2024 (8) TMI 1563 - AT - Income Tax

Conversion from limited scrutiny to complete scrutiny - Addition u/s. 69 and 69A - sum invested in the construction of a new residential house was unexplained - HELD THAT - Reliance being placed in the order of CBS International Projects Pvt. Ltd. 2019 (2) TMI 1748 - ITAT DELHI and Best Plastics Pvt. Ltd. 2006 (4) TMI 53 - HIGH COURT DELHI wherein it was held that the assessment order passed by the AO disregarding the instructions of the CBDT are liable to the set aside and no substantial of law arises. The said judgment relied upon the decision of Indian Oil Corporation 2004 (2) TMI 66 - SUPREME COURT and also UCO Bank 1999 (5) TMI 3 - SUPREME COURT Hence we hold that the Assessing Officer can widen the scope of scrutiny even the case is selected for limited scrutiny under CASS however the condition precedent for such widening of the scope is that the Assessing Officer has to seek prior approval of the authorities mentioned. As per A.R. there was no prior approval and permission of the ld. PCIT. As such there was no reason to convert the limited scrutiny in complete scrutiny. In our opinion these facts required to be examined at the end of ld. AO as the lower authorities have not produced concerned records for our consideration. Hence this issue is remitted to the file of ld. AO to decide the same accordingly. Addition u/s 69 and 69C - The claim of assessee supported by the unregistered sale agreement. This fact has been accepted by Parasmal Lodha. However he stated that the said sale agreement has been made for limited purpose of availing housing loan from L T Housing Finance Ltd. against which he has taken Rs. 90 lakhs from L T Housing Finance Ltd. however stopped the enquiry at this stage and not carried to the logical conclusion. In our opinion it is appropriate to remit the issue to the file of ld. AO to carry out necessary enquiry on this issue and provide an opportunity of cross examining Parasmal Lodha to know what was the exact amount in respect of property. Accordingly the issue in dispute is remitted to the file of ld. AO for fresh consideration at the end of ld. AO. Appeal of the assessee is partly allowed for statistical purposes.

Summary

The core legal questions considered by the Tribunal in this appeal include:

1. Whether the assessment proceedings, initiated as a limited scrutiny under section 143(2) of the Income Tax Act, 1961, could be validly extended to a full-fledged scrutiny without obtaining prior approval from the Commissioner as mandated by CBDT instructions.

2. Whether the addition of Rs. 1,42,25,000/- under section 69 (unexplained investments) of the Income Tax Act was justified, given the evidence and explanations provided by the assessee regarding the source of funds.

3. Whether the assessing officer was required to provide an opportunity for cross-examination of the third party witness (buyer) whose statement was relied upon to make the addition under section 69.

4. Whether the sale consideration for the property in question was Rs. 57,75,000/- as per the registered sale deed or Rs. 2,00,00,000/- as claimed by the assessee and supported by an unregistered sale agreement.

5. Whether the Commissioner of Income Tax (Appeals) erred in not adjudicating on certain grounds raised by the assessee, including the validity of the assessment and opportunity of hearing by video conferencing.

Issue-wise Detailed Analysis:

1. Validity of Conversion from Limited Scrutiny to Complete Scrutiny

Legal Framework and Precedents: The CBDT issued Instruction No. 20/2015 and Instruction No. 5/2016 which govern the procedure for scrutiny assessments selected through Computer Aided Scrutiny Selection System (CASS). These instructions restrict the scope of limited scrutiny assessments to specific issues for which the case was selected, and mandate that any expansion to complete scrutiny requires prior written approval from the Principal Commissioner or Commissioner of Income Tax after formation of a reasonable view supported by credible material.

Precedents cited include decisions by various Tribunals emphasizing that failure to follow this procedure renders the assessment order null and void. For instance, the Hon'ble Delhi Tribunal in Balvinder Kumar v. PCIT and the Jaipur Tribunal in Smt. Manju Kaushik v. DCIT held that the Assessing Officer cannot go beyond the limited scrutiny issues without prior approval, and any such action is beyond jurisdiction.

