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Facts
The assessee filed its return declaring a total income. The case was selected for limited scrutiny. The Assessing Officer (AO) expanded the scrutiny without proper approval, treated rental income as business income, and made disallowances under Section 14A. The NFAC confirmed the AO's order.
Held
The Tribunal held that the assessment order was bad in law and liable to be quashed because the limited scrutiny was converted to complete scrutiny without obtaining the necessary approval as mandated by the CBDT, a fact conceded by the Department.
Key Issues
Whether the assessment order is liable to be quashed for conversion of limited scrutiny to complete scrutiny without approval? Whether rental income was correctly treated as business income?
Sections Cited
24, 14A, 143(3), 28
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Income Tax Appellate Tribunal, LUCKNOW BENCH “B”, LUCKNOW
Before: SHRI. SUDHANSHU SRIVASTAVA & SHRI NIKHIL CHOUDHARY
PER SUDHANSHU SRIVASTAVA, J.M.: This appeal has been preferred by the Assessee against the order dated 13.09.2022, passed by the National Faceless Appeal Centre, Delhi (NFAC) for Assessment Year 2015-16.
2.0 The brief facts of the case are that the assessee filed its return of income for the year under consideration on 29.09.2015, declaring a total income of Rs.52,72,810/-. The case of the assessee was selected for limited scrutiny. The Assessing Officer (AO) issued statutory notices to the assessee. In compliance to the notices, assessee’s Counsel attended before the AO and furnished copies of audited Financial Statements, books of account and original bank statements. From the computation of income filed by the assessee, the AO noticed that the assessee had shown income from house property at Rs.57,41,669/- after claiming deductions under section 24 of the Income Tax Act, 1961 (hereinafter called “the Act’) and had also shown loss of Rs.4,68,861/- from Business/Profession. The Computation of Income filed by the assessee during the course of assessment proceedings also revealed that the assessee had claimed deduction under section 24 of the Act at Rs.24,60,715/-, Repair & Maintenance charges at Rs.9,68,213/- and also shown profit of Rs.23,06,932/- on sale of investment for separate consideration. During the course of assessment proceedings, it was noticed by the AO that the assessee was a company with four main objects which as per Memorandum of Association and as reproduced by the AO in the assessment order, are as under:
“(1) To carry on the business of manufacturing and compressing Oxygen, Hydrogen, Nitrogen, Ammonia, Carbonic Acid, Acetylene (including dissolved) Argon, Cooking gas, and all other types of industrial gases or kindred substances or any compounds thereof by any process, and of selling or applying such gases, substances and compounds or any of them to such purposes as the company may from time to tune think desirable and to manufacture, buy, sell, import, export, set on hire, and deal in engines, electrodes, transformers, gas cylinders, containers, compressors, welding machines, and other apparatus and convenience which may seem calculated to promote the consumption of gases. (2) To manufacture all appliances and apparatus inclusive of furnace, retorts, hydraulic main, exhausters, condensers, scribers, purifiers, meters, holders governor and all other parts, and accessories that may be required or used for the purpose of manufacturing, storing, processing, regulating, supplying and distributing gas or water gas or natural gas. (3) To manufacture, produce, buy, sell, import, export, dispose of and deal in gas, cokes, Mobil oil, and all other byproducts produced in manufacturing gas. (4) To construct, raise, purchase, acquire on hire or lease, cinema halls, hotels, restaurants, godowns, markets, buildings apartment, apartment buildings and to do business of exhibitors, hoteliers, and landlords.” 2.1 The AO, after considering the submissions made on behalf of the assessee, observed that there was a mixed fund flow and, therefore, Rule 8D of the Income Tax Rules will be applicable and calculations will have to be made accordingly. The AO computed the amount of interest on the investments made by the assessee which was not directly attributable to any particular income or receipts as per Rule 8D(2)(ii) of the Rule at Rs.158/-. :
2.2 Further, the AO held that the disallowance under Rule 8D(2)(iii) was to be made at Rs.18,573/-. The AO, accordingly, made disallowance of Rs.18,731/- (158+18,573) as per provisions of Section 14-A of the Act.
2.3 The AO completed the assessment under section 143(3) of the Act, computing the total income of the assessee as under:
Profits and Gains of Business or profession Net Profit (as per P&L a/c) 90,52,603 Add. 1. Dep. Taken separately 23,922 2. Demat Charges 1,796 3. Disallowance u/s 14A 18,731 44,449 90,97,052 Less- 1. Depreciation 4,793 2. Dividend 1,286 3. Profit on sale of investment 23,06,932 23,13,011 Total Income Rs.67,84,041/- Or Rs.67,84,040/- 2.4 Aggrieved, the Assessee preferred an appeal before the NFAC, which dismissed the appeal of the assessee and confirmed the order of the AO.
