ABIL REALTY PVT. LTD.,PUNE vs. ITO, WARD 1(1), PUNE, PUNE

In appeal, the Ld. CIT(A) / NFAC upheld the action of the Assessing Officer by observing as under: ―5. Decision: I have carefully considered the facts of the case, the assessment order, written submission of appellant and materials on records. Also, the judgments and decision of High courts/tribunals and various judicial authorities relied on by the appellant have been carefully gone through. The facts of the case as perused from the order of the AO is that the assessing officer made an addition of Rs.9,30,66,244/- to the total income of the appellant company as per the provisions of section 2(22)(e), on account of funds that have been received as advances for sale of land which the company proposed to purchase and sell. The AO has given his findings in the assessment order that the advances received against the sale of land which the company proposed to purchase and sell is nothing but a transfer of accumulated Reserve & Surplus in the guise of unsecured loan/advance with no business nexus. 5.1 Ground No 1 is against the addition of Rs.9,30,66.244/- u/s 2(22)(e) and in not treating the amount received from subsidiary company as part of normal business transaction. Further, the appellant company pleads for direction to the AO to restrict the addition u/s 2(22)(e) to 51 percent of Rs.9,30,66,244/- i.e. Rs.4,74,64,090/- being the shareholding of the appellant company in M/s. Shashbindu Constructions Pvt. Ltd. In the assessment order the AO has highlighted that the appellant company. engaged in Real Estate Projects had received advances against sale of land of Rs. 164 Crores (Rs.94 Crores from ABIL Corporation Pvt. Ltd Rs.70 Crores from Shashbindu Constructions Pvt. Ltd) and reflected under the head current liabilities. The transactions between M/s ABIL Realty Private Limited and M/s. Shashbindu Constructions Pvt. Ltd are plain loans and advances and not pertaining to any kind of land transactions. The appellant company M/s ABIL Realty Private Limited & M/s Shashbindu Constructions Pvt Ltd were not having any authority or occasion to collect or raise these funds at this juncture on the proposed sale of land more so when the said land has legal issues and encumbrances and the development of the property was not possible. The amount of Rs. 164 Crores is in the nature of interest free unsecured loans/advances transferred to appellant company by M/s. ABIL Corporation Pvt. Ltd by M/s Shashbindu Constructions Pvt. Ltd. in the guise of business advance. As the advances received are not related to any business of the appellant company, the provisions of section 2(22)(e) are applicable to the appellant company. M/s. Shashbindu Constructions Pvt. Ltd. was having reserve and surplus at Rs.9,30,66,244/- as on 31.03.2015 and the appellant company was having 51% shareholding(more than ten per cent of the voting power) in this entity. Therefore, accumulated Reserve & Surplus as on 31.03.2015 of Rs.9,30,66,244/-was added as per the provisions of section 2(22)(e) in the hands of the appellant company. I have considered the facts of the case and the submissions as advanced by the appellant company carefully along with the case law relied upon. As perused from the assessment order, the appellant company had received funds of Rs.164 crores against the sale of land proposed to be purchased and sold. Out of Rs.164 crores advance, Rs.70 crores was received from M/s Shashbindu Constructions Pvt. Ltd. The land proposed to be purchased and sold was not owned by the appellant company but by M/s Beeline Impex Pvt. Ltd & Pearl Cosmetics & Chemicals Pvt. Ltd. the said land was having certain legal issues and encumbrances due to which the development of the property was not possible. It is far-fetched that a real estate business entity would give/take an advance of crores of rupees to deal in such a property. It would not fall in the nature of a pure commercial transactions as claimed by the appellant company. Having no ownership/rights on the subject

Aggrieved with such order of Ld. CIT(A) / NFAC, the assessee is in appeal before the Tribunal by raising the following grounds:

The Ld. Counsel for the assessee at the time of hearing filed the following two additional grounds: 1] The assessee submits that in the present case, no notice u/s 143(2) was issued within the stipulated time limit of 30.09.2017 and hence, the asst. order u/s 143(3) passed without issuing a valid notice u/s 143(2) within the prescribed time limit may be declared as null and void in law. 2] The assessee submits that the addition u/s 2(22)(e) towards deemed dividend was outside the scope of reasons stated for selection of the case for limited scrutiny and hence, the said addition u/s 2(22)(e) made by the A.O. without obtaining requisite approval for conversion of the case from limited scrutiny to complete scrutiny, was unsustainable in law.

However, the Ld. Counsel for the assessee did not press the additional ground No.1 for which Ld. DR has no objection. Accordingly, the additional ground No.1 is dismissed as not pressed.

