Assessment Converted from limited to Unlimited Scrutiny without Approval: ITAT Remands Case [Read Order]

The Jaipur Bench of Income Tax Appellate Tribunal ( ITAT ) remanded the case back to the Commissioner of Income Tax(Appeals)[CIT(A)] for a fresh decision, ruling that the Assessing Officer( AO ) did not require approval to convert the case from limited to unlimited scrutiny.

The Revenue-appellant appealed against the order passed by CIT(A) order dated  21.06.2024 for the Assessment Year(AY) 2022-23. In this case, Sangeeta Bafna, respondent-assessee, had also filed a cross objection.

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The AO, in the assessment order dated 12.03.2021, had computed the taxable income of the assessee as ₹3,03,60,730/-, following a scrutiny due to reasons such as high income reported in the return, substantial loans given, and large squared-up loans. The assessment was completed under Section 143(3) read with section 144B, and penalty proceedings under Section 270A for under-reporting of income were initiated.

During the assessment, discrepancies were noted in the Gross Profit (G.P.) rate, undervaluation of closing stock, unsubstantiated discount claims, and excessive commission payments. The AO found that the closing stock had been undervalued by ₹77,13,200/-, and that discount claims of ₹56,99,493/- lacked sufficient supporting documentation. Additionally, the brokerage/commission claim of ₹7,77,060/- was found to be unreasonable, considering the margin of profit.

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In light of these deficiencies, the AO concluded that the books of accounts and the profits offered by the assessee could not be relied upon. A variation of ₹1,64,11,510/- was made to the taxable income, and penalty proceedings for under-reporting of income were initiated under Section 270A of the Act.

The assessee challenged the assessment order before the CIT(A),on the grounds that the AO had changed the case from limited scrutiny to unlimited scrutiny without prior approval from the Administrative Commissioner of Income Tax. The CIT(A) agreed with the assessee and ruled that the assessment order was invalid and void from the start.

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Read More: Limited Scrutiny can be changed to Regular Assessment with Approval of Competent Authority: ITAT

The Revenue counsel explained that the order sheets couldn’t be downloaded on time due to technical issues. The office was also busy with urgent cases, and most staff were on leave from 14.8.2024 to 20.8.2024 due to the festive period. The counsel asked for a 4-day delay in filing the appeal to be condoned because of these reasons.

The assessee's counsel did not oppose the delay. The court agreed to condone the 4-day delay in filing the appeal.

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The revenue counsel argued that the case was selected for "complete scrutiny," not "limited scrutiny," and the CIT(A) erred in setting aside the assessment order. The counsel requested the appeal be allowed, the assessee's cross-objection dismissed, and the matter remanded for a fresh decision.

The assessee's counsel disagreed, stating the case was properly selected for scrutiny due to three reasons: high income without the required assets and liabilities schedule, substantial loans given, and large squared-up loans. The revenue counsel pointed out that the assessment sheet showed no mention of "limited scrutiny," which the assessee did not dispute. The court agreed that the first reason was valid, and the loans and squared-up loans needed verification.

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The two member bench comprising Narinder Kumar ( Judicial Member ) and Rathod Kamlesh Jayantbhai ( Accountant Member ) found that the CIT(A), was wrong in stating that the Assessing Officer did not follow the proper procedure. The AO did not need approval from the competent authority to convert the case from limited to unlimited scrutiny.

Based on the reasons for selecting the case for scrutiny, it wasn’t a limited scrutiny case, and the AO did not exceed his jurisdiction. The decision in the Shri Arun Kumar Palawat case did not apply here, as it involved different facts, where the case was specifically selected for limited scrutiny on certain issues.

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The tribunal allowed the department's appeal and dismissed the assessee's cross-objection, as the delay was condoned. The CIT(A)'s order was set aside, and the matter was remanded for a fresh decision on merits, excluding the technical ground. The CIT(A) was instructed to give the assessee a chance to be heard.

To Read the full text of the Order CLICK HERE

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