USUAL PETTY ADDITIONS IN SCRUTINY ASSESSMENT MAY BE CONTESTED BY FILING APPEAL AND WRITTEN SUBMISSION JUST AFTER RECEIVING ASSESSMENT ORDER.

[C.A. DEV KUMAR KOTHARI]

CASES OF SMALL ADDITIONS

Purpose of article:

This article concerns small additions and disallowances. In case of any general practioners such cases are quite large. Therefore author hope that the article will provide some guidance about how to contest such cases which are large in number. To deal with such cases, certain standard formats, statement of facts, grounds of appeal and written submission can be prepared and the same can be modified according to actual facts prevailing in any case. Author has  guided to adopt  the practices suggested herein for  case of   individuals and HUF  (belonging to group of clients /  directors, and executives of corporate clients) and it is found useful.

Cases selected under CASS/ AIR:

Many cases are selected for scrutiny on the basis of information found in AIR. As discussed later on in such cases scrutiny should be restricted to the items covered in AIR. However, many assessing officers have practice of making detailed  enquiry and making additions on different accounts on estimate basis. Such additions are not intended by the government.

Additions and disallowances beyond scope of CASS/ AIR enquiry:

One can challenge such additions and disallowances which were not supposed to be in pursuance of information gathered through AIR as without jurisdiction and as not intended by the scheme of scrutiny of cases.

Small additions and appeal:

These additions and disallowances are generally not justified and are not sustainable. However, considering small amounts, the assessee accept such orders (unless penalty proceedings are initiated) and do not file appeal.

However, even in such cases it may be advisable to file an appeal along with written submission and relevant documents. And later on when CIT(A) fix the case for hearing a further update, if required may be filed and a request can be made to decide the appeal based on written submission. This will reduce administrative burden and costs of preferring and pursuing appeal.  

Usual additions and disallowances:

Generally Assessing Officers make additions on account of personal expenses, certain portion out of various expenses like motor care expenses, telephone expenses, entertainment expenses, general expenses etc. The same may not at all be disallowable if the assessee has made estimated disallowance or accounting adjustment for personal element and  thus not claimed expenses pertaining to personal requirements.

File appeal and written submission:

An appeal against assessment order is to be filed within thirty days from the date of receipt of  assessment order. When the assessment order is received, things are fresh in mind and it is not difficult to prepare a written submission and paper book simultaneously or just within few days after filing of appeal. It would be better if written submission and paper book fro supporting documents are also filed along with the appeal so that all these documents are placed in appeal folder in the office of the CIT(A). This will also reduce administrative burden.

When notice for hearing is received:

When notice for hearing is received, one can easily review the matter and decide to file further notes or documents, if at all there is such requirement. And can request the CIT(A) to decide the appeal based on written submission filed along with the appeal or on particular date and/ or  further documents being filed.

Illustrative written submission before CIT(A) ( to be modified as per facts and claims):

Before the Honorable C.I.T.(Appeals)

Dear Sir,

PAN:            Asst. Yr. 2007-08   Appeal no.        (filed on….. ) / being filed simultaneously / fixed for hearing on

Thank you very much for allowing opportunity/ further opportunity  of hearing.

I request you to kindly consider written submission  appended below / submitted on  …  and decide the appeal on merit.

 

In furtherance of statements of facts, ground of appeal and assessment records I submit written submission for your honors kind consideration:

The ground no.1 is on the point of jurisdiction of the A.O. / desired scope of enquiry for making  variation in returned income, tax rate , heads of income etc. as per provisions of section 143, policy of the government about scrutiny and scope of scrutiny etc. My  case was selected under CASS ,though AIR is not mentioned in notice or assessment order, however, I understand and believe that the information in AIR was basis for CASS selection.   In this regard Ground no. 1 and 2 read as follows:

