Limited Scrutiny- scope is to be understood in reasonable manner and not to indulge into roving enquiry leading to litigation.

[CA DEV KUMAR KOTHARI]

Accepting Returns is one of result oriented policy:

Major part of Returns of Income filed by assesse are accepted subject only to making adjustments of specified category of mistakes. This is based on Trust reposed by government into public- tax payers.

This is also result oriented. History shows that huge demands raised by tax authorities are generally not sustainable and more than 80% demands stand deleted. In many cases tax payers also win on new claims preferred during scrutiny and appeals.

As per experience of author, in case of scrutiny leading to appeals, many new claims are allowed, which were not claimed in ROI and / or comutation   but were mentioned below computation for consideration of the Assessing Officer.  

Therefore, by reposing confidence in tax payers, generally government is gainer by accepting ROI and self-assessment.

Accepting Return is not without application of mind:

When Return is accepted as per self-assessment made by assesse it cannot be said that the tax authorities have not applied mind. This is because of following reasons:

1. Now-a-days return of income are comprehensive and lot of information which are provided by assesse are sufficient  for ascertain facts.
2. Information provided in ROI are also reconciled with other returns and reports. In case other return and information is found to indicate inconsistency, mismatch etc. then a communication can be sent for clarification and in case of return is selected for limited scrutiny on that point.
3. Natural intelligence and Artificial Intelligence (AI) both are  applied by tax department in  review of tax returns.

Therefore, it cannot be said that mind has not been applied, so far the ROI contains relevant information.  

Limited Scrutiny: 

A portions of ROI are selected for limited scrutiny. Such selection is based on numerical analysis of ROI of assesse, related returns  application of certain parameters, formulae, and information received in annual information return (AIR), and other data collected by tax department and other agencies of GOI / Tax department.

 In case of limited scrutiny, the purpose is specified in selection related documents and is also mentioned in notice issued by AO.

Conversion of limited Scrutiny to comprehensive or enlarged scrutiny:

A limited scrutiny case can be enlarged in scope or made comprehensive scrutiny only in specified circumstances and with prior approval of authority having jurisdiction in this regard. (at present usually Pr. CIT).

However, many times such enlargement of scrutiny is made in casual and routine manner, just on request of the AO and without application of mind by the AO and the higher authority.

 Cases have been wherein increased scope of scrutiny was not upheld for such reasons like prior approval was not obtained or prior approval was granted in a mechanical manner without application of mind and additions made beyond scope of limited scrutiny were deleted.

Making roving enquiry is not proper:

In many cases the AO himself assumed unlimited scope of enquiry and enlarged scope of enquiry and made additions which were beyond scope of limited scrutiny. Ld. AO made roving enquiry on matters not covered in scope of limited scrutiny.

Scope of limited scrutiny should be reasonably understood:

AO should consider and understand scope of limited scrutiny in a reasonable manner and should not take it in extensive manner to make roving enquiry. In case AO consider that the return requires extensive scrutiny, he must find out and record reasons in this regard and then write to the concerned higher authority to seek prior approval. It is also desirable that on such matters a preliminary information can be gathered from the assesse before launching comprehensive scrutiny.

Many of aspects can be considered for reconciliation:

Many times scrutiny is undertaken or widened after limited scrutiny due to certain figures and facts requiring reconciliation or clarification. For example, differences found in other reports like TDS / TCS as per form 26AS and as claimed by assesse, cash deposits in bank accounts as per reports submitted by banks, difference in amount of balances or volume of business  shown by other party having dealing with assesse. Many of such differences are reconcilable and it is not necessary that there is escapement of income.

Some examples of limited scrutiny:

In some cases selection is made for limited scrutiny on very limited aspect for example:

1. Share premium – this should mean enquiry only  about rate and amount of share premium credited. It should not be considered so as to have detailed and roving enquiry about share application money, share capital and premium and enquiry u.s. 68.  

2. Share capital – this should be restricted to obtain information about share capital raised and should not be considered to make roving enquiry in suspicious manner.

Note:  in case the limited scrutiny is to cover S.68 and 56 then reasons should cover them in words and / or numbers. As was in a case before Karnatak High Court in case of  SUNRISE ACADEMY OF MEDICAL SPECIALITIES (INDIA) PRIVATE LIMITED VERSUS INCOME TAX OFFICER CORPORATE WARD 2 (1) , RANGE - 2, KOCHI 2018 (5) TMI 1492 - KERALA HIGH COURT wherein reason for limited scrutiny was “ issue identified for scrutiny is whether the funds received by the petitioner in the form of share premium are from disclosed sources and whether the same have been correctly offered for tax.

This detailed reason indicated enquiry about source, nature and reasonableness of premium. Whereas use of word “share premium” or “share capital”  indicates only rate and amount of share premium and details of share capital and nothing more.

3. Difference in figures of turnover or inventory- this should be for reconciliation of figures and not to make roving enquiry about purchase and sale and inventory. The reasons for difference can be due to different grouping and different presentation or timing difference.
4. Information from AIR- this should also be for reconciliation, confirmation and clarification.
5. Cash deposits – this should be viewed for obtaining nature of cash deposits and source. In case of traders and many other businesses cash deposit is common because sale proceeds realized in cash are deposited. 

 If in preliminary reply information is provided by assesse and it is satisfactory on standard of reasonableness no further enquiry should be made.

However, it is felt in reality that officers try to enlarge scope of limited scrutiny in an unreasonable manner and start to make roving enquiry to harass tax payers.   Leading to litigation.