2025 (11) TMI 403 - AT - Income Tax

AO exceeded limited s.143(2) scrutiny treating forfeited advance as income under s.56(2)(ix) without PCIT approval

ITAT (Bangalore) held the AO exceeded the scope of a limited scrutiny under s.143(2) by treating forfeited advance as income u/s.56(2)(ix) without ... Scope of limited scrutiny - Addition u/s 56(2)(ix) - advance amount received from the purchaser was forfeited by the assessee and therefore the said forfeiture amount would be treated as an income from other sources - HELD THAT:- While seeking the details, the AO had found that an advance amount of Rs. 50 Lakhs received from the purchaser was forfeited by the assessee and therefore the said forfeiture amount would be treated as an income u/s. 56(2)(ix) of the Act. This proposal was not found place in the limited scrutiny notice issued by the AO on 11/09/2018. There is no bar against the AO to investigate the other issues also based on the limited scrutiny notice but the only requirement is that before proceeding further, the AO should get the prior approval of the PCIT / DIT and thereafter the AO can enquire into the other aspects also which do not find place in the 143(2) notice issued on 11/09/2018. Also perused the reply letter dated 06/05/2025 by the ITO for the RTI enquiry made by the assessee about the details of the approvals sought for by the AO from the PCIT in which the ITO had denied any such approvals obtained from the PCIT. Therefore, the fact of not getting prior approval from the PCIT by the AO was accepted and therefore the assessment made dehorse the limited scrutiny issues, without obtaining a prior approval from the PCIT is certainly against the instructions issued by the CBDT from time to time. AO being a subordinate officer is bound by the instructions issued by the CBDT as per section 119 of the Act. If the AO has not adhered to the instructions, it is bad in law to declare the orders passed dehorse the CBDT instructions. In the present case, the AO had exceeded its powers by probing the other issues which were not raised in the 143(2) limited scrutiny notice issued on 11/09/2018, that too without giving any prior notice to the assessee and therefore we are satisfied that the assessment order dated 28/12/2019 made u/s. 143(3) of the Act is bad in law and liable to be set aside. We have decided the appeal on the legal issue. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether an assessing officer, when a case is selected for limited scrutiny under section 143(2) for specified issues, may proceed to make additions on grounds not specified in the limited scrutiny notice without prior approval from the Principal Commissioner/Director as required by CBDT instructions. 2. Whether an advance received pursuant to a registered sale agreement in an earlier assessment year can be treated as income in a subsequent assessment year under section 56(2)(ix) as a forfeiture where (a) no registered cancellation deed was executed, and (b) the advance was received in an earlier year than the year under scrutiny. 3. Whether assessing the entire advance amount as income in the hands of one co-owner is permissible where the property is jointly owned and the assessee holds a fractional share. 4. Whether an assessment based on presumption or assumptions (including presumed cancellation/forfeiture of a registered sale agreement without evidence) is legally sustainable. ISSUE-WISE DETAILED ANALYSIS Issue 1: Legality of converting limited scrutiny into extended scrutiny without prior approval Legal framework: Limited scrutiny selection under section 143(2) confines the assessment to specified issues listed in the notice. CBDT instructions require prior approval of the Principal Commissioner/Director before expanding scrutiny beyond the matters specified in the limited scrutiny notice. Precedent Treatment: No judicial precedents are cited in the record; the Tribunal treats the CBDT instructions as binding administrative directions under section 119 and as limiting the AO's competence in the context of limited scrutiny. Interpretation and reasoning: The Tribunal examined the 143(2) notice which specified only cash deposits and cash withdrawals for the assessment year under scrutiny. The advance in issue was received in an earlier year. The AO, without prior PCIT/DIT approval, proceeded to treat that earlier-year advance as forfeited income under section 56(2)(ix) and made additions not contemplated in the limited scrutiny notice. An RTI reply confirmed that no prior approval was obtained. The Tribunal held that the AO, being subordinate, must adhere to CBDT instructions and that converting limited scrutiny into wider inquiry without prescribed approval exceeds the AO's powers. Ratio vs. Obiter: Ratio - Where a case is selected for limited scrutiny and the AO seeks to probe issues beyond those specified, prior approval from the PCIT/DIT per CBDT instructions is mandatory; absence of such approval renders the expanded inquiry and resulting assessment bad in law. Obiter - Observations on the absolute bar to probe other issues generally are ancillary to the finding on absence of approval. Conclusions: The assessment framed after expanding the scope without prior approval is set aside as bad in law; the appeal is allowed on this preliminary/legal