By Jagdish T. Punjabi | Prachi Parekh
Chartered Accountants | Devendra Jain
Advocate
14. TS-279-ITAT-2020 (Delhi) Dev Milk Foods Pvt. Ltd. vs. Addl. CIT ITA No. 6767/Del/2019 A.Y.: 2015-16 Date of order: 12th June, 2020
Section 143(3), CBDT Instruction No. 5/2016
– Assessment order passed upon conversion of case from limited scrutiny to
complete scrutiny, in violation of CBDT Instruction No. 5/2016, is a nullity
FACTS
For assessment year
2015-16, the assessee filed its return of income declaring a total income of
Rs. 19,44,88,700. The case was selected for limited scrutiny through CASS.
In the assessment
order, the A.O. stated that the assessee’s case was selected for limited
scrutiny with respect to long-term capital gains but it was noticed that the
assessee had claimed a short-term capital loss of Rs. 4,20,94,764 which had
been adjusted against the long-term capital gains. The A.O. was of the view
that the loss claimed by the assessee appeared to be suspicious in nature
primarily because the loss could possibly have been created to reduce the
incidence of tax on long-term capital gains shown by the assessee. The A.O.
further stated in the assessment order that in order to verify this aspect,
approval of the Learned Principal Commissioner of Income Tax (PCIT) was taken
to convert the case from limited scrutiny to complete scrutiny and that the
assessee was also intimated about the change in status of the case.
The A.O. held that
the purchase of shares did not take place and the transactions were sham in
view of documentary evidence, circumstantial evidence, human conduct and
preponderance of probabilities. He observed that the entire exercise was a
device to avoid tax. The A.O. completed the assessment u/s 143(3) after making
an addition of Rs. 4,20,94,764 on account of disallowance of short-term capital
loss, Rs. 8,41,895 for alleged unexplained expenditure on commission, and Rs.
1,93,20,000 on account of difference in computation of long-term capital gains.
Thus, the total income was computed by the A.O. at Rs. 25,67,43,360.
Aggrieved, the
assessee preferred an appeal to the CIT(A) who upheld the additions made by the
A.O. on merits.
The assessee
preferred an appeal to the Tribunal challenging the validity of the order
passed by the A.O. inter alia on the ground that the return was
primarily selected for limited scrutiny only on the limited issue of long-term
capital gains (LTCG) on which aspect, as per the order of the CIT(A), there
remains no existing addition, and conversion of limited scrutiny to complete
scrutiny was on mere suspicion only and for verification only, on the basis of
invalid approval of the PCIT-3; consequently, the entire addition on account of
disallowance of short-term capital loss of Rs. 4,20,94,764 and Rs. 8,41,895 as
alleged unexplained commission expense is not as per CBDT instructions (refer
Instruction Nos. 19 and 20/2015 of 29th December, 2015) on the
subject and is ultra vires of the provisions of the Act.
HELD
The Tribunal, on
perusal of the instructions issued by CBDT vide its letter No. DGIT
VIF/HQ SI/2017-18 dated 30th November, 2017, observed that the
objective behind the issuance of these instructions is to (i) prevent the
possibility of fishing and roving inquiries; (ii) ensure maximum objectivity;
and (iii) enforce checks and balances upon the powers of an A.O.
The Tribunal
observed that the proposal drafted by the A.O. on 5th October, 2017
for converting the case from limited scrutiny to complete scrutiny and the
original order sheet entries, do not have an iota of any cogent material
mentioned by the A.O. which enabled him to reach the conclusion that this was a
fit case for conversion from limited scrutiny to complete scrutiny.
Examining the
proposal of the A.O. of 5th October, 2017 and the approval of the
PCIT dated 10th October, 2017 on the anvil of paragraph 3 of CBDT
Instruction No. 5/2016, the Tribunal held that no reasonable view is formed as
mandated in the said Instruction in an objective manner, and secondly, merely
suspicion and inference is the foundation of the view of the A.O. The Tribunal
also noted that no direct nexus has been brought on record by the A.O. in the
said proposal and, therefore, it was very much apparent that the proposal of
converting the limited scrutiny to complete scrutiny was merely aimed at making
fishing inquiries. It also noted that the PCIT accorded the approval in a
mechanical manner which is in clear violation of the CBDT Instruction No.
20/2015.
The Tribunal noted
that the co-ordinate bench of the ITAT at Chandigarh in the case of Payal
Kumari in ITA No. 23/Chd/2011, vide order dated 24th
February, 2011 has held that even section 292BB of the Act cannot save
the infirmity arising from infraction of CBDT Instructions dealing with the
subject of scrutiny assessments where an assessment has been framed in direct
conflict with the guidelines issued by the CBDT.
In this case, the
Tribunal held that the instant 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 Instruction No. 5/2016. Accordingly, the entire assessment proceedings
do not have any leg to stand on. The Tribunal held the assessment order to be
null and quashed the same.
The appeal filed by
the assessee was allowed.