2.5 Now, the assessee has approached this Tribunal challenging the order of the NFAC, by raising the following revised grounds of appeal:
1. That the Ld. Commissioner of Income Tax (Appeals) NFAC has erred in law and on facts and circumstances of the case in confirming the action of the Ld. Assessing Officer wherein the scope of the limited scrutiny has been expanded to complete scrutiny without taking necessary approval of higher authority as mandated by the CBDT's Instruction No.20/2015 dated 29/12/2015.
2. That the Ld. Commissioner of Income Tax (Appeals) NFAC has failed to appreciate that in cases of Limited Scrutiny, the Assessing Officer has to stay within the scope of reasons for selection of the case and has to make enquires accordingly, and any action beyond the same shall make the entire assessment bad in law and deserves to be quashed at the onset.
3. That the Ld. Commissioner of Income Tax (Appeals) NFAC has erred in law and on facts and circumstances of the case in confirming the action of the Ld. Assessing Officer whereby Rental Income of Rs.82,02,384/- has been treated as business income u/s.28 of the Act, rejecting the claim of the assessee of Income from House Property.
That the Ld. Commissioner of Income Tax (Appeals) NFAC has failed to appreciate that the rental income has been consistently taxed as Income from House Property in the subsequent years, in as much as the same has not been disputed by the department also and hence the change of head of income is a clear violation of the rule of consistency as laid by the Hon'ble Apex Court.
That the Ld. Commissioner of Income Tax (Appeals) NFAC has erred in law and on facts and circumstances of the case in confirming the addition of Rs.18,731/- made by Assessing officer applying provisions of section 14A of Income-tax Act, 1961.
That the Ld. Commissioner of Income Tax (Appeals) NFAC has failed to appreciate that no disallowance could be made under section 14A of the Act without recording satisfaction with respect to the nexus of any expenditure incurred during the year with investments made or exempt income earned.
7. That the Appellate Order passed by the Ld. CIT (Appeals) NFAC was passed without affording proper opportunity to the appellant and therefore, the same is void ab- initio and bad in law.
That the order passed by the Ld. Commissioner of Income Tax (Appeals) is against merits, circumstances and legal aspects of the case.
That the appellant craves leave to add, alter, amend or withdraw any or all the grounds of appeal on or before the date of hearing. 3.0 The Ld. Authorized Representative for the assessee (Ld. A.R.) submitted that apart from the merits of the case, the Ld. First Appellate Authority had erred in law and on facts in confirming the order passed by the AO, wherein the scope of limited scrutiny had been converted to complete scrutiny without obtaining the necessary approval as mandated by the CBDT, vide Instruction No.20/2015 dated 29.12.2015. It was further submitted that since there was no approval for conversion of limited scrutiny to complete scrutiny, the assessment order passed subsequent thereto was null and void and is liable to be quashed. The Ld. A.R. referred to communication received from the DCIT, Circle 2(i)(i), Kanpur dated 15.09.2025 (filed by the Department) wherein it has been communicated that no approval for conversion to complete scrutiny assessment was on record.
4.0 The Ld. Sr. D.R. conceded this fact and submitted that no approval was available on record for conversion of limited scrutiny to complete scrutiny in this case. However, he supported the orders of the authorities below and submitted that the appeal of the assessee should be heard on merits.
5.0 We have heard both the parties and have also perused the material on record. The very submission of the Ld. A.R. was that there was no approval for conversion of limited scrutiny to compete scrutiny in the case of the assessee and, therefore, the assessment order passed subsequent thereto was null and void and is liable to be quashed. The Department has furnished before us a letter dated 15.09.2025 from the DCIT, Circle 2(1)(1), Kanpur addressed to the JCIT (Sr. DR)-2, ITAT, Lucknow, stating therein that in the case of M/s K.M. Gases (P) Ltd., Kanpur for assessment year 2015-16, no approval for conversion to complete scrutiny is available on record. Since the Department has conceded the fact that no approval for conversion of limited scrutiny to complete scrutiny is available on record in the case of the present assessee for assessment year 2015-16, the assessment order passed subsequent thereto is bad in law and is liable to be quashed. We order accordingly.
6.0 In the result, the appeal of the assessee stands allowed.
Order pronounced in the open Court on 31/12/2025.