So far as the additional ground No.2 is concerned, the Ld. Counsel for the assessee submitted that the said additional ground raised is purely legal in nature which goes to the root of the matter and all necessary facts are already available on record and no new facts are required to be investigated. Referring to the decision of Hon‟ble Supreme Court in the case of the National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383 (SC) and in the case of Jute Corporation Of India Ltd vs Commissioner Of Income Tax And Anr (1991) 187 ITR 688 he submitted that the additional ground raised by the assessee should be admitted.

The Ld. Counsel for the assessee referring to the additional ground submitted that the case was selected for limited scrutiny under CASS for examination of the following issues as stated in the notice u/s 143(2) of the Act:

He submitted that in the balance sheet filed for assessment year 2016-17 the assessee company had shown current liabilities in respect of total advance of Rs.164 crores received from two sister concerns. Out of the same, Rs.94 Crs. was received from M/s. ABIL Corporation Pvt. Ltd. whereas Rs.70 Crs. was received from M/s. Shashbindu Constructions Pvt. Ltd. In the assessment order, the Assessing Officer has held that the advances received from these two companies are in the nature of plain loans and advances. He submitted that the Assessing Officer has held that these advances are not received in connection with business transactions and hence, the Assessing Officer has proceeded to tax the advances received from M/s. Shashbindu Constructions Pvt. Ltd. [SCPL] as deemed dividend u/s 2(22)(e) to the extent of accumulated reserves of SCPL of Rs.9,30,66,244.

Referring to the order passed u/s 143(3) of the Act, he submitted that the Assessing Officer has categorically accepted that the said advances shown under „Current liabilities‟ were genuine and they did not constitute any non genuine advances taxable as unexplained cash credits u/s 68. Referring to para 6.4.3 of the assessment order, he drew the attention of the Bench to the same and submitted that the Assessing Officer in the assessment order has stated that the transactions between M/s. ABIL Realty Private Limited and M/s. Shashbindu Constructions Pvt. Ltd. are plain loans and advances. He submitted that once the Assessing Officer had accepted that the 'Current liabilities‟ shown as genuine liabilities and not as bogus liabilities reflected to introduce assessee's own unaccounted income u/s 68, the scope of limited scrutiny on this issue should have ended there and the Assessing Officer could not have proceeded to carry out further enquiries on other tax aspects.

Referring to the CBDT Instructions on limited scrutiny cases dated 29.12.2015, 14.07.2016 and 30.11.2017, copies of which are placed in the paper book from pages 1 to 6, the Ld. Counsel for the assessee drew the attention of the Bench to the same and submitted that as per the said circulars which are mandatory on the department, the Assessing Officer has to confine the scrutiny assessment proceedings to the issues under limited scrutiny and in case he wants to expand the scope of the same for complete scrutiny or issues other than the issues that have been the criteria as per the limited scrutiny, he has to take permission from the PCCIT / PCIT.

Referring to the following decisions, he submitted that in all these decisions it has been held that where the addition made by the Assessing Officer is outside the ambit of reason for which the case was selected for limited scrutiny under CASS, then such addition is not sustainable in law:

He accordingly submitted that since the addition made by the Assessing Officer towards deemed dividend u/s 2(22)(e) of the Act is outside the scope of limited scrutiny, therefore, the same should be deleted.

So far as the ground challenging the addition on merit is concerned, he submitted that the assessee company has entered into MOUs with M/s. Shashbindu Constructions Pvt. Ltd. and ABIL Corporation Pvt. Ltd. and the advance of Rs.164 crores so received was business advance against the specific MOUs. He submitted that the assessee has not retained those loan funds for its own activities but has re- distributed the same to its subsidiaries for carrying on their respective businesses. He submitted that the assessee during the year has received a net amount of Rs.4,56,50,000/- only from M/s. Shashbindu Construction Pvt. Ltd. and therefore, the addition at best could have been restricted to Rs.4,56,50,000/- and not to Rs.9,30,66,244/- as made by the Assessing Officer.

In his alternate contention, the Ld. Counsel for the assessee submitted that assuming without admitting that the advance received from M/s. Shashbindu Constructions Pvt. Ltd. is not received towards proposed sale of land, still the said advance has been received in the normal course of business as part of running account with the said party depending on business requirements. He submitted that in the earlier years from 2012 to 31.03.2015 the assessee company had lent interest free advances to the extent of around Rs.61 Crs. to M/s. Shashbindu Constructions Pvt. Ltd. (SCPL) to satisfy its business requirements which has been admitted by the Assessing Officer in para 6.2 of his order.

