Limited Scrutiny : Power of A.O Curtailed . Here Are 5 Things Every Taxpayer Needs to Know to Get its Benefit

Have you noticed words Limited Scrutiny on the notice for scrutiny received by you ? If not , go and see again . If there appears these words, think yourself better than many others , as the government has drastically reduced the discretion of the assessing officer and other authorities for this type of scrutiny .This post is going to discuss

  • What are new rules for limited scrutiny ?
  • What A.O Can ask you in a Limited Scrutiny ?
  • What A.O Can’t Ask You in a Limited Scrutiny ?
  • What to do if A.O asks what he should not ask in a Limited Scrutiny?
  • What if he passess an assessment order without adhering rules for Limited Scrutiny?

Rules fixed for Limited Scrutiny

CBDT issued an instruction no 20/2015 dt 29/12/2015 under which following rules are fixed for the assessing officer:

  1. The reason for slection of case in a limited scrutiny has to be intimated to the assessee along with notice of scrutiny or notice for various queries.
  2. The query must be restricted to the reasons for selection of case under limited scrutiny case.
  3. If any point comes to the notice for scrutiny , in addition to the point of selection for limited scrutiny , the A.O must ask for approval from the Commissioner of Income Tax concerned and the CIT will ask in writing .

What A.O Can ask you in a Limited Scrutiny ?

The A.O can ask  all kinds of questions and documents related to the reason for selection of case under limited Scrutiny . For example if your case is slected for the reason of buying a house , the A.O is entitled to ask for source of fund used to buy the house, registration, agreement or conveyance documents , your bank statement of rth period concerned.

What A.O Can’t Ask You in a Limited Scrutiny ?

As for the aforesaid example i.e if the reason for selection of case under Limited Scrutiny is a regsitering a house , and in that year you had also earned capital gains and claimed exemption u/s 54 or 54F . The A.O is not allowed to ask questions or for documents related to the exemption of capital gains , because that was not the reason for selction of case under limited scrutiny.

However , it must be noted that CBDT has made an exception vide its circular related to limited scrutiny . SO if the A.O desire to scrutinize the capital gains issue or exemption u/s 54 or 54F or any other issue, first he will have to seek approval from commissioner of income tax , who will pass speaking order for scrutinizing those issue.

Only after that A.O get jurisdiction to ask question on the new issue.

What to do if A.O asks what he should not ask in a Limited Scrutiny?

There are many options for you to choose as the circumstances approaches

(i) approach higher authority ( JCIT or CIT )

(ii) Send a grievance letter

Do not do any thing , but also do not answre his requirements as it is not legal for asking questions . The practical think is to seek in writing the approval letter fo CIT for asking the questions unrelated to the scrutiny . Please read this article and the instruction of Board on limited scrutiny.

What if he passess an assessment order without adhering rules for Limited Scrutiny?

If he asked for any question, documents without the approval of commissioner of income tax and passed the order making any addition on the other issue, the assessment order shall be illegal because the order is against the CBDT instructions. Courts and Tribunal have held that such orders are illegal . For example, recently ITAT, Amritsar Bench in case of Smt Gurpreet Kaur vs ITR , in ITA No.87(Asr)/2016 ( Assessment Year 2011-12) held that the assessment order passed on an issue other than the reasons selected for scrutiny is not legally sustainable.

Breiefly the fact involved in the case was that the case of assessee was selected for scrutiny on AIR information that there was cash deposit of Rs 25 lakhs in aggregate in the year. But the A.O while scrutinizing the case went ahead and investigated teh issue of claim of long term exemption on sale of land.

CIT(A) confirmed the order of the A.O .

One of the specific ground raised by the assessee before ITAT was

That ld. CIT(A) has grossly erred in rejecting the assessee’s contention that the ITO had violated the CBDT Instructions dated 08.09.2010 governing AIR cases, while passing the impugned assessment ex-parte, without first meeting the objection taken by the assessee, and as such, the order impugned was liable to be quashed.

ITAT while disagreeing with both CIT(A) and assessee concluded as under :

In ‘Crystal Phosphates Ltd. vs. ACIT’, 34 CCH 136 (Del. Trib.), it has been held that once the CBDT had issued instructions, the same have to be followed in letter and spirit by the AO.

14. In ‘Amal Kumar Ghosh vs. Addl. CIT’, 361 ITR 458 (Cal.), it has been held that when the department has set down a standard for itself, the department is bound by that standard and it cannot act with discrimination.

No decision contrary to the above decisions has been filed. 16. Thus, evidently, the Income Tax Authorities are bound to observe and follow the instructions of the Board. The operative word in section 119(1) is ‘shall’. Judicial decisions have recognized this position.

ITAT therefore held the order of A.O as illegal .

Another case is that of ITAT , Chandigarh in case of Rajesh Jain vs ITO  [2007] 162 TAXMAN 212 (CHD.) (MAG.) in which facts involved was that 

 The Assessing Officer  issued a notice to the assessee under section 143(2)(i) for the purposes of limited scrutiny. As per the said notice, the assessee was required to explain the claim of depreciation in respect of the plinth constructed by him for storage of the food grains. The Assessing Officer held that the assessee was not entitled to depreciation in respect of the plinth and, accordingly, disallowed the same. The Assessing Officer also disallowed the depreciation in respect of furniture.

On appeal, the Commissioner (Appeals) issued enhancement notice to the assessee and in the impugned order held that the income from letting out of plinth should be assessed under the head ‘Income from other sources’; and that the assessee was entitled to the depreciation under section 57(ii) as the open plinth godown falls under the category of plant. The Commissioner (Appeals) further made disallowance of expenses, which were earlier allowed by the Assessing Officer.

The assessee appealed before ITAT, wherein the Hon”ble tribunal decided on the following issue

 whether in a case where a notice under section 143(2)(ii) has been issued by the Assessing Officer for limited scrutiny, the Assessing Officer has the power to make the entire assessment considering the other claims and deductions not specified in the notice issued under section 143(2)(i). 

The Tribunal held that the Assessing Officer does not have the powers to make the entire assessment of income in limited scrutiny cases.

It also held that the since under Limited Scrutiny case , the A.O has no power to make entire assessment , CIT(A) also do not hav epower to go for any other assessments .

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