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2025 (6) TMI 954 - AT - Income TaxLimited scrutiny OR complete unlimited scrutiny - procedure for conversion - HELD THAT - Case of the assessee was selected for limited scrutiny however the questionnaire has been issued by the AO as if it were a complete scrutiny. In our opinion the said action on the part of the ld. AO is not permissible under the Act as the ld. AO is not authorized to issue such questionnaire in case of limited scrutiny and has to confine his questionnaire to the point(s) mentioned in the notice issued u/s 143(2) of the Act. In our opinion the process followed by the ld. AO is flawed for two reasons namely (i) non-mentioning of the point for which the case of the assessee was selected for limited scrutiny and (ii) issuing a questionnaire along with notice u/s 142(1) of the Act as if it were complete scrutiny. The action of the ld. AO is not inconformity with the CBDT Instruction F No. 225/157/2017/ITA-II Dated 23.06.2017 which prescribes the procedure to be followed by the ld. AO in case of limited scrutiny and in case he wishes to examine the point beyond the scope of limited scrutiny. In our view this is incomplete disregard of the Instruction No. 5/2016 issued by CBDT on 14.07.2016 which provides that while proposing to take up complete scrutiny which was fixed for limited scrutiny the AO shall form a reasonable view that there is a possibility of under-assessment of income if the case is not examined under complete scrutiny and that plea has to be on the existence of the credible material not merely on suspicion and conjecture or unreliable sources. We note that the instruction provide that there has to be a direct nexus between the available material and formation of such view. Assessee appeal allowed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal in this appeal are: (a) Whether the assessment framed by the Assessing Officer (AO) is valid when the case was selected for limited scrutiny but the AO conducted proceedings as if it were a complete scrutiny without following the prescribed procedure for conversion; (b) Whether the AO was authorized to issue a comprehensive questionnaire containing multiple points of examination in a limited scrutiny case, thereby exceeding the scope of limited scrutiny; (c) Whether the AO was required to record a reasoned satisfaction or opinion based on credible material before converting a limited scrutiny case into a complete scrutiny case, as per the CBDT instructions and legal precedents; (d) Whether the failure to mention specific points of examination in the notice under section 143(2) of the Income Tax Act vitiates the assessment proceedings; (e) Whether the addition of undisclosed income based on the difference between the purchase price and stamp duty valuation of property is sustainable in the absence of proper scrutiny procedure. 2. ISSUE-WISE DETAILED ANALYSIS Issue (a) and (b): Validity of assessment framed under limited scrutiny but conducted as complete scrutiny Relevant legal framework and precedents: The procedure for limited scrutiny and its distinction from complete scrutiny is governed by the Income Tax Act and clarified through CBDT instructions, notably Instruction No. 5/2016 dated 14.07.2016 and Instruction F No. 225/157/2017/ITA-II dated 23.06.2017. These instructions mandate that limited scrutiny must be confined to specific points mentioned in the notice under section 143(2) and that any conversion to complete scrutiny requires formation of a reasonable view based on credible material, not mere suspicion or conjecture. The AO must record such satisfaction and obtain administrative approval before proceeding with complete scrutiny. Judicial precedents cited include decisions from coordinate benches in Chandigarh and Delhi, which held that assessments framed without following the prescribed procedure for conversion of limited scrutiny into complete scrutiny are invalid and liable to be quashed. Court's interpretation and reasoning: The Tribunal observed that the AO issued a notice under section 143(2) indicating limited scrutiny but failed to specify the points of examination. Subsequently, the AO issued a detailed questionnaire under section 142(1) containing 16 queries, effectively treating the case as a complete scrutiny. The Tribunal held that such action is impermissible as the AO is not authorized to expand the scope of limited scrutiny without following the prescribed procedure. The Tribunal emphasized that the AO's process was flawed on two grounds: (i) the notice under section 143(2) did not mention the specific points for limited scrutiny; and (ii) the questionnaire issued was comprehensive and akin to complete scrutiny, which is not allowed without proper conversion procedure. The Tribunal relied on the CBDT instructions which require the AO to form a reasonable view supported by credible material and to obtain necessary approvals before converting limited scrutiny into complete scrutiny. The AO's failure to do so amounted to disregard of these instructions and rendered the assessment invalid. Key evidence and findings: The record showed that the AO issued the limited scrutiny notice without specifying examination points and later issued a detailed questionnaire. There was no evidence of any recorded satisfaction or administrative approval for conversion to complete scrutiny. The assessee challenged this procedural lapse, supported by judicial precedents. Application of law to facts: Applying the CBDT instructions and judicial precedents, the Tribunal found that the AO's action of conducting a comprehensive inquiry under the guise of limited scrutiny without following the procedural safeguards was illegal. The AO's assessment order was therefore not sustainable. Treatment of competing arguments: The Revenue argued that the AO examined the points within the scope of limited scrutiny and that conversion to