We are in month of November and
the due date of completion of assessment i.e. 31st December is fast
approaching. There are many issues which my professional colleagues ignores while
appearing for assessment proceedings before Assessing Officer [AO]. In this
article, I tried to highlight some of those issues. Scrutiny assessment refers to the examination of a
return of income by giving an opportunity to the assessee to substantiate the
income declared and the expenses, deductions, losses, exemptions, etc. claimed
in the return with the help of evidence.
Selection of Cases for Scrutiny Assessment:
Presently the returns of
income filed by the tax payers are accepted by the Income Tax
Department without any questions. Only a small percentage of cases are getting
selected for scrutiny. The cases are mostly selected through the process of
computer assisted scrutiny selection (CASS) and there is no element of
subjectivity in this process.
In addition to the
above CASS system, the cases where there is information about concealment of
income, which may be based on an enquiry report, survey report or any other
source, can also be selected for scrutiny. Only deserving cases are identified
for scrutiny assessment in this manner. The selection in this manner is made by
the AO only with the approval of higher authorities so that the selection is
fair and proper.
There is yet another category of cases in which
scrutiny assessment is framed under section 143(3) of the Act. There is a
provision in the Income Tax Act which enables the reopening of cases where
there is reason to believe that any income has escaped assessment. This reopening
can be resorted to even in cases which had been subjected to scrutiny
assessment earlier. A case can be reopened within a period of six years from
the end of the relevant assessment year.
Further if any person has undisclosed Income / assets and he has not
disclosed the same in the recently concluded Income Declaration Scheme, in that
case the case of the assessee can be reopened beyond six years. Section 197 of
the Income Tax Act deals with the same, which says that
“Where any income has accrued, arisen or received or any asset has been
acquired out of such income prior to commencement of this Scheme, and no
declaration in respect of such income is made under this Scheme,—
- such income shall be deemed to have accrued, arisen or received, as
the case may be; or
- the value of the asset acquired out of such income shall be deemed
to have been acquired or made,
in the year in which a notice under section 142, sub-section (2) of
section 143 or section 148 or section 153A or section 153C of the Income-tax
Act is issued by the Assessing Officer, and the provisions of the Income-tax
Act shall apply accordingly.”
Category of Assessment:
CBDT has classified the assessments in two categories namely:
(A) Limited Scrutiny (B) Detailed Scrutiny
(A) Limited Scrutiny
Central Board of Direr Taxes vide
instruction no. 7/2014 dated 26.09.2014 (applicable for cases selected for
scrutiny during FY 2014-15 via CASS), has provided instructions regarding
method of scrutiny in specific cases:
“2. Therefore, for proper administration of the
lncome-tax Act, 1961 (‘Act’), Central Board of Direct Taxes, by virtue of its
powers under section 119 of the Act, in supersession of earlier instructions/
guidelines on this subject, here by directs that the cases selected for
scrutiny during the Financial Year 2014-2015 under CASS, on the basis of either
AIR data or CIB information or for non re-conciliation with 26AS data, the
scope of enquiry should be limited to verification these particular aspects
only. Therefore, in such cases, an Assessing Officer shall confine the
questionnaire and subsequent enquiry or verification only to the specific
point(s) on the basis of which the particular return has been selected for
scrutiny.”
This circular is mainly speaking about
cases where scrutiny is called for on the basis of either AIR data or CIB
information & non reconciliation with 26 AS or directed the AO to confine
in those issues only. But further the circular says that
“4. In case,
during the course of assessment proceedings it is found that there is potential
escapement of income exceeding Rs. 10 lakhs (for non-metro charges,
the monetary limit shall be Rs. 5 lakhs) on any other issue(s) apart from the
AIR/CIB/26AS information based on which the case was selected under CASS requiring
substantial verification, the case may be taken up for comprehensive scrutiny
with the approval of the Pr. CIT/DIT concerned. However, such an approval shall
be accorded by the Pr. CIT/DIT in writing after being satisfied about merits of
the issue(s) necessitating wider and detailed scrutiny in the case. Cases so
taken up for detailed scrutiny shall be monitored by the Jt. CIT/Addl. CIT
concerned.”