Court's Interpretation and Reasoning: The Tribunal noted that the case was selected for limited scrutiny specifically to verify the deduction claimed under capital gains. However, the Assessing Officer made additions under sections 69 and 69A, which go beyond the limited scrutiny scope. The Assessing Officer did not obtain prior approval from the Commissioner to convert the case to complete scrutiny, as confirmed by the Right to Information Act order obtained by the assessee.

The Tribunal observed that the CBDT instructions are clear that the scope of enquiry in limited scrutiny should be confined to the specified issues unless proper procedure for conversion is followed. The Assessing Officer's failure to obtain approval and to intimate the assessee about the conversion is a procedural irregularity.

Application of Law to Facts: Since the Assessing Officer proceeded beyond the limited scrutiny scope without following the prescribed procedure, the Tribunal remitted the issue to the Assessing Officer for fresh consideration after compliance with the procedural requirements, including obtaining approval and intimating the assessee.

Treatment of Competing Arguments: The assessee argued for quashing the entire assessment on this ground, relying on CBDT instructions and judicial precedents. The Department relied on the order of the Commissioner of Income Tax (Appeals) which dismissed the ground. The Tribunal sided with the assessee on the procedural lapse but remitted the matter for fresh adjudication rather than quashing outright.

Conclusion: The assessment order is not sustainable without compliance with the CBDT instructions regarding conversion of limited scrutiny to complete scrutiny. The matter is remitted for fresh consideration in accordance with law.

2. Addition under Section 69 for Unexplained Investments

Legal Framework and Precedents: Section 69 of the Income Tax Act allows the Assessing Officer to deem unexplained investments as income if the assessee fails to satisfactorily explain the nature and source of such investments. The burden lies on the assessee to prove the source of funds. However, reliance on third-party statements without giving the assessee an opportunity for cross-examination has been held to violate principles of natural justice (Andaman Timber Industries v. CCE; Kirloskar Investments & Finance Ltd v. ACIT).

Court's Interpretation and Reasoning: The Assessing Officer relied on the statement of the buyer, Mr. Parasmal Lodha, who denied making cash payments and claimed the unregistered agreement was only for obtaining a bank loan. The Assessing Officer treated the difference between the declared sale consideration in the registered sale deed (Rs. 57,75,000/-) and the claimed consideration (Rs. 2,00,00,000/-) as unexplained investment and added Rs. 1,42,25,000/- to income.

The assessee produced the unregistered sale agreement, bank statements showing cash deposits corresponding to the alleged payments, and investment certificates for bonds qualifying for exemption under section 54EC. The assessee also contended that the buyer did not deny paying the cash amount but only stated the sale agreement was for bank loan purposes.

The Tribunal emphasized that the Assessing Officer failed to provide an opportunity for cross-examination of the buyer whose statement was adverse to the assessee. Reliance on such statements without cross-examination violates natural justice and renders the assessment order unsustainable.

Application of Law to Facts: The Tribunal found that the circumstantial evidence, including the unregistered sale agreement and bank statements, sufficiently explained the source of the cash deposits and investments. The buyer's denial was not conclusive as he admitted the existence of the agreement and did not deny the cash payments outright.

Treatment of Competing Arguments: The assessee argued for deletion of the addition based on proof of source and violation of natural justice principles. The Department relied on the Assessing Officer's findings and statements recorded. The Tribunal found merit in the assessee's submissions regarding procedural fairness and evidentiary support.

Conclusion: The Tribunal held that the addition under section 69 could not be sustained without affording the assessee an opportunity to cross-examine the buyer. The matter was remitted to the Assessing Officer for fresh enquiry and to provide such opportunity before making a final decision.

3. Sale Consideration Discrepancy

Legal Framework and Precedents: The sale consideration recorded in the registered sale deed is prima facie evidence, but not conclusive if credible evidence shows a different amount was actually paid. Courts have recognized that actual sale consideration may differ from registered value due to prevalent practices and tax considerations, provided the assessee can prove the true amount (Commissioner of Income Tax v. Intezar Ali).

