DHYANESHWAR ANNAJI THAKRE,NAGPUR vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-2, NAGPUR

This appeal by the assessee against the order dated 20-08-2020 passed by the Commissioner of Income Tax (Appeals)-2, Nagpur [‘CIT(A)’] for assessment year 2015-16.

The assessee raised ground Nos. 1 and 2 questioning the action of CIT(A) in confirming the addition made by the AO on account of section 56(2)(vii)(b) of the Act.

The ld. AR, Shri Milind Bhusari submits that the case of the assessee was selected for limited scrutiny for the reason of “substantial increase in capital in a year” and drew my attention to para 2 of the assessment order. He submits that the AO passed order making addition u/s. 56(2)(vii)(b) of the Act for the issue which was not the reason for selecting the case under limited scrutiny through CASS. He vehemently argued that the AO without obtaining prior approval of the competent authority converted into complete scrutiny which is not permissible under law. The ld. AR drew my attention to the Instruction No. 20/2015 dated 29-12-2015 issued by the CBDT and argued that the said Instruction is binding on the AO, of any violation of the said Instruction therein, the assessment made is bad under law. He submits that in the limited scrutiny cases, if it is comes to the notice of the AO that it is a potential escapement of income then the case may be taken up for complete scrutiny with the approval of PCIT/CIT concerned. The ld. AR submits that it is evident from the assessment order that the limited scrutiny assessment was enlarged into complete scrutiny by making addition u/s. 56(2)(vii)(b) of the Act which was not the issue for which the case was taken for limited scrutiny under CASS without necessary approval from the competent authority. He drew my attention to the decision of Hon’ble High Court of Bombay in the case of Bombay Cloth Syndicate Vs. CIT reported in 214 ITR 210 (Bom.) and argued that the Instruction issued by the CBDT is binding on the subordinate authorities. Further, he also drew my attention to the Instruction No. 5/2016 dated 14-07-2016 and argued that the CBDT further clarified in partial modification to para 3(d) of the Instruction No. 20/2015 in a way that the 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. He vehemently argued that the AO in defiance of the said both Instructions issued by the CBDT proceeded to complete the limited scrutiny assessment converted into complete scrutiny assessment without following the directions issued by the CBDT and the CIT(A) simply confirmed the same without appreciating the facts and circumstances of the case. He placed reliance of the decision of Co-ordinate Bench of this Tribunal in the case of Suresh Jugraj Mutha in for A.Y. 2011-12 vide order dated 04-05-2018 and argued that this Tribunal held the assessment order passed by the AO is bad under law on account of converting the limited scrutiny into complete scrutiny.

On the other hand ld. DR, Shri G.J. Ninawe vehemently opposed the arguments of the ld. AR and submits that the AO correctly completed the assessment by making addition u/s. 56(2)(vii)(b) of the Act and he is within his jurisdiction. He submits that no prior approval is necessary in the facts and circumstances involved in the present case. The ld. DR heavily relied on the orders of AO and CIT(A).

Heard both the parties and perused the material available on record. Admittedly, as is evident from para 2 of the assessment order that the assessee’s case was specifically selected for limited scrutiny through CASS for the reason of substantial increase in capital in a year. In explanation the assessee furnished all the necessary details in respect of scrutiny under CASS as called by the AO which were examined at length which is reflecting in the assessment order, but however, the AO made addition u/s. 56(2)(vii)(b) of the Act under the head “Income from other sources” which is evident from the computation made by the AO in respect of discussion made in para 3 of the assessment order vide para 4 for assessment order.

I find that the Instruction issued by the CBDT at page 9 of the paper book and in para 3(d) of the said Instruction which discloses that if during the course of assessment proceedings in limited scrutiny cases, if it is comes to the knowledge of AO that there is potential escapement of income exceeding Rs.5 lakhs (for metro charges, the monetary limit shall be Rs.10 lakhs) requiring substantial verification on any other issues, then, the case may be taken up for complete scrutiny with the approval of the PCIT/CIT concerned in writing after being satisfied about merits of the issues necessitating complete scrutiny. Therefore, it is clear when there is a potential escapement of income exceeding Rs.5 lakhs a limited scrutiny cases that the AO required to take prior approval of PCIT/CIT concerned. I find no such approval brought on record by the ld. DR to show that the AO is well within its jurisdiction to convert limited scrutiny into complete scrutiny taken prior approval from PCIT/CIT concerned. In the absence of such approval I find force in the arguments of ld. AR that the assessment passed by the AO is invalid. Further, Instruction No. 5/2016 dated 14-07- 2016 issued by the CBDT which is at page 11 of the paper book further clarified that the AO shall be required to form a reasonable view that there is possibility of under assessment of income while proposing to take up complete scrutiny in a case which was originally earmarked for limited scrutiny vide para 2 of the said Instruction dated 14-07-2016. There is no dispute with regard to binding nature of these two Instructions on the AO and no reasonable view brought on record to show that the AO formed an opinion to take up as complete scrutiny, in the absence of such reasonable view the assessment made by the AO is in my opinion is bad under law.

The Co-ordinate Bench of this Tribunal in the case of Suresh Jugraj Mutha (supra) held the assessment order made in the absence of approval of Administrative Commissioner of Income Tax vide para 11 of the said order is bad under law. On perusal of the said order, I note that the Co- ordinate Bench in order to come to such conclusion, placed reliance in the case of M/s. Nitin Killawala & Associates Vs. ITO in and in the case of M/s. S.H. Chougule Vs. JCIT in ITA No. 458/PN/2012 and ITA No. 605/PN/2012, dated 21-12-2016. The Co-ordinate Bench reproduced the finding rendered in the case of M/s. S.H. Chougule (supra) at para 11 of the said decision. Therefore, considering the facts and circumstances of the case along with material evidence on record I hold that the AO has failed to follow the guidelines issued by the CBDT for converting the limited scrutiny into complete scrutiny without prior approval of PCIT/CIT concerned, therefore, in my opinion, the AO lacks jurisdiction to carry out the assessment and the addition made by the AO u/s. 56(2)(vii)(b) is not justified. Therefore, the order of CIT(A) in confirming the addition made by the AO on account of income from other sources fails and it is set aside. Thus, ground Nos. 1 and 2 raised by the assessee are allowed.

In ground No. 3 the assessee has assailed charging of interest u/s. 234B and 234C of the Act. The charging of interest u/s. 234B and 234C is mandatory and consequential. Accordingly, ground No. 3 is dismissed.

In the result, the appeal of assessee is allowed.