Referring to para 6.2 of the order of the Assessing Officer, he submitted that the assessee has not charged any interest on the said advances. As against the same, the assessee during the year has received advances of around Rs.70 Crs. from SCPL and thus, the net additional interest free advance received from SCPL in this year is around Rs.10 Crs. Thus, when the assessee in the earlier years had bestowed a huge favour upon SCPL by advancing interest free funds of around Rs.61 Crs. for business needs of SCPL and in consideration of the said favour, M/s. SCPL has advanced interest free funds of around Rs.10 Crs. to the assessee company in this year, therefore, such interest free advance / loan given by SCPL in this year cannot be considered to be a gratuitous advance as contemplated u/s 2(22)(e) of the Act, therefore, such addition u/s 2(22)(e) is not justified. For the above proposition, the Ld. Counsel for the assessee relied on the following decisions:

The Ld. DR on the other hand heavily relied on the orders of the Assessing Officer and the Ld. CIT(A) / NFAC.

We have heard the rival arguments made by both the sides, perused the order of the Ld. CIT(A) / NFAC and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. Before deciding the issue on merit, we would first like to decide the additional ground raised by the assessee i.e. as to whether the addition made by the Assessing Officer towards deemed dividend u/s 2(22)(e) of the Act can be sustained if the same is outside the scope of limited scrutiny proceedings. We find the reasons recorded by the Assessing Officer at para 2 of his order for selection of the case for limited scrutiny are as under: ―2. The issues to verify under LIMITED scrutiny are 1) "Low income in comparison to high loans/advances/Investment in shares appearing in balance sheet (Part A-BS, Income in Part B-TI) 2) Low income in comparison to very high investment appearing in balance sheet (Part A-BS, Income in Part B-TI and Schedule EI of ITR) 3) Large other expenses claimed in the Profit & Loss a/c 4) Large current liability in comparison to total asset in balance sheet (Part A-BS of ITR)" as per the return of income filed for the assessment year concerned.‖

As per the above reasons, there is no issue relating to verification of deemed dividend u/s 2(22)(e) of the Act. We find the CBDT Instruction No.20/2015, dated 29.12.2015 reads as under: ―INSTRUCTION NO.20/2015 Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes North Block, New Delhi, the 29th of December, 2015 Subject: Scrutiny Assessments-some important issues and scope of scrutiny in cases selected through Computer Aided Scrutiny Selection (‗CASS‘)-reg .- The Central Board of Direct Taxes (‗CBDT‘), vide Instruction No. 7/2014 dated 26-9-2014 had clarified the extent of enquiry in certain category of cases specified therein, which are selected for scrutiny through CASS. Further clarifications have been sought regarding the scope and applicability of the aforesaid Instruction to cases being scrutinized. 2. In order to facilitate the conduct of scrutiny assessments and to bring further clarity on some of the issues emerging from the aforesaid Instruction, following clarifications are being made: i. Year of applicability: As stated in the Instruction No. 7/2014, the said Instruction is applicable only in respect of the cases selected for scrutiny through CASS-2014. ii. Whether the said Instruction is applicable to all cases selected under CASS: The said Instruction is applicable where the case is selected for scrutiny under CASS only on the parameter(s) of AIR/CIB/26AS data. If a case has been selected under CASS for any other reason(s)/parameter(s) besides the AIR/CIB/26AS data, then the said Instruction would not apply. iii. Scope of Enquiry: Specific issue based enquiry is to be conducted only in those scrutiny cases which have been selected on the parameter(s) of AIR/CIB/26AS data. In such cases, the Assessing Officer, shall also confine the Questionnaire only to the specific issues pertaining to AIR/CIB/26AS data. Wider scrutiny in these cases can only be conducted as per the guidelines and procedures stated in Instruction No. 7/2014. iv. Reason for selection: In cases under scrutiny for verification of AIR/CIB/26AS data, the Assessing Officer has to intimate the reason for selection of case for scrutiny to the assessee concerned.

Further, Instruction No.5/2016 issued by the CBDT reads as under:

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.

Similarly, the CBDT on 30.11.2017 has issued the guidelines regarding unauthorized expansion of scope of limited scrutiny which read as under:

Instances have come to notice of CBDT where some Assessing Officers are travelling beyond their jurisdiction while making assessments in Limited Scrutiny cases by initiating inquiries on new issues without complying with mandatory requirements of the relevant CBDT Instructions dated 26.09.2014, 29.12.2015 and 14.07.2016. These instances have been viewed very seriously by the CBDT and in one case the Central Inspection Team of the CBDT was tasked with examination of assessment records on receipt of allegations of several irregularities. Amongst other irregularities, it was found that no reasons had been recorded for expanding the scope of limited scrutiny, no approval was taken from the PCIT for conversion of the limited scrutiny case to a complete scrutiny case and the order sheet was maintained very perfunctorily. This gave rise to a very strong suspicion of mala fide intentions. The Officer concerned has been placed under suspension.

