A.C.I.T.,CIRCLE-40, KOLKATA vs. M/S SUKHDHAM INFRASTRUCTURES LLP, KOLKATA

This is the appeal preferred by the assessee and the cross- appeal preferred by the revenue against the order of the Ld. Commissioner of Income Tax (Appeals)-12,

2. First we shall adjudicate assessee’s appeal in for AY 2015-16. The assessee has raised following grounds of appeal:

1. That on the facts and in the circumstances of the case and in law, the AO grossly erred in converting the limited scrutiny to complete scrutiny on 14.12.2017 even though the notices broadening the scrutiny beyond the scope of limited scrutiny were issued prior to 14.12.2017, which is bad in law and the entire proceedings under Section 143(3) of the Act is liable to be quashed. 2. a) That on the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in confirming the action of the AO in treating an aggregate sum of Rs. 80,00,000/- i.e. (Rs. 15,00,000/- from Varmita Developers (wrongly mentioned as 25,00,000/-) + Rs. 25,00,000/- from Oversure Vincom Pvt. Ltd. + Rs. 40,00,000/- from Silvertoss Vanijya Pvt. Ltd.) received as loan as unexplained cash credit under section 68 of the Act which is erroneous, arbitrary and bad in law. b) That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the action of AO and concluded that the assessee has failed to prove identity, genuineness and creditworthiness in respect of the three parties when all the corroborating evidences were placed on record. 3. That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the action of AO with respect to the addition of Rs. 42,747/- being 20% of the gardening expenses incurred by the appellant. 4. That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the action of AO with respect to the addition of Rs. 70,262/- being 20% of the administrative expenses incurred by the appellant. 5. That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the action of AO with respect to the addition of Rs. 42,193/- being interest on TDS, income tax and service tax. 6. That the appellant craves leave to add, alter, adduce or amend any ground on or at the time of hearing of the appeal.

3 Assessment Year: 2015-16 Sukhdham Infrastructures LLP 3. Issue raised in ground no. 1 is a legal issue challenging the order of Ld. CIT(A) upholding the assessment framed by the AO wherein the AO has completed the assessment on the basis of complete scrutiny on 14.12.2017 whereas the notices calling for details and information from the assesse were issued prior to the date on which the approval for complete scrutiny was given under the Act.

4. Facts in brief are that the assessee filed return of income on 26.08.2015 disclosing total income of Rs. 2,18,390/-. The case of the assessee was selected for scrutiny under the CASS under the category of limited scrutiny. The statutory notices were duly issued and served upon the assessee. In the notice issued u/s 143(2) for limited scrutiny, there were four issues stated/covered namely i) Interest expenses, ii) Income from Real Estate Business, iii) Sales Turnover mismatch and iv) Other expenses claimed in the profit and loss a/c. However, the AO issued notice u/s 142(1) of the Act dated 20.02.2017 calling for information and details as required for secured &unsecured loans/deposits beside calling for the details. The assessee duly complied with the notices issued by the AO by filing the details/ evidences , complete books of accounts, audited accounts etc as desired by the AO. The AO converted the limited scrutiny into complete scrutiny on 14.12.2017 whereas the notices were issued by the AO on the issues beyond the scope of limited scrutiny priority on 14.12.2017 and finally the assessment was framed vide order dated 28.12.2017 u/s 143(3) of the Act just two days before the assessment was getting time barred.

“5. I have perused the Remand Report, various submissions of the appellant and the assessment folder. As regards the scrutiny alleged to have been conducted beyond the scope of limited scrutiny, I do see that the AO issued requisitions and notices as if he was in a proceeding of complete scrutiny even though it was a limited scrutiny case. Consequent to an information/ report dated 10.10.2017 from I & CI Unit, Kanpur received in the AO’s folder on 2nd November, 2017, the AO converted it formally into complete scrutiny only on 14th December, even though he had already issued (earlier on 26th July, 2017 and later) notices broadening the scrutiny beyond the scope of limited scrutiny.” So it is clear from the above extract that the Ld. CIT(A) has not given any finding despite appreciating that the AO has exceeded jurisdiction.

6. The Ld. A.R. vehemently submitted before the Bench that the order passed by the AO is void and nullity in the eyes of law on the ground that the AO has exceeded the jurisdiction by enquiring into those issues which were not covered in the limited scrutiny in terms of the notice issued u/s 143(2) of the Act dated 28.07.2016. The Ld. Counsel also drew our attention to the notice issued u/s 142(1) dated 20.02.2017 wherein the AO called for information from the assessee in respect of secured & unsecured loan deposits which were also furnished despite the fact that he AO had no valid jurisdiction or power to call for the information under the limited scrutiny. The Ld. A.R. submitted that the AO has converted the limited scrutiny into a broad scrutiny only on 14.12.2017 whereas the enquiry was made qua the loans much prior to that date thereby rendering the assessment as nullity which deserved to be quashed on this score alone. The Ld. A.R referred to the instruction NO. 5/2016 of CBDT dated 14.07.2016 taking the bench through the procedure to be followed for conversion into complete scrutiny in a case which was originally earmarked for limited scrutiny. The ld AR contended that the AO was required to make a reasonable

