AO has complete jurisdiction to examine all issues during scrutiny assessment beyond initial selection parameters

ITAT Hyderabad held that AO has complete jurisdiction to examine all issues during scrutiny assessment, not limited to initial selection parameters. Development charges received by assessee were treated as revenue receipts despite government restrictions on utilization. TDS claim as application of income was partly allowed, requiring verification of receipts treated as income. Loan repayment as application of income remanded for verification whether utilization was previously claimed. Set-off of brought forward deficit against current year income was allowed as Explanation 5 to section 11(1) applies prospectively from AY 2022-23. GST/Service Tax deduction claim remanded for verification of corresponding revenue receipts.

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Issues presented and considered in the judgment primarily revolve around the assessment and taxation of income of a development authority under the Income Tax Act, 1961, for the assessment year 2020-21. The core legal questions considered include:

1. Whether the Assessing Officer (AO) was justified in conducting a complete scrutiny beyond the limited reasons specified in the notice under section 143(2) of the Act.

2. Whether the entire amount of development charges collected by the assessee should be treated as revenue receipts or only 15% thereof, with the balance 85% being non-revenue in nature due to usage restrictions imposed by the Government Order (G.O.).

3. Whether the claim of payment of Income Tax Deducted at Source (TDS) can be treated as application of income under section 11 of the Act when the corresponding receipts have not been offered as income.

4. Whether repayment of a loan availed for charitable purposes can be treated as application of income in the year of repayment if the utilization of the loan amount was not claimed as application of income in the year of utilization.

5. Whether the assessee is entitled to set off brought forward deficits (excess expenditure over income) from earlier years against the income of the current year, given the statutory amendments effective from assessment year 2022-23.

6. Whether the expenditure claimed by the assessee has been correctly adopted by the AO.

7. Whether the disallowance of GST and Service Tax (GST/ST) paid by the assessee is justified when the underlying receipts on which GST/ST was paid were not offered as income.

Issue-wise detailed analysis:

1. Jurisdiction of AO to conduct complete scrutiny beyond specified reasons (Grounds 2 & 4 of assessee)

The assessee contended that the AO's scrutiny was limited to 11 specific items mentioned in the notice under section 143(2) and that additions beyond these items, particularly relating to development charges, were outside the AO's jurisdiction. The AO and Revenue argued that the case was selected for complete scrutiny, which empowers the AO to examine all aspects of the return of income and related documents, not limited to the specified reasons.

The Court examined the AO's order, which listed the reasons for selection but also noted that the scrutiny was comprehensive. The Court held that under complete scrutiny, the AO's jurisdiction is not confined to the specified reasons but extends to all issues arising from the return and documents submitted. Therefore, the AO was entitled to verify the receipt of development charges and make additions accordingly.

This reasoning rejects the assessee's technical objection and confirms the AO's jurisdiction to scrutinize all relevant aspects under complete scrutiny.

2. Treatment of development charges as revenue receipts (Ground 3 of assessee)

The assessee received development charges amounting to Rs. 576.66 crores and contended that only 15% of these receipts should be treated as revenue, while 85% should not be treated as income due to restrictions imposed by Government Order (G.O.) No. 439 dated 13.06.2007. The assessee argued that the 85% portion was required to be expended strictly for specified objects (traffic improvement, construction of bridges, development of green belts and parks) and that it had no discretion over this amount, thus it should not be treated as income.

The Revenue countered that the G.O. only prescribed the mode of utilization, not a prohibition on treating 85% as income. The assessee was free to utilize the 85% for specified objects, which was evident from the expenditure incurred on lake and road development, development of sites and services, and other capital payments. The Revenue also pointed to the deficit shown in the accounts as evidence of utilization.

The Court analyzed the G.O. and found no restriction preventing the assessee from treating the entire development charges as income. The G.O. mandated utilization of 85% of the income for specified objects but did not deny the assessee's control or ownership over these funds. The Court distinguished prior decisions cited by the assessee, including a Bombay High Court decision where the assessee was held to be an agent or arm of the State with no discretion, and a Tribunal decision where the assessee had created a sinking fund as per a different G.O., which was not applicable here.

Accordingly, the Court upheld the treatment of the entire development charges as revenue receipts and dismissed the assessee's ground on this issue.

3. Claim of TDS as application of income under section 11 (Ground 5 of assessee)

The assessee claimed that TDS deducted on various receipts, including sale of land, should be treated as application of income because the amounts were not available for utilization by the assessee. The AO and CIT(A) rejected the claim primarily because the sale proceeds of land, on which TDS was deducted, were not offered as income by the assessee, who acted as an agent of the State for such receipts.

