into the following sub-issues:Whether the advances received by the assessee from M/s Shashbindu Constructions Pvt. Ltd. were business advances or deemed dividends under section 2(22)(e).Whether the AO was justified in expanding the scope of limited scrutiny to include the deemed dividend issue without obtaining the requisite approval for conversion to complete scrutiny.2. ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsThe legal framework revolves around section 2(22)(e) of the Income Tax Act, which treats certain loans and advances as deemed dividends. The case also involved procedural aspects related to limited scrutiny under the Central Board of Direct Taxes (CBDT) Instructions, which restrict the scope of inquiries unless expanded to complete scrutiny with proper approval.Court's Interpretation and ReasoningThe Tribunal focused on whether the AO was justified in treating the advances as deemed dividends. It considered the procedural aspect of whether the AO exceeded the scope of limited scrutiny without proper authorization. The Tribunal emphasized that the CBDT instructions are binding, and any expansion of scrutiny scope requires explicit approval.Key Evidence and FindingsThe AO treated the advances from M/s Shashbindu Constructions Pvt. Ltd. as deemed dividends, arguing that they were not genuine business transactions. The assessee contended these were business advances backed by MOUs, although unsigned. The Tribunal noted that the AO did not have approval to expand the limited scrutiny to include the deemed dividend issue.Application of Law to FactsThe Tribunal applied the CBDT Instructions, which mandate that any expansion beyond the limited scrutiny scope requires approval. Since the AO did not obtain such approval, the Tribunal found the addition under section 2(22)(e) unsustainable.Treatment of Competing ArgumentsThe Tribunal considered the assessee's argument that the advances were business-related and the AO's view that they were disguised dividends. However, the Tribunal's decision primarily hinged on procedural grounds, emphasizing the lack of authorization for expanding the scrutiny scope.ConclusionsThe Tribunal concluded that the addition under section 2(22)(e) could not be sustained due to procedural lapses, specifically the unauthorized expansion of limited scrutiny.3. SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning'Since the Assessing Officer in the instant case has travelled beyond the issues for which the case was selected for limited scrutiny without taking mandatory permission from the concerned PCIT or Pr.CCIT, therefore, the addition u/s 2(22)(e) of the Act made by the Assessing Officer which was not the issue as per limited scrutiny, cannot be sustained.'Core Principles EstablishedThe Tribunal reinforced the principle that CBDT Instructions are binding, and any deviation from the prescribed scope of limited scrutiny requires formal approval. This ensures checks against arbitrary expansion of inquiries.Final Determinations on Each IssueThe Tribunal allowed the appeal, directing the deletion of the addition under section 2(22)(e) due to the procedural impropriety of expanding the limited scrutiny scope without obtaining necessary approval.