complete scrutiny was unnecessary. The Tribunal rejected this, noting the absence of specific points in the notice and the issuance of a broad questionnaire, which clearly indicated a departure from limited scrutiny. The Revenue's contention was held to be devoid of merit. Conclusions: The assessment framed by the AO is invalid and liable to be quashed for failure to comply with the procedural requirements governing limited scrutiny and its conversion. Issue (c) and (d): Requirement of recording satisfaction/opinion and mentioning points in notice under section 143(2) Relevant legal framework and precedents: CBDT Instruction No. 5/2016 mandates that before converting a limited scrutiny case into a complete scrutiny case, the AO must form a reasonable view supported by credible material, which cannot be based on suspicion or conjecture. The notice under section 143(2) must specify the points of examination in a limited scrutiny case to ensure procedural fairness and transparency. Court's interpretation and reasoning: The Tribunal noted that the notice under section 143(2) dated 04.09.2015 merely mentioned the type of scrutiny as limited but did not specify the points of examination. This omission was a procedural defect. Further, the AO did not record any satisfaction or form a reasonable view to convert the limited scrutiny into complete scrutiny. The Tribunal held that both these lapses violated the CBDT instructions and the principles of natural justice. Key evidence and findings: The absence of any recorded satisfaction or opinion by the AO and the non-mention of specific scrutiny points in the notice were established from the record. Application of law to facts: The Tribunal applied the CBDT instructions and held that the failure to specify points in the notice and to record satisfaction before expanding the scope of scrutiny rendered the assessment invalid. Treatment of competing arguments: The Revenue's argument that the AO implicitly examined relevant points was rejected as non-compliant with mandatory procedural requirements. Conclusions: The procedural lapses of non-mentioning points in the notice and failure to record satisfaction vitiate the assessment order. Issue (e): Addition of undisclosed income based on difference between purchase price and stamp duty valuation Relevant legal framework and precedents: Section 56(2) of the Income Tax Act deals with taxation of income from other sources including the valuation of property transactions. The assessee contended that section 56(2) is not applicable to private limited companies for the relevant assessment year, citing the effective date of applicability to individuals and HUFs only. Court's interpretation and reasoning: The Tribunal did not delve deeply into the substantive merits of the addition under section 56(2) because the primary issue of procedural infirmity in the assessment process was dispositive. The Tribunal noted that the addition was made by the AO without following proper scrutiny procedure, which itself rendered the assessment order invalid. Key evidence and findings: The AO added Rs. 81,31,691/- as undisclosed income based on the difference between the purchase price and stamp duty valuation. The assessee disputed the applicability of section 56(2) to the company. Application of law to facts: Since the assessment was quashed on procedural grounds, the substantive addition was not sustained at this stage. Treatment of competing arguments: The assessee's argument on non-applicability of section 56(2) to private limited companies was noted but not adjudicated upon due to procedural invalidity of the assessment. Conclusions: The addition was set aside along with the assessment order due to procedural defects. 3. SIGNIFICANT HOLDINGS The Tribunal held: "The process followed by the ld. AO is flawed for two reasons namely (i) non-mentioning of the point for which the case of the assessee was selected for limited scrutiny and (ii) issuing a questionnaire along with notice u/s 142(1) of the Act as if it were complete scrutiny. The action of the ld. AO is not in conformity with the CBDT Instruction F No. 225/157/2017/ITA-II Dated 23.06.2017, which prescribes the procedure to be followed by the ld. AO in case of limited scrutiny and in case he wishes to examine the point beyond the scope of limited scrutiny." "While proposing to take up 'Complete Scrutiny' in a case which was originally earmarked for 'Limited Scrutiny' the Assessing Officer ('AO') shall be required to form a reasonable view that there is possibility of under assessment of income if the case is not examined under 'Complete Scrutiny'. This reasonable view should not be based on mere suspicion, conjecture or unreliable source; and there must be a direct nexus between the available material and formation of such view." "The order framed by the ld. AO is not sustainable in the eyes of law for the aforesaid reasons. We accordingly, following the judicial pronouncements as relied by the ld. AR quash the assessment framed by the Assessing Officer." Core principles established include: - Limited scrutiny proceedings must be confined to points specified in the notice under section 143(2); - Conversion of limited scrutiny into complete scrutiny requires a recorded satisfaction based on credible material and administrative approval; - Issuance of comprehensive questionnaires beyond the scope of limited scrutiny without following procedural safeguards renders the assessment invalid; - Failure to mention points of examination in the limited scrutiny notice is a procedural defect; - Assessments framed without adherence to these procedural requirements are liable to be quashed. Final determination: The appeal was allowed on the legal issue, and the assessment order framed by the AO was quashed for non-compliance with mandatory procedural requirements governing limited scrutiny assessments.
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