The Court noted that TDS related to sale of land receipts, which were not income of the assessee, cannot be treated as application of income. However, the Court also observed that TDS was deducted on other receipts which were offered as income. The Court directed the AO to verify the nature of receipts on which TDS was deducted; where receipts were treated as income, the corresponding TDS should be allowed as application of income, but not otherwise.

This ground was partly allowed for statistical purposes pending verification.

4. Repayment of loan as application of income (Ground 6 of assessee)

The assessee claimed that repayment of a loan of Rs. 60.76 crores availed from HUDCO for construction of express highway should be treated as application of income in the year of repayment, as the loan amount was utilized for the object of the assessee but not claimed as application of income in the year of utilization. The AO and CIT(A) rejected the claim on the ground that application of income was already claimed in the year of utilization.

The Court held that if the utilization of the loan amount was not claimed as application of income in the year of utilization, then repayment of the loan can be treated as application of income in the year of repayment. The Court directed the AO to verify whether the utilization was claimed previously and allow the claim accordingly.

This ground was allowed for statistical purposes subject to factual verification.

5. Set off of brought forward deficit (Ground 7 of assessee)

The assessee sought set off of excess expenditure over income (deficit) from earlier years against the current year's income. The AO denied the claim relying on Explanation 5 to section 11(1) of the Act, which restricts such set off from assessment year 2022-23 onwards. The assessee contended that the restriction is prospective and not applicable to the year under consideration (2020-21).

The Court agreed with the assessee, holding that the statutory amendment is prospective and the law prior to insertion of Explanation 5 permitted set off of brought forward deficit. The Court directed the AO to verify the correctness and arithmetical accuracy of the deficit claimed and allow the set off if found correct.

This ground was allowed for statistical purposes.

6. Adoption of expenditure amount by AO (Additional ground of assessee)

The assessee contended that actual expenditure incurred was Rs. 639.25 crores, but AO adopted Rs. 578.49 crores. The Court found this to be a factual issue requiring verification and remanded the matter to the AO for verification and allowance as per law.

This ground was allowed for statistical purposes.

7. Disallowance of GST and Service Tax paid (Revenue's appeal)

The Revenue challenged the deletion of disallowance of GST and Service Tax (GST/ST) paid by the assessee. The AO disallowed GST/ST paid on receipts not offered as income, including sale of land proceeds. The assessee contended that sale of land is not a taxable supply under GST law and that GST/ST paid relates to other service components offered as income.

The Court examined Schedule III of the GST Act, confirming that sale of land is not subject to GST. The Court noted that the issue requires verification whether GST/ST paid relates to receipts offered as income. The Court directed the AO to verify the nature of receipts on which GST/ST was paid and allow deduction where the receipts have been offered as income, but disallow otherwise.

The Revenue's appeal was partly allowed for statistical purposes.

Significant holdings:

"The mere fact that the selection was based on certain parameters, it does not limit the jurisdiction of Ld. AO under complete scrutiny. Hence, in our considered opinion, the argument of the assessee that the Ld. AO was not entitled to verify the receipt of development charges is devoid of merit and is liable to be rejected."

"On perusal of the Government Order, it is evident that only the mode of utilisation has been prescribed by the government. There is no restriction that the assessee cannot utilise 85% of the development charges or the assessee has no liberty over 85% of development charges. The restriction has been made for utilisation of 85% for some specified objects only."

"Where a charitable institution utilises borrowed fund towards its object, and such utilization is not claimed as application of income in the year of utilization, then the repayment of such loan can be treated as application of income in the year of repayment."

"The restriction imposed by Explanation 5 to section 11(1) of the Act is prospective and applicable only from A.Y. 2022-23 onwards. The law prior to insertion of Explanation 5 clearly permitted the charitable institution to set off brought forward deficit against the income of the current year."

"Sale of land is not a taxable supply under the GST Act and hence no GST is leviable thereon. If the GST/ST has been paid on such receipt that has been shown as income, then the corresponding GST/ST must be allowed as application of income."

The Court's final determinations were:

• The AO had jurisdiction to conduct complete scrutiny beyond the limited reasons specified.
• The entire development charges collected by the assessee are to be treated as revenue receipts.
• TDS amounts corresponding to receipts offered as income should be allowed as application of income; others, including sale proceeds of land, should not.
• Repayment of loan can be treated as application of income if utilization was not claimed earlier.
• Set off of brought forward deficit is permitted for the year under consideration, subject to verification.
• Expenditure claimed by the assessee requires verification and adjustment as per actuals.
• GST/ST paid on receipts offered as income should be allowed as application of income; others should be disallowed.

Accordingly, the appeals of both the assessee and the revenue were partly allowed and remanded for factual verification on certain issues.

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