Court's Interpretation and Reasoning: The Tribunal noted that the registered sale deed recorded consideration of Rs. 57,75,000/-, while the unregistered agreement and bank transactions indicated Rs. 2,00,00,000/-. The buyer admitted the agreement but claimed it was for bank loan purposes. The assessee's evidence included bank statements showing cash deposits matching the alleged payments.

The Tribunal found that the preponderance of evidence favored the assessee's claim of higher sale consideration. However, due to contradictory statements and procedural irregularities, the Tribunal remitted the issue for fresh verification including cross-examination of the buyer.

Application of Law to Facts: The Tribunal applied the principle that circumstantial evidence and prevalent commercial practices can establish actual consideration beyond the registered deed. The assessee's evidence was prima facie sufficient, but the contradictory statements necessitated further enquiry.

Conclusion: The Tribunal did not conclusively accept or reject the sale consideration claimed by the assessee but remitted the issue for fresh adjudication after proper enquiry and opportunity to cross-examine.

4. Opportunity for Cross-Examination

Legal Framework and Precedents: The principle of natural justice requires that when adverse inferences are drawn from a third party's statement, the assessee must be given an opportunity to cross-examine that witness. The Supreme Court in Andaman Timber Industries v. CCE held that failure to provide such opportunity leads to nullity of the assessment order.

Court's Interpretation and Reasoning: The Tribunal observed that the Assessing Officer relied on the statement of the buyer denying cash payments without providing the assessee an opportunity to cross-examine him. The assessee had specifically requested such opportunity, which was not granted.

Application of Law to Facts: The Tribunal held that reliance on unchallenged statements of third parties in assessment proceedings violates natural justice and cannot sustain additions. It directed that the Assessing Officer must provide an opportunity for cross-examination before finalizing the assessment.

Conclusion: The Tribunal found the assessment order unsustainable on this ground and remitted the matter for fresh enquiry with due opportunity to the assessee.

5. Grounds Not Pressed and Other Procedural Issues

Grounds relating to validity of assessment on conversion from limited to full scrutiny and opportunity for hearing by video conferencing were not pressed by the assessee and accordingly dismissed as not pressed.

The Tribunal did not find any merit in the Commissioner of Income Tax (Appeals) not adjudicating certain grounds as these were either not pressed or lacked fresh material.

Significant Holdings:

"The Assessing Officer can widen the scope of scrutiny even if the case is selected for limited scrutiny under CASS, however, the condition precedent for such widening of the scope is that the Assessing Officer has to seek prior approval of the authorities mentioned."

"Without the necessary approval, the assumption of jurisdiction by the Assessing Officer is invalid. Consequently, the addition made by the Assessing Officer by denying the deduction under section 54B is not sustainable and the same is deleted."

"When the assessee asked for cross examination of the third party whose statement was relied upon, it is incumbent upon the Assessing Officer to give an opportunity of cross examination to the assessee as held by Hon'ble Supreme Court in the case of Andaman Timber Industries."

"Ignoring the documents, circumstantial evidence and the prevalent practice in the land transaction, the authorities below were not justified in doubting the explanation of the assessee for the source of deposit in question mainly on the basis that the registered sale deed shows a sale value consideration of only Rs. 22,20,000."

Final determinations:

- The assessment order passed without prior approval for conversion from limited to complete scrutiny is liable to be quashed or set aside; the matter is remitted for fresh consideration after compliance with procedural requirements.

- The addition under section 69 for unexplained investment of Rs. 1,42,25,000/- cannot be sustained without providing the assessee an opportunity to cross-examine the buyer; the matter is remitted for fresh enquiry.

- The sale consideration claimed by the assessee at Rs. 2,00,00,000/- is prima facie supported by evidence, but due to contradictory statements, the issue requires fresh verification.

- Grounds relating to opportunity of hearing by video conferencing and validity of assessment on other procedural aspects were dismissed as not pressed or lacking merit.

- The appeal is partly allowed for statistical purposes with remand directions to the Assessing Officer to comply with procedural safeguards and conduct fresh enquiry.