It means subject to incriminating evidences
& approval of higher Authority, Limited scrutiny can be converted in to
details scrutiny. A
sample of notice u/s 143(2) of Limited Scrutiny is given below for
understanding:
“Notice under
section 143(2) of the Income Tax Act, 1961
Limited
Scrutiny
This is for your information
that return of income for assessment year 2015-16 filed on 24/01/2016 has been
selected for scrutiny. Following issues have been identified for examination
(i)
Derivative (Future)
transactions
(ii)
Salary Income Mismatch.
I view of the above, we would
like to give you an opportunity to produce or cause to be produced, any
evidence which you feel is necessary in support of the said return.”
(B) Detailed Scrutiny
Assessment:
In this proceeding, AO makes a detailed inquiry on each and every
aspect of the Return of Income.
•
The procedure begins with a Notice u/s 143(2) which is the key to open
the door of scrutiny proceedings. It needs to be “Served” on an assessee prior
to expiry of six months from the end of the financial year in which the return
is furnished. Assessment framed u/s 143(3) without serving notice u/s 143(2)
shall be void-abinitio. It was held by the Supreme Court in case of Hotel Blue Moon that “Omission on the
part of the assessing authority to issue notice under section 143(2) cannot be
a procedural irregularity and is not curable.
•
It is followed by a notice u/s 142(1) calling for various information
by AO for carrying out the assessment.
·
AO shall consider all the information furnished by an assessee at the
assessment stage in response to his notices or queries raised vide order sheet
entries.
•
AO shall issue a Show Cause Notice (SCN) intimating the assessee about
the additions which he proposes to make in the assessee’s case.
•
Assessee shall furnish a reply in response to such SCN which shall be
considered by AO prior to making the additions.
•
AO can use some special powers in assessment proceedings like:
•
As per section 131(1), AO may issue “Summons” to any person for
discovery and inspection, enforcing attendance and for compelling production of
books of accounts.
•
• As per section 131(3), AO may impound and retain books of accounts
or any other document produced before him during the assessment proceedings.
•
• As per section 133(6), AO may call for information from third
parties.
•
Finally, an Asst Order shall be passed u/s 143(3).
Precaution to be taken in
assessment proceedings:
n Assessment
proceedings commences with the issue of notice under Section 143(2). The
assessee takes it lightly that it is a formal notice. This is not a correct
approach since when the question whether adequate opportunity is given or not,
the formal notice is also considered. In reply to the first notice, there
should be some written communication with the AO.
n Preparation
of details in response to Notice of AO
ü On
receipt of Notice a detailed list of documents required from the assessee
should be prepared and should be immediately inform to the assessee with date
of hearing so as to enable its timely compliance.
ü The
reply should be prepared point wise as per notice / questionnaire received from
AO.
ü A
proper index of papers should be prepared and all the papers in the file should
be numbered so as to help the assessing officer to locate the papers easily.
All supporting documents regarding the explanations given in the submission
should be duly attached with reference page no. This helps in completion of
security assessment in smooth manner.
ü Any
document which are not being submitted at the time of hearing should be
specifically noted and informed that those will be submitted in due time or
those cannot be submitted.
ü A
proper covering letter should always accompany the submission.
ü Even
if no documents are ready or able to be produced on the date of hearing,
at-least a letter stating that it should be submitted to the department
informing the inability.
n Whenever
difficult query is raised, the assessee at times either gives vague reply or
avoids to give reply. This is very risky. In fact, the assessee should try to
find out the proper reply and should give the reply with adequate evidences.
This is because it is difficult to produce additional evidence before the
appellate stage. Non-compliance of notices under Sections 142(2) and 143(2)
attracts penalties as per law.
n Before making
any addition in the assessment, the AO normally issues final show cause notice
or makes entry in the order sheet and inform the Authorised Representative
about the same. Assessee should make sure about timely compliance of this
notice because the AO will not wait for the reply after the specified date of
the compliance and will make the addition. It will be more difficult to defend
these types of additions in appellate proceedings.
