2024 (10) TMI 1687 - AT - Income Tax

Scope of limited scrutiny - Addition in respect of an item which was not the subject matter of limited scrutiny that too without obtaining prior approval of PCIT as directed by CBDT vide Instruction No. F. No. 225/402/2018/ITA.II dated 28.11.2018 HELD THAT - As the CBDT Instruction No. 5/2016 we are of the considered view that the AO has exceeded his jurisdiction in enquiring into those issues and making additions on those items which were beyond the scope of limited scrutiny which is in clear violation of mandate given by CBDT in the said Circular and has been held in the case of Dev Milk Foods Pvt. Ltd. 2020 (6) TMI 317 - ITAT DELHI to be bad in law. We note that CBDT has in para 4 of the said instruction clarified that in a limited scrutiny the scrutiny assessment proceedings would initially be confined only to issues and questionnaire enquiry investigation etc. would be restricted to such issues in the limited scrutiny. Only upon conversion of such case to complete scrutiny after following the procedure laid down as stated the AO may examine the issues other than the issues involved in the limited scrutiny but in the present case the limited scrutiny was not converted into complete scrutiny. In our opinion the order passed by the AO is bad in law and cannot be sustained for the said reasons stated above. Accordingly we quash the assessment order as nullity and bad in law. Issue raised by the assessee in ground no. 1 to 4 are allowed.

Summary

ISSUES:

Whether an Assessing Officer (AO) can examine and make additions on issues beyond the scope of limited scrutiny without prior approval to convert the case into complete scrutiny.Whether the AO's order is valid if additions are made on matters not covered under the limited scrutiny selection parameters and without following prescribed procedural safeguards.Whether the conversion of limited scrutiny to complete scrutiny requires formation of a reasonable view supported by credible material and administrative approval as per CBDT instructions.Whether failure to comply with CBDT Instruction No. 5/2016 and related instructions renders the assessment order void and invalid.Whether the principle of natural justice is violated if the assessee is not given proper opportunity to respond to proposed additions/disallowances.

RULINGS / HOLDINGS:

The AO exceeded jurisdiction by making additions beyond the limited scrutiny scope without converting the case into complete scrutiny with prior approval of the Pr. CIT, thereby violating CBDT Instruction No. 5/2016; such additions are invalid.The order passed by the AO without following the procedure of forming a reasonable view based on credible material and obtaining administrative approval is held to be ab-initio void and invalid.The CBDT Instruction No. 5/2016 mandates that conversion from limited to complete scrutiny requires a reasonable view that there is a possibility of under-assessment supported by credible material, not mere suspicion or conjecture, and a direct nexus between material and such view; failure to comply invalidates the assessment.Failure to provide the assessee with a fair opportunity to explain proposed additions/disallowances violates the principle of natural justice and CBDT guidelines, rendering the assessment order unsustainable.The assessment order made in violation of the above principles and instructions is a nullity and is quashed accordingly.

RATIONALE:

The Court applied CBDT Instruction No. 5/2016 dated 28.11.2018 and earlier Instruction No. 20/2015, which govern the scope and procedure for scrutiny assessments selected under Computer Aided Scrutiny Selection (CASS), distinguishing between limited and complete scrutiny.The instructions require that limited scrutiny cases be confined to specific issues for which the case was selected, and any expansion to complete scrutiny must be justified by a reasonable view based on credible material, with administrative approval and proper communication to the assessee.The Court relied on precedent decisions emphasizing that non-compliance with CBDT instructions and procedural safeguards results in invalid assessment orders, including coordinate bench rulings and High Court observations on the binding nature of departmental circulars and the need to prevent fishing and roving enquiries.The Court noted that the AO's proposal for conversion was based on suspicion and lacked direct nexus or credible material, and the Pr. CIT's approval was mechanical, violating the mandatory instructions.The Court emphasized the constitutional principle under Article 14 that the department is bound by the standards it sets for itself, and failure to adhere to such standards invites invalidation of departmental actions.The Court refrained from adjudicating other merit-based issues as the appeal was allowed on the legal ground of invalidity of the assessment proceedings.