Can the scope of a Limited Scrutiny Assessment be Expanded u/s 143(2)?
A limited scrutiny assessment is one which is undertaken by the assessing officer when he/she finds certain discrepancies in the income tax return which he/she believes need to be investigated further.
In essence, when the assessing officer has reason to believe that a certain amount of income of the assessee has escaped the tax net the assessing officer may call for limited scrutiny, by issuing a notice under section 143(2).
Limited scrutiny, as the name suggests is only with respect to that particular discrepancy which needs to be rectified. The assessing officer is required to not extend his jurisdiction beyond the scope of this scrutiny.
The objective of this process is to impose certain checks and balances on the assessing officer to ensure that he doesn’t transgress the scope.
However, there have been many instances, wherein the assessing officers have gone beyond the scope of limited scrutiny assessment and have considered other issues. The CBDT in 2018 had issued a circular, asking assessing officers to follow certain guidelines while dealing with such cases. Through this post, we explore the validity of the expansion of the scope of the limited scrutiny and the CBDT’s and the judiciary’s position in this regard.
Position of CBDT Regarding Expansion of Jurisdiction in Limited Scrutiny Cases
CBDT had issued circulars regarding the expansion of jurisdiction in limited scrutiny cases in 2014, 2015, 2016 and 2017. However, they noticed that despite these instructions, assessing officers are routinely expanding their jurisdiction in limited scrutiny cases. The CBDT also observed that typically, no reasons are assigned for the expansion of jurisdiction and no permission from the PCIT taken. Hence, CBDT issued a circular (F.No. 225/402/2018/ITA.II) explaining the scope of limited scrutiny enquiries and the conditions which must be complied with in order to expand the scope of enquiry in necessary conditions.
The CBDT reaffirmed its view that the assessing officer cannot increase the scope of a limited scrutiny assessment to go beyond the issue filed for scrutiny or beyond the nature of the information provided.
The following conditions were enlisted to be complied with in cases where the assessing officer deems it necessary to expand the scope to take on additional issues –
- The reasons for increasing the scope must be duly recorded by the assessing officer
- The aforementioned reasons must be placed in front of the Principal Commissioner of Income Tax with a view to receiving his assent. On obtaining the same, additional issues may be investigated.
- The assessing officer would be required to provide a prior intimation to the assessee, informing him of the fact that the additional information would be looked into as well.
- The last condition states that in order to properly monitor cases of additional information being investigated, the provisions of section 144A of the Income Tax Act, 1961 should be applied. Finally, in order to prevent fishing or roving by assessing officers, the cases should be reviewed by administrative authorities.
Judicial Position on Expanded Jurisdiction in Limited Scrutiny Cases
The courts have often dealt with cases dealing with expanded jurisdiction in limited scrutiny cases. The general trend is to not allow such an expansion of jurisdiction.
Cases indicating that:
- Pune ITAT in the decision of Suresh Jugraj Mutha v. ACIT: held that it is outside the jurisdiction and authority of the assessing officer to convert limited scrutiny cases to ones of complete scrutiny without the approval of Administrative Commissioner of Income Tax.
- Lucknow ITAT in the decision of Ravi Prakash Khandelwal v. DCIT
- Bangalore ITAT in the decision of M/s Srinidhi Mines v. ITO held that prior approval of CIT or Pr. CIT is required before the assessing officer can expand his jurisdiction, in the absence of the same such an expansion of jurisdiction to issues beyond the limited scrutiny is not warranted.
- Jaipur ITAT in the decision of Gurbachan Kaur v. DCIT: held the order passed by the assessing officer with regard to matters outside the scope of limited scrutiny assessments as illegal and void.
- M/s Yikti Tiwari v. ITO and Smt. Gurpreet Kaur v. ITO,
- Hyderabad ITAT in the decision of P. Venkata Ramana Reddy v. ACIT
While the general position in this regard is to discourage the expansion of jurisdiction, a few cases have been decided in favour of the expansion of jurisdiction in limited scrutiny cases.
Cases indicating that:
- In Baby Memorial Hospital v. ITAT, the Cochin ITAT held that while, AO is supposed to restrict his examination to the issues under limited scrutiny, in the interest of justice, and for seeking of truth, he can expand his jurisdiction to the examination of other issues as well. The tribunal, however, cautioned, that such expansion would require prior approval of Pr. CIT.
- Delhi ITAT in the decision of Prime Comfort Products v. ACIT upheld the expansion of jurisdiction. The issue for limited scrutiny in that decision was a larger share premium. The tribunal held that this issue cannot be examined in isolation and the assessing officer will have to examine all the issues involved in order to resolve this issue and hence, an expansion of jurisdiction is merited.
In view of the stance of the courts as well as the administrative bodies, the general and most appropriate practice to be followed with regard to limited scrutiny assessments would be to restrict the scope of enquiry to the specific instance sought to be looked into. However, the administrative authority, having taken into consideration the issues faced by assessing officers may permit the scope to be increased provided that certain conditions are complied with before the said expansion takes place. We, thus, realize that there is no set formula or standard for determining the scope of limited scrutiny assessments. It varies from case to case on the basis of the facts and circumstances of each matter. Even where the scope is expanded, there are certain checks and balances; the assessing officer does not have the liberty to exercise his discretion in this regard. The expansion of the scope is dependent on the views of the administrative arm of the taxation system and on the facts at hand.
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