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Facts
The Revenue appealed an order by the CIT(A) concerning the assessment year 2015-16. The assessee, engaged in data analysis services, filed its return which was selected for limited scrutiny under CASS. The CIT(A) had previously addressed an issue concerning inter-company cross charges related to section 40(a)(i) r.w. 195 of the Income Tax Act.
Held
The Tribunal held that in cases selected for limited scrutiny, the Assessing Officer, and by extension the CIT(A), cannot go beyond the scope of issues identified for limited scrutiny unless the case is converted to complete scrutiny with proper approval. The CIT(A) correctly determined that the issue of inter-company cross charges was not part of the limited scrutiny grounds.
Key Issues
Whether the CIT(A) erred in not giving a finding on inter-company cross charges when the case was selected for limited scrutiny and the issue was not part of the specified grounds, despite the powers of CIT(A) being plenary.
Sections Cited
40(a)(i), 195, 250, 251(1)(a), 143(3), 40A(2)(b), 9(1)(vii), 12(4), 36(1)(iii), 14A
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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Before: SHRI OM PRAKASH KANTSHRI SANDEEP SINGH KARHAIL
Date of Hearing – 28/11/2024 Date of Order – 09/12/2024
O R D E R PER SANDEEP SINGH KARHAIL, J.M.
The Revenue has filed the present appeal challenging the impugned order dated 27/05/2024, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [“learned CIT(A)”] for the assessment year 2015-16.
Having considered the submissions made in the application seeking condonation of delay, the delay of 25 days in filing the present appeal is condoned.
3. In this appeal, the Revenue has raised the following grounds:
– “1. On the facts and circumstances of the case and in law, the Id. CIT(A) erred in not giving any finding in respect of issues raised by the AO and Addl. CIT in the report regarding applicability of Section 40a(i) r.w. 195 in respect of inter-company cross charges amounting to Rs. 5,57,05,812/- ignoring that the powers of CIT(A) are plenary and coterminous with that of the AO.
2. The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the AO be restored.”
4. In the present case, the solitary issue that arises for our consideration pertains to the powers of the learned CIT(A) in dealing with issues that does not form part of the issues on which the return was selected for limited scrutiny.
We have considered the submissions of both sides and perused the material available on record. The brief facts of the case are that the assessee is engaged in data analysis services. For the year under consideration, the assessee filed its return of income on 30/11/2015 declaring a total income of Rs. 5,06,93,660 under normal provisions of the Act. Later the assessee filed the revised return of income on 03/10/2016 declaring a total income of Rs. 4,60,18,293. It is evident from the record that the return filed by the assessee was selected for scrutiny through CASS under the category “Compulsory” and type of scrutiny “Limited”. As is evident from paragraph 3 of the assessment order, the return was selected for scrutiny under the limited category and was restricted to the following issues mentioned under CASS: –
(i) High ratio of refund to TDS. (ii) Depreciation claimed at higher rate/higher additional depreciation claimed. (iii) Mismatch in the amount paid to related persons under section 40A(2)(b) reported in the Audit Report and ITR.
Vide order dated 29/12/2017 passed under section 143(3) of the Act the total income of the assessee was assessed at Rs. 11,13,24,590. Being aggrieved, the assessee filed an appeal before the learned CIT(A).
