ITAT Quashed Order as AO Started Making Enquiries on Loans Even Before Converting Case Into Full Scrutiny

Case Details: Sukhdham Infrastructures LLP vs. ITO - [2024] 165 taxmann.com 154 (Kolkata-Trib.)

Judiciary and Counsel Details

• Rajesh Kumar, Accountant Member & Sonjoy Sarma, Judicial Member
• Manish Tiwari, FCA for the Appellant.
• Sudipta Guha, CIT-DR for the Respondent.

Facts of the Case

Assessee, a limited liability partnership (LLP), filed its return of income for the relevant assessment year. The case was selected for scrutiny under the Computer Assisted Scrutiny Selection (CASS), and notices were issued to the assessee for limited scrutiny. The notice was issued for four issues namely interest expenses, income from Real Estate Business, Sales Turnover mismatch and other expenses claimed in the profit and loss a/c.

Subsequently, the Assessing Officer (AO) issued a notice under section 142(1) seeking information regarding the assessee’s unsecured loan. After receiving the information, the AO converted the limited scrutiny into complete scrutiny and added to the assessee’s income.

On appeal, CIT(A) upheld the action of AO, and the matter reached before the Kolkata Tribunal.

ITAT Held

The Tribunal held that the AO conducted inquiries during the year even before converting the limited scrutiny into complete scrutiny. This was evident from the notice wherein the information or details were called for. Thus, it was undisputed that the AO inquired about the issue of secured and unsecured loans even before converting the limited scrutiny to complete scrutiny.

Instruction No. 5/2016, issued by CBDT on 14.07.2016, provides that while proposing to take up complete scrutiny that 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. That plea has to be on credible material, not merely on suspicion and conjecture or unreliable sources. It provides that there has to be a direct nexus between the available material and the formation of such a view.

In the present case, this was a clear violation of the instructions issued by the CBDT. The AO was required to form a reasonable view that there was a possibility of under-assessment of income if the case was not examined under complete scrutiny.

Therefore, the AO exceeded his jurisdiction by enquiring into those issues beyond the scope of limited scrutiny even prior to the date of conversion, which was in clear violation of the mandate given by CBDT.

List of Cases Referred to

• Shri Vijay Kumar v. ITO [IT Appeal No. 434 (Chad.) of 2019, dated 12.09.2019] (para 6)
• Dev Milk Foods Pvt. Ltd. v. Addl. CIT [IT Appeal No. 6767 (Delhi) of 2019, dated 12.06.2020] (para 6).