5 Assessment Year: 2015-16 Sukhdham Infrastructures LLP view that there was a possibility of under-assessment of income if the case was not examined under complete scrutiny. The ld. A.R has referred to para 3 of the instruction which says that while forming the reasonable view the AO would ensure that there exists credible material or information available on record for forming such view and this reasonable view should not be based on mere suspicion, conjecture or unreliable source andthere must be a direct nexus between the available material and formation of such view. The Ld. A.R. therefore prayed that the order passed by the AO is bad in law and may kindly be quashed. In defense of his arguments the Ld. A.R. relied on the decision of the Co-ordinate Bench of Chandigarh in the case of Shri Vijay Kumar vs. ITO in ITA No. 434/Chad/2019 for AY 2014-15 dated 12.09.2019 and the decision of Co-ordinate Bench of Delhi in the case of Dev Milk Foods Pvt. Ltd. vs. Addl. CIT in ITA No. 6767/Del/2019 for AY 2015-16 dated 12.06.2020. The Ld. A.R submitted that in view of the decisions as referred to above the assessment framed by the AO is bad in law and may kindly be quashed.

7. The Ld. D.R on the other hand relied heavily on the order of authorities below by submitting that though the notice was issued u/s 142(1) of the Act dated 20.02.2017 calling for information in respect of secured and unsecured loans while admitting that the case was converted into complete scrutiny on 14.12.2017. The ld. D.R submitted that what is required during the assessment proceedings converting the limited scrutiny into complete scrutiny was duly done by the AO and therefore the arguments of the AO has nor force and the appeal of the assessee may kindly be dismissed on this legal issue.

3. Further, while forming the reasonable view, the Assessing Officer would ensure that: a. there exists credible material or information available on record for forming such view; b. this reasonable view should not be based on mere suspicion, conjecture or unreliable source; and c. there must be a direct nexus between the available material and formation of such view. 4. It is further clarified that in cases under 'Limited Scrutiny', the scrutiny assessment proceedings would initially be confined only to issues under 'Limited Scrutiny' and questionnaires, enquiry, investigation etc. would be restricted to such issues. Only upon

conversion of case to 'Complete * Scrutiny' after following the procedure outlined above, the AO may examine the additional issues besides the issue(s) involved in 'Limited Scrutiny'. The AO shall also expeditiously intimate the taxpayer concerned regarding conducting 'Complete Scrutiny' in such cases. Instruction no. 4 provides only complete scrutiny after following the procedure laid down above and the AO may examine the additional issues besides the issue involved in limited scrutiny and AO shall also expeditiously conducted complete scrutiny in such cases. We note that in the present case there has been a complete violation of the Circular issued by the CBDT. The case of the assessee finds support from the decision of Co-ordinate Bench of Delhi in the case of Dev Milk Foods Pvt. Ltd. (supra) wherein it has been held as under:

6.0 We have heard the rival submissions and have also perused the material on record. After considering the entire factual matrix we first deal with the primary arguments of the Ld. Authorized Representative that the conversion of the case from limited scrutiny to completer scrutiny was not legally valid. The subject of conversion of case from limited scrutiny to complete scrutiny has been dealt with in CBDT Instruction No.5/2016 which is being reproduced herein under for the sake of convenience: “2. In order to ensure that maximum objectivity is maintained in converting a case falling under ‘Limited Scrutiny’ into a ‘Complete Scrutiny’ case, the matter has been further examined and in partialmodification to Para 3(d) of the earlier order dated 29.12.2015, Board hereby lays down that 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’. In this regard, the monetary limits and requirement of administrative approval from Pr. CIT/CIT/Pr. DIT/DIT, as prescribed in Para 3(d) of earlier Instruction dated 29.12.2015, shall continue to remain applicable.

3. Further, while forming the reasonable view, the Assessing Officer would ensure that: a. there exists credible material or information available on record for forming such view; b. this reasonable view should not be based on mere suspicion, conjecture or unreliable source; and c. there must be a direct nexus between the available material and formation of such view.

4. The Board further desires that in all cases under scrutiny, where the Assessing Officer proposes to make additions or disallowances, the assessee would be given a fair opportunity to explain his position on the proposed additions/disallowances in accordance with the principle of natural justice. In this regard, the Assessing Officer shall issue an appropriate show-cause notice duly indicating the reasons for the proposed additions/disallowances along with necessary evidences/ reasons forming the basis of the same. Before passing the final order against the proposed additions/disallowances due consideration shall be given to the submissions made by the assessee in response to the show cause notice. 5. The contents of this Instruction should be immediately brought to the notice of all concerned for strict compliance. 6. Hindi version to follow.” 6.2 We have also gone through the CBDT letter bearing No. DGITVIF/HQ SI/2017- 18 dated 30.11.2017 which states that the idea behind such stipulation was to enforce checks and balances upon the power of the Assessing Officer to do fishing and roving enquiries in cases selected for limited scrutiny etc. In this very letter, the CBDT has also highlighted the aspect of cryptic order sheet entries which according to the CBDT shows irresponsible, ad hoc and indisciplined working of an Officer of the Department. A perusal of the aforesaid instructions would show that the objective