7. During the appellate proceedings before the learned CIT(A), the assessee filed its submission, which was forwarded to the AO for obtaining its comments. The AO filed its remand report on 01/09/2020 in response to the written submission filed by the assessee. Subsequently, the Addl. CIT, Range- 1(1), Bangalore vide its letter dated 03/09/2020 submitted the following remand report to the learned CIT(A): –
On similar lines as above, a supplementary report to the remand report was also submitted by the AO before the learned CIT(A). Thus, the remand report and supplementary report to the remand report of AO and letter of Addl. CIT was forwarded to the assessee for its comments, which were filed on 22/08/2023 by the assessee. Accordingly, vide letter dated 29/08/2023, the AO was asked to submit his comments on the applicability of the provisions of section 40(a)(ia) of the Act and the assessee’s comments were also enclosed along with the said letter. However, despite five reminders, no reply was received from the AO till the passing of the impugned order. After having considered the submissions of the assessee in response to the remand report and letter of the Addl CIT, the learned CIT(A) rejected the plea of the Revenue, by observing as follows: -
“7.7 With regard to applicability of Section 40(a)(ia) r.w.s. 195 of the Act on inter-company cross charges as pointed out by the AO/Addl. CIT in the remand report (as quoted in the preceding paras), it is noted that this issue is not covered under any of the grounds of appeal/statement of facts filed by the appellant. Further, the case was also under limited scrutiny and not under complete scrutiny. However, since the said remand report of the AO was forwarded to the appellant on 18.08.2023 (in which the fresh issue of disallowance u/s 40(a)(ia) of the Act was raised by Addl. CIT), the appellant vide response dated 22.08.2023 has submitted before NFAC that income from market support services received by AQ Inc. USA was towards making or earning any income from any source outside India. Hence, such income does not fall within the ambit of fees for technical service u/s 9(1)(vii) of the Act. Further, such services rendered by AQ Inc. USA does not 'make available technology, skill, knowledge, process, etc. to AQ India which will enable AQ India to apply any such technical knowledge by itself in its business without recourse to AQ Inc. USA. Hence, such income does not fall within the ambit of 'fees for included service within the meaning of Article 12(4) of the DTAA between India and USA Accordingly, it has been claimed by the appellant that withholding tax implications do not apply on payment made by the Appellant to AQ Inc. USA. Accordingly, this rejoinder of the appellant dated 22.08.2023 was forwarded to the AO for, his comments on such claim and applicability of provisions of section 40(a)(ia) of the Act vide letter dated 29.08.2023 and thereafter, five reminders have been issued to the AO on 27.09.2023, 19.10.2023, 2.11.2023 and 19.12.2023 as stated in preceding paras. However, despite issuing five reminders, no reply has been received from the Assessing Officer till date. The impugned issue is also not covered under the specific reasons of limited scrutiny provisions under which the assessment order was passed. Under these circumstances of the case and in law, there is no reason to give any finding on the above issue as pointed out by the AO / Addl. CIT.”
9. During the hearing, the learned Departmental Representative submitted that one of the issues for selection of return for limited scrutiny, i.e. “High ratio of refund to TDS” covers the issue of applicability of the provisions of section 40(a)(ia) read with section 195 of the Act to the payment of inter- company cross charges by the assessee and thus the learned CIT(A) erred in holding that the impugned issue is not covered under the specific reasons for limited scrutiny provisions under which the assessment order was passed.
10. On the other hand, the learned Authorised Representative (“learned AR”) by specifically referring to the issues on which the return of income filed by the assessee was selected for limited scrutiny submitted that the issue of applicability of the provisions of section 40(a)(ia) read with section 195 of the Act to the payment inter-company cross charges by the assessee does not fall within the ambit of any of those issues. By referring to the Instruction No. 20 of 2015 dated 29/12/2015 and Instruction No. 5 of 2016 dated 14/07/2016 issued by the Central Board of Direct Taxes (“CBDT”), the learned AR submitted that the Board has laid down specific guidelines for conversion of case from limited scrutiny to complete scrutiny and without following such guidelines neither the AO nor the learned CIT(A) can expand the scope of assessment despite the fact that the power of enhancement is available with the learned CIT(A) under section 251(1)(a) of the Act.
