2025 (5) TMI 1564 - AT - Income Tax

Expansion of the scope of limited scrutiny without following mandatory procedure laid down - disallowing the capital loss and further determining the business loss by allowing the assessee to set off against capital gain from acquisition of smartplay startup by aricent - HELD THAT - In cases under limited scrutiny the scrutiny assessment proceeding would be confined only to issues under limited scrutiny and questionnaires inquiry investigation etc. would be restricted to such issues. AO has asked detailed questionnaire relating to number of shares purchased and sold along with the details of bonus shares and cost of acquisition as well as the details of dividend received which in our view was not the issues identified for examination under the notice u/s 143(2) of the Act under the limited scrutiny . AO has over stepped his jurisdiction without duly recording the reasons for expanding the scope of Limited Scrutiny . The same also not placed before the Pr. CIT/CIT concerned for his approval the assessee had also not been intimated that additional issue would also be considered during the course of pending assessment proceeding. If we consider the argument of the D.R. that since the refund arises out of all the items included in computation of income the AO can verify all the heads of income because of which refund results then in our view it will completely frustrate the very objective of limited scrutiny . When the tax authorities are scrutinizing/examining whether refund claimed is justified they should confined themselves whether the gross receipts on which the TDS credit is sought has been declared in the return or not Whether TDS claimed are reflecting in the Form 26AS of not whether the assessee had actually paid any excess advance tax or not the reasons for claiming the refund. In the present case the AO completed the assessment on the sole presumption that that the assessee has made artificial arrangements to generate the capital loss and accordingly the claim of capital loss amounting was disallowed business loss was determined which in our opinion are not identified for the limited examination u/s 143(2) of the Act. Under these circumstances in our opinion even if some other issues comes to the notice of AO during the course of assessment proceedings he cannot make any other addition/disallowance without obtaining prior approval from concerned PCIT/CIT as per the instruction issued by the CBDT cited (supra). In our opinion the AO has exceeded the jurisdiction by calling for details and carrying out inquiries by issuing notice u/s 142(1) of the Act dated 5.10.2018. AO has exceeded his jurisdiction in inquiring into those issues which are beyond the scope of limited scrutiny which is clear violation of mandate given by the CBDT in the above instructions/orders which are binding on the AO and accordingly without jurisdiction bad in law. We are of the view that CBDT has specifically clarified that in a limited scrutiny the scope of enquiry shall be restricted to the limited scrutiny issues. It will be confined only to issues and questionnaire inquiry investigation etc. would be restricted to such issues in the limited scrutiny . Bench is of considered opinion that the very exercise of jurisdiction to examine/scrutinize the transaction in BEL shares are not covered in the any of the issues identified for the examination under the limited scrutiny . The examination of refund claim in a limited scrutiny cannot be construed as giving jurisdiction to a complete scrutiny - AO has expanded the scope of limited scrutiny without following due procedure as directed under various instructions/orders. Passing of the final order u/s 147 without complying with the mandatory requirement of issuing a draft assessment order u/s 144C(1) - HELD THAT - It is undisputed that the Assessee is a non-resident during the previous year as observed by the AO in his assessment order. Hence he is an eligible assessee under section 144C(15)(b). It is also undisputed that draft assessment order was not issued to the Assessee before passing the final assessment order u/s 147 of the Act. Section 144C of the Act is a machinery provision which has been incorporated for the benefit of the assessee including the eligible assessee . The non-resident Indian has been included in the definition of eligible assessee u/s 144C (15)(b)(ii) of the Act w.e.f. 1st April 2020 and therefore the assessment proceeding in respect of a non-resident Indian undertaken after the said date are to be governed under the provisions of section 144C. Failure on the part of AO to follow procedure u/s 144C(1) is not merely a procedural or inadvertent error but a breach of a mandatory provision. The AO by not following the procedure laid down in section 144C(1) of the Act to pass and furnish a draft assessment order to the assessee and directly passing a final assessment order without giving assessee an opportunity to raise objection before the DRP is not mere a procedural irregularity but an incurable illegality and even provisions of section 292B of the Act would not protect such order as section 292B of the Act cannot be read to confer jurisdiction on assessing officer where none-exist as held in the case of S.H.L. (India)(P) Ltd 2021 (7) TMI 1208 - BOMBAY HIGH COURT The statutory provisions make it abundantly clear that the procedure laid down u/s 144C of the Act is of great importance and is mandatory. The order passed by the AO lacked jurisdiction as there is a statutory violation in not following the procedure prescribed and the same order also cannot be cured. As the order passed by the AO is without jurisdiction the assessment order dated 29.3.2022 is without jurisdiction null and void. Assessee appeal allowed.