1. For that  it appears that learned A.O. has exceeded his jurisdiction in making enquiry and variation to income beyond the  purpose and scope of scrutiny based on information received by him from CASS and AIR when the case was selected  under Scrutiny through  CASS and not a case selected by application of mind to enquire any other matter as required by application of mind by the A.O. u/s 143(2).
2. For that it appears that all variations, additions, disallowances etc. made by the A.O. to the returned income while assessing income  and tax of assessee are without jurisdiction and are illegal as non of such variations or  adjustments made by him in the assessed income  and tax arose out of enquiry which was to be  made in pursuance of information obtained through AIR, because the case was selected for scrutiny only for such purposes

In the first paragraph of the assessment order  learned A.O. has stated as follows:

           “ The return was duly processed u/s 143(1) and  thereafter having been  selected for scrutiny through  CASS, notices U/s. 143(2) and 142(1) were issued and served on the assessee….”

Thus, I believe that the case was selected   subsequent to processing of return and only through CASS. It is likely a case of selection based on AIR information. 

Therefore, it is clear that selection for scrutiny and service of notice u/s 143 (2)   was on the basis of ‘computer added selection system’ and not by the A.O. by application of his mind and recording of reasons for such selection.

In such circumstances it is clear that learned A.O. has not applied his mind and decided to issue notice u/s 143(2). The relevant portion of section 143(2) (ii) reads as follows:

“…. If he (means the  A.O.)  consider it necessary or expedient to ensure that the assessee had not understated  the income or has computed excessive loss or has not under-paid tax in any manner, serve on the assessee a notice..….”

Since the notice was not served in terms of  section 143 (2) (ii), as stated above, the A.O. had not acquired   wider scope of scrutiny and his scope of scrutiny as well as variation to income or tax should be considered as restricted in terms of reasons for selection under CASS and information obtained in AIR as might be indicated in the computer generated reports.

The expressions used like "...if he (AO) consider it necessary or expedient to ensure that the assessee had not understated..."  mean that the A.O. should have so considered by application of his mind, and therefore, there should also be recording for the same because otherwise it cannot be said that he has actually applied his mind and so considered about need of enquiry beyond what is suggested by CASS report. As the notice was issued only  based CASS report the AO should restrict scope of enquiry to the aspects covered by CASS report and he should not go beyond the same.

Learned AO has made enquiry in respect of information obtained from computer system and all transactions were verified. Therefore, any variation has not been made in regard those items.

However, learned AO has made some other additions and disallowances which I feel were not at all warranted in view of the nature of assessee and the government’s policy as reflected in the provisions of S. 143(2) as mentioned above and also circulars about selection and scrutiny, appeals etc.

The government’s  policy decision is clear that assessee should be relied upon and returns should be accepted   and there should not be initiation and carrying of litigation on small matters. In this regard I rely on recent circular of the Board vide F.No.225/26/2006-ITA.II (Pt.).  dated 08.09.2010  operative part of which read as  follows: 

               Subject: Selection of cases for scrutiny on the basis of data in AIR returns and subsequent assessment proceedings-regarding.

1. Reference is invited to Board's letter of even number dated 23^rd May, 2007 regarding scope of enquiry in the scrutiny cases selected only on the basis of information received through the AIR returns.

2. The above mentioned guidelines have been reconsidered by the Board and it has been decided that the scrutiny of such cases would be limited only to the aspects of information received through AIR. However, a case may be taken up for wider scrutiny with the approval of the administrative Commissioner, where it is felt that apart from the AIR information there is a potential escapement of income more than Rs. 10 Lacs.

3. It has also been decided that in all the cases which are picked for scrutiny only on the basis of AIR information, the notice u/s 143(2) of Income Tax Act should clearly be stamped with "AIR Case".

Source: Tax Management India .Com

In the circular dt. 23.05.2007 (for AY 2005-06) also it has been stated that when return is selected for scrutiny based on AIR returns, the scope of scrutiny should be restricted to items covered in AIR.

My case:

In my case learned AO in the assessment order has stated  only “CASS”, and AIR has not been mentioned. In the notices also “AIR” was not mentioned. However, I understand and believe that the case was selected in pursuance of information in AIR. In any case keeping in mind provisions of S. 143(2) as discussed above and the government’s policy as reflected in circulars issued from time to time, I submit for you kind consideration that learned AO should have kept variation in income by way of additions and disallowances only to the extent of matters for which case was selected for scrutiny.