Finding merits in the submissions of the learned AR, we find that this issue came up for consideration before the coordinate bench of the Tribunal in Shri Amit Kumar Dey v/s DCIT, in for the assessment year 2015-16. While deciding this particular issue in favour of the assessee, the coordinate bench of the Tribunal vide its order dated 30/03/2021 observed as under: -
“10. Now we come to the issue of the enhancement made by the CIT (Appeals). Firstly, on perusal of the above facts, we hold that when the case of the assessee was selected for limited scrutiny, the Id. CIT (Appeals) can make enhancement only with the aspect of issues that were part of the limited scrutiny. Otherwise, it may happen that the Id. Assessing Officer may pass an order on the issues related to limited scrutiny and the Id. CIT (Appeals) may enhance the income of the assessee on issues other than limited scrutiny issues. This will amount to bypassing the above quoted instructions of the CBDT. It also shows that if that happens then without obtaining the approval of Commissioner of Income Tax and CCIT, the whole assessment of the assessee remains open, despite the fact that the learned assessing officer has looked into the issues contained in the limited scrutiny notice. We do not find such an intention of the CBDT in issuing the instructions of limited scrutiny case. On this score, we do not approve the enhancement made by the Id. CIT (Appeals) on issues, which were not part of limited scrutiny.”
12. Similar views are expressed by the Tribunal in M/s Arjun Transport Company Private Limited v/s ITO, in for the assessment year 2016-17, vide its order dated 02/07/2021. The relevant findings of the Tribunal in the aforesaid decision are reproduced as follows: –
“7. In ground No.2 of appeal, the assessee has assailed enhancement made by the CIT(A) by disallowing interest expenditure under section 36(1)(iii) of the Act. A perusal of the assessment order shows that the case of the assessee was selected under ‘limited scrutiny’ category on the basis of ITS information to examine interest 5 (A.Y 2016-17) expenses relatable to exempt income under section 14A of the Act. The Assessing Officer during assessment proceedings made limited enquiries in line with the mandate of ‘limited scrutiny’ and made addition accordingly. In First Appellate proceedings, the CIT(A) made disallowance of interest expenditure Rs.17,34,520/- under section 36(1)(iii) of the Act. The contention of the assessee is that the CIT(A) has enhanced assessment by invoking provisions of section 36(1)(iii) of the Act, not covered by ‘limited scrutiny’.
8. The provisions of Section 251(1)(a) of the Act empowers the CIT(A) in first appellate proceedings to confirm, reduce, enhance or annul the assessment or set aside the assessment and refer the case back to the Assessing Officer for making a fresh assessment. The Hon’ble Apex Court in the case of Jute Corporation of India Ltd. vs. CIT, [supra] has held: “5. ……….The declaration of law is clear that the power of the AAC is co-terminous with that of the ITO, if that be so, there appears to be no reason as to why the appellate authority cannot modify the assessment order on an additional ground even if not raised before the ITO. No exception could be taken to this view as the Act does not place any restriction or limitation on the exercise of appellate power. Even otherwise an appellate authority while hearing appeal against the order of a subordinate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter.” The Hon’ble Supreme Court of India, thus, in an unambiguous manner held that the powers of CIT(A) are coterminous with that of the Assessing Officer. In other words, what an Assessing Officer can do, a CIT(A) can do and the same applies in the reverse i.e. what an Assessing Officer cannot do, a CIT(A) cannot do. The First Appellate authority has power to enhance assessment u/s 251 of the Act, but such powers of enhancement are not unfettered.
9. In cases selected under ‘limited scrutiny’, the Assessing Officer cannot exceed the latitude of limited scrutiny unless the scope of scrutiny is expanded or the case is converted from ‘limited scrutiny’ to ‘complete scrutiny’ with the approval of authority, as specified by the CBDT in Instructions No.5 of 2016 dated 14/7/2016. The said Instructions in an explicit manner states that in assessment proceedings the Assessing officer shall confine his enquiries/investigations etc. only to the issue selected under ‘Limited Scrutiny’. It is only after conversion of case to complete scrutiny by following the due procedure, the Assessing Officer can travel beyond the scope of limited scrutiny. The same restrictions apply to the CIT(A) in respect of cases falling under ‘limited scrutiny category’. If the CIT(A) is allowed to make addition on any issue not covered under limited scrutiny, the very purpose of selecting the case under ‘limited scrutiny category’ will be defeated. In the present case, no document has been furnished by the Department/respondent to show that ‘limited security’ was converted to ‘complete scrutiny’. Ergo, the CIT(A) overstepped his jurisdiction in invoking the provisions of section 36(1)(iii) of the Act for making disallowance in First Appellate proceedings in a case selected for ‘limited scrutiny’ to examine disallowance of interest expenditure u/s 14A of the Act.
