SUBODH ADHIKARY,KOLKATA vs. ITO, WARD 51(1), KOLKATA

The Ld. AR drew our attention to order sheet entry dated 30.10.2017 and pointed out that though the case was selected for limited scrutiny, the AO called for the information/details/explanation about the issues which were not subject matter of the limited scrutiny. The Ld. AR thereafter referred to the order sheet entry dated 01.12.2017, wherein the AO issued letter dated 30.11.2017wherein the conversion of scrutiny into complete scrutiny was communicated to the assessee and accordingly he was asked to explain the sources of funds w.r.t. purchase transactions and sale of properties. The Ld. AR therefore, submitted that so far as the addition made by the AO in respect of Short-Term Capital Gain of Rs. 2,26,77,110/- in Ground No. 3, Rs. 1,10,12,228/- u/s 56(2)(vii)(b)(ii) of the Act, in Ground No. 4 and Rs. 2,84,88,545/-, in Ground No. 5 and 6 in respect of unexplained investment are concerned, the same were without jurisdiction as the AO has no authority under the Act to initiate the enquiry and call for record/explanation from the assessee on that date when the case of the assessee was selected for limited scrutiny and the there was no conversion of the limited scrutiny to complete scrutiny. The Ld. AR submitted that on the date of issue of notice u/s 142(1) of the Act on 05.06.2017 calling for the information/details/explanation from the assessee other than on the issue of cash deposit is without jurisdiction. Therefore, the procedure laid down under the Act has not been followed which is in violation to Circular Board Instruction NO. 5/2016 of CBDT dated 14.07.2016. and accordingly, the same are invalid, without jurisdiction and have to be deleted. 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 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 for AY 2015-16 dated 12.06.2020.

Specific questionnaire/ show-cause notice shall be sent giving you another opportunity in case any adverse view is contemplated. 5. (#) The assessment proceeding in your case is proposed to be conducted through email based communication. The email provided in the said return of income shall be used for communication for this purpose. In case you wish to communicate through any other alternate email, the same may kindly be informed. A brief note regarding benefits of this facility and procedure is enclosed overleaf. In case you do not wish to participate in this taxpayer friendly initiative, you may convey your refusal to the undersigned by the above mentioned date. In case, you Subodh Adhikary wish to opt out from this scheme at any subsequent stage due to any technical difficulties faced by you, the same can be done with prior intimation to the undersigned. (#) applicable only in case of taxpayers whose Income-tax jurisdiction falls in the cities of Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata or Mumbai.”

Thereafter, we note that the AO issued notice u/s 142(1) of the Act dated 05.06.2017 raising certain points and calling upon the assessee to furnish evidences/explanations on those issues which were not the subject matter of limited scrutiny. The extracts of the notice are as below:

After hearing the rival contentions and perusing the material on record, and also notice dated 143(2) dated 29.07.2016 issued for limited scrutiny covering one issue namely cash deposits. Subsequently in the Subodh Adhikary notice issued u/s 142(1) dated 05.06.2017 and order sheet entries , the AO called for information on those issues which were not in the scope of limited scrutiny and even prior to conversion of limited scrutiny to complete scrutiny on 01.12.2017. The AO has started enquiries during the assessment proceedings on the issues even prior to the date of conversion of limited scrutiny to complete scrutiny. In our view this is in complete 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. The relevant part of the instruction are reproduced as under:

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:

The above Instruction shall be applicable from the date of its issue and would cover the cases selected under CASS 2015 which are pending scrutiny cases as well as cases selected/being selected under the CASS 2016.” 6.1 Earlier preceding instruction in this regard was 20/2015 whichstates 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. 7/2014dated 26 09.2014 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.

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 al l cases selected under CASS :

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 behindsuch stipulation was to enforce checks and balances upon the power ofthe Assessing Officer to do fishing and roving enquiries in cases selectedfor limited scrutiny etc. In this very letter, the CBDT has also highlightedthe aspect of cryptic order sheet entries which according to the CBDTshows irresponsible, ad hoc and indisciplined working of an Officer of theDepartment. 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 Subodh Adhikary 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 that the 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 assettled judicial position, we are of the considered opinion that the instant Subodh Adhikary 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.”

Similarly, the Co-ordinate Bench of Chandigarh in the case of Shri Vijay Kumar (ITA No. 434/Chad/2019 for AY 2014-15 dated 12.09.20) wherein it has been held as under:

Considering the facts of the assessee’s case and also the ratio laid down drawn in the above decisions and also the CBDT Instruction No. 5/2016, we are of the considered view that the AO has exceeded his jurisdiction in enquiring into those issues beyond the scope of limited scrutiny even prior to the date of conversion which is in clear violation of mandate given by CBDT in the said Circular and has been held by the Co-ordinate Bench of Delhi in the case of Dev Milk Foods Pvt. Ltd. (supra) to be bad in law. We note that CBDT has in para 4 of the said instruction clarified that in a limited scrutiny, the scrutiny assessment proceedings would initially be confined only to issues and questionnaire, enquiry, investigation etc. would be restricted to such issues in the limited scrutiny. Only upon conversion of such case to complete scrutiny after following the procedure laid down as stated, the AO may examine the issues other than the issues involved in the limited Subodh Adhikary scrutiny but in the present case the procedures were not followed and assessment was conducted in violation of this Instruction. Consequently, additions made of Rs. 2,26,77,110/- in respect of short-term capital gain of Rs. 1,10,12,228/- u/s 56(2)(vii)(b)(ii) of the Act and Rs. 2,84,88,544/- u/s 69A of the Act are without jurisdiction and accordingly ordered to be deleted. Consequently, the Ground Nos. 3 to 6 are allowed.

So far as the issue raised in Ground No. 7 is concerned challenging the order of Ld. CIT(A) upholding the addition of Rs. 28,00,000/- as made by the AO u/s 68 of the Act in respect of cash deposited into Bank A/c No. 7007945, the AO noted during the course of assessment proceedings that the assessee had deposited cash, the source of which had not been explained as the assessee had offered only salary income of Rs. 7,20,000/-. The AO noted that Rs. 28,00,000/- was found credited in the books of the assessee maintained for the impugned assessment year for which the assessee had not offered any explanation whereas the assessee is salaries and has not maintained any books. Accordingly, the same is treated as unexplained cash credit u/s 68 of the Act and added to the income of the assessee. In the appellate proceedings, the Ld. CIT(A) has dismissed the appeal of the assessee.

After hearing the rival contention and perusing the material on record, we find that the cash deposited in the Axis Bank was duly explained by the assessee vide letter dated 22.12.2017 which was furnished before the AO and acknowledged by the Revenue /department along with the copy of bank account No. 973901 with Axis Bank. These are available in the paper book at page no. 20 to 26. We note the assessee replied to the show cause notice dated 21.12.2017 vide letter dated 22.12.2017, which is available at page No. 110 to 119 and also acknowledged by the revenue. We note that the AO issued show cause notice dated 21.12.2017 which was replied on 21.12.2017 itself.

The perusal of the above reply along with bank statement furnished by the assessee adequately proved the sources for Rs. 28,00,000/-. Accordingly, we set aside the order of Ld. CIT(A) and direct the AO to delete the addition. Ground No. 7 is allowed.