Without prejudice to my contentions as raised in ground no 1 and 2 I submit my written submission for other grounds of appeal 

Ground no. 3 is “ For that learned A.O. was wrong in making an addition of Rs.51000 on account of  personal drawings without pointing out any expenditure incurred by assessee over and above drawings shown by assessee. Learned A.O. also ignored the social and family trend as well as drawings made by family members.”

Learned A.O. has added Rs.51000/- on account of alleged low personal drawings. Learned A.O. ignored the fact that the assessee  is a lady from an Indian and  Marwari family and as per  family and social tradition generally most of expenses of personal nature were borne by my husband and my son. Furthermore we live in a joint family with two elder brothers of my husband. I had informed the learned AO about personal expenses of family members as follows:

  Rs.127931/-  in a/c of my husband Shri

  Rs.177606/-in account of my son Shri

  Rs. 36000/- in account of  our HUF namely  ….ABC  HUF.

  Rs.42000/- in a/c of Ms. …. my dauhghter.

Taking into account my drawings of Rs.31000/- total drawings of our family  

Was Rs.414537/-   

In such circumstances drawings, in my hand amounting to Rs. 31000/- was not low as alleged by the AO.

Furthermore, learned A.O. has not indicated any expenditure which was actually incurred by assessee and thus addition of Rs.51000/- made by him is arbitrary and without any basis.   

Kindly delete the entire addition of Rs.51000

Ground no. 4.  “For that learned A.O. was wrong in disallowing general expenses s.466/- and salary Rs. 4800/- ignoring that such administrative expenses are minimum expenses which are necessary for accounting and administration.”                                                                                                                                                                                        

  Learned A.O. has disallowed Rs.466 and Rs. 4800 incurred on account of general expenses and salary ignoring the fact that in view of income earned and work involved in accounting and administration such expenses are nominal expenses. Books of account and vouchers etc. were produced before the A.O. Learned A.O. never asked in writing or verbally any evidence in regarding these expenses but made disallowance. He never issued a show cause notice in this regard. Thus principal of natural justice is totally ignored by the learned AO.

On one hand learned AO has made addition on account of alleged low drawings pleading status of assessee and on other hand he has disallowed some administrative and other expenses without considering income and work required for the same. These are contradictory stands taken by the AO.

I am enclosing details and evidence of expenses.

Kindly deleted disallowance of Rs. 466 and Rs.4800/-

Ground no.5 reads as follows:

For that learned AO was wrong and unjustified while disallowing  estimated expenses although assessee had himself disallowed estimated expenses for personal use as following expenses:

Nature of expenses	Total expenses	Expenses charged to personal drawings and other family members	Net expenses claimed.	Disallowed by the AO
Motor car running and driving expenses	Rs.135000/-	Rs.18000/-	Rs.117000/-	20% Rs.23400/-
General Expenses	Rs.39500/-	Rs.6000/-	Rs.33500/-	20% Rs.6700/-
Telephone Expenses	Rs.69000/-	Rs.9000/-	Rs.60000/-	20$% Rs.12000/-

I had estimated my personal use and made estimated disallowance for such use by crediting such expenses and charging to drawings account and also use by family members have been charged to them. However, learned AO has made further disallowance equal to 20% of  net claim for above expenses for alleged personal use. This is not justified. Copy of ledger accounts to show charge on drawings account and account of others is attached.  Kindly delete disallowance under all heads.

Ground no. 6 reads as follows: “For that learned A.O. may be directed to allow fully and correctly refund with interest u/s 244A till the date of actual refund.”

Kindly issue necessary directions to the AO to recheck and allow full and correct interest  so that assessee is not deprived of interest due to delays in actual refund and other reasons and assessee get full amount of interest till the refund is  actually granted by issue of cheque and delivering the cheque to the assessee.

Thanking you,

(Appellant)    

Enclosed details and evidence of expenses.

Details of family members, PAN and drawings.