Summary

Issues Presented and Considered

1. Whether the Assessing Officer (AO) exceeded jurisdiction by expanding the scope of a 'limited scrutiny' assessment without following mandatory procedures prescribed by the Central Board of Direct Taxes (CBDT), thereby rendering the assessment order void.

2. Whether the purchase and sale of shares of Bharat Electronics Limited (BEL) by the assessee constitute an 'adventure in the nature of trade' or are to be treated as capital asset transactions.

3. Whether the bonus shares allotted by BEL should be classified as stock-in-trade or capital asset, especially when original shares are recharacterized as stock-in-trade.

4. Whether the reassessment proceedings under section 147 read with section 144B of the Income Tax Act, 1961 (the Act) were valid, particularly regarding jurisdiction, issuance of notices, and procedural compliance.

5. Whether the AO had jurisdiction to initiate reassessment proceedings given the assessee's residential status and administrative control.

6. Whether the reassessment proceedings should have been conducted under the new reassessment regime introduced by the Finance Act, 2021, effective from 01.04.2021.

7. Whether the faceless assessment procedure under section 144B was applicable to the assessee.

8. Whether the long-term capital gains (LTCG) arising from the sale of bonus BEL shares are exempt under section 10(38) or taxable as business income.

9. Whether interest under sections 234A, 234B, and 234C is leviable on the assessee.

10. Whether the AO's failure to issue a draft assessment order (DAO) under section 144C(1) before passing the final assessment order under section 147 renders the assessment void ab initio.

Issue-wise Detailed Analysis

1. Jurisdiction and Scope of Limited Scrutiny (AY 2016-17)

Legal Framework and Precedents: The CBDT's instructions and orders, including Instruction No. 20/2015 dated 29.12.2015, Instruction No. 5/2016 dated 14.7.2016, and Order No. F.No.225/402/2018/ITA.II dated 28.11.2018, govern the procedure and scope of limited scrutiny cases selected under the Computer Aided Scrutiny Selection (CASS) system. These mandate that the AO must confine the scrutiny to the issues specified in the notice under section 143(2) and may expand the scope only with prior written approval of the Principal Commissioner of Income Tax (PCIT) or Commissioner of Income Tax (CIT).

Court's Interpretation and Reasoning: The Tribunal noted that the case was selected for limited scrutiny on two specific issues: (i) justification of refund claim, and (ii) disclosure of investment and income relating to foreign bank accounts. However, the AO expanded the scrutiny to examine the purchase and sale of BEL shares, which was not part of the limited scrutiny scope and did so without obtaining the mandatory approval from PCIT/CIT. The Tribunal observed that the AO's action amounted to an unauthorized expansion of scope and was contrary to CBDT's binding instructions.

Key Evidence and Findings: The notices under sections 143(2) and 142(1) were examined, showing that the AO sought information beyond the limited scrutiny issues. The AO's assessment order disallowed capital loss claimed on sale of BEL shares based on a presumption of artificial arrangements, which was beyond the limited scrutiny scope.

Application of Law to Facts: The Tribunal held that AO's expansion of scrutiny without following prescribed procedure was a jurisdictional error. The limited scrutiny process is designed to be confined to specific issues, and expanding it without approval violates the statutory mandate and CBDT instructions.

Treatment of Competing Arguments: The Revenue argued that since the refund arose from the entire computation of income, AO could verify all heads of income. The Tribunal rejected this, stating that such an argument would defeat the purpose of limited scrutiny.

Conclusion: The Tribunal set aside the AO's order for lack of jurisdiction and held that the disallowance of capital loss and determination of business loss were without jurisdiction and bad in law. Consequently, the additional grounds raised by the assessee were allowed, and the merits of other grounds were kept open.

2. Classification of BEL Shares and Bonus Shares (AY 2016-17)

This issue was not adjudicated by the Tribunal due to the acceptance of the jurisdictional ground in favor of the assessee. The merits were kept open for adjudication in further proceedings.