A perusal of the above three instructions / circulars issued by the CBDT from time to time clearly and categorically shows that if during the course of assessment proceedings in limited scrutiny cases, it comes to the notice of the Assessing Officer that there is potential escapement of income exceeding certain limit requiring substantial verification on any other issue(s), then, the case may be taken up for „Complete Scrutiny‟ with the approval of the PCCIT / Pr. CIT / CIT concerned. Without taking prior approval of the PCCIT / Pr.CIT / CIT or Pr.DIT/DIT, the Assessing Officer cannot expand the scope of limited scrutiny to complete scrutiny. The CBDT has also cautioned the Assessing Officers who have travelled beyond their jurisdiction while making assessments in limited scrutiny by initiating inquiries on new issues without complying with the mandatory requirements of the relevant CBDT Instructions dated 26.09.2014, 29.12.2015 and 14.07.2016. The CBDT has viewed very seriously such instances and in certain cases explanations have been called for from the officers. It is also to be noted that the CBDT circulars are binding on the Revenue authorities and once the Assessing Officer has not followed the CBDT circular / guidelines in case of limited scrutiny and expands the scope by initiating enquiries on new issues i.e. here the provisions of section 2(22)(e) of the Act, such addition on a new issue which is not the issue as per the limited scrutiny, cannot be upheld.

We find the Hon‟ble Calcutta High Court in the case of PCIT v. Weilburger Coatings (India) (P) Ltd. (supra) has held that the Assessing Officer making additions in respect of issues not mentioned in limited scrutiny were beyond jurisdiction of the AO as the scrutiny assessment was selected for limited scrutiny u/s 143(2) and not complete scrutiny.

We find the Hon‟ble Calcutta High Court in the case of PCIT v. Sukhdham Infrastructures LLP (supra) has held that the Assessing Officer having issued notice under section 142(1) during the limited scrutiny assessment proceedings seeking information regarding secured and unsecured loans which was not an issue covered by limited scrutiny prior to the conversion of limited scrutiny into complete scrutiny, the Tribunal was justified in holding that the procedure adopted by the Assessing Officer was in complete derogation to Instruction No.5 of 2016, dt. 14th July, 2016 and, therefore, the assessment order passed by the Assessing Officer is not sustainable.

We find the Hon‟ble Orissa High Court in the case of PCIT v. Shark Mines and Minerals Pvt. Ltd. (supra) at para 10 has held that What persuades this Court to reach this conclusion is the requirement in law that if the Assessing Officer has to go beyond the scope of the issues for which limited scrutiny has to be undertaken by him, he has to seek prior permission of the superior officer in terms of the CBDT Instruction No.7/14 dated 26 September, 2014 and Instruction No.20/15 dated 19 December, 2015.

We find the Hon‟ble Kerala High Court in the case of Sahyadri Agencies Ltd. v. PCIT (supra) has held as under: ―8.1 On a reading of the circular, it is discernible that the circular is applicable during the scrutiny assessment taken by the AO under CASS. As explained to this Court by the learned senior counsel appearing for the parties, the CASS is a system-driven identification of returns for limited scrutiny. The picking up of a return under CASS for scrutiny must be restricted only to the selected reasons. Therefore, it is procedurally legal for the AO to confine the scrutiny to the limited reasons selected under CASS. The AOs are not allowed to expand the limited scrutiny introduced through the faceless interface of scrutiny to other aspects, because the ease desired through CASS is effaced. The CBDT, in its jurisdiction, inputs, received and wisdom, restrained the AOs to the reasons for selecting a return under CASS and computing the assessment.‖

The various other decisions relied on by the Ld. Counsel for the assessee also supports his case to the proposition that once the case is selected for limited scrutiny under CASS for certain issues, the Assessing Officer cannot make any other addition by travelling beyond the issues for which the case was selected for limited scrutiny without taking the mandatory permission from the concerned PCIT / Pr.CIT for conversion of such „limited scrutiny‟ to „complete scrutiny‟. It is the settled proposition of law that the CBDT circulars are binding on the department and it has to be strictly followed by the officers of the department. Since the Assessing Officer in the instant case has travelled beyond the issues for which the case was selected for limited scrutiny without taking mandatory permission from the concerned PCIT or Pr.CCIT, therefore, the addition u/s 2(22)(e) of the Act made by the Assessing Officer which was not the issue as per limited scrutiny, cannot be sustained. We, therefore, allow the additional ground raised by the assessee and direct the Assessing Officer to delete the addition made by him u/s 2(22)(e) of the I.T. Act, 1961. Since the assessee succeeds on this additional legal ground, the grounds challenging the addition on merit are not being adjudicated being academic in nature.

In the result, the appeal filed by the assessee is allowed.