ground, obviating need for merits adjudication. Issue 2: Treatment of advance under registered sale agreement as income under section 56(2)(ix) Legal framework: Section 56(2)(ix) treats sums forfeited in negotiations for transfer of a capital asset as income where negotiations do not result in transfer. Registered sale agreements and their cancellation have statutory/formal consequences; a registered cancellation deed is the recognized mode to cancel a registered sale agreement. Precedent Treatment: No specific case law referenced in the text; Tribunal applies principle that registered instruments cannot be treated as cancelled absent formal cancellation. Interpretation and reasoning: The advance in question was received in FY 2015-16 (AY 2016-17) under a registered sale agreement requiring execution of the sale deed by 30/04/2016. No registered cancellation deed was executed; the assessee asserted legal issues prevented transfer and maintained the agreement subsisted. The AO treated the agreement as deemed cancelled from 01/05/2016 and treated the advance as forfeited income in AY 2017-18. The Tribunal noted (i) inability to presume cancellation of a registered agreement absent a registered cancellation deed or other evidence; and (ii) temporal mismatch - the advance was received in an earlier year and could not properly be investigated in the year selected for limited scrutiny without requisite approval (see Issue 1). The Tribunal also noted the agreement's clause limiting forfeiture to 20% but primarily set aside the assessment on procedural grounds. Ratio vs. Obiter: Obiter on the substantive point - while indicating that a registered sale agreement cannot be presumed cancelled and that the whole advance cannot be treated as forfeited income without appropriate evidence or formal cancellation, the Tribunal's operative decision rests on procedural infirmity (lack of prior approval for expanded scrutiny). The Tribunal nevertheless rejected the AO's assumption-based treatment of forfeiture. Conclusions: On merits the AO's treatment of the entire advance as income by deeming cancellation/forfeiture is unsustainable in the absence of formal cancellation or evidential basis; however the appeal is primarily allowed because the AO exceeded the limited scrutiny scope without required approvals. Issue 3: Taxation of entire advance on a single co-owner where property is jointly owned Legal framework: Income arising from property is to be assessed in accordance with ownership rights and shares; principles of attribution require treating income in proportion to ownership unless lawably attributable otherwise. Precedent Treatment: No authorities were invoked in the judgment. Interpretation and reasoning: The assessee pleaded a one-fourth share in the property and contended that taxing the entire advance as her income was arbitrary. The Tribunal's order focuses on procedural invalidity of the AO's action and does not expressly decide the factual allocation of the advance among co-owners. It notes the contention that the assessee's share is limited and that AO's blanket attribution to the assessee lacked evidential basis. Ratio vs. Obiter: Obiter - The Tribunal records that treating the entire advance as the assessee's income without addressing joint ownership and share allocation is arbitrary; however no definitive ratio on share-wise taxation is laid down because the assessment was set aside on procedural grounds. Conclusions: The contention that the entire advance cannot be taxed solely in the assessee's hands where she holds a fractional share is accepted as a valid challenge to the AO's approach; assessment to that effect lacks basis but is not finally adjudicated in light of the order setting aside the assessment. Issue 4: Assessments based on presumptions/assumptions and requirement of evidentiary basis Legal framework: Assessments must be grounded on evidence and not on mere assumptions; statutory provisions and administrative instructions require reasoned and evidenced findings. Precedent Treatment: No cases cited; Tribunal reiterates general principle of evidence-based assessment. Interpretation and reasoning: The AO's conclusion that the registered sale agreement was deemed cancelled and that the advance was forfeited was held to be based on presumption rather than evidentiary proof. Coupled with the procedural infirmity of expanding scrutiny without approval, the Tribunal found the assessment to be made dehorse the required evidentiary basis and therefore bad in law. Ratio vs. Obiter: Ratio - An assessment predicated on assumption of cancellation/forfeiture without supporting evidence is unsustainable; assessorial conclusions must be supported by material on record. Conclusions: Assessment based on presumptions and assumptions is invalid; the Tribunal set aside the assessment order for lack of evidentiary foundation and procedural non-compliance. Overall Disposition The Tribunal allowed the appeal, set aside the assessment under section 143(3) as unlawful for having expanded limited scrutiny without prior PCIT/DIT approval and for being based on presumptions; the Tribunal decided the matter on legal grounds and did not proceed to a full merits adjudication of substantive points such as quantification of forfeiture or division among co-owners.