Facts of the Case

The assessee filed his return of income for Assessment Year 2015-16 on 11.01.2016 declaring total income of ₹5,86,810. The case was selected for scrutiny under CASS for limited scrutiny specifically for verification of cash deposits, as communicated in notice under Section 143(2) dated 29.07.2016. During the course of assessment, the Assessing Officer issued notices under Section 142(1) calling for information and explanations on issues beyond the scope of limited scrutiny, including purchase and sale of properties, capital gains, and sources of investment, even prior to formal conversion of the case into complete scrutiny. The assessment was ultimately completed making multiple additions under Sections 56(2)(vii)(b)(ii), 68 and 69A of the Income-tax Act. The additions were confirmed by the CIT(A), leading to the appeal before the Tribunal.

Issues Involved

Whether the Assessing Officer was justified in making enquiries and additions on issues beyond the scope of limited scrutiny without following the procedure prescribed for conversion to complete scrutiny, whether such action was in violation of CBDT Instruction No. 5/2016, and whether the additions made under Sections 56, 68 and 69A were sustainable in law.

Petitioner’s Arguments

The assessee contended that the case was selected strictly for limited scrutiny on the issue of cash deposits and that the Assessing Officer had no jurisdiction to enquire into or make additions on other issues without valid conversion to complete scrutiny. It was argued that notices under Section 142(1) calling for details beyond the limited scrutiny issues were issued even before any formal conversion and without fulfilling the conditions laid down under CBDT Instruction No. 5/2016. Reliance was placed on coordinate bench decisions holding that such fishing and roving enquiries are impermissible and render the assessment invalid.

Respondent’s Arguments

The Revenue argued that the Assessing Officer had subsequently converted the limited scrutiny into complete scrutiny and therefore the enquiries and additions were valid. It was submitted that the additions were rightly made based on material gathered during assessment proceedings and confirmed by the CIT(A).

Court Order / Findings

The ITAT Kolkata held that the Assessing Officer had clearly exceeded jurisdiction by initiating enquiries and making additions on issues beyond the scope of limited scrutiny even prior to valid conversion of the case into complete scrutiny. The Tribunal observed that CBDT Instruction No. 5/2016 mandates strict compliance with prescribed procedure, including formation of a reasonable view based on credible material and obtaining proper administrative approval before conversion. In the present case, the Tribunal found that the conversion was mechanical, unsupported by credible material, and aimed at conducting fishing enquiries. Consequently, the assessment proceedings were held to be in complete violation of CBDT instructions and without jurisdiction. The Tribunal further held that the addition of ₹28,00,000 under Section 68 on account of cash deposits was also unsustainable, as the assessee had duly explained the source with supporting bank statements and replies, which were ignored by the lower authorities.

Important Clarification

The Tribunal clarified that in cases selected for limited scrutiny, the Assessing Officer is strictly bound to confine enquiries to the specific issues identified and cannot travel beyond the scope without valid conversion to complete scrutiny as per CBDT instructions. Any assessment framed in violation of such binding instructions is void and unsustainable. Even Section 292BB cannot cure jurisdictional defects arising from non-compliance with CBDT mandates.

Final Outcome

The appeal filed by the assessee was allowed in full. The assessment order for Assessment Year 2015-16 was quashed, and all additions made under Sections 56(2)(vii)(b)(ii), 68 and 69A of the Income-tax Act were deleted as being without jurisdiction and contrary to law.

Source Link- https://itat.gov.in/public/files/upload/1768209190-TPaeeY-1-TO.pdf

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