AO can’t Travel beyond his Jurisdiction inorder to Invoke the Provision of Section 40A(3) of the Income Tax Act: ITAT quashes Order of AO [Read Order]

The Visakhapatnam bench of the Income Tax Appellate Tribunal (ITAT) held that the Assessing Officer cannot travel beyond his jurisdiction in order to invoke the provision of section 40A(3) of the Income Tax Act, 1961.

The Assessee, Vishnu Srinivasa Rao Kakarla is a fish commission agent and acts as a middleman between the farmer and market person for which he receives commission. He filed his return of income admitting a total income of Rs. 46,15,390/-.

Subsequently, the case was selected for limited scrutiny for the purpose of verifying cash deposits. A notice under Section 143(2) of the Income Tax Act and a detailed questionnaire through a notice under Section 142(1) of the Income Tax Act was issued and served on the assessee.

The Assessing Officer noticed that the assessee has made cash payments exceeding the limits prescribed under Section 40A(3) of the Income Tax Act. Therefore, the assessing officer treated the cash withdrawals of Rs. 84,60,669/- as disallowance and added to the total income of the assessee.

The Authorized Representative argued that the assessing officer has travelled beyond his powers in verifying the cash withdrawals and the assessing officer has no jurisdiction to make disallowance under Section 40A(3) of the Income Tax Act without converting the assessment into complete scrutiny proceedings.

The assessing officer has travelled beyond his jurisdiction in verifying the cash withdrawals without converting the case into complete scrutiny as per the directions issued by the Central Board of Direct Taxes [CBDT].

There is no dispute by the assessing officer regarding the satisfaction of the cash deposits for which the limited scrutiny purpose was initiated. But the scrutiny has to be limited to the parameters selected for the purpose of scrutiny only to the specific issues and not beyond that under any circumstances.

If the assessing officer wanted to take up the case for complete scrutiny, first he should have converted the limited scrutiny into a complete scrutiny case and then he may take up the case for complete scrutiny with the prior approval of the Commissioner of Income Tax concerned after being satisfied with the issue of converting it into complete scrutiny.

The two-bench member comprising of Duvvuru Reddy (Judicial member) and S Balakrishnan (Accountant member) held that the assessing officer has travelled beyond his jurisdiction in disallowing the cash withdrawals being payments made to various fishermen by invoking the provisions of section 40A(3) of the Income Tax Act is not valid in law.

Therefore, the order passed by the assessing officer was quashed and the appeal of the assessee is allowed.

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