3. Validity of Reassessment Proceedings (AY 2017-18)

Legal Framework and Precedents: Sections 147, 148, and 144B of the Act govern reassessment proceedings and faceless assessments. Section 144C mandates issuance of draft assessment orders (DAO) to eligible assessees before final assessment orders. The Finance Act, 2021 introduced a new reassessment regime effective 01.04.2021, which applies to proceedings initiated thereafter unless a saving clause exists.

Precedents include judgments of the Hon'ble High Courts of Gujarat, Bombay at Goa, Andhra Pradesh, and the Supreme Court, emphasizing the mandatory nature of section 144C procedures and invalidity of assessments without compliance.

Court's Interpretation and Reasoning: The Tribunal found that the AO passed the final assessment order under section 147 without issuing a DAO under section 144C(1), violating a mandatory procedural safeguard. The assessee was a non-resident individual, thus an "eligible assessee" under section 144C(15)(b)(ii), and entitled to the protections therein.

The Tribunal held that failure to issue a DAO is not a mere procedural irregularity but a jurisdictional defect rendering the assessment order void ab initio. The Tribunal relied on binding precedents which held that such non-compliance cannot be cured by subsequent actions or corrigenda.

Regarding jurisdiction, the Tribunal noted that the AO who issued the reassessment notice was not the administrative authority for the non-resident assessee, whose jurisdiction lies with the Director General of Income-tax (International Tax). The AO's assumption of jurisdiction was therefore incorrect.

On the issue of reassessment regime, the Tribunal observed that the reassessment notice was issued on 31.03.2021, just before the new regime came into effect on 01.04.2021. However, no saving clause was applicable, and hence reassessment should have been completed under the new regime. The AO's failure to do so was an error.

Regarding faceless assessment, the Tribunal found that the assessee did not belong to the notified class for faceless assessments; thus, the faceless procedure applied incorrectly.

Key Evidence and Findings: The assessment order dated 29.03.2022 was passed without issuing a DAO. Notices and objections filed by the assessee were on record. The reassessment proceedings were initiated without jurisdiction and procedural compliance.

Application of Law to Facts: The Tribunal applied the statutory provisions and precedents mandating compliance with section 144C and proper jurisdictional exercise. The AO's failure to issue a DAO and incorrect jurisdictional assumption invalidated the reassessment.

Treatment of Competing Arguments: The Revenue argued that non-issuance of DAO was a curable procedural defect, relying on Supreme Court decisions on procedural irregularities. The Tribunal distinguished those cases, emphasizing the mandatory and substantive nature of section 144C protections and binding High Court precedents holding such non-compliance as jurisdictional.

Conclusion: The Tribunal held the reassessment order void ab initio for non-compliance with section 144C and lack of jurisdiction. The additional grounds raised by the assessee were allowed, and other merits were kept open.

4. Classification of Long-Term Capital Gains from Bonus Shares (AY 2017-18)

This issue was not adjudicated due to the acceptance of procedural and jurisdictional grounds in favor of the assessee, leaving the merits open.

5. Levy of Interest under Sections 234A, 234B, and 234C

This issue was not adjudicated for the same reason as above.

Significant Holdings

"The AO has exceeded his jurisdiction by expanding the scope of 'limited scrutiny' without obtaining prior approval from the PCIT/CIT as provided in the CBDT order. Such expansion without due procedure is bad in law and renders the assessment order void."

"The procedure laid down under section 144C of the Act is mandatory and not merely procedural. Failure to issue a draft assessment order before passing the final assessment order to an eligible assessee renders the assessment order void ab initio."

"The reassessment proceedings initiated without jurisdiction, including incorrect assumption of jurisdiction by an AO not competent to assess the non-resident assessee, are void."

"Limited scrutiny cases must be confined strictly to the issues specified in the notice under section 143(2). The AO cannot convert a limited scrutiny into a complete scrutiny without following the mandatory procedure of obtaining prior approval and informing the assessee."

"The examination of refund claims in limited scrutiny cases does not confer jurisdiction to the AO to scrutinize unrelated issues such as share transactions beyond the scope of the scrutiny notice."

"The faceless assessment procedure under section 144B applies only to notified classes of assessees; its application to non-notified assessees is erroneous."

"The burden of proof regarding jurisdiction and procedural compliance lies on the Revenue, and failure to comply with mandatory provisions vitiates the assessment."