Other Important Points to
remember in assessment proceedings:
1. Ad-hoc additions / suspicion is not permissible in Assessment
proceedings
Many a times we found that certain % of the Expenditure has been
disallowed on ad-hoc basis by the AO(like ad-hoc disallowance of 20% of
travelling expenditure being personal in nature). Hon’ble Supreme Court in the
case of Dhakeshwari Cotton Mills has held that Ad-hoc disallowance is not
permissible in Assessment proceedings. As per the Apex court there must be
something more than bare suspicion to support the assessment u/s 143(3).
2. Notice deemed to valid in certain circumstances:
Section 292BB provides that where an assessee has appeared in
assessment proceedings or co-operated in any proceedings or co-operated in any
inquiry related to an assessment or reassessment, it shall be deemed that any
notice under the provisions of the act has been duly served upon him in time in
accordance with the provisions of the Act.
Further, such an assessee shall be precluded from taking any objection
in any proceedings or inquiry under the act that notice was not served upon him
or served in an improper manner. However the provisions of section 292BB shall
not be applicable where the assessee raised the aforesaid objection before the
completion of the assessment.
3.
Presumption and burden of proof in assessment:
This presumption applies to the bona fides of the assessee’s
transactions as well as his accounts. It cannot be presumed that an assessee is
a notorious black marketer or smuggler or Hawala Dealer or that, in the
circumstances prevalent in the accounting year, he must have entered into
transactions not lawful, above board or dishonest. The presumption is similarly
regarding his books of account, that the entries in the account books are made
in the ordinary course of business and there is no concealment of income. The
books of account maintained in the regular course of business are relevant and
afford prima facie proof of the entries and the correctness thereof. It is for the department to prove to
the contrary and there should be adequate grounds for disbelieving the
accounts. It is for A.O. to prove that there is income from that source. The
assessee cannot prove the negative.
Where an assessee produced unsatisfactory and unbelievable evidence
the department can reject the same and need not produce contrary evidence
before drawing an adverse inference against the assessee. Again, if the income was
shown as having suddenly diminished from the previous year, the onus will be on
the assessee to explain. The onus is on the assessee to show that his return is
correct, as all the facts are exclusively in his knowledge and that he has incurred
a loss.
4. Principle of Natural Justice should be followed
The principle of Natural justice is applicable to assessment
proceedings and the assessee should have knowledge of the material that is
proposed to be used against him, in order to enable him to rebut it. If the A.O. proposes to act on such material as he might
have gathered as a result of his private inquiries behind the back of the
assessee, he must disclose the substance of all such material, though not the
sources thereof to the assessee and if this is not done, the principle of
natural justice stands violated. An order passed in violation of principle of
natural justice may not, however, render the act one totally outside the Act.
It may still be an order under the Act liable to be corrected or set-aside to
be redone after complying with such principle.
5. Value of Audit Report when books were destroyed
Where the books of account of an assessee are examined and audited
under statutory provisions and audit report is submitted thereabout, reliance
could be placed by the income tax authorities on such a report treating the
same as “a material” in case the books of account of the assessee were
destroyed by fire etc. This is so because an auditor is required by the statute
to find out if the deductions claimed by the assessee in its balance sheet and
profit and loss account are supported by the relevant entries in assessee’s
books of account. Therefore, it may be presumed that the auditor has done so
and has found that the books of account supported the claim for deductions made
by the assessee.
6. Additional Claim before AO in assessment proceedings :
Hon’ble Supreme Court in case of Goetze (India)
Ltd held that AO cannot entertain any new claim made by the assessee otherwise
than by way of revised return. However, there is no such barrier to make
additional claim in appellate proceedings. It is always wise for the assessee
to make new claim, if any, along with all supporting documents before the AO
only, so that they have a strong case in appellate proceedings and that shall
not be treated as additional evidence in appellate proceedings.
7.
Cross Examination of Witness:
If an assessing authority is relying on the testimony of a witness,
the assessee is to be afforded an opportunity to cross-examine him. It is not open to the assessing
authority to get over this hurdle on the plea that the witness had not been
produced by the assessee. Gujarat High Court in case of D.M. Joshi
held that, in the absence of any opportunity for cross- examination, the assessment
is invalid. The
cross-examination depends upon the facts of each case.