10. In the case of Amit Kumar Dey vs. DCIT in for AY 2015- 16 decided on 30/3/2021, the case was selected for limited scrutiny, the Assessing Officer completed the assessment by making enquiries etc. only on the issue covered by limited scrutiny, in First Appellate proceedings the CIT(A) made addition/adjustment on issue other than covered by limited scrutiny and at no point of time limited scrutiny was converted into complete scrutiny, the Division Bench of Tribunal after referring to CBDT Instructions (supra) held as under: “10. Now we come to the issue of the enhancement made by the CIT (Appeals). Firstly, on perusal of the above facts, we hold that when the case of the assessee was selected for limited scrutiny, the ld. CIT (Appeals) can make enhancement only with the aspect of issues that were part of the limited scrutiny. Otherwise, it may happen that the ld. Assessing Officer may pass an order on the issues related to limited 7 (A.Y 2016-17) scrutiny and the ld. CIT (Appeals) may enhance the income of the assessee on issues other than limited scrutiny issues. This will amount to bypassing the above quoted instructions of the CBDT. It also shows that if that happens then without obtaining the approval of Commissioner of Income Tax and CCIT, the whole assessment of the assessee remains open, despite the fact that the learned assessing officer has looked into the issues contained in the limited scrutiny notice. We do not find such an intention of the CBDT in issuing the instructions of limited scrutiny case. On this score, we do not approve the enhancement made by the ld. CIT (Appeals) on issues, which were not part of limited scrutiny.” Thus, from the above decision it is evident that the CIT(A) in the case of limited scrutiny assessments cannot travel beyond the issue, selected under ‘limited scrutiny’.”
In the present case, it is discernible from the record that the procedure as laid down by the CBDT in the aforementioned Instructions has not been followed and there was no attempt on the part of the Revenue to convert the limited scrutiny case to complete scrutiny after seeking necessary approvals. Therefore, having considered the Instructions issued by the CBDT and respectfully following the decision of the coordinate bench of the Tribunal in Shri Amit Kumar Dey (supra), we find no infirmity in the findings of the learned CIT(A) in holding that since the case was under limited scrutiny and not under complete scrutiny, the impugned issue is not covered under the specific reasons of limited scrutiny provisions under which the assessment order was passed. Thus, the impugned order on this issue is upheld and the grounds raised by the Revenue are dismissed.
In the result, the appeal by the Revenue is dismissed. Order pronounced in the open Court on 09/12/2024
Sd/- Sd/- OM PRAKASH KANT SANDEEP SINGH KARHAIL ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 09/12/2024 Prabhat Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Mumbai; and (5) Guard file. By Order Assistant Registrar ITAT, Mumbai Date Initials 1. Draft dictated on Dragon Legal 03.12.2024 Sr.P.S 2. Draft placed before author 04.12.2024 Sr.P.S.
Draft proposed & placed before the second member 4. Draft discussed/approved by Second Member.
5. Approved Draft comes to the Sr.PS/PS Sr.P.S 6. Pronounced on Sr.P.S.
File comes back to PS/Sr. PS Sr.P.S 8. Uploaded on Sr.P.S.
File sent to the Bench Clerk Sr.P.S.
Date on which file goes to the AR 11. Date on which file goes to the Head Clerk.
Date of dispatch of Order.