behind the issuance of these instructions is (i) to prevent possibility of fishing and roving enquiries; (ii) ensure maximum objectivity; and (iii) to enforce checks and balances upon the powers of an Assessing Officer. 6.3 We have also gone through the proposal drafted by the Assessing Officer on 05.10.2017 for converting the case from limited scrutiny to complete scrutiny. This reads as under: “….4. In this regard it may be mentioned here that the assessee has shown a short term capital loss on sale of shares purchased on09.07.2014 and sold on 15.02.2015 . The purchase price of the shares has been stated at Rs 499,98,440 and sale price has been mentioned at Rs 79,03,676. The resultant loss of Rs 420,94,764 has been set off by the assessee against long term capital gains. This transaction appears to be suspicious in nature and probably this loss has been created to reduce the incidence of tax on long term capital gains discussed in para 3. This issue needs to be thoroughly examined to ascertain the genuineness of this loss” 6.4 We have also through the original order sheet entries, as were present in the assessment records and which had been submitted for our perusal by the Ld. Sr. Departmental Representative under our directions and it shows that there is not an iota of any cogent material mentioned by the Assessing Officer which enabled him to have reached the conclusion that this case was a fit case for conversion from limited scrutiny to complete scrutiny. We have also gone through the statement of assessee’s Director Mr. Rohit Verma which was recorded on 18.07.2017 i.e., after the conversion of the case and even in his statement nothing adverse is coming out vis. a vis. the impugned transactions. If the proposal of the Assessing Officer dated 05.10.2017 and the approval of the Ld. Pr. Commissioner of Income Tax dated 10.10.2017 are examined on the anvil of paragraph 3 of CBDT Instruction No.5/2016, it is very much clear that no reasonable view is formed as mandated in the said CBDT InstructionNo.5/2016 in an objective manner and secondly merely suspicion and inference is the foundation of the view of the Assessing Officer. We also note that there is no direct nexus brought on record by the Assessing Officer in the said proposal and, therefore, it is very much apparent that the proposal of converting the limited scrutiny to complete scrutiny aimed at making fishing enquiries. We also note that the Ld. Pr. Commissioner of Income Tax has accorded the approval in a mere mechanical manner which is in clear violation of the CBDT InstructionsNo.20/2015. 6.5 The Hon’ble Calcutta High Court in the case of Amal Kumar Ghosh reported in 361 ITR 458 (Cal.) discussed the purpose behind the CBDT Circulars. The relevant observations of the Hon’ble Calcutta High Court are as under: “…..Mrs. Gutgutia, learned Advocate submitted that the circulars are not meant for the purpose of permitting the unscrupulous assessees from evading tax. Even assuming, that to be so, it cannot be said thatthe department, which is State, can be permitted to selectively apply the standards set by themselves for their own conduct. If this type of deviation is permitted, the consequences will be that floodgate of corruption will be opened which it is not desirable to encourage. When the department has set down a standard for itself, the department is bound by that standard and cannot act with discrimination. In case, it does that, the act of the department is bound to be struck down under Article 14 of the Constitution. In the facts of the case, it is not necessary for us to decide whether the intention of CBDT was to restrict the period of issuance of notice from the date of filing the return laid down under section 143(2) of the I.T. Act.” 6.6 The Co-ordinate bench of ITAT at Chandigarh in the case of Paya Kumari in vide order dated 24.02.2011, has held that even Section 292 BB of the Act cannot save the infirmity arising from infraction of CBDT Instructions dealing with the subject of scrutiny assessments where assessment has been framed in direct conflict with the guidelines issued by the CBDT. 6.7 Therefore, on an overall view of the factual matrix as well as settled judicial position, we are of the considered opinion that the instant conversion of the case from limited scrutiny to complete scrutiny cannot be upheld as the same is found to be in total violation of CBDT Instructions No.5/2016. Accordingly, it is our considered opinion that the entire assessment proceedings do not have any feet to stand on. Therefore, we hold the assessment order to be nullity and we quash the same.”

“3. The main contention of the Ld. Counsel for the assessee is that the Assessing Officer while making the impugned additions has exceeded his jurisdiction. That the case of the assessee was selected for limited scrutiny issue i.e. regarding security transaction. The Assessing Officer could not find any reason to make any addition in respect of issue for which the limited scrutiny was done. However, the Assessing officer made the certain other additions for which the Assessing Officer did not have any jurisdiction.

12 Assessment Year: 2015-16 Sukhdham Infrastructures LLP 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 procedures were not followed and assessment was conducted in violation of this Instruction. In our opinion, the order passed by the AO is bad in law and cannot be sustained for the said reason. Accordingly we quash the assessment order as nullity and bad in law. Issue raised by the assessee in ground no. 1 is allowed.

Order is pronounced in the open court on 23rd February, 2023