Hon’ble
Supreme Court in case of Kishinchand Chellaram held that though
the proceedings under the Income-tax Act are not governed by the strict rules
of evidence, the department is bound to afford an opportunity to controvert and
cross examine the evidence on which the department places its reliance.
Opportunity of cross examination must be given. The consequence of breach of
natural justice is that either the addition is void or matter may have to be to
be remanded to lower authorities.
8. Method of accounting section 145
Section 145 lays down the Method of Accounting. The section states,
briefly, that the assessee’s income will be computed in accordance with the
cash or mercantile system of accounting regularly employed by the assessee.
Section 145(3) also lays down that where the AO is not satisfied about the
correctness or completeness of the accounts, or if the accounting standards
have not been regularly followed, the AO may make a best judgment assessment as
in sec. 144. The principle, that there should be a loss to revenue for invoking
sec. 145, was reinforced in case of Realest
Builders and Services (SC) where the assessee chose to adopt a different
method of accounting. The SC held that a vital aspect to be seen is whether the
method adopted by the assessee results in underestimation of profits, for which
the facts and figures to demonstrate this have to be given by the AO. This case
also serves to highlight the importance of burden of proof, viz. The AO has to
show by evidence that the assessee’s claim was untenable.
9. Past History :
An assessment cannot be based on a presumption relating to some issues
in the earlier years. Past history may be legitimate material but that is not
sufficient by itself without more, to justify assessment in a particular year.
There must be some material relatable to the accounting, which taken with the
past history may reasonably entitle the AO to hold that there must in fact have
been concealed income during the accounting year which is liable to
assessment.
10. Principle of ‘Res Judicata’ and it’s Exceptions:
Though the principle of “res
judicata” has no application to proceedings under the Income Tax Act and
the finding reached for one particular assessment year cannot be held to be
binding in the assessment proceedings for subsequent years, yet this general
rule is subject to the qualification that a finding reached in the assessment
proceedings for an earlier year, after due enquiry, would not be reopened in a
subsequent year if it is not arbitrary or peverse, and if no fresh facts are
found in the subsequent assessment year. Hon’ble SC in case of Radhasoami Satsang held that in the
absence of any material change justifying the Department to take a different
view from that taken in earlier proceedings, it is not permissible to take
different and contradictory stand in a subsequent year with regard to the
exemption earlier granted. The fact that the departmental officers took a
particular view of the statutory provisions at an early stage will not stop
them from taking a corrective view of the statutory provisions at a later point
of time.
11. Non service of Notice u/s 133(6):
During the course of assessment proceedings, AO generally sends notice
u/s 133(6) to get confirmation from third party to verify the claim of the
assessee. In case the notice u/s 133(6) gets un-served, AO generally makes
addition by giving reason of non service of notice. Mumbai ITAT in case of Eagle Impex held that only non service
of notice u/s 133(6) should not be made basis for making addition in the hands
of the assessee and if any addition made by the AO solely on that basis, that
is liable to be deleted. While filing
the details with the AO, the assessee should ensure that they are submitting
the latest addresses of different parties as asked by the AO to avoid above
circumstances.
Conclusion:
Majority of the additions made in the assessment proceedings is due to
non – compliance of the notices issued by the AO. A proper care should be taken
while responding the queries / notices of the AO. As a professional our
responsibility should be like due to our negligence, the assessee should not
suffer and at the same time it is the responsibility of the assessee to provide
the details on time for timely compliance of notices of AO.
DISCLAIMER:
The information contained in
this write up has been carefully prepared, but it has been written in general
terms and should be seen as broad guidance only. It cannot be relied upon to
cover specific situations and you should not act, or refrain from acting, upon
the information contained therein without obtaining specific professional
advice. The Author, it’s Firm, its partners and employees do not accept or
assume any liability or duty of care for any loss arising from any action taken
or not taken by anyone in reliance on the information in this article or for
any decision based on it. In case of any query / suggestions regarding the
same, please mail at bikashbogi@sbrca